CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Contractual Obligations and Commercial Commitments.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2007

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

Commission File Number 0-9859

BANCTEC, INC.

(Exact name of registrant as specified in its charter)

DELAWARE		75-1559633
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2701 E. Grauwyler Road, Irving, Texas 75061
(972) 821-4000
(Address and telephone number of principal executive offices)

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

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

Large accelerated filer o Accelerated filer o Non-accelerated filer x

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

Yes o No x

Indicate the number 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

BancTec, Inc.

Quarterly Report

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

PART I

FINANCIAL INFORMATION

ITEM 1. Financial Statements

BANCTEC, INC.

CONDENSED CONSOLIDATED BALANCE 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 condensed consolidated financial statements.

BANCTEC, INC.

(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 condensed consolidated financial statements.

BANCTEC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF 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 condensed consolidated financial statements.

BANCTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

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

The accompanying unaudited condensed consolidated balance sheet at March 31, 2007, and the unaudited condensed consolidated statements of operations and cash flows for the interim periods ended March 31, 2007 and 2006, should be read in conjunction with BancTec, Inc. and subsidiaries (“BancTec” or the “Company”) consolidated financial statements and notes thereto in the most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all material adjustments, consisting principally of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations of the Company. All significant intercompany balances and transactions have been eliminated in consolidation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Cash and Cash Equivalents

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

Property, Plant, and Equipment

Property, plant, and equipment are recorded at cost and are depreciated or amortized principally on a straight-line basis over the estimated useful lives of the related assets. Depreciation expense is reflected in both cost of sales and selling, general and administrative expense. Depreciation expense for the three months ended March 31, 2007 and 2006 was $2.1 million and $4.0 million, respectively.

Revenue Recognition

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

The Company’s revenue recognition policies are in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions”, “Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements,” SAB No. 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 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software.”

Software and software elements (including equipment, installation and training)

In the case of software arrangements that require significant production, modification, or customization of software, or the license agreements require the Company to provide implementation services that are determined to be essential to other elements of the arrangement, the Company follows the guidance in SOP 81-1, “Accounting for Performance of Construction—Type and Certain Production—Type Contracts,” and applies the completed contract method of accounting. In compliance with the completed contract method under SOP 81-1, revenue is recognized when proof of customer acceptance has been received. In the case of non-software arrangements, the Company applies EITF No. 00-21 where revenues related to arrangements with multiple elements are allocated to each element based on the element’s relative fair value. Revenue allocated to separate elements is recognized for each element in accordance with the accounting policies described below. EITF No. 03-5 is applied in determining whether non-software elements are included with the software in applying SOP 97-2.

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

The Company recognizes hardware and software revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. At the time of the transaction, the Company determines whether the fee associated with revenue transactions is fixed or determinable and whether or not collection is reasonably assured. The Company determines whether the fee is fixed or determinable based on the payment terms associated with the transaction. If a significant portion of a fee is due after the normal payment terms, which are generally 30 days from invoice date, the Company recognizes revenue as the fees are due. The Company assesses collectibility based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. The Company does not request collateral from customers. If the Company determines that collection of the fee is not reasonably assured, the Company defers the revenue and recognizes revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash. For all sales, the Company generally uses either a binding purchase order or signed sales agreement as evidence of an arrangement.

Non-software equipment

The Company recognizes revenue from sales of non-software related equipment and supplies upon delivery and transfer of title or upon customer acceptance.

Postcontract customer support

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

Maintenance services not classified as postcontract customer support (PCS)

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

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

Business process outsourcing

The Company provides business process outsourcing services under contracts under a unit-price or fixed-price basis, which may extend up to 10 or more years. If a contract involves the provision of a single element, revenue is generally recognized when the Company performs the services or processes transactions in accordance with

contractual performance standards. Revenues from unit-priced contracts are recognized as transactions are processed based on objective measures of output. Revenues from fixed-price contracts are recognized on a straight-line basis, unless revenues are earned and obligations are fulfilled in a different pattern. In some of these arrangements, the Company hires customer employees and becomes responsible for certain customer obligations. The Company continuously reviews and reassesses the estimates of contract profitability. Circumstances that potentially affect profitability over the life of the contract include decreases in volumes of transactions or other inputs/outputs on which the Company is paid, failure to deliver agreed benefits, variances from planned internal/external costs to deliver the services, and other factors affecting revenues and costs.

Costs related to delivering outsourcing services are expensed as incurred with the exception of certain transition costs related to the set-up of processes, personnel and systems, which are deferred and expensed evenly over the period outsourcing services are provided. The deferred costs are specific internal costs or incremental external costs directly related to transition or set-up activities necessary to enable the outsourced services. Deferred amounts are recoverable in the event of early termination of the contract and are monitored regularly for impairment. Impairment losses are recorded when projected undiscounted operating cash flows of the related contract are not sufficient to recover the carrying amount of contract assets.

Research and Development

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

Foreign Currency Translation

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

Stock-Based Compensation

Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R, (“SFAS 123R”) “Share-Based Payment,” which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS No. 123R, share-based compensation cost is measured 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 January 1, 2006, the Company accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company also followed the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”.

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

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

Incentive Options. During the year ended December 31, 2006, the Company granted 462,500 incentive options. During the three months ended March 31, 2007, 70,000 incentive options were granted. Under the Plan, incentive options are granted at a fixed exercise price not less than 100% of the fair market value of the shares of stock on the date of grant (or not less than 110% of the fair market value in certain circumstances). Options granted 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 ended December 31, 2006 or the three months ended March 31, 2007. When granted under the Plan, non-qualified options are granted at a fixed exercise price equal to, more than, or less than 100% of the fair market value of the shares of stock on the date of grant.

At December 30, 2005, with board of directors’ approval, all stock options were repriced from a previous strike price of $9.25 to a strike price of $2.25. No other provisions of the stock 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 the date of grant or three months after the date the employee ceases to be employed by the Company. The weighted average remaining contractual life of the outstanding options is 7.48 years and 7.64 years at March 31, 2007 and December 31, 2006, respectively.

The following table presents the vested status of all options outstanding at 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

The following table presents share-based compensation expenses for continuing operations included in the Company’s unaudited condensed consolidated statements of operations:

	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 plans was estimated on the date of grant using the Black-Scholes option-pricing model. The fair value of each stock-option grant was estimated with the following weighted-average assumptions 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 AND FINANCING TRANSACTIONS

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

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

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 Credit Facility. The Company has a revolving credit facility (the “Revolver”) provided by Heller Financial, Inc. (“Heller”). Effective March 31, 2006, the Company and Heller entered into an amendment to the Revolver which extended the maturity date from May 30, 2006 to May 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 entered into an amendment to the Revolver which provides for a $5.0 million Term Loan to the Company and reduces the availability under the Revolver from $40 million to $35 million. In, addition, on March 22, 2007, the Company and Heller entered into an amendment to the Revolver which provides for an additional $10.0 million Term Loan to the Company, thus reducing the availability under the Revolver from $35.0 million to $25.0 million. The total potential availability under the Loan and Security agreement, however, remains at $40 million.

The Revolver is secured by substantially all the assets of the Company, subject to the limitations on liens contained in the Company’s existing Senior Notes. Funds availability under the Revolver is determined by a borrowing-base formula equal to a specified percentage of the value of the Company’s eligible accounts receivable, inventory, owned real property, machinery and equipment and pledged cash. At March 31, 2007, the Company had $30.3 million outstanding under the Revolver and $0.4 million outstanding on letters-of-credit. The availability remaining under the Revolver that the Company can draw was $9.3 million at March 31, 2007. A commitment fee of 0.375%

per annum on the unused portion of the Revolver is payable quarterly. The balance outstanding under the Revolver is classified in current obligations in the accompanying Condensed Consolidated Balance Sheets.

The interest rate on borrowings under the Revolver is, at the Company’s option, either (1) 0.25% over prime or (2) 1.75% over LIBOR. At March 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 proceeds from accounts receivable and asset sales) must be applied to repay the outstanding loans, which may be re-borrowed subject to availability in accordance with the borrowing base formula. The Revolver contains restrictions on the use of cash for dividend payments or non-scheduled principal payments on certain indebtedness. Restricted cash at March 31, 2007 and December 31, 2006 of $2.8 million and $2.5, respectively, million represents cash in escrow from a customer deposit.

The Revolver contains various representations, warranties and covenants, including financial covenants as to minimum fixed charge coverage ratio and minimum average borrowing availability. Effective March 31, 2006, the Company and Heller amended the loan and security agreement to state that a covenant to maintain a specific fixed charge coverage ratio would apply only if the average daily availability for the three month period ending on the last day of the most recent calendar quarter is less than $15.0 million. The fixed charge coverage ratio test was triggered for the three months ended March 31, 2007. At March 31, 2007, the minimum fixed charge coverage ratio required under the Revolver was 1.0, compared to the actual fixed charge coverage ratio of 1.74. At March 31, 2007, the Company was in compliance with all covenants under the Revolver.

Senior Notes. The Company’s Senior Notes (the “Senior Notes”) accrue interest at a fixed 7.5% rate which is due and payable in semi-annual installments. The Senior Notes contain covenants placing limitations on the Company’s ability to permit subsidiaries to incur certain debts, incur certain loans and liens, and engage 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. The Senior Notes mature on June 1, 2008.

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

As provided under the agreement, the Sponsor Note holder, WCAS, elected to defer the quarterly interest payment for the quarter ended December 31, 2006 of $2.6 million plus the deferred financing fee of $0.8 million, which increased the principal amount of the Sponsor Note by $3.4 million. In addition, for the quarter ended March 31, 2007, WCAS elected to defer the quarterly interest payment of $2.7 million plus the deferred financing fee of $0.8 million, which increased the principal amount of the Sponsor Note by $3.5 million. Such elections required the Company to incur a deferred financing fee of 30.0% of the amount of each interest payment deferred. The Company accounts for the additional financing fees as a change in the effective interest rate of the debt. WCAS may, at its election, defer each future quarterly payment under similar terms. At March 31, 2007 and December 31, 2006, the Company had $110.7 million and $107.2 million outstanding on the Sponsor Note, respectively.

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

Equity Line of Credit. Effective December 31, 2006, the Company and its majority shareholder, WCAS, entered into an arrangement whereby WCAS provided a commitment to purchase up to an additional $15.0 million of Series B Preferred stock for cash. No accounting recognition has been given to this right of BancTec to put its Series B Preferred stock, upon occurrence of certain events, to WCAS, primarily due to the parent/subsidiary nature of the arrangement. As of March 31, 2007, 53,333 shares of Series B Preferred stock had been purchased under this commitment for a total of $8.0 million. Dividends on these 53,333 shares of Series B Preferred Stock accrue quarterly at an annual dividend rate of 25% of the then “Stated Value.” The Stated Value equals $150.00 per share, plus accumulated and unpaid dividends. For the three months ended March 31, 2007, accrued but unpaid dividends totaled $0.5 million.

Capital Leases. During 2006, the Company entered into a capital lease for $1.3 million that pertained to imaging equipment to be used in the Company’s BPO operations. The Company’s interest in assets acquired under capital leases is recorded as property and equipment on the Condensed Consolidated Balance Sheets. Assets under capital lease were $2.8 million and $2.8 million as of March 31, 2007 and December 31, 2006, respectively. Amortization of assets recorded under capital leases is included in depreciation expense. Amounts due under capital leases are recorded as liabilities. The current obligations under capital leases are classified in the Current Liabilities section of the accompanying consolidated balance sheets and the non-current portion of capital leases are included in Other Liabilities.

At March 31, 2007, the Company had capital lease balances outstanding of $1.6 million, of which $0.6 million was classified as current and $1.0 million was classified as long-term.

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

8. INTANGIBLE ASSETS

The Company accounts for goodwill in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. Goodwill is not amortized but rather is tested at least annually for impairment. The impairment test is based on fair value compared to the recorded value at a reporting unit level. Reporting units are defined as an operating segment or one level below. Valuation methods used in determining fair value include an analysis of the cash flows that the reporting units can be expected to generate in the future (“Income Approach”) and the fair value of a reporting unit as compared to similar publicly traded companies (“Market Approach”). In preparing these valuations, management utilizes estimates to determine fair value of the reporting units. These estimates include future cash flows, growth rates, capital needs and projected margins, among other factors. Estimates utilized in future calculations could differ from estimates used in the current period. Future years’ estimates that are unfavorable compared to current estimates could cause an impairment of goodwill. The Company performs the annual test for impairment as of December 31, each year. There have been no events that would indicate interim testing for impairment is necessary.

Components of the Company’s goodwill and other intangibles include amounts that are foreign currency denominated. These goodwill amounts are subject to translation at each balance sheet date. The Company records the change to its Accumulated Other Comprehensive Loss on the accompanying condensed consolidated balance sheet.

A summary of amortizable intangible assets as of March 31, 2007 and December 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

Outsourcing contract costs consist of certain costs associated with contract acquisition and related direct and incremental costs and are capitalized in accordance with SOP 81-1 and Technical Bulletin 90-1. Contract acquisition costs include direct incremental costs associated with contract negotiation, such as legal fees, and costs incurred to transform customer processes and technology in direct support of implementing the contract terms and conditions, such as labor and travel costs. These costs are amortized on a pro-rata basis over the term of the contract.

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

9. PENSION BENEFITS

Net periodic pension costs 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 the provisions of FIN 48 – Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109, on January 1, 2007. FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent 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 adjustments to liabilities or operations were required.

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

With few exceptions, the Company 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 provision for income taxes for the three months ended March 31, 2007 and 2006 was $1.6 million and $1.3 million, respectively, reflecting an effective tax rate of (425.0%) and (31.4%), respectively. The effective tax rate differs from the statutory rate primarily due to the impact of different effective rates in some overseas jurisdictions and the impact of changes in the valuation allowance on net deferred tax assets.

A valuation allowance has been provided to reduce the deferred tax assets to an amount management believes is more likely than not to be realized. Expected realization of deferred tax assets for which a valuation allowance has not been recognized is based upon the reversal of existing taxable temporary differences and taxable income expected to be generated in the future. The need for a valuation allowance on deferred tax assets is evaluated on a

jurisdiction by jurisdiction basis. As a result, certain of the foreign subsidiaries deferred tax assets are not reserved with a valuation allowance due to their history of profitability.

Components of the valuation 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. COMPREHENSIVE LOSS

The components of comprehensive 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 Company reported its operations as three primary segments: 1) Americas, 2) Europe, Middle East and Asia (“EMEA”), and 3) Information Technology Service Management (“ITSM”).

Americas and Europe, Middle East and Asia. Americas and EMEA offer similar systems-integration and business-process solutions and services and market to similar types of customers. The solutions offered primarily involve high-volume transaction processing using advanced technologies that capture, process and archive paper and electronic documents.

Information Technology Service Management. ITSM provides quality integrated support services to the evolving Information Technology industry, with focused deployment and ongoing support solutions for the OEM, Enterprise and Fortune marketplaces. ITSM provides coverage in North America and Europe, and customers include OEM providers, defense and aerospace companies, strategic outsourcing organizations, and consumer electronics manufacturers.

	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

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

RESULTS OF OPERATIONS.

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

FORWARD-LOOKING STATEMENTS

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

Highlights

The Company experienced several shifts in its business during the year ended December 31, 2006, which continued into the three months ended March 31, 2007. During 2006, the Company began offering business process outsourcing services in the United States, building on the experience gained in the business process outsourcing market in Europe over the last several years. In addition, the Company experienced continued expansion of the ITSM business in European markets. The US hardware maintenance business, which has been in decline over the last several years, experienced growth in 2006 and early 2007 due to the addition of significant contracts for the maintenance of third party electromechanical equipment. Other factors continue to impact the Company, including reduced corporate customer technology spending; ongoing competitive pressures; an ongoing planned change in revenue mix within the Company’s Americas and EMEA segments; and a highly leveraged financial position. The change in revenue mix is partially a result of trends in payment processing, including check truncation (the process whereby banks are able to truncate original checks and to process check information electronically), which impacts domestic and international markets.

The Company continues to introduce new product offerings in its document and content management solutions as well as expand its managed services business in North America. In addition, the Company continues to seek reductions in operating costs.

During the year ended December 31, 2006 and the three months ended March 31, 2007, the Company experienced declines in maintenance contract deposits related to the personal computer repair business, which significantly impacted cash from operations. These declines can be attributed to two primary factors. First, the overall amount of extended maintenance contracts have declined as a result of continued declines in prices of personal computers. As businesses and consumers have paid less per unit for personal computers, the purchase of extended maintenance contracts has declined as businesses and individuals choose to replace rather than repair. Second, the price per contract has declined due to decreased sales of multi-year maintenance contracts.

RESULTS OF OPERATIONS

Comparison of Three Months Ended March 31, 2007 and Three Months Ended March 31, 2006

Consolidated revenue 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 was primarily due to the addition of contracts for the maintenance of third party equipment throughout 2006 and early 2007. In addition, strong sales related to the sale and installation of hardware and software products related to document processing solutions contributed to the increase. Also, during the quarter ended March 31, 2007, software maintenance revenue and supplies sales revenue decreased slightly.

· An increase in EMEA of $3.4 million is the result of the continued growth of business process outsourcing services in Europe and the impact of a weaker dollar on the conversion of revenue stated in foreign currencies.

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

Factors expected to impact future revenue include corporate-customer spending for large systems-solutions, the continued impacts of check truncation, on-going competitive pressures, and fluctuations in international currencies.

Consolidated gross profit of $23.7 million increased by $4.8 million or 25.4% from the comparable 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, the start-up nature of the Company’s managed services business and initial costs associated with new contracts for the maintenance of third party equipment drove down the gross profit percentage.

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

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

Operating expenses of $18.9 million increased $0.6 million compared to the prior-year period. Product-development expenses stayed 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 amortization expense when compared with the prior year period.

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

Sundry items resulted in a gain of $0.1 million for the three months ended March 31, 2007, compared to no gain or loss in the comparable prior-year period. Foreign exchange gains were $0.1 million in the current year compared to a negligible amount for the comparable prior year period.

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

LIQUIDITY AND CAPITAL RESOURCES

The Company’s working capital requirements are generally provided by cash and cash equivalents, funds available under the Company’s revolving credit facility, as discussed below, which matures May 30, 2008, and by internally generated funds from operations. Funds availability under the revolving credit facility is determined by a borrowing-base formula equal to a specified percentage of the value of the Company’s eligible accounts receivable, inventory, real property, machinery and equipment and pledged cash. General economic conditions, decreased revenues from the Company’s maintenance contracts, and the requirement to obtain performance bonds or similar instruments could have a material impact on the Company’s future liquidity. The Company believes that cash from available borrowings under its revolving credit facility, other sources of funding, existing cash balances and a commitment from WCAS to purchase up to an additional $7.0 million in Series B Preferred stock for cash, will be sufficient to fund its operations for at least the next 12 months.

The Company’s cash and cash equivalents, including restricted cash, totaled $14.5 million at March 31, 2007, compared to $12.2 million at December 31, 2006. The working capital deficit decreased $3.5 million to a working capital deficit of $16.0 million at March 31, 2007. The change in working capital was primarily due to increases in accounts receivable of $5.4 million and inventory of $3.7 million. In addition, working capital was impacted by the increase in cash as well as a decrease of $1.2 million in the Revolver and other current obligations. These were somewhat offset by increases in accrued expenses totaling $7.0 million. During the three months ended March 31, 2007, the Company also experienced continued declines in maintenance contract deposits due to two primary factors. First, the overall amount of extended maintenance contracts have declined as a result of continued declines in prices of personal computers. As businesses and consumers have paid less per unit for personal computers, the purchase of extended maintenance contracts have declined as businesses and individuals choose to replace rather than repair. Second, the price per contract has declined due to competitive pressure from other service providers and also due to declines in the per unit price of personal computers.

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

Operating activities provided $2.4 million and used $4.6 million of cash in the three months ended March 31, 2007 and 2006, respectively, an increase of $7.0 million. The net loss decreased $3.6 million from the prior-year period. In addition, cash utilized by changes in operating assets and liabilities was $4.2 million less than in the prior-year period.

Investing activities used net cash of $6.3 million and $4.4 million in the three months ended March 31, 2007 and 2006, respectively. The Company used cash for purchases of property, plant and equipment of $5.2 million and $5.2 million during the three months ended March 31, 2007 and 2006, respectively. In addition, the Company used cash of $0.9 million during the three months ended March 31, 2007 related to the increase in outsourcing contract costs.

Financing activities provided $6.0 million and $2.3 million for the three months ended March 31, 2007 and 2006, respectively. The purchase by WCAS of $8.0 of Series B Preferred stock provided the cash during the current year period, while borrowings under the Revolving Credit Facility provided the cash during the prior year period. Partially offsetting these increases was payments of $1.2 million on the Revolving Credit Facility during the prior year period.

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

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

from potential bidders. However, the Company has not entered into any binding agreements or agreements in principle to sell any assets and there can be no assurance that any such asset sales will occur or, if they occur, as to the timing or amount of proceeds that such asset sales may generate.

Revolving Credit Facility. The Company has a revolving credit facility (the “Revolver”) provided by Heller Financial, Inc. (“Heller”). Effective March 31, 2006, the Company and Heller entered into an amendment to the Revolver which extended the maturity date from May 30, 2006 to May 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 entered into an amendment to the Revolver which provides for a $5.0 million Term Loan to the Company and reduces the availability under the Revolver from $40 million to $35 million. In, addition, on March 22, 2007, the Company and Heller entered into an amendment to the Revolver which provides for an additional $10.0 million Term Loan to the Company, thus reducing the availability under the Revolver from $35.0 million to $25.0 million. The total potential availability under the Loan and Security agreement, however, remains at $40 million.

Under the Revolver, substantially all of the Company’s domestic cash receipts (including proceeds from accounts receivable and asset sales) must be applied to repay the outstanding loans, which may be re-borrowed subject to availability in accordance with the borrowing base formula. The Revolver contains restrictions on the use of cash for dividend payments or non-scheduled principal payments on certain indebtedness. Restricted cash at March 31, 2007 and December 31, 2006 of $2.8 million and $2.5 million, respectively, represents cash in escrow from a customer deposit.

The Revolver contains various representations, warranties and covenants, including financial covenants as to minimum fixed charge coverage ratio and minimum average borrowing availability. Effective March 31, 2006, the Company and Heller amended the loan and security agreement to state that a covenant to maintain a specific fixed charge coverage ratio would apply only if the average daily availability for the three month period ending on the last day of the most recent calendar quarter is less than $15.0 million. The fixed charge coverage ratio test was triggered for the three months ended March 31, 2007. At March 31, 2997, the minimum fixed charge coverage ratio required under the Revolver was 1.0, compared to the actual fixed charge coverage ratio of 1.74. At March 31, 2007, the Company was in compliance with all covenants under the Revolver.

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

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

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

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

Equity Line of Credit. Effective December 31, 2006, the Company and its majority shareholder, WCAS, entered into an arrangement whereby WCAS provided a commitment to purchase up to an additional $15.0 million of Series B Preferred stock for cash. No accounting recognition has been given to this right of BancTec to put its Series B Preferred stock, upon occurrence of certain events, to WCAS, primarily due to the parent/subsidiary nature of the arrangement. As of March 31, 2007, 53,333 shares of Series B Preferred stock had been purchased under this commitment for a total of $8.0 million. Dividends on these 53,333 shares of Series B Preferred Stock accrue quarterly at an annual dividend rate of 25% of the then “Stated Value.” The Stated Value equals $150.00 per share, plus accumulated 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 on the operating results of the Company.

Off Balance Sheet Arrangements. The Company currently does not have any off balance sheet arrangements.

Three Months Ended March 31,

(In thousands)

Inventory put in service as fixed asset

Purchases of fixed assets included in accounts payable at quarter end

In the normal course of business, the Company enters into various contractual and other commercial commitments that impact, or could impact, the liquidity of operations. The following table outlines the commitments at March 31, 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	$	—	$	—	$	—

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 as of January 1, 2007 with no impact on the consolidated financial statements during the three months ended March 31, 2007.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective as of the beginning of fiscal year 2008. The Company is currently evaluating the impact of adopting SFAS 157 on the consolidated financial statements.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

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

Interest Rate Risk

The Company utilizes long-term fixed rate and short-term variable rate borrowings to finance the working capital and capital requirements of the business. At March 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, the Company also had the Sponsor Note, due 2009, with a balance of $110.7 million and $107.2 million, respectively. The Sponsor Note bears interest at a fixed rate of 10.0%.

The interest rate on loans under the Revolver is, at the Company’s option, either (1) 0.25% over prime or (2) 1.75% over LIBOR. At March 31, 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 basis point change in the bank’s prime or LIBOR rate would impact net interest expense by $303,000 over a twelve-month period

Foreign Currency Risk

The Company’s international subsidiaries operate in approximately 11 countries and use the local currencies as the functional currency and the U.S. dollar as the reporting currency. Transactions between the Company and the international subsidiaries are denominated in U.S. dollars. As a result, the Company has certain exposures to foreign currency risk. However, management believes that such exposure does not present a significant risk due to a relatively limited number of transactions and operations denominated in foreign currency. For the three months ended March 31, 2007, approximately $46.1 million or 48.4% of the Company’s revenues are denominated in the international currencies. Transaction gains and losses on U.S. dollar denominated transactions are recorded within Sundry, net in the accompanying consolidated statements of operations and were not material for the three months ended March 31, 2007 or 2006.

The Company may use foreign forward currency-exchange rate contracts to minimize the adverse earnings impact from the effect of exchange rate fluctuations. No hedging instruments existed at March 31, 2007.

ITEM 4. CONTROLS AND PROCEDURES.

As of the end of the period covered by this report, March 31, 2007, the Chief Executive Officer and the Chief Financial Officer of the Company, with the participation of the Company’s management, evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer believe that the Company’s disclosure controls and procedures are effective in making known to them material information relating to the Company (including its consolidated subsidiaries) required to be included in this report. In addition, the disclosure controls and procedures are effective to ensure that information required to be disclosed in this report is recorded, processed, summarized and reported within 90 days of March 31, 2007, and such information required to be disclosed is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure. The Company will continue to evaluate disclosure controls on an ongoing basis.

Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the Chief Executive Officer and Chief Financial Officer believe that the Company’s disclosure controls and procedures are effective at that reasonable assurance level.

There were no significant changes in the Company’s internal controls over financial reporting or in other factors that could significantly affect internal controls, known to the Chief Executive Officer or the Chief Financial Officer, during the first quarter of 2007.

BANCTEC, INC.

PART II

OTHER INFORMATION

ITEM 1. Legal Proceedings

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

ITEM 1A. Risk Factors

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

Business and Economic Conditions

Demand for the Company’s services could be adversely impacted by economic and political uncertainty. A general economic downturn may adversely impact customers’ demand for information technology outsourcing, business processing outsourcing and systems integration services. The Company’s sales are concentrated to businesses in industries involving high volume transaction processing, including banking, financial services, insurance, health care and high technology, and to governmental agencies. Business or economic conditions, such as consolidation with the industry, that cause customers in these industries to reduce or delay their investments in document processing products and solutions, such as those offered by the Company, could have a material adverse effect on the Company, including its business, operating results, financial condition and prospects.

Technological Changes and Product Transitions

The Company’s industry is characterized by continuing improvement in technology, which results in the frequent introduction of new products, short product life cycles and continual improvement in product price/performance characteristics. The Company must incorporate these new technologies into its products and solutions in order to remain competitive. The Company may not be able to continue to manage technological transitions. A failure on the part of the Company to effectively manage the transition of its product lines to new technologies on a timely basis could have a material adverse effect, specifically reductions in sales, on the Company. In addition, the Company’s business depends on technology trends in its customers’ businesses. Many of the Company’s traditional products depend on the efficient handling of paper-based transactions. To the extent that technological changes impact the future volume of paper transactions, the Company’s traditional business may be adversely impacted.

Competition

The business processing outsourcing and the information technology outsourcing industries are highly competitive. Certain of the Company’s competitors have greater financial resources and may develop solutions or services which may make the Company’s service offerings obsolete. These situations may impact the Company’s ability to win new contracts or develop and expand service offerings. In addition, competition places downward pressure on operating margins, particularly for technology outsourcing contract extensions or renewals. As a result, the Company may not be able to maintain current operating margins for technology outsourcing contracts extended or renewed in the future.

Contract Profitability

The pricing and other terms of customer contracts require the Company to make estimates and assumptions at the time these contracts are entered into that could differ from actual results. These estimates reflect the Company’s best judgments regarding the nature of the contract and the expected costs to provide the contracted services. In addition, some contracts require significant investments in the early stages, which are expected to be recovered over the life of the contract through billings for services. Increased or unexpected costs or unanticipated delays in the implementation of the services or decreases in the actual work volumes generated under the contracts could make these contracts less profitable or unprofitable.

Customer concentration

The Company’s success depends upon retention of significant customers. For the year ended December 31, 2006, the top ten customer accounted for 48.6% of total revenue. Customers may be lost due to merger or acquisition, business failure, contract expiration, conversion to a competitor, or conversion to an in-house system. The Company cannot guarantee that they will be able to retain long-term relationships or secure renewals of current contracts in the future. Significant decreases in the volumes under contracts with these significant customers or the loss of any significant customer could leave the Company with a higher level of fixed costs than is necessary to service remaining customers.

Key personnel

The Company’s ability to grow and provide customers with competitive solutions and services is partially dependent on the ability to attract and retain highly motivated people with the skills to serve customers. In addition, the Company’s operations depend on the continued efforts of the executive officers and on senior management. If the Company fails to attract, train and retain key management and technically skilled people, the financial condition and results of operations could be materially and adversely affected.

Dependence on Suppliers

The Company’s hardware products depend on the quality of components that are procured from third-party suppliers. Reliance on suppliers, as well as industry supply conditions, generally involves several risks, including the possibility of defective parts (which can adversely affect the reliability and reputation of the Company’s products), a shortage of components and reduced control over delivery schedules (which can adversely affect the Company’s manufacturing efficiencies) and increases in component costs (which can adversely affect the Company’s profitability).

The Company has several single-sourced supplier relationships, either because alternative sources are not available or the relationship is advantageous due to performance, quality, support, delivery, capacity or price considerations. If these sources are unable to provide timely and reliable supply, the Company could experience manufacturing interruptions, delays or inefficiencies, adversely affecting its results of operations. Even where alternative sources of supply are available, qualification of the alternative suppliers and establishment of reliable supplies could result in delays and a possible loss of sales, which could affect operating results adversely.

Indebtedness and Impact on Operating Results

As a result of the Company’s high debt to equity ratio, the Company is required to devote significant cash to debt service. This limits the Company’s future operating flexibility and could make the Company more vulnerable to a downturn in its operating performance or a decline in general economic conditions.

International Activities

The Company’s international operations are a significant part of the Company’s business. The success and profitability of international operations are subject to numerous risks and uncertainties, such as economic and labor conditions, political instability, tax laws (including U.S. taxes on foreign subsidiaries) and changes in the value of

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

Fluctuations in Operating Results

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

Product Development Activities

The strength of the Company’s overall business depends in part on the Company’s ability to develop products and solutions based on new or evolving technology and the market’s acceptance of those products. There can be no assurance that the Company’s product development activities will be successful, that new technologies will be available to the Company, that the Company will be able to deliver commercial quantities of new products in a timely manner, that those products will adhere to generally accepted industry standards or that products will achieve market acceptance. Many of the Company’s customers use its products in highly regulated or technologically demanding industries. As a result of products introduced by the Company’s competitors, generally accepted industry standards can change rapidly in ways that are beyond the control of the Company.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

ITEM 3. Defaults Upon Senior Securities

None

ITEM 4. Submission of Matters to a Vote of Security Holders

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 Rule 15d-14(a) under the Securities Exchange Act

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

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

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

(b) Reports on Form 8-K:

No reports on Form 8-K were filed during the three months ended March 31, 2007.

SIGNATURES

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

			BancTec, Inc.


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


Dated: May 15, 2007