**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-K/A**

**Amendment No. 1**

**x ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934**

**For the Fiscal Year Ended December 31, 2006**

**OR**

**oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934**

# **CommissionFile Number 0-9859**

**BANCTEC, INC.**

(Exact Name of Registrant asSpecified in its Charter) 

| **DELAWARE**                                                 | **75-1559633**      |
|--------------------------------------------------------------|---------------------|
| (State or Other Jurisdiction of                              | (I.R.S. Employer    |
| Incorporation or Organization)                               | Identification No.) |
|                                                         |                |
| **2701 East Grauwyler, Irving, Texas 75061**                 |
| (Address of Principal Executive Offices, including ZIP Code) |

 

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

Securities registered pursuantto Section 12(b) of the Act:**None**

Securities registered pursuantto Section 12(g) of the Act:**None**

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes: o No: x

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes: o No: x

Indicate by check mark whether the registrant (1)has filed all reports 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: x No: o

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

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, or a non-accelerated filer.

Largeaccelerated filer o Accelerated filer o Non-accelerated filer x

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act).  Yes: o No: x

As of December 31, 2006, the aggregate market value of common equity heldby non-affiliates:  **Notapplicable**

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

|                                        |   | **Number of Shares Outstanding at** |
|----------------------------------------|--------|---------------------------------------------------------|
| **Title of Each Class** |   | **March 15, 2007**                            |
| Common Stock, $0.01 Par Value          |   | 17,003,838                                              |
| Class A common stock, $0.01 Par Value  |   | 1,181,946                                               |

 

**DOCUMENTSINCORPORATED BY REFERENCE**

**None**

 

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BancTec, Inc.

Annual Report

on

Form 10-K/A

Year Ended December 31, 2006

**EXPLANATORY NOTE**

The originally filed Annual Report on Form 10-K is being amended tomodify the Report of Independent Registered Public Accounting Firm of Deloitte &Touche LLP with regard to the references to the financial statement schedulesand to add the signature. Also, the Report of Independent Registered PublicAccounting Firm of KPMG LLP is being modified with regard to the reference to financialstatement schedules. Finally, Note H in the Notes to the Consolidated FinancialStatements with regard to the disclosure of the redemption value of the SeriesA Preferred Stock is being corrected to properly state the amount ofaccumulated dividends. This Form 10-K/A does not reflect events occurring afterthe filing of the original Annual Report on Form 10-K.

**FORWARD-LOOKING STATEMENTS**

*This Annual Report on Form 10-K/A, including Management’s Discussionand Analysis of Financial Condition and Results of Operations in Item 7 andQuantitative and Qualitative Disclosure About Market Risk in Item 7A, containsforward-looking statements as that term is defined in the Private SecuritiesLitigation Reform Act of 1995 (the “PSLRA”) that involve risks anduncertainties, as well as assumptions that, if they never materialize or proveincorrect, could cause the results of BancTec, Inc. and its consolidatedsubsidiaries (the “Company”) to differ materially from those expressed orimplied by such forward-looking statements. All statements other than statementsof historical fact are statements that could be deemed forward-lookingstatements, including any projections of earnings, revenues, or other financialitems; any statements of the plans, strategies, and objectives of managementfor future operations; any statements concerning proposed new products,services, or developments; any statements regarding future economic conditionsor performance; statements of belief and any statement of assumptionsunderlying any of the foregoing. The risks, uncertainties and assumptionsreferred to above include the ability of the Company to retain and motivate keyemployees; the timely development, production and acceptance of products andservices and their feature sets; the challenge of managing asset levels, includinginventory; the flow of products into third-party distribution channels; thedifficulty 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 Management’s Discussion and Analysis of Financial Condition andResults of Operations in Item 7 below in this report, and items described inthe Company’s other filings with the Securities and Exchange Commission.*

TABLE OF CONTENTS
|          |   | ** **                                                                                                         |   |   |
|----------|--------|--------------------------------------------------------------------------------------------------------------------|--------|--------|
|     |   | **PART I**                                                                                                         |   |   |
| ITEM  1. |   | Business                                                                                                           |   |   |
| ITEM 1A. |   | Risk Factors                                                                                                       |   |   |
| ITEM 1B. |   | Unresolved Staff Comments                                                                                          |   |   |
| ITEM 2.  |   | Properties                                                                                                         |   |   |
| ITEM 3.  |   | Legal Proceedings                                                                                                  |   |   |
| ITEM 4.  |   | Submission of Matters to a Vote of Security Holders                                                                |   |   |
|     |   |                                                                                                               |   |   |
|     |   | **PART II**                                                                                                        |   |   |
| ITEM 5.  |   | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |   |   |
| ITEM 6.  |   | Selected Financial Data                                                                                            |   |   |
| ITEM 7.  |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                        |   |   |
| ITEM 7A. |   | Quantitative and Qualitative Disclosure About Market  Risk                                                         |   |   |
| ITEM 8.  |   | Financial Statements and Supplementary Data                                                                        |   |   |
| ITEM 9.  |   | Changes in and  Disagreements With Accountants on Accounting and Financial Disclosure                              |   |   |
| ITEM 9A. |   | Controls and Procedures                                                                                            |   |   |
| ITEM 9B. |   | Other Information                                                                                                  |   |   |
|     |   |                                                                                                               |   |   |
|     |   | **PART  III**                                                                                                      |   |   |
| ITEM 10. |   | Directors and Executive Officers of the Registrant                                                                 |   |   |
| ITEM 11. |   | Executive Compensation                                                                                             |   |   |
| ITEM 12. |   | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                    |   |   |
| ITEM 13. |   | Certain Relationships and Related Transactions                                                                     |   |   |
| ITEM 14. |   | Principal Accountant Fees and Services                                                                             |   |   |
|     |   |                                                                                                               |   |   |
|     |   | **PART IV**                                                                                                        |   |   |
| ITEM 15. |   | Exhibits and Financial Statement Schedules                                                                         |   |   |

 

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**PART I**

**ITEM 1. BUSINESS.**

**OVERVIEW**

BancTec,Inc. (BancTec or the Company), a Delaware corporation, helps clients around theworld simplify the process of managing their information.  The Company provides a wide range ofsolutions for automating complex, high-volume and data-intensive businessprocesses for clients in the financial services, manufacturing, healthcare,government, services and utilities industries.  BancTec’s offerings includebusiness solutions, business process outsourcing, technology products andinfrastructure services.

Foundedin 1972, the Company is headquartered in Irving, Texas and serves customers inmore than 50 countries, with international revenue in 2006 representingapproximately 40% of total revenues.

### **OWNERSHIP**

Welsh,Carson, Anderson & Stowe (“WCAS”), a private investment partnership, owns93.5% of the Company through a two-tier holding company structure abovethe Company.  All the outstanding capitalstock of the Company and warrants to purchase capital stock of the Company (butnot employee stock options) are held by BancTec Intermediate Holding, Inc., aDelaware corporation (“Intermediate Holding”). In turn, all the outstanding capital stock of Intermediate Holding isheld by BancTec Upper-Tier Holding, LLC, a Delaware limited liability company (“Upper-TierHolding”).  Upper-Tier Holding also holdsthe Senior Subordinated Note Due 2009, together with pay-in-kind interestthereon, in an aggregate principal amount of approximately $193.8 million (the “SponsorNote”).

WCAS is one of the largest private equity investmentfirms in the U.S. focused exclusively on investments in three industries:information and business services, healthcare, and communications. Since itsfounding in 1979, WCAS has organized limited partnerships with total capital ofmore than $16 billion. The firm currently invests out of Welsh, Carson,Anderson & Stowe IX, L.P., a $3.8 billion equity fund, and WCAS CapitalPartners IV, L.P., a $1.3 billion dedicated subordinated debt fund.

**OPERATINGSEGMENTS**

Operatingsegments are defined as components of a company about which separate financialinformation is available that is evaluated regularly by the company’s chiefoperating decision-maker, or decision-making group, in deciding howto allocate resources and in assessing performance.  In 2006, the Company reported its operations as three primary segments, Americas,EMEA, and ITSM. The operations of Americas and EMEA include manufacturing andsupplies, maintenance of Company and third-party manufactured equipment, integratedsystems, BancTec software products sold through Plexus Software (“Plexus”), adivision of BancTec, and business process outsourcing services.  The ITSM operations include personal computerrepair services and administration of third-party extended-servicecontracts.  ITSM provides warrantyservices, fulfillment services and related maintenance support to manufacturersof desktop and enterprise IT products in North America and Europe.

**Americasand EMEA**. These twooperating segments are responsible for business in North, Central and SouthAmerica (“Americas”) and Europe, Middle East and Africa (“EMEA”).  These two groups offer a similar portfolio ofbusiness process outsourcing, business solutions, technology products andinfrastructure services to similar types of clients. The portfolio offeringsfocus primarily on payment and remittance processing, document and contentprocessing and IT service management. These solutions help drive operational efficiencies through automationof mission critical processes for some of the world’s largest credit cardcompanies, financial institutions, insurance companies, government entities,service providers and consumer goods manufacturers.

**Information Technology Service Management (“ITSM”)**. ITSM provides quality integrated supportservices to the evolving Information Technology industry, with focuseddeployment and ongoing support solutions for original equipment manufacturers (“OEM”),outsourcing services providers, systems integrators and technologymanufacturers. These services result in cost savings, improved clientsatisfaction and increased revenues for BancTec’s clients.  ITSMprovides warranty services, fulfillment services and related maintenancesupport to manufacturers of desktop and enterprise IT products in North Americaand Europe.

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NoteN – Business Segment Data and Note O – Geographic Operations, contained inNotes to the Consolidated Financial Statements, include detailed financialinformation concerning the Company’s segments and geographic areas.  The 2004 segment information has beenconformed to the 2005 and 2006 presentation.

**MARKETSSERVED**

TheCompany’s portfolio of offerings generally incorporate advanced applicationssoftware developed by the Company and by third parties. These solutions may alsoinclude hardware developed and manufactured by the Company as well as by thirdparties.  Key applications provided bythe Americas and EMEA business units focus on the document and contentprocessing and payment and remittance processing markets.

**Documentand Content Processing**.  The Company’s Document and Content Processingportfolio offers innovative solutions that simplify the capturing,processing and archiving of information across the enterprise. The Company hasbecome a recognized leader in document and content processing by providingclients complete end-to-end solutions for credit card origination,loan/mortgage origination, accounts payable, document imaging and archiving,credit card and loan exceptions processing, claims processing and mailroomautomation.  While many BancTec solutionsare available ‘out of the box’, they can also be tailored without incurringhigh development costs and lengthy implementation timescales. Each BancTecsolution can be rapidly deployed and easily adapted to changing requirements.

TheCompany’s document and content processing software technology, marketed underthe eFIRST brand, is highly scaleable, designed for high-volume, complex anddistributed environments.  eFIRST Capture**provides a software solution to capture structured orunstructured documents from paper scanners, fax machines and e-mail and thenextract key information needed to categorize, index and distribute the data tothe appropriate person or department. eFIRST Process is a Business Process Management tool that enablesbusiness process automation through analysis, modeling, development anddeployment.  eFIRST Process providesintelligent workflow and routing of documents and cases in complex environmentsbased on business rules.  eFIRST Archivecan store large volumes of highly complex documents and provide multipleindices for improved search and retrieval. These technologies are available as stand-alone, integrated with BancTecor third-party hardware, or as the foundation for a comprehensive outsourcingsolution.

TheCompany also offers document and content processing hardware technology.  The DocuScan 9000, introduced in 2004, is ahigh-speed mixed document scanner designed to provide the highest hourlythroughput in difficult paper handling applications.  The Company introduced the DocuScan 6000 in2005 which offers an entry-level high-speed scanner with a compactphysical size that can still digitize and process up to 260 pages per minute.

TheCompany provides a complete line of products and services to address thehigh-volume check or mixed document imaging environment.  In addition to the DocuScan family, thecompany offers the E-Series and X-Series transports.  The E-Series is a high-speed transport thatcan read and sort between 10,000 and 1,000,000 check-size documents perday.  The X-Series offers a mid-rangetransport for check and remittance processing which enables check anditem-based transactions to be digitally captured, processed and retained.  To help companies achieve optimal performancein day-to-day check imaging operations, the Company offers its advanced imagequality software, Image Sentry.

**Payment andRemittance Processing. **The Company is focusedon helping clients move into the new era of remittance processing by addressingcurrent challenges around check conversion with ACH, ARC and check truncationwith Check 21.  The passage of theCheck Clearing for the 21st Century Act (“Check 21”), which facilitatescheck truncation by authorizing substitute checks, is expected to result indecreased demand for payment and check clearing solutions.  The Company’s suite of payment processing solutionstake advantage of new technology advances, such as automatic image recognitionand internet accessibility, to offset labor costs, facilitate timely researchand handle complex transaction variations. The Company’s payment processing technology suite includes eCap, a datacapture application that automates check and list processing and the extractionof data from invoices or payment advices. PayCourier Retail is a comprehensive remittance software solution forprocessing payment transactions, such as return documents, customercorrespondences, customer envelopes and checks. PayCourier Archive is a transaction archive solution that provides long-termdata and image storage for remittance processing.

**SERVICESPORTFOLIO**

TheCompany employs a services portfolio approach to maximize the marketpenetration and revenue potential from our targeted geographies, horizontalmarkets and vertical industries.  Thisservices portfolio consists of business process outsourcing, businesssolutions, infrastructure services and products.

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**BusinessProcess Outsourcing.** Business Process Outsourcing (BPO) is defined as having theunderstanding of industry, market and business processes intimately enough toapply tools, methods, products and services to allow our clients to delegate apart of their business for us to manage and deliver through measurableperformance metrics.  Because BancTec hasa strong tradition of technology experience, service excellence and solutionexpertise, the Company is uniquely positioned for leadership in the rapidlygrowing market for Business Process Outsourcing (BPO).  BancTec has a long history of offering BPO inthe U.K., and launched BPO services in the United States in 2005.  With outsourcing centers throughout the U.S.and Europe, BancTec offers BPO services for both document and contentprocessing as well as payment and remittance processing.

**BusinessSolutions. **Business Solutions are defined as the applicationof tools, methods and processes in conjunction with products and services todeliver business value to meet a client’s business need.  Utilizing a number of software technologiesdeveloped by BancTec and third party providers, as well as BancTec’s projectimplementation processes, the Company provides end-to-end Business Solutions tomeet client needs.  These solutions aretypically implemented at client locations and operated by client staff.

**InfrastructureServices. **Infrastructure Services are defined as themanagement, support and maintenance of BancTec products and third partyproducts within the IT infrastructure to deliver business and technical valueto meet our clients’ business requirements. The Company provides clients with system support for hardware andsoftware products and provides expertise in the installation, repair andmaintenance of large mission-critical, computer- driven electromechanicaldevices, such as reader/sorters and scanners, which involve imaging and paperhandling.  The Company employs customerservice engineers located in the United States and international locations toperform such service. The Company’s maintenance contracts usually include bothparts and labor, and the contracts are typically renewed for five to sevenyears.  In addition, the Company marketsa full range of consumable supplies that complement the Company’s documentprocessing systems.

**Products. **Products are defined as BancTec hardware, software and consumables, aswell as, third party hardware and software to meet a client’s technologyneeds.  The Company incorporates theseProducts as an integral part of our Business Solutions.  We utilize these products in delivering ourBusiness Process Outsourcing solutions and we offer these products to marketthrough indirect sales.

**GEOGRAPHICLOCATIONS**

Thereare no significant risks associated with foreign operations other than thefluctuation of international currencies (in Europe), political environments andeconomic cycles.  The Company does notcurrently hedge its foreign currency exposure. Note O – Geographic Operations, contained in Notes to the ConsolidatedFinancial Statements, includes detailed financial information concerning theCompany’s geographic operations.

**PRODUCTDEVELOPMENT**

TheCompany is engaged in ongoing software and hardware product developmentactivities for both new and existing products, employing approximately 106people for such activities as of December 31, 2006.

Thefollowing table sets forth the Company’s product development expenses:
|                              | ** ** | **For the years ended December 31,** | ** ** |
|------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                   | ** ** | **(dollars in thousands)**                          | ** ** |
|                         |       |                                                          |       |   |   |   |   |
| Product Development Expenses |       | $                                                             | 7,275      |   | $ | 8,823 |   | $ | 7,768 |   |
| Percent  of Total Revenue    |       | 1.9                                                           | %          | 2.6 | % | 2.2 | % |
|                              |            |                                                               |            |  |  |  |  |  |  |  |

 

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Currentexpenditures are concentrated on developing new applications for the Company’sproduct lines and improving and expanding existing products. Additional productdevelopment funding is provided by customers for customer-specific developmentactivities, which is not included in the expense outlined above, but is insteadpart of cost of sales in the accompanying Consolidated Statement ofOperations.  There can be no assurancethat the Company’s development efforts will result in successful commercialproducts. Many risks exist in developing new product concepts, adapting newtechnology and introducing new products to the market.

BancTec’sDocument and Content Processing business is organized around a set of solutions(both licensed and outsourced) and high-level reusable components that form thebasis of vertical solutions for specific markets.

TheDocument and Content Solution set includes; A/P Master, a complete solution foraccounts payable automation, Document and Image Archive, a hosted capture andarchive service, Remit Cycle 360, a  comprehensive transaction exchange cycle forthe healthcare market that includes providers, payers and banks and eFIRSTOrigin, a web based mortgage and loan origination solution.

Thethree core modules in the eFIRSTTM suite of solutions are; generic documentcapture system (eFIRST Capture), business process automation (eFIRST Process)and archiving (eFIRST Archive).  Inaddition, the Company will add key managed services capabilities to theseproducts.

**eFIRST Capture** captures, sorts and processes data from manytypes of documents, such as e-mail, web, scanned documents, faxes andweb-forms, and provides real-time access to this data for subsequent use.

**eFIRST Process** provides a technology platform and user tools toconstruct workflows, business rules, data views, user environments and accesspermission models that integrate with existing systems and people to automatebusiness processes.

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

*Image Capture.* In 2007, the Company plans to continuedeveloping options for the DocuScan 9000 system and make strategic market-basedinvestments in the E-Series and X-Series transports.  All other products are now effectively in asustaining mode only of development.

**SALES ANDDISTRIBUTION**

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

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

**CUSTOMERDIVERSIFICATION**

Forthe years ended December 31, 2006, 2005 and 2004, Dell, accounted for 19.5%,15.5%, and 17.4%, respectively, of the total revenue of the Company.  The Company’s ten largest customers accountedfor 48.6%, 45.0%, and 44.3%, of the Company’s revenues for the years endedDecember 31, 2006, 2005, and 2004 respectively.

**COMPETITION**

Inmarketing its products and services, the Company encounters aggressivecompetition from a wide variety of companies, some of which have substantiallygreater resources than BancTec. The Company believes that functionality,performance, quality, service and price are important competitive factors inthe markets in which it operates. Generally, the Company emphasizes industryknowledge, unique product features, flexibility, quality and service toconfigure unique systems from standard components in its competitive efforts.While the Company believes that its offerings compete favorably based on eachof these elements, the Company could be adversely affected if its competitorsintroduce innovative or technologically superior solutions or offer theirproducts at significantly lower prices than the Company. No assurance can begiven that the Company will have the resources, marketing and servicecapability, or technological knowledge to continue to compete successfully.

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**BACKLOG**

TheCompany believes that backlog is not a meaningful indicator in understandingBancTec’s business nor a meaningful indicator of future business prospects dueto the large volume of products delivered from shelf inventories and therelative portion of net revenue related to the Company’s services businesses.In addition, any backlog information would exclude ITSM contracts, recurringhardware and software maintenance contracts, and contracts for sales ofsupplies. Further, the Company’s backlog is subject to fluctuation due tovarious factors, including the size and timing of orders for the Company’sproducts and exchange rate fluctuations, and accordingly, is not necessarilyindicative of the level of future revenue.

**MANUFACTURING-SUPPLIERS**

TheCompany’s hardware and systems solutions are assembled using various purchasedcomponents such as PC monitors, minicomputers, image electronics, encoders,communications equipment and other electronic devices. Certain products arepurchased from sole source suppliers. The Company generally has contracts withthese suppliers that are renewed periodically. The Company has not experienced,nor does it foresee any significant difficulty in obtaining necessarycomponents or subassemblies; however, if the supply of certain components orsubassemblies was interrupted without sufficient notice, the result could be aninterruption of product deliveries.

**PATENTS**

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

Thevalidity of any patents issued, or that may be issued, to the Company may bechallenged by others and the Company could encounter legal difficulties inenforcing its patent rights against infringement. In addition, there can be noassurance that other technology cannot or will not be developed, or thatpatents will not be obtained by others, that would render the Company’s patentsobsolete.

**EMPLOYEES**

AtDecember 31, 2006, the Company employed approximately 2670 full-time employees.None of the Company’s employees is represented by a labor union. The Companyhas never experienced a work stoppage.

**WEBSITEACCESS TO BANCTEC’S REPORTS**

BancTec’s internetwebsite address is www.banctec.com.

The Company’s annualreports on Form 10-K, quarterly reports on Form 10-Q, current reportson Form 8-K, and amendments to those reports filed or furnished pursuantto section 13(a) or 15(d) of the Securities Exchange Act of 1934, asamended (the Exchange Act) are available free of charge through our website.

**ITEM 1A. RISK FACTORS.**

Information provided bythe Company in this Annual Report on Form 10-K/A and other documents filed withthe Securities and Exchange Commission include “forward-looking”information, as that term is defined in the Private Securities LitigationReform Act of 1995 (the “PSLRA”). Allstatements other than statements of historical fact could be deemedforward-looking statements.  TheCompany cautions investors that actual results or business conditions maydiffer materially from those projected or suggested in such forward-lookingstatements as a result of numerous factors beyond the Company’s control. TheCompany undertakes no obligation to update or revise forward-looking statementsto reflect 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.

***Businessand Economic Conditions***

Demand for the Company’sservices could be adversely impacted by economic and politicaluncertainty.  A general economic downturnmay adversely impact customers’ demand for information technology outsourcing,business processing outsourcing and systems integration services.  The Company’s sales are concentrated tobusinesses in industries involving 

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high volume transactionprocessing, including banking, financial services, insurance, health care andhigh technology, and to governmental agencies. Business or economic conditions, such as consolidation with theindustry, that cause customers in these industries to reduce or delay theirinvestments 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.

***TechnologicalChanges and Product Transitions***

The Company’s industry ischaracterized by continuing improvement in technology, which results in thefrequent introduction of new products, short product life cycles and continualimprovement in product price/performance characteristics.  The Company must incorporate these newtechnologies into its products and solutions in order to remain competitive.The Company may not be able to continue to manage technologicaltransitions.  A failure on the part ofthe Company to effectively manage the transition 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’s business dependson technology trends in its customers’ businesses.  Many of the Company’s traditional productsdepend on the efficient handling of paper-based transactions.  To the extent that technological changesimpact the future volume of paper transactions, the Company’s traditionalbusiness may be adversely impacted.

***Competition***

The business processingoutsourcing and the information technology outsourcing industries are highlycompetitive.  Certain of the Company’scompetitors have greater financial resources and may develop solutions orservices which may make the Company’s service offerings obsolete.  These situations may impact the Company’sability to win new contracts or develop and expand service offerings.  In addition, competition places downwardpressure on operating margins, particularly for technology outsourcing contractextensions or renewals.  As a result, theCompany may not be able to maintain current operating margins for technology outsourcingcontracts extended or renewed in the future.

***ContractProfitability***

The pricing and otherterms of customer contracts require the Company to make estimates andassumptions at the time these contracts are entered into that could differ fromactual results.  These estimates reflectthe Company’s best judgments regarding the nature of the contract and theexpected costs to provide the contracted services.  In addition, some contracts requiresignificant investments in the early stages, which are expected to be recoveredover the life of the contract through billings for services.  Increased or unexpected costs orunanticipated delays in the implementation of the services or decreases in theactual work volumes generated under the contracts could make these contractsless profitable or unprofitable.

***Customerconcentration***

The Company’s successdepends upon retention of significant customers.  For the year ended December 31, 2006, the topten customer accounted for 48.6% of total revenue. Customers may be lost due tomerger or acquisition, business failure, contract expiration, conversion to acompetitor, or conversion to an in-house system.  The Company cannot guarantee that they willbe able to retain long-term relationships or secure renewals of currentcontracts in the future.  Significantdecreases in the volumes under contracts with these significant customers orthe loss of any significant customer could leave the Company with a higherlevel of fixed costs than is necessary to service remaining customers.

***Keypersonnel***

The Company’s ability togrow and provide customers with competitive solutions and services is partiallydependent on the ability to attract and retain highly motivated people with theskills to serve customers.  In addition,the Company’s operations depend on the continued efforts of the executiveofficers and on senior management.  Ifthe Company fails to attract, train and retain key management and technicallyskilled people, the financial condition and results of operations could bematerially and adversely affected.

***Dependenceon Suppliers***

The Company’s hardwareproducts depend on the quality of components that are procured from third-partysuppliers.  Reliance on suppliers, aswell as industry supply conditions, generally involves several risks, includingthe possibility of defective parts (which can adversely affect the reliabilityand reputation of the Company’s products), a shortage of 

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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).

The Company has severalsingle-sourced supplier relationships, either because alternative sources arenot available or the relationship is advantageous due to performance, quality,support, delivery, capacity or price considerations.  If these sources are unable to provide timelyand reliable supply, the Company could experience manufacturing interruptions,delays or inefficiencies, adversely affecting its results of operations. Evenwhere alternative sources of supply are available, qualification of thealternative suppliers and establishment of reliable supplies could result indelays and a possible loss of sales, which could affect operating resultsadversely.

*** 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.   This limits the Company’s future operatingflexibility and could make the Company more vulnerable to a downturn in itsoperating performance or a decline in general economic conditions.

***InternationalActivities***

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

***Fluctuationsin Operating Results***

The Company’s operatingresults may fluctuate from period to period and will depend on numerous factors,including the following: customer demand and market acceptance of the Company’sproducts and solutions, new product introductions, product obsolescence,varying product mix, foreign-currency exchange rates, competition and otherfactors. The Company’s business is sensitive to the spending patterns of itscustomers, which in turn are subject to prevailing economic conditions andother factors beyond the Company’s control. In addition, recent laws governingcheck truncation could reduce the demand for the Company’s paymentproducts.  Any unfavorable change in oneor more of these factors could have a material adverse effect on the Company.

***ProductDevelopment Activities***

The strength of theCompany’s overall business depends in part on the Company’s ability to developproducts and solutions based on new or evolving technology and the market’sacceptance of those products.  There canbe no 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’s customers use itsproducts in highly regulated or technologically demanding industries.  As a result of products introduced by theCompany’s competitors, generally accepted industry standards can change rapidlyin ways that are beyond the control of the Company.

**ITEM 1B. UNRESOLVED STAFF COMMENTS.**

None.

**ITEM 2. PROPERTIES.**

Theprincipal executive offices of the Company are located in its Irving, Texasfacility.

Afacility located in Dallas, Texas was sold in October 2005 for $1.6 million,resulting in a loss of $1.2 million.  Inaddition, during February 2005, the Company consolidated personnel from anotherowned facility in Dallas, Texas to its facility in Irving, Texas.  This facility was also sold in November 2005for $3.5 million, resulting in no gain or loss.

9

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Asof December 31, 2006, the Company owned or leased numerous facilitiesthroughout the world to support its operations. The Company believes that thesefacilities are adequate to meet its ongoing needs. The loss of any of theCompany’s principal facilities could have an adverse impact on operations inthe short term. The Company has the option to renew its facility leases orbelieves it can replace them with alternate facilities at comparable cost. TheIrving manufacturing facility, which the Company owns, is the primary locationfor the Company’s administration, assembly and manufacturing activities.

**ITEM 3. LEGAL PROCEEDINGS.**

TheCompany is a party to various legal proceedings.  None of those current proceedings iscurrently expected to have an outcome that is material to the financialcondition or operations of the Company.

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

None.

10

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**PART II**

**ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY,RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.**

None.

**ITEM 6. SELECTED FINANCIAL DATA.**

The following tablepresents selected consolidated historical financial data for the periodsindicated.  The selected historicalconsolidated financial data set forth below should be read in conjunction with “Management’sDiscussion and Analysis  of  Financial Condition and Results of Operations”  and the Consolidated Financial Statements ofthe Company for the three years ended December 31, 2006, 2005 and 2004, and therelated notes thereto.
| ** **                                                   | ** ** | **Years Ended**    | ** ** |
|--------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                   | ** ** | **December 31,**   | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                   | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002 (A)** | ** ** |
| ** **                                                   | ** ** | **(In thousands)** | ** ** |
| Revenue                                                      |       | $                       | 379,479    |   | $ | 344,898 |   | $ | 360,726 |   | $ | 378,891 |   | $ | 379,433 |   |
| Gross profit                                                 |       | 97,238                  |       | 87,490 |   | 87,406 |   | 97,112 |   | 96,205 |   |
| Operating expenses                                           |       | 73,321                  |       | 73,935 |   | 71,598 |   | 73,242 |   | 70,968 |   |
| Interest expense                                             |       | 20,326                  |       | 19,166 |   | 19,098 |   | 19,473 |   | 33,080 |   |
| Income (loss) from continuing operations before income taxes |       | 3,943                   |       | (5,672 | ) | (3,606 | ) | 6,456 |   | 700 |   |
| Income tax expense (benefit)                                 |       | 4,785                   |       | 1,623 |   | 13,621 |   | (11,370 | ) | 344 |   |
| Net income (loss)                                            |       | (842                    | )          | (7,295 | ) | (17,227 | ) | 17,826 |   | 59,126 |   |
|                                                         |       |                    |       |   |   |   |   |   |   |   |   |
| Total assets                                                 |       | 212,597                 |       | 197,214 |   | 216,065 |   | 239,515 |   | 231,395 |   |
| Working capital (deficit)                                    |       | (19,518                 | )          | (5,988 | ) | 11,531 |   | 12,337 |   | (8,877 | ) |
| Long-term debt, less current maturities                      |       | 201,841                 |       | 199,063 |   | 197,823 |   | 197,823 |   | 201,723 |   |
| Series A preferred stock                                     |       | 18,040                  |       | 18,040 |   | 18,040 |   | 16,568 |   | 14,856 |   |
| Series B preferred stock                                     |       | 13,520                  |       | 13,520 |   | 13,520 |   | 10,609 |   | 8,324 |   |
| Stockholders’  deficit                                  |       | (169,625                | )          | (171,985 | ) | (159,703 | ) | (152,636 | ) | (161,724 | ) |
|                                                              |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(A)            In November 2002, the Company completed the saleof BancTec Japan.  For financialstatement purposes, the sale was treated as a discontinued operation.  As a result, the financial data above hasbeen restated for 2002 to reflect the continuing operations of the Company.

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

THEFOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATEDFINANCIAL STATEMENTS AND THE RELATED NOTES THAT APPEAR ELSEWHERE IN THISDOCUMENT.

The following discussioncontains forward-looking statements as that term is defined in thePSLRA.  See “Forward Looking Statements.”The Company cautions investors that there can be no assurance that actualresults or business conditions will not differ materially from those projectedor suggested in such forward-looking statements as a result of variousfactors, including those described below under the caption “Factors Affectingthe Company’s Business and Prospects.” The Company undertakes no obligation to update or revise forward-lookingstatements to reflect changes in assumptions, the occurrence of unanticipatedresults or changes to future operating results over time.

**Highlights**

The Company experienced several shifts in its business during the yearended December 31, 2006.  During theyear, the Company began offering business process outsourcing services in theUnited States, building on the experience gained in business processoutsourcing market in Europe over the last several years.  In addition, the Company experiencedcontinued expansion of the ITSM business in European markets.  The US hardware maintenance business, whichhas been in decline over the last several years, experienced growth in 2006 dueto the addition of significant contracts for the maintenance of third partyelectromechanical equipment.  Otherfactors continue to impact the Company, including reduced corporate customertechnology spending; ongoing competitive pressures; an ongoing planned changein revenue mix within the Company’s Americas and EMEA segments; and a highlyleveraged financial position.  The changein revenue mix is partially a result of trends in payment processing, includingcheck truncation (the process whereby banks are able to truncate originalchecks and to process check information electronically), which impacts domesticand international markets.

 

The Company continues to introduce new product offerings in itsdocument and content management solutions as well as expand its managedservices business in North America.  Inaddition, the Company continues to seek reductions in operating costs.

 

During the year endedDecember 31, 2006, the Company experienced declines in maintenance contractdeposits related to the personal computer repair business, which significantlyimpacted cash from operation.  Thesedeclines can be attributed  to twoprimary factors.  First, the overallamount of extended maintenance contracts have declined as a result of continueddeclines in prices of personal computers. As businesses and consumers have paid less per unit for personalcomputers, the purchase of extended maintenance contracts has declined asbusinesses and individuals choose to replace rather than repair.  Second, the price per contract has declineddue to competitive pressure from other service providers and also due todeclines in the per unit price of personal computers.  

11

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**Critical Accounting Policies**

The Company’s significantaccounting policies and methods used in the preparation of the ConsolidatedFinancial Statements are discussed in Note A of the Notes to ConsolidatedFinancial Statements. The following is a listing of the Company’s criticalaccounting policies and a brief discussion of each:

·                  Revenue recognition

·                  Allowance for doubtful accounts

·                  Inventory valuation

·                  Goodwill and other intangible assets

·                  Income taxes

·                  Stock-basedcompensation

**Revenue Recognition. **The Company derives revenueprimarily from two sources: (1) equipment and software sales - systemsintegration solutions which address complex data and paper-intensive workprocesses, including advanced web-enabled imaging and workflow technologieswith both BancTec-manufactured  equipmentand third-party equipment,  and (2)maintenance and other services - consist primarily of application design,development and maintenance, all aspects of desktop outsourcing, includingfield engineering, as well as help desk and LAN/WAN network outsourcing.

The Company’s revenuerecognition policies are in accordance with Statement of Position (“SOP”) 97-2,*“Software Revenue Recognition,”*as amended by SOP 98-9, “*Modification of SOP97-2,**Software RevenueRecognition with Respect to Certain Transactions”,*“Staff Accounting Bulletin (“SAB”) No. 101,*“Revenue Recognition 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.”*

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

In the case of softwarearrangements that require significant production, modification, orcustomization of software, or the license agreements require the Company toprovide implementation services that are determined to be essential to otherelements of the arrangement, the Company follows the guidance in SOP 81-1, *“Accounting for Performance of Construction–Type andCertain Production–Type Contracts,”*and applies the completed contract method of accounting.* *Incompliance with the completed contract method under SOP 81-1, revenue isrecognized when proof of customer acceptance has been received. * *Inthe 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.  Revenueallocated to separate elements is recognized for each element in accordancewith the accounting policies described below. EITF No. 03-5 is applied in determining whether non-software elementsare included with the software in applying SOP 97-2.

If the Company cannotaccount for items included in a multiple-element software or non-softwarearrangement as separate units of accounting, they are combined and accountedfor as a single unit of accounting and generally recognized as the undelivereditems or services are provided to the customer. The Company specifically uses the residual method, under which revenueis recognized on the delivered elements only when the remaining undeliveredelement is postcontract customer support (PCS).

The Company recognizeshardware and software revenue when persuasive evidence of an arrangementexists, delivery has occurred, the sales price is fixed or determinable andcollectibility is reasonably assured. At the time of the transaction, theCompany determines whether the fee associated with revenue transactions isfixed or determinable and whether or not collection is reasonably assured. TheCompany determines whether the fee is fixed or determinable based on thepayment terms associated with the transaction. If a significant portion of afee is due after the normal payment terms, which are generally 30 days frominvoice date, the Company recognizes revenue as the fees are due. The Companyassesses 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.

12

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*Non-software equipment*

The Company recognizes revenue from sales of non-software relatedequipment and supplies upon delivery and transfer of title or upon customeracceptance.

*Postcontract customer support*

Maintenancecontracts are primarily one year in duration and the revenue generated isgenerally recognized ratably over the term of the contract.

*Maintenance services not classified as postcontractcustomer support (PCS)*

The Company’s servicesrevenue is primarily billed based on contractual rates and terms, and theCompany generally recognizes revenue as these services are performed which, insome cases, is ratably over the contract term. Certain customers advance funds prior to the performance of the services.The Company recognizes revenue related to these advances as services areperformed over time or on a “per call” basis. Certain estimates are used in recognizing revenue on a “per call” basisrelated to breakdown rates, contract types, calls related to specific contracttypes, and contract periods.  The Companyuses its best judgment to relate calls to contracts.  In addition, as actual breakdown experiencerates are compared to estimates, such estimates may change over time and willresult in adjustments to the amount 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.

During the quarter endedJune 30, 2004, the Company recorded revenue of $4.3 million reflecting anadjustment arising out of a change in accounting estimate related to servicerevenue.  The information used incomputing these estimates is partially provided by a customer, and since June30, 2004, this information has been provided to the Company on a more timelyand accurate basis, resulting in greater accuracy of these estimates.  The Company anticipates that futureadjustments, if necessary, related to these estimates will be immaterial to theresults of operations.  The current andnon-current portions of these advances are shown as Deferred Revenue orMaintenance Contract Deposits on the Consolidated Balance Sheets.

*Business process outsourcing*

The Company providesbusiness process outsourcing services under contracts under a unit-price orfixed-price basis, which may extend up to 10 or more years.  If a contract involves the provision of asingle element, revenue is generally recognized when the Company performs theservices or processes transactions in accordance with contractual performancestandards.  Revenues from unit-pricedcontracts are recognized as transactions are processed based on objectivemeasures of output.  Revenues fromfixed-price contracts are recognized on a straight-line basis, unless revenuesare earned and obligations are fulfilled in a different pattern.  In some of these arrangements, the Companyhires customer employees and becomes responsible for certain customerobligations.  The Company continuouslyreviews and reassesses the estimates of contract profitability. Circumstancesthat potentially affect profitability over the life of the contract includedecreases in volumes of transactions or other inputs/outputs on which theCompany is paid, failure to deliver agreed benefits, variances from plannedinternal/external costs to deliver the services, and other factors affectingrevenues and costs.

Costs related todelivering outsourcing services are expensed as incurred with the exception ofcertain transition costs related to the set-up of processes, personnel andsystems, which are deferred during the Transition and expensed evenly over theperiod outsourcing services are provided. The deferred costs are specificinternal costs or incremental external costs directly related to transition orset-up activities necessary to enable the outsourced services. Deferred amountsare recoverable in the event of early termination of the contract and aremonitored regularly for impairment. Impairment losses are recorded whenprojected undiscounted operating cash flows of the related contract are notsufficient to recover the carrying amount of contract assets.  (See discussion of critical accounting policyfor goodwill and other intangible assets.)

**Allowancefor Doubtful Accounts**. The Company’s allowance for doubtfulaccounts relates to trade accounts receivable. The allowance for doubtfulaccounts is an estimate prepared by management based on identification of thecollectibility of specific accounts and the overall condition of the receivableportfolios. The Company analyzes trade receivables, and analyzes historical baddebts, customer credits, customer concentrations, customer credit-worthiness,current economic trends and changes in customer payment terms, when evaluatingthe adequacy of the allowance for doubtful accounts. If the financial conditionof the Company’s customers were to deteriorate, resulting in an impairment oftheir ability to make payments, additional allowances may be required.Likewise, should the Company determine that it would be able to realize more ofits receivables in the future than previously estimated, an adjustment to theallowance would increase income in the period such determination was made. Theallowance for doubtful accounts is reviewed periodically and adjustments arerecorded as deemed necessary.  During thequarter ended September 30, 2006, the Company updated the percentages used tocalculate the allowance for doubtful accounts to reflect improved recenthistory of collections and customer credits. This change in estimate was applied prospectively during the quarter andresulted in an immaterial impact to the Company’s financial statements.

13

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

**Goodwill and Other IntangibleAssets.** The Company accounts for goodwill inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwilland Other Intangible Assets”.  Goodwill is not amortized but ratheris tested at least annually for impairment. The impairment test is based onfair value compared to the recorded value at a reporting unit level. Reportingunits are defined as an operating segment or one level below. Valuation methodsused in determining fair value include an analysis of the cash flows that thereporting units can be expected to generate in the future (“Income Approach”)and the fair value of a reporting unit as compared to similar publicly tradedcompanies (“Market Approach”). In preparing these valuations, managementutilizes estimates to determine fair value of the reporting units. Theseestimates include future cash flows, growth rates, capital needs and projectedmargins, among other factors.  Estimates utilized in future calculationscould differ from estimates used in the current period. Future years’ estimatesthat are unfavorable compared to current estimates could cause an impairment ofgoodwill.  The Company performs the annual testfor impairment as of December 31, each year. No impairment ofgoodwill has been deemed necessary for 2006 and 2005.

Components of theCompany’s goodwill and other intangibles include amounts that are foreigncurrency denominated.  These amounts aresubject to translation at each balance sheet date.  The Company records the change to itsAccumulated Other Comprehensive Loss on the accompanying consolidated balancesheet.  Goodwill previously classified asunallocated has been allocated to the reporting units as required by SFAS No.142. The following is a summary of goodwillbalances as of December 31, 2006 by reporting unit.
|                                              | ** ** | **US  Operations** | ** ** | **SDS   Applications,  Ltd.** | ** ** | **BancTec   Canada** | ** ** | **Total** | ** ** |
|----------------------------------------------|------------|--------------------|------------|------------------------------------|------------|---------------------------|------------|-----------|------------|
| Balance at  January 1, 2006                  |       | $                  | 41,236     |                               | $          | 497                       |       | $         | 240        |   | $ | 41,973 |   |
| Goodwill  impairment                         |       | —             |       | —                             |       | —                    |       | —    |       |
| Additions in  Fiscal 2006                    |       | —             |       | 79                                 |       | —                    |       | 79        |       |
| Changes due to  foreign currency translation |       | —             |       | 69                                 |       | —                    |       | 69        |       |
|  Balance at December 31, 2006           |       | $                  | 41,236     |                               | $          | 645                       |       | $         | 240        |   | $ | 42,121 |   |

 

Certain costsassociated with contract acquisition and related direct and incremental costsare capitalized in accordance with SOP 81-1 and Technical Bulletin 90-1.  Contract acquisition costs include directincremental costs associated with contract negotiation, such as legal fees, andcosts incurred to transform customer processes and technology in direct supportof implementing the contract terms and conditions.  These costs are amortized on a pro-rata basisover the term of the contract.

In the event indicationsexist that an outsourcing contract cost balance related to a particularcontract may be impaired, undiscounted estimated cash flows of the contract areprojected over its remaining term, and compared to the unamortized outsourcingcontract cost balance.  If the projectedcash flows are not adequate to recover the unamortized cost balance, thebalance would be adjusted to equal the contract’s fair value in the period sucha determination is made.  The primaryindicator used to determine when impairment testing should be performed is whena contract is materially underperforming, or is expected to materiallyunder-perform in the future, as compared to the bide model that was developedas part of the original proposal process and subsequent annual budgets.  No impairment of contract acquisition costshas been recorded for the year ended December 31, 2006.

See Note F for a summaryof other intangible assets.

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**Income Taxes**.The Company is required to estimate income taxes in each of the jurisdictionsin which the Company operates. This process involves estimating the Company’sactual current tax expense together with assessing temporary differencesresulting from differing treatment of items for tax and accounting purposes.These differences result in deferred tax assets and liabilities, which would beincluded within the Company’s consolidated balance sheet. The Company must thenassess the likelihood that the deferred tax assets will be recovered fromfuture taxable income and to the extent that the Company believes recovery isnot likely, the Company must establish a valuation allowance. To the extent theCompany establishes a valuation allowance in a period, the Company must includean expense within the tax provision in the statement of operations. The Companyhas recorded a valuation allowance to reduce the carrying amount of recordeddeferred tax assets representing future deductions to an amount that is morelikely than not to be realizable. In the event the Company were to determinethat it would be able to realize additional deferred tax assets in the future,an adjustment to the deferred tax asset would increase income in the periodsuch determination was made.

**Stock-Based Compensation. **EffectiveJanuary 1, 2006, the Company adopted the provisions of Statement of FinancialAccounting Standards No. 123R, (“SFAS 123R”) “Share-Based Payment,” whichestablishes accounting for equity instruments exchanged for employee services.Under the provisions of SFAS No. 123R, share-based compensation cost ismeasured at the grant date, based on the calculated fair value of the award,and is recognized as an expense over the employee’s requisite service period(generally the vesting period of the equity grant).

Prior to January1, 2006, the Company accounted for share-based compensation to employees inaccordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations. The Company alsofollowed the disclosure requirements of SFAS No. 123, “Accounting forStock-Based Compensation”, as amended by SFAS 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure”.

The Companyelected to adopt the modified prospective transition method as provided by SFASNo. 123R and, accordingly, financial statement amounts for the prior periods presentedin this Form 10-K have not been restated to reflect the fair value method ofexpensing share-based compensation. Under this application, the Company isrequired to record compensation cost for all share-based payments granted afterthe date of adoption based on the grant date fair value estimated in accordancewith the provisions of SFAS 123R and for the unvested portion of allshare-based payments previously granted that remain outstanding which werebased on the grant date fair value estimated in accordance with the originalprovisions of SFAS 123.

Effective July 1, 2000, the Company adopted the 2000 Stock Plan (thePlan), which provides for the grant to employees of incentive options,non-qualified stock options, and restricted stock awards.

*Incentive Options.*During the years ended December 31, 2006 and 2005, the Company granted 462,500and 640,000 incentive options, respectively. Under the Plan, incentive options are granted at a fixed exercise pricenot less than 100% of the fair market value of the shares of stock on the dateof grant (or not less than 110% of the fair market value in certaincircumstances).  Options granted in 2004,2005 and 2006 vest over a four-year period at 25% per year.

*Non-qualified stock options.* No non-qualified stock options were granted during the years endedDecember 31, 2006 and 2005.  When grantedunder the Plan, non-qualified options are granted at a fixed exercise priceequal to, more than, or less than 100% of the fair market value of the sharesof stock on the date of grant.

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

The following table illustrates the effect on net loss as if compensationfor the Company’s stock option plans had been determined in conformance withSFAS No. 123 for the years ended December 31, 2005 and 2004:
|                                                                                                                              | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| Net loss applicable to common stock, as reported                                                                             |       | $                                           | (7,295     | ) | $ | (21,610 | ) |
| Total stock-based  employee compensation expense determined  under fair-value-based  method for all rewards, net of tax |       | (55                                         | )          | (17 | ) |
| Pro Forma net loss                                                                                                           |       | $                                           | (7,350     | ) | $ | (21,627 | ) |

 

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The fair value of each stock-option grant under the stock option planswas estimated on the date of grant using the Black-Scholes option-pricingmodel.  During 2005, the Company obtainedan independent valuation of the fair value of each stock option grant on thedate of grant using the lattice model and the Black-Scholes option-pricingmodel, both of which yielded approximately the same result.  As a result, the Company has revised thecompensation expense for all years as determined under SFAS No. 123R in thetable above using the Black-Scholes option-pricing model.

The followingtable presents share-based compensation expenses for continuing operationsincluded in the Company’s consolidated statements of operations:
|                                                                                                               | ** ** | **Year Ended December  31, 2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| Share-based  compensation expense recorded   as selling, general and administrative, net of tax benefit of $0 |       | $                                                | 249        |   |
|                                                                                                               |            |                                                  |            |  |

 

The current and revised fair value of each stock-option grant wasestimated with the following weighted-average assumptions and results:
| ** **                    | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------|------------|---------------------------------------------|------------|
| **Weighted Average**     | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Risk  free interest rate      |       | 4.67                                        | %          | 4.70 | % | 4.10 | % |
| Expected  life                |       | 10  years                                   |       | 10  years |   | 10  years |   |
| Expected  volatility          |       | 40.0                                        | %          | 40.0 | % | 40.0 | % |
| Fair value of options granted |       | $                                           | 0.44       |   | $ | 0.42 |   | $ | 0.12 |   |
|                               |            |                                             |            |  |  |  |  |  |  |  |

 

**RESULTS OFOPERATIONS**

**Comparison of Years EndedDecember 31, 2006 and December 31, 2005**

Consolidatedrevenue of $379.5 million for the year ended December 31, 2006 increased by$34.6 million or 10.0% from the comparable prior-year period.

·                  The Americas revenue increase of $24.1 millionwas partially due to $15.2 million of revenue from the start of businessprocess outsourcing services in the United States in 2006.  The majority of the business processoutsourcing revenue related to a significant seven year contract involvingthree processing centers which process transactions for multiplecustomers.  In addition, these processingcenters contain excess capacity which provides the Company the opportunity toprocess volumes from additional contracts without significant expansion offixed overhead.  The increase in revenuewas also related to $5.6 million of equipment sales into South America.  In addition, hardware maintenance revenueincreased $6.6 million due to the addition of contracts related to themaintenance of third-party equipment. These increases were partially offset by a decline in revenues relatedto the sale and installation of packaged solutions, as the demand for paymentssolutions continues to decline due to market trends, including reduced checkvolume, check truncation, and the passage of Check 21.  The Check Clearing for the 21st Century Act (“Check 21”) facilitates checktruncation by authorizing substitute checks, thus negatively impacting thedemand for check and payment solutions.

·                  The ITSM decrease of $3.0 million resulted fromdecreased revenue in the United States of $14.2 due to pricing decreases,domestic competitive pressure, and decreased volume under certain maintenanceprograms, somewhat offset by increased revenue of $11.2 million from theexpansion by ITSM of operations in Europe.

·                  Revenue increases in EMEA of $13.5 million arethe result strong sales in Europe of document and content processing solutions,increasing $7.4 and the continued growth in the United Kingdom of businessprocessing outsourcing, which contributed an additional $4.1 million ofrevenue, as well as the impact of a weakening dollar on the conversion ofrevenue stated in foreign currencies.

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Consolidatedgross profit of $97.2 million increased by $9.7 million or 11.10% from thecomparable prior-year period.

·                 Grossprofit decreased in Americas by $1.9 million or 4.6%.  Although revenue in Americas increased, theoverall gross profit decreased due to the gross profit percentage decreasingfrom 33.8% to 27.4%.  The start-up natureof the Company’s business process outsourcing business contributed to thereduction in the America’s gross profit percentage relative to the amount ofrevenue generated.  In addition, thehardware maintenance contracts added in the current year carried a lower grossprofit percentage due to higher inventory and labor costs associated withmaintaining third-party equipment.

·                  Increasesin EMEA gross profit of $7.5 millionor 20.6% resulted primarily from increased revenue.  A higher gross profit percentage alsocontributed to the improved gross profit, increasing from 33.1% to 34.3%,resulting from cost efficiencies.

·                  ITSM’s gross profit increased $4.2 million or42.0%.  Although revenue decreased, thegross margin percentage increased from 7.9% to 11.5%, primarily due to costreductions in the domestic operations.  ITSMis the major component in the maintenance and other services category on theConsolidated Statements of Operations, and therefore is a significant contributingfactor in the increased gross profit in the maintenance and other servicescategory.

Operatingexpenses of $73.3 million represented a decrease of $0.6 million compared tothe comparable prior-year period. Operating expenses, by component, changedprimarily as follows: (1) Product development expenses decreased $1.5 millioncompared to the prior year primarily due to the focused realignment of researchand development expenditures against future product strategies and marketingplans.  (2) Selling, general andadministrative expenses increased by $0.9 million or 1.4%, primarily due toincreased sales expenses and increased amortization of intangible assets.

Interestexpense for the year ended December31, 2006 of $20.3 millionrepresented an increase of $1.1 million compared to the prior-year period.  This increase resulted from the increasedlevel of amounts borrowed under the Revolver.

Sundry items resulted ina net gain of $0.1 million during the year ended December 31, 2006 as compared to a net loss of $0.8 million duringthe comparable prior-year period.  This decrease is primarily due to lowerforeign exchange transaction gains incurred in the current year.

An income tax provisionof $4.8 million for the year ended December 31, 2006, is compared to acorresponding prior-year income tax provision of $1.6 million.  The Company’s effective income tax rate wasapproximately 121.4 % as compared to (28.6%) for the corresponding prior-yearperiod.  The Company recorded anadditional valuation allowance of $5.1 million on deferred income tax assetsgenerated in 2006 to reduce that asset to a carrying amount that is more likelythan not to be realizable.  As a result,the Company’s effective income tax rate is greatly elevated relative to theprior year.  If no additional valuationallowance had been required, the Company’s effective income tax rate would havebeen 20.9%.

**Comparison of Years EndedDecember 31, 2005 and December 31, 2004**

Consolidatedrevenue of $344.9 million for the year ended December 31, 2005 decreased by$15.8 million or 4.4% from the comparable prior-year period.

·                  The Americas revenue decrease of $7.7 millioncontinues to reflect the decline in maintenance revenue due to the Company’sinstalled products reaching the end of their useful lives and from increasingcompetition.  The Company expects thesetrends to continue on these end of life products.  In addition, hardware and software productrevenue declines was primarily related to a weak market for payments solutionsdue to market trends, including reduced check volume and check truncation.

·                  The ITSM decrease of $1.0 million resulted frompricing decreases, domestic competitive pressure, and decreased volumes undercertain maintenance programs, partially offset by revenue increases resultingfrom the continued expansion by ITSM of operations into Europe.

·                  Decreases in EMEA of $7.2 million are the resultof decreased sales in Europe of ECM solutions compared with the prior year’speriod and the impact of the strengthening dollar on the conversion of revenuestated in foreign currencies.    Factorsexpected to impact future revenue include corporate-customer spending for largesystems-solutions, the continued impacts of check truncation, industryconsolidation reducing the volume of customers, on-going competitive pressures,and fluctuations in international currencies.

17

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Consolidatedgross profit of $87.5 million increased by $0.1 million or 0.1% from thecomparable prior-year period. Decreases in ITSM of $5.3 million and EMEA of$0.1 million were partially offset by increases in Americas of $5.0 million.

·                  The increase in Americas resulted from animproved gross margin percentage from 28.1% to 33.8% resulting fromproductivity improvements and cost savings.

·                  Although the EMEA gross margin percentageincreased from 31.3% to 33.1%, this was not enough to offset decreases in grossmargin resulting from revenue declines. Continued efforts to provide proven deliverables as well as targeted newofferings, including ECM solutions, archive solutions and hardwareenhancements, which, along withongoing cost-containment efforts, allowed for cost reductions to strengthen theEMEA gross profit percentage.

·                  ITSM gross profit percentage decreased from 12.1%to 7.9% resulting primarily from decreased revenue, margin reduction caused bycompetitive pricing pressure and volume losses experienced under certainservice contracts.  ITSM is the majorcomponent in the maintenance and other services category on the ConsolidatedStatements of Operations, and therefore is the primary contributing factor inthe decreased gross profit in that category.

Operatingexpenses of $73.9 million represented an increase of $2.3 million compared tothe comparable prior-year period. Operating expenses, by component, changedprimarily as follows: (1) Product development expenses increased $1.0 millioncompared to the prior year primarily due to the focused realignment of researchand development expenditures against future product strategies and marketingplans.  (2) Selling, general andadministrative expenses increased by $1.4 million or 2.2%.  Selling, general and administrative expenseincluded a $1.2 million loss from the sale of a vacated facility in Dallas,Texas in October 2005.

Interestexpense for the year ended December31, 2005 was flat at $19.1 millioncompared to the prior-year period.

Sundry items resulted ina net loss of $0.8 million during the year ended December 31, 2005 as compared to a net loss of $1.0 million duringthe comparable prior-year period.  This decreased loss is primarily due toforeign exchange transaction losses of $0.8 million during the current yearperiod.  This is compared to a $1.3million loss on the sale of 100% of the Company’s investment in the stock ofServibanca S.A. during the prior year period, which was partially offset byforeign exchange transaction gains of $0.3 million.

An income taxprovision of $1.6 million for the year ended December 31, 2005, is compared toa corresponding prior-year income tax provision of $13.6 million.  The Company’s effective income tax rate wasapproximately (28.6%) as compared to (377.7%) for the corresponding prior-yearperiod.  During 2004, the Companyrecorded an additional valuation allowance of $10.3 million on the deferredincome tax asset to reduce that asset to a carrying amount that is more likelythan not to be realizable.  No similaradditional allowance was required in 2005.

**LIQUIDITYAND CAPITAL RESOURCES**

The Company’s workingcapital requirements are generally provided by cash and cash equivalents, fundsavailable under the Company’s revolving credit facility, as discussed below,which matures May 30, 2008, and by internally generated funds fromoperations.  Funds availability under therevolving credit facility is determined by a borrowing-base formula equal to aspecified percentage of the value of the Company’s eligible accountsreceivable, inventory, real property, machinery and equipment and pledgedcash.  General economic conditions,decreased revenues from the Company’s maintenance contracts, and therequirement to obtain performance bonds or similar instruments could have amaterial impact on the Company’s future liquidity.  The Company believes that cash from availableborrowings under its revolving credit facility, other sources of funding, existing cash balances and a commitment fromWCAS to purchase up to $15 million in Series B Preferred stock for cash, willbe sufficient to fund its operations for at least the next 12 months.

TheCompany’s cash and cash equivalents, including restricted cash, totaled $12.2million at December 31, 2006, compared to $21.7 million at December 31,2005.  The working capital deficitincreased $13.5 million to a working capital deficit of $19.5 million atDecember 31, 2006.  The change in workingcapital was primarily due to the decrease in cash as well as an increase of$31.4 million in the Revolver and other current obligations.  These were somewhat offset by decreasesin deferred revenue and current maintenance contract deposits totaling $12.4million.  During the year ended December31, 2006, the Company experienced continued declines in maintenance contractdeposits due to two primary factors. First, the overall amount of extended maintenance contracts havedeclined as a result of continued declines in prices of personalcomputers.  As businesses and consumershave paid less per unit for personal computers, the purchase of extendedmaintenance contracts have declined as businesses and individuals choose to replacerather than repair.  Second, the priceper contract has declined due to competitive pressure from other serviceproviders and also due to declines in the per unit 

18

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price of personalcomputers.  In addition, increases inaccounts receivable of $7.7 million and inventory of $4.0 million contributedto the decrease in working capital.

During2006, the Company relied on cash reserves and borrowings from the Revolver tofund operations. At December 31, 2006, the Company’s remaining availabilityunder the Revolver, as hereinafter defined, was $4.3 million, of whichthe Company could draw $4.3 million.

Operatingactivities utilized $16.9 million of cash in 2006 and $12.8 million of cash in2005, an increase of $4.1 million.  Cashfrom operations before changes in working capital generated $19.9 million ofcash for the year ended December 31, 2006, an increase of $11.3 million overthe prior year.  This was offset by theutilization of cash resulting from decreases in working capital assets andliabilities of $36.8 million for the current year, an increase of $15.3 millionover the prior year.   This increase incash utilized by working capital activities mainly consisted of additionaldecreases in accounts payable and accrued expenses of $15.3 million andadditional decreases in deferred revenue and maintenance contract deposits of $2.4million, somewhat offset by increases in accounts receivable of $8.9million.  In addition, cash used inoperating activities was impacted by $2.6 million of interest paid in-kind onthe Sponsor Note in the current year. The decision to defer interest on the Sponsor Note accrued throughDecember 31, 2006, was made in January 2007. However, this transaction qualifies as a Type I subsequent event and istherefore reflected in the consolidated financial statements as a 2006transaction.

Investingactivities used net cash of $23.2 million during 2006 compared to $14.0 millionin 2005. The uses of cash for 2006 consisted of purchases of property, plantand equipment of $19.1 million and spending on intangible assets of $4.7million.  The uses of cash for 2005consisted of purchases of property, plant and equipment of $14.5 million andbusiness and asset acquisitions of $5.4 million, offset by cash received fromthe sale of fixed assets of $5.1 million. In addition, changes in restricted cash balances decreased $0.7 millionfrom the prior year period.

Financingactivities provided $30.1 million of net cash in 2006 compared to the use of$0.5 million of net cash in 2005.  In2006, cash was provided by net borrowings under the Revolver less payments oncapital leases and other financing arrangements.  Uses of cash in 2005 consisted primarily ofreductions to the Company’s debt and capital lease obligations.

At December 31, 2006, theCompany’s principal outstanding debt instruments consisted of (i) $31.5 millionunder the revolving credit facility maturing May 30, 2008 (which is more fullydescribed below) (ii) $94.0 million of 7.5% Senior Notes due 2008, and (iii)$107.2 million Sponsor Notes due 2009. As of December 31, 2006, the Company’s foreign subsidiaries had nooutstanding borrowings.  The Company orits affiliates may from time to time purchase, redeem or pay deferred intereston some of its outstanding debt or equity securities.  The Company would only make these payments incompliance with the covenants of its debt instruments.

The Company continuallyreviews its various lines of business to assess their contribution to theCompany’s business plan and from time to time considers the sale of certainassets in order to raise cash or reduce debt. Accordingly, the Company from time to time has explored and may explorepossible asset sales by seeking expressions of interest from potential bidders.  However, as of December 31, 2006, the Companyhas not entered into any binding agreements or agreements in principle to sellany assets and there can be no assurance that any such asset sales will occuror, if they occur, as to the timing or amount of proceeds that such assetssales 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 anamendment to the Revolver which extended the maturity date from May 30, 2006 toMay 30, 2008.  The committed amount is $40 million,with a letter-of-credit sub-limit of $10 million.  On October 6, 2006, the Company and Hellerentered into an amendment to the Revolver which provides for a $5 million TermLoan to the Company and reduces the availability under the Revolving Creditfacility from $40 million to $35 million. In, addition, on March 22, 2007, the Company and Heller entered into anamendment to the Revolver which provides for an additional $10.0 million TermLoan to the Company, thus reducing the availability under the Revolver from$35.0 million to $25.0 million.  Thetotal potential availability under the Loan and Security agreement, however,remains at $40 million.

The Revolver is securedby substantially all the assets of the Company, subject to the limitations onliens contained in the Company’s existing Senior Notes.  Funds availability under the Revolver isdetermined by a borrowing-base formula equal to a specified percentage of thevalue of the Company’s eligible accounts receivable, inventory, owned realproperty, machinery and equipment and pledged cash.  At December 31, 2006, the Company had $31.5million outstanding under the Revolver and $0.4 million outstanding on letters-of-credit.  The current borrowing base availability underthe Revolver that the Company can draw was $4.3 million at December 31,2006.  A commitment fee of 0.375% perannum on the unused portion of the Revolver is payable quarterly.

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The interest rate onborrowings under the Revolver is, at the Company’s option, either (1) 0.25%over prime or (2) 1.75% over LIBOR.  AtDecember 31, 2006, the Company’s weighted average rate on the Revolver was7.58%.

Under the Revolver,substantially all of the Company’s domestic cash receipts (including proceedsfrom accounts receivable and asset sales) must be applied to repay theoutstanding loans, which may be re-borrowed subject to availability inaccordance with the borrowing base formula. The Revolver contains restrictionson the use of cash for dividend payments or non-scheduled principal payments oncertain indebtedness.  Restricted cash atDecember 31, 2006 of $2.5 million represents cash in escrow from a customerdeposit.

The Revolver containsvarious representations, warranties and covenants, including financialcovenants as to minimum fixed charge coverage ratio and minimum averageborrowing availability.  Effective March31, 2006, the Company and Heller amended the loan and security agreement tostate that a covenant to maintain a specific fixed charge coverage ratio wouldapply only if the average daily availability for the three month period endingon the last day of the most recent calendar quarter is less than $15.0million.  The fixed charge coverage ratiotest was triggered for the three months ended December 31, 2006.  At December 31, 2006, the minimum fixedcharge coverage ratio required under the Revolver was 0.9, compared to theactual fixed charge coverage ratio of 1.64. At December 31, 2006, the Company was in compliance with all covenantsunder the Revolver.

**SeniorNotes**.  The Company’s Senior Notes (the “Senior Notes”)accrue interest at a fixed 7.5% rate which is due and payable in semi-annualinstallments. The Senior Notes contain covenants placing limitations on theCompany’s ability to permit subsidiaries to incur certain debts, incur certainloans and liens, and engage in certain sale and leaseback transactions.  At December 31, 2006 and 2005, the Companyhad $94.0 million outstanding on the Senior Notes.

**Senior Subordinated UnsecuredSponsor Note**. The Company’s $160.0 million Sponsor Note bearsinterest at 10.0%, due and payable quarterly. The Sponsor Note is subordinate only upon bankruptcy or insolvency ofthe Company, or if upon maturity of the Senior Notes, the Senior Notes remainunpaid. The interest payments began September 30, 1999.  The Sponsor Note matures on July 22, 2009.

As provided under theagreement, the Sponsor Note holder, WCAS, elected to defer the quarterlypayment for the quarter ended December 31, 2006 of $2.6 million plus thedeferred financing fee of $0.8 million, which increased the principal amount ofthe Sponsor Note by $3.4 million.  WCAShad previously elected to defer quarterly interest payments of $4.0 million foreach of the June 2000 through September 2001 quarterly periods resulting in anincrease in the principal amount of the Sponsor Note totaling $33.8 million.Such elections required the Company to incur a deferred financing fee of 30.0%of the amount of each interest payment deferred.  The Company accounts for the additionalfinancing fees as a change in the effective interest rate of the debt.  WCAS may, at its election, defer each futurequarterly payment under similar terms. At December 31, 2006 and 2005, theCompany had $107.2 million and $103.8 outstanding on the Sponsor Note,respectively.

Financing Arrangements.  During 2005, the Company entered into afinancing arrangement for $1.8 million that pertained to computersoftware.  At December 31, 2006, theCompany had financing arrangement balances outstanding of $1.2 million, ofwhich $0.6 million was classified as current and $0.6 million was classified aslong-term.  The balance outstanding underfinancing arrangements at December 31, 2005 was $1.8 million.  This arrangement accrues interest at a fixed8.0% rate.  This arrangement is due inthree annual installments which began January 2006.

EquityLine of Credit.  Effective December 31, 2006, the Company andits majority shareholder, WCAS, entered into an arrangement whereby WCASprovided a commitment to purchase up to an additional $15.0 million of Series BPreferred stock for cash.  No accountingrecognition has been given to this right of BancTec to put its Series BPreferred stock, upon occurrence of certain events, to WCAS, primarily due to theparent/subsidiary nature of the arrangement. As of December 31, 2006, no stock had been purchased under thiscommitment.

**PreferredStock – Series A.**  As of December 31, 2006, the carrying amount of the Series APreferred stock was $18.0 million and the stated value of the Series APreferred stock, including accumulated but unpaid dividends, was $201.32 pershare.

**PreferredStock – Series B**.****As of December 31,2006, the carrying amount of the Series B Preferred stock was $13.5 million andthe stated value of the Series B Preferred stock, including accumulated butunpaid dividends, was $380.63 per share.

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### **Inflation****. **Inflation has not had a material effect on the operatingresults of the Company.

**OFF BALANCE SHEET ARRANGEMENTS**

The Company currentlydoes not have any off balance sheet arrangements.

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### **CONTRACTUALOBLIGATIONS AND COMMERCIAL COMMITMENTS**

In the normal course ofbusiness, the Company enters into various contractual and other commercialcommitments that impact, or could impact, the liquidity of operations. Thefollowing table outlines the commitments at December 31, 2006:
| ** **                              | ** ** | **Total   Amounts** | ** ** | **Less than  1 Year** | ** ** | **1-3  Years** | ** ** | **4-5  Years** | ** ** | **Over 5   Years** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|---------------------------------|------------|----------------|------------|----------------|------------|------------------------------|------------|
| ** **                              | ** ** | **(In Millions)**   | ** ** |
| Long-term  debt                         |       | $                        | 202.4      |                            | $          | 0.6            |       | $              | 201.8      |                         | $          | — |   | $ | — |   |
| Revolving  credit facility              |       | 31.5                     |       | 31.5                            |       | —         |       | —         |       | —                       |       |
| Interest  obligations on long-term debt |       | 37.0                     |       | 17.9                            |       | 19.1           |       | —         |       | —                       |       |
| Capital  leases                         |       | 2.1                      |       | 0.8                             |       | 0.9            |       | 0.4            |       | —                       |       |
| Operating  leases (non-cancelable)      |       | 18.4                     |       | 6.4                             |       | 6.2            |       | 2.6            |       | 3.2                          |       |
| Total  Contractual                      |       | 291.4                    |       | 57.2                            |       | 228.0          |       | 2.9            |       | 3.2                          |       |
|                                    |       |                     |       |                            |       |           |       |           |       |                         |       |
| Unused  lines of credit                 |       | $                        | 4.3        |                            | $          | 4.3            |       | $              | —     |                         | $          | — |   | $ | — |   |
| Standby  letters of credit              |       | 0.4                      |       | 0.4                             |       | —         |       | —         |       | —                       |       |
| Total Commercial                        |       | $                        | 4.7        |                            | $          | 4.7            |       | $              | —     |                         | $          | — |   | $ | — |   |

 

*PurchaseObligations* — Purchase obligations are defined ascontractual obligations to purchase goods or services that are enforceable andlegally binding on the Company and that specify all significant terms,including fixed or minimum quantities to be purchased; fixed, minimum, orvariable price provisions; and the approximate timing of the transaction.Purchase obligations do not include contracts that may be cancelled withoutpenalty.  The Company had no purchaseobligations at December 31, 2006.

**NEWACCOUNTING PRONOUNCEMENTS**

In June 2006, theFinancial Accounting Standards Board (FASB) issued FASB Interpretation No. 48(FIN 48), “Accounting for Uncertainty in Income Taxes-an Interpretation of FASBStatement No. 109”.  FIN 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return.  FIN 48 also providesguidance on de-recognition, classification, interest and penalties, accountingin interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.  The Company is currently evaluating the impactof adopting FIN 48 on the consolidated financial statements, but believes therewill be no material impact when adopted.

In September 2006,the FASB issued SFAS 157,*Fair ValueMeasurements* (“SFAS 157”)*,*which defines fair value, establishes a framework for measuring fair value, andexpands disclosures about fair value measurements. The provisions of SFAS 157are effective as of the beginning of fiscal year 2008. The Company is currentlyevaluating the impact of adopting SFAS 157 on the consolidated financialstatements.

In September 2006,the FASB issued SFAS 158, *Employers’Accounting for Defined Benefit Pension and Other Post-Retirement Plans — anAmendment of FASB Statements No. 87, 88, 106 and 132(R)*(“SFAS 158”),which requires that the Company recognize the over-funded or under-fundedstatus of the Company’s defined benefit post-retirement plans as an asset orliability in the Company’s 2007 year-end balance sheet, with changes in thefunded status recognized through comprehensive income in the year in which theyoccur. The funded status is measured by the difference between plan assets atfair value and the projected benefit obligation in its statement of financialposition.  The Company is currently evaluatingthe impact of adopting SFAS 158 on the consolidated financial statements, butbelieves there will be no material impact when adopted.  SFAS 158 also requires the Company to measurethe funded status of its defined benefit plans as of the year-end balance sheetdate no later than 2008. The Company already measures the funded status of itsdefined benefit plans as of the year-end balance sheet date.

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

TheCompany is subject to certain market risks arising from transactions in thenormal course of its business, and from obligations under its debt instruments.Such risk is principally associated with interest rate and foreign exchangefluctuations, as explained below.

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**InterestRate Risk**

TheCompany utilizes long-term fixed rate and short-term variable rate borrowingsto finance the working capital and capital requirements of the business. AtDecember 31, 2006 and 2005, the Company had outstanding Senior Notes, due in2008, of $94.0 million, with a fixed interest rate of 7.5%.  At December 31, 2006 and 2005, the Companyalso had the Sponsor Note, due 2009, with a balance of $107.2 million and$103.8 million, respectively. The Sponsor Note bears interest at a fixed rateof 10.0%.

The interest rate onloans under the Revolver is, at the Company’s option, either (1) 0.25% overprime or (2) 1.75% over LIBOR.  AtDecember 31, 2006, the Company’s weighted average rate on the Revolver was7.58%.  A balance of $31.5 million was outstanding under the Revolver at December 31,2006.  At this level, a one hundred basispoint change in the bank’s prime or LIBOR rate would impact net interestexpense by $315,000 over a twelve-month period

Theestimated fair values of the outstanding Senior Notes and the Sponsor Note,based upon recently completed market trades, comparable borrowing rates and therelative seniority preference of the instruments under certain circumstances,were $87.2 million and $66.9 million at December 31, 2006 and 2005,respectively, for the Senior Notes, and $89.1 million and $61.2 million atDecember 31, 2006 and 2005, respectively, for the Sponsor Note.  The Company does not expect changes in fairvalue of the Senior Notes or the Sponsor Note to have a significant effect onthe Company’s operations, cash flow or financial position.

**ForeignCurrency Risk**

TheCompany’s international subsidiaries operate in approximately 11 countries anduse the local currencies as the functional currency and the U.S. dollar as thereporting currency. Transactions between the Company and the internationalsubsidiaries are denominated in U.S. dollars. As a result, the Company hascertain exposures to foreign currency risk. However, management believes thatsuch exposure does not present a significant risk due to a relatively limitednumber of transactions and operations denominated in foreign currency.Approximately $153.6 million or 40.4% of the Company’s revenues are denominatedin the international currencies. Transaction gains and losses on U.S. dollardenominated transactions are recorded within Sundry, net in the accompanyingconsolidated statements of operations and were not material in 2006, 2005 or2004.

TheCompany may use foreign forward currency-exchange rate contracts to minimizethe adverse earnings impact from the effect of exchange rate fluctuations. Nohedging instruments existed at December 31, 2006.

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

**BANCTEC, INC.**

**INDEX TO FINANCIAL STATEMENTS ANDSCHEDULES**
| Financial Statements and Independent Registered  Public Accounting Firms’ Reports                        |
|---------------------------------------------------------------------------------------------------------------|
|                                                                                                          |
| Reports  of Independent Registered Public Accounting Firms                                                    |
|                                                                                                          |
| Consolidated Balance Sheets at December 31, 2006 and  2005                                                    |
|                                                                                                          |
| Consolidated Statements of Operations for the years  ended

December 31, 2006, 2005 and 2004                  |
|                                                                                                          |
| Consolidated Statements of Stockholders’ Deficit for  the

years ended December 31, 2006, 2005 and 2004  |
|                                                                                                          |
| Consolidated Statements of Comprehensive Income (Loss)  for the

years ended December 31, 2006, 2005 and 2004 |
|                                                                                                          |
| Consolidated Statements of Cash Flows for the years  ended

December 31, 2006, 2005 and 2004                  |
|                                                                                                          |
| Notes to Consolidated Financial Statements                                                                    |
|                                                                                                          |
| Supplemental Schedule                                                                                         |
|                                                                                                          |
| Schedule  II—Valuation and Qualifying Accounts for the years

ended  December 31, 2006, 2005 and 2004    |

 

All other schedules have been omitted as the required information isinapplicable, not required, or the information is included in the financialstatements and notes thereto.

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Tothe Board of Directors and Stockholders of BancTec, Inc.

Irving,TX

 

                We have audited the accompanyingconsolidated balance sheets of BancTec, Inc. and subsidiaries (the"Company") as of December 31, 2006 and 2005, and the relatedconsolidated statements of operations, stockholders' deficit, comprehensiveincome (loss), and cash flows for the years then ended. Our audit also includedthe financial statement schedule listed in the Index at Item 15 withrespect to 2006 and 2005. These financial statements and the financialstatement schedule are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statements andfinancial statement schedule based on our audits.

 

                We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. The Company is not required to have, nor were we engagedto perform, an audit of its internal control over financial reporting. Ouraudits included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany's internal control over financial reporting. Accordingly, we express nosuch opinion*.* An audit alsoincludes examining, on a test basis, evidence supporting the amounts and disclosuresin the financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

                In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of BancTec, Inc. and subsidiaries at December 31,2006 and 2005, and the results of their operations and their cash flows for theyears then ended in conformity with accounting principles generally accepted inthe United States of America. Also, in our opinion, such financial statementschedule with respect to 2006 and 2005, when considered in relation to thebasic consolidated financial statements taken as a whole, presents fairly, inall material respects, the information set forth therein.

 
| /s/ Deloitte & Touche LLP |   |
|-------------------------------|--------|

 

Dallas,Texas

April 2,2007

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors and Stockholders of BancTec, Inc.:

We have audited the accompanying consolidated statementsof operations, stockholders' deficit and comprehensive income, and cash flow ofBancTec, Inc. and subsidiaries for the year ended December 31, 2004.In connection with our audit of the consolidated financial statements, we havealso audited the accompanying Schedule II, Valuation and QualifyingAccounts ("Financial Statement Schedule") as of and for the yearended December 31, 2004. These consolidated financial statements andfinancial statement schedule are the responsibility of the Company'smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements and financial statement schedule based on our audit.

We conducted our audit in accordance with the standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made by management,as well as evaluating the overall financial statement presentation. We believethat our audit provides a reasonable basis for our opinion.

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the results of operations and the cash flowof BancTec, Inc. and subsidiaries for the year ended December 31,2004, in conformity with U.S. generally accepted accounting principles. Also,in our opinion, the related financial statement schedule as of and for the yearended December 31, 2004, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein.

 
|                     |         |
|---------------------|--------------|
|                | /s/ KPMG LLP |   |
|                |         |
| March 31, 2005 |         |

 

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**BANCTEC, INC.**

**CONSOLIDATED BALANCE SHEETS**

**ASSETS**

(In thousands) 
| ** **                                                                                                                     | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                     | ** ** | **2006**              | ** ** | **2005** | ** ** |
| CURRENT  ASSETS:                                                                                                               |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                      |       | $                     | 9,615      |   | $ | 18,540 |   |
| Restricted cash                                                                                                                |       | 2,542                 |       | 3,205 |   |
| Accounts receivable, less allowance for doubtful accounts of $838 and $1,110 at December 31, 2006 and 2005,  respectively |       | 65,674                |       | 58,020 |   |
| Inventories, net                                                                                                               |       | 23,792                |       | 19,807 |   |
| Prepaid expenses                                                                                                               |       | 7,284                 |       | 5,488 |   |
| Other current assets                                                                                                           |       | 329                   |       | 1,115 |   |
| Total current assets                                                                                                           |       | 109,236               |       | 106,175 |   |
|                                                                                                                           |       |                  |       |   |   |
| PROPERTY,  PLANT AND EQUIPMENT, AT COST:                                                                                       |       |                  |       |   |   |
| Land                                                                                                                           |       | 874                   |       | 874 |   |
| Field support spare parts                                                                                                      |       | 33,017                |       | 34,853 |   |
| Systems and software                                                                                                           |       | 54,520                |       | 52,263 |   |
| Machinery and equipment                                                                                                        |       | 22,376                |       | 21,094 |   |
| Furniture, fixtures and other                                                                                                  |       | 10,597                |       | 9,573 |   |
| Buildings                                                                                                                      |       | 20,769                |       | 20,716 |   |
| Construction in process                                                                                                        |       | 17,680                |       | 5,483 |   |
|                                                                                                                           |       | 159,833               |       | 144,856 |   |
| Less accumulated depreciation and amortization                                                                                 |       | (119,639              | )          | (114,932 | ) |
| Property, plant and equipment, net                                                                                             |       | 40,194                |       | 29,924 |   |
|                                                                                                                           |       |                  |       |   |   |
| OTHER  ASSETS:                                                                                                                 |       |                  |       |   |   |
| Goodwill                                                                                                                       |       | 42,121                |       | 41,973 |   |
| Other intangible assets, less accumulated amortization of $1,160  and $297 at December 31, 2006 and 2005, respectively    |       | 4,711                 |       | 5,018 |   |
| Outsourcing contract costs, less accumulated amortization of $526  at December 31, 2006                                   |       | 3,963                 |       | — |   |
| Deferred income taxes                                                                                                          |       | 8,886                 |       | 10,336 |   |
| Other assets                                                                                                                   |       | 3,486                 |       | 3,788 |   |
| Total other assets                                                                                                             |       | 63,167                |       | 61,115 |   |
| TOTAL ASSETS                                                                                                                   |       | $                     | 212,597    |   | $ | 197,214 |   |

 

See notes to consolidatedfinancial statements.

27

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**BANCTEC, INC.**

**CONSOLIDATED BALANCE SHEETS**

**LIABILITIES AND STOCKHOLDERS’ DEFICIT**

(In thousands, except sharedata) 
| ** **                                                                                                              | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                              | ** ** | **2006**              | ** ** | **2005** | ** ** |
| CURRENT LIABILITIES:                                                                                                    |       |                  |       |   |   |
| Current obligations under  capital leases, financing arrangements and revolver                                          |       | $                     | 32,843     |   | $ | 1,095 |   |
| Trade accounts payable                                                                                                  |       | 19,727                |       | 19,870 |   |
| Other accrued expenses and  liabilities                                                                                 |       | 29,252                |       | 31,293 |   |
| Deferred revenue                                                                                                        |       | 19,199                |       | 21,505 |   |
| Maintenance contract deposits                                                                                           |       | 23,367                |       | 33,453 |   |
| Income taxes payable                                                                                                    |       | 4,366                 |       | 4,947 |   |
| Total current liabilities                                                                                               |       | 128,754               |       | 112,163 |   |
|                                                                                                                    |       |                  |       |   |   |
| OTHER LIABILITIES:                                                                                                      |       |                  |       |   |   |
| Long-term debt and financing  arrangements                                                                              |       | 201,841               |       | 199,063 |   |
| Non-current maintenance  contract deposits                                                                              |       | 3,577                 |       | 11,466 |   |
| Pension liability                                                                                                       |       | 23,355                |       | 22,719 |   |
| Other liabilities                                                                                                       |       | 6,655                 |       | 5,748 |   |
| Total other liabilities                                                                                                 |       | 235,428               |       | 238,996 |   |
| Total liabilities                                                                                                       |       | 364,182               |       | 351,159 |   |
| COMMITMENTS AND CONTINGENCIES (Note M)                                                                                  |       |                  |       |   |   |
|                                                                                                                    |       |                  |       |   |   |
| SERIES A PREFERRED STOCK - issued and outstanding, 100,667 shares at  December 31, 2006 and 2005                        |       | 18,040                |       | 18,040 |   |
|                                                                                                                    |       |                  |       |   |   |
| STOCKHOLDERS’ DEFICIT:                                                                                             |       |                  |       |   |   |
| Cumulative preferred stock -  authorized, 200,000 shares of $0.01 par value at December 31, 2006 and December  31, 2005 |       |                  |       |   |   |
| Series B convertible preferred  stock - issued and outstanding, 35,520 shares at December 31, 2006 and 2005             |       | 13,520                |       | 13,520 |   |
| Common stock - authorized,  21,800,000 shares of $0.01 par value at December 31, 2006 and 2005:                         |       |                  |       |   |   |
| Common stock - issued and  outstanding 17,003,838 shares at December 31, 2006 and 2005                                  |       | 170                   |       | 170 |   |
| Class A common stock - issued  and outstanding 1,181,946 shares at December 31, 2006 and 2005                           |       | 12                    |       | 12 |   |
| Subscription stock warrants                                                                                             |       | 3,726                 |       | 3,726 |   |
| Additional paid-in capital                                                                                              |       | 122,904               |       | 122,655 |   |
| Accumulated deficit                                                                                                     |       | (294,384              | )          | (293,542 | ) |
| Accumulated other  comprehensive loss                                                                                   |       | (15,573               | )          | (18,526 | ) |
| Total stockholders’ deficit                                                                                        |       | (169,625              | )          | (171,985 | ) |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                       |       | $                     | 212,597    |   | $ | 197,214 |   |

 

See notes to consolidatedfinancial statements.

28

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**BANCTEC, INC.**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

(In thousands)
| ** **                                            | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| REVENUE                                               |       |                                       |       |   |   |   |   |
| Equipment and software                                |       | $                                          | 136,136    |   | $ | 126,676 |   | $ | 137,842 |   |
| Maintenance and other services                        |       | 243,343                                    |       | 218,222 |   | 222,884 |   |
|                                                  |       | 379,479                                    |       | 344,898 |   | 360,726 |   |
| COST OF SALES                                         |       |                                       |       |   |   |   |   |
| Equipment and software                                |       | 78,726                                     |       | 74,986 |   | 90,148 |   |
| Maintenance and other services                        |       | 203,515                                    |       | 182,422 |   | 183,172 |   |
|                                                  |       | 282,241                                    |       | 257,408 |   | 273,320 |   |
| Gross profit                                          |       | 97,238                                     |       | 87,490 |   | 87,406 |   |
|                                                  |       |                                       |       |   |   |   |   |
| OPERATING EXPENSES                                    |       |                                       |       |   |   |   |   |
| Product development                                   |       | 7,275                                      |       | 8,823 |   | 7,768 |   |
| Selling, general and  administrative                  |       | 66,046                                     |       | 65,112 |   | 63,830 |   |
|                                                  |       | 73,321                                     |       | 73,935 |   | 71,598 |   |
| Income from operations                                |       | 23,917                                     |       | 13,555 |   | 15,808 |   |
|                                                  |       |                                       |       |   |   |   |   |
| OTHER INCOME (EXPENSE):                               |       |                                       |       |   |   |   |   |
| Interest income                                       |       | 236                                        |       | 710 |   | 718 |   |
| Interest expense                                      |       | (20,326                                    | )          | (19,166 | ) | (19,098 | ) |
| Sundry, net                                           |       | 116                                        |       | (771 | ) | (1,034 | ) |
|                                                  |       | (19,974                                    | )          | (19,227 | ) | (19,414 | ) |
| INCOME (LOSS) BEFORE INCOME TAXES                     |       | 3,943                                      |       | (5,672 | ) | (3,606 | ) |
| INCOME TAX EXPENSE                                    |       | 4,785                                      |       | 1,623 |   | 13,621 |   |
| NET LOSS                                              |       | (842                                       | )          | (7,295 | ) | (17,227 | ) |
| PREFERRED STOCK DIVIDENDS  AND  ACCRETION OF DISCOUNT |       | —                                     |       | — |   | (4,383 | ) |
| NET  LOSS APPLICABLE TO COMMON STOCK                  |       | $                                          | (842       | ) | $ | (7,295 | ) | $ | (21,610 | ) |

 

See notes to consolidatedfinancial statements.

29

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**BANCTEC, INC.**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ DEFICIT**

# **(Inthousands, except share data)**

| ** **                                      | ** ** | **Series**    | ** ** | ** ** | ** ** | **Class**  | ** ** | ** **       | ** ** | ** **       | ** ** | ** **      | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|---------------|------------|------------|------------|------------|------------|------------------|------------|------------------|------------|-----------------|------------|-------------------|------------|------------|------------|
| ** **                                      | ** ** | **B**         | ** ** | ** ** | ** ** | **A**      | ** ** | ** **       | ** ** | **Additional**   | ** ** | ** **      | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Preferred** | ** ** | **Common** | ** ** | **Common** | ** ** | **Subscription** | ** ** | **Paid in** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Stock**     | ** ** | **Stock**  | ** ** | **Stock**  | ** ** | **Warrants**     | ** ** | **Capital**      | ** ** | **Deficit**     | ** ** | **Loss**          | ** ** | **Total**  | ** ** |
| Balance at December 31, 2003                    |       | $             | —     |       | $          | 170        |       | $                | 12         |             | $          | 3,726           |       | $                 | 127,038    |       | $          | (269,020 | ) | $ | (14,562 | ) | $ | (152,636 | ) |
|                                            |       |          |       |       |       |       |       |             |       |             |       |            |       |              |       |       |       |
| Series B Preferred Stock                        |       | 10,609        |       | —     |       | —     |       | —           |       | —           |       | —          |       | —            |       | 10,609     |       |
| Foreign currency translation adjustments        |       | —        |       | —     |       | —     |       | —           |       | —           |       | —          |       | 1,577             |       | 1,577      |       |
| Net loss                                        |       | —        |       | —     |       | —     |       | —           |       | —           |       | (17,227         | )          | —            |       | (17,227    | )          |
| Minimum pension liability, net of tax of $1,336 |       | —        |       | —     |       | —     |       | —           |       | —           |       | —          |       | (554              | )          | (554       | )          |
| Series A preferred stock dividends              |       | —        |       | —     |       | —     |       | —           |       | (1,359           | )          | —          |       | —            |       | (1,359     | )          |
| Series B preferred stock dividends              |       | 2,911         |       | —     |       | —     |       | —           |       | (2,911           | )          | —          |       | —            |       | —     |       |
| Accretion of discount                           |       | —        |       | —     |       | —     |       | —           |       | (113             | )          | —          |       | —            |       | (113       | )          |
| Balance at December 31, 2004                    |       | $             | 13,520     |       | $          | 170        |       | $                | 12         |             | $          | 3,726           |       | $                 | 122,655    |       | $          | (286,247 | ) | $ | (13,539 | ) | $ | (159,703 | ) |
|                                            |       |          |       |       |       |       |       |             |       |             |       |            |       |              |       |       |       |
| Foreign currency translation adjustments        |       | —        |       | —     |       | —     |       | —           |       | —           |       | —          |       | (2,088            | )          | (2,088     | )          |
| Net loss                                        |       | —        |       | —     |       | —     |       | —           |       | —           |       | (7,295          | )          | —            |       | (7,295     | )          |
| Minimum pension liability, net of tax of $1,243 |       | —        |       | —     |       | —     |       | —           |       | —           |       | —          |       | (2,899            | )          | (2,899     | )          |
| Balance at December 31, 2005                    |       | $             | 13,520     |       | $          | 170        |       | $                | 12         |             | $          | 3,726           |       | $                 | 122,655    |       | $          | (293,542 | ) | $ | (18,526 | ) | $ | (171,985 | ) |
|                                            |       |          |       |       |       |       |       |             |       |             |       |            |       |              |       |       |       |
| Foreign currency translation adjustments        |       | —        |       | —     |       | —     |       | —           |       | —           |       | —          |       | 2,452             |       | 2,452      |       |
| Net loss                                        |       | —        |       | —     |       | —     |       | —           |       | —           |       | (842            | )          | —            |       | (842       | )          |
| Minimum pension liability, net of tax of $445   |       | —        |       | —     |       | —     |       | —           |       | —           |       | —          |       | 501               |       | 501        |       |
| Stock-based compensation expense                |       | —        |       | —     |       | —     |       | —           |       | 249              |       | —          |       | —            |       | 249        |       |
| Balance  at December 31, 2006                   |       | $             | 13,520     |       | $          | 170        |       | $                | 12         |             | $          | 3,726           |       | $                 | 122,904    |       | $          | (294,384 | ) | $ | (15,573 | ) | $ | (169,625 | ) |

 

See notes to consolidatedfinancial statements.

30

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**BANTEC, INC.**

**CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME (LOSS)**

(In thousands)
| ** **                                                   | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                   | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net loss                                                     |       | $                                           | (842       | ) | $ | (7,295 | ) | $ | (17,227 | ) |
| Foreign currency translation adjustments                     |       | 2,452                                       |       | (2,088 | ) | 1,577 |   |
| Decrease (Increase) to minimum pension liability, net of tax |       | 501                                         |       | (2,899 | ) | (554 | ) |
| Total  comprehensive income (loss)                           |       | $                                           | 2,111      |   | $ | (12,282 | ) | $ | (16,204 | ) |

 

See notes to consolidatedfinancial statements.

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**BANCTEC, INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

(In thousands)
| ** **                                                                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                 | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES                                       |       |                                       |       |   |   |   |   |
| Net loss                                                                   |       | $                                          | (842       | ) | $ | (7,295 | ) | $ | (17,227 | ) |
| Adjustments to reconcile to  cash flows (used in) provided by operations:  |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                              |       | 14,130                                     |       | 15,956 |   | 15,913 |   |
| Recovery (provision) for  doubtful accounts                                |       | 981                                        |       | 146 |   | (229 | ) |
| Deferred income tax expense  (benefit)                                     |       | 2,456                                      |       | (2,324 | ) | 9,580 |   |
| Loss on disposition of  property, plant and equipment                      |       | 447                                        |       | 1,976 |   | 978 |   |
| Loss on sale of unconsolidated  subsidiary                                 |       | —                                     |       | — |   | 1,280 |   |
| Interest paid in-kind                                                      |       | 2,596                                      |       | — |   | — |   |
| Other non-cash items                                                       |       | 154                                        |       | 182 |   | 340 |   |
| Changes in operating assets  and liabilities:                              |       |                                       |       |   |   |   |   |
| Increase in accounts  receivable                                           |       | (5,431                                     | )          | (14,283 | ) | (6,350 | ) |
| (Increase) decrease in  inventories                                        |       | (3,741                                     | )          | 2,268 |   | 85 |   |
| (Increase) decrease in other  assets                                       |       | (203                                       | )          | 295 |   | 807 |   |
| (Decrease) increase in trade  accounts payable                             |       | (2,196                                     | )          | 5,729 |   | 1,357 |   |
| Decrease in deferred revenue  & maintenance contracts deposits         |       | (20,692                                    | )          | (18,265 | ) | (13,055 | ) |
| (Decrease) increase in other  accrued expenses and liabilities             |       | (4,536                                     | )          | 2,798 |   | 818 |   |
| Cash flows used in operating  activities                                   |       | (16,877                                    | )          | (12,817 | ) | (5,703 | ) |
|                                                                       |       |                                       |       |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                       |       |                                       |       |   |   |   |   |
| Purchases of property, plant  and equipment                                |       | (19,145                                    | )          | (14,499 | ) | (6,751 | ) |
| Proceeds from sale of  property, plant and equipment                       |       | —                                     |       | 5,086 |   | 297 |   |
| Decrease in restricted cash                                                |       | 663                                        |       | 851 |   | 15,522 |   |
| Purchase of intangibles                                                    |       | (4,727                                     | )          | (1,825 | ) | — |   |
| Purchase of business, net of  cash acquired                                |       | —                                     |       | (3,610 | ) | — |   |
| Proceeds from sale of  unconsolidated subsidiary                           |       | —                                     |       | — |   | 2,955 |   |
| Cash flows (used in) provided  by investing activities                     |       | (23,209                                    | )          | (13,997 | ) | 12,023 |   |
|                                                                       |       |                                       |       |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                       |       |                                       |       |   |   |   |   |
| Payments of current maturities  of capital lease and financing obligations |       | (1,237                                     | )          | (467 | ) | (1,175 | ) |
| Proceeds (payments) on  short-term borrowings, net                         |       | 31,532                                     |       | (1 | ) | 1 |   |
| Debt issuance costs                                                        |       | (200                                       | )          | (70 | ) | (50 | ) |
| Cash flows provided by (used  in) financing activities                     |       | 30,095                                     |       | (538 | ) | (1,224 | ) |
|                                                                       |       |                                       |       |   |   |   |   |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH                                    |       | 1,066                                      |       | (1,539 | ) | 347 |   |
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                       |       | (8,925                                     | )          | (28,891 | ) | 5,443 |   |
| CASH AND CASH EQUIVALENTS—BEGINNING OF YEAR                           |       | 18,540                                     |       | 47,431 |   | 41,988 |   |
|                                                                       |       |                                       |       |   |   |   |   |
| CASH AND CASH EQUIVALENTS—END OF YEAR                                 |       | $                                          | 9,615      |   | $ | 18,540 |   | $ | 47,431 |   |
|                                                                       |       |                                       |       |   |   |   |   |
| SUPPLEMENTAL DISCLOSURES OF INFORMATION:                                   |       |                                       |       |   |   |   |   |
| Cash paid during the period  for:                                          |       |                                       |       |   |   |   |   |
| Interest                                                                   |       | $                                          | 18,940     |   | $ | 19,170 |   | $ | 17,774 |   |
| Taxes                                                                      |       | $                                          | 3,499      |   | $ | 1,596 |   | $ | 2,774 |   |

 

See notes to consolidatedfinancial statements.

32

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**BANCTEC, INC.**

**NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS**

**NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**Description of Business**

BancTec,Inc. (BancTec or the Company), a Delaware corporation, is a worldwide providerof comprehensive enterprise content management, image capture devices, infrastructuresupport services and payment processing solutions. The Company helps customerscreate business efficiencies through innovative technology and services bycombining advanced web-enabled imaging and workflow technologies with bothBancTec-manufactured equipment and third-party equipment. These solutions aresubsequently maintained and supported by the Company’s service operations. TheCompany is also a leading provider of personal computer maintenance servicesfor major computer companies, government and corporate customers.  See Note N for further discussion of Companybusiness structure.

**Principles of Consolidation**

The consolidated financial statements include the accounts of BancTec,Inc. and its wholly-owned subsidiaries. The Company accounts for investments inwhich it does not exercise control (generally ownership of 50% or less) underthe equity method of accounting.  During2004, the Company sold 100% of its investments accounted for under the equitymethod.  Inter-company accounts and transactionshave been eliminated in consolidation.

**Use of Estimates**

The preparation of the Company’s consolidated financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities and the reported amounts of revenues, costs and expensesduring the reporting period. Actual results could differ from those estimates.

**Cash and Cash Equivalents**

Cashand cash equivalents include cash on hand and on deposit, including highlyliquid investments with original maturities of three months or less.  Restricted cash at December 31, 2006 and 2005of $2.5 million and $3.2 million, respectively, represents cash in escrow froma customer deposit.

**Allowance for Doubtful Accounts**

The allowance fordoubtful accounts is an estimate prepared by management based on evaluation ofthe collectibility of specific accounts and the overall condition of thereceivable portfolios. The Company analyzes customer credits, customerconcentrations, customer credit-worthiness, current economic trends and changesin customer payment terms, when evaluating the adequacy of the allowance fordoubtful accounts. The allowance for doubtful accounts is reviewed periodicallyand adjustments are recorded as deemed necessary.  During the quarter ended September 30, 2006,the Company updated the percentages used to calculate the allowance for doubtfulaccounts to reflect improved recent history of collections and customercredits.  This change in estimate wasapplied prospectively during the quarter and resulted in an immaterial impactto the Company’s financial statements.

**Inventories**

Inventories are valued at the lower of cost or market and include thecost of raw materials, labor, factory overhead, and purchased subassemblies.Cost is determined using the first-in, first-out and weighted average methods.

FromJuly 1, 2006 forward, parts purchased to support the repair operations of theITSM business segment have been classified as inventory rather than fieldsupport spare parts (“spare parts”), which are categorized as fixed assets inthe accompanying consolidated balance sheets. The Company made the decision to reduce the number of items thatwere repaired by the Company.  Insteadthese parts are being handled through the parts vendors using an advancedexchange program whereby the part is ordered and used for the repair with theold part sent back to the parts vendor. The Company then receives a credit from the vendor for a percentage ofthe part cost when the old part is received by them.  As a result 

33

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fewer parts fit thedefinition of a field support spare part. Parts on hand at June 30, 2006, willcontinue to be classified as field support spare parts until utilized, at whichpoint they will be retired.

At least quarterly, the Company evaluates the carrying amount ofinventory based on the identification of excess and obsolete inventory. The Company’sevaluation involves a multi-factor approach incorporating the stratification ofinventory by time held and the stratification of inventory by risk category,among other factors.  The approachincorporates both recent historical information and management estimates oftrends. The Company’s approach is intended to take into consideration potentialexcess and obsolescence caused by a decreasing installed base, engineeringchanges and end of manufacture.  If anyof the factors of the Company’s estimate were to deteriorate, additionalreserves may be required. The inventory reserve calculations are reviewedperiodically and additional reserves are recorded as deemed necessary.  Inventoryreserves as of December 31, 2006 and 2005 were $14.7 million and $12.6 million,respectively.

**Property, Plant, and Equipment**

Property, plant, and equipment are recorded at cost and are depreciatedor amortized principally on a straight-line basis over the estimated usefullives of the related assets, as follows:
| Field support spare parts | 2 to 5 years                                     |
|---------------------------|--------------------------------------------------|
| Systems and software      | 3 to 8 years                                     |
| Machinery and equipment   | 5 to 7 years                                     |
| Leasehold improvements    | Lesser of 5 to 7 years or the  life of the lease |
| Furniture and fixtures    | 5 to 7 years                                     |
| Buildings                 | 40 years                                         |

 

Depreciation expense is reflected in both cost of sales and selling,general and administrative expense. Depreciation expense for the years ended December 31, 2006, 2005, and2004 was $12.7 million, $15.7 million, and $15.9 million, respectively.

Property, plant and equipment still under construction are classified onthe accompanying Consolidated Balance Sheets as Construction in Process.   The increase in Construction in Processduring the year ended December 31, 2006 of $12.2 million is primarily a resultof the capitalization of costs related to the implementation of new ERPsoftware to be used by the Company.  Thisnew software is expected to be placed in service for internal use in the secondquarter of 2007.

**Impairment of Long-Lived Assets**

Long-lived assets andcertain identifiable intangibles are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to future net operating cashflows expected to be generated by the asset. If such assets are considered tobe impaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds the fair value of the assets. Assetsto be disposed of are reported at the lower of the carrying amount or fairvalue less costs to sell.   The Company’sinvestments in non-marketable equity securities are monitored for impairmentand are written down to fair value with a change to earnings if a decline infair value is judged to be other than temporary.

During the second quarterof 2004, the Company recorded a write down of approximately $1.5 million toreflect the estimated fair value of $2.7 million in its investment in the stockof Servibanca S.A. (43.4% interest), which was accounted for as an equityinvestment.  The sale of this stock, at anet sales price of $2.7 million was completed in August 2004.  The impairment charge of $1.5 million isreflected in Sundry, net in the accompanying consolidated statements ofoperations for the year ended December 31, 2004.

**Goodwill and Other Intangible Assets**

The Company accounts forgoodwill in accordance with Statement of Financial Accounting Standards (“SFAS”)No. 142, “Goodwill and Other Intangible Assets”.  Goodwill is not amortized but ratheris tested at least annually for impairment. The impairment test is based onfair value compared to the recorded value at a reporting unit level. Reportingunits are defined as an operating segment or one level below. Valuation methodsused in determining fair value include an analysis of the cash flows that thereporting units can be expected to generate in the future (“Income Approach”)and the fair value of a reporting 

34

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unit as compared to similar publicly traded companies (“MarketApproach”). In preparing these valuations, management utilizes estimates todetermine fair value of the reporting units. These estimates include futurecash flows, growth rates, capital needs and projected margins, among otherfactors.  Estimates utilized in future calculationscould differ from estimates used in the current period. Future years’ estimatesthat are unfavorable compared to current estimates could cause an impairment ofgoodwill.  The Company performs the annual testfor impairment as of December 31, each year. No impairment ofgoodwill has been deemed necessary for 2006 and 2005.

Components of theCompany’s goodwill and other intangibles include amounts that are foreigncurrency denominated.  These amounts aresubject to translation at each balance sheet date.  The Company records the change to itsAccumulated Other Comprehensive Loss on the accompanying consolidated balancesheet.

On November 15, 2005, the Company completed the acquisition of 100% ofthe common stock of SDS Applications Limited which included goodwill of $0.5million and other intangibles of $3.0, both of which are foreign currencydenominated (Note D).

Goodwillpreviously classified as unallocated has been allocated to the reporting unitsas required by SFAS No. 142. The followingis a summary of goodwill balances as of December 31, 2006 by reporting unit.
|                                              | ** ** | **US  Operations** | ** ** | **SDS   Applications,  Ltd.** | ** ** | **BancTec   Canada** | ** ** | **Total** | ** ** |
|----------------------------------------------|------------|--------------------|------------|------------------------------------|------------|---------------------------|------------|-----------|------------|
| Balance at  January 1, 2006                  |       | $                  | 41,236     |                               | $          | 497                       |       | $         | 240        |   | $ | 41,973 |   |
| Goodwill  impairment                         |       | —             |       | —                             |       | —                    |       | —    |       |
| Additions in  Fiscal 2006                    |       | —             |       | 79                                 |       | —                    |       | 79        |       |
| Changes due to  foreign currency translation |       | —             |       | 69                                 |       | —                    |       | 69        |       |
|  Balance at December 31, 2006           |       | $                  | 41,236     |                               | $          | 645                       |       | $         | 240        |   | $ | 42,121 |   |

 

Certain costsassociated with contract acquisition and related direct and incremental costsare capitalized in accordance with SOP 81-1 and Technical Bulletin 90-1.  Contract acquisition costs include directincremental costs associated with contract negotiation, such as legal fees, andcosts incurred to transform customer processes and technology in direct supportof implementing the contract terms and conditions.  These costs are amortized on a pro-rata basisover the term of the contract.

In the event indicationsexist that an outsourcing contract cost balance related to a particularcontract may be impaired, undiscounted estimated cash flows of the contract areprojected over its remaining term, and compared to the unamortized outsourcingcontract cost balance.  If the projectedcash flows are not adequate to recover the unamortized cost balance, thebalance would be adjusted to equal the contract’s fair value in the period sucha determination is made.  The primaryindicator used to determine when impairment testing should be performed is whena contract is materially underperforming, or is expected to materiallyunder-perform in the future, as compared to the bid model that was developed aspart of the original proposal process and subsequent annual budgets.  No impairment of contract acquisition costshas been recorded for the year ended December 31, 2006.

See Note F for a summaryof other intangible assets.

**RevenueRecognition**

The Company derivesrevenue primarily from two sources: (1) equipment and software sales - systemsintegration solutions which address complex data and paper-intensive workprocesses, including advanced web-enabled imaging and workflow technologieswith both BancTec-manufactured  equipmentand third-party equipment,  and (2)maintenance and other services - consist primarily of application design,development and maintenance, all aspects of desktop outsourcing, includingfield engineering, as well as help desk and LAN/WAN network outsourcing.

The Company’s revenuerecognition policies are in accordance with Statement of Position (“SOP”) 97-2,*“Software Revenue Recognition,”*as amended by SOP 98-9, “*Modification of SOP97-2,**Software RevenueRecognition with Respect to Certain Transactions”,*“Staff Accounting Bulletin (“SAB”) No. 101,*“Revenue Recognition in Financial Statements,”** *SABNo. 104,*“Revenue Recognition,”*Emerging Issues Task Force (“EITF”) No. 00-21,*“Revenue Arrangements with*

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*MultipleDeliverables,”*andEITF No. 03-5, *“Applicability of AICPAStatement of Position 97-2 to Non-Software Deliverables in an ArrangementContaining More-Than-Incidental Software.”*

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

In the case of softwarearrangements that require significant production, modification, orcustomization of software, or the license agreements require the Company toprovide implementation services that are determined to be essential to otherelements of the arrangement, the Company follows the guidance in SOP 81-1, *“Accounting for Performance of Construction–Type andCertain Production–Type Contracts,”*and applies the completed contract method of accounting.* *Incompliance with the completed contract method under SOP 81-1, revenue isrecognized when proof of customer acceptance has been received. * *Inthe 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.  Revenueallocated to separate elements is recognized for each element in accordancewith the accounting policies described below. EITF No. 03-5 is applied in determining whether non-software elementsare included with the software in applying SOP 97-2.

If the Company cannotaccount for items included in a multiple-element software or non-softwarearrangement as separate units of accounting, they are combined and accountedfor as a single unit of accounting and generally recognized as the undelivereditems or services are provided to the customer. The Company specifically uses the residual method, under which revenueis recognized on the delivered elements only when the remaining undeliveredelement is postcontract customer support (PCS).

The Company recognizeshardware and software revenue when persuasive evidence of an arrangementexists, delivery has occurred, the sales price is fixed or determinable andcollectibility is reasonably assured. At the time of the transaction, theCompany determines whether the fee associated with revenue transactions isfixed or determinable and whether or not collection is reasonably assured. TheCompany determines whether the fee is fixed or determinable based on thepayment terms associated with the transaction. If a significant portion of afee is due after the normal payment terms, which are generally 30 days frominvoice date, the Company recognizes revenue as the fees are due. The Companyassesses 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 collection becomesreasonably assured, which is generally upon receipt of cash. For all sales, theCompany generally uses either a binding purchase order or signed salesagreement as evidence of an arrangement.

*Non-software equipment*

The Company recognizes revenue from sales of non-software relatedequipment and supplies upon delivery and transfer of title or upon customeracceptance.

*Postcontract customer support*

Maintenancecontracts are primarily one year in duration and the revenue generated isgenerally recognized ratably over the term of the contract.

*Maintenance services not classified as postcontractcustomer support (PCS)*

The Company’s servicesrevenue is primarily billed based on contractual rates and terms, and theCompany generally recognizes revenue as these services are performed which, insome cases, is ratably over the contract term. Certain customers advance funds prior to the performance of the services.The Company recognizes revenue related to these advances as services areperformed over time or on a “per call” basis. Certain estimates are used in recognizing revenue on a “per call” basisrelated to breakdown rates, contract types, calls related to specific contracttypes, and contract periods.  The Companyuses its best judgment to relate calls to contracts.  In addition, as actual breakdown experiencerates are compared to estimates, such estimates may change over time and willresult in adjustments to the amount of “per call” revenue.

During the quarter endedJune 30, 2004, the Company recorded revenue of $4.3 million reflecting anadjustment arising out of a change in accounting estimate related to servicerevenue.  The information used incomputing these estimates is partially provided by a customer, and since June30, 2004, this information has been provided to the Company on a more timelyand accurate basis, resulting in greater accuracy of these estimates.  The Company anticipates that futureadjustments, if necessary, related to these estimates will be immaterial to theresults of operations.  The current andnon-current portions of these advances are shown as Deferred Revenue orMaintenance Contract Deposits on the Consolidated Balance Sheets.

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*Business process outsourcing*

The Company providesbusiness process outsourcing services under contracts under a unit-price orfixed-price basis, which may extend up to 10 or more years.  If a contract involves the provision of asingle element, revenue is generally recognized when the Company performs theservices or processes transactions in accordance with contractual performancestandards.  Revenues from unit-pricedcontracts are recognized as transactions are processed based on objectivemeasures of output.  Revenues fromfixed-price contracts are recognized on a straight-line basis, unless revenuesare earned and obligations are fulfilled in a different pattern.  In some of these arrangements, the Companyhires customer employees and becomes responsible for certain customerobligations.  The Company continuouslyreviews and reassesses the estimates of contract profitability. Circumstancesthat potentially affect profitability over the life of the contract includedecreases in volumes of transactions or other inputs/outputs on which theCompany is paid, failure to deliver agreed benefits, variances from plannedinternal/external costs to deliver the services, and other factors affectingrevenues and costs.

Costs related todelivering outsourcing services are expensed as incurred with the exception ofcertain transition costs related to the set-up of processes, personnel andsystems, which are deferred during the Transition and expensed evenly over theperiod outsourcing services are provided. The deferred costs are specificinternal costs or incremental external costs directly related to transition orset-up activities necessary to enable the outsourced services. Deferred amountsare recoverable in the event of early termination of the contract and aremonitored regularly for impairment. Impairment losses are recorded whenprojected undiscounted operating cash flows of the related contract are notsufficient to recover the carrying amount of contract assets.  (See discussion of critical accounting policyfor goodwill and other intangible assets.)

**Research and Development**

Research and development costs are expensed as incurred. Research anddevelopment costs for the year ended December 31, 2006, 2005 and 2004 were $7.3million, $8.8 million and $7.8 million, respectively.

**Income Taxes**

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

Incometaxes are accounted for under the asset and liability method of SFAS No.109, “Accounting for Income Taxes”.  Deferredtax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases and operatingloss and tax credit carryforwards. The Company records valuation allowancesrelated to its deferred income tax assets when, in the opinion of management,it is more likely than not that some portion or all of the deferred income taxassets will not be realized. Deferred tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years inwhich those temporary differences are expected to be recovered or settled. Theeffect on deferred tax assets and liabilities of a change in tax rates isrecognized in income in the period that includes the enactment date.

**Foreign Currency Translation**

Foreign assets and liabilities are translated using the exchange rate ineffect at the balance sheet date, and results of operations are translated usingan average rate for the period. Translation adjustments are accumulated andreported as a component of stockholders’ deficit and comprehensive income(loss). Transaction gains and losses are included in results of operations in “Sundry,net”. Foreign currency transaction (losses) gains for the years ended December31, 2006, 2005, and 2004 were $(0.2) million, $(0.8) million, and $0.3 million,respectively.  The Company does notcurrently hedge any of its net foreign currency exposure

**Accrued Vacation**

Prior to June 30, 2006, vacation was earned and accrued as the employeeworked.  A maximum of one week of unusedvacation could be carried over to the subsequent year and any earned but unusedvacation would be paid to the employee upon termination.  Beginning June 30, 2006, the vacation policywas changed for U.S. employees to specify that vacation is provided as acompany benefit, and is not earned and does not accrue.  As a result, unused vacation is not payableupon termination, unless specifically provided for by state law.  In addition, no unused vacation is eligibleto be carried over to subsequent calendar years.  As a result of this change in policy, theCompany adjusted its vacation accrual to be equal to the unused vacation foremployees in those states which require vacation be paid upon termination.  Accrued vacation was $2.1 million and $3.2million at December 31, 2006 and 2005, respectively.  This change was applied prospectively duringthe quarter ended June 30, 2006 and resulted in an immaterial impact to theCompany’s financial statements.

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**Concentration of Risk**

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

The Company sells its products to customers under specified credit termsin the normal course of business. These customers’ businesses can generally beclassified as banking, personal computer manufacturers, financial services,insurance, healthcare, government agencies, utilities and telecommunications.During 2006, 2005, and 2004, the Company derived 19.5%, 15.5%, and 17.4%,respectively, of revenues from a single customer, Dell. The loss of thisrevenue could have a material adverse effect on the Company.  The revenue from this single source isentirely in the Information Technology and Service Management (“ITSM”) businesssegment.

The Company currently receives funds in advance for a significant portionof the Company’s services prior to the performance of the services they relateto and management believes this mitigates the related credit risk.  Due to the diversity of the Company’scustomers, management does not consider there to be a concentration of riskwithin any single business segment. However, general economic conditions thatcause customers in such industries to reduce or delay their investments inproducts and solutions such as those offered by the Company could have amaterial adverse effect on the Company.

The Company’s hardware and systems solutions are assembled using variouspurchased components such as PC monitors, minicomputers, encoders,communications equipment and other electronic devices. Certain products arepurchased from sole- source suppliers. The Company generally has contracts withthese suppliers that are renewed periodically. The Company has not experienced,nor does it foresee any significant difficulty in obtaining necessary componentsor subassemblies; however, if the supply of certain components or subassemblieswas interrupted without sufficient notice, the result could be an interruptionof product deliveries.

**Fair Value of Financial Instruments**

The following estimated fair values of financial instruments have beendetermined by the Company using available market information and valuationmethodologies:

Cash and cash equivalents: Carrying amount approximates fair value due tothe short-term nature of the instruments.

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

Senior notes: The Company estimated fair value for 2006 based on anaverage value of recently completed market trades, resulting in ayield-to-maturity of approximately 13.08%. The number of actual trades is limited; therefore the result may vary ifa widely-traded market environment existed.

Sponsor Note: The Company estimated fair value at December 31, 2006,using a yield-to-maturity of approximately 18.08%, based on a premium to theSenior notes discussed above.

The estimated fair values of the Company’s financial instruments atDecember 31 are as follows:
| ** **                | ** ** | **2006**                | ** ** | **2005**        | ** ** |
|---------------------------|------------|-------------------------|------------|-----------------|------------|
| ** **                | ** ** | **(In thousands)** | ** ** |
| ** **                | ** ** | **Carrying  Amount**    | ** ** | **Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| Cash and cash equivalents |       | $                       | 9,615      |            | $          | 9,615 |   | $ | 18,540 |   | $ | 18,540 |   |
| Restricted cash           |       | 2,542                   |       | 2,542           |       | 3,205 |   | 3,205 |   |
| Senior Notes              |       | 93,975                  |       | 87,162          |       | 93,975 |   | 66,924 |   |
| Sponsor  Note             |       | 107,223                 |       | 89,102          |       | 103,848 |   | 61,170 |   |
|                           |            |                         |            |                 |            |  |  |  |  |  |  |  |  |

 

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**Stock-Based Compensation**

Effective January1, 2006, the Company adopted the provisions of Statement of FinancialAccounting Standards No. 123R, (“SFAS 123R”) “Share-Based Payment,” whichestablishes accounting for equity instruments exchanged for employee services.Under the provisions of SFAS No. 123R, share-based compensation cost ismeasured at the grant date, based on the calculated fair value of the award,and is recognized as an expense over the employee’s requisite service period(generally the vesting period of the equity grant).

Prior to January1, 2006, the Company accounted for share-based compensation to employees inaccordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations. The Company alsofollowed the disclosure requirements of SFAS No. 123, “Accounting forStock-Based Compensation”, as amended by SFAS 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure”.

The Companyelected to adopt the modified prospective transition method as provided by SFASNo. 123R and, accordingly, financial statement amounts for the prior periodspresented in this Form 10-K have not been restated to reflect the fair valuemethod of expensing share-based compensation. Under this application, theCompany is required to record compensation cost for all share-based paymentsgranted after the date of adoption based on the grant date fair value estimatedin accordance with the provisions of SFAS 123R and for the unvested portion ofall share-based payments previously granted that remain outstanding which werebased on the grant date fair value estimated in accordance with the originalprovisions of SFAS 123.

Effective July 1, 2000, the Company adopted the 2000 Stock Plan (thePlan), which provides for the grant to employees of incentive options,non-qualified stock options, and restricted stock awards.

*Incentive Options.*During the years ended December 31, 2006 and 2005, the Company granted 462,500and 640,000 incentive options, respectively. Under the Plan, incentive options are granted at a fixed exercise pricenot less than 100% of the fair market value of the shares of stock on the dateof grant (or not less than 110% of the fair market value in certaincircumstances).  Options granted in 2004,2005 and 2006 vest over a four-year period at 25% per year.

*Non-qualified stock options.* No non-qualified stock options were granted during the years endedDecember 31, 2006 and 2005.  When grantedunder the Plan, non-qualified options are granted at a fixed exercise priceequal to, more than, or less than 100% of the fair market value of the sharesof stock on the date of grant.

At December 30, 2005, with board of directors’ approval, all stockoptions were repriced from a previous strike price of $9.25 to a strike priceof $2.25.  No other provisions of thestock options were modified.
| ** **                                  | ** ** | **Incentive   Shares** | ** ** | **Non-qualified   Shares** | ** ** | **Weighted   Average   Exercise   Price** | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|----------------------------------------------------------|------------|
| Options outstanding–December 31, 2004  |       | 1,775,240                   |       | 31,760                          |       | 2.25                                                     |       |
| Granted                                     |       | 640,000                     |       | —                          |       | 2.25                                                     |       |
| Forfeited                                   |       | (71,500                     | )          | —                          |       | 2.25                                                     |       |
| Exercised                                   |       | —                      |       | —                          |       | —                                                   |       |
| Options outstanding–December 31, 2005  |       | 2,343,740                   |       | 31,760                          |       | 2.25                                                     |       |
| Granted                                     |       | 462,500                     |       | —                          |       | 2.25                                                     |       |
| Forfeited                                   |       | (127,000                    | )          | —                          |       | 2.25                                                     |       |
| Exercised                                   |       | —                      |       | —                          |       | —                                                   |       |
| Options  outstanding–December 31, 2006 |       | 2,679,240                   |       | 31,760                          |       | 2.25                                                     |       |

 

Options and awards expire and terminate the earlier of 10 years from thedate of grant or three months after the date the employee ceases to be employedby the Company.  The weighted averageremaining contractual life of the outstanding options is 7.64 years and 8.25years at December 31, 2006 and 2005, respectively.

At December 31, 2006, options to purchase 2,711,000 shares wereoutstanding, of which 1,027,150 were vested. All options outstanding have an exercise price of $2.25.  No options have been exercised in 2006 or2005.

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The following table presents the vested status of all options outstandingat December 31, 2006 and 2005:
|                                                                                | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Total options outstanding                                                      |       | 2,711,000                       |       | 2,375,500                       |       |
| Vested options                                                                 |       | 1,027,150                       |       | 560,975                         |       |
| Non-vested options                                                             |       | 1,683,850                       |       | 1,814,525                       |       |
| Compensation related to non-vested options                                     |       | $                               | 571        |                            | $          | 637 |   |
| Weighted  average period over which remaining compensation is to be recognized |       | 1.98 years                      |       | 2.60 years                      |       |
|                                                                                |            |                                 |            |                                 |            |  |  |

 

The number of options which vested in 2006 was 491,750 options, and theseoptions have an average grant date fair value of between $0.42 and $0.44 pershare.

The Company had previously adopted the provisions of Statement ofFinancial Accounting Standard No. 123, “Accounting for Stock-Based Compensation,”(“SFAS 123”), as amended by SFAS No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure” through disclosure only.  Under the intrinsic-value method,compensation expense is recorded only to the extent that the strike price isless than fair value on the measurement date. All options granted in 2004 and 2005 were issued at or above fair value,and therefore no stock-based compensation was recorded.  In addition, at December 30, 2005, when theoptions were repriced, creating variable plan accounting, no stock-basedcompensation was recorded in accordance with APB 25, as the repriced optionshad no intrinsic value on the date of the change.

The following table illustrates the effect on net loss as if compensationfor the Company’s stock option plans had been determined in conformance withSFAS No. 123 for the years ended December 31, 2005 and 2004:
|                                                                                                                        | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                             | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| Net loss applicable to common stock, as reported                                                                       |       | $                                           | (7,295     | ) | $ | (21,610 | ) |
| Total stock-based  employee compensation expense determined under fair-value-based  method for all rewards, net of tax |       | (55                                         | )          | (17 | ) |
| Pro Forma net loss                                                                                                     |       | $                                           | (7,350     | ) | $ | (21,627 | ) |

 

The fair value of each stock-option grant under the stock option planswas estimated on the date of grant using the Black-Scholes option-pricingmodel.  During 2005, the Company obtainedan independent valuation of the fair value of each stock option grant on thedate of grant using the lattice model and the Black-Scholes option-pricingmodel, both of which yielded approximately the same result.  As a result, the Company has revised thecompensation expense for all years as determined under SFAS No. 123 in thetable above using the Black-Scholes option-pricing model.

The following tablepresents share-based compensation expenses for continuing operations includedin the Company’s consolidated statements of operations for the year endedDecember 31, 2006:
|                                                                                                              | ** ** | **Year Ended December  31, 2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| Share-based  compensation expense recorded as selling, general and administrative, net of  tax benefit of $0 |       | $                                                | 249        |   |
|                                                                                                              |            |                                                  |            |  |

 

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The current and revised fair value of each stock-option grant wasestimated with the following weighted-average assumptions and results:
| ** **                     | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|
| **Weighted Average**      | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Risk free interest rate        |       | 4.67                                        | %          | 4.7 | % | 4.1 | % |
| Expected life                  |       | 10  years                                   |       | 10  years |   | 10  years |   |
| Expected volatility            |       | 40.0                                        | %          | 40.0 | % | 40.0 | % |
| Fair  value of options granted |       | $                                           | 0.44       |   | $ | 0.42 |   | $ | 0.12 |   |
|                                |            |                                             |            |  |  |  |  |  |  |  |

 

**NEW ACCOUNTING PRONOUNCEMENTS**

In June 2006, theFinancial Accounting Standards Board (FASB) issued FASB Interpretation No. 48(FIN 48), “Accounting for Uncertainty in Income Taxes-an Interpretation of FASBStatement No. 109”.  FIN 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return.  FIN 48 also providesguidance on de-recognition, classification, interest and penalties, accountingin interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15,2006.  The Company is currentlyevaluating the impact of adopting FIN 48 on the consolidated financialstatements, but believes there will be no material impact when adopted.

In September 2006,the FASB issued SFAS 157,*Fair ValueMeasurements* (“SFAS 157”)*,*which defines fair value, establishes a framework for measuring fair value, andexpands disclosures about fair value measurements. The provisions of SFAS 157 areeffective as of the beginning of fiscal year 2008. The Company is currentlyevaluating the impact of adopting SFAS 157 on the consolidated financialstatements.

In September 2006,the FASB issued SFAS 158, *Employers’Accounting for Defined Benefit Pension and Other Post-Retirement Plans – anAmendment of FASB Statements No. 87, 88, 106 and 132(R)*(“SFAS 158”),which requires that the Company recognize the over-funded or under-fundedstatus of the Company’s defined benefit post-retirement plans as an asset orliability in the Company’s 2007 year-end balance sheet, with changes in thefunded status recognized through comprehensive income in the year in which theyoccur.  The funded status is measured bythe difference between plan assets at fair value and the projected benefitobligation in its statement of financial position.  The Company is currently evaluating theimpact of adopting SFAS 158 on the consolidated financial statements, butbelieves there will be no material impact when adopted.  SFAS 158 also requires the Company to measurethe funded status of its defined benefit plans as of the year-end balance sheetdate no later than 2008. The Company already measures the funded status of itsdefined benefit plans as of the year-end balance sheet date.

**Reclassification**

Certain amounts have been reclassified from the prior years to conform tothe current year presentation.   Theaccompanying Consolidated Statements of Operations reflects reclassificationsin 2004 to conform to the 2005 and 2006 presentation related to the allocationby the Company of overhead costs between selling, general and administrativeexpense and cost of sales.

**NOTE B – SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCINGTRANSACTIONS**

The Consolidated Statement of Cash Flows included the following non-cashinvesting and financing transactions:
| ** **                                                          | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                          | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Capital lease obligation incurred for lease of computer hardware    |       | $                                           | 1,301      |   | $ | 1,179 |   | $ | 287 |   |
| Inventory put in service as fixed assets                            |       | 458                                         |       | 1,532 |   | 105 |   |
| Financing obligation incurred for purchase of computer software     |       | —                                      |       | 1,860 |   | — |   |
| Purchases  of fixed assets included in accounts payable at year end |       | 1,614                                       |       | — |   | — |   |
|                                                                     |            |                                             |            |  |  |  |  |  |  |  |

 

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**NOTE C - RESTRUCTURING**

*Restructuring*.  As a part of the Company’s focus on cost efficiency,management makes ongoing staff reductions as needed.  Severance charges are included in the cost ofsales, selling, general and administrative and product development expense lineitems in the accompanying consolidated Statements of operations.  Consistent with the provision of SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities”, severanceliabilities are accrued when the amount of liability is determined and has beencommunicated to the employee.

Changes to the Company’s accrued severance liability, included in OtherAccrued Expenses and Liabilities in the accompanying consolidated balancesheets, during the years ended December 31, 2004, 2005 and 2006 are summarizedas follows:
| ** **                    | ** ** | **US   Solutions** | ** ** | **ITSM** | ** ** | **International** | ** ** | **Corp/Elims** | ** ** | **Total** | ** ** |
|-------------------------------|------------|-------------------------|------------|----------|------------|-------------------|------------|----------------|------------|-----------|------------|
| Balance at January 1, 2004    |       | $                       | 466        |     | $          | —            |       | $              | 56         |      | $          | — |   | $ | 522 |   |
|                          |       |                    |       |     |       |              |       |           |       |      |       |
| Severance expense             |       | 1,310                   |       | 949      |       | 393               |       | 829            |       | 3,481     |       |
| Severance paid                |       | (1,130                  | )          | (949     | )          | (444              | )          | (177           | )          | (2,700    | )          |
| Balance at December 31, 2004  |       | $                       | 646        |     | $          | —            |       | $              | 5          |      | $          | 652 |   | $ | 1,303 |   |
|                          |       |                    |       |     |       |              |       |           |       |      |       |
| Severance expense             |       | 329                     |       | 399      |       | 183               |       | 301            |       | 1,212     |       |
| Severance paid                |       | (759                    | )          | (399     | )          | (121              | )          | (813           | )          | (2,092    | )          |
| Balance at December 31, 2005  |       | $                       | 216        |     | $          | —            |       | $              | 67         |      | $          | 140 |   | $ | 423 |   |
|                          |       |                    |       |     |       |              |       |           |       |      |       |
| Severance expense             |       | 557                     |       | 890      |       | 127               |       | 111            |       | 1,685     |       |
| Severance paid                |       | (590                    | )          | (890     | )          | (183              | )          | (251           | )          | (1,914    | )          |
| Balance  at December 31, 2006 |       | $                       | 183        |     | $          | —            |       | $              | 11         |      | $          | — |   | $ | 194 |   |

 

**NOTE D - ACQUISITIONS**

*Purchase Combination*

On November 15, 2005, theCompany completed the acquisition of 100% of the common stock of SDSApplications Limited for a net purchase price of $3.9 million plus a contingentpayment of up to $0.4 million.  Thiscontingent payment has not been and is not currently recorded at December 31,2006, as the liability is not yet probable, SDS Application Limited providesmortgage and trading software to the commercial market.

The allocation of the net purchase price was asfollows (in thousands):
|                            | ** ** | **Value assigned** | ** ** | **Life in years** | ** ** |
|----------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Net working  capital       |       | $                       | 297        |                        | N/A        |   |
| Property and  equipment    |       | 115                     |       | 1 to 5 years                |       |
| Trade name and  trademarks |       | 485                     |       | Indefinite                  |       |
| Software                   |       | 1,640                   |       | 10 years                    |       |
| Maintenance  agreements    |       | 408                     |       | 15 years                    |       |
| Non-compete  agreements    |       | 232                     |       | 3 years                     |       |
| Customer  relationships    |       | 230                     |       | 8 years                     |       |
| Goodwill                   |       | 500                     |       | Indefinite                  |       |
|                       |       | $                       | 3,907      |                        |       |   |

 

These intangiblesassets are foreign currency denominated. The amounts are subject to translation at each balance sheet date.  The Company records the change to itsAccumulated Other Comprehensive Loss on the accompanying consolidated balancesheet.

42

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Intangible assets were allocated to the EMEAsegment.  Definite life intangible assetsare being amortized to cost of product revenue over its estimated useful life.The consolidated financial statements include the operating results of SDSApplications Limited from the date of purchase. Pro forma results of operationshave not been presented because the effect of this acquisition was notmaterial.

*AssetPurchase*

On July 29, 2005, the Company completed the acquisition of certain assetsof a product manufacturing enterprise for a net purchase price of $2.4 million,consisting of $0.5 million in non-compete agreements and $1.9 million inproperty and equipment and other intangibles, primarily customer lists.

**NOTE E – INVENTORIES, NET**

Inventory consists of the following:

|                         | ** ** | **December 31,**   | ** ** |
|-------------------------|------------|-------------------------|------------|
| ** **              | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **              | ** ** | **(In thousands)** | ** ** |
| Raw materials           |       | $                       | 10,128     |   | $ | 9,503 |   |
| Work-in-progress        |       | 4,656                   |       | 3,305 |   |
| Finished goods          |       | 23,724                  |       | 19,550 |   |
|                    |       | 38,508                  |       | 32,358 |   |
| Less inventory reserves |       | (14,716                 | )          | (12,551 | ) |
| Inventories,  net       |       | $                       | 23,792     |   | $ | 19,807 |   |

 

**NOTE F – INTANGIBLE ASSETS**

A summary of amortizable intangible assets as of December 31, 2006 and2005 is as follows:
|                                      | ** ** | **December 31, 2006**      | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **Gross Carrying   Value** | ** ** | **Accumulated   Amortization** | ** ** | **Net** | ** ** |
| Outsourcing contract costs           |       | $                                    | 4,489      |   | $ | 526 |   | $ | 3,963 |   |
| Customer and other intangible assets |       | 5,871                                |       | 1,160 |   | 4,711 |   |
| Total amortizable intangible assets  |       | $                                    | 10,360     |   | $ | 1,686 |   | $ | 8,674 |   |

 
|                                      | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **Gross Carrying  Value**  | ** ** | **Gross Carrying  Value** | ** ** | **Gross   Carrying   Value** | ** ** |
| Outsourcing contract costs           |       | $                               | —     |   | $ | — |   | $ | — |   |
| Customer and other intangible assets |       | 5,315                           |       | 297 |   | 5,018 |   |
| Total  amortizable intangible assets |       | $                               | 5,315      |   | $ | 297 |   | $ | 5,018 |   |

 

Outsourcing contract costs consist of certain costs associated withcontract acquisition and related direct and incremental costs and arecapitalized in accordance with SOP 81-1 and Technical Bulletin 90-1.  Contract acquisition costs include directincremental costs associated with contract negotiation, such as legal fees, andcosts incurred to transform customer processes and technology in direct supportof implementing the contract terms and conditions, such as labor and travelcosts.

43

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These costs are amortized on a pro-rata basis over the term of thecontract.  See Note A under Goodwill andOther Intangible Assets for additional discussion of the accounting policiesfor outsourcing contract costs.

Amortization related to intangible assets was $1.7 million and $0.3million for the years ended December 31, 2006 and 2005, respectively.

**NOTE G - DEBT AND OTHER LIABILITIES**

Debt and other obligations consist of the following:
|                                                       | ** ** | **December 31,**   | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|
| ** **                                            | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                            | ** ** | **(In thousands)** | ** ** |
| Senior Notes, due 2008                                |       | $                       | 93,975     |   | $ | 93,975 |   |
| Revolving Credit Facility                             |       | 31,533                  |       | 1 |   |
| Senior Subordinated Sponsor Note, unsecured, due 2009 |       | 107,223                 |       | 103,848 |   |
| Financing Arrangement                                 |       | 1,286                   |       | 1,860 |   |
|                                                  |       | 234,017                 |       | 199,684 |   |
| Less: Current portion                                 |       | 32,176                  |       | 621 |   |
|                                                  |       | $                       | 201,841    |   | $ | 199,063 |   |

 

Revolving CreditFacility.****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 anamendment to the Revolver which extended the maturity date from May 30, 2006 toMay 30, 2008.  The committed amount is $40 million,with a letter-of-credit sub-limit of $10 million.  On October 6, 2006, the Company and Hellerentered into an amendment to the Revolver which provides for a $5.0 millionTerm Loan to the Company and reduces the availability under the Revolver from$40 million to $35 million.  In,addition, on March 22, 2007, the Company and Heller entered into an amendmentto the Revolver which provides for an additional $10.0 million Term Loan to theCompany, thus reducing the availability under the Revolver from $35.0 millionto $25.0 million.  The total potentialavailability under the Loan and Security agreement, however, remains at $40million.

The Revolver is securedby substantially all the assets of the Company, subject to the limitations onliens contained in the Company’s existing Senior Notes.  Funds availability under the Revolver isdetermined by a borrowing-base formula equal to a specified percentage of thevalue of the Company’s eligible accounts receivable, inventory, owned real property,machinery and equipment and pledged cash. At December 31, 2006, the Company had $31.5 million outstanding underthe Revolver and $0.4 million outstanding on letters-of-credit.  The availability remaining under the Revolverthat the Company can draw was $4.3 million at December 31, 2006.  A commitment fee of 0.375% per annum on theunused portion of the Revolver is payable quarterly.  The balance outstanding under the Revolver isclassified in current obligations in the accompanying Consolidated BalanceSheets.

The interest rate onborrowings under the Revolver is, at the Company’s option, either (1) 0.25%over prime or (2) 1.75% over LIBOR.  AtDecember 31, 2006, the Company’s weighted average rate on the Revolver was ­­­7.58%.

Under the Revolver, substantiallyall of the Company’s domestic cash receipts (including proceeds from accountsreceivable and asset sales) must be applied to repay the outstanding loans,which may be re-borrowed subject to availability in accordance with theborrowing base formula. The Revolver contains restrictions on the use of cashfor dividend payments or non-scheduled principal payments on certainindebtedness.  Restricted cash atDecember 31, 2006 and 2005 of $2.5 million and $­­­3.2 million represents cashin escrow from a customer deposit.

The Revolver containsvarious representations, warranties and covenants, including financialcovenants as to minimum fixed charge coverage ratio and minimum averageborrowing availability.  Effective March31, 2006, the Company and Heller amended the loan and security agreement tostate that a covenant to maintain a specific fixed charge coverage ratio wouldapply only if the average daily availability for the three month period endingon the last day of the most recent calendar quarter is less than $15.0million.  The fixed charge coverage ratiotest was triggered for the three months ended 

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December 31, 2006.  At December 31, 2006, the minimum fixedcharge coverage ratio required under the Revolver was 0.9, compared to theactual fixed charge coverage ratio of 1.64. At December 31, 2006, the Company was in compliance with all covenantsunder the Revolver.

SeniorNotes.  The Company’s Senior Notes (the “Senior Notes”)accrue interest at a fixed 7.5% rate which is due and payable in semi-annualinstallments. The Senior Notes contain covenants placing limitations on theCompany’s ability to permit subsidiaries to incur certain debts, incur certainloans and liens, and engage in certain sale and leaseback transactions.  At December 31, 2006 and 2005, the Companyhad $94.0 million outstanding on the Senior Notes.

Senior SubordinatedUnsecured Sponsor Note. The Company’s $160.0 million SponsorNote bears interest at 10.0%, due and payable quarterly.  The Sponsor Note is subordinate only uponbankruptcy or insolvency of the Company, or if upon maturity of the SeniorNotes, the Senior Notes remain unpaid. The interest payments began September30, 1999.  The Sponsor Note matures onJuly 22, 2009.

As provided under theagreement, the Sponsor Note holder, WCAS, elected to defer the quarterlypayment for the quarter ended December 31, 2006 of $2.6 million plus thedeferred financing fee of $0.8 million, which increased the principal amount ofthe Sponsor Note by $3.4 million.  WCAShad previously elected to defer quarterly interest payments of $4.0 million foreach of the June 2000 through September 2001 quarterly periods resulting in anincrease in the principal amount of the Sponsor Note totaling $33.8 million.Such elections required the Company to incur a deferred financing fee of 30.0%of the amount of each interest payment deferred.  The Company accounts for the additionalfinancing fees as a change in the effective interest rate of the debt.  WCAS may, at its election, defer each futurequarterly payment under similar terms. At December 31, 2006 and 2005, theCompany had $107.2 million and $103.8 outstanding on the Sponsor Note,respectively.

Financing Arrangements.  During 2005, the Company entered into afinancing arrangement for $1.8 million that pertained to computersoftware.  At December 31, 2006, theCompany had financing arrangement balances outstanding of $1.2 million, ofwhich $0.6 million was classified as current and $0.6 million was classified aslong-term.  The balance outstanding underfinancing arrangements at December 31, 2005 was $1.8 million.  This arrangement accrues interest at a fixed8.0% rate.  This arrangement is due inthree annual installments which began January 2006.

EquityLine of Credit.  Effective December 31, 2006, the Company andits majority shareholder, WCAS, entered into an arrangement whereby WCASprovided a commitment to purchase up to an additional $15.0 million of Series BPreferred stock for cash.  No accountingrecognition has been given to this right of BancTec to put its Series BPreferred stock, upon occurrence of certain events, to WCAS, primarily due tothe parent/subsidiary nature of the arrangement.  As of December 31, 2006, no stock had beenpurchased under this commitment.

Capital Leases.  During 2004, the Company entered into acapital lease for $0.2 million that pertained to computer hardware.  During 2005, the Company entered into anadditional capital lease for $0.2 million that pertained to computer hardware.  Amounts due under capital leases are recordedas liabilities.  During 2006, the Companyentered into a capital lease for $1.3 million that pertained to imagingequipment to be used in the Company’s BPO operations.  The Company’s interest in assets acquiredunder capital leases is recorded as property and equipment on the ConsolidatedBalance Sheets.  Assets under capitallease were $2.8 million and $1.6 million as of December 31, 2006 and 2005,respectively.  Amortization of assetsrecorded under capital leases is included in depreciation expense.  The current obligations under capital leasesare classified in the Current Liabilities section of the accompanyingconsolidated balance sheets and the non-current portion of capital leases areincluded in Other Liabilities.

At December 31, 2006, theCompany had capital lease balances outstanding of $1.8 million, of which $0.7million was classified as current and $1.1 million was classified aslong-term.  At December 31, 2005, theCompany had capital lease balances outstanding of $1.3 million.

TheCompany had no outstanding foreign-credit balances as of December 31, 2006.

45

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As of December 31, 2006 the future maturities of debt are as follows:
| Year       | ** ** | **(In thousands)** | ** ** |
|------------|------------|-------------------------|------------|
| 2007       |       | $                       | 32,129     |   |
| 2008       |       | 94,618                  |       |
| 2009       |       | 107,223                 |       |
| 2010       |       | —                  |       |
| 2011       |       | —                  |       |
| Thereafter |       | —                  |       |
|       |       | $                       | 233,970    |   |

 

The Company paid cash totaling $18.9 million, $19.2 million, and $17.8million, for interest during the twelve months ended December 31, 2006, 2005,and 2004, respectively. During the years ended December 31, 2006, 2005 and2004, the Company capitalized no interest costs.

**NOTE H – REDEEMABLE PREFERRED STOCK**

**SERIES A PREFERRED STOCK**

In September 2000, the Company issued 100,000 shares of $0.01 par valueSeries A Preferred Stock to WCAS, its primary owners in exchange for $15.0million in cash.  The aggregateliquidation preference/redemption value is $15.0 million, plus accumulated andunpaid dividends of $5,161 million at December 31, 2006.  The Company has the right to redeem theSeries A Preferred Stock at any time by payingfor each share the “stated value” per share as of the redemption date.In addition, upon the occurrence of certain events, as defined, and upon theapproval of a majority of the holders of the Series A Preferred Stock, theCompany would be required to redeem the shares. Due to the redemption rights at the option of the holder, the Series APreferred Stock is classified as mezzanine equity.  Eachshare of Series A Preferred Stock includes a warrant to purchase between 2.5and 7.75 shares of Common Stock at $0.01 per share. Common stock exercisable bythe warrant totals 750,000 shares and may be exercised at any time from thedate of purchase.

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

Forthe year ended December 31, 2004, accretion of the related discount and accruedbut unpaid dividends totaled $1.7 million. Effective January 1, 2005, the Series A Preferred Stock agreement wasamended to eliminate the dividends payable on the Series A PreferredStock.  As a result, no dividends wereaccrued during the year ended December 31, 2005 and 2006.    As of December 31, 2006, the carryingamount of the Series A Preferred Stock was $18.0 million and the stated valueper share, including accumulated but unpaid dividends, was $201.32.

**SERIES B PREFERRED STOCK**

In February 2001,the Company issued 35,520 shares of $0.01 par value Series B Preferred Stock toits primary owners, WCAS in exchange for $5.3 million in cash.  The aggregate liquidationpreference/redemption value at December 31, 2006 and 2005 is $13.5 million,including accumulated and unpaid dividends. The Company has the right to redeemthe Series B Preferred Stock at any time bypaying for each share the Stated Value per share as of the redemption date.Each share of Series B Preferred Stock is convertible into shares of CommonStock at any time. The number of shares of Common Stock is determined bymultiplying the number of shares being converted by $150.00 and dividing theresult by $8.325 per share. The conversion rate is subject to variousadjustments (for anti-dilution).  The Company is required to keep availableapproximately 640,000 common shares for issuance upon conversion of alloutstanding shares of Series B Preferred Stock.

Forthe year ended December 31, 2004, accrued but unpaid dividends totaled $2.9million.  Effective January 1, 2005, theSeries B Preferred Stock agreement was amended to eliminate the dividendspayable on the Series B Preferred Stock. As a result, no dividends were accrued during the year ended December31, 2005 and 2006.  As of December 31,2006, the stated value per share of the Series B Preferred, includingaccumulated but unpaid dividends, was $380.63.

46

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**NOTE I - OTHER ACCRUED EXPENSES AND LIABILITIES**

Other accrued expenses and liabilities consist of the following:
|                                        | ** ** | **December 31,**   | ** ** |
|----------------------------------------|------------|-------------------------|------------|
| ** **                             | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                             | ** ** | **(In thousands)** | ** ** |
| Salaries, wages and other compensation |       | $                       | 12,089     |   | $ | 11,903 |   |
| Accrued taxes, other than income taxes |       | 5,299                   |       | 4,376 |   |
| Accrued interest payable               |       | 860                     |       | 3,200 |   |
| Accrued invoices and costs             |       | 2,025                   |       | 1,586 |   |
| Other                                  |       | 8,979                   |       | 10,228 |   |
|                                   |       | $                       | 29,252     |   | $ | 31,293 |   |

 

**NOTE J - TAXES**

The income tax expense (benefit) on net (loss) income consists of thefollowing:
| ** **     | ** ** | **Years Ended December 31,** | ** ** |
|----------------|------------|---------------------------------------------|------------|
| ** **     | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current:       |       |                                        |       |   |   |   |   |
| Federal        |       | $                                           | (968       | ) | $ | 184 |   | $ | (42 | ) |
| State          |       | (10                                         | )          | (406 | ) | 153 |   |
| Foreign        |       | 3,308                                       |       | 4,169 |   | 3,930 |   |
| Total current  |       | 2,330                                       |       | 3,947 |   | 4,041 |   |
| Deferred:      |       |                                        |       |   |   |   |   |
| Federal        |       | —                                      |       | — |   | 8,919 |   |
| State          |       | —                                      |       | — |   | 81 |   |
| Foreign        |       | 2,455                                       |       | (2,324 | ) | 580 |   |
| Total deferred |       | 2,455                                       |       | (2,324 | ) | 9,580 |   |
|           |       | $                                           | 4,785      |   | $ | 1,623 |   | $ | 13,621 |   |

 

The difference between the income tax provision on net (loss) incomecomputed at the statutory federal income tax rate and the financial statementprovision for taxes is summarized as follows:
| ** **                                                        | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Provision (benefit) at U.S. statutory rate of 35% for all periods |       | $                                           | 1,380      |   | $ | (1,985 | ) | $ | (1,262 | ) |
| Increase in tax expense resulting from:                           |       |                                        |       |   |   |   |   |
| Impact of foreign and Puerto  Rico income tax rate                |       | (685                                        | )          | 13 |   | 203 |   |
| State income tax, net of  federal income tax benefit              |       | (491                                        | )          | (333 | ) | 109 |   |
| Change in valuation allowance                                     |       | 4,487                                       |       | 1,490 |   | 9,695 |   |
| Permanent differences                                             |       | 1,165                                       |       | 2,577 |   | 4,669 |   |
| Other, net                                                        |       | (1,071                                      | )          | (139 | ) | 207 |   |
|                                                              |       | $                                           | 4,785      |   | $ | 1,623 |   | $ | 13,621 |   |

 

47

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The Company paid cash totaling $3.5 million, $1.6 million, and $2.8million for income taxes during the years ended December 31, 2006, 2005 and2004, respectively.

The tax effects of temporary differences that give rise to significantportions of the deferred tax assets and liabilities at December 31, 2006 and2005 are presented below:
|                                        | ** ** | **December 31,**   | ** ** |
|----------------------------------------|------------|-------------------------|------------|
| ** **                             | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                             | ** ** | **(In thousands)** | ** ** |
| Gross deferred tax assets:             |       |                    |       |   |   |
| Net operating losses                   |       | $                       | 59,663     |   | $ | 56,687 |   |
| AMT credit carryforwards               |       | 101                     |       | 101 |   |
| Inventory reserves                     |       | 6,211                   |       | 4,671 |   |
| Receivable allowance                   |       | 173                     |       | 292 |   |
| Intangible assets previously  deducted |       | 638                     |       | — |   |
| Deferred revenues                      |       | 7,027                   |       | 10,183 |   |
| Deferred compensation                  |       | 3,349                   |       | 3,045 |   |
| Foreign timing differences,  net       |       | 8,792                   |       | 9,059 |   |
| Depreciation                           |       | 3,683                   |       | 3,761 |   |
| Other                                  |       | 2,582                   |       | 2,975 |   |
| Total gross deferred tax asset         |       | 92,219                  |       | 90,774 |   |
| Gross deferred tax liability:          |       |                    |       |   |   |
| Intangible assets previously  deducted |       | —                  |       | (506 | ) |
| Total gross deferred tax  liability    |       | —                  |       | (506 | ) |
| Deferred tax asset valuation reserve   |       | (83,022                 | )          | (78,832 | ) |
| Net deferred tax asset                 |       | $                       | 9,197      |   | $ | 11,436 |   |

 

A valuation allowance has been provided to reduce the deferred tax assetsto an amount management believes is more likely than not to be realized.Expected realization of deferred tax assets for which a valuation allowance hasnot been recognized is based upon the reversal of existing taxable temporarydifferences and taxable income expected to be generated in the future.  The need for a valuation allowance ondeferred tax assets is evaluated on a jurisdiction by jurisdiction bases.  As a result, certain of the foreignsubsidiaries deferred tax assets are not reserved with a valuation allowancedue to their history of profitability.

 Components of the valuationallowance are as follows:
| ** **                                  | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                  | ** ** | **(In thousands)**                     | ** ** |
| Valuation  allowance at beginning of year   |       | $                                           | 78,832     |   | $ | 76,184 |   | $ | 63,874 |   |
| (Decrease)  increase in valuation allowance |       | (596                                        | )          | (2,602 | ) | 10,305 |   |
| Tax deductible  loss                        |       | 5,144                                       |       | 5,187 |   | 1,612 |   |
| Other                                       |       | (358                                        | )          | 63 |   | 393 |   |
| Valuation allowance at  end of year         |       | $                                           | 83,022     |   | $ | 78,832 |   | $ | 76,184 |   |

 

Company’s effective tax rate was 121.4%, (28.6%), (377.7%) for the yearsended December 31, 2006, 2005, and 2004, respectively.

48

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The Company’s foreign and domestic net operating loss carryforwards of$165.0 million expire as follows: $5.5 million in 2007, $0.2 million in theperiod from 2014 through 2019, $134.9 million in the period from 2020 through2027, and $24.4 million with no expiration.

Components of net (loss) income before income tax expense (benefit) areas follows:
| ** **        | ** ** | **Years Ended December 31,** | ** ** |
|-------------------|------------|---------------------------------------------|------------|
| ** **        | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| United States     |       | $                                           | (16,121    | ) | $ | (20,400 | ) | $ | (16,441 | ) |
| Foreign           |       | 20,064                                      |       | 14,728 |   | 12,835 |   |
| Net(loss)  income |       | $                                           | 3,943      |   | $ | (5,672 | ) | $ | (3,606 | ) |

 

Undistributed earnings of foreign subsidiaries included in continuingoperations were approximately $25.6 million, $17.0 million, and $17.7 million,at December 31, 2006, 2005 and 2004, respectively.  No taxes have been provided on theundistributed earnings as they are considered to be permanently reinvested.

In October 2004, the JobsCreation Act was enacted. One of the provisions of this act provides adeduction for income from qualified domestic production activities (“qualifiedproduction income” or QPI). The deduction, which cannot exceed 50 percent ofannual wages paid, is phased in as follows: 3 percent of QPI in 2005-2006, 6percent in 2007-2009, and 9 percent in 2010 and thereafter. The Jobs CreationAct also provides for a two-year phase-out of the existing extra-territorialincome exclusion (ETI) for foreign sales with a 20 percent phase-out in 2005,40 percent in 2006 and 100 percent thereafter. The impact on the Company’s tax rate of the new manufacturing deductionat a fully phased-in rate of 9 percent is not anticipated to have a materialimpact on the statement of condition or results of operations.

The Jobs Creation Actalso creates a temporary incentive for U.S. corporations to repatriateaccumulated income earned abroad by providing an 85 percent dividends receiveddeduction for certain dividends from controlled foreign corporations. Thededuction is subject to a number of limitations and uncertainty remains as tohow to interpret numerous provisions in the Jobs Creation Act.  As of December 31, 2006, the Company does notplan to apply the 85 percent dividends received deduction for any repatriatedaccumulated income.

As a matter ofcourse, the Company is regularly examined by federal, state and foreign taxauthorities. Although the results of these examinations are uncertain, based oncurrently available information, the Company believes that the ultimate outcomewill not have a material adverse effect on the Company’s financial statements

**NOTE K - EMPLOYEE BENEFIT PLANS**

**US 401(K)Plan**

The Company’s Employees’ Savings Plan allows substantially all full-timeand part-time U.S. employees to make contributions defined by Section 401(k) ofthe Internal Revenue Code. Beginning January 1, 2006 the Company’s 401(k) Planchanged to match 10% of the first 5% of the participants’ qualifying totalpre-tax contributions.  No amounts wereexpensed under the plan for the years ended December 31, 2005 and 2004, as nomatching contributions were made in these years.  For the year ended December 31, 2006, theCompany recorded expense of $0.2 million for matching contributions.

**UK PensionPlan**

The Company’s subsidiary in the United Kingdom provides pension benefitsto retirees and eligible dependents. Employees eligible for participationinclude all full-time regular employees who are more than three years fromretirement. A retirement pension or a lump-sum payment may be paid dependentupon length of service at the mandatory retirement age. The Company accountsfor this plan under SFAS No. 87, “**Employers’ Accounting forPensions.” **The Company accrues the cost of these benefitsover the service lives of the covered employees based on an actuarialcalculation.   The Company uses aDecember 31 measurement date for this plan.

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The following table provides a reconciliation of the benefit obligation,plan assets and funded status of the pension fund.
| ** **                                               | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Change  in Benefit Obligation                            |       |                                        |       |   |   |   |   |
| Benefit obligation at beginning of year                  |       | $                                           | 43,527     |   | $ | 35,784 |   | $ | 26,856 |   |
| Service cost                                             |       | 956                                         |       | 877 |   | 446 |   |
| Interest cost                                            |       | 2,202                                       |       | 1,870 |   | 1,586 |   |
| Participant’s contributions                         |       | 813                                         |       | 618 |   | 728 |   |
| Actuarial loss                                           |       | (1,789                                      | )          | 9,102 |   | 3,975 |   |
| Amendments                                               |       | —                                      |       | — |   | — |   |
| Benefits paid                                            |       | (290                                        | )          | (377 | ) | (108 | ) |
| Foreign-exchange rate changes                            |       | 6,125                                       |       | (4,347 | ) | 2,301 |   |
| Benefit Obligation at end of year                        |       | 51,544                                      |       | 43,527 |   | 35,784 |   |
|                                                     |       |                                        |       |   |   |   |   |
| Change  in Plan Assets                                   |       |                                        |       |   |   |   |   |
| Estimated fair value of plan assets at beginning of year |       | 20,808                                      |       | 17,443 |   | 13,434 |   |
| Actual return on plan assets                             |       | 1,583                                       |       | 3,736 |   | 990 |   |
| Employer contribution                                    |       | 2,145                                       |       | 1,482 |   | 1,269 |   |
| Employee contribution                                    |       | 813                                         |       | 618 |   | 728 |   |
| Benefits paid                                            |       | (290                                        | )          | (377 | ) | (108 | ) |
| Foreign-exchange rate changes                            |       | 3,134                                       |       | (2,094 | ) | 1,130 |   |
| Estimated  fair value of plan assets at end of year      |       | 28,193                                      |       | 20,808 |   | 17,443 |   |
|                                                     |       |                                        |       |   |   |   |   |
| Funded  status                                           |       | (23,351                                     | )          | (22,719 | ) | (18,341 | ) |
| Unrecognized  actuarial loss                             |       | 16,188                                      |       | 17,136 |   | 12,994 |   |
| Net amount recognized                                    |       | $                                           | (7,163     | ) | $ | (5,583 | ) | $ | (5,347 | ) |

 

The accumulated benefit obligation was equal to the projected benefitobligation for years ended December 31, 2006, 2005 and 2004.

The components of the net periodic benefit cost are as follows:
| ** **                          | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service  Cost                       |       | $                                           | 956        |   | $ | 877 |   | $ | 446 |   |
| Interest  Cost                      |       | 2,202                                       |       | 1,870 |   | 1,586 |   |
| Expected  return on plan assets     |       | (1,306                                      | )          | (1,070 | ) | (1,095 | ) |
| Amortization  of transition amount  |       | —                                      |       | — |   | — |   |
| Amortization  of prior service cost |       | —                                      |       | — |   | — |   |
| Recognized  actuarial loss          |       | 1,055                                       |       | 638 |   | 431 |   |
| Net periodic benefit cost           |       | $                                           | 2,907      |   | $ | 2,315 |   | $ | 1,368 |   |

 

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| ** **                                                                         | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Weighted-average  assumptions used to determine benefit obligations at December 31 |       |                                        |       |   |   |   |   |
| Discount  Rate                                                                     |       | 5.20                                        | %          | 4.75 | % | 5.55 | % |
| Rate  of compensation increase                                                     |       | 2.50                                        | %          | 2.50 | % | 2.60 | % |

 
| ** **                                                                                             | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Weighted-average  assumptions used to determine net periodic benefit cost for years ended  December 31 |       |                                        |       |   |   |   |   |
| Discount  Rate                                                                                         |       | 4.75                                        | %          | 5.55 | % | 5.80 | % |
| Expected  asset return                                                                                 |       | 5.56                                        | %          | 6.20 | % | 7.60 | % |
| Rate  of compensation increase                                                                         |       | 2.50                                        | %          | 2.60 | % | 2.50 | % |

 

The net pension liabilityat December 31, 2006 and 2005 was $23.4 million and $22.7 million,respectively.  This liability isclassified in Other Liabilities in the accompanying Consolidated BalanceSheets.  The (decrease) increase inminimum liability included in other comprehensive loss for the years endedDecember 31, 2006, 2005 and 2004 was $(1.5) million, $4.1 million, and $1.9million respectively.

The weighted averageasset allocations for the Company’s defined benefit plans at December 31, 2006and 2005, are as follows:
|                                    | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Domestic  and overseas equities    |       | 81.1                  | %          | 65.1 | % |
| UK  government and corporate bonds |       | 18.8                  | %          | 33.8 | % |
| Cash                               |       | 0.1                   | %          | 1.1 | % |
| Total                              |       | 100.0                 | %          | 100.0 | % |

 

The Company’s investmentpolicy related to the defined benefit plans is to continue to maintaininvestments in government gilts and highly rated bonds as a means to reduce theoverall risk of assets held in the funds. No specific targeted allocation percentages have been set by category,but are at the direction and discretion of the plan trustees.  During 2006, all contributions made to thefund were in these categories.

The Company’s fundingmethods are based on governmental requirements and differ from those methodsused to recognize pension expense. The Company expects to contribute $2.3million to the pension plan during 2007, based on current plan provisions.

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Pension benefit paymentsexpected to be paid to plan participants are as follows:

| Year      | ** ** | **(In Thousands)** | ** ** |
|-----------|------------|-------------------------|------------|
| 2007      |       | $                       | 284        |   |
| 2008      |       | 313                     |       |
| 2009      |       | 357                     |       |
| 2010      |       | 481                     |       |
| 2011      |       | 488                     |       |
| 2012-2016 |       | 4,592                   |       |
| Total     |       | $                       | 6,462      |   |

 

**ExecutiveDeferred Compensation Plan**

The Company has individual arrangements with seven former executives inthe U.S. which provide for fixed payments to be made to each individualbeginning at age 65 and continuing for 20 years.  This is an unfunded plan with payments to bemade from operating cash of the Company. The weighted average discount rate used as of December 31, 2006 and 2005was 5.8% and 5.25%, respectively. Benefit payments of $0.2 million and $0.2 million were made during eachof the years ended December 31, 2006 and 2005, respectively.  The expense for the years ended December 31,2006 and 2005 was $0.02 million and $0.9 million, respectively, a portion ofwhich related to the change in discount rate. The balance of this obligation is $4.0 million and $4.2 million as ofDecember 31, 2006 and 2005, respectively, and is classified in Other Liabilitiesin the accompanying consolidated balance sheets.  Benefit payments expected to be paid to planparticipants in 2007 are $0.3 million.

**NOTE L - WARRANTY LIABILITY**

The Company offersvarious product warranties for hardware sold to its customers.  Thespecific terms and conditions of the warranties vary depending upon thecustomer and the product sold.  Factors that affect the Company’s warrantyliability include number of products sold, historical and anticipated rates ofwarranty claims and cost per claim.  The Company accrues for estimatedwarranty costs as sales are made and periodically assesses the adequacy of itsrecorded warranty liability and adjusts the amount as necessary.

Changesto the Company’s warranty liability, which is reported as a component of otheraccrued expenses and liabilities in the accompanying consolidated balance sheetduring the year ended December 31, 2005 and 2006 are summarized as follows:
|                                                   | ** ** | **(In thousands)** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|
| Balance at January 1,  2005                       |       | $                       | 180        |   |
|                                              |       |                    |       |
| Warranties issued                                 |       | 208                     |       |
| Claims paid/settlements                           |       | (205                    | )          |
| Changes in liability  for pre-existing warranties |       | —                  |       |
| Balance at December 31,  2005                     |       | $                       | 183        |   |
|                                              |       |                    |       |
| Warranties issued                                 |       | 97                      |       |
| Claims paid/settlements                           |       | (210                    | )          |
| Changes in liability  for pre-existing warranties |       | —                  |       |
| Balance at December 31,  2006                     |       | $                       | 70         |   |

 

**NOTE M - COMMITMENTS AND CONTINGENCIES**

*Leases.* TheCompany leases certain sales and service office facilities and equipment undernon-cancelable operating leases expiring through year 2017. Total Company rentexpense for the years ended December 31, 2006, 2005, and 2004 was $7.8 

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million, $6.5 million, and $8.4 million, respectively.

Future minimum payments under non-cancelable operating leases are asfollows:
| Year       | ** ** | **(In thousands)** | ** ** |
|------------|------------|-------------------------|------------|
| 2007       |       | $                       | 6,376      |   |
| 2008       |       | 4,292                   |       |
| 2009       |       | 1,927                   |       |
| 2010       |       | 1,403                   |       |
| 2011       |       | 1,191                   |       |
| Thereafter |       | 3,217                   |       |
|       |       | $                       | 18,406     |   |

 

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

*Litigation.*  The Company and its subsidiaries are partiesto various legal proceedings. Although the ultimate disposition of suchproceedings is not presently determinable, in the opinion of the Company, anyliability that may ensue would not have a material adverse impact on thefinancial position or results of operations or cash flows of the Company.

**NOTE N - BUSINESS SEGMENT DATA**

Operating segments are defined as components of a company about whichseparate financial information is available that is evaluated regularly by thecompany’s chief operating decision-maker, or decision-making group,in deciding how to allocate resources and in assessing performance.  Managementhas chosen to structure the organization around product lines and geography.

In 2006, the Company reportedits operations as three primary segments, Americas, EMEA, and ITSM. Theoperations of Americas and EMEA include manufacturing and supplies, maintenanceof Company-manufactured and related products, integrated systems, BancTecsoftware products sold through Plexus Software (“Plexus”), a division ofBancTec, and business processing outsourcing services.  The ITSM operations include personal computerrepair services and administration of third-party extended-service contracts inthe United States, Canada and Europe.

*Americasand Europe, Middle East and Asia.*  Americas and EMEA offer similarsystems-integration and business-process solutions and services and market tosimilar types of customers.  Thesolutions offered primarily involve high-volume transaction processing usingadvanced technologies that capture, process and archive paper and electronicdocuments.  The Company’s powerful,high-volume integrated systems deliver important benefits to some of the world’slargest credit card companies and major banks. In addition, these segmentsprovide their products and services to other customers, including financialservices companies and insurance providers, telecommunications companies,utility companies, governmental agencies, and retail companies.   The Company combines its extensive businessapplication knowledge with a full range of software and equipment offerings forcomplex transaction processing environments. The Company’s integrated systemsgenerally incorporate advanced applications software developed by the Companyand by third parties. These solutions may also include hardware developed andmanufactured by the Company as well as by third parties.  Key applications provided by Americas andEMEA focus around the following process services and solutions: (1) Documentand Content Processing Solutions, (2) Payment Processing Solutions, (3)Business Process Outsourcing Services, and (4) Infrastructure Services.

*Information Technology Service Management.*  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 North America and Europe, and customers includeOEM providers, defense and aerospace companies, strategic outsourcingorganizations, and consumer electronics manufacturers.

For the years ended December 31, 2006, 2005 and 2004, a single customeraccounted for 19.5%, 15.5%, and 17.4%, respectively, of the total revenue ofthe Company.

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

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In2004, the Company reported its operations in three segments, U.S. Solutions (“USS”),which included all operations of Americas with the exception of Canada,International Solutions (“INTL”), which included all operations of EMEA plusCanada, and Computer and Network Services (“CNS”), which included alloperations of ITSM.  The 2004 segmentinformation has been conformed to the 2005 and 2006 presentation.

Table 1— Segments 
| ** **                            | ** ** | **Americas** | ** ** | **Information  Technology  Service  Management** | ** ** | **Europe,  Middle East,  and Asia** | ** ** | **Corp/Elims** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|--------------|------------|--------------------------------------------------|------------|-----------------------------------------------|------------|----------------|------------|-----------|------------|
| For  the year ended December 31, 2006 |       |         |       |                                             |       |                                          |       |           |       |      |       |
|                                  |       |         |       |                                             |       |                                          |       |           |       |      |       |
| Revenue  from external customers      |       | $            | 138,928    |                                             | $          | 123,090                                       |       | $              | 117,461    |      | $          | — |   | $ | 379,479 |   |
| Intersegment  revenues                |       | 4,511        |       | 176                                              |       | 10,254                                        |       | (14,941        | )          | —    |       |
| Segment  gross profits                |       | 39,342       |       | 14,182                                           |       | 43,855                                        |       | (141           | )          | 97,238    |       |
| Segment  operating income (loss)      |       | 19,950       |       | 7,704                                            |       | 16,489                                        |       | (20,226        | )          | 23,917    |       |
| Segment  identifiable assets          |       | 91,324       |       | 27,419                                           |       | 55,794                                        |       | 38,060         |       | 212,597   |       |
| Capital  appropriations               |       | 5,797        |       | 2,440                                            |       | 1,522                                         |       | 12,759         |       | 22,518    |       |
|                                  |       |         |       |                                             |       |                                          |       |           |       |      |       |
| For  the year ended December 31, 2005 |       |         |       |                                             |       |                                          |       |           |       |      |       |
|                                  |       |         |       |                                             |       |                                          |       |           |       |      |       |
| Revenue  from external customers      |       | $            | 114,805    |                                             | $          | 126,143                                       |       | $              | 103,950    |      | $          | — |   | $ | 344,898 |   |
| Intersegment  revenues                |       | 6,910        |       | —                                           |       | 5,958                                         |       | (12,868        | )          | —    |       |
| Segment  gross profits                |       | 41,175       |       | 10,041                                           |       | 36,411                                        |       | (137           | )          | 87,490    |       |
| Segment  operating income (loss)      |       | 19,921       |       | 4,478                                            |       | 11,626                                        |       | (22,470        | )          | 13,555    |       |
| Segment  identifiable assets          |       | 88,275       |       | 28,977                                           |       | 44,042                                        |       | 35,920         |       | 197,214   |       |
| Capital  appropriations               |       | 3,869        |       | 3,051                                            |       | 3,870                                         |       | 8,366          |       | 19,156    |       |
|                                  |       |         |       |                                             |       |                                          |       |           |       |      |       |
| For  the year ended December 31, 2004 |       |         |       |                                             |       |                                          |       |           |       |      |       |
|                                  |       |         |       |                                             |       |                                          |       |           |       |      |       |
| Revenue  from external customers      |       | $            | 122,505    |                                             | $          | 127,061                                       |       | $              | 111,160    |      | $          | — |   | $ | 360,726 |   |
| Intersegment  revenues                |       | 6,191        |       | —                                           |       | 5,555                                         |       | (11,746        | )          | —    |       |
| Segment  gross profits                |       | 36,190       |       | 15,359                                           |       | 36,471                                        |       | (614           | )          | 87,406    |       |
| Segment  operating income (loss)      |       | 11,905       |       | 5,852                                            |       | 12,014                                        |       | (13,963        | )          | 15,808    |       |
| Segment  identifiable assets          |       | 83,600       |       | 25,552                                           |       | 50,553                                        |       | 56,360         |       | 216,065   |       |
| Capital  appropriations               |       | 2,153        |       | 2,088                                            |       | 1,725                                         |       | 1,286          |       | 7,252     |       |

 

**NOTE O - GEOGRAPHIC OPERATIONS**

The Company operates in the following geographic areas: the UnitedStates, the UK, and other international areas consisting primarily of Canada,France, Sweden, Germany, and the Netherlands. Inter-area sales to affiliatesare accounted for at established transfer prices.

Sales to unaffiliated customers and affiliates for the years endedDecember 31, 2006, 2005 and 2004, and long-lived assets, other than deferredtaxes, at the end of each of those periods, classified by geographic area, areas follows:
| ** **                                  | ** ** | **United   States** | ** ** | **United  Kingdom** | ** ** | **Other  Inter-  national** | ** ** | **Elimina-  tions** | ** ** | **Consoli-  dated** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|---------------------|------------|-----------------------------|------------|---------------------|------------|---------------------|------------|
| Year  ended December 31, 2006               |       |                     |       |                |       |                        |       |                |       |                |       |
| Sales to unaffiliated customers             |       | $                        | 225,885    |                | $          | 73,403                      |       | $                   | 80,191     |                | $          | — |   | $ | 379,479 |   |
| Inter-area sales to affiliates              |       | 4,499                    |       | 3,514               |       | 6,928                       |       | (14,941             | )          | —              |       |
| Long-lived assets other than deferred taxes |       | 104,428                  |       | 9,690               |       | 5,271                       |       | (24,914             | )          | 94,475              |       |
|                                        |       |                     |       |                |       |                        |       |                |       |                |       |
| Year  ended December 31, 2005               |       |                     |       |                |       |                        |       |                |       |                |       |
| Sales to unaffiliated customers             |       | $                        | 215,939    |                | $          | 55,778                      |       | $                   | 73,181     |                | $          | — |   | $ | 344,898 |   |
| Inter-area sales to affiliates              |       | 7,132                    |       | 3,276               |       | 2,460                       |       | (12,868             | )          | —              |       |
| Long-lived assets other than deferred taxes |       | 92,601                   |       | 8,248               |       | 7,828                       |       | (27,974             | )          | 80,703              |       |
|                                        |       |                     |       |                |       |                        |       |                |       |                |       |
| Year  ended December 31, 2004               |       |                     |       |                |       |                        |       |                |       |                |       |
| Sales to unaffiliated customers             |       | $                        | 234,908    |                | $          | 60,625                      |       | $                   | 65,193     |                | $          | — |   | $ | 360,726 |   |
| Inter-area sales to affiliates              |       | 8,326                    |       | 3,111               |       | 309                         |       | (11,746             | )          | —              |       |
| Long-lived assets other than deferred taxes |       | 97,409                   |       | 3,185               |       | 7,826                       |       | (27,888             | )          | 80,532              |       |

 

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**NOTE P - SUMMARIZED QUARTERLY DATA (UNAUDITED)**
| ** **           | ** ** | **Year Ended December 31, 2006** | ** ** |
|----------------------|------------|------------------------------------------------------|------------|
| ** **           | ** ** | **Q1**                                               | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Total** | ** ** |
| Revenue              |       | $                                                    | 89,678     |   | $ | 95,126 |   | $ | 94,923 |   | $ | 99,752 |   | $ | 379,479 |   |
| Gross  profit (loss) |       | 18,879                                               |       | 25,026 |   | 24,706 |   | 28,627 |   | 97,238 |   |
| Net  income (loss)   |       | (5,509                                               | )          | (1,224 | ) | 707 |   | 5,184 |   | (842 | ) |
|                      |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **           | ** ** | **Year Ended December 31, 2005** | ** ** |
|----------------------|------------|------------------------------------------------------|------------|
| ** **           | ** ** | **Q1**                                               | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Total** | ** ** |
| Revenue              |       | $                                                    | 88,635     |   | $ | 84,434 |   | $ | 80,837 |   | $ | 90,992 |   | $ | 344,898 |   |
| Gross  profit (loss) |       | 24,211                                               |       | 20,962 |   | 21,004 |   | 21,313 |   | 87,490 |   |
| Net  income (loss)   |       | (1,444                                               | )          | (4,988 | ) | (3,065 | ) | 2,202 |   | (7,295 | ) |
|                      |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**NOTE Q - ACCUMULATED OTHER COMPREHENSIVE LOSS**

The components ofaccumulated other comprehensive loss is as follows:
| ** **                               | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Foreign-currency translation adjustments |       | $                                           | (4,079     | ) | $ | (6,531 | ) | $ | (4,443 | ) |
| Minimum pension liability, net of tax    |       | (11,494                                     | )          | (11,995 | ) | (9,096 | ) |
| Accumulated  Other Comprehensive Loss    |       | $                                           | (15,573    | ) | $ | (18,526 | ) | $ | (13,539 | ) |

 

For the year endedDecember 31, 2006, other comprehensive loss consisted of foreign-currencytranslation adjustments related to the Company’s international operations (again of $2.5 million) and a decrease to the minimum pension liability, net oftax, related to the Company’s subsidiary in the United Kingdom ($0.5million).  The gain related toforeign-currency translation adjustments resulted from significant movement inexchange rates, particularly the U.S. Dollar versus the Euro and the U.S.Dollar versus the Pound Sterling.  Thechange in minimum pension liability was primarily due to adjustment of thediscount rate used to measure the minimum pension liability, consistent withthe provisions of SFAS No. 87.

**NOTE R – RELATED PARTY TRANSACTIONS**

Welsh, Carson, Anderson & Stowe (“WCAS”) is themajority shareholder of Headstrong Corp., who in turn owns 100% of Metamor,Inc., a company that provides ERP consulting services. The Company paid Metamorapproximately $8.5 million in fiscal year 2006 as consulting fees for ERPsoftware implementation.  This agreementis similar to consulting agreements the Company enters into from time to timewith other providers of consulting services. The Company believes the terms areno less favorable to BancTec than what are offered by Metamor to other largecustomers. The Company’s Board of Directors has approved this arrangement.

The Company also holdsthe Sponsor Note payable to WCAS in the amount of $107.2 million which matureson July 22, 2009.  This note bearsinterest at 10.0%, due and payable quarterly. The Sponsor Note is subordinate only upon bankruptcy or insolvency ofthe Company, or if upon maturity of the Senior Notes, the Senior Notes remainunpaid.  The Company paid total interestduring fiscal year 2006 of $10.4 million.

EffectiveDecember 31, 2006, the Company andits majority shareholder, WCAS, entered into an arrangement whereby WCASprovided a commitment to purchase up to an additional $15.0 million of Series BPreferred stock for cash.  No accountingrecognition has been given to this right of BancTec to put its Series BPreferred stock, upon occurrence of

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certainevents, to WCAS, primarily due to the parent/subsidiary nature of thearrangement.  As of December 31, 2006, nostock had been purchased under this commitment.

**NOTE S – SUBSEQUENT EVENTS**

On March 22, 2007,the Company and Heller entered into an amendment to the Revolver which providesfor an additional $10.0 million Term Loan to the Company, thus reducing theavailability under the Revolver from $35.0 million to $25.0 million.  The total potential availability under theLoan and Security agreement, however, remains at $40 million.  Subsequent to December 31, 2006, the Companymade net payments of $0.5 million on the Revolver, bringing the totaloutstanding balance under the Revolver at March 26, 2007 to $31.0 million.

On February 26,2007, the Company sold $8.0 million of Series B Preferred stock for cash toWCAS under the Equity Line of Credit arrangement.  This stock accrues dividends at the rate of25% per annum.

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

None.

**ITEM 9A.  CONTROLS AND PROCEDURES**

As of the end of theperiod covered by this report, December 31, 2006, the Chief Executive Officerand the Chief Financial Officer of the Company, with the participation of the Company’smanagement, evaluated the effectiveness of the Company’s disclosure controlsand procedures pursuant to Exchange Act Rule 13a-14.  Based upon this evaluation, the ChiefExecutive Officer 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 and procedures are effective toensure that information required to be disclosed in this report is recorded,processed, summarized and reported within 90 days of December 31, 2006, andsuch information required to be disclosed is accumulated and communicated tomanagement as appropriate to allow timely decisions regarding requireddisclosure.  The Company will continue toevaluate disclosure controls on an ongoing basis.

Disclosure controls andprocedures, no matter how well designed and implemented, can provide onlyreasonable assurance of achieving an entity’s disclosure objectives.  The likelihood of achieving such objectivesis affected by limitations inherent in disclosure controls and procedures.  These include the fact that human judgment indecision-making can be faulty and that breakdowns in internal control can occurbecause of human failures such as simple errors or mistakes or intentionalcircumvention of the established process. The Company’s disclosure controls and procedures are designed to providereasonable assurance of achieving their objectives, and the Chief ExecutiveOfficer and Chief Financial Officer believe that the Company’s disclosurecontrols and procedures are effective at that reasonable assurance level.

There were nosignificant changes in the Company’s internal controls over financial reportingor in other factors that could significantly affect internal controls, known tothe Chief Executive Officer or the Chief Financial Officer, during the fourthquarter of 2006.

**ITEM 9B.  OTHER INFORMATION**

On March 22, 2007, the Company and Heller entered into anamendment to the Revolver which provides for an additional $10.0 million TermLoan to the Company, thus reducing the availability under the Revolver from$35.0 million to $25.0 million.  Thetotal potential availability under the Loan and Security agreement, however,remains at $40 million.

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**PART III**

**ITEM 10.  DIRECTORS, EXECUTIVEOFFICERS  AND CORPORATE GOVERNANCE.**

The following table sets forth the names, ages, and positions of each ofthe directors and executive officers of the Company as of March 31, 2007.

The Board of Directors elects executive officers annually. No familyrelationships exist among the directors or executive officers of theCompany.  Except for traffic offenses orother minor offenses, no director or executive officer has been convicted ornamed in a criminal proceeding during the past five years.
| **Name**            | ** ** | **Age** | ** ** | **Position**                                           |
|---------------------|------------|---------|------------|--------------------------------------------------------|
| J. Coley Clark      |       | 61      |       | President and Chief Executive  Officer                 |
| Jeffrey D. Cushman  |       | 45      |       | Senior Vice President and  Chief Financial Officer     |
| Robert A. Minicucci |       | 54      |       | Chairman of the Board and  Director                    |
| Gary J. Fernandes   |       | 63      |       | Director                                               |
| Eric J. Lee         |       | 35      |       | Director                                               |
| Sanjay Swani        |       | 40      |       | Director                                               |
| Michael D. Peplow   |       | 47      |       | Senior Vice President, Europe,  Middle East & Asia |
| Michael D. Fallin   |       | 54      |       | Senior Vice President and  President, Americas         |
| Brendan P. Keegan   |       | 37      |       | Senior Vice President and  President, ITSM             |

 

Mr. Clark has been a director of the Company since March 2004 and ChiefExecutive Officer since September 2004, when he joined BancTec from EDS.  Mr. Clark retired from EDS in 2004 as aSenior Vice President and President of EDS Financial Global IndustrySolutions.  Mr. Clark is also director ofCarreker Corp., a provider of software solutions to the financial industry andFundsXpress, a software provider to the financial industry.

Mr.Cushman has been Senior Vice President and Chief Financial Officer sinceFebruary 18, 2005.  Mr. Cushmanjoined BancTec, Inc. in November 2004 as Vice President of Finance.  Mr. Cushman previously did strategicdevelopment work for Metromedia Fiber Network, Inc. and before joiningMetromedia, Mr. Cushman was the Chief Financial Officer, Senior Vice President,Secretary and Treasurer for GroceryWorks, Inc and Evercom, Inc.  Prior to this time, Mr. Cushman was Directorof Business Development at Electronic Data Systems Corporation, after holding anumber of financial positions, including Group Financial Officer, Controller,and Financial Manager & Supervisor.

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

Mr.Fernandes has been a director of the Company since March 2003.  Mr. Fernandes retired as Vice Chairmanof Electronic Data Systems Corporation (EDS), a global services company, in1998, after serving on the Board of Directors of EDS since 1981.  After retiring from EDS, Mr. Fernandesfounded Convergent Partners, a venture-capital fund focusing on buyouts oftechnology-related companies.  He alsoserved as Chairman and CEO of GroceryWorks, Inc, an internetgrocery-fulfillment company until 2001. He currently serves on the Boards of Directors of 7-Eleven, Inc., aworldwide operator, franchisor and licensor of convenience stores, webMethods,Inc., a software-integration company listed on NASDAQ, and Anacomp, Inc.  Mr. Fernandes is currently the Chairman andPresident of FLF Real Estate Ventures.

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

Mr. Swani has been a director of the Company since December 2000. Mr.Swani joined Welsh, Carson, Anderson & Stowe in July 1999 and became aGeneral Partner in October 2001. Mr. Swani also served as a principal of FoxPaine & Company (a San Francisco-based buyout firm) from June 1998 to June1999 and worked in the mergers and acquisitions department of Morgan Stanley& Co. (a global financial services firm) from August 1994 to June 1998. Mr.Swani is also a director of Global Knowledge Networks, Inc. and ValorTelecommunications, LLC.

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Mr.Peplow has been Senior Vice President of Europe, Middle East and Asia (EMEA)since 2004.  Mr. Peplow joined BancTec in June 1997 as BusinessDevelopment Manager.  Mr. Peplow has alsoserved as Sales and Marketing Director and Managing Director of BancTec Ltd. inthe United Kingdom.   Prior to joiningBancTec, Mr. Peplow served in a number of programming, strategic support, andconsultancy roles with organizations such as ICL and London Bridge Software.

Mr. Fallin has been Senior Vice President and President of Americas sinceApril 2005, when he joined BancTec after 29 years with EDS.  Mr. Fallin was Vice President of theIndustrial Manufacturing Division at Electronic Data Systems and prior to thatheld various positions at EDS including Division Manager, Financial IndustryGroup and Vice President in the U.S. Southwest Region responsible for clientsin energy, telecommunications, manufacturing and financial industries.

Mr. Keegan has been Senior Vice President and President of InformationTechnology Service Management since March 2006.  Mr. Keegan joinedBancTec in June 2005 as Senior Vice President, Strategy & BusinessDevelopment where he was responsible for heading up the development of BancTec’sbusiness strategy and market re-positioning.  Prior to joiningBancTec, Mr. Keegan served as Senior Vice President & President,Emerging Markets for Seven Worldwide, President and CEO of Revenue EdgeVentures, Inc. and President and CEO of Bravanta, Inc.  Mr. Keegan hasserved on numerous boards and is currently serving in the community as adirector for Special Friends not-for-profit Charity.

**AUDIT COMMITTEE REPORT**

TheAudit Committee of the Board of Directors is responsible for overseeingmanagement’s financial reporting practices and internal controls, and for auditfunctions.  On March 31, 2007, theAudit Committee consisted of Sanjay Swani,Eric J. Lee, and Gary J. Fernandes. No member of the Audit Committee was an officer or former officer of theCompany.  None of the audit committeemembers are independent directors.

Inconnection with the consolidated financial statements for the fiscal year endedDecember 31, 2006, the Audit Committee has:

·                  Reviewedand discussed the audited financial statements with management and with representativesof Deloitte & Touche, LLP, the Company’s Independent Registered PublicAccounting Firm;

·                  Discussedwith the Independent Registered Public Accounting Firm the matters required tobe discussed by *Statement On Auditing Standards No. 61*,as amended (Communications with Audit Committees); and

·                  Receivedfrom the Independent Registered Public Accounting Firm the written disclosuresregarding Deloitte & Touche, LLP’s independence as required by *Independence Board Standard No. 1* (Independence Discussionswith Audit Committees), and discussed with representatives of Deloitte &Touche, LLP their independence, including the compatibility of non-auditservices with the auditors’ independence.

Based on these actions,the Audit Committee has recommended to the Board of Directors that the auditedconsolidated financial statements be included in the Annual Report on Form 10-Kfor the fiscal year ended December 31, 2006, as filed with the SEC.

## **Code of Business Conduct and Ethics**

The Company has adopted aCode of Business Conduct and Ethics that applies to all of the Company’sdirectors, officers and employees, including its principal executive officer,principal financial officer and controller. The Code is posted on the Company’swebsite at www.banctec.com. The Company intends to disclose any amendments tothe Code by posting such amendments on its website. In addition, any waivers ofthe Code for directors or executive officers of the Company will be disclosedin a report on Form 8-K.

## ***Section 16(a)Beneficial Ownership Reporting Compliance***

Not applicable.

**ITEM 11.  EXECUTIVE COMPENSATION**

### **COMPENSATIONCOMMITTEE REPORT**

The Compensation and Options Committees of the Board of Directorsevaluates compensation for executive officers. Management has the primary responsibility for the Company’s financialstatements and reporting process, including the 

59

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disclosure of executive compensation. As a result the Compensation and Options Committees have reviewed anddiscussed this section of the Company’s Annual Report on Form 10-K for thefiscal year ended December 31, 2006 entitled “Compensation Discussion andAnalysis” with management.  The Committeeis satisfied that the Compensation Discussion and Analysis fairly andcompletely represent the philosophy, intent and actions of the Committees withregard to executive compensation.  Basedof this review and discussion, the Committee has recommended to the Board thatthe section entitled “Compensation Discussion and Analysis,” as it appears onpages 60 to 64, be included in this Form 10-K.

The Compensation Committee and Option Committees were composed of RobertA. Minicucci.  No member of theCompensation Committee or the Option Committee was an officer or employee ofthe Company.  No member of theCompensation Committee or the Option Committee was formerly an officer of theCompany.

### **COMPENSATIONDISCUSSION AND ANALYSIS**

**Compensation Policy and ExecutiveCompensation. **Theexecutive compensation program is designed to attract, motivate, reward andretain the executive officers needed to achieve the Company’s businessobjectives, to increase profitability and to provide value to the stockholders.The program has been structured and implemented to provide competitivecompensation opportunities and various incentive awards based on company andindividual performance.  Future monetarygrowth is dependent upon the Company’s performance as well as the individualexecutive’s performance against pre-established objectives and the achievementof goals.  The executive compensationprogram is composed of three principal components:

·                  Annualbase salary

·                  Annualincentive bonus, the amount of which is dependent on the Company’s financialperformance

·                  Long-termincentive awards, currently provided in the form of stock options.

Our executive compensationprogram is intended to:

·                  Rewardperformance  which drives successfulCompany results,

·                  Reinforcea team focus and therefore reward both individual success and the success ofthe organization,

·                  Accommodatethe financial resources available to the Company based on the goal ofmaximizing return to shareholders.

**Annual Base Salary.**  The base salary for each executive officer isdetermined at levels considered appropriate for comparable positions at similarcompanies.

**Annual Incentive Bonus.**  To reinforce the attainment of Company goals,the Committee believes that a substantial portion of the annual compensation ofeach executive officer should be in the form of variable incentive pay.   The Company maintains an incentive planunder which the executive officers may earn an award as a percentage of theirbase compensation, if the Company meets the EBITDA profit objective (earningsbefore interest, taxes, depreciation and amortization) set by the CompensationCommittee at the beginning of the fiscal year.  The achievement of the objective will determine the payout under theplan, after the threshold is met.  Thepayout to each executive is calculated by multiplying a targeted payout forthat executive, which is expressed as a percentage of the executive officer’sbase salary, by the level of achievement of the EBITDA objective.  The target payout for each executive rangesfrom 15% to 100% of base salary, depending on the executive’s position.

The CompensationCommittee and Board of Directors review performance against the objectives setforth in the plan annually and approve awards consistent with the plan.  Based on 2006 actual financial resultscompared to the pre-established objectives, the plan threshold of EBITDA wasmet, and therefore, bonus awards were made to the CEO and other executivesunder the plan for 2006 performance.

**Long-Term Incentive Awards. **Stock options awards have alonger term focus than the annual incentive plan.  These awards are designed to driveshareholder value through alignment of executive pay with corporate strategicgoals and to support alignment between executive actions and the Company’slong-term strategic plan.  Under thisprogram, stock options are awarded based on an individual’s level ofresponsibility within his or her area, such individual’s executive developmentpotential and competitive market norms. Options granted under the 2000 StockOption Plan are granted at no greater than the fair market value of the stockon the date of grant.

60

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**Employment and Retirement Benefits.**  In order to attract and retain employees andprovide support in the event of illness or injury, the Company offers allemployees, including the executives, medical and dental coverage, disabilityinsurance, and life insurance.  Allexecutives are entitled to participate in these plans.

The Company does not havea defined benefit plan for executives or employees in the United States, butinstead encourages saving for retirement through the 401(k) Retirement SavingPlan, to which the Company makes matching contributions.  Employees may contribute up to 25% of theirannual salary, including bonuses, into the plan (subject to IRS limits, and theCompany will match 10% of the first 5% the employee contributes.  All employee contributions and any matchingCompany contributions are fully vested upon contribution.

**Severance Benefits.**  In general, the Company does not maintainemployment agreement with the executive officers.  In 2006, we paid Craig D. Crisman, our formerCEO, severance payments of $132,900.

**2006Total Compensation for the Chief Executive Officer. **J. Coley Clark*.*WhenMr. Clark became the company’s Chief Executive Officer in September 2004,the Committee designed a compensation plan which was consistent with thatprovided to the company’s other executive officers. Although a significantportion of Mr. Clark’s potential future compensation consists of bonusplan payments based on company performance, the Committee did not rely entirelyon predetermined formulas or a limited set of criteria when it determined thecompensation of the company’s Chief Executive Officer.  The Committee designed a compensation packagefor Mr. Clark that provided a competitive salary with the potential ofsignificant bonus plan compensation in the event the company performed wellunder his leadership.

**SUMMARY COMPENSATION TABLE**

The table below summarizes the compensation paid to the persons servingas our Chief Executive Officer and Chief Financial Officer and each of theother three most highly compensated executive officers from 2006.
| **Name and Principal  Position**                                | ** ** | **Year** | ** ** | **Salary  ($)** | ** ** | **Bonus  ($)(7)** | ** ** | **Option  Awards  ($) (1)** | ** ** | **Non-equity  Incentive Plan Compensation($) (3)** | ** ** | **Change in  Pension  Value  and Non-  Qualified  Deferred CompensationEarnings  ($) (4)** | ** ** | **All Other Compensation($) (5)** | ** ** | **Total  ($)** | ** ** |
|---------------------------------------------------------------------------|------------|----------|------------|-----------------|------------|-------------------|------------|----------------------------------|------------|--------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|----------------|------------|
| J. Coley Clark  President and Chief  Executive  Officer                   |       | 2006     |       | $               | 450,000    |              | $          | —                           |       | $                                                            | —     |                                                                                                      | $          | 545,000                                     |       | $              | —     |   | $ | — |   | $ | 995,000 |   |
|                                                                      |       |     |       |            |       |              |       |                             |       |                                                         |       |                                                                                                      |       |                                        |       |           |       |
| Jeffrey D. Cushman  Senior Vice President and Chief Financial Officer     |       | 2006     |       | 303,846         |       | —            |       | 37,400                           |       | 353,846                                                      |       | —                                                                                                    |       | 1,500                                       |       | 696,592        |       |
|                                                                      |       |     |       |            |       |              |       |                             |       |                                                         |       |                                                                                                      |       |                                        |       |           |       |
| Michael D. Peplow(2)  Senior Vice President, Europe, Middle East and Asia |       | 2006     |       | 258,947         |       | —            |       | 33,000                           |       | 281,368                                                      |       | 19,965                                                                                                    |       | 25,445                                      |       | 618,725        |       |
|                                                                      |       |     |       |            |       |              |       |                             |       |                                                         |       |                                                                                                      |       |                                        |       |           |       |
| Michael D. Fallin  Senior Vice President and President of Americas        |       | 2006     |       | 299,039         |       | 50,000            |       | —                           |       | 324,039                                                      |       | —                                                                                                    |       | 1,500                                       |       | 674,578        |       |
|                                                                      |       |     |       |            |       |              |       |                             |       |                                                         |       |                                                                                                      |       |                                        |       |           |       |
| Brendan P. Keegan  Senior Vice President and President of ITSM            |       | 2006     |       | 300,000         |       | —            |       | 11,000                           |       | 350,000                                                      |       | —                                                                                                    |       | 59,757                                      |       | 720,757        |       |
|                                                                      |       |     |       |            |       |              |       |                             |       |                                                         |       |                                                                                                      |       |                                        |       |           |       |
| Craig  D. Crisman (6)  Former President and Chief Executive Officer       |       | 2006     |       | —          |       | —            |       | —                           |       | —                                                       |       | —                                                                                                    |       | 132,900                                     |       | 132,900        |       |
|                                                                           |            |          |            |                 |            |                   |            |                                  |            |                                                              |            |                                                                                                           |            |                                             |            |                |            |  |  |  |  |  |  |  |

 

61

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(1)                    The amounts in the table reflect the compensationexpense calculated in accordance with the provisions of Statement of FinancialAccounting Standards No. 123(R), *Share-Based Payment*(SFAS 123(R)), for stock awards granted to the named executive officers in 2001to 2006.  In December 2004, the FinancialAccounting Standard Board issued SFAS 123(R), which requires the Company torecognize compensation expense for stock options and other stock-related awardsgranted to the employees and directors based on the estimated fair value underSFAS 123 (R) of the equity instrument at the time of grant.  The compensation expense is required to berecognized over the vesting period.  Therequirements of SFAS 123(R) became effective beginning in the first quarter of2006.  The assumptions used to determinethe valuation of the awards are discussed in Note A to the consolidatedfinancial statements.

(2)                    The amounts paid to Mr. Peplow were paid in PoundsSterling and were converted to U.S. Dollars using the weekly average Sterlingto Dollars rate for 2006.

(3)                    Amounts shown represent the amounts earned underthe Company’s annual management incentive plan for 2006.  The amounts to be paid under the managementincentive plan for 2006 were based on achievement of a target level of EBITDA.

(4)                    Representsthe increase in the actuarial present value of pension benefits between fiscalyear-end 2005 and 2006.  See the “PensionBenefits” table below for further discussion regarding the Company’s UK pensionplans.

(5)                    Includes Company contributions under certainbenefit plans and other arrangements for the five named executiveofficers.  The Company’s 401(k) SavingsPlan is a tax-qualified plan subject to government imposed annual limitationson contributions.  Non-U.S. employees(such as Mr. Peplow) maintain the retirement benefits from their homecountry.  The amounts related to retirementplan benefits and other non-retirement plan benefits listed in the column entitled“All Other Compensation” in the “Summary Compensation Table” above are asfollows:
| Name               | ** ** | **Savings Plan** | ** ** | **Automobile** | ** ** | **Commuting  Cost** | ** ** | **Total** | ** ** |
|--------------------|------------|-----------------------|------------|----------------|------------|---------------------|------------|-----------|------------|
| J. Coley Clark     |       | $                     | —     |           | $          | —              |       | $         | —     |   | $ | — |   |
| Jeffrey D. Cushman |       | 1,500                 |       | —         |       | —              |       | 1,500     |       |
| Michael D. Peplow  |       | —                |       | 25,445         |       | —              |       | 25,445    |       |
| Michael D. Fallin  |       | 1,500                 |       | —         |       | —              |       | 1,500     |       |
| Brendan  P. Keegan |       | —                |       | —         |       | 59,757              |       | 59,757    |       |
|                    |            |                       |            |                |            |                     |            |           |            |  |  |  |  |

 

The SummaryCompensation Table provided above has been prepared in accordance with SECrules to show all of the compensation received or to be received by the namedexecutive officers for their services on behalf of the Company during 2006. TheCompany’s compensation program is intentionally designed to link executive andshareholder interests through equity-based compensation arrangements and torecognize individual contributions toward the achievement of corporate goalsand objectives.

(6)           Includes the severance paid toCraig D. Crisman, the former CEO, during 2006 under the severance agreementreached in September 2004.

(7)           The $50,000 bonus paid toMr. Fallin in 2006 is a result of the execution of a business processoutsourcing contract completed in 2005.

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**GRANTS OF PLAN-BASED AWARDS IN 2006**

The following table shows awardsthat were granted during 2006 under non-equity and equity plans, including the2006 Executive Incentive Plan and the 2000 Stock Option Plan, to the executivesnamed in the Summary Compensation Table.
| ** **          | ** ** | **Grant**            | ** ** | **Estimated Future Payouts Under  Non-Equity Incentive Plan Awards (1)** | ** ** | **All Other  Option  Awards:  Number of  Securities  Underlying  Options** | ** ** | **Exercise or  Base Price  of Option  Awards** | ** ** | **Grant Date  Fair Value  of Stock  and Option  Awards** | ** ** |
|---------------------|------------|----------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| **Name**            | ** ** | **Date**             | ** ** | **Threshold ($)**                                                                                      | ** ** | **Target ($)**                                                                  | ** ** | **Maximum ($)**                                          | ** ** | **(#)**                                                                      | ** ** | **($/Sh)** | ** ** | **($)** | ** ** |
| J.  Coley Clark     |       |                 |       | $                                                                                                           | 45,000     |                                                                                 | $          | 450,000                                                       |       | N/A                                                                          |       |   |   |   |   |   |   |
|                |       |                 |       |                                                                                                        |       |                                                                                 |       |                                                          |       |                                                                         |       |   |   |   |   |
| Jeffrey  D. Cushman |       | 1-1-2006

11-16-2006 |       | $                                                                                                           | 30,385     |                                                                                 | $          | 303,846                                                       |       | N/A                                                                          |       | 60,000

25,000 |   | $ | 2.25 |   | $ | 26,400 |   |
|                |
|                |
|                |       |                 |       |                                                                                                        |       |                                                                                 |       |                                                          |       |                                                                         |       |   |   |   |   |
| Michael  D. Peplow  |       | 1-1-2006

11-16-2006 |       | $                                                                                                           | 25,637     |                                                                                 | $          | 256,368                                                       |       | N/A                                                                          |       | 50,000

25,000 |   | $ | 2.25 |   | $ | 22,000 |   |
|                |
|                |
|                |       |                 |       |                                                                                                        |       |                                                                                 |       |                                                          |       |                                                                         |       |   |   |   |   |
| Michael  D. Fallin  |       |                 |       | $                                                                                                           | 29,904     |                                                                                 | $          | 299,039                                                       |       | N/A                                                                          |       |   |   |   |   |   |   |
|                |       |                 |       |                                                                                                        |       |                                                                                 |       |                                                          |       |                                                                         |       |   |   |   |   |
| Brendan  P. Keegan  |       | 11-16-2006           |       | $                                                                                                           | 30,000     |                                                                                 | $          | 300,000                                                       |       | N/A                                                                          |       | 25,000 |   | $ | 2.25 |   | $ | 11,000 |   |
|                |

 

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(1)           Represents potential payouts under the Executive IncentivePlan for 2006.  Actual payouts were atapproximately 108% to 121% of the target amount as reflected in the SummaryCompensation Table.

**OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END (1)**
|                    | ** ** | **Option Awards**                                                             | ** ** |
|--------------------|------------|------------------------------------------------------------------------------------|------------|
| **Name**           | ** ** | **Number of  Securities  Underlying  Unexercised  Options  (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options  (#)  Unexercisable (2)** | ** ** | **Equity in-  centive plan  awards:  Number of  securities  underlying  unexercised  unearned  options  (#)** | ** ** | **Option  exercise  price  ($)** | ** ** | **Option  expiration  date** | ** ** |
| J. Coley Clark     |       | 525,000                                                                            |       | 525,000 |   | — |   | $ | 2.25 |   | 9-14-2014 |   |
|               |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Jeffrey D. Cushman |       | 25,000                                                                             |       | 75,000 |   | — |   | $ | 2.25 |   | 1-1-2015 |   |
|                    |       | 0                                                                                  |       | 60,000 |   | — |   | $ | 2.25 |   | 1-1-2016 |   |
|                    |       | 0                                                                                  |       | 25,000 |   | — |   | $ | 2.25 |   | 11-16-2016 |   |
|               |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Michael D. Peplow  |       | 15,000                                                                             |       | 0 |   | 10,000 |   | $ | 2.25 |   | 3-31-2010 |   |
|                    |       | 17,500                                                                             |       | 17,500 |   | 0 |   | $ | 2.25 |   | 3-31-2014 |   |
|                    |       | 5,000                                                                              |       | 15,000 |   | 0 |   | $ | 2.25 |   | 4-30-2015 |   |
|                    |       | 0                                                                                  |       | 50,000 |   | 0 |   | $ | 2.25 |   | 1-1-2016 |   |
|                    |       | 0                                                                                  |       | 25,000 |   | 0 |   | $ | 2.25 |   | 11-16-2016 |   |
|               |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Michael D. Fallin  |       | 50,000                                                                             |       | 150,000 |   | 0 |   | $ | 2.25 |   | 4-30-2015 |   |
|               |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Brendan P. Keegan  |       | 37,500                                                                             |       | 112,500 |   | 0 |   | $ | 2.25 |   | 6-6-2015 |   |
|                    |       | 0                                                                                  |       | 25,000 |   | 0 |   | $ | 2.25 |   | 11-16-2016 |   |

----

(1)           Options shown in this table weregranted between 2000 and 2006.

(2)                                  All options granted after 2002 vest annually over4 years.  For options granted between2000 and 2002, one-half of the options vest annually over 4 years and theremainder vest based on the performance of the Company.  Vesting of 20.0% of the performance-basedincentive options occurred in 2000.  Theremaining 80% of the performance-based options remain unvested.

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No stock options were exercised in 2006.

**PENSION BENEFITS**
| **Name**           | ** ** | **Plan Name**                          | ** ** | **Number of  years  credited  service  (#)** | ** ** | **Present  value of   accumulated   benefit  ($) (1)** | ** ** | **Payments  during last  fiscal year  ($)** | ** ** |
|--------------------|------------|---------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| J. Coley Clark     |       | N/A                                         |       | —                                            |       | $                                                                          | —     |                                                  | $          | — |   |
| Jeffrey D. Cushman |       | N/A                                         |       | —                                            |       | —                                                                     |       | —                                                |       |
| Michael D. Peplow  |       | BancTec Limited Retirement  Benefits Scheme |       | 9                                                 |       | $                                                                          | 236,629    |                                                  | —     |   |
| Michael D. Fallin  |       | N/A                                         |       | —                                            |       | —                                                                     |       | —                                                |       |
| Brendan  P. Keegan |       | N/A                                         |       | —                                            |       | —                                                                     |       | —                                                |       |
|                    |            |                                             |            |                                                   |            |                                                                            |            |                                                       |            |  |  |

 

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(1)                                  Thepresent value of these benefits is shown based on the assumptions used indetermining the annual pension expense, as shown in Note K to the consolidatedfinancial statements.

**EmploymentAgreements**

The Company has no employmentcontracts or change of control agreements with any of the executives named inthe Summary Compensation Table.  Mr.Clark has a severance arrangement which guarantees 18 months of payments at hisbase salary rate upon the occurrence of termination without cause.  The other named executives have severancearrangements which guarantee up to 12 months of potential payments at theirbase salary rate upon the occurrence of termination without cause.

**Compensationof Directors**

The Company has no standardarrangements under which directors receive compensation and no director’s feeswere paid during 2006.

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**ITEM 12.  SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

The following table sets forth certain information as of March 15, 2007regarding the ownership of Common Stock, Class A Common Stock, and PreferredStock of: (1) each person who is known by the Company to be the beneficialowner of more than five percent of the outstanding shares of the named class ofStock; (2) each director of the Company; (3) each executive officer named inthe Summary Compensation Table; and (4) all executive officers and directors ofthe Company as a group. Percentage of ownership is based on 17,003,838 sharesof Common Stock and 1,181,946 shares of Class A Common Stock (both issued andoutstanding at March 15, 2006), 100,667 shares of Series A Preferred Stock(Preferred A), and 35,520 shares of Series B Preferred Stock (Preferred B)outstanding as of March 15, 2007.   Theassumed exercise of the Series A Preferred warrants (“Series A Warrants”) andthe assumed conversion of the Series B Preferred (“Series B Conversion Rights”)results in 750,000 and 640,000 additional shares, respectively, of CommonStock. Additionally, the assumed exercise of options results in 185,150additional shares of Common Stock. Included in the Number of SharesBeneficially Owned are shares attributable to stock options, stock warrants,and conversion rights that are exercisable as of, or will be exercisable within60 days after, March 15, 2007.
| **Name of Beneficial Owner (1)**                                                | ** ** | **Class of  Shares Held (2)** | ** ** | **Number of Shares  Beneficially  Owned (3) (4)** | ** ** | **Percent of  Outstanding  Class of Stock** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| BancTec Intermediate Holding,  Inc.

2701 E. Grauwyler

Irving, TX 75061                            |       | Common

Preferred  A

Preferred  B           |       | 19,575,784

100,667

35,520                                           |       | 100.0

100.0

100.0                                        | %

%

%    |
|                                                                                                |       |                                         |       |                                                                  |       |                                                       |       |
| BancTec Upper-Tier Holding, LLC (5)

2701 E. Grauwyler

Irving, TX 75061                            |       | Common

Preferred A

Preferred B             |       | 19,575,784

100,667

35,520                                           |       | 100.0

100.0

100.0                                        | %

%

%    |
|                                                                                                |       |                                         |       |                                                                  |       |                                                       |       |
| Welsh, Carson, Anderson & Stowe VIII, L.P. (6)

320 Park Avenue, Suite 2500

New York, NY 10022 |       | Common

Preferred A

Preferred B             |       | 19,575,784

100,667

35,520                                           |       | 100.0

100.0

100.0                                        | %

%

%    |
|                                                                                                |       |                                         |       |                                                                  |       |                                                       |       |
| WCAS Capital Partners III, L.P. (7)

320 Park Avenue, Suite 2500

New York, NY 10022                |       | Common

Preferred A

Preferred B             |       | 19,575,784

100,667

35,520                                           |       | 100.0

100.0

100.0                                        | %

%

%    |
|                                                                                                |       |                                         |       |                                                                  |       |                                                       |       |
| WCAS Information Partners, L.P. (8)

320 Park Avenue, Suite 2500

New York, NY 10022                |       | Common

Preferred A

Preferred B             |       | 19,575,784

100,667

35,520                                           |       | 100.0

100.0

100.0                                        | %

%

%    |
|                                                                                                |       |                                         |       |                                                                  |       |                                                       |       |
| Robert A. Minicucci(9)

320 Park Avenue, Suite 2500

New York, NY 10022                             |       | Common

Preferred A

Preferred B             |       | 19,575,784

100,667

35,520                                           |       | 100.0

100.0

100.0                                        | %

%

%    |
|                                                                                                |       |                                         |       |                                                                  |       |                                                       |       |
| Eric J. Lee(10)

320 Park Avenue, Suite 2500

New York, NY 10022                                    |       | Common

Preferred A

Preferred B             |       | 0

0

0                                                               |       | *

*

*                                                    |       |
|                                                                                                |       |                                         |       |                                                                  |       |                                                       |       |
| Gary J. Fernandes(11)

100 Crescent Court, Suite 230

Dallas, TX 75201                              |       | Common

Preferred A

Preferred B             |       | 19,575,784

100,667

35,520                                           |       | 100.0

100.0

100.0                                        | %

%

%    |
|                                                                                                |       |                                         |       |                                                                  |       |                                                       |       |
| Murray Holland(12)

100 Crescent Court, Suite 230

Dallas, TX 75201                                 |       | Common

Preferred A

Preferred B             |       | 19,575,784

100,667

35,520                                           |       | 100.0

100.0

100.0                                        | %

%

%    |
|                                                                                                |       |                                         |       |                                                                  |       |                                                       |       |
| Sanjay Swani(13)

320 Park Avenue, Suite 2500

New York, NY 10022                                   |       | Common

Preferred A

Preferred B             |       | 19,575,784

100,667

35,520                                           |       | 100.0

100.0

100.0                                        | %

%

%    |
|                                                                                                |       |                                         |       |                                                                  |       |                                                       |       |
| Craig D. Crisman(14)

2701 E. Grauwyler

Irving, TX 75061                                           |       | Common

Preferred A

Preferred B             |       | 19,575,784

100,667

35,520                                           |       | 100.0

100.0

100.0                                        | %

%

%    |
|                                                                                                |       |                                         |       |                                                                  |       |                                                       |       |
| J. Coley Clark

2701 E. Grauwyler

Irving, TX 75061                                                 |       | Common

Preferred A

Preferred B             |       | 0

0

0                                                               |       | *

*

*                                                    |       |
|                                                                                                |       |                                         |       |                                                                  |       |                                                       |       |
| Jeffrey D. Cushman

2701 E. Grauwyler

Irving, TX 75061                                             |       | Common

Preferred A

Preferred B             |       | 0

0

0                                                               |       | *

*

*                                                    |       |

 

65

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| **Name of Beneficial Owner (1)**         | ** ** | **Class of  Shares Held (2)** | ** ** | **Number of Shares  Beneficially  Owned (3) (4)** | ** ** | **Percent of  Outstanding  Class of Stock** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Michael D. Peplow

2701 E. Grauwyler

Irving, TX 75061       |       | Common

Preferred  A

Preferred  B           |       | 0

0

0                                                               |       | *

*

*                                                    |       |
|                                                         |       |                                         |       |                                                                  |       |                                                       |       |
| Michael D. Fallin

2701 E. Grauwyler

Irving, TX 75061       |       | Common

Preferred  A

Preferred  B           |       | 0

0

0                                                               |       | *

*

*                                                    |       |
|                                                         |       |                                         |       |                                                                  |       |                                                       |       |
| Brendan P. Keegan

2701 E. Grauwyler

Irving, TX 75061       |       | Common

Preferred  A

Preferred  B           |       | 0

0

0                                                               |       | *

*

*                                                    |       |
|                                                         |       |                                         |       |                                                                  |       |                                                       |       |
| All executive officers and directors as a group  (6 persons) |       | Common

Preferred  A

Preferred  B           |       | 19,575,784

100,667

35,520                                           |       | 100.0

100.0

100.0                                        | %

%

%    |

 

----

| *    | Less than one percent.                                                                                                                                                                                                                                                                                         |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1)  | BancTec Intermediate Holding,  Inc. has sole investment and sole voting power with respect to the shares of  Stock shown.                                                                                                                                                                                      |
| (2)  | Common Stock includes  17,003,838 shares of Common Stock, 1,181,946 shares of Class A Common Stock,  750,000 shares of Common Stock (Series A Warrants), and 640,000 shares of  Common Stock (Series B Conversion Rights).                                                                                     |
| (3)  | 100,000 shares of Series A  Preferred includes a warrant to purchase between 2.5 and 7.75 shares of  Common Stock. Common Stock exercisable by the warrants totals 750,000 shares.                                                                                                                             |
| (4)  | Each share of Series B  Preferred Stock includes the right to convert into Common Stock. The number  of shares of Common Stock is determined by multiplying the number of shares  being converted by $150 and dividing the result by $8.325 per share. The  conversion rate is subject to various adjustments. |
| (5)  | BancTec Upper-Tier Holding,  LLC holds 100% of the outstanding capital stock of BancTec Intermediate  Holding, Inc., which in turn holds 100% of all classes of capital stock,  including warrants.                                                                                                            |
| (6)  | Welsh, Carson, Anderson &  Stowe VIII, L.P holds the majority interest in BancTec Upper-Tier Holding,  LLC.                                                                                                                                                                                                |
| (7)  | WCAS Capital Partners III,  L.P. holds a minority interest in BancTec Upper-Tier Holding, LLC.                                                                                                                                                                                                                 |
| (8)  | WCAS Information Partners,  L.P. holds a minority interest in BancTec Upper-Tier Holding, LLC.                                                                                                                                                                                                                 |
| (9)  | Mr. Minicucci is a managing  member of WCAS VIII Associates LLC, the general partner of Welsh, Carson,  Anderson & Stowe VIII, L.P. Mr. Minicucci disclaims beneficial ownership  of such shares.                                                                                                          |
| (10) | Mr. Lee is not a general  partner of Welsh, Carson, Anderson & Stowe VIII.                                                                                                                                                                                                                                 |
| (11) | Mr. Fernandes holds a minority  interest in BancTec Upper-Tier Holding, LLC. Mr. Fernandes disclaims  beneficial ownership of such shares.                                                                                                                                                                     |
| (12) | Mr. Holland holds a minority  interest in BancTec Upper-Tier Holding, LLC. Mr. Holland disclaims beneficial  ownership of such shares.                                                                                                                                                                         |
| (13) | Mr. Swani is a managing member  of WCAS VIII Associates LLC, the general partner of Welsh, Carson, Anderson  & Stowe VIII, L.P. Mr. Swani disclaims beneficial ownership of such  shares.                                                                                                                  |
| (14) | Mr. Crisman holds a minority  interests in BancTec Upper-Tier Holding, LLC. Mr. Crisman disclaims  beneficial ownership of such shares.                                                                                                                                                                        |

 

**ITEM 13.  CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS**

Welsh, Carson, Anderson & Stowe is the majorityshareholder of Headstrong Corp., who in turn owns 100% of Metamor, Inc., acompany that provides ERP consulting services. The Company paid Metamorapproximately $8.5 million in fiscal year 2006 as consulting fees for ERPsoftware implementation.  This agreementis similar to consulting agreements the Company enters into from time to timewith other providers of consulting services. The Company believes the terms areno less favorable to BancTec than what are offered by Metamor to other largecustomers. The Company’s Board of Directors has approved this arrangement.

The Company also holdsthe Sponsor Note payable to WCAS in the amount of $107.2 million which matureson July 22, 2009.  This note bearsinterest at 10.0%, due and payable quarterly. The Sponsor Note is subordinate only upon bankruptcy or insolvency ofthe Company, or if upon maturity of the Senior Notes, the Senior Notes remainunpaid.  The Company paid total interestduring fiscal year 2006 of $10.4 million.

66

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EffectiveDecember 31, 2006, the Company and its majority shareholder, WCAS, entered intoan arrangement whereby WCAS provided a commitment to purchase up to anadditional $15.0 million of Series B Preferred stock for cash.  No accounting recognition has been given tothis right of BancTec to put its Series B Preferred stock to WCAS, primarilydue to the parent/subsidiary nature of the arrangement.  As of December 31, 2006, no stock had beenpurchased under this commitment.

**ITEM 14.  PRINCIPAL ACCOUNTANTFEES AND SERVICES**

Deloitte& Touche, LLP and their respective affiliates (collectively, the “D&TEntities”) were retained as the company’s independent auditors for the 2006fiscal year. The following table presents the aggregate fees billed by theD&T Entities, for services provided during 2006 and 2005:
|                     | ** ** | **2006 (3)(4)**    | ** ** | **2005 (3)(4)** | ** ** |
|---------------------|------------|-------------------------|------------|----------------------|------------|
| ** **          | ** ** | **(in thousands)** | ** ** |
| Audit Fees (1)      |       | $                       | 1,103      |                 | $          | 760 |   |
| Audit-Related  Fees |       | —                  |       | —               |       |
| Tax Fees (2)        |       | 8                       |       | —               |       |
| All Other Fees      |       | —                  |       | —               |       |
| Total               |       | $                       | 1,111      |                 | $          | 760 |   |

 

----

| (1)    | Audit fees consisted of audit work performed in the  preparation of the financial statements, as well as work that generally only  the independent auditor can reasonably be expected to provide, such as  statutory audits and reviews of interim financial information.                                                                                                                                                                                                                                                |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (2)    | Tax fees consist principally of assistance related  to tax compliance and reporting.                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (3)    | All audit and audit-related fees were approved by  the Audit Committee.                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (4)    | The Audit Committee approves in advance all audit  services, audit-related services and tax-related services provided by the  Company’s independent public accountants. Pursuant to the pre-approval policy  adopted by the Board of Directors in 2003, the Audit Committee also approves  all other services provided by the independent public accountants in advance  on a case-by-case basis. All engagements of the independent public  accountants in 2005 and 2006 were pre-approved pursuant to the policy. |

 

67

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**PART IV**

**ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM8-K**

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

(b)         Reports on Form 8-K:

None

(c)       Exhibits:

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

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

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

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

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

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

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

4.6 — Exchange and Registration Rights Agreement dated May 22, 1998 byand among the Company, Chase Securities, Inc., Goldman, Sachs & Co. andNationsBanc Montgomery Securities LLC, incorporated by reference to Exhibit 4.1to the Company’s Registration Statement on Form S-4 dated August 28, 1998.

4.7 — Senior Subordinated Note dated July 22, 1999, among ColonialAcquisition Corp., a predecessor in interest to the Company, WCAS CP III andthe several Purchasers named in Schedules I and II thereto, incorporated byreference to Exhibit 4.7 to the Company’s Annual Report on Form 10-K for theyear ended December 31, 2001.

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

10.2 — First Amendment and Waiver dated January 21, 2000 to LoanDocuments, incorporated by reference to Exhibit 10.2 to the Company’s AnnualReport on Form 10-K for the year ended December 31, 1999.

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

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

10.5 — Stock Subscription Warrant, incorporated by reference to Exhibit10.3 to the Company’s Quarterly Report on Form 10-Q for the period endedSeptember 30, 2000.

10.6 — BancTec, Inc. 2000 Stock Plan, incorporated by reference toExhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the periodended September 30, 2000.

68

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

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

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

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

10.11 — FourthAmendment to Loan and Security Agreement, dated as of November 27, 2002,between Heller Financial, Inc. and BancTec, Inc., incorporated by reference toExhibit 10.3 to the Company’s Current Report on Form 8-K filed as of November27, 2002.

10.12 — Loan andSecurity Agreement—Waiver, Consent and Amendment Relating to BancTecRestructuring, dated as of November 1, 2002, between Heller Financial, Inc. andBancTec, Inc., incorporated by reference to Exhibit 10.2 to the Company’sCurrent Report on Form 8-K filed as of November 27, 2002.

10.13 — Stock PurchaseAgreement, dated as of November 27, 2002, between BancTec, Inc. and JAFCO MBOCo., Ltd., incorporated by reference to Exhibit 10.1 to the Company’s CurrentReport on Form 8-K filed as of November 27, 2002.

10.14 — Fifth Amendmentto Loan and Security Agreement, dated as of May 7, 2003, between HellerFinancial, Inc. and BancTec, Inc., incorporated by reference to Exhibit 10.1 tothe Company’s Quarterly Report on Form 10-Q for the period ended March 31,2003.

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

10.16 —Certificate of Designations, Preferences and Rights of Series A and B PreferredStock, dated March 31, 2004, incorporated by reference to Exhibit 10.16 to theCompany’s Annual Report on Form 10-K for the year ended December 31, 2004.

10.17 —Loan and Security Agreement—Waiver and Consent, dated as of August 9, 2004,between Heller Financial, Inc. and BancTec, Inc., incorporated by reference toExhibit 10.17 to the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2004.

10.18 —Loan and Security Agreement — December 31, 2004 Amendment to Paragraph B ofFinancial Covenants Rider to Loan and Security Agreement, dated as of December31, 2004, between Heller Financial, Inc. and BancTec, Inc., incorporated byreference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K for theyear ended December 31, 2004.

10.19 —Ninth Amendment to Loan and Security Agreement, dated as of March 31, 2006,between Heller Financial, Inc. and BancTec, Inc., incorporated by reference toExhibit 10.19 to the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2005.

10.20 —Tenth Amendment to Loan and Security Agreement, dated as of October 6, 2006,between Heller Financial, Inc. and BancTec, Inc., incorporated by reference toExhibit 10.20 to the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006.

10.21 —Eleventh Amendment to Loan and Security Agreement, dated as of March 22, 2007,between Heller Financial, Inc. and BancTec, Inc., incorporated by reference toExhibit 10.21 to the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006.

69

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21.1 — Subsidiaries of Registrant

31.1 — Certificate of Chief Executive Officer pursuant to Rule15d-14(a) under the Securities Exchange Act.

31.2 — Certificate of Chief Financial Officer pursuant to Rule15d-14(a) under the Securities Exchange Act.

32.1 — Certificateof Chief Executive Officer pursuant to 18 USC 1350 and Rule 15d-14(a) under theSarbanes-Oxley Act.

32.2 — Certificateof Chief Financial Officer pursuant to 18 USC 1350 and Rule 15d-14(a) under theSarbanes-Oxley Act.

70

----

**SCHEDULE II**

**BANCTEC, INC.**

**VALUATION AND QUALIFYING ACCOUNTS**

Forthe Years Ended December 31, 2006, 2005 and 2004

(000’s)
| **Column A**                                  | ** ** | **Column B**                              | ** ** | **Column C**                                        | ** ** | **Column D**   | ** ** | **Column E**                        | ** ** |
|----------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------|------------|------------------------------------------|------------|
| **Allowance for Doubtful Accounts** | ** ** | **Balance at  beginning of  period** | ** ** | **Additions  charged to  costs and  expenses** | ** ** | **Deductions  (a)** | ** ** | **Balance at  end of  period** | ** ** |
| Year ended December 31, 2006                       |       | $                                              | 1,110      |                                                     | $          | 981                 |       | $                                        | 1,253      | (a) | $ | 838 |   |
| Year ended December 31, 2005                       |       | 931                                            |       | 146                                                      |       | 33                  | (a)        | 1,110                                    |       |
| Year  ended December 31, 2004                      |       | 1,126                                          |       | (229                                                     | )          | 34                  | (a)        | 931                                      |       |
|                                                    |            |                                                |            |                                                          |            |                     |            |                                          |            |  |  |  |  |

 

----

(a)          (Write-off) recoveries of uncollectible accounts.

71

----

**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

**BancTec, Inc.**
|          | *By*     | */s/ J. Coley Clark*                    | * * |
|----------|----------|-----------------------------------------|----------|
| * * | * * | *J. Coley Clark*                        |
| * * | * * | *President and Chief Executive Officer* |

 

Dated: June 26, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, asamended, this report has been signed below by the following persons on behalfof the Company and in the capacities and on the dates indicated: 

 
| **Signature**           | ** ** | **Title**                         | ** ** | **Date**      |
|-------------------------|------------|-----------------------------------|------------|---------------|
| /s/ J. Coley Clark      |       | President and Chief Executive     |       | June 26, 2007 |
| J. Coley Clark          |       | Officer (Principal Executive      |       |          |
|                    |       | Officer); and Director            |       |          |
|                    |       |                              |       |          |
| /s/ Jeffrey D. Cushman  |       | Senior Vice President, Chief      |       | June 26, 2007 |
| Jeffrey D. Cushman      |       | Financial Officer, and  Treasurer |       |          |
|                    |       | (Principal Accounting  Officer);  |       |          |
|                    |       | and Director                      |       |          |
|                    |       |                              |       |          |
| /s/ Robert A. Minicucci |       | Chairman of the Board and         |       | June 26, 2007 |
| Robert A. Minicucci     |       | Director                          |       |          |
|                    |       |                              |       |          |
| /s/ Eric J. Lee         |       | Director                          |       | June 26, 2007 |
| Eric J. Lee             |       |                              |       |          |
|                    |       |                              |       |          |
| /s/ Gary J. Fernandes   |       | Director                          |       | June 26, 2007 |
| Gary J. Fernandes       |       |                              |       |          |
|                    |       |                              |       |          |
| /s/ Sanjay Swani        |       | Director                          |       | June 26, 2007 |
| Sanjay Swani            |       |                              |       |          |

 

72

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