##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 0-19657
 TRM CORPORATION
  Oregon
    
    93-0809419(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 (Address of principal executive offices) (Zip Code)
 (Registrants telephone number, including area code)
 o þ
  o þ o
 o þ




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II  OTHER INFORMATIONITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSITEM 3. DEFAULTS UPON SENIOR SECURITIESITEM 5. OTHER INFORMATIONITEM 6. EXHIBITSSIGNATUREEmployment Agreement, Richard B. StrenAMENDMENT TO LOAN & SERVICING AGREEMENT DATED SEPTEMBER 30, 2006Certification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Principal Accounting OfficerCertification of Chief Executive Officer, pursuant to Section 906Certification of Chief Financial Officer, pursuant to Section 906Certification of Principal Accounting Officer, pursuant to Section 906    Table of Contents  
 PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 TRM Corporation
Consolidated Balance Sheets
(unaudited)
(In thousands)
 December 31,
    
    
    September 30,2005
    
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    9,708
    
    
    $
    7,867Accounts receivable, net
    
    
    13,231
    
    
    
    11,589Income tax receivable
    
    
    211
    
    
    
    215Inventories
    
    
    1,930
    
    
    
    2,413Prepaid expenses and other
    
    
    3,610
    
    
    
    4,024Deferred tax asset
    
    
    1,036
    
    
    
    Restricted cash  TRM Inventory Funding Trust
    
    
    74,962
    
    
    
    84,723Total current assets
    
    
    104,688
    
    
    
    110,831Equipment, less accumulated depreciation and amortization
    
    
    71,709
    
    
    
    44,631Deferred tax asset
    
    
    1,631
    
    
    
    Goodwill
    
    
    118,875
    
    
    
    75,966Other intangible assets, less accumulated amortization
    
    
    43,044
    
    
    
    7,523Other assets
    
    
    1,835
    
    
    
    1,535Total assets
    
    $
    341,782
    
    
    $
    240,486Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    13,218
    
    
    $
    13,632Accrued expenses
    
    
    14,940
    
    
    
    8,663Term loans and line of credit
    
    
    91,605
    
    
    
    94,917TRM Inventory Funding Trust note payable
    
    
    73,269
    
    
    
    82,940Current portion of obligations under capital leases
    
    
    828
    
    
    
    278Total current liabilities
    
    
    193,860
    
    
    
    200,430Obligations under capital leases
    
    
    686
    
    
    
    Deferred tax liability
    
    
    5,430
    
    
    
    Other long-term liabilities
    
    
    380
    
    
    
    382Total liabilities
    
    
    200,356
    
    
    
    200,812Minority interest
    
    
    1,500
    
    
    
    1,500Shareholders equity:Common stock, no par value -
50,000 shares authorized; 17,106 shares issued and
outstanding (16,871 at December 31, 2005)
    
    
    131,545
    
    
    
    132,591Additional paid-in capital
    
    
    63
    
    
    
    63Accumulated other comprehensive income:Accumulated foreign currency translation adjustments
    
    
    2,958
    
    
    
    4,938Other
    
    
    (74
    )
    
    
    Retained earnings (accumulated deficit)
    
    
    5,434
    
    
    
    (99,418
    )Total shareholders equity
    
    
    139,926
    
    
    
    38,174Total liabilities and shareholders equity
    
    $
    341,782
    
    
    $
    240,486
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TRM Corporation
Consolidated Statements of Operations
(unaudited)
(In thousands, except per share data)
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Sales
    
    $
    57,916
    
    
    $
    51,138
    
    
    $
    175,495
    
    
    $
    155,900Less discounts
    
    
    27,677
    
    
    
    24,312
    
    
    
    80,952
    
    
    
    73,456Net sales
    
    
    30,239
    
    
    
    26,826
    
    
    
    94,543
    
    
    
    82,444Cost of sales:Cost of vault cash
    
    
    2,612
    
    
    
    2,987
    
    
    
    7,126
    
    
    
    7,879Other
    
    
    15,425
    
    
    
    15,127
    
    
    
    43,955
    
    
    
    44,865Gross profit
    
    
    12,202
    
    
    
    8,712
    
    
    
    43,462
    
    
    
    29,700Selling, general and administrative expense (including
non-cash stock compensation of $160 and $955 in the three and
nine months ended September 30, 2006)
    
    
    10,906
    
    
    
    11,228
    
    
    
    32,062
    
    
    
    33,945Impairment charges (note 12):Goodwill
    
    
    
    
    
    
    43,743
    
    
    
    
    
    
    
    43,743Other intangible assets
    
    
    
    
    
    
    30,916
    
    
    
    
    
    
    
    30,916Equipment
    
    
    
    
    
    
    21,403
    
    
    
    
    
    
    
    21,403Equipment write-offs
    
    
    54
    
    
    
    12
    
    
    
    166
    
    
    
    238Operating income (loss)
    
    
    1,242
    
    
    
    (98,590
    )
    
    
    11,234
    
    
    
    (100,545
    )Interest expense:Interest expense and amortization of debt issuance costs
    
    
    2,642
    
    
    
    2,765
    
    
    
    7,661
    
    
    
    8,623Loss on early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,477Other expense (income), net
    
    
    (1,458
    )
    
    
    (289
    )
    
    
    (2,375
    )
    
    
    (1,829
    )Income (loss) from continuing operations before income taxes
    
    
    58
    
    
    
    (101,066
    )
    
    
    5,948
    
    
    
    (110,816
    )Provision (benefit) for income taxes
    
    
    (394
    )
    
    
    (2,395
    )
    
    
    998
    
    
    
    (5,194
    )Income (loss) from continuing operations
    
    
    452
    
    
    
    (98,671
    )
    
    
    4,950
    
    
    
    (105,622
    )Discontinued operations:Income (loss) from operations of discontinued UK photocopier
company (including gain on disposal of $1,900 in the nine
months ended September 30, 2006)
    
    
    (191
    )
    
    
    (286
    )
    
    
    (171
    )
    
    
    1,347Provision (benefit) for income tax
    
    
    (57
    )
    
    
    (102
    )
    
    
    (51
    )
    
    
    577Income (loss) from discontinued operations
    
    
    (134
    )
    
    
    (184
    )
    
    
    (120
    )
    
    
    770Net income (loss)
    
    $
    318
    
    
    $
    (98,855
    )
    
    $
    4,830
    
    
    $
    (104,852
    )Basic and diluted per share information:Income (loss) from continuing operations
    
    $
    452
    
    
    $
    (98,671
    )
    
    $
    4,950
    
    
    $
    (105,622
    )Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    (147
    )
    
    
    Income allocated to Series A preferred shareholders
    
    
    
    
    
    
    
    
    
    
    (57
    )
    
    
    Net income (loss) from continuing operations available to
common shareholders
    
    $
    452
    
    
    $
    (98,671
    )
    
    $
    4,746
    
    
    $
    (105,622
    )Weighted average common shares outstanding
    
    
    14,041
    
    
    
    17,102
    
    
    
    13,809
    
    
    
    17,007Dilutive effect of stock options
    
    
    730
    
    
    
    
    
    
    
    803
    
    
    
    Dilutive effect of warrants
    
    
    
    
    
    
    
    
    
    
    32
    
    
    
    Weighted average common shares outstanding, assuming
dilution
    
    
    14,771
    
    
    
    17,102
    
    
    
    14,644
    
    
    
    17,007Basic income (loss) per share:Continuing operations
    
    $
    .03
    
    
    $
    (5.77
    )
    
    $
    .34
    
    
    $
    (6.21
    )Discontinued operations
    
    
    (.01
    )
    
    
    (.01
    )
    
    
    (.01
    )
    
    
    .04Net income (loss)
    
    $
    .02
    
    
    $
    (5.78
    )
    
    $
    .33
    
    
    $
    (6.17
    )Diluted income (loss) per share:Continuing operations
    
    $
    .03
    
    
    $
    (5.77
    )
    
    $
    .33
    
    
    $
    (6.21
    )Discontinued operations
    
    
    (.01
    )
    
    
    (.01
    )
    
    
    (.01
    )
    
    
    .04Net income (loss)
    
    $
    .02
    
    
    $
    (5.78
    )
    
    $
    .32
    
    
    $
    (6.17
    )
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TRM Corporation
Consolidated Statement of Shareholders Equity
(unaudited)
(In thousands)
 AccumulatedAdditional
    
    
    other
    
    
    RetainedComprehensive
    
    
    Common
    
    
    paid-in
    
    
    comprehensive
    
    
    earningsincome
(loss)
    

    Shares
    
Amounts
    
 capital
    
  income
    
   (deficit)
    
  TotalBalances, December 31, 2005
    
    
    
    
    
    
    16,871
    
    
    $
    131,545
    
    
    $
    63
    
    
    $
    2,884
    
    
    $
    5,434
    
    
    $
    139,926Comprehensive loss:Net loss
    
    $
    (104,852
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (104,852
    )
    
    
    (104,852
    )Other comprehensive income
(loss):Foreign currency
translation adjustment:Recognized in income
    
    
    (1,538
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,538
    )
    
    
    
    
    
    
    (1,538
    )Other
    
    
    3,518
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,518
    
    
    
    
    
    
    
    3,518Other
    
    
    74
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74
    
    
    
    
    
    
    
    74Comprehensive loss
    
    $
    (102,798
    )Exercise of stock options
    
    
    
    
    
    
    235
    
    
    
    91
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91Restricted stock expense
    
    
    
    
    
    
    
    
    
    
    246
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    246Stock option expense
    
    
    
    
    
    
    
    
    
    
    709
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    709Balances, September 30, 2006
    
    
    
    
    
    
    17,106
    
    
    $
    132,591
    
    
    $
    63
    
    
    $
    4,938
    
    
    $
    (99,418
    )
    
    $
    38,174
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TRM Corporation
Consolidated Statements of Cash Flows
(unaudited)
(In thousands)
 Nine months ended September 30,2005
    
    
    2006Operating activities:Net income (loss)
    
    $
    4,830
    
    
    $
    (104,852
    )Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Impairment charges
    
    
    
    
    
    
    96,062Depreciation and amortization
    
    
    15,341
    
    
    
    15,608Non-cash stock compensation
    
    
    
    
    
    
    955Gain on sale of investment security
    
    
    (1,312
    )
    
    
    Loss on disposal of equipment
    
    
    210
    
    
    
    366Provision for doubtful accounts
    
    
    142
    
    
    
    397Deferred income taxes
    
    
    527
    
    
    
    (5,082
    )Loss on
early extinguishment of debt
    
    
    
    
    
    
    2,560Gain on sale of discontinued operations
    
    
    
    
    
    
    (362
    )Cumulative translation adjustment recognized in current period net income
    
    
    
    
    
    
    (1,538
    )Changes in items affecting operations:Accounts receivable
    
    
    (5,715
    )
    
    
    2,143Income tax receivable
    
    
    (278
    )
    
    
    (4
    )Inventories
    
    
    4,708
    
    
    
    608Prepaid expenses and other
    
    
    1,183
    
    
    
    (295
    )Accounts payable
    
    
    (7,481
    )
    
    
    101Accrued expenses
    
    
    (1,509
    )
    
    
    (6,175
    )Total operating activities
    
    
    10,646
    
    
    
    492Investing activities:Proceeds from sale of equipment
    
    
    41
    
    
    
    43Capital expenditures
    
    
    (14,064
    )
    
    
    (4,464
    )Proceeds from discontinued operations sold
    
    
    
    
    
    
    4,280Proceeds from sale of investment in equity security
    
    
    9,583
    
    
    
    Acquisition of intangible and other assets
    
    
    (3,346
    )
    
    
    (778
    )Total investing activities
    
    
    (7,786
    )
    
    
    (919
    )Financing activities:Borrowings on notes payable
    
    
    7,359
    
    
    
    116,431Repayment of notes payable
    
    
    (11,004
    )
    
    
    (114,001
    )Debt financing costs
    
    
    
    
    
    
    (2,979
    )Principal payments on capital lease obligations
    
    
    (1,702
    )
    
    
    (576
    )Change in restricted cash
    
    
    (18,438
    )
    
    
    (9,761
    )Proceeds from issuance of TRM Inventory Funding Trust note, net of repayments
    
    
    18,739
    
    
    
    9,671Proceeds from exercise of stock options
    
    
    249
    
    
    
    91Preferred stock dividends
    
    
    (367
    )
    
    
    Other
    
    
    (141
    )
    
    
    (19
    )Total financing activities
    
    
    (5,305
    )
    
    
    (1,143
    )Effect of exchange rate changes
    
    
    1
    
    
    
    (271
    )Decrease in cash and cash equivalents
    
    
    (2,444
    )
    
    
    (1,841
    )Beginning cash and cash equivalents
    
    
    5,576
    
    
    
    9,708Ending cash and cash equivalents
    
    $
    3,132
    
    
    $
    7,867Supplemental cash flow information:Non-cash transactions Conversion of preferred shares to common shares
    
    $
    11,620
    
    
    $
    Payments:Cash paid for interest
    
    $
    8,021
    
    
    $
    6,245Cash paid for income taxes
    
    $
    469
    
    
    $
    79
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TRM Corporation
 Notes to Condensed Consolidated Financial Statements (unaudited)
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December 31,
    
    
    September 30,2005
    
    
    2006Parts
    
    $
    1,239
    
    
    $
    1,977ATMs held for resale
    
    
    654
    
    
    
    388Paper, toner and developer
    
    
    37
    
    
    
    48Total
    
    $
    1,930
    
    
    $
    2,413
  December 31,
    
    
    September 30,2005
    
    
    2006Konica analog photocopiers
    
    $
    50,120
    
    
    $
    29,101Non-Konica analog photocopiers
    
    
    9,233
    
    
    
    5,787Toshiba digital photocopiers
    
    
    5,314
    
    
    
    ATMs
    
    
    49,547
    
    
    
    54,572Furniture and fixtures
    
    
    2,767
    
    
    
    2,953Computer equipment
    
    
    7,994
    
    
    
    8,240Vehicles
    
    
    200
    
    
    
    128125,175
    
    
    
    100,781Accumulated depreciation and amortization
    
    
    (53,466
    )
    
    
    (56,150
    )$
    71,709
    
    
    $
    44,631
  December 31, 2005
    
    
    September 30, 2006Gross
    
    
    
    
    
    
    
    
    
    
    Grosscarrying
    
    
    Accumulated
    
    
    
    
    
    
    carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    Net
    
    
    amount
    
    
    amortization
    
    
    NetSubject to amortization:Acquired merchant contracts
    
    $
    44,717
    
    
    $
    (8,871
    )
    
    $
    35,846
    
    
    $
    8,998
    
    
    $
    (4,651
    )
    
    $
    4,347Other
    
    
    9,917
    
    
    
    (2,792
    )
    
    
    7,125
    
    
    
    4,754
    
    
    
    (1,652
    )
    
    
    3,10254,634
    
    
    
    (11,663
    )
    
    
    42,971
    
    
    
    13,752
    
    
    
    (6,303
    )
    
    
    7,449Not subject to amortization:Goodwill
    
    
    118,875
    
    
    
    
    
    
    
    118,875
    
    
    
    75,966
    
    
    
    
    
    
    
    75,966Other
    
    
    73
    
    
    
    
    
    
    
    73
    
    
    
    74
    
    
    
    
    
    
    
    74118,948
    
    
    
    
    
    
    
    118,948
    
    
    
    76,040
    
    
    
    
    
    
    
    76,040$
    173,582
    
    
    $
    (11,663
    )
    
    $
    161,919
    
    
    $
    89,792
    
    
    $
    (6,303
    )
    
    $
    83,489
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Three months ending December 31, 2006:
    
    $
    450Years ending December 31:2007
    
    
    1,4852008
    
    
    1,2882009
    
    
    1,2152010
    
    
    1,1482011
    
    
    757Thereafter
    
    
    1,106$
    7,449
  December 31,
    
    
    September 30,2005
    
    
    2006Term loans
    
    $
    82,182
    
    
    $
    90,211Line of credit
    
    
    9,394
    
    
    
    4,675Other
    
    
    29
    
    
    
    31Total
    
    $
    91,605
    
    
    $
    94,917
   
    
    a $45.5 million credit agreement (the First Lien Credit Agreement) with GSO
Origination Funding Partners LP (the GSO Fund), certain other lenders and Wells Fargo
Foothill, Inc., serving as administrative agent, revolving lender, swing line lender
and L/C issuer (WFF);
    
    a $40 million second lien loan agreement with the GSO Fund, certain other lenders
and WFF (the Second Loan Agreement and, together with the First Lien Credit
Agreement, the Credit Agreements); and
    
    a £12.9 million (approximately $24.3 million based on exchange rates as of September
30, 2006) facility agreement between our wholly-owned subsidiary, TRM
 8




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(ATM) Limited (TRM (ATM) Ltd.) and GSO Luxembourg Onshore Funding SarL (GSO Lux) as
the original lender, facility agent and security agent (the UK Facility Agreement).
  First Lien
Credit Agreement, including $4,675 borrowing on line of credit
    
    $
    30,610Second Loan Agreement
    
    
    40,000UK Facility Agreement
    
    
    24,276$
    94,886
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Three months ended
    
    
    Nine months endedSeptember 30, 2005
    
    
    September 30, 2005Net income, as reported
    
    $
    318
    
    
    $
    4,830Deduct total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects
    
    
    (371
    )
    
    
    (1,116
    )Pro forma net income (loss)
    
    $
    (53
    )
    
    $
    3,714Basic net income per share:As reported
    
    $
    .02
    
    
    $
    .33Pro forma
    
    $
    .00
    
    
    $
    .26Diluted net income per share:As reported
    
    $
    .02
    
    
    $
    .32Pro forma
    
    $
    .00
    
    
    $
    .24
   12




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Modification of options previously granted
    
    $
    618Amortization of:Option grants
    
    
    91Restricted shares
    
    
    246$
    955
   Shares
    
    Weightedunder
    
    averageoption
    
    exercise priceBalance January 1, 2006
    
    
    1,457,015
    
    
    $
    5.94Options granted
    
    
    15,000
    
    
    
    6.10Options exercised
    
    
    (306,890
    )
    
    
    1.97Options forfeited
    
    
    (156,750
    )
    
    
    8.81Balance September 30, 2006
    
    
    1,008,375
    
    
    
    6.71
   13




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Number of shares under option
    
    
    1,008,375Weighted average exercise price
    
    $
    6.71Aggregate intrinsic value
    
    $
    133,000Weighted average remaining contractual term

    
    1.9
    years
     14




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United States ATM
    
    $
    37,140Canada ATM
    
    
    9,513United Kingdom ATM
    
    
    73,056
    15




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##### Table of Contents



Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Net sales:ATM:United States
    
    $
    12,589
    
    
    $
    9,712
    
    
    $
    39,730
    
    
    $
    32,351Canada
    
    
    2,281
    
    
    
    1,852
    
    
    
    6,956
    
    
    
    5,476United Kingdom
    
    
    8,517
    
    
    
    8,913
    
    
    
    25,193
    
    
    
    24,346Germany
    
    
    
    
    
    
    48
    
    
    
    
    
    
    
    5923,387
    
    
    
    20,525
    
    
    
    71,879
    
    
    
    62,232Photocopy:United States
    
    
    6,059
    
    
    
    5,551
    
    
    
    19,954
    
    
    
    17,457Canada
    
    
    793
    
    
    
    750
    
    
    
    2,710
    
    
    
    2,7556,852
    
    
    
    6,301
    
    
    
    22,664
    
    
    
    20,212$
    30,239
    
    
    $
    26,826
    
    
    $
    94,543
    
    
    $
    82,444Pretax income (loss) excluding unallocated costs:ATM:United States
    
    $
    2,203
    
    
    $
    (45,004
    )
    
    $
    7,078
    
    
    $
    (44,947
    )Canada
    
    
    394
    
    
    
    (6,367
    )
    
    
    439
    
    
    
    (6,560
    )United Kingdom
    
    
    41
    
    
    
    (25,936
    )
    
    
    1,514
    
    
    
    (27,612
    )Germany
    
    
    (271
    )
    
    
    (185
    )
    
    
    (389
    )
    
    
    (617
    )2,367
    
    
    
    (77,492
    )
    
    
    8,642
    
    
    
    (79,736
    )Photocopy:United States
    
    
    644
    
    
    
    (18,282
    )
    
    
    3,172
    
    
    
    (18,321
    )Canada
    
    
    (379
    )
    
    
    (2,999
    )
    
    
    (366
    )
    
    
    (2,984
    )265
    
    
    
    (21,281
    )
    
    
    2,806
    
    
    
    (21,305
    )$
    2,632
    
    
    $
    (98,773
    )
    
    $
    11,448
    
    
    $
    (101,041
    )Reconciliation of segment data to income (loss) from
continuing operations before income taxes:Pretax income (loss) excluding unallocated costs
    
    $
    2,632
    
    
    $
    (98,773
    )
    
    $
    11,448
    
    
    $
    (101,041
    )Unallocated costs
    
    
    (2,384
    )
    
    
    (1,931
    )
    
    
    (5,678
    )
    
    
    (6,161
    )Interest expense
    
    
    (149
    )
    
    
    (456
    )
    
    
    (457
    )
    
    
    (2,025
    )Loss on
early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,105
    )Other income (expense)
    
    
    (41
    )
    
    
    94
    
    
    
    635
    
    
    
    1,516Income (loss) from continuing operations before
income taxes
    
    $
    58
    
    
    $
    (101,066
    )
    
    $
    5,948
    
    
    $
    (110,816
    )
  16




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ATM:United States (including goodwill of $16.7 million)
    
    $
    123,163Canada (including goodwill of $3.7 million)
    
    
    11,674United Kingdom (including goodwill of $55.6 million)
    
    
    92,076Germany
    
    
    1,002Photocopy:United States
    
    
    10,711Canada
    
    
    1,860$
    240,486
     
    
    ATM goodwill. Because of continuing decreases in sales and operating margins in the ATM
segments and other factors, we re-evaluated our financial forecasts in the third quarter of
2006 and concluded that it was necessary to review goodwill in our United States, Canadian
and United Kingdom ATM segments for impairment of value. The review, consisting of a
comparison of the carrying value of the goodwill to its implied fair value, resulted in
impairment charges of $20.4 million in the United States,
$5.8 million in Canada and $17.5 million in the United Kingdom. Our estimate of the implied fair value of the United States
ATM segments goodwill was based on the quoted market price of our common stock and the
discounted value of estimated future cash flows over a six-year period with residual value,
using an 11% discount rate. Our estimate of the implied fair value of the Canadian and
United Kingdom ATM segments goodwill was based on the estimated selling prices of those
ATM segments.
    
    Finite-lived intangible assets associated with the ATM businesses. Because of faster
than anticipated attrition of customer contracts, operating losses and revised financial
forecasts, we decided that we should review the carrying value of the long-lived assets of
our United States, Canadian and United Kingdom ATM segments. As a result, we determined
that the future cash flows from those assets were not adequate to recover those assets, and
we recorded impairment charges of $22.9 million in the United States, $272,000 in Canada
and $7.7 million in the United Kingdom, based on comparisons of the carrying amounts of the
assets to their estimated fair values. Our estimate of the fair value of the United States
assets was based on the discounted values of estimated future
 17




---



##### Table of Contents



cash flows over a seven-year period using an 11% discount rate. Our estimates of the fair
value of the Canadian and United Kingdom assets were based on the estimated selling price of
those ATM segments.
    
    Photocopy equipment in the United States and Canada. Because of operating losses in our
United States and Canadian photocopy segments and revised financial forecasts, we reviewed
the carrying value of those segments long-lived assets, which consist almost entirely of
photocopy equipment. As a result, we determined that future cash flows from the photocopy
segments were not adequate to recover the carrying value of that equipment, and we recorded
impairment charges of $18.7 million in the United States and $2.7 million in Canada based
on a comparison of the carrying amounts of these assets to their estimated fair values.
Our estimates of the fair values of the asset groups were based on the estimated selling
price of the United States photocopy segment and the discounted value of estimated future
cash flows over a ten-year period using an 11% discount rate for the Canadian photocopy
segment.
      18




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19



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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 Forward-Looking Statements
   Overview
    20




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21




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##### Table of Contents



Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
   Three months ended September 30, 2006United States
    
    
    Canada
    
    
    United Kingdom
    
    
    Germany
    
    
    Total ATM% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofAmount
    
    
    sales
    
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    sales(in thousands, except operating and percentage data)Transaction-based sales
    
    $
    24,809
    
    
    
    93.9
    %
    
    $
    3,470
    
    
    
    84.0
    %
    
    $
    12,879
    
    
    
    99.1
    %
    
    $
    50
    
    
    
    100.0
    %
    
    $
    41,208
    
    
    
    94.5
    %Service and other sales
    
    
    1,009
    
    
    
    3.8
    
    
    
    628
    
    
    
    15.2
    
    
    
    82
    
    
    
    0.6
    
    
    
    
    
    
    
    0.0
    
    
    
    1,719
    
    
    
    3.9Sales of ATM equipment
    
    
    596
    
    
    
    2.3
    
    
    
    33
    
    
    
    0.8
    
    
    
    36
    
    
    
    0.3
    
    
    
    
    
    
    
    0.0
    
    
    
    665
    
    
    
    1.6Total sales
    
    
    26,414
    
    
    
    100.0
    
    
    
    4,131
    
    
    
    100.0
    
    
    
    12,997
    
    
    
    100.0
    
    
    
    50
    
    
    
    100.0
    
    
    
    43,592
    
    
    
    100.0Less discounts
    
    
    16,702
    
    
    
    63.2
    
    
    
    2,279
    
    
    
    55.2
    
    
    
    4,084
    
    
    
    31.4
    
    
    
    2
    
    
    
    4.0
    
    
    
    23,067
    
    
    
    52.9Net sales
    
    
    9,712
    
    
    
    36.8
    
    
    
    1,852
    
    
    
    44.8
    
    
    
    8,913
    
    
    
    68.6
    
    
    
    48
    
    
    
    96.0
    
    
    
    20,525
    
    
    
    47.1Cost of sales:Cost of vault cash
    
    
    1,782
    
    
    
    6.7
    
    
    
    311
    
    
    
    7.5
    
    
    
    885
    
    
    
    6.8
    
    
    
    9
    
    
    
    18.0
    
    
    
    2,987
    
    
    
    6.9Other
    
    
    4,110
    
    
    
    15.6
    
    
    
    1,016
    
    
    
    24.6
    
    
    
    5,398
    
    
    
    41.6
    
    
    
    90
    
    
    
    180.0
    
    
    
    10,614
    
    
    
    24.3Gross profit (loss)
    
    $
    3,820
    
    
    
    14.5
    %
    
    $
    525
    
    
    
    12.7
    %
    
    $
    2,630
    
    
    
    20.2
    %
    
    $
    (51
    )
    
    
    (102.0
    )%
    
    $
    6,924
    
    
    
    15.9
    %Operating data:Average number of
transacting ATMs
    
    
    12,236
    
    
    
    
    
    
    
    1,469
    
    
    
    
    
    
    
    3,858
    
    
    
    
    
    
    
    24
    
    
    
    
    
    
    
    17,587Withdrawal transactions
    
    
    11,068,157
    
    
    
    
    
    
    
    1,890,246
    
    
    
    
    
    
    
    4,871,116
    
    
    
    
    
    
    
    14,530
    
    
    
    
    
    
    
    17,844,049Average withdrawals per
ATM per month
    
    
    302
    
    
    
    
    
    
    
    429
    
    
    
    
    
    
    
    421
    
    
    
    
    
    
    
    202
    
    
    
    
    
    
    
    338Average transaction-based
sales per withdrawal
transaction
    
    $
    2.24
    
    
    
    
    
    
    $
    1.84
    
    
    
    
    
    
    $
    2.64
    
    
    
    
    
    
    $
    3.44
    
    
    
    
    
    
    $
    2.31Average discount per
withdrawal transaction
    
    $
    1.51
    
    
    
    
    
    
    $
    1.21
    
    
    
    
    
    
    $
    0.84
    
    
    
    
    
    
    $
    0.14
    
    
    
    
    
    
    $
    1.29Net transaction-based sales
per withdrawal transaction
    
    $
    0.73
    
    
    
    
    
    
    $
    0.63
    
    
    
    
    
    
    $
    1.81
    
    
    
    
    
    
    $
    3.30
    
    
    
    
    
    
    $
    1.02
 Three months ended September 30, 2005United States
    
    
    Canada
    
    
    United Kingdom
    
    
    Total ATM% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofAmount
    
    
    sales
    
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    sales(in thousands, except operating and percentage data)Transaction-based sales
    
    $
    29,479
    
    
    
    91.0
    %
    
    $
    3,862
    
    
    
    78.4
    %
    
    $
    12,195
    
    
    
    99.2
    %
    
    $
    45,536
    
    
    
    91.8
    %Service and other sales
    
    
    2,420
    
    
    
    7.5
    
    
    
    721
    
    
    
    14.6
    
    
    
    16
    
    
    
    0.1
    
    
    
    3,157
    
    
    
    6.4Sales of ATM equipment
    
    
    508
    
    
    
    1.5
    
    
    
    342
    
    
    
    7.0
    
    
    
    85
    
    
    
    0.7
    
    
    
    935
    
    
    
    1.8Total sales
    
    
    32,407
    
    
    
    100.0
    
    
    
    4,925
    
    
    
    100.0
    
    
    
    12,296
    
    
    
    100.0
    
    
    
    49,628
    
    
    
    100.0Less discounts
    
    
    19,818
    
    
    
    61.2
    
    
    
    2,644
    
    
    
    53.7
    
    
    
    3,779
    
    
    
    30.7
    
    
    
    26,241
    
    
    
    52.9Net sales
    
    
    12,589
    
    
    
    38.8
    
    
    
    2,281
    
    
    
    46.3
    
    
    
    8,517
    
    
    
    69.3
    
    
    
    23,387
    
    
    
    47.1Cost of sales:Cost of vault cash
    
    
    1,508
    
    
    
    4.7
    
    
    
    218
    
    
    
    4.4
    
    
    
    886
    
    
    
    7.2
    
    
    
    2,612
    
    
    
    5.3Other
    
    
    4,411
    
    
    
    13.5
    
    
    
    1,454
    
    
    
    29.5
    
    
    
    4,999
    
    
    
    40.7
    
    
    
    10,864
    
    
    
    21.8Gross profit
    
    $
    6,670
    
    
    
    20.6
    %
    
    $
    609
    
    
    
    12.4
    %
    
    $
    2,632
    
    
    
    21.4
    %
    
    $
    9,911
    
    
    
    20.0
    %Operating data:Average number of
transacting ATMs
    
    
    14,326
    
    
    
    
    
    
    
    1,748
    
    
    
    
    
    
    
    3,702
    
    
    
    
    
    
    
    19,776Withdrawal transactions
    
    
    12,917,269
    
    
    
    
    
    
    
    2,287,547
    
    
    
    
    
    
    
    4,769,240
    
    
    
    
    
    
    
    19,974,056Average withdrawals per
ATM per month
    
    
    301
    
    
    
    
    
    
    
    436
    
    
    
    
    
    
    
    429
    
    
    
    
    
    
    
    337Average transaction-based
sales per withdrawal
transaction
    
    $
    2.28
    
    
    
    
    
    
    $
    1.69
    
    
    
    
    
    
    $
    2.56
    
    
    
    
    
    
    $
    2.28Average discount per
withdrawal transaction
    
    $
    1.53
    
    
    
    
    
    
    $
    1.16
    
    
    
    
    
    
    $
    0.79
    
    
    
    
    
    
    $
    1.31Net transaction-based sales
per withdrawal transaction
    
    $
    0.75
    
    
    
    
    
    
    $
    0.53
    
    
    
    
    
    
    $
    1.76
    
    
    
    
    
    
    $
    0.97
 22




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Three months ended September 30, 2006United States
    
    
    Canada
    
    
    Total Photocopy% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofAmount
    
    
    sales
    
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    sales(in thousands, except operating and percentage data)Sales
    
    $
    6,668
    
    
    
    100.0
    %
    
    $
    878
    
    
    
    100.0
    %
    
    $
    7,546
    
    
    
    100.0
    %Less discounts
    
    
    1,117
    
    
    
    16.8
    
    
    
    128
    
    
    
    14.6
    
    
    
    1,245
    
    
    
    16.5Net sales
    
    
    5,551
    
    
    
    83.2
    
    
    
    750
    
    
    
    85.4
    
    
    
    6,301
    
    
    
    83.5Cost of sales
    
    
    3,723
    
    
    
    55.8
    
    
    
    790
    
    
    
    90.0
    
    
    
    4,513
    
    
    
    59.8Gross profit (loss)
    
    $
    1,828
    
    
    
    27.4
    %
    
    $
    (40
    )
    
    
    (4.6
    )%
    
    $
    1,788
    
    
    
    23.7
    %Operating data:Average number of photocopiers
    
    
    17,341
    
    
    
    
    
    
    
    2,751
    
    
    
    
    
    
    
    20,092Number of photocopies
    
    
    68,226,667
    
    
    
    
    
    
    
    14,906,889
    
    
    
    
    
    
    
    83,133,556Average photocopies per machine per month
    
    
    1,311
    
    
    
    
    
    
    
    1,806
    
    
    
    
    
    
    
    1,379Average sales per photocopier per month
    
    $
    128.17
    
    
    
    
    
    
    $
    106.39
    
    
    
    
    
    
    $
    125.19Average sales per photocopy
    
    $
    0.098
    
    
    
    
    
    
    $
    0.059
    
    
    
    
    
    
    $
    0.091Average discount per photocopy
    
    $
    0.017
    
    
    
    
    
    
    $
    0.009
    
    
    
    
    
    
    $
    0.015Average net sales per photocopy
    
    $
    0.081
    
    
    
    
    
    
    $
    0.050
    
    
    
    
    
    
    $
    0.076Average gross profit (loss) per photocopy
    
    $
    0.027
    
    
    
    
    
    
$
    (0.003
    )

    
    
    
    

    
    $
    0.022
 Three months ended September 30, 2005United States
    
    
    Canada
    
    
    Total Photocopy% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofAmount
    
    
    sales
    
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    sales(in thousands, except operating and percentage data)Sales
    
    $
    7,349
    
    
    
    100.0
    %
    
    $
    939
    
    
    
    100.0
    %
    
    $
    8,288
    
    
    
    100.0
    %Less discounts
    
    
    1,290
    
    
    
    17.6
    
    
    
    146
    
    
    
    15.5
    
    
    
    1,436
    
    
    
    17.3Net sales
    
    
    6,059
    
    
    
    82.4
    
    
    
    793
    
    
    
    84.5
    
    
    
    6,852
    
    
    
    82.7Cost of sales
    
    
    3,859
    
    
    
    52.5
    
    
    
    702
    
    
    
    74.8
    
    
    
    4,561
    
    
    
    55.1Gross profit
    
    $
    2,200
    
    
    
    29.9
    %
    
    $
    91
    
    
    
    9.7
    %
    
    $
    2,291
    
    
    
    27.6
    %Operating data:Average number of photocopiers
    
    
    18,310
    
    
    
    
    
    
    
    2,783
    
    
    
    
    
    
    
    21,093Number of photocopies
    
    
    86,070,253
    
    
    
    
    
    
    
    14,745,182
    
    
    
    
    
    
    
    100,815,435Average photocopies per machine per month
    
    
    1,567
    
    
    
    
    
    
    
    1,766
    
    
    
    
    
    
    
    1,593Average sales per photocopier per month
    
    $
    133.79
    
    
    
    
    
    
    $
    112.47
    
    
    
    
    
    
    $
    130.98Average sales per photocopy
    
    $
    0.085
    
    
    
    
    
    
    $
    0.064
    
    
    
    
    
    
    $
    0.082Average discount per photocopy
    
    $
    0.015
    
    
    
    
    
    
    $
    0.010
    
    
    
    
    
    
    $
    0.014Average net sales per photocopy
    
    $
    0.070
    
    
    
    
    
    
    $
    0.054
    
    
    
    
    
    
    $
    0.068Average gross profit per photocopy
    
    $
    0.026
    
    
    
    
    
    
    $
    0.006
    
    
    
    
    
    
    $
    0.023
 Sales
  23




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##### Table of Contents



ATM sales.
   Photocopier sales.
 
    
    Declining photocopy volume  Continuing a trend, photocopy volume declined
by 17.5% for the third quarter of 2006 compared to the same period in the prior year,
to 83 million copies from 101 million copies, due to a combination of:
 
    
    A decline in operating photocopiers to an average of 20,092 in the
third quarter of 2006 from an average of 21,093 for the same period in the prior
year.
    
    A decline in the average number of photocopies made per unit per month
to 1,379 for the third quarter of 2006 from 1,593 for the same period in the prior
year due
 24




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##### Table of Contents



in part to price increases as well as competition from alternative media and copying
services.
  Sales Discounts
    Cost of Sales
  ATM cost of sales.
 
    
    A $378,000 increase in labor cost, due in part to increased maintenance
requirements and in part to servicing more of our ATMs with our own technicians as
opposed to using contract services.
    
    Cost of vault cash increased $375,000 due to increased interest rates.
The average interest rate on our United States vault cash facility during the three
months ended September 30, 2006 was approximately 1.9% higher than the rate for the
same period in the prior year.
 25




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##### Table of Contents




    
    The cost of parts increased $219,000 in part because we serviced more of
our ATMs with our own technicians in 2006 as opposed to using contract services.
    
    Depreciation increased $209,000, primarily due to an increase in the
number of our owned ATM units, additional technology upgrades and the impact of the
increase in the value of the British pound relative to the dollar.
    
    A $180,000 increase in auto expense due in part to rising fuel costs.
  
    
    A $1.0 million decrease in cash losses, primarily in the United Kingdom,
resulting in part from additional security measures implemented during 2006 and reduced
cash loads in selected ATM machines.
    
    A $245,000 decrease in third party maintenance.
  Photocopier cost of sales.
  Selling, General and Administrative Expense
   26




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##### Table of Contents



Impairment Charges
  
    
    ATM goodwill. Because of continuing decreases in sales and operating margins in the ATM
segments and other factors, we re-evaluated our financial forecasts in the third quarter of
2006 and concluded that it was necessary to review goodwill in our United States, Canadian
and United Kingdom ATM segments for impairment of value. The review, consisting of a
comparison of the carrying value of the goodwill to its implied fair value, resulted in
impairment charges of $20.4 million in the United States,
$5.8 million in Canada and $17.5
million in the United Kingdom. Our estimate of the implied fair value of the United States
ATM segments goodwill was based on the quoted market price of our common stock and the
discounted value of estimated future cash flows over a six-year period with residual value,
using an 11% discount rate. Our estimate of the implied fair value of the Canadian and
United Kingdom ATM segments goodwill was based on the estimated selling prices of those
ATM segments.
    
    Finite-lived intangible assets associated with the ATM businesses. Because of faster
than anticipated attrition of customer contracts, operating losses and revised financial
forecasts, we decided that we should review the carrying value of the long-lived assets of
our United States, Canadian and United Kingdom ATM segments. As a result, we determined
that the future cash flows from those assets were not adequate to recover those assets, and
we recorded impairment charges of $22.9 million in the United States, $272,000 in Canada
and $7.7 million in the United Kingdom, based on comparisons of the carrying amounts of the
assets to their estimated fair values. Our estimate of the fair value of the United States
assets was based on the discounted values of estimated future cash flows over a seven-year
period using an 11% discount rate. Our estimates of the fair value of the Canadian and
United Kingdom assets were based on the estimated selling price of those ATM segments.
    
    Photocopy equipment in the United States and Canada. Because of operating losses in our
United States and Canadian photocopy segments and revised financial forecasts, we reviewed
the carrying value of those segments long-lived assets, which consist almost entirely of
photocopy equipment. As a result, we determined that future cash flows from the photocopy
segments were not adequate to recover the carrying value of that equipment, and we recorded
impairment charges of $18.7 million in the United States and $2.7 million in Canada based
on a comparison of the carrying amounts of these assets to their estimated fair values.
Our estimates of the fair values of the asset groups were based on the estimated selling
price of the United States photocopy segment and the discounted value of estimated future
cash flows over a ten-year period using an 11% discount rate for the Canadian photocopy
segment.
 27




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Interest Expense and Amortization of Debt Issuance Cost
  Other Expense (Income), Net
  Tax Rate
   Discontinued Operations
  Net Income (Loss)
  28




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##### Table of Contents



Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
   Nine months ended September 30, 2006United States
    
    
    Canada
    
    
    United Kingdom
    
    
    Germany
    
    
    Total ATM% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofAmount
    
    
    sales
    
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    Sales
    
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    sales(in thousands, except operating and percentage data)Transaction-based sales
    
    $
    76,253
    
    
    
    91.3
    %
    
    $
    10,198
    
    
    
    83.5
    %
    
    $
    35,595
    
    
    
    99.3
    %
    
    $
    64
    
    
    
    100.0
    %
    
    $
    122,110
    
    
    
    92.8
    %Service and other sales
    
    
    4,475
    
    
    
    5.4
    
    
    
    1,944
    
    
    
    15.9
    
    
    
    108
    
    
    
    0.3
    
    
    
    
    
    
    
    0.0
    
    
    
    6,527
    
    
    
    5.0Sales of ATM equipment
    
    
    2,755
    
    
    
    3.3
    
    
    
    72
    
    
    
    0.6
    
    
    
    146
    
    
    
    0.4
    
    
    
    
    
    
    
    0.0
    
    
    
    2,973
    
    
    
    2.2Total sales
    
    
    83,483
    
    
    
    100.0
    
    
    
    12,214
    
    
    
    100.0
    
    
    
    35,849
    
    
    
    100.0
    
    
    
    64
    
    
    
    100.0
    
    
    
    131,610
    
    
    
    100.0Less discounts
    
    
    51,132
    
    
    
    61.2
    
    
    
    6,738
    
    
    
    55.2
    
    
    
    11,503
    
    
    
    32.1
    
    
    
    5
    
    
    
    7.8
    
    
    
    69,378
    
    
    
    52.7Net sales
    
    
    32,351
    
    
    
    38.8
    
    
    
    5,476
    
    
    
    44.8
    
    
    
    24,346
    
    
    
    67.9
    
    
    
    59
    
    
    
    92.2
    
    
    
    62,232
    
    
    
    47.3Cost of sales:Cost of vault cash
    
    
    4,822
    
    
    
    5.8
    
    
    
    893
    
    
    
    7.3
    
    
    
    2,155
    
    
    
    6.0
    
    
    
    9
    
    
    
    14.1
    
    
    
    7,879
    
    
    
    6.0Other
    
    
    12,057
    
    
    
    14.5
    
    
    
    2,892
    
    
    
    23.7
    
    
    
    15,260
    
    
    
    42.6
    
    
    
    225
    
    
    
    351.5
    
    
    
    30,434
    
    
    
    23.1Gross profit (loss)
    
    $
    15,472
    
    
    
    18.5
    %
    
    $
    1,691
    
    
    
    13.8
    %
    
    $
    6,931
    
    
    
    19.3
    %
    
    $
    (175
    )
    
    
    (273.4
    )%
    
    $
    23,919
    
    
    
    18.2
    %Operating data:Average number of
transacting ATMs
    
    
    12,667
    
    
    
    
    
    
    
    1,504
    
    
    
    
    
    
    
    3,774
    
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    17,957Withdrawal transactions
    
    
    33,663,157
    
    
    
    
    
    
    
    5,619,975
    
    
    
    
    
    
    
    13,852,305
    
    
    
    
    
    
    
    18,530
    
    
    
    
    
    
    
    53,153,967Average withdrawals per
ATM per month
    
    
    295
    
    
    
    
    
    
    
    415
    
    
    
    
    
    
    
    408
    
    
    
    
    
    
    
    172
    
    
    
    
    
    
    
    329Average transaction-based
sales per withdrawal
transaction
    
    $
    2.27
    
    
    
    
    
    
    $
    1.82
    
    
    
    
    
    
    $
    2.57
    
    
    
    
    
    
    $
    3.45
    
    
    
    
    
    
    $
    2.30Average discount per
withdrawal transaction
    
    $
    1.52
    
    
    
    
    
    
    $
    1.20
    
    
    
    
    
    
    $
    0.83
    
    
    
    
    
    
    $
    0.27
    
    
    
    
    
    
    $
    1.31Net transaction-based sales
per withdrawal transaction
    
    $
    0.75
    
    
    
    
    
    
    $
    0.62
    
    
    
    
    
    
    $
    1.74
    
    
    
    
    
    
    $
    3.18
    
    
    
    
    
    
    $
    0.99
 Nine months ended September 30, 2005United States
    
    
    Canada
    
    
    United Kingdom
    
    
    Total ATM% of
    
    
    
    
    
    
    
    
    
    
    % of
    
    
    % of
    
    
    
    
    
    
    % ofAmount
    
    
    sales
    
    
    Amount
    
    
    Amount
    
    
    sales
    
    
    sales
    
    
    Amount
    
    
    sales(in thousands, except operating and percentage data)Transaction-based sales
    
    $
    88,603
    
    
    
    91.1
    %
    
    $
    11,334
    
    
    
    78.1
    %
    
    $
    35,988
    
    
    
    99.1
    %
    
    $
    135,925
    
    
    
    91.8
    %Service and other sales
    
    
    6,515
    
    
    
    6.7
    
    
    
    2,151
    
    
    
    14.8
    
    
    
    38
    
    
    
    0.1
    
    
    
    8,704
    
    
    
    5.9Sales of ATM equipment
    
    
    2,097
    
    
    
    2.2
    
    
    
    1,020
    
    
    
    7.1
    
    
    
    272
    
    
    
    0.8
    
    
    
    3,389
    
    
    
    2.3Total sales
    
    
    97,215
    
    
    
    100.0
    
    
    
    14,505
    
    
    
    100.0
    
    
    
    36,298
    
    
    
    100.0
    
    
    
    148,018
    
    
    
    100.0Less discounts
    
    
    57,485
    
    
    
    59.1
    
    
    
    7,549
    
    
    
    52.0
    
    
    
    11,105
    
    
    
    30.6
    
    
    
    76,139
    
    
    
    51.4Net sales
    
    
    39,730
    
    
    
    40.9
    
    
    
    6,956
    
    
    
    48.0
    
    
    
    25,193
    
    
    
    69.4
    
    
    
    71,879
    
    
    
    48.6Cost of sales:Cost of vault cash
    
    
    3,809
    
    
    
    3.9
    
    
    
    647
    
    
    
    4.5
    
    
    
    2,670
    
    
    
    7.4
    
    
    
    7,126
    
    
    
    4.8Other
    
    
    12,838
    
    
    
    13.3
    
    
    
    3,501
    
    
    
    24.1
    
    
    
    13,193
    
    
    
    36.3
    
    
    
    29,532
    
    
    
    20.0Gross profit
    
    $
    23,083
    
    
    
    23.7
    %
    
    $
    2,808
    
    
    
    19.4
    %
    
    $
    9,330
    
    
    
    25.7
    %
    
    $
    35,221
    
    
    
    23.8
    %Operating data:Average number of
transacting ATMs
    
    
    14,731
    
    
    
    
    
    
    
    1,769
    
    
    
    
    
    
    
    3,653
    
    
    
    
    
    
    
    20,153Withdrawal transactions
    
    
    38,799,711
    
    
    
    
    
    
    
    6,622,129
    
    
    
    
    
    
    
    13,618,122
    
    
    
    
    
    
    
    59,039,962Average withdrawals per
ATM per month
    
    
    293
    
    
    
    
    
    
    
    416
    
    
    
    
    
    
    
    414
    
    
    
    
    
    
    
    326Average transaction-based
sales per withdrawal
transaction
    
    $
    2.28
    
    
    
    
    
    
    $
    1.71
    
    
    
    
    
    
    $
    2.64
    
    
    
    
    
    
    $
    2.30Average discount per
withdrawal transaction
    
    $
    1.48
    
    
    
    
    
    
    $
    1.14
    
    
    
    
    
    
    $
    0.82
    
    
    
    
    
    
    $
    1.29Net transaction-based sales
per withdrawal transaction
    
    $
    0.80
    
    
    
    
    
    
    $
    0.57
    
    
    
    
    
    
    $
    1.83
    
    
    
    
    
    
    $
    1.01
 29




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Nine months ended September 30, 2006United States
    
    
    Canada
    
    
    Total Photocopy% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofAmount
    
    
    sales
    
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    sales(in thousands, except operating and percentage data)Sales
    
    $
    20,951
    
    
    
    100.0
    %
    
    $
    3,339
    
    
    
    100.0
    %
    
    $
    24,290
    
    
    
    100.0
    %Less discounts
    
    
    3,494
    
    
    
    16.7
    
    
    
    584
    
    
    
    17.5
    
    
    
    4,078
    
    
    
    16.8Net sales
    
    
    17,457
    
    
    
    83.3
    
    
    
    2,755
    
    
    
    82.5
    
    
    
    20,212
    
    
    
    83.2Cost of sales
    
    
    12,152
    
    
    
    58.0
    
    
    
    2,279
    
    
    
    68.2
    
    
    
    14,431
    
    
    
    59.4Gross profit
    
    $
    5,305
    
    
    
    25.3
    %
    
    $
    476
    
    
    
    14.3
    %
    
    $
    5,781
    
    
    
    23.8
    %Operating data:Average number of photocopiers
    
    
    17,726
    
    
    
    
    
    
    
    2,768
    
    
    
    
    
    
    
    20,494Number of photocopies
    
    
    213,127,353
    
    
    
    
    
    
    
    44,904,881
    
    
    
    
    
    
    
    258,032,234Average photocopies per machine per month
    
    
    1,336
    
    
    
    
    
    
    
    1,803
    
    
    
    
    
    
    
    1,399Average sales per photocopier per month
    
    $
    131.33
    
    
    
    
    
    
    $
    134.03
    
    
    
    
    
    
    $
    131.69Average sales per photocopy
    
    $
    0.098
    
    
    
    
    
    
    $
    0.074
    
    
    
    
    
    
    $
    0.094Average discount per photocopy
    
    $
    0.016
    
    
    
    
    
    
    $
    0.013
    
    
    
    
    
    
    $
    0.016Average net sales per photocopy
    
    $
    0.082
    
    
    
    
    
    
    $
    0.061
    
    
    
    
    
    
    $
    0.078Average gross profit per photocopy
    
    $
    0.025
    
    
    
    
    
    
    $
    0.011
    
    
    
    
    
    
    $
    0.022
 Nine months ended September 30, 2005United States
    
    
    Canada
    
    
    Total Photocopy% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofAmount
    
    
    sales
    
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    sales(in thousands, except operating and percentage data)Sales
    
    $
    24,188
    
    
    
    100.0
    %
    
    $
    3,288
    
    
    
    100.0
    %
    
    $
    27,476
    
    
    
    100.0
    %Less discounts
    
    
    4,234
    
    
    
    17.5
    
    
    
    578
    
    
    
    17.6
    
    
    
    4,812
    
    
    
    17.5Net sales
    
    
    19,954
    
    
    
    82.5
    
    
    
    2,710
    
    
    
    82.4
    
    
    
    22,664
    
    
    
    82.5Cost of sales
    
    
    12,473
    
    
    
    51.6
    
    
    
    1,951
    
    
    
    59.3
    
    
    
    14,424
    
    
    
    52.5Gross profit
    
    $
    7,481
    
    
    
    30.9
    %
    
    $
    759
    
    
    
    23.1
    %
    
    $
    8,240
    
    
    
    30.0
    %Operating data:Average number of photocopiers
    
    
    18,537
    
    
    
    
    
    
    
    2,840
    
    
    
    
    
    
    
    21,377Number of photocopies
    
    
    289,985,018
    
    
    
    
    
    
    
    48,152,511
    
    
    
    
    
    
    
    338,137,529Average photocopies per machine per month
    
    
    1,738
    
    
    
    
    
    
    
    1,884
    
    
    
    
    
    
    
    1,758Average sales per photocopier per month
    
    $
    144.98
    
    
    
    
    
    
    $
    128.64
    
    
    
    
    
    
    $
    142.81Average sales per photocopy
    
    $
    0.083
    
    
    
    
    
    
    $
    0.068
    
    
    
    
    
    
    $
    0.081Average discount per photocopy
    
    $
    0.015
    
    
    
    
    
    
    $
    0.012
    
    
    
    
    
    
    $
    0.014Average net sales per photocopy
    
    $
    0.069
    
    
    
    
    
    
    $
    0.056
    
    
    
    
    
    
    $
    0.067Average gross profit per photocopy
    
    $
    0.026
    
    
    
    
    
    
    $
    0.016
    
    
    
    
    
    
    $
    0.024
 Sales
  30




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##### Table of Contents



ATM sales.
   Photocopier sales.
 
    
    Declining photocopy volume  Continuing a trend, photocopy volume declined
by 23.7% for the first nine months of 2006 compared to the same period in the prior
year, to 258 million copies from 338 million copies, due to a combination of:
 31




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##### Table of Contents




    
    A decline in billed photocopiers to an average of 20,494 in the first
nine months of 2006 from an average of 21,377 for the same period in the prior
year.
    
    A decline in the average number of photocopies made per unit per month
to 1,399 for the first nine months of 2006 from 1,758 for the same period in the
prior year due in part to price increases as well as competition from alternative
media and copying services.
  Sales Discounts
    Cost of Sales
  ATM cost of sales.
 32




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##### Table of Contents




    
    Depreciation increased $846,000, primarily because we began depreciating
the cost of upgrading ATM equipment in the United Kingdom to meet EMV standards in the
second half of 2005.
    
    Cost of vault cash increased $753,000 due to increased interest rates.
    
    A $670,000 increase in armored car costs, due in part to decreased cash
loads in selected ATMs for security reasons requiring more frequent armored car visits.
    
    A $633,000 increase in labor cost, due in part to increased maintenance
requirements and in part to servicing more of our ATMs with our own technicians as
opposed to using contracted services.
    
    ATM processing and telecommunications costs increased $602,000, partially
due to credits received from our United Kingdom and Canadian processors in the third
quarter of 2005.
  
    
    A $1.0 million decrease in cash losses, primarily in the United Kingdom,
resulting in part from additional security measures implemented during 2006 and reduced
cash loads in selected ATM machines.
    
    A $528,000 decrease in third party maintenance.
  Photocopier cost of sales.
  33




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##### Table of Contents



Selling, General and Administrative Expense
   Impairment Charges
  Interest Expense and Amortization of Debt Issuance Cost
   Other Expense (Income), Net
   34




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##### Table of Contents



Tax Rate
  Discontinued Operations
    Net Income (loss)
  35




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##### Table of Contents



Liquidity and Capital Resources
 General
     36




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##### Table of Contents



Syndicated Credit Facility
  
    
    a $45.5 million credit agreement, which we refer to as the First Lien Credit
Agreement with GSO Origination Funding Partners LP, or the GSO Fund, certain other
lenders and Wells Fargo Foothill, Inc., or WFF, serving as administrative agent,
revolving lender, swing line lender and L/C issuer;
    
    a $40 million second lien loan agreement with the GSO Fund, certain other lenders
and WFF (which we refer as the Second Loan Agreement and, together with the First Lien
Credit Agreement, as the Credit Agreements); and
    
    a £12.9 million ($24.3 million based on exchange
rates as of September 30, 2006) facility agreement, which we refer to as the UK Facility Agreement,
between our wholly-owned subsidiary, TRM (ATM) Limited and GSO Luxembourg Onshore
Funding SarL or GSO Lux, as the original lender, facility agent and security agent.
   37




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38




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##### Table of Contents



United States Vault Cash Facility
 General.
 Structure of the facility.
 
    
    TRM Inventory Funding Trust, or the Trust. The Trust is a Delaware business trust
that was created pursuant to a deposit trust agreement between GSS Holdings, Inc. as
depositor, Wilmington Trust Company as owner trustee, and TRM ATM Corporation as
servicer. The majority equity holder in the Trust is Autobahn Funding Company, LLC,
and the minority equity holder is GSS Holdings, Inc. Neither we, TRM ATM Corporation
nor any of our other affiliates have any ownership interest in the Trust.
 39




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##### Table of Contents




    
    TRM ATM Corporation, or TRM ATM. TRM ATM is one of our subsidiaries and acts as the
servicer under the facility.
    
    Autobahn Funding Company, LLC, or Autobahn. Autobahn is an affiliate of DZ Bank AG,
Deutsche Zentral-Genossenschaftsbank Frankfurt am Main, which is the lender under the
facility. Autobahn is independent of us, TRM ATM and our other affiliates.
 Operation of the facility.
    Collateral and credit enhancement.
  40




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##### Table of Contents



Cost of the facility.
 
    
    Interest on the loaned funds. The loans bear interest at an interest rate equal to
1.75% plus the interest rate borne by the commercial paper that was issued to raise
the funds for the loans. Interest for the nine months ended September 30, 2006 was
$3.0 million.
    
    Return for equity investors. Autobahn and GSS Holdings, Inc., as equity investors
in the Trust, receive a return on the value of their investments, which were
$1,485,000 and $15,000, respectively, as of September 30, 2006. Autobahns annual
return is equal to 1.75% plus the interest rate borne by the commercial paper that is
outstanding. GSS Holdings annual return is equal to 25.0%.
    
    Fees. Autobahn receives a commitment fee and TRM ATM, as servicer, and the
collateral agent each receive administrative fees in connection with the facility.
Autobahns fees for the nine months ended September 30, 2006 were $1.2 million.
 Risk of loss and insurance.
  United Kingdom Vault Cash Facility
  41




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##### Table of Contents



Canadian Vault Cash Facility
  Contractual Commitments and Obligations
  Payments Due by PeriodOctober 1 December 31,Contractual obligations
    
    Total
    
    
    2006
    
    
    2007-2008
    
    
    2009-2010
    
    
    After 2010TRM Corporation and subsidiariesLong-term debt
    
    $
    123,118
    
    
    $
    3,258
    
    
    $
    80,036
    
    
    $
    8,636
    
    
    $
    31,188Capital lease obligations
    
    
    286
    
    
    
    86
    
    
    
    200
    
    
    
    
    
    
    
    Operating leases
    
    
    7,318
    
    
    
    671
    
    
    
    3,690
    
    
    
    1,642
    
    
    
    1,315Purchase obligations
    
    
    15,625
    
    
    
    1,250
    
    
    
    10,000
    
    
    
    4,375
    
    
    
    Total TRM Corporation and subsidiaries
    
    
    146,347
    
    
    
    5,265
    
    
    
    93,926
    
    
    
    14,653
    
    
    
    32,503TRM Inventory Funding Trust note payable
    
    
    86,289
    
    
    
    1,503
    
    
    
    84,786
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    232,636
    
    
    $
    6,768
    
    
    $
    178,712
    
    
    $
    14,653
    
    
    $
    32,503
   Critical Accounting Policies and Estimates
  New Accounting Standards
  42




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest Rate Risk
   43




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Foreign Currency Risk
  
 ITEM 4. CONTROLS AND PROCEDURES
   Material Weaknesses
  44




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45




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Remediation Plan for Previously Identified Material Weaknesses:
  Valuation of accounts receivable
 Equipment and depreciation expense
 Accrued liabilities.
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Remediation Plan for New Material Weaknesses Identified:
   Changes in Internal Control Over Financial Reporting
  47




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PART II  OTHER INFORMATION
 
 ITEM
1A. RISK FACTORS
 We
are uncertain whether our operations can generate sufficient cash to
comply with the covenants of our loan agreements and to pay our
obligations on an ongoing basis.
  Our
common stock  may be delisted from The Nasdaq National Market due to
our failure to timely file our Form 10-Q quarterly report for the
quarter ended September 30, 2006.
  ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
     
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 5. OTHER INFORMATION
  
    
    Mr. Stern will receive an annual base salary of not less than $300,000. Mr. Stern
will also earn an annual bonus determined by our Compensation Committee
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targeted to be at least 50% of base salary. The bonus will be not less than $100,000
in the first year of employment.
 
    
    Mr. Stern will be granted 50,000 shares of restricted common stock and options to
purchase 50,000 shares of our common stock, which vest over three years. Vesting
will accelerate upon a change in control. Change in control means the direct or
indirect sale, lease, transfer, conveyance or other disposition, of all or
substantially all of our properties or assets and our subsidiaries taken as a whole.
    
 ITEM 6. EXHIBITS
 (a) Exhibits
 3.1
    (a)
    
    Amendments to the Restated Articles of Incorporation (incorporated herein by
reference to Exhibit 3.1(a) of Form 10-K for the fiscal year ended June 30, 1998)3.1
    (b)
    
    Restated Articles of Incorporation (incorporated herein by reference to Exhibit
3.1(b) of Form 10-K for the fiscal year ended June 30, 1998)3.2
    
    
    Restated Bylaws (incorporated herein by reference to Exhibit 3.2 of
Form 10-K for the fiscal year ended June 30, 1998)4.1
    
    
    Specimen Stock Certificate (incorporated herein by reference to
Exhibit 4.1 of Form S-3/A filed on August 25, 2004 [No. 333-116748])4.2
    
    
    Investors Rights Agreement (incorporated herein by reference to
Exhibit 4.1 of Form 8-K dated July 9, 1998)4.3
    
    
    Articles V, VI and VII of the Restated Articles of Incorporation,
as amended (See Exhibit 3.1)4.4
    
    
    Articles I, II, V, VII and X of the Restated Bylaws (See Exhibit
3.2)
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4.5
    
    
    Warrant to GSO Credit Opportunities Fund (Helios), L.P. (incorporated herein by reference
to Exhibit 4.1 to Form 8-K filed on November 22, 2006)4.6
    
    
    Warrant to GSO Special Situations Overseas Benefit Plan Fund Ltd. (incorporated herein by
reference to Exhibit 4.2 to Form 8-K filed on November 22, 2006)4.7
    
    
    Warrant to GSO Special Situations Fund Ltd. (incorporated herein by reference to Exhibit
4.3 to Form 8-K filed on November 22, 2006)4.8
    
    
    Warrant to GSO Domestic Capital Funding Partners LP (incorporated herein by reference to
Exhibit 4.4 to Form 8-K filed on November 22, 2006)10.3
    
    
    TRM Omnibus Stock Incentive Plan (incorporated herein by reference to
Appendix B to Notice of Annual Meeting of Shareholders and Proxy Statement filed
on April 24, 2005)10.4
    
    
    a)
    
    Form of Incentive Stock Option Agreement under TRM Omnibus Stock
Incentive Plan (incorporated herein by reference to Exhibit 10.2(a) of Form 10-Q
for the period ended June 30, 2005)b)
    
    Form of Non Qualified Stock Option agreement
under TRM Omnibus Stock Incentive Plan (incorporated herein by
reference to Exhibit 10.2(b) of Form 10-Q for the period ended June 30,
2005)c)
    
    Form of Award Agreement under TRM Omnibus Stock
Incentive Plan (incorporated herein by reference to Exhibit 10.2(c) of
Form 10-Q for the period ended June 30, 2005)10.5
    
    
    Employee Stock Purchase Plan (incorporated herein by reference to
Exhibit 28.1 of Form S-8 dated December 7, 1992 [No. 33-55370])10.6
    
    
    Form of Stock Option Agreements:a)
    
    For option grants before fiscal 1994
(incorporated herein by reference to Exhibit 10.9 of Form S-1 dated
November 8, 1991 [No. 33-43829])b)
    
    For option grants during fiscal 1994
(incorporated herein by reference to Exhibit 10.10 of Form 10-K for the
fiscal year ended June 30, 1994)c)
    
    For option grants during fiscal 1995
(incorporated herein by reference to Exhibit 10.8 of Form 10-K for the
fiscal year ended June 30, 1995)10.7
    (i)
    
    Employment Agreement dated May 3, 2006 by and between TRM Corporation and Jeffrey
F. Brotman (incorporated herein by reference to Exhibit 10.7(i) of Form 10-Q filed
for the quarter ended March 31, 2006)
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10.7
    (j)
    
    Retainer Agreement dated May 3, 2006 by and between TRM Corporation and Amy B.
Krallman (incorporated herein by reference to Exhibit 10.7(j) of Form 10-Q filed for
the quarter ended March 31, 2006)10.7
    (k)
    
    Senior Executive Agreement dated May 30, 2006, by and between TRM (ATM) Limited
and Kevin Waterhouse (incorporated herein by reference to Exhibit 10.7(k) of Form
10-Q filed for the quarter ended June 30, 2006)10.7
    (l)
    
    Employment Agreement dated September 15, 2006, by and between TRM Corporation and
Richard B. Stern10.8
    
    
    Credit Agreement dated June 6, 2006, among TRM Corporation, TRM ATM
Corporation and TRM Copy Centers (USA) Corporation, as Borrowers, the Subsidiaries
of the Borrowers identified therein, Wells Fargo Foothill, Inc., as Administrative
Agent, Revolving Lender, Swing Line Lender and L/C Issuer, and GSO Origination
Funding Partners LP, the other lenders identified therein (incorporated herein by
reference to Exhibit 10.8 of Form 10-Q filed for the quarter ended June 30, 2006)10.9
    
    
    Second Lien Loan Agreement dated June 6, 2006, among TRM Corporation,
TRM ATM Corporation and TRM Copy Centers (USA) Corporation, as Borrowers, the
Subsidiaries of the Borrowers identified therein, Wells Fargo Foothill, Inc., as
Administrative Agent, Revolving Lender, Swing Line Lender and L/C Issuer, and GSO
Origination Funding Partners LP, the other lenders identified therein
(incorporated herein by reference to Exhibit 10.9 of Form 10-Q filed for the
quarter ended June 30, 2006)10.10
    
    
    Facility Agreement by and among TRM (ATM) Limited and GSO Luxembourg
Onshore Funding SarL dated June 6, 2006 (incorporated herein by reference to
Exhibit 10.10 of Form 10-Q filed for the quarter ended June 30, 2006)10.11
    
    
    First Amendment to Credit Agreement dated November 20, 2006, among TRM
Corporation, TRM ATM Corporation, TRM Copy Centers (USA) Corporation, as Borrowers,
the subsidiaries of the Borrowers identified therein, Wells Fargo Foothill, Inc.,
as Administrative Agent and as a Lender and GSO Origination Funding Partners, LP,
as a Lender (incorporated herein by reference to Exhibit 10.1 of Form 8-K filed on
November 22, 2006)10.12
    
    
    Amended and Restated Second Lien Loan Agreement dated November 20, 2006, among TRM
Corporation, TRM ATM Corporation and TRM Copy Centers (USA) Corporation, as Borrowers, the
Subsidiaries of the Borrowers identified therein, Wells Fargo Foothill, Inc., as Administrative
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Agent, GSO Origination Funding Partners LP, and the other lenders identified therein (incorporated
herein by reference to Exhibit 10.2 of Form 8-K filed on November 22, 2006)10.13
    
    
    Supplemental Deed Amending a Facility Agreement dated November 2006, by and among TRM
(ATM) Limited, GSO Luxembourg Onshore Funding SarL, Wells Fargo Foothill, Inc. and TRM Corporation
(incorporated herein by reference to Exhibit 10.3 of Form 8-K filed on November 22, 2006)10.14
    
    
    Registration Rights Agreement dated November 20, 2006 (incorporated herein by reference
to Exhibit 10.4 of Form 8-K filed on November 22, 2006)10.15
    
    
    Twelfth Amendment to
Loan and Servicing Agreement dated as of September 30, 2006
among TRM Inventory Funding Trust (Borrower), TRM ATM
Corporation, in its individual capacity (TRM ATM) and as
Servicer (in such capacity, Servicer), Autobahn Funding
Company LLC (Lender), DZ Bank AG, Deutsche
Zentral-Genossenschaftsbank Frankfurt am Main, as Administrative
Agent (in such capacity, Administrative Agent) and as
Liquidity Agent (in such capacity Liquidity Agent), and
U.S. Bank National Association, as Collateral Agent (Collateral
Agent)31.1
    
    
    Certification of Chief Executive Officer of TRM Corporation pursuant
to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Chief Financial Officer of TRM Corporation pursuant
to Section 302 of the Sarbanes-Oxley Act of 200231.3
    
    
    Certification of Principal Accounting Officer of TRM Corporation
pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    
    Certification of Chief Executive Officer of TRM Corporation pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 135032.2
    
    
    Certification of Chief Financial Officer of TRM Corporation pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 135032.3
    
    
    Certification of Principal Accounting Officer of TRM Corporation
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
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SIGNATURE
  TRM CORPORATION
 Date:      February 9, 2007
    By:
    /s/ Jon S. PitcherJon S. Pitcher 53