**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C.  20549**

**FORM 10-Q**

**(Mark One)**

**x****        Quarterly Report Pursuantto Section 13 or 15(d) of the SecuritiesExchange Act of 1934**

**For thequarterly period ended March 31, 2007**

**OR**

**o****        Transition Report Pursuantto Section 13 or 15(d) of the SecuritiesExchange Act of 1934**

**CommissionFile Number 0-9859**

**BANCTEC, INC.**

(Exact name ofregistrant as specified in its charter)

| **DELAWARE**                                                    |   | **75-1559633**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **2701 E.  Grauwyler Road, Irving, Texas 75061**                |
| **(972)  821-4000**                                             |
| (Address and  telephone number of principal executive offices)  |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.              Yes  x    No  o

 

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

 

Large accelerated filer o Accelerated filer oNon-accelerated filer x

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act)

Yes  o           No x

 

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

 
|                                       | ** ** | **Number of  Shares Outstanding at** |
|---------------------------------------|------------|--------------------------------------|
| **Title of Each Class**               | ** ** | **May 15, 2007**                     |
|                                  |       |                                 |
| Common Stock, $0.01 par value         |       | 17,003,838                           |
| Class A Common Stock, $0.01 par value |       | 1,181,946                            |

 

 

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BancTec, Inc.

Quarterly Report

on

Form 10-Q

Three Months Ended March 31,2007

TABLE OF CONTENTS

 
|          |         | PART I                                                                                                  |   |   |
|----------|--------------|---------------------------------------------------------------------------------------------------------|--------|--------|
| ITEM 1.  | *** *** | ***Financial Statements (Unaudited)***                                                                  |   |   |
|     |         | Condensed Consolidated  Balance Sheets: March 31, 2007 and December 31, 2006                            |   |   |
|     |         | Condensed Consolidated  Statements of Operations: Three Months Ended March 31, 2007 and March 31,  2006 |   |   |
|     |         | Condensed Consolidated  Statements of Cash Flows: Three Months Ended March 31, 2007 and March 31,  2006 |   |   |
|     |         | Notes to  Condensed Consolidated Financial Statements                                                   |   |   |
| ITEM 2.  |         | Management’s  Discussion and Analysis of Financial Condition and Results of Operations             |   |   |
| ITEM 3.  |         | Quantitative  and Qualitative Disclosure about Market Risk                                              |   |   |
| ITEM 4.  |         | Controls and  Procedures                                                                                |   |   |
|     |         | PART II                                                                                                 |   |   |
| ITEM 1.  |         | Legal Proceedings                                                                                       |   |   |
| ITEM  1A |         | Risk Factors                                                                                            |   |   |
| ITEM 2.  |         | Unregistered  Sales of Equity Securities and Use of Proceeds                                            |   |   |
| ITEM 3.  |         | Defaults  Upon Senior Securities                                                                        |   |   |
| ITEM 4.  |         | Submission  of Matters to a Vote of Security Holders                                                    |   |   |
| ITEM 5.  |         | Other Information                                                                                       |   |   |
| ITEM 6.  |         | Exhibits and  Reports on Form 8-K                                                                       |   |   |

2

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**PART I**

**FINANCIAL INFORMATION**

 

**ITEM1.  Financial Statements**

 

**BANCTEC, INC.**

**CONDENSED CONSOLIDATEDBALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                                                  | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                  | ** ** | **2007**                | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                                                                                                  | ** ** | **(In thousands)** | ** ** |
| CURRENT ASSETS:                                                                                                                                                                                                                             |       |                    |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                                                   |       | $                       | 11,709     |                  | $          | 9,615 |   |
| Restricted cash                                                                                                                                                                                                                             |       | 2,777                   |       | 2,542                 |       |
| Accounts receivable, less  allowance for doubtful accounts of  $1,020  and $838 at March 31, 2007 and December 31, 2006                                                                                                                     |       | 71,099                  |       | 65,674                |       |
| Inventories, net                                                                                                                                                                                                                            |       | 27,498                  |       | 23,792                |       |
| Prepaid expenses                                                                                                                                                                                                                            |       | 8,951                   |       | 7,284                 |       |
| Other current assets                                                                                                                                                                                                                        |       | 292                     |       | 329                   |       |
| Total current assets                                                                                                                                                                                                                        |       | 122,326                 |       | 109,236               |       |
|                                                                                                                                                                                                                                        |       |                    |       |                  |       |
| PROPERTY, PLANT AND EQUIPMENT, net                                                                                                                                                                                                          |       | 42,434                  |       | 40,194                |       |
|                                                                                                                                                                                                                                        |       |                    |       |                  |       |
| OTHER ASSETS:                                                                                                                                                                                                                               |       |                    |       |                  |       |
| Goodwill                                                                                                                                                                                                                                    |       | 42,121                  |       | 42,121                |       |
| Other intangible assets, less  accumulated amortization of $1,385 and $1,160 at March 31, 2007 and December  31, 2006                                                                                                                       |       | 4,533                   |       | 4,711                 |       |
| Outsourcing contract costs,  less accumulated amortization of $722 and $526 at March 31, 2007 and December  31, 2006                                                                                                                        |       | 4,538                   |       | 3,963                 |       |
| Deferred income tax benefit                                                                                                                                                                                                                 |       | 10,671                  |       | 8,886                 |       |
| Other assets                                                                                                                                                                                                                                |       | 4,287                   |       | 3,486                 |       |
| Total other assets                                                                                                                                                                                                                          |       | 66,150                  |       | 63,167                |       |
|                                                                                                                                                                                                                                        |       |                    |       |                  |       |
| TOTAL ASSETS                                                                                                                                                                                                                                |       | $                       | 230,910    |                  | $          | 212,597 |   |
|                                                                                                                                                                                                                                        |       |                    |       |                  |       |
| CURRENT LIABILITIES:                                                                                                                                                                                                                        |       |                    |       |                  |       |
| Current obligations under  capital leases, financing arrangements and revolver                                                                                                                                                              |       | $                       | 31,645     |                  | $          | 32,843 |   |
| Trade accounts payable                                                                                                                                                                                                                      |       | 20,490                  |       | 19,727                |       |
| Other accrued expenses and  liabilities                                                                                                                                                                                                     |       | 33,432                  |       | 29,252                |       |
| Deferred revenue                                                                                                                                                                                                                            |       | 27,397                  |       | 19,199                |       |
| Maintenance contract deposits                                                                                                                                                                                                               |       | 18,197                  |       | 23,367                |       |
| Income taxes payable                                                                                                                                                                                                                        |       | 7,179                   |       | 4,366                 |       |
| Total current liabilities                                                                                                                                                                                                                   |       | 138,340                 |       | 128,754               |       |
|                                                                                                                                                                                                                                        |       |                    |       |                  |       |
| OTHER LIABILITIES:                                                                                                                                                                                                                          |       |                    |       |                  |       |
| Long-term debt                                                                                                                                                                                                                              |       | 204,682                 |       | 201,841               |       |
| Non-current maintenance  contract deposits                                                                                                                                                                                                  |       | 3,065                   |       | 3,577                 |       |
| Pension liability                                                                                                                                                                                                                           |       | 23,410                  |       | 23,355                |       |
| Other non-current liabilities                                                                                                                                                                                                               |       | 6,661                   |       | 6,655                 |       |
| Total other liabilities                                                                                                                                                                                                                     |       | 237,818                 |       | 235,428               |       |
|                                                                                                                                                                                                                                        |       |                    |       |                  |       |
| Total liabilities                                                                                                                                                                                                                           |       | 376,158                 |       | 364,182               |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                               |       |                    |       |                  |       |
|                                                                                                                                                                                                                                        |       |                    |       |                  |       |
| SERIES A PREFERRED STOCK - issued and outstanding, 100,667 shares at  March 31, 2007 and December 31, 2006                                                                                                                                  |       | 18,040                  |       | 18,040                |       |
|                                                                                                                                                                                                                                        |       |                    |       |                  |       |
| STOCKHOLDERS’ DEFICIT:                                                                                                                                                                                                                 |       |                    |       |                  |       |
| Cumulative preferred stock -  authorized, 200,000 shares of $0.01 par value at March 31, 2007 and December  31, 2006  Series B preferred stock - issued and outstanding,  88,853 and 35,520 shares at March 31, 2007 and  December 31, 2006 |       | 22,020                  |       | 13,520                |       |
| Common stock authorized,  21,800,000 shares of $0.01 par value at  March 31, 2007 and December 31, 2006:                                                                                                                                    |       |                    |       |                  |       |
| Common stock-issued and  outstanding  17,003,838 shares at  March 31, 2007 and December 31, 2006                                                                                                                                            |       | 170                     |       | 170                   |       |
| Class A common stock-issued  and outstanding 1,181,946 shares  at  March 31, 2007 and December 31, 2006                                                                                                                                     |       | 12                      |       | 12                    |       |
| Subscription stock warrants                                                                                                                                                                                                                 |       | 3,726                   |       | 3,726                 |       |
| Additional paid-in capital                                                                                                                                                                                                                  |       | 122,473                 |       | 122,904               |       |
| Accumulated deficit                                                                                                                                                                                                                         |       | (296,316                | )          | (294,384              | )          |
| Accumulated other comprehensive  loss                                                                                                                                                                                                       |       | (15,373                 | )          | (15,573               | )          |
| Total stockholders’ deficit                                                                                                                                                                                                            |       | (163,288                | )          | (169,625              | )          |
|                                                                                                                                                                                                                                        |       |                    |       |                  |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                                                                           |       | $                       | 230,910    |                  | $          | 212,597 |   |

 

See notes to unaudited condensedconsolidated financial statements.

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**BANCTEC, INC.**

# **CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**
| ** **                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **(In thousands)**                          | ** ** |
| REVENUE                              |       |                                             |       |   |   |
| Equipment and software               |       | $                                                | 32,018     |   | $ | 30,412 |   |
| Maintenance and other services       |       | 60,656                                           |       | 59,266 |   |
|                                 |       | 92,674                                           |       | 89,678 |   |
|                                 |       |                                             |       |   |   |
| COST OF SALES                        |       |                                             |       |   |   |
| Equipment and software               |       | 18,168                                           |       | 17,865 |   |
| Maintenance and other services       |       | 50,775                                           |       | 52,934 |   |
|                                 |       | 68,943                                           |       | 70,799 |   |
|                                 |       |                                             |       |   |   |
| Gross profit                         |       | 23,731                                           |       | 18,879 |   |
|                                 |       |                                             |       |   |   |
| OPERATING EXPENSES                   |       |                                             |       |   |   |
| Product development                  |       | 1,708                                            |       | 1,762 |   |
| Selling, general and  administrative |       | 17,157                                           |       | 16,578 |   |
|                                 |       | 18,865                                           |       | 18,340 |   |
|                                 |       |                                             |       |   |   |
| Income from operations               |       | 4,866                                            |       | 539 |   |
|                                 |       |                                             |       |   |   |
| OTHER INCOME (EXPENSE):              |       |                                             |       |   |   |
| Interest income                      |       | 73                                               |       | 90 |   |
| Interest expense                     |       | (5,364                                           | )          | (4,821 | ) |
| Sundry, net                          |       | 57                                               |       | — |   |
|                                 |       | (5,234                                           | )          | (4,731 | ) |
|                                 |       |                                             |       |   |   |
| LOSS BEFORE INCOME TAXES             |       | (368                                             | )          | (4,192 | ) |
| INCOME TAX EXPENSE                   |       | 1,564                                            |       | 1,317 |   |
|                                 |       |                                             |       |   |   |
| NET  LOSS                            |       | (1,932                                           | )          | (5,509 | ) |
| PREFERRED  STOCK DIVIDENDS           |       | 500                                              |       | — |   |
| NET  LOSS APPLICABLE TO COMMON STOCK |       | $                                                | (2,432     | ) | $ | (5,509 | ) |

 

See notes to unaudited condensedconsolidated financial statements.

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**BANCTEC, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(Unaudited)**
| ** **                                                                    | ** ** | **Three Months Ended March 31** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| ** **                                                                    | ** ** | **(In thousands)**                             | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES                                          |       |                                                |       |   |   |
| Net loss                                                                      |       | $                                                   | (1,932     | ) | $ | (5,509 | ) |
| Adjustments to reconcile net  loss to cash flows used in operations:          |       |                                                |       |   |   |
| Depreciation and amortization                                                 |       | 2,611                                               |       | 4,253 |   |
| Provision for doubtful  accounts                                              |       | 129                                                 |       | 98 |   |
| Deferred income tax (benefit)  expense                                        |       | (1,723                                              | )          | 166 |   |
| Interest paid in kind                                                         |       | 2,680                                               |       | — |   |
| Loss on disposition of  property, plant and equipment                         |       | 93                                                  |       | 86 |   |
| Other non-cash items                                                          |       | 116                                                 |       | 114 |   |
| Changes in operating assets  and liabilities:                                 |       |                                                |       |   |   |
| Increase in accounts  receivable                                              |       | (5,259                                              | )          | (1,886 | ) |
| Increase in inventories                                                       |       | (3,776                                              | )          | (2,938 | ) |
| Increase in other assets                                                      |       | (1,631                                              | )          | (2,977 | ) |
| Increase (decrease) in trade  accounts payable                                |       | 1,640                                               |       | (1,320 | ) |
| (Decrease) increase in  deferred revenue & maintenance contracts deposits |       | 2,489                                               |       | 2,330 |   |
| Increase in other accrued  expenses and liabilities                           |       | 6,979                                               |       | 2,988 |   |
| Cash flows provided by (used  in) operating activities                        |       | 2,416                                               |       | (4,595 | ) |
|                                                                          |       |                                                |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                          |       |                                                |       |   |   |
| Purchases of property, plant  and equipment                                   |       | (5,201                                              | )          | (5,198 | ) |
| (Increase) decrease in  restricted cash                                       |       | (235                                                | )          | 771 |   |
| Increase in outsourcing  contract costs                                       |       | (866                                                | )          | — |   |
| Cash flows used in investing  activities                                      |       | (6,302                                              | )          | (4,427 | ) |
|                                                                          |       |                                                |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                          |       |                                                |       |   |   |
| Payments of current maturities  of capital lease and financing obligations    |       | (786                                                | )          | (713 | ) |
| (Payments) proceeds on  revolver, net                                         |       | (1,185                                              | )          | 3,199 |   |
| Proceeds from issuance of  preferred stock                                    |       | 8,000                                               |       | — |   |
| Debt issuance costs                                                           |       | —                                              |       | (200 | ) |
| Cash flows provided by  financing activities                                  |       | 6,029                                               |       | 2,286 |   |
|                                                                          |       |                                                |       |   |   |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH                                       |       | (49                                                 | )          | 56 |   |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                          |       | 2,094                                               |       | (6,680 | ) |
| CASH AND CASH EQUIVALENTS—BEGINNING OF PERIOD                            |       | 9,615                                               |       | 18,540 |   |
|                                                                          |       |                                                |       |   |   |
| CASH AND CASH EQUIVALENTS—END OF PERIOD                                  |       | $                                                   | 11,709     |   | $ | 11,860 |   |
|                                                                          |       |                                                |       |   |   |
| SUPPLEMENTAL DISCLOSURES INFORMATION:                                         |       |                                                |       |   |   |
| Cash paid during the period  for:                                             |       |                                                |       |   |   |
| Interest                                                                      |       | $                                                   | 769        |   | $ | 2,668 |   |
|                                                                          |       |                                                |       |   |   |
| Taxes                                                                         |       | $                                                   | 530        |   | $ | 790 |   |

 

See notes to unaudited condensedconsolidated financial statements.

5

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**BANCTEC, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

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

BancTec, Inc. is aworldwide systems integration and services company with a 30-year history inimaging technology, financial transaction processing and workflow productivityimprovement.  Serving a variety ofindustries, including banking, financial services, insurance, healthcare,governmental agencies and others, the Company offers a portfolio of payment anddocument processing systems and services, workflow and image managementsoftware products, and computer and network support services.

The accompanyingunaudited condensed consolidatedbalance sheet at March 31, 2007, and the unaudited condensed consolidated statements of operations and cash flows forthe interim periods ended March 31, 2007 and 2006, should be read inconjunction with BancTec, Inc. and subsidiaries (“BancTec” or the “Company”)consolidated financial statements and notes thereto in the most recent AnnualReport on Form 10-K filed with the Securities and ExchangeCommission.   In the opinion ofmanagement, the accompanying unauditedcondensed consolidated financial statements contain all materialadjustments, consisting principally of normal recurring adjustments, necessaryfor a fair presentation of the financial position and results of operations ofthe Company. All significant intercompany balances and transactions have beeneliminated in consolidation.

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

The significantaccounting principles and practices used in the preparation of the accompanyingfinancial statements are summarized below:

**Cash and Cash Equivalents**

Cash and cash equivalents include cash on hand and on deposit, includinghighly liquid investments with original maturities of three months or less.  Restricted cash at March 31, 2007 of $2.8million and at December 31, 2006 of $2.5 million represents cash in escrow froma customer deposit.

**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. Depreciation expense is reflected in both cost ofsales and selling, general and administrative expense.  Depreciation expense for the three monthsended March 31, 2007 and 2006 was $2.1 million and $4.0 million, respectively.

**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 Multiple Deliverables,”*and EITF No. 03-5, *“Applicability of AICPA Statement of Position 97-2 toNon-Software Deliverables in an Arrangement Containing More-Than-IncidentalSoftware.”*

6

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

In the case of 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 accordance withthe 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.

*Non-softwareequipment*

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

*Postcontractcustomer support*

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

*Maintenance services notclassified as postcontract customer 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 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

7

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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 to deliveringoutsourcing services are expensed as incurred with the exception of certaintransition costs related to the set-up of processes, personnel and systems,which are deferred and expensed evenly over the period outsourcing services areprovided. The deferred costs are specific internal costs or incrementalexternal costs directly related to transition or set-up activities necessary toenable the outsourced services. Deferred amounts are recoverable in the eventof early termination of the contract and are monitored regularly forimpairment. Impairment losses are recorded when projected undiscountedoperating cash flows of the related contract are not sufficient to recover thecarrying amount of contract assets.

**Research and Development**

Research and development costs are expensed as incurred.   Research and development costs for the threemonths ended March 31, 2007 and 2006, were $1.7 million and $1.8 millionrespectively, and is shown as Product Development in the accompanying unauditedCondensed Consolidated Statement of Operations.

**Foreign Currency Translation**

Foreign assets and liabilities are translated using the exchange rate ineffect at the balance sheet date, and results of operations are translatedusing an average rate for the period. Translation adjustments are accumulatedand reported as a component of stockholders’ deficit and comprehensive (loss)income. Transaction gains and losses are included in results of operations in “Sundry,net”. Foreign currency transaction gains (losses) for the three months endedMarch 31, 2007 and 2006 were $75,000 and ($7,000), respectively.

**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-Q 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.

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*Incentive Options.*During the year ended December 31, 2006, the Company granted 462,500 incentiveoptions.  During the three months endedMarch 31, 2007, 70,000 incentive options were granted.  Under the Plan, incentive options are grantedat a fixed exercise price not less than 100% of the fair market value of theshares of stock on the date of grant (or not less than 110% of the fair marketvalue in certain circumstances).  Optionsgranted in 2007 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 year endedDecember 31, 2006 or the three months ended March 31, 2007.  When granted under the Plan, non-qualifiedoptions are granted at a fixed exercise price equal to, more than, or less than100% of the fair market value of the shares of 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—January 1, 2006   |       | 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                                   |       |
| Granted                                    |       | 70,000                |       | —                    |       | 2.25                                   |       |
| Forfeited                                  |       | (17,500               | )          | —                    |       | 2.25                                   |       |
| Exercised                                  |       | —                |       | —                    |       |                                   |       |
| Options  outstanding—March 31, 2007   |       | 2,731,740             |       | 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 7.48 years and 7.64years at March 31, 2007 and December 31, 2006, respectively.

The following table presents the vested status of all options outstandingat March 31, 2007 and December 31, 2006:
|                                                                                | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Total options outstanding                                                      |       | 2,763,500                |       | 2,711,000                   |       |
| Vested Options                                                                 |       | 1,186,900                |       | 1,027,150                   |       |
| Nonvested options                                                              |       | 1,576,600                |       | 1,683,850                   |       |
| Compensation related to nonvested options                                      |       | $                        | 530        |                        | $          | 571 |   |
| Weighted-average  period over which remaining compensation is to be recognized |       | 1.89 years               |       | 1.98 years                  |       |
|                                                                                |            |                          |            |                             |            |  |  |

 

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The followingtable presents share-based compensation expenses for continuing operationsincluded in the Company’s unaudited condensed consolidated statements ofoperations:
|                                                                                                              | ** ** | **Three Months Ended  March 31, 2007** | ** ** | **Three Months Ended  March 31, 2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
|                                                                                                         |       |                                                       |       |                                                       |       |
| Share-based  compensation expense recorded as selling, general and administrative, net of  tax benefit of $0 |       | $                                                          | (69        | )                                                          | $          | (60 | ) |
|                                                                                                              |            |                                                            |            |                                                            |            |  |  |

 

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.  The fair value of eachstock-option grant was estimated with the following weighted-averageassumptions and results:
|                                | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|
| **Weighted Average**      | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                           |       |                                                 |       |   |   |
| Risk free interest rate        |       | 4.53                                                 | %          | 4.50 | % |
| Expected life                  |       | 10  years                                            |       | 10  years |   |
| Expected volatility            |       | 40.0                                                 | %          | 40.0 | % |
| Dividend yield                 |       | —                                               |       | — |   |
| Fair  value of options granted |       | $                                                    | 0.44       |   | $ | 0.44 |   |
|                                |            |                                                      |            |  |  |  |  |

 

**3.****                                      SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ANDFINANCING TRANSACTIONS**

The Consolidated Statement of Cash Flows included the following noncashinvesting and financing transactions:
|                                                                        | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                                             | ** ** | **(In thousands)**                              | ** ** |
| Inventory put in  service as fixed asset                               |       | $                                                    | 144        |   | — |   |
| Purchases of fixed  assets included in accounts payable at quarter end |       | 716                                                  |       | — |   |
|                                                                        |            |                                                      |            |  |  |  |

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**4.****                                      INVENTORIES**

 

Inventory consists of the following:
|                         | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|-------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2007**                | ** ** | **2006**              | ** ** |
| ** **              | ** ** | **(In thousands)** | ** ** |
| Raw materials           |       | $                       | 10,281     |                  | $          | 10,128 |   |
| Work-in-progress        |       | 6,886                   |       | 4,656                 |       |
| Finished goods          |       | 24,819                  |       | 23,724                |       |
|                    |       | 41,986                  |       | 38,508                |       |
| Less inventory reserves |       | (14,488                 | )          | (14,716               | )          |
| Inventories,  net       |       | $                       | 27,498     |                  | $          | 23,792 |   |

 

**5.****                                      PROPERTY, PLANT AND EQUIPMENT**

Property, plant and equipment consist of the following:
|                                           | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2007**                | ** ** | **2006**              | ** ** |
| ** **                                | ** ** | **(In thousands)** | ** ** |
| Land                                      |       | $                       | 874        |                  | $          | 874 |   |
| Field support spare parts                 |       | 32,933                  |       | 33,017                |       |
| Systems and software                      |       | 54,060                  |       | 54,520                |       |
| Machinery and equipment                   |       | 23,617                  |       | 22,376                |       |
| Furniture, fixtures and other             |       | 10,729                  |       | 10,597                |       |
| Buildings                                 |       | 20,769                  |       | 20,769                |       |
| Construction in process                   |       | 20,696                  |       | 17,680                |       |
|                                      |       | 163,678                 |       | 159,833               |       |
| Accumulated depreciation and amortization |       | (121,244                | )          | (119,639              | )          |
| Property,  plant and equipment, net       |       | $                       | 42,434     |                  | $          | 40,194 |   |

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**6.****                                      OTHER ACCRUED EXPENSES AND LIABILITIES**

Other accrued expenses and liabilities consist of the following:
|                                        | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2007**                | ** ** | **2006**              | ** ** |
| ** **                             | ** ** | **(In thousands)** | ** ** |
| Salaries, wages and other compensation |       | $                       | 14,618     |                  | $          | 12,089 |   |
| Accrued taxes, other than income taxes |       | 4,540                   |       | 5,299                 |       |
| Accrued interest payable               |       | 2,508                   |       | 860                   |       |
| Accrued invoices and costs             |       | 1,998                   |       | 2,025                 |       |
| Other                                  |       | 9,768                   |       | 8,979                 |       |
|                                   |       | $                       | 33,432     |                  | $          | 29,252 |   |

 

**7.****                                      DEBT AND OTHER OBLIGATIONS**

Debt and other obligations consist of the following:
|                                                       | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2007**                | ** ** | **2006**              | ** ** |
| ** **                                            | ** ** | **(In thousands)** | ** ** |
| Senior Notes, due 2008                                |       | $                       | 93,975     |                  | $          | 93,975 |   |
| Revolving Credit Facility                             |       | 30,348                  |       | 31,533                |       |
| Senior Subordinated Sponsor Note, unsecured, due 2009 |       | 110,707                 |       | 107,223               |       |
| Financing Arrangement                                 |       | 643                     |       | 1,286                 |       |
|                                                  |       | 235,673                 |       | 234,017               |       |
| Less: Current portion                                 |       | 30,991                  |       | 32,176                |       |
|                                                  |       | $                       | 204,682    |                  | $          | 201,841 |   |

 

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 Heller enteredinto an amendment to the Revolver which provides for a $5.0 million Term Loanto the Company and reduces the availability under the Revolver from $40 millionto $35 million.  In, addition, on March22, 2007, the Company and Heller entered into an amendment to the Revolverwhich provides for an additional $10.0 million Term Loan to the Company, thusreducing the availability under the Revolver from $35.0 million to $25.0million.  The total potential availabilityunder 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 March 31, 2007, the Company had $30.3million outstanding under the Revolver and $0.4 million outstanding onletters-of-credit.  The availabilityremaining under the Revolver that the Company can draw was $9.3 million atMarch 31, 2007.  A commitment fee of0.375%

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per annum on the unusedportion of the Revolver is payable quarterly. The balance outstanding under the Revolver is classified in currentobligations in the accompanying Condensed Consolidated Balance Sheets.

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.  AtMarch 31, 2007, the Company’s weighted average rate on the Revolver was 7.79%.

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 atMarch 31, 2007 and December 31, 2006 of $2.8 million and $­2.5, respectively,million represents cash in 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 March 31, 2007.  At March 31, 2007, the minimum fixed chargecoverage ratio required under the Revolver was 1.0, compared to the actualfixed charge coverage ratio of 1.74.  AtMarch 31, 2007, the Company was in compliance with all covenants under theRevolver.

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 March 31, 2007 and December 31, 2006, theCompany had $94.0 million outstanding on the Senior Notes.  The Senior Notes mature on June 1, 2008.

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 quarterlyinterest payment for the quarter ended December 31, 2006 of $2.6 million plusthe deferred financing fee of $0.8 million, which increased the principalamount of the Sponsor Note by $3.4 million. In addition, for the quarter ended March 31, 2007, WCAS elected to deferthe quarterly interest payment of $2.7 million plus the deferred financing feeof $0.8 million, which increased the principal amount of the Sponsor Note by$3.5 million.  Such elections requiredthe Company to incur a deferred financing fee of 30.0% of the amount of eachinterest payment deferred.  The Companyaccounts for the additional financing fees as a change in the effectiveinterest rate of the debt.  WCAS may, atits election, defer each future quarterly payment under similar terms. At March31, 2007 and December 31, 2006, the Company had $110.7 million and $107.2million 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 March 31, 2007, the Companyhad financing arrangement balances outstanding of $0.6 million, which wasclassified as current.  This arrangementaccrues interest at a fixed 8.0% rate. This arrangement has one remaining annual installment due January 2008.

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 March 31, 2007, 53,333 shares of SeriesB Preferred stock had been purchased under this commitment for a total of $8.0million. Dividends on these 53,333 shares of Series B Preferred Stockaccrue quarterly at an annual dividend rate of 25% of the then “Stated Value.”The Stated Value equals $150.00 per share, plus accumulated and unpaiddividends. For the three months ended March 31, 2007, accrued but unpaiddividends totaled $0.5 million.

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Capital Leases.  During 2006, the Company entered into acapital lease for $1.3 million that pertained to imaging equipment to be usedin the Company’s BPO operations.  TheCompany’s interest in assets acquired under capital leases is recorded asproperty and equipment on the Condensed Consolidated Balance Sheets.  Assets under capital lease were $2.8 millionand $2.8 million as of March 31, 2007 and December 31, 2006, respectively.  Amortization of assets recorded under capitalleases is included in depreciation expense. Amounts due under capital leases are recorded as liabilities.  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 March 31, 2007, theCompany had capital lease balances outstanding of $1.6 million, of which $0.6million was classified as current and $1.0 million was classified as long-term.

TheCompany had no outstanding foreign-credit balances as of March 31, 2007.

**8.****                                      INTANGIBLEASSETS**

The Companyaccounts for goodwill in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”.  Goodwill is not amortized but rather istested at least annually for impairment. The impairment test is based on fairvalue compared to the recorded value at a reporting unit level. Reporting unitsare defined as an operating segment or one level below. Valuation methods usedin 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.  Estimatesutilized in future calculations could differ from estimates used in the currentperiod. Future years’ estimates that are unfavorable compared to currentestimates could cause an impairment of goodwill.  The Company performs the annual test forimpairment as of December 31, each year. There have been no events that would indicate interim testing forimpairment is necessary.

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

A summary of amortizable intangible assets as of March 31, 2007 andDecember 31, 2006 is as follows:
|                                      | ** ** | **March 31, 2007**   | ** ** |
|--------------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **Gross Carrying  Value** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Outsourcing contract costs           |       | $                              | 5,356      |   | $ | 818 |   | $ | 4,538 |   |
| Customer and other intangible assets |       | 5,918                          |       | 1,385 |   | 4,533 |   |
| Total  amortizable intangible assets |       | $                              | 11,274     |   | $ | 2,203 |   | $ | 9,071 |   |

 
|                                      | ** ** | **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 |   |

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Outsourcingcontract costs consist of certain costs associated with contractacquisition and related direct and incremental costs and are capitalized inaccordance 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.  These costs are amortized on apro-rata basis over the term of the contract.

Amortization related to intangible assets was $0.5 million for the threemonths ended March 31, 2007.

**9.****                                      PENSIONBENEFITS**

Net periodic pensioncosts included the following components for the three months ended March 31:
|                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                              | ** ** | **(In thousands)**                              | ** ** |
| Components of net period benefits cost: |       |                                                 |       |   |   |
| Service cost                            |       | $                                                    | 270        |   | $ | 194 |   |
| Interest cost                           |       | 635                                                  |       | 413 |   |
| Expected return on plan assets          |       | (457                                                 | )          | (236 | ) |
| Recognized actuarial loss               |       | 172                                                  |       | 141 |   |
| Net periodic benefit cost               |       | $                                                    | 620        |   | $ | 512 |   |

 

**10.****                               TAXES**

The Company adopted theprovisions of FIN 48 – *Accounting for Uncertaintyin Income Taxes – an interpretation of FASB Statement No. 109*, onJanuary 1, 2007.  FIN 48 prescribes acomprehensive model for recognizing, measuring, presenting and disclosing inthe financial statements tax positions taken or expected to be taken on a taxreturn.  For those benefits to berecognized, a tax position must be more likely than not to be sustained upon examinationby taxing authorities.  The amountrecognized is measured as the largest amount of benefit that is greater than 50percent likely of being realized upon ultimate settlement.  At the adoption date and as of March 31,2007, the Company had no material unrecognized tax benefits and no adjustmentsto liabilities or operations were required.

The Company may from timeto time be assessed interest or penalties by major tax jurisdictions.  The Company recognizes interest and penaltiesrelated to uncertain tax positions in income tax expense.  No interest and penalties have beenrecognized by the Company to date.

With few exceptions, theCompany is no longer subject to examination for its U.S. Federal and state,foreign and local jurisdictions for years prior to 2003.

The Company’s provisionfor income taxes for the three months ended March 31, 2007 and 2006 was $1.6 millionand $1.3 million, respectively, reflecting an effective tax rate of (425.0%)and (31.4%), respectively. The effective tax rate differs from the statutoryrate primarily due to the impact of different effective rates in some overseasjurisdictions and the impact of changes in the valuation allowance on netdeferred tax assets.

A valuation allowance has been provided 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

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jurisdiction by jurisdiction basis. As a result, certain of the foreign subsidiaries deferred tax assets arenot reserved with a valuation allowance due to their history of profitability.

Components of thevaluation allowance are as follows:
|                                           | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **(In thousands)**                              | ** ** |
| Valuation  allowance at beginning of year |       | $                                                    | 83,022     |   | $ | 78,832 |   |
| Release of  valuation allowance           |       | (38                                                  | )          | (35 | ) |
| Loss from  continuing operations          |       | 1,896                                                |       | 2,617 |   |
| Valuation allowance at  end of period     |       | $                                                    | 84,880     |   | $ | 81,414 |   |

 

**11.****                               COMPREHENSIVELOSS**

The components ofcomprehensive loss were as follows:
|                                           | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **(In thousands)**                              | ** ** |
| Net loss                                  |       | $                                                    | (1,932     | ) | $ | (5,509 | ) |
| Foreign currency  translation adjustments |       | 200                                                  |       | 202 |   |
| Total comprehensive  loss                 |       | $                                                    | (1,732     | ) | $ | (5,307 | ) |

 

**12.****                               BUSINESS SEGMENT DATA**

In 2007 and 2006, the Companyreported its operations as three primary segments: 1) Americas, 2) Europe,Middle East and Asia (“EMEA”), and 3) Information Technology Service Management(“ITSM”).

*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.

*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 customersinclude OEM providers, defense and aerospace companies, strategic outsourcingorganizations, and consumer electronics manufacturers.

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| ** **                                | ** ** | **Americas**            | ** ** | **ITSM** | ** ** | **EMEA** | ** ** | **Corp/Elims** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| ** **                                | ** ** | **(In thousands)** | ** ** |
| For the three months ended March 31, 2007 |       |                    |       |     |       |     |       |           |       |      |       |
|                                      |       |                    |       |     |       |     |       |           |       |      |       |
| Revenue from external customers           |       | $                       | 34,882     |     | $          | 27,847   |       | $              | 29,945     |      | $          | — |   | $ | 92,674 |   |
| Intersegment revenue                      |       | 1,016                   |       | 60       |       | 4,063    |       | (5,139         | )          | —    |       |
| Segment gross profits                     |       | 10,204                  |       | 3,071    |       | 10,257   |       | 199            |       | 23,731    |       |
| Segment operating income (loss)           |       | 5,045                   |       | 1,601    |       | 3,339    |       | (5,119         | )          | 4,866     |       |
| Segment identifiable assets               |       | 99,160                  |       | 27,270   |       | 61,841   |       | 42,639         |       | 230,910   |       |
| Capital appropriations                    |       | 659                     |       | 502      |       | 677      |       | 2,609          |       | 4,447     |       |
|                                      |       |                    |       |     |       |     |       |           |       |      |       |
| For the three months ended March 31, 2006 |       |                    |       |     |       |     |       |           |       |      |       |
|                                      |       |                    |       |     |       |     |       |           |       |      |       |
| Revenue from external customers           |       | $                       | 31,544     |     | $          | 31,521   |       | $              | 26,613     |      | $          | — |   | $ | 89,678 |   |
| Intersegment revenue                      |       | 1,058                   |       | 29       |       | 3,361    |       | (4,448         | )          | —    |       |
| Segment gross profits                     |       | 8,444                   |       | 1,043    |       | 9,944    |       | (552           | )          | 18,879    |       |
| Segment operating income (loss)           |       | 3,668                   |       | (645     | )          | 3,817    |       | (6,301         | )          | 539       |       |
| Segment identifiable assets               |       | 91,266                  |       | 29,184   |       | 47,186   |       | 31,182         |       | 198,818   |       |
| Capital  appropriations                   |       | 1,596                   |       | 926      |       | 542      |       | 2,134          |       | 5,198     |       |

 

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

**RESULTS OFOPERATIONS.**

THEFOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THAT APPEAR ELSEWHEREIN THIS DOCUMENT.

**FORWARD-LOOKING STATEMENTS**

*This Quarterly Report on Form10-Q, including Management’s Discussion and Analysis of Financial Condition andResults of Operations and Quantitative and Qualitative Disclosure About MarketRisk contains forward-looking statements as that term is defined in the PrivateSecurities Litigation Reform Act of 1995 (the “PSLRA”) that involve 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 thanstatements of historical fact are statements that could be deemedforward-looking statements, including any projections of earnings, revenues, orother financial items; any statements of the plans, strategies, and objectivesof management for future operations; any statements concerning proposed newproducts, services, or developments; any statements regarding future economicconditions or performance; statements of belief and any statement ofassumptions underlying any of the foregoing. The risks, uncertainties andassumptions referred to above include the ability of the Company to retain and motivatekey employees; the timely development, production and acceptance of productsand services and their feature sets; the challenge of managing asset levels,including inventory; the flow of products into third-party distributionchannels; the difficulty of keeping expense growth at modest levels whileincreasing revenues; and other risks that are described from time to time inthe Company’s Securities and Exchange Commission reports, including but notlimited to the items discussed in “Factors Affecting the Company’s Business andProspects” set forth in this report, and items described in the Company’s otherfilings with the Securities and Exchange Commission. The Company undertakes noobligation to update or revise forward-looking statements to reflect changes inassumptions, the occurrence of unanticipated results or changes to futureoperating results over time.*

**Highlights**

The Company experienced several shifts in its business during the yearended December 31, 2006, which continued into the three months ended March 31,2007.  During 2006, the Company beganoffering business process outsourcing services in the United States, buildingon the experience gained in the business process outsourcing market in Europe overthe last several years.  In addition, theCompany experienced continued expansion of the ITSM business in Europeanmarkets.  The US hardware maintenancebusiness, which has been in decline over the last several years, experiencedgrowth in 2006 and early 2007 due to the addition of significant contracts forthe maintenance of third party electromechanical equipment.  Other factors continue to impact the Company,including reduced corporate customer technology spending; ongoing competitivepressures; an ongoing planned change in revenue mix within the Company’sAmericas and EMEA segments; and a highly leveraged financial position.  The change in revenue mix is partially aresult of trends in payment processing, including check truncation (the processwhereby banks are able to truncate original checks and to process checkinformation electronically), which impacts domestic and 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 yearended December 31, 2006 and the three months ended March 31, 2007, the Companyexperienced declines in maintenance contract deposits related to the personalcomputer repair business, which significantly impacted cash fromoperations.  These declines can beattributed 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 has declined as businesses and individuals choose to replacerather than repair.  Second, the priceper contract has declined due to decreased sales of multi-year maintenancecontracts.

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**RESULTS OFOPERATIONS**

**Comparisonof Three Months Ended March 31, 2007 and Three Months Ended March 31, 2006**

Consolidatedrevenue of $92.7 million for the three months ended March 31, 2007 increased by$3.0 million or 3.3% from the comparable prior-year period.

·                  The Americas revenue increase of $3.4 million wasprimarily due to the addition of contracts for the maintenance of third partyequipment throughout 2006 and early 2007. In addition, strong sales related to the sale and installation ofhardware and software products related to document processing solutionscontributed to the increase.   Also,during the quarter ended March 31, 2007, software maintenance revenue andsupplies sales revenue decreased slightly.

·                  An increase in EMEA of $3.4 million is the resultof the continued growth of business process outsourcing services in Europe andthe impact of a weaker dollar on the conversion of revenue stated in foreigncurrencies.

·                  A decrease in ITSM of $3.7 million was primarilydriven by the termination of various client and contractual relationships wherethe Company was not producing a profit, as well as the strategic decision toclose the business unit’s end user sales channel made in 2006. Furtherdecreases in revenue in the United States resulted from pricing decreases,domestic competitive pressure, and decreased volume under certain maintenanceprograms.  This was somewhat offset byincreased revenue from the continued growth of ITSM operations in Europe.

Factorsexpected to impact future revenue include corporate-customer spending for largesystems-solutions, the continued impacts of check truncation, on-goingcompetitive pressures, and fluctuations in international currencies.

Consolidatedgross profit of $23.7 million increased by $4.8 million or 25.4% from thecomparable prior-year period.

·                  Americas’ gross profit increased by $1.8 million,driven primarily by increased revenues. In addition, the Americas’ gross profit percentage increased from 25.8%to 28.4%.  In the prior year, thestart-up nature of the Company’s managed services business and initial costsassociated with new contracts for the maintenance of third party equipmentdrove down the gross profit percentage.

·                  The increase in EMEA gross profit of $0.4 million resulted from theincreased revenue, including the impact of currency conversion.  The gross profit margin, however, declinedfrom 33.0% to 30.3%, primarily as a result of product mix.  The gross profit margin for EMEA on managedservices is slightly lower than for product sales.

·                  ITSM’s gross profit increased $2.1 million overthe prior year and the gross profit percentage increased from 3.2% to 11.1%.Although revenue decreased during the current year, cost cutting measures putin place late in the first quarter of 2006 resulted in the higher gross profitand the significantly higher gross profit percentage.  ITSM is the major component in themaintenance and other services category on the Condensed ConsolidatedStatements of Operations, and therefore is a significant contributing factor inthe increased gross profit in the maintenance and other services category.

Operatingexpenses of $18.9 million increased $0.6 million compared to the prior-yearperiod.  Product-development expensesstayed flat at $1.7 million.  Selling,general and administrative expenses (“SG&A”) increased by $0.6 million or 3.6%due to increases in marketing and sales expenses and increased amortizationexpense when compared with the prior year period.

Interestexpense for the three months ended March 31, 2007 of $5.4 millionincreased $0.5 million from the comparable prior-year period due primarily toan increased amount of debt under the Revolving Credit Facility.

Sundry items resulted ina gain of $0.1 million for the three months ended March 31, 2007, compared tono gain or loss in the comparable prior-year period.  Foreign exchange gains were $0.1 million inthe current year compared to a negligible amount for the comparable prior yearperiod.

An income tax provisionof $1.6 million for the three months ended March 31, 2007 is compared to a corresponding prior-year period incometax provision of $1.3 million.  Theincome tax provision for both periods related primarily to income from theCompany’s international subsidiaries.   The Company’s effective tax rate was approximately (425.0%) for thethree months ended March 31, 2007 ascompared to (31.4%) for the corresponding prior-year period.

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**LIQUIDITYAND CAPITAL RESOURCES**

The Company’s working capital requirements are generally provided bycash and cash equivalents, funds available under the Company’s revolving creditfacility, as discussed below, which matures May 30, 2008, and by internallygenerated funds from operations.  Fundsavailability under the revolving credit facility is determined by aborrowing-base formula equal to a specified percentage of the value of the Company’seligible accounts receivable, inventory, real property, machinery and equipmentand pledged cash.  General economicconditions, decreased revenues from the Company’s maintenance contracts, andthe requirement 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 an additional $7.0 million in Series B Preferred stockfor cash, will be sufficient to fund its operations for at least the next 12months.

 

TheCompany’s cash and cash equivalents, including restricted cash, totaled $14.5million at March 31, 2007, compared to $12.2 million at December 31, 2006.  The working capital deficit decreased $3.5million to a working capital deficit of $16.0 million at March 31, 2007.  The change in working capital was primarilydue to increases in accounts receivable of $5.4 million and inventory of $3.7million.  In addition, working capitalwas impacted by the increase in cash as well as a decrease of $1.2 million inthe Revolver and other current obligations. These were somewhat offset by increases in accrued expensestotaling $7.0 million.  During the threemonths ended March 31, 2007, the Company also experienced continued declines inmaintenance contract deposits due to two primary factors.  First, the overall amount of extendedmaintenance contracts have declined as a result of continued declines in pricesof personal computers.  As businesses andconsumers have paid less per unit for personal computers, the purchase ofextended maintenance contracts have declined as businesses and individualschoose to replace rather than repair. Second, the price per contract has declined due to competitive pressurefrom other service providers and also due to declines in the per unit price ofpersonal computers.

Duringthe three months ended March 31, 2006,the Company relied primarily on cash reserves, borrowings from the Revolver andthe purchase of $8.0 million of Series B Preferred stock by WCAS to fundoperations. At March 31, 2007, theCompany had available $9.3 million of borrowing capacity under the Revolver.

Operatingactivities provided $2.4 million and used $4.6 million of cash in the threemonths ended March 31, 2007 and2006, respectively, an increase of $7.0 million.  The net loss decreased $3.6 million from theprior-year period.  In addition, cash utilizedby changes in operating assets and liabilities was $4.2 million less than inthe prior-year period.

Investingactivities used net cash of $6.3 million and $4.4 million in the three monthsended March 31, 2007 and 2006,respectively.  The Company used cash forpurchases of property, plant and equipment of $5.2 million and $5.2 millionduring the three months ended March 31, 2007 and 2006, respectively.  Inaddition, the Company used cash of $0.9 million during the three months endedMarch 31, 2007 related to the increase in outsourcing contract costs.

Financingactivities provided $6.0 million and $2.3 million for the three months endedMarch 31, 2007 and 2006, respectively. The purchase by WCAS of $8.0 of Series B Preferred stock provided the cashduring the current year period, while borrowings under the Revolving CreditFacility provided the cash during the prior year period.  Partially offsetting these increases waspayments of $1.2 million on the Revolving Credit Facility during the prior yearperiod.

At March 31, 2007, theCompany’s principal outstanding debt instruments consisted of (i) $30.3 millionoutstanding under the revolving credit facility maturing May 30, 2008 (which ismore fully described below), (ii)  $94.0million of 7.5% Senior Notes due May 2008, and (iii) $110.7 million of SponsorNotes due 2009. The Company or its affiliates may from time to time purchase,redeem or pay deferred interest on some of its outstanding debt or equitysecurities.  The Company would only makethese payments in compliance with the covenants of its debt instruments.

The Companycontinually reviews its various lines of business to assess their contributionto the Company’s business plan and from time to time considers the sale ofcertain assets in order to raise cash or reduce debt.  Accordingly, the Company has explored and mayexplore possible asset sales by seeking expressions of interest

 

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from potential bidders.  However,the Company has not entered into any binding agreements or agreements in principleto sell any assets and there can be no assurance that any such asset sales willoccur or, if they occur, as to the timing or amount of proceeds that such assetsales 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 $5.0 millionTerm Loan to the Company and reduces the availability under the Revolver from $40million to $35 million.  In, addition, onMarch 22, 2007, the Company and Heller entered into an amendment to theRevolver 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 realproperty, machinery and equipment and pledged cash.  At March 31, 2007, the Company had $30.3million outstanding under the Revolver and $0.4 million outstanding onletters-of-credit.  The availabilityremaining under the Revolver that the Company can draw was $9.3 million at March31, 2007.  A commitment fee of 0.375% perannum on the unused 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.  AtMarch 31, 2007, the Company’s weighted average rate on the Revolver was 7.79%.

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 atMarch 31, 2007 and December 31, 2006 of $2.8 million and $­2.5 million,respectively, represents cash in 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 March 31, 2007.  At March 31, 2997, the minimum fixed chargecoverage ratio required under the Revolver was 1.0, compared to the actualfixed charge coverage ratio of 1.74.  AtMarch 31, 2007, the Company was in compliance with all covenants under theRevolver.

**SeniorNotes**. In August 1998,the Company exchanged the public Senior Notes (the “Senior Notes”) for thenotes sold in a May 1998 Rule 144A private offering. Interest is fixed at 7.5%and is due and payable in semi-annual installments, which began December 1,1998. The Senior Notes mature on June 1, 2008. The Senior Notes contain covenants placing limitations on the Company’sability to permit subsidiaries to incur certain debts, incur certain loans, andengage in certain sale and leaseback transactions.   At March 31, 2007 and December 31,2006, the Company had $94.0 million outstanding on the Senior Notes.

**Subordinated Unsecured SponsorNote**. 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 quarterlyinterest payment for the quarter ended December 31, 2006 of $2.6 million plusthe deferred financing fee of $0.8 million, which

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increased the principalamount of the Sponsor Note by $3.4 million. In addition, for the quarter ended March 31, 2007, WCAS elected to deferthe quarterly interest payment of $2.7 million plus the deferred financing feeof $0.8 million, which increased the principal amount of the Sponsor Note by$3.5 million.  Such elections requiredthe Company to incur a deferred financing fee of 30.0% of the amount of eachinterest payment deferred.  The Companyaccounts for the additional financing fees as a change in the effectiveinterest rate of the debt.  WCAS may, atits election, defer each future quarterly payment under similar terms. At March31, 2007 and December 31, 2006, the Company had $110.7 million and $107.2million outstanding on the Sponsor Note, respectively.

**Financing Arrangements. **During 2005, the Companyentered into a financing arrangement for $1.8 million that pertained tocomputer software.  At March 31, 2007,the Company had financing arrangement balances outstanding of $0.6 million,which was classified as current.  Thisarrangement accrues interest at a fixed 8.0% rate.  This arrangement has one remaining annualinstallment due January 2008.

**Equity Line of Credit.**  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, upon occurrence ofcertain events, to WCAS, primarily due to the parent/subsidiary nature of thearrangement.  As of March 31, 2007,53,333 shares of Series B Preferred stock had been purchased under this commitmentfor a total of $8.0 million. Dividends on these 53,333 shares ofSeries B Preferred Stock accrue quarterly at an annual dividend rate of25% of the then “Stated Value.” The Stated Value equals $150.00 per share, plusaccumulated and unpaid dividends. For the three months ended March 31,2007, accrued but unpaid dividends totaled $0.5 million.

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

**Off Balance Sheet Arrangements. **The Company currently doesnot have any off balance sheet arrangements.

### **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 March 31, 2007:
| ** **                             | ** ** | **Total  Amounts**     | ** ** | **Less than  1 Year** | ** ** | **1-3  Years** | ** ** | **4-5  Years** | ** ** | **Over 5  Years** | ** ** |
|----------------------------------------|------------|------------------------|------------|---------------------------------|------------|----------------|------------|----------------|------------|------------------------|------------|
| ** **                             | ** ** | **(In Millions)** | ** ** |
| Long-term debt                         |       | $                      | 205.3      |                            | $          | 0.6            |       | $              | 204.7      |                   | $          | — |   | $ | — |   |
| Revolving credit facility              |       | 30.3                   |       | 30.3                            |       | —         |       | —         |       | —                 |       |
| Interest obligations on long-term debt |       | 34.1                   |       | 18.2                            |       | 15.9           |       | —         |       | —                 |       |
| Capital leases                         |       | 1.9                    |       | 0.8                             |       | 0.8            |       | 0.3            |       | —                 |       |
| Operating leases (non-cancelable)      |       | 16.5                   |       | 5.4                             |       | 5.4            |       | 2.3            |       | 3.4                    |       |
| Total Contractual                      |       | 288.1                  |       | 55.3                            |       | 226.8          |       | 2.6            |       | 3.4                    |       |
|                                   |       |                   |       |                            |       |           |       |           |       |                   |       |
| Unused lines of credit                 |       | $                      | 9.3        |                            | $          | 9.3            |       | $              | —     |                   | $          | — |   | $ | — |   |
| Standby letters of credit              |       | 0.4                    |       | 0.4                             |       | —         |       | —         |       | —                 |       |
| Total  Commercial                      |       | $                      | 9.7        |                            | $          | 9.7            |       | $              | —     |                   | $          | — |   | $ | — |   |

 

**RECENTACCOUNTING 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 adopted FIN 48 as ofJanuary 1, 2007 with no impact on the consolidated financial statements duringthe three months ended March 31, 2007.

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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 currentlyevaluating the impact of adopting SFAS 158 on the consolidated financialstatements, but believes 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 3. 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.

**InterestRate Risk**

TheCompany utilizes long-term fixed rate and short-term variable rate borrowingsto finance the working capital and capital requirements of the business. AtMarch 31, 2007 and December 31, 2006, the Company had outstanding Senior Notes,due in 2008, of $94.0 million, with a fixed interest rate of 7.5%.  At March 31, 2007 and December 31, 2006, theCompany also had the Sponsor Note, due 2009, with a balance of $110.7 millionand $107.2 million, respectively. The Sponsor Note bears interest at a fixedrate of 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.  At March31, 2007, the Company’s weighted average rate on the Revolver was 7.79%.  A balance of $30.3 million was outstanding under the Revolver at March 31,2007.  At this level, a one hundred basispoint change in the bank’s prime or LIBOR rate would impact net interestexpense by $303,000 over a twelve-month period

**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 has certainexposures to foreign currency risk. However, management believes that suchexposure does not present a significant risk due to a relatively limited numberof transactions and operations denominated in foreign currency. For the threemonths ended March 31, 2007, approximately $46.1 million or 48.4% of theCompany’s revenues are denominated in the international currencies. Transactiongains and losses on U.S. dollar denominated transactions are recorded withinSundry, net in the accompanying consolidated statements of operations and werenot material for the three months ended March 31, 2007 or 2006.

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 March 31, 2007.

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**ITEM 4. CONTROLS AND PROCEDURES.**

As of the end of theperiod covered by this report, March 31, 2007, the Chief Executive Officer andthe Chief Financial Officer of the Company, with the participation of theCompany’s management, evaluated the effectiveness of the Company’s disclosurecontrols and procedures pursuant to Exchange Act Rule 13a-15.  Based upon this evaluation, the ChiefExecutive Officer and the Chief Financial Officer believe that the Company’sdisclosure controls and procedures are effective in making known to themmaterial information relating to the Company (including its consolidatedsubsidiaries) required to be included in this report.  In addition, the disclosure controls andprocedures are effective to ensure that information required to be disclosed inthis report is recorded, processed, summarized and reported within 90 days ofMarch 31, 2007, and such information required to be disclosed is accumulatedand communicated to management as appropriate to allow timely decisionsregarding required disclosure.  TheCompany will continue to evaluate 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 firstquarter of 2007.

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**BANCTEC,INC.**

**PART II**

**OTHER INFORMATION**

**ITEM 1. Legal Proceedings**

TheCompany is a party to various legal proceedings.  None of those current proceedings is expectedto have an outcome that is material to the financial condition or operations ofthe Company.

**ITEM 1A. Risk Factors**

Information provided bythe Company in this Quarterly Report on Form 10-Q and other documents filedwith the 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 high volume transaction processing,including banking, financial services, insurance, health care and hightechnology, 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 technologyoutsourcing contracts extended or renewed in the future.

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***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 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.

***Indebtednessand 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

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the U.S. dollar versusthe local currency in which products are sold. Any unfavorable change in one or more of these factors could have amaterial adverse effect on the Company.

***Fluctuationsin Operating Results***

The Company’s operatingresults may fluctuate from period to period and will depend on numerousfactors, including the following: customer demand and market acceptance of theCompany’s products and solutions, new product introductions, productobsolescence, varying product mix, foreign-currency exchange rates, competitionand other factors. The Company’s business is sensitive to the spending patternsof its customers, which in turn are subject to prevailing economic conditionsand other factors beyond the Company’s control. In addition, recent lawsgoverning check 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 2.  Unregistered Sales of Equity Securities andUse of Proceeds**

None

 

**ITEM 3.  Defaults Upon Senior Securities**

None

**ITEM4.  Submission of Matters to a Vote of SecurityHolders**

None

**ITEM 5. Other Information**

None

**ITEM 6. Exhibits and Reports on Form 8-K**

(a)          Exhibits:

31.1 – Certification of Chief Executive Officer pursuant to Rule15d-14(a) under the Securities Exchange Act

31.2 – Certification of Chief Financial Officer pursuant to Rule15d-14(a) under the Securities Exchange Act

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

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

(b)         Reports on Form 8-K:

No reports on Form8-K were filed during the three months ended March 31, 2007.

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
|                     | **BancTec, Inc.** |
|---------------------|-------------------|
| ** **          |
| ** **          |
| * *            | *By*              | /s/ Jeffrey D. Cushman | * * |
| * *            | * *          | *Jeffrey D. Cushman* |
| * *            | * *          | *Senior  Vice President on behalf of  the registrant and as Chief* |
| * *            | * *          | *Financial Officer* |
|                |              |
|                |              |
| Dated: May 15, 2007 |              |
|                     |                   |  |  |  |

 

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