## ** **

## **UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

 

**Washington,D.C. 20549**

 

## **FORM 10-Q**

 

** **
| **ý** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|-----------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                    |
|       | **For the  quarterly period ended June 30, 2004**                                             |
|       |                                                                                          |
| **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**

(Exactname of registrant as specified in its charter)

 

| **Oregon**                                                      | **93-0809419**                        |
|-----------------------------------------------------------------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization) | (I.R.S.  Employer Identification No.) |

 

**5208 N.E.122nd Avenue**

**Portland, Oregon 97230**

(Address of principal executive offices) (ZipCode)

 

**(503) 257-8766**

(Registrant’s telephone number, including areacode)

 

 

Indicate by check mark whether the registrant:(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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 ý  NO o

 

Indicate by check mark whether the registrant isan accelerated filer (as defined in Rule 12b-2 of the  Exchange Act).

 

YES o  NO ý

 

Indicate the number of shares outstanding of eachof the issuer’s classes of common stock, as of the latest practicable date:

** **

| **CLASS**     | **OUTSTANDING AT JUNE 30, 2004** |
|---------------|----------------------------------|
| Common  Stock | 7,520,589                        |

 

----

 

**PART I - FINANCIALINFORMATION**

 

**ITEM 1.          FINANCIAL STATEMENTS**

 

**TRM Corporation**

**ConsolidatedBalance Sheets**

**(unaudited)**

**(Inthousands)**

 
| ** **                                                                                                                                                                                 | ** ** | **December 31, 2003** | ** ** | **June 30, 2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| **Assets**                                                                                                                                                                                 |       |                  |       |              |       |
| Current assets:                                                                                                                                                                            |       |                  |       |              |       |
| Cash and cash equivalents                                                                                                                                                                  |       | $                     | 5,724      |              | $          | 6,530 |   |
| Accounts receivable, net                                                                                                                                                                   |       | 6,134                 |       | 5,592             |       |
| Inventories                                                                                                                                                                                |       | 1,567                 |       | 1,949             |       |
| Prepaid expenses and other                                                                                                                                                                 |       | 1,405                 |       | 2,175             |       |
| Deferred tax asset                                                                                                                                                                         |       | 423                   |       | 424               |       |
| Total current assets                                                                                                                                                                       |       | 15,253                |       | 16,670            |       |
| Equipment, less accumulated depreciation and  amortization                                                                                                                                 |       | 63,991                |       | 63,273            |       |
| Restricted cash - TRM Inventory Funding Trust                                                                                                                                              |       | 28,939                |       | 39,942            |       |
| Deferred tax asset                                                                                                                                                                         |       | 2,767                 |       | 2,509             |       |
| Intangible assets                                                                                                                                                                          |       | 72                    |       | 7,323             |       |
| Other assets                                                                                                                                                                               |       | 1,253                 |       | 1,108             |       |
| Total assets                                                                                                                                                                               |       | $                     | 112,275    |              | $          | 130,825 |   |
|                                                                                                                                                                                       |       |                  |       |              |       |
| **Liabilities and Shareholders’  Equity**                                                                                                                                             | ** ** | ** **            | ** ** | ** **        | ** ** |
| Current liabilities:                                                                                                                                                                       |       |                  |       |              |       |
| Accounts payable                                                                                                                                                                           |       | $                     | 1,367      |              | $          | 2,986 |   |
| Accrued expenses                                                                                                                                                                           |       | 6,429                 |       | 5,019             |       |
| Accrued expenses of TRM Inventory Funding Trust                                                                                                                                            |       | 57                    |       | 67                |       |
| Current portion of long-term debt                                                                                                                                                          |       | 3,024                 |       | 3,155             |       |
| Current portion of obligations under capital  leases                                                                                                                                       |       | 2,113                 |       | 2,234             |       |
| Total current liabilities                                                                                                                                                                  |       | 12,990                |       | 13,461            |       |
|                                                                                                                                                                                       |       |                  |       |              |       |
| TRM Inventory Funding Trust note payable                                                                                                                                                   |       | 27,455                |       | 38,494            |       |
| Long-term debt                                                                                                                                                                             |       | 7,040                 |       | 5,028             |       |
| Obligations under capital leases                                                                                                                                                           |       | 2,784                 |       | 1,835             |       |
| Deferred tax liability                                                                                                                                                                     |       | 7,049                 |       | 7,765             |       |
| Other long-term liabilities                                                                                                                                                                |       | 79                    |       | 173               |       |
| Preferred dividends payable                                                                                                                                                                |       | 4,502                 |       | 4,498             |       |
| Total liabilities                                                                                                                                                                          |       | 61,899                |       | 71,254            |       |
| Minority interest                                                                                                                                                                          |       | 1,500                 |       | 1,500             |       |
| Shareholders’ equity:                                                                                                                                                                 |       |                  |       |              |       |
| Preferred stock, no par value - 5,000 shares  authorized; 1,757 shares issued and outstanding (liquidation preference  $19,764) (1,778 shares issued and outstanding at December 31, 2003) |       | 19,798                |       | 19,559            |       |
| Common stock, no par value - 50,000 shares  authorized; 7,521 shares issued and outstanding (7,060 shares issued and  outstanding at December 31, 2003)                                    |       | 19,026                |       | 24,044            |       |
| Additional paid-in capital                                                                                                                                                                 |       | 63                    |       | 63                |       |
| Accumulated other comprehensive income                                                                                                                                                     |       | 2,088                 |       | 2,029             |       |
| Retained earnings                                                                                                                                                                          |       | 7,901                 |       | 12,376            |       |
| Total shareholders’ equity                                                                                                                                                            |       | 48,876                |       | 58,071            |       |
| Total liabilities and shareholders’ equity                                                                                                                                            |       | $                     | 112,275    |              | $          | 130,825 |   |
|                                                                                                                                                                                            |            |                       |            |                   |            |  |  |  |  |

 

Seeaccompanying notes to consolidated financial statements.

 

2

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**TRMCorporation**

**ConsolidatedStatements of Operations**

**(unaudited)**

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

 
| ** **                                                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **2003**                         | ** ** | **2004**                       | ** ** | **2003** | ** ** | **2004** | ** ** |
| Sales                                                                              |       | $                                | 24,366     |                           | $          | 28,840 |   | $ | 46,780 |   | $ | 54,769 |   |
| Less discounts                                                                     |       | 4,151                            |       | 6,328                          |       | 7,877 |   | 11,227 |   |
| Net sales                                                                          |       | 20,215                           |       | 22,512                         |       | 38,903 |   | 43,542 |   |
| Cost of sales                                                                      |       | 11,950                           |       | 12,106                         |       | 23,036 |   | 22,782 |   |
| Gross profit                                                                       |       | 8,265                            |       | 10,406                         |       | 15,867 |   | 20,760 |   |
| Selling, general and administrative expense                                        |       | 6,264                            |       | 6,371                          |       | 12,063 |   | 12,582 |   |
| Asset retirements                                                                  |       | 152                              |       | —                         |       | 216 |   | — |   |
| Operating income                                                                   |       | 1,849                            |       | 4,035                          |       | 3,588 |   | 8,178 |   |
| Interest expense                                                                   |       | 238                              |       | 251                            |       | 568 |   | 497 |   |
| Other (income) expense, net                                                        |       | (103                             | )          | 74                             |       | 46 |   | 209 |   |
| Income before income taxes                                                         |       | 1,714                            |       | 3,710                          |       | 2,974 |   | 7,472 |   |
| Provision for income taxes                                                         |       | 566                              |       | 1,002                          |       | 1,073 |   | 2,251 |   |
| Net income                                                                         |       | $                                | 1,148      |                           | $          | 2,708 |   | $ | 1,901 |   | $ | 5,221 |   |
|                                                                               |       |                             |       |                           |       |   |   |   |   |
| Basic and diluted per share information  (2003 amounts are restated - see note 3): |       |                             |       |                           |       |   |   |   |   |
| Net income                                                                         |       | $                                | 1,148      |                           | $          | 2,708 |   | $ | 1,901 |   | $ | 5,221 |   |
| Preferred stock dividend                                                           |       | (375                             | )          | (371                           | )          | (750 | ) | (746 | ) |
| Income allocated to Series A preferred  shareholders                               |       | (123                             | )          | (350                           | )          | (183 | ) | (686 | ) |
| Income available to common shareholders                                            |       | $                                | 650        |                           | $          | 1,987 |   | $ | 968 |   | $ | 3,789 |   |
|                                                                               |       |                             |       |                           |       |   |   |   |   |
| Net income per common share:                                                       |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                              |       | $                                | .09        |                           | $          | .26 |   | $ | .14 |   | $ | .52 |   |
|                                                                               |       |                             |       |                           |       |   |   |   |   |
| Diluted                                                                            |       | $                                | .09        |                           | $          | .23 |   | $ | .14 |   | $ | .45 |   |
|                                                                                    |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financialstatements.

 

3

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**TRMCorporation**

**ConsolidatedStatement of Shareholders’ Equity**

**(unaudited)**

**(Inthousands)**

 

 
| ** **                                                                        | ** ** | **Comprehensive** | ** ** | **Preferred** | ** ** | **Common** | ** ** | **Additional paid-in** | ** ** | **Accumulated other comprehensive** | ** ** | **Retained** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------|------------|---------------|------------|------------|------------|------------------------|------------|-------------------------------------|------------|--------------|------------|------------|------------|
| ** **                                                                        | ** ** | **income**        | ** ** | **Shares**    | ** ** | **Amount** | ** ** | **Shares**             | ** ** | **Amount**                          | ** ** | **capital**  | ** ** | **income** | ** ** | **earnings** | ** ** | **Total** | ** ** |
|                                                                              |       |              |       |          |       |       |       |                   |       |                                |       |         |       |       |       |   |   |   |   |
| **Balances, December 31, 2003**                                                   |       |              |       | 1,778         |       | $          | 19,798     |                   | 7,060      |                                | $          | 19,026       |       | $          | 63         |   | $ | 2,088 |   | $ | 7,901 |   | $ | 48,876 |   |
| Comprehensive  income                                                             |       |              |       |          |       |       |       |                   |       |                                |       |         |       |       |       |   |   |   |   |
| Net  income                                                                       |       | $                 | 5,221      |          | —     |       | —     |                   | —     |                                | —     |         | —     |       | —     |   | 5,221 |   | 5,221 |   |
| Other  comprehensive income, net of tax - foreign currency translation adjustment |       | (59               | )          | —        |       | —     |       | —                 |       | —                              |       | —       |       | (59        | )          | — |   | (59 | ) |
| Comprehensive  income                                                             |       | $                 | 5,162      |          | —     |       | —     |                   | —     |                                | —     |         | —     |       | —     |   | — |   | — |   |
| Conversion  of Series A preferred stock                                           |       |              |       | (21           | )          | (239       | )          | 16                     |       | 239                                 |       | —       |       | —     |       | — |   | — |   |
| Exercise  of stock options                                                        |       |              |       | —        |       | —     |       | 445                    |       | 3,576                               |       | —       |       | —     |       | — |   | 3,576 |   |
| Tax  benefit of stock options exercised                                           |       |              |       | —        |       | —     |       | —                 |       | 1,203                               |       | —       |       | —     |       | — |   | 1,203 |   |
| Preferred  stock dividends                                                        |       |              |       | —        |       | —     |       | —                 |       | —                              |       | —       |       | —     |       | (746 | ) | (746 | ) |
| **Balances, June 30, 2004**                                                       |       |              |       | 1,757         |       | $          | 19,559     |                   | 7,521      |                                | $          | 24,044       |       | $          | 63         |   | $ | 2,029 |   | $ | 12,376 |   | $ | 58,071 |   |
|                                                                                   |            |                   |            |               |            |            |            |                        |            |                                     |            |              |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

 

4

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**TRMCorporation**

**ConsolidatedStatements of Cash Flows**

**(unaudited)**

**(Inthousands)**
| ** **                                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **2003**                       | ** ** | **2004** | ** ** |
| **Operating activities:**                                                          |       |                           |       |   |   |
| Net income                                                                         |       | $                              | 1,901      |   | $ | 5,221 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                      |       | 4,979                          |       | 4,643 |   |
| Loss on disposal of equipment                                                      |       | 419                            |       | 322 |   |
| Changes in items affecting operations, net of  effect of business acquisitions:    |       |                           |       |   |   |
| Accounts receivable                                                                |       | 102                            |       | 741 |   |
| Inventories                                                                        |       | (732                           | )          | (137 | ) |
| Prepaid expenses and other                                                         |       | 409                            |       | (746 | ) |
| Accounts payable                                                                   |       | (598                           | )          | 1,216 |   |
| Accrued expenses                                                                   |       | (1,106                         | )          | (2,032 | ) |
| Income taxes payable                                                               |       | 3                              |       | — |   |
| Deferred taxes                                                                     |       | 1,213                          |       | 2,176 |   |
| Litigation settlement                                                              |       | (1,738                         | )          | — |   |
| Total operating activities                                                         |       | 4,852                          |       | 11,404 |   |
| **Investing activities:**                                                          |       |                           |       |   |   |
| Proceeds from sale of equipment                                                    |       | 468                            |       | 49 |   |
| Capital expenditures                                                               |       | (258                           | )          | (3,255 | ) |
| Acquisition of intangible and other assets                                         |       | (41                            | )          | (651 | ) |
| Acquisition of businesses, net of cash acquired                                    |       | —                         |       | (6,324 | ) |
| Total investing activities                                                         |       | 169                            |       | (10,181 | ) |
| **Financing activities:**                                                          |       |                           |       |   |   |
| Borrowings on notes payable                                                        |       | 23,128                         |       | 3,915 |   |
| Repayment of notes payable                                                         |       | (24,779                        | )          | (6,074 | ) |
| Principal payments on capital lease obligations                                    |       | (874                           | )          | (1,146 | ) |
| Increase in restricted cash                                                        |       | (931                           | )          | (11,003 | ) |
| Proceeds from issuance of TRM Inventory Funding  Trust note, net of repayments     |       | 259                            |       | 11,039 |   |
| Proceeds from issuance of equity in TRM Inventory  Funding Trust                   |       | 600                            |       | — |   |
| Proceeds from exercise of stock options                                            |       | —                         |       | 3,576 |   |
| Preferred stock dividends                                                          |       | —                         |       | (750 | ) |
| Total financing activities                                                         |       | (2,597                         | )          | (443 | ) |
| Effect of exchange rate changes                                                    |       | (142                           | )          | 26 |   |
| Net increase in cash and cash equivalents                                          |       | 2,282                          |       | 806 |   |
| Beginning cash and cash equivalents                                                |       | 2,127                          |       | 5,724 |   |
| Ending cash and cash equivalents                                                   |       | $                              | 4,409      |   | $ | 6,530 |   |
|                                                                               |       |                           |       |   |   |
| Supplemental disclosure of non-cash transactions:                                  |       |                           |       |   |   |
| Assets acquired under capital lease obligations                                    |       | $                              | 2,104      |   | $ | — |   |

 

See accompanying notes to consolidated financialstatements.

 

5

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**TRM Corporation**

 

**Notes to Consolidated FinancialStatements (unaudited)**

 

1.           Interim FinancialData:

 

The consolidated financial statements of TRM Corporation and itssubsidiaries (collectively, “TRM” or the “Company”) included herein have beenprepared by us, without audit, pursuant to the rules and regulations of theSecurities and Exchange Commission and reflect all adjustments, consisting onlyof normal recurring adjustments, which, in the opinion of management, arenecessary for a fair statement of the results of the interim periods.  These consolidated financial statementsshould be read in conjunction with our latest annual report on Form 10-K.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with generallyaccepted accounting principles have been condensed or omitted pursuant to suchrules and regulations.  The results ofoperations for the periods presented are not necessarily indicative of theresults to be expected for any subsequent interim period or for the year endingDecember 31, 2004.

 

2.             FinancialStatement Reclassifications

 

Certain financial statementreclassifications have been made to prior year amounts to conform to thecurrent year presentation.  These changeshad no impact on shareholders’ equity or previously reported net income.

 

3.             NetIncome Per Share

 

In March 2004, the Financial AccountingStandards Board approved Emerging Issues Task Force (“EITF”) IssueNo. 03-6 “Participating Securities and the Two-Class Method under FASBStatement No. 128, EarningsPer Share,” or EITF 03-6.    EITF03-6 supersedes the guidance in Topic No. D-95, “Effect of Participating Convertible Securities on the Computationof Basic Earnings per Share,” and requires the use of the two-class method forthe computation of basic earnings per share for companies that haveparticipating securities.  The two-classmethod is an earnings allocation formula that determines earnings per share foreach class of common stock and participating security according to dividendsdeclared (or accumulated) and participation rights in undistributedearnings.  In addition, EITF 03-6addresses other forms of participating securities, including options, warrants,forwards and other contracts to issue an entity’s common stock, with theexception of stock-based compensation (unvested options and restricted stock)subject to the provisions of Accounting Principles Board (“APB”) OpinionNo. 25 and Statement of Financial Accounting Standards (“SFAS”)No. 123.  EITF 03-6 became effectivefor reporting periods beginning after March 31, 2004 and must be applied byrestating previously reported earnings per share information.  Our Series A preferred stock qualifies as aparticipating security under EITF 03-6.  Accordingly, we have adopted the use of thetwo-class method for the computation of earnings per share in the secondquarter of 2004.  The application of EITF 03-6 as ofJune 30, 2004 has resulted in a reduction in our per share earnings, bothbasic and diluted, for the three and six-month periods ended June 30,2003.  EITF 03-6 provides a new methodfor calculating per share

 

6

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earnings and does not otherwise affect our financial statements or haveany economic or operating impact on us.

 

Previously reported earnings per shareamounts for 2003 have been restated, as follows:.

 

 
| ** **                                              | ** ** | **Three Months Ended  June 30, 2003** | ** ** | **Six Months Ended  June 30, 2003** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                              | ** ** | **As  previously  reported**          | ** ** | **Restated**                        | ** ** | **As  previously  reported** | ** ** | **Restated** | ** ** |
|                                                    |       |                                  |       |                                |       |   |   |   |   |
| Income available to common shareholders (in  thousands) |       | $                                     | 773        |                                | $          | 650 |   | $ | 1,151 |   | $ | 968 |   |
| Net income per common share:                            |       |                                  |       |                                |       |   |   |   |   |
| Basic                                                   |       | $                                     | .11        |                                | $          | .09 |   | $ | .16 |   | $ | .14 |   |
| Diluted                                                 |       | $                                     | .11        |                                | $          | .09 |   | $ | .16 |   | $ | .14 |   |

 

Net income per share using the two-class method has been computed asfollows (in thousands except per share data):

 
| ** **                                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                           | ** ** | **2003**                         | ** ** | **2004**                       | ** ** | **2003** | ** ** | **2004** | ** ** |
| Basic:                                               |       |                             |       |                           |       |   |   |   |   |
| Net income                                           |       | $                                | 1,148      |                           | $          | 2,708 |   | $ | 1,901 |   | $ | 5,221 |   |
| Preferred stock dividend                             |       | (375                             | )          | (371                           | )          | (750 | ) | (746 | ) |
| Income allocated to Series A preferred  shareholders |       | (123                             | )          | (350                           | )          | (183 | ) | (686 | ) |
| Income available to common shareholders              |       | $                                | 650        |                           | $          | 1,987 |   | $ | 968 |   | $ | 3,789 |   |
| Weighted average common shares outstanding           |       | 7,060                            |       | 7,509                          |       | 7,060 |   | 7,331 |   |
| Basic net income per common share                    |       | $                                | .09        |                           | $          | .26 |   | $ | .14 |   | $ | .52 |   |
| Diluted:                                             |       |                             |       |                           |       |   |   |   |   |
| Net income                                           |       | $                                | 1,148      |                           | $          | 2,708 |   | $ | 1,901 |   | $ | 5,221 |   |
| Preferred stock dividend                             |       | (375                             | )          | (371                           | )          | (750 | ) | (746 | ) |
| Income allocated to Series A preferred  shareholders |       | (123                             | )          | (350                           | )          | (183 | ) | (686 | ) |
| Income available to common shareholders              |       | $                                | 650        |                           | $          | 1,987 |   | $ | 968 |   | $ | 3,789 |   |
| Weighted average common shares outstanding           |       | 7,060                            |       | 7,509                          |       | 7,060 |   | 7,331 |   |
| Assumed exercise of stock options                    |       | 37                               |       | 1,129                          |       | 19 |   | 1,087 |   |
| Assumed exercise of warrants                         |       | —                           |       | 25                             |       | — |   | 12 |   |
| Adjusted weighted average shares                     |       | 7,097                            |       | 8,663                          |       | 7,079 |   | 8,430 |   |
| Diluted net income per common share                  |       | $                                | .09        |                           | $          | .23 |   | $ | .14 |   | $ | .45 |   |
|                                                      |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |

 

Basic and diluted net income per share arebased on the weighted average number of shares outstanding during each period,with diluted net income per share including the effect of potentially dilutivesecurities.  For diluted net income pershare, the calculation assumes the conversion of common stock equivalentsincluding the conversion of preferred stock unless such conversion isantidilutive.  Weighted average commonshares outstanding, assuming dilution, include the incremental shares thatwould be issued upon the assumed exercise of stock options.  For the three months ended June 30,2004, options to purchase 15,000 shares of our stock and preferred stockconvertible into approximately 1,333,000 common shares were excluded from thecalculation of diluted earnings per share because their inclusion would havebeen antidilutive.  For the three monthsended June 30, 2003, approximately 1,258,000 of our stock options wereexcluded from the calculation as exercise prices were greater than the averageshare price of the common shares.  Inaddition, preferred stock convertible into approximately 1,333,000 commonshares and warrants exercisable for 300,000 common shares were excluded fromthe calculation for the three months 

 

7

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ended June 30, 2003 because theirinclusion would also have been antidilutive. These options, preferred shares and warrants could be dilutive in thefuture.

 

During the second quarter of2004, our Board of Directors approved payment of a dividend in the amount of$371,000 related to our Series A preferred stock, which equates to $.04 perfully diluted common share.  This paymentwas made in July 2004 pursuant to a waiver from Bank of America, N.A.

 

4.             Inventories(in thousands):

 
| ** **                 | ** ** | **December 31,  2003** | ** ** | **June 30,  2004** | ** ** |
|----------------------------|------------|------------------------|------------|--------------------|------------|
| Parts                      |       | $                      | 1,052      |               | $          | 1,199 |   |
| ATMs held for resale       |       | 483                    |       | 730                |       |
| Paper, toner and developer |       | 32                     |       | 20                 |       |
| Total                      |       | $                      | 1,567      |               | $          | 1,949 |   |

 

5.             Bank Loan Agreement

 

In March 2004 we and ourprimary lender, Bank of America, N.A., executed an amendment to our loanagreement.  The amendment increased theamount of the revolving line of credit from $4.0 million to $8.0 million anddecreased the interest rate on borrowings pursuant to the line of credit fromthe bank’s prime rate to the bank’s prime rate minus one-half percent (3.5% atJune 30, 2004).  The agreement hasbeen further amended to extend the availability period for the line of creditto August 31, 2004.  As of June 30,2004, we had no outstanding debt under the revolving line of credit, and wewere in compliance with all covenants of our loan agreement.

 

6.             Employee Stock Options

 

Weaccount for stock-based compensation utilizing the intrinsic value method inaccordance with the provisions of APB Opinion No. 25, “Accounting for StockIssued to Employees.”  Accordingly, nocompensation expense is recognized for our stock option plans because theexercise prices of employee stock options equal or exceed the market prices ofthe underlying stock on the measurement dates. The following table illustrates the effect on net income and net incomeper common share if we had applied the fair value recognition provisions ofSFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-basedemployee compensation (in thousands, except per share data):

 

8

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| ** **                                                                                                                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2003**                         | ** ** | **2004**                       | ** ** | **2003** | ** ** | **2004** | ** ** |
|                                                                                                                                         |       |                             |       |                           |       |   |   |   |   |
| Net income, as reported                                                                                                                      |       | $                                | 1,148      |                           | $          | 2,708 |   | $ | 1,901 |   | $ | 5,221 |   |
| Deduct total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |       | (25                              | )          | (256                           | )          | (39 | ) | (342 | ) |
| Pro forma net income                                                                                                                         |       | 1,123                            |       | 2,452                          |       | 1,862 |   | 4,879 |   |
| Preferred stock dividend                                                                                                                     |       | (375                             | )          | (371                           | )          | (750 | ) | (746 | ) |
| Income allocated to Series A preferred  shareholders                                                                                         |       | (119                             | )          | (312                           | )          | (177 | ) | (635 | ) |
| Pro forma net income available to common  shareholders                                                                                       |       | $                                | 629        |                           | $          | 1,769 |   | $ | 935 |   | $ | 3,498 |   |
| Net income per common share:                                                                                                                 |       |                             |       |                           |       |   |   |   |   |
| Basic:                                                                                                                                       |       |                             |       |                           |       |   |   |   |   |
| As reported                                                                                                                                  |       | $                                | .09        |                           | $          | .26 |   | $ | .14 |   | $ | .52 |   |
| Pro forma                                                                                                                                    |       | $                                | .09        |                           | $          | .24 |   | $ | .13 |   | $ | .48 |   |
| Diluted:                                                                                                                                     |       |                             |       |                           |       |   |   |   |   |
| As reported                                                                                                                                  |       | $                                | .09        |                           | $          | .23 |   | $ | .14 |   | $ | .45 |   |
| Pro forma                                                                                                                                    |       | $                                | .09        |                           | $          | .20 |   | $ | .13 |   | $ | .41 |   |

 

7.             Business Acquisitions

 

Ina cash transaction effective March 31, 2004, we acquired all of the outstandingshares of Inkas Financial Corp. Ltd. (“Inkas”), an independent ATM company, for$6,018,000.  As a result of theacquisition, we added 447 ATM processing and management contracts and 85 ATMmachines to our United Kingdom operations. The acquisition was accounted for as a purchase; the purchase price andthe related allocation are subject to further refinement and change during 2004.  The results of operations of Inkas areincluded in our consolidated results of operations starting in the secondquarter of 2004.

 

Thepurchase price was allocated as follows (in thousands):

 

| Cash                               |   | $      | 100    |   |
|------------------------------------|--------|--------|--------|--------|
| Accounts receivable                |   | 211    |   |
| Inventories                        |   | 239    |   |
| Prepaid expenses                   |   | 18     |   |
| Equipment                          |   | 322    |   |
| Intangible asset - contract rights |   | 6,150  |   |
| Other assets                       |   | 104    |   |
| Current liabilities                |   | (1,126 | )      |
| Total                              |   | $      | 6,018  |   |

 

Contractrights acquired are being amortized over their estimated useful lives of tenyears.

 

Simultaneousto the purchase of Inkas, we entered into an earn-out agreement with thesellers and an Inkas employee.  Theearn-out agreement provides that we will make payments to the sellers and theInkas employee for up to 150 net new ATM contracts entered into by Inkas duringthe first nine months following the acquisition of Inkas and which reachcertain transaction levels. The maximum payment to be made pursuant to theearn-out agreement is £850,000 (approximately $1.5 million based upon currencyexchange rates at June 30, 2004).

 

9

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Any payments to be madepursuant to the earn-out agreement will be accounted for as additional contractrights as they are earned.

 

InJune 2004 we acquired all of the outstanding shares of Mighty Cash Financial Services,Inc., a Canadian corporation with a network of 72 ATM locations comprisedprimarily of ATMs owned by merchants who signed contracts with Mighty Cash toprovide processing and management services. The purchase price of approximately $604,000 was paid in cash anddeferred payments and allocated primarily to contract rights.

 

Thefollowing table reflects the unaudited combined results of TRM, Inkas andMighty Cash as if the acquisitions of Inkas and Mighty Cash had taken place atthe beginning of each period presented. The pro forma information includes adjustments for the amortization ofthe contract  rights, decreased interestincome and the tax effect of these adjustments. The pro forma information does not necessarily reflect the actualresults that would have occurred nor is it necessarily indicative of futureresults of operations of the combined companies.

 
| ** **                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                   | ** ** | **2003**                         | ** ** | **2004**                       | ** ** | **2003** | ** ** | **2004** | ** ** |
| Net sales (in thousands)     |       | $                                | 21,397     |                           | $          | 22,551 |   | $ | 40,874 |   | $ | 44,359 |   |
| Net income (in thousands)    |       | $                                | 1,025      |                           | $          | 2,713 |   | $ | 1,700 |   | $ | 5,187 |   |
| Basic net income per share   |       | $                                | .08        |                           | $          | .27 |   | $ | .11 |   | $ | .51 |   |
| Diluted net income per share |       | $                                | .08        |                           | $          | .23 |   | $ | .11 |   | $ | .45 |   |

 

OnJuly 8, 2004, we acquired a portfolio of approximately 350 ATM contractsin the United Kingdom.  These contractsare for merchant-filled ATMs.  Thepurchase price of £1.9 million ($3.5 million) was paid in cash and deferredpayments.

 

8.          Segment Reporting (in thousands)

 

We have three reportable segments: Automated Teller Machines (ATM), Photocopy and SoftwareDevelopment.  ATM owns and operates ATMmachines in retail establishments, sells ATM machines, and began servicingequipment for others in the fourth quarter of 2003.  Photocopy owns and maintains self-servicephotocopiers in retail establishments. The Software Development business develops software to deliver productsand services through ATMs.

 

The accounting policies of the segments are substantially the same asthose described in Note 1 to the financial statements in our annual reporton Form 10-K for the year ended December 31, 2003.  We evaluate each segment’s performance basedon operating income or loss.  In ourfinancial statements for 2003 we reported segment performance based on incomeor loss before interest, taxes, minority interest, and cumulative effect ofaccounting changes.  The 2003 informationbelow has been restated to conform to the current presentation.  Information regarding the operations of thesereportable segments is as follows (in thousands):

 

10

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|                                                           |   | **Three Months Ended  June 30,** |       | **Six Months Ended  June 30,** |       |
|----------------------------------------------------------------|--------|----------------------------------|------------|--------------------------------|------------|
|                                                           |   | **2003**                         | ** ** | **2004**                       | ** ** | **2003** | ** ** | **2004** |   |
| Net sales:                                                     |   |                             |       |                           |       |   |   |   |   |
| ATM                                                            |   | $                                | 8,758      |                           | $          | 11,489 |   | $ | 16,148 |   | $ | 21,094 |   |
| Photocopy                                                      |   | 11,105                           |       | 11,023                         |       | 21,801 |   | 22,434 |   |
| Software Development                                           |   | 352                              |       | —                         |       | 954 |   | 14 |   |
|                                                           |   | $                                | 20,215     |                           | $          | 22,512 |   | $ | 38,903 |   | $ | 43,542 |   |
|                                                           |   |                             |       |                           |       |   |   |   |   |
| Operating income (loss):                                       |   |                             |       |                           |       |   |   |   |   |
| ATM                                                            |   | $                                |  866  |                           | $          |  1,243 |   | $ |  1,332 |   | $ |  2,678 |   |
| Photocopy                                                      |   | 1,171                            |       | 2,881                          |       | 2,454 |   | 5,724 |   |
| Software Development                                           |   | (188                             | )          | (89                            | )          | (198 | ) | (224 | ) |
|                                                           |   | $                                | 1,849      |                           | $          | 4,035 |   | $ | 3,588 |   | $ | 8,178 |   |
|                                                           |   |                             |       |                           |       |   |   |   |   |
| Reconciliation of segment data to income before  income taxes: |   |                             |       |                           |       |   |   |   |   |
| Operating income                                               |   | $                                | 1,849      |                           | $          |  4,035 |   | $ | 3,588 |   | $ | 8,178 |   |
| Interest expense                                               |   | 238                              |       | 251                            |       | 568 |   | 497 |   |
| Other (income) expense, net                                    |   | (103                             | )          | 74                             |       | 46 |   | 209 |   |
| Income before income taxes                                     |   | $                                | 1,714      |                           | $          | 3,710 |   | $ | 2,974 |   | $ | 7,472 |   |
|                                                           |   |                             |       |                           |       |   |   |   |   |
| Total assets as of June  30, 2003:                             |   |                             |       |                           |       |   |   |   |   |
|                                                           |   |                             |       |                           |       |   |   |   |   |
| ATM                                                            |   | $                                | 78,306     |                           |       |   |   |   |   |   |
| Photocopy                                                      |   | 52,449                           |       |                           |       |   |   |   |   |
| Software development                                           |   | 70                               |       |                           |       |   |   |   |   |
|                                                           |   | $                                | 130,825    |                           |       |   |   |   |   |   |

 

**ITEM 2.****                       ****MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL  CONDITIONAND RESULTS OF OPERATIONS**

** **

**Forward-Looking Statements**

** **

Information in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andelsewhere in this Quarterly Report on Form 10-Q with respect to our beliefs,plans, objectives, goals, expectations, anticipations, intentions, financialcondition, results of operations, future performance and business, including,without limitation, increasing ATM revenues, decreases in photocopy volume,growth of our business (including acquisitions) and the sale of common stock,constitutes forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934.  We have based theseforward-looking statements on management’s current expectations about futureevents.  These statements can beidentified by the fact that they do not relate strictly to historical orcurrent facts, and by words such as “may,” “could,” “should,” “would,”“believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan” or othersimilar words or expressions.

 

Any or all of the forward-looking statements in thisreport and in any other public statements we make may turn out to bewrong.  This can occur as a result ofinaccurate assumptions or as a consequence of known or unknown risks anduncertainties.  Many factors discussed inthis report will be important in determining our future performance.  Consequently,

 

11

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actual results may differ materially fromthose that might be anticipated from our forward-looking statements.  Other factors beyond those discussed abovecould also adversely affect us. Therefore, you are cautioned not to place undue reliance on ourforward-looking statements.  We undertakeno obligation to publicly update any forward-looking statements, whether as aresult of new information, future events or otherwise.  This discussion is provided as permitted bythe Private Securities Litigation Reform Act of 1995.

 

**Overview**

 

We are a large-scale,multinational owner and operator of ATMs and photocopiers in the United States,the United Kingdom and Canada.  We havethe tenth largest ATM network in the United States and the second largest ATMnetwork in the United Kingdom.  Inaddition, we believe we have the largest self-service photocopier network inthe world.  Our machines are locatedwithin high traffic national retailers and regional and locally-owned retailconvenience stores.

 

InJune 2004 our ATM network had a total of 4,616 revenue-generating machinesdeployed throughout the United Kingdom, United States and Canada representingan increase of 1,343 ATM machines (or 41%) when compared to the same month in2003.  The ATM operations produced netsales of $21.1 million during the first six months of 2004, an increase of $4.9million (or 31%) as compared to the same period in the prior year.  We believe that revenues generated fromservices delivered through our ATM network will represent a greater percentageof overall net sales in the future.

 

In addition to expanding ourATM operations through placements generated by our internal sales staff, wehave been actively pursuing acquisitions of ATM networks since the second halfof 2003.  In February 2004, we acquired a20-ATM network in the United States.  OnMarch 31, 2004, we added 447 ATM contracts and 85 ATM machines to ournetwork through the acquisition of Inkas Financial Corp., Ltd. in the UnitedKingdom.  In June 2004, we entered theCanadian ATM market through the acquisition of Mighty Cash Financial Services,Inc., which had 72 ATMs in Canada.

 

At June 30, 2004, wehad a total of 25,285 installed photocopiers in the United States, Canada andthe United Kingdom, a decrease of 2,385 copiers (or 8.6%) when compared toJune 30, 2003.  Photocopy net saleswere $22.4 million for the six months ended June 30, 2004, up from $21.8million during the same period in 2003. The decrease in the number of photocopierswas caused primarily by the elimination of low volume sites.  However, price increases more than offset thedecline in photocopy volume, resulting in a 2.9% increase in net photocopyrevenue in the six months of 2004 compared to the six months of 2003.

** **

Our  Board of Directorsapproved payment of a dividend for the second quarter of 2004 in the amount of$371,000 related to our Series A preferred stock, which equates to $.04 perfully diluted common share.  This paymentwas made in July 2004 pursuant to a waiver from Bank of America, N.A.

 

12

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###### **Consolidated Results of Operations**

 

The following table sets forth, for the periods indicated, selectedstatement of operations data, expressed as a percentage of sales of each itemon the Consolidated Statements of Operations (see page 3 of this QuarterlyReport on Form 10-Q).

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **June  30,  2003**    | ** ** | **June  30,  2004**  | ** ** | **June 30,  2003** | ** ** | **June 30,  2004** | ** ** |
| Sales                                       |       | 100.0                  | %          | 100.0                | %          | 100.0 | % | 100.0 | % |
| Less discounts                              |       | 17.0                   |       | 21.9                 |       | 16.8 |   | 20.5 |   |
| Net sales                                   |       | 83.0                   |       | 78.1                 |       | 83.2 |   | 79.5 |   |
| Cost of sales                               |       | 49.1                   |       | 42.0                 |       | 49.3 |   | 41.6 |   |
| Gross profit                                |       | 33.9                   |       | 36.1                 |       | 33.9 |   | 37.9 |   |
| Selling, general and administrative expense |       | 25.7                   |       | 22.1                 |       | 25.8 |   | 23.0 |   |
| Asset retirements                           |       | 0.6                    |       | —               |       | 0.4 |   | — |   |
| Operating income                            |       | 7.6                    |       | 14.0                 |       | 7.7 |   | 14.9 |   |
| Interest expense                            |       | 1.0                    |       | 0.9                  |       | 1.2 |   | 0.9 |   |
| Other (income) expense, net                 |       | (0.4                   | )          | 0.2                  |       | 0.1 |   | 0.4 |   |
| Income before income taxes                  |       | 7.0                    |       | 12.9                 |       | 6.4 |   | 13.6 |   |
| Provision for income taxes                  |       | 2.3                    |       | 3.5                  |       | 2.3 |   | 4.1 |   |
| Net income                                  |       | 4.7                    | %          | 9.4                  | %          | 4.1 | % | 9.5 | % |

 

13

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**Three Months Ended June 30, 2004Compared to Three Months Ended June 30, 2003**

 

ATMResults of Operations

 
| ** **                                                  | ** ** | **Three months ended June 30,**                           | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2003**                                                  | ** ** | **% of  Sales** | ** ** | **2004** | ** ** | **% of  Sales** | ** ** |
| ** **                                                  | ** ** | **(in thousands, except operating  and percentage data)** | ** ** |
|                                                        |       |                                                      |       |   |   |   |   |   |   |
| Transaction-based sales                                     |       | $                                                         | 9,755      |   | 93.3 | % | $ | 14,668 |   | 95.1 | % |
| Service sales                                               |       | 28                                                        |       | 0.3 |   | 496 |   | 3.2 |   |
| Sales of ATM equipment                                      |       | 674                                                       |       | 6.4 |   | 256 |   | 1.7 |   |
| Total sales                                                 |       | 10,457                                                    |       | 100.0 |   | 15,420 |   | 100.0 |   |
| Less discounts                                              |       | 1,699                                                     |       | 16.2 |   | 3,931 |   | 25.5 |   |
| Net sales                                                   |       | 8,758                                                     |       | 83.8 |   | 11,489 |   | 74.5 |   |
| Cost of sales                                               |       | 5,040                                                     |       | 48.2 |   | 6,624 |   | 43.0 |   |
| Gross profit                                                |       | $                                                         | 3,718      |   | 35.6 | % | $ | 4,865 |   | 31.5 | % |
| Operating Data:                                             |       |                                                      |       |   |   |   |   |   |   |
| Average number of ATMs                                      |       | 3,215                                                     |       |   |   | 4,264 |   |   |   |
| Withdrawal transactions                                     |       | 3,882,848                                                 |       |   |   | 5,216,693 |   |   |   |
| Average withdrawals per ATM per month                       |       | 403                                                       |       |   |   | 408 |   |   |   |
| Average transaction-based sales per withdrawal  transaction |       | $                                                         | 2.51       |   |   |   | $ | 2.81 |   |   |   |
| Average discount per withdrawal transaction                 |       | $                                                         | .44        |   |   |   | $ | .75 |   |   |   |
| Net transaction-based sales per withdrawal  transaction     |       | $                                                         | 2.07       |   |   |   | $ | 2.06 |   |   |   |
|                                                             |            |                                                           |            |  |  |  |  |  |  |  |  |  |

 

PhotocopyResults of Operations

 
| ** **                                | ** ** | **Three months ended June 30,**                           | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                | ** ** | **2003**                                                  | ** ** | **% of  Sales** | ** ** | **2004** | ** ** | **% of  Sales** | ** ** |
| ** **                                | ** ** | **(in thousands, except operating  and percentage data)** | ** ** |
|                                      |       |                                                      |       |   |   |   |   |   |   |
| Sales                                     |       | $                                                         | 13,557     |   | 100.0 | % | $ | 13,420 |   | 100.0 | % |
| Less discounts                            |       | 2,452                                                     |       | 18.1 |   | 2,397 |   | 17.9 |   |
| Net sales                                 |       | 11,105                                                    |       | 81.9 |   | 11,023 |   | 82.1 |   |
| Cost of sales                             |       | 6,558                                                     |       | 48.4 |   | 5,467 |   | 40.7 |   |
| Gross profit                              |       | $                                                         | 4,547      |   | 33.5 | % | $ | 5,556 |   | 41.4 | % |
| Operating Data:                           |       |                                                      |       |   |   |   |   |   |   |
| Average number of photocopiers            |       | 27,794                                                    |       |   |   | 25,477 |   |   |   |
| Average photocopies per machine per month |       | 2,775                                                     |       |   |   | 2,128 |   |   |   |
| Average sales per photocopier per month   |       | $                                                         | 162.59     |   |   |   | $ | 175.58 |   |   |   |
| Average sales per photocopy               |       | $                                                         | .059       |   |   |   | $ | .083 |   |   |   |
| Average discount per photocopy            |       | $                                                         | .011       |   |   |   | $ | .015 |   |   |   |
| Average net sales per photocopy           |       | $                                                         | .048       |   |   |   | $ | .068 |   |   |   |
| Average gross profit per photocopy        |       | $                                                         | .020       |   |   |   | $ | .034 |   |   |   |
|                                           |            |                                                           |            |  |  |  |  |  |  |  |  |  |  |

 

**Sales**

 

Forthe second quarter of 2004, consolidated sales increased by $4.5 million, or18%, to $28.8 million from $24.4 million for the second quarter of 2003.  ATM sales increased by

 

14

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$4.9 million andphotocopier sales decreased by $137,000, while software development salesdecreased by $352,000.

 

During the second quarter of 2004, salesand expenses were affected by the decline in value of the U.S. dollar ascompared to the British pound and, to a lesser extent, the Canadiandollar.  Approximately 37% ofconsolidated sales for the quarter were produced in the United Kingdom by ourU.K. subsidiaries.  The average exchangerate during the second quarter of 2004 was $1.8233 to £1.00, compared to$1.6046 to £1.00 during the second quarter of 2003.  As a result of this increase in the value ofthe British pound, we reported $1.5 million more in sales during the second quarterof 2004 than we would have reported had the exchange rate remained constant atthe average for the second quarter of 2003. This gain was substantially offset by a corresponding increase inexpenses.

 

*ATM sales. *ATM sales were $15.4 million for thesecond quarter of 2004 compared to $10.5 million for the second quarter of2003.  The $5.0 million increase in ATMsales was a combination of a $4.9 million increase in transaction-based salesand a $468,000 increase in service sales, which were partially offset by a$418,000 decrease in sales of ATM equipment.

 

The$4.9 million increase in transaction-based sales resulted from:

 
| • | Expansion of  our ATM network - The average number of transacting ATMs in our network  during the second quarter of 2004 increased by 32.6% compared to the same  period in 2003. The increase of 1,049 average ATMs includes 447 ATMs acquired  in the Inkas acquisition in March 2004.                                                                            |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                |
| • | Increased  withdrawals per ATM - The average number of withdrawals per unit per month  increased by 1.2% to 408 for the second quarter of 2004 compared to 403 for  the second quarter of 2003.                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                |
| • | Price  increases - In the second half of 2002 we initiated increases in withdrawal  fees. As a result of the price increases and the increase in the value of the  British pound, the average transaction-based sales generated per withdrawal  transaction increased 12.0% to $2.81 for the second quarter of 2004 compared  to $2.51 for the same period in 2003. |
|   |                                                                                                                                                                                                                                                                                                                                                                |
| • | Exchange rate  benefits.                                                                                                                                                                                                                                                                                                                                            |

 

Thevalue of the British pound relative to the U.S. dollar increased for the secondquarter of 2004 compared to same period in 2003, resulting in a $1.2 millionincrease in ATM net sales.  This increasewas substantially offset by the exchange rate-related increase in costs.

 

*Photocopier sales. *Photocopier sales in the second quarterof 2004 were $13.4 million compared to $13.6 million in the second quarter of2003.  The $137,000 decrease resultedprimarily from:

 

15

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| • | Declining  photocopy volume - Continuing a trend, photocopy volume declined by 29.7% for  the second quarter of 2004 compared to the same period in 2003, to 162.7  million copies from 231.4 million copies, due to a combination of: |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                   |
|   | •                                                                                                                                                                                                                                 | a decline in  installed photocopiers to an average of 25,477 in the second quarter of 2004  from an average of 27,794 for the same period in 2003, as we continued a  program of eliminating lower volume sites that were either unprofitable or  marginally profitable; and |
|   |                                                                                                                                                                                                                                   |   |
|   | •                                                                                                                                                                                                                                 | a decline in  the average number of photocopies made per unit per month to 2,128 for the  second quarter of 2004 from 2,775 for the same period in 2003 due primarily  to price increases, as discussed in the next paragraph, as well as  competition from alternative media and copying services. |

 

The declining volume was partially offset by:

 
| • | Price  increases - During 2003 we began to work with merchants to systematically  increase the price per photocopy across our network of photocopiers. The  average sales price per photocopy increased to $.082 in the second quarter of  2004 from $.059 for the same period in 2003.                                                |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                   |
| • | Exchange rate benefit - The value of  the British pound and Canadian dollar relative to the U.S. dollar increased  for the second quarter of 2004 compared to the same period in 2003, resulting  in a $291,000 increase in photocopier sales. This increase was substantially  offset by the exchange rate-related increase in costs. |

 

*Software development sales. *We had no software development sales for the second quarterof 2004 compared to $352,000 for the second quarter of 2003 following thesubstantial completion of a development contract with NCR Corporation duringthe second quarter of 2003. We do not expect software development to providesignificant additional sales in the future.

 

**Sales Discounts**

 

Sales discounts on a consolidated basis as apercentage of sales were 21.9% in the second quarter of 2004 and 17.0% in thesecond quarter of 2003.  Sales discountsin the ATM business increased to 26.8% of transaction-based sales in the secondquarter of 2004 from 17.4% in the second quarter of 2003.  The increased discounts were caused by anincrease in the percentage of merchants who provide their own cash in theirATMs (“self-fill” contracts) and merchants for whom we provide only processingservices (“processing only” contracts). Most of the ATM contracts acquired in the Inkas and Mighty Cashtransactions are either self-fill or processing only contracts.  Sales discounts in the photocopier businessdecreased slightly in the second quarter of 2004 to 17.9% of sales from 18.1%in the second quarter of 2003.

 

16

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**Cost of Sales**

 

Cost of sales on a consolidated basis decreasedto 42.0% of sales in the second quarter of 2004, from 49.1% in the secondquarter of 2003.  Costs of sales as apercentage of sales declined in both the ATM and photocopier segments.

 

*ATM cost of sales. *Costs of sales in the ATM businessincreased by $1.6 million to $6.6 million in the second quarter of 2004 from$5.0 million for the same time period in 2003, as a result of:

 
| • | Expansion of  our ATM network;                                                                                                                                                                                                                                  |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                            |
| • | Increase in  the number of withdrawals per ATM; and                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                            |
| • | Exchange rate  effects - The ATM segment reported approximately $542,000 more in cost of  sales in the second quarter of 2004 than it would have reported had the  exchange rate for the British pound remained at the average for the second  quarter of 2003. |

 

Costof sales from the ATM operations (excluding sales of ATM equipment and therelated cost of sales) declined to 43.1% of sales from 47.7% in the secondquarter of 2003.  This percentagedecrease resulted from increases in the amount of sales per transaction.

 

*Photocopier cost of sales. *Costof sales in our photocopier business decreased by $1.1 million, to $5.5 millionin the second quarter of 2004 compared to $6.6 million for the same time periodin 2003, due primarily to a decrease in photocopy volume.  The reduction in photocopy volume resulted ina decline in the cost of paper and other supplies by $429,000, a reduction indepreciation by $288,000, and a reduction in third party servicers’ andinstallation fees by $116,000.  The costof labor in photocopy cost of sales was reduced by $227,000 due to the decreasein volume and the corresponding decrease in maintenance requirements.

 

Thesesavings were partially offset by exchange rate effects, as we reportedapproximately $140,000 more in cost of sales in the second quarter of 2004 thanwe would have reported had the exchange rates for the British pound andCanadian dollar remained at the average for same time period in 2003.

 

**Selling, General and Administrative Expense**

 

Selling,general and administrative expense remained relatively flat, increasing by$107,000 to $6.4 million in the second quarter of 2004 from $6.3 million in thesecond quarter of 2003.  The increase inthe value of the British pound and Canadian dollar caused an increase of$228,000 in selling, general and administrative expense.  Without the increase in the value of theBritish pound and Canadian dollar, selling, general and administrative expensewould have decreased slightly.

 

17

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**Interest Expense**

 

Interest expense increased by $13,000 to$251,000 in the second quarter of 2004 from $238,000 in the second quarter of2003.

 

**Tax Rate**

 

Oureffective tax rate for the second quarter of 2004 was 27.0%, resulting in a taxprovision of $1.0 million.  For thesecond quarter of 2003, the effective tax rate was 33.0%, and the tax provisionwas $566,000.  The effective tax rate inthe second quarter of 2004 was lower because we released a valuation allowancein this quarter.

 

**Net Income**

 

Net income for the second quarter of 2004was $2.7 million, an increase of $1.6 million over the $1.1 million in netincome for the same period in 2003. After giving effect to Series A preferred stock dividends and a portionof undistributed income allocated to the preferred shareholders, the net incomeavailable to common shareholders was $2.0 million in the second quarter of 2004and $650,000 in the second quarter of 2003. Increased ATM transactions and higher transaction fees for our ATMs andphotocopiers primarily contributed to the $2.1 million increase in gross profitto $10.4 million in the second quarter of 2004. Increases in selling, general and administrative expense of $107,000 andthe increase in the provision for income taxes of $436,000 partially offset theincreased gross profit.

 

18

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**SixMonths Ended June 30, 2004 Compared to Six Months Ended June 30, 2003**

 

ATM Results of Operations

 
| ** **                                                  | ** ** | **Six months ended June 30,**                             | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2003**                                                  | ** ** | **% of  Sales** | ** ** | **2004** | ** ** | **% of  Sales** | ** ** |
| ** **                                                  | ** ** | **(in thousands, except operating  and percentage data)** | ** ** |
|                                                        |       |                                                      |       |   |   |   |   |   |   |
| Transaction-based sales                                     |       | $                                                         | 18,165     |   | 94.4 | % | $ | 25,939 |   | 94.6 | % |
| Service sales                                               |       | 44                                                        |       | 0.2 |   | 1,063 |   | 3.9 |   |
| Sales of ATM equipment                                      |       | 1,038                                                     |       | 5.4 |   | 400 |   | 1.5 |   |
| Total Sales                                                 |       | 19,247                                                    |       | 100.0 |   | 27,402 |   | 100.0 |   |
| Less discounts                                              |       | 3,099                                                     |       | 16.1 |   | 6,308 |   | 23.0 |   |
| Net sales                                                   |       | 16,148                                                    |       | 83.9 |   | 21,094 |   | 77.0 |   |
| Cost of sales                                               |       | 9,334                                                     |       | 48.5 |   | 11,582 |   | 42.3 |   |
| Gross profit                                                |       | $                                                         | 6,814      |   | 35.4 | % | $ | 9,512 |   | 34.7 | % |
| Operating Data:                                             |       |                                                      |       |   |   |   |   |   |   |
| Average number of ATMs                                      |       | 3,137                                                     |       |   |   | 3,860 |   |   |   |
| Withdrawal transactions                                     |       | 7,274,803                                                 |       |   |   | 9,239,903 |   |   |   |
| Average withdrawals per ATM per month                       |       | 387                                                       |       |   |   | 399 |   |   |   |
| Average transaction-based sales per withdrawal  transaction |       | $                                                         | 2.50       |   |   |   | $ | 2.81 |   |   |   |
| Average discount per withdrawal transaction                 |       | $                                                         | .43        |   |   |   | $ | .68 |   |   |   |
| Net transaction-based sales per withdrawal  transaction     |       | $                                                         | 2.07       |   |   |   | $ | 2.13 |   |   |   |
|                                                             |            |                                                           |            |  |  |  |  |  |  |  |  |  |

 

PhotocopyResults of Operations

 
| ** **                                | ** ** | **Six months ended June 30,**                             | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                | ** ** | **2003**                                                  | ** ** | **% of  Sales** | ** ** | **2004** | ** ** | **% of  Sales** | ** ** |
| ** **                                | ** ** | **(in thousands, except operating  and percentage data)** | ** ** |
|                                      |       |                                                      |       |   |   |   |   |   |   |
| Sales                                     |       | $                                                         | 26,579     |   | 100.0 | % | $ | 27,353 |   | 100.0 | % |
| Less discounts                            |       | 4,778                                                     |       | 18.0 |   | 4,919 |   | 18.0 |   |
| Net sales                                 |       | 21,801                                                    |       | 82.0 |   | 22,434 |   | 82.0 |   |
| Cost of sales                             |       | 13,059                                                    |       | 49.1 |   | 11,128 |   | 40.7 |   |
| Gross profit                              |       | $                                                         | 8,742      |   | 32.9 | % | $ | 11,306 |   | 41.3 | % |
| Operating Data:                           |       |                                                      |       |   |   |   |   |   |   |
| Average number of photocopiers            |       | 27,999                                                    |       |   |   | 25,719 |   |   |   |
| Average photocopies per machine per month |       | 2,725                                                     |       |   |   | 2,103 |   |   |   |
| Average sales per photocopier per month   |       | $                                                         | 158.21     |   |   |   | $ | 177.26 |   |   |   |
| Average sales per photocopy               |       | $                                                         | .058       |   |   |   | $ | .084 |   |   |   |
| Average discount per photocopy            |       | $                                                         | .010       |   |   |   | $ | .015 |   |   |   |
| Average net sales per photocopy           |       | $                                                         | .048       |   |   |   | $ | .069 |   |   |   |
| Average gross profit per photocopy        |       | $                                                         | .019       |   |   |   | $ | .035 |   |   |   |
|                                           |            |                                                           |            |  |  |  |  |  |  |  |  |  |

 

**Sales**

 

Forthe first six months of 2004, consolidated sales increased by $8.0 million, or17.1%, to $54.8 million from $46.8 million for the first six months of2003.  ATM sales increased by $8.2million and photocopier sales increased by

 

19

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$774,000, whilesoftware development sales decreased by $940,000.

 

During the first six months of 2004,sales and expenses were affected by the decline in value of the U.S. dollar ascompared to the British pound and, to a lesser extent, the Canadiandollar.  Approximately 40% of ourconsolidated sales for the six months were produced in the United Kingdom byour U.K. subsidiaries.  The averageexchange rate during the first six months of 2004 was $1.8258 to £1.00,compared to $1.6050 to £1.00 during the first six months of 2003. As a resultof this increase in the value of the British pound, we reported $2.6 millionmore in sales during the six months of 2004 than we would have reported had theexchange rate remained constant at the average for the first six months of2003.  This gain was substantially offsetby a corresponding increase in expenses.

 

*ATM sales. *ATM sales were $27.4 million for thefirst six months of 2004 compared to $19.2 million for the first six months of2003.  The $8.2 million increase in ATMsales was a combination of a $7.8 million increase in transaction-based salesand a $1.0 million increase in service sales, which were partially offset by a$638,000 decrease in sales of ATM equipment.

 

The$7.8 million increase in transaction-based sales resulted from:

 
| • | Expansion of  our ATM network - The average number of transacting ATMs in our network  during the first six months of 2004 increased by 23.0% compared to the same  period in 2003. The increase of 723 average ATMs reflects 447 ATMs acquired  in the Inkas acquisition in March 2004.                                                                              |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                  |
| • | Increased  withdrawals per ATM - The average number of withdrawals per unit per month  increased by 3.1% to 399 for the first six months of 2004 compared to 387 for  the first six months of 2003.                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                  |
| • | Price  increases - In the second half of 2002 we initiated increases in withdrawal  fees. As a result of the price increases and the increase in the value of the  British pound, the average transaction-based sales generated per withdrawal  transaction increased 12.4% to $2.81 for the first six months of 2004  compared to $2.50 for the same period in 2003. |
|   |                                                                                                                                                                                                                                                                                                                                                                  |
| • | Exchange rate  benefits.                                                                                                                                                                                                                                                                                                                                              |

 

Thevalue of the British pound relative to the U.S. dollar increased for the firstsix months of 2004 compared to same period in 2003, resulting in a $1.7 millionincrease in ATM net sales.  This increasewas substantially offset by the exchange rate-related increase in costs.

 

*Photocopier sales. *Photocopier sales in the first six monthsof 2004 were $27.4 million compared to $26.6 million in the first six months of2003.  The $774,000 increase resultedprimarily from:

 

20

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| •                                                                  | Price  increases - The average sales price per photocopy increased to $.084 in the  first six months of 2004 from $.058 for the same period in 2003 as a result  of our working with merchants to implement price increases in most of our  photocopier locations. The average sales per installed unit per month  increased by 12.0% to $177.26 for the first six months of 2004 compared to  $158.21 for the same period in 2003. |
|-------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                |
| •                                                                  | Exchange rate benefit - The value of  the British pound and Canadian dollar relative to the U.S. dollar increased  for the first six months of 2004 compared to the same period in 2003,  resulting in a $728,000 increase in photocopier sales. This increase was  substantially offset by the exchange rate-related increase in costs.                                                                                            |
|                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                |
| The price increase and  exchange rate benefit were partially offset by: |
|                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| •                                                                  | Declining  photocopy volume - Continuing a trend, photocopy volume declined by 29.1% for  the first six months of 2004 compared to the same period in 2003, to 324.5  million copies from 457.9 million copies, due to a combination of:                                                                                                                                                                                            |
|                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                    | •                                                                                                                                                                                                                                                                                                                                                                                                                              | a decline in  installed photocopiers to an average of 25,719 in the first six months of  2004 from an average of 27,999 for the same period in 2003, as we continued a  program of eliminating lower volume sites that were either unprofitable or  marginally profitable; and |
|                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|                                                                    | •                                                                                                                                                                                                                                                                                                                                                                                                                              | a decline in  the average number of photocopies made per unit per month to 2,103 for the  first six months of 2004 from 2,725 for the same period in 2003 due primarily  to the price increases, as well as competition from alternative media and  copying services. |
|                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |  |

 

*Software development sales. *Software development sales decreased to $14,000 forthe first six months of 2004 from $954,000 for the first six months of2003.  The decrease resulted from thesubstantial completion of a development contract with NCR Corporation during the first quarter of 2003.  We do not expect software development toprovide significant additional sales in the future.

 

**Sales Discounts**

 

Sales discounts on a consolidated basis as apercentage of sales were 20.5% in the first six months of 2004 and 16.8% in thefirst six months of 2003.  Salesdiscounts in the ATM business increased to 24.3% of transaction-based sales inthe first six months of 2004 from 17.1% in the first six months of 2003.  The increased discounts were caused by anincrease in the percentage of merchants who provide their own cash in theirATMs and merchants for whom we provide only processing services.  Most of the ATM contracts acquired in theInkas and Mighty Cash transactions are either self-fill or processing onlycontracts.  Sales discounts in thephotocopier business remained constant at 18.0% of sales.

 

21

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**Cost of Sales**

 

Cost of sales on a consolidated basis decreasedto 41.6% of sales in the first six months of 2004, from 49.3% in the first sixmonths of 2003.  Cost of sales as apercentage of sales declined in both the ATM and photocopier segments.

 

*ATM cost of sales. *Cost of sales in the ATM businessincreased by $2.2 million to $11.6 million in the first six months of 2004 from$9.3 million for the same time period in 2003, as a result of:

 
| • | Expansion of  our ATM network;                                                                                                                                                                                                                                      |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                |
| • | Increase in  the number of withdrawals per ATM; and                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                |
| • | Exchange rate  effects - The ATM segment reported approximately $944,000 more in cost of  sales in the first six months of 2004 than it would have reported had the  exchange rate for the British pound remained at the average for the first six  months of 2003. |

 

Costof sales from ATM operations (excluding sales of ATM equipment and the relatedcost of sales) declined to 42.3% of sales from 48.2% in the first six months of2003.  This percentage decrease resultedfrom increases in the amount of sales per transaction.

 

*Photocopier cost of sales. *Costof sales in our photocopier business decreased by $1.9 million, to $11.1million in the first six months of 2004 from $13.1 million for the same timeperiod in 2003, due primarily to a decrease in photocopy volume.  The reduction in photocopy volume resulted ina decline in the cost of paper and other supplies by $812,000, a reduction indepreciation by $594,000, and a reduction in third party servicers’ andinstallation fees by $238,000.  The costof labor in photocopy cost of sales was reduced by $289,000 due to the decreasein volume and the corresponding decrease in maintenance requirements.

 

Thesesavings were partially offset by exchange rate effects, as we reported approximately$342,000 more in cost of sales in the first six months of 2004 than we wouldhave reported had the exchange rates for the British pound and Canadian dollarremained at the average for same time period in 2003.

 

**Selling, General andAdministrative Expense**

 

Selling, general and administrative expenseincreased by $519,000 to $12.6 million in the first six months of 2004 from$12.1 million in the first six months of 2003. Of the increase, $459,000 was due to the increase in the value of theBritish pound and Canadian dollar.

 

**Interest Expense**

 

Interestexpense decreased by $71,000 to $497,000 in the first six months of 2004 from$568,000 in the first six months of 2003. The decrease was primarily due to decreases in our

 

22

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outstanding bankborrowings and capital leases as well as a reduction in interest rates on thebank borrowings.

 

**Tax Rate**

 

Oureffective tax rate for the first six months of 2004 was 30.1%, resulting in atax provision of $2.3 million.  For thefirst six months of 2003, our effective tax rate was 36.1%, and the taxprovision was $1.1 million.  Theeffective tax rate in the first six months of 2004 was lower because wereleased a valuation allowance in the second quarter of 2004.

 

**Net Income**

 

Net income for the first six months of2004 was $5.2 million, an increase of $3.3 million over the $1.9 million in netincome for the same period in 2003. After giving effect to Series A preferred stock dividends and a portionof undistributed income allocated to the preferred shareholders, the net incomeavailable to common shareholders was $3.8 million in the first six months of2004 and $968,000 in the first six months of 2003.  Increased ATM transactions and highertransaction fees for our ATMs and photocopiers primarily contributed to the$4.9 million increase in our gross profit to $20.8 million in the first sixmonths of 2004.  Increases in selling,general and administrative expense of $519,000 and the increase in theprovision for income taxes of $1.2 million partially offset the increased grossprofit.

 

 

**Liquidity and Capital Resources**

 

**General**

 

Our principal ongoingfunding requirements are for working capital to finance the continued growth ofour business (including acquisitions), service bank debt and service leaseobligations.  During the first six monthsof 2004, we generated $11.4 million in cash flows from operating activities ascompared to $4.9 million in the same period in 2003.  In addition, the exercise of stock optionsprovided $3.6 million in cash during the first six months of 2004.  These cash flows in 2004 have been used forthe following purposes:

 
| • | to expand our ATM network  by acquiring a 20-ATM portfolio, Inkas Financial Corp., Ltd. and Mighty Cash  Financial Services, Inc.; |
|--------|------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                               |
| • | to reduce long-term debt  by $2.2 million;                                                                                         |
|   |                                                                                                                               |
| • | to make $3.3 million in  equipment purchases, primarily ATM equipment; and                                                         |
|   |                                                                                                                               |
| • | to make payments of $1.1  million on capital lease obligations.                                                                    |

 

We had cash and cashequivalents of $6.5 million at June 30, 2004, compared to $5.7 million atDecember 31, 2003, and net working capital of $3.2 million atJune 30, 2004 compared to net working capital of $2.3 million atDecember 31, 2003.

 

23

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We believe that the cost ofupgrading our ATMs to comply with new industry standards known as triple DESand EMV will be approximately $2.0 million in the United States andapproximately $4.5 million in the United Kingdom, based upon exchange rates asof June 30, 2004.  These costs willbe capitalized and depreciated over the remaining life of each asset.  As of June 30, 2004, approximately 10% of ourATMs were compliant with either triple DES or EMV.

 

                In June 2004 wefiled a Form S-3 Registration Statement with the Securities and ExchangeCommission.  The purpose of the filing isto register 5,175,000 shares of our common stock which we expect to sell duringthe third quarter of 2004 after the SEC declares the Form S-3 to be effective.  We expect to use the proceeds from the salefor the acquisitions of ATMs, which may include the purchase of ATM equipment,the acquisition of ATM systems owned by third parties or the acquisition ofcompanies owning ATMs and for working capital and general corporate purposes.

 

**U.S. Credit Facility**

 

In May 2004 we accepted acommitment letter to modify and increase our credit facility with Bank ofAmerica on more favorable terms, including a reduction in the interest ratefrom prime plus 50 basis points to an interest rate that is capped at prime,and may be less depending upon our leverage ratio.  Based upon our existing leverage ratios, theinterest rate on the modified facility would be prime minus 50 basispoints.  The modification, if finalized,will increase credit availability under the facility to $20.0 million, anincrease of $2.8 million over the existing facility, with a maturity date ofJune 2007.  As of June 30, 2004, $8.0million was outstanding under the existing facility.

 

**U.S. Vault Cash Facility**

 

                TRM Inventory Funding Trust (the “Trust”) providescash to be placed in our United States ATM machines (“vault cash”) by accessingcommercial paper markets.  Because we arethe primary beneficiary of the Trust, the Trust’s accounts are included in ourconsolidated financial statements. Pursuant to the trust agreement, up to $50 million of cash is availablefor use in our United States ATM network, of which $40 million was being usedat June 30, 2004.

 

**U.K. Vault Cash Facility**

 

Our U.K. ATM businessobtains vault cash under an agreement with a local bank.  Vault cash obtained under the program remainsthe property of the bank, and is not included on our balance sheet.  We are insured against risk of loss while thecash is in or being distributed to our ATM network.  During the first six months of 2004, weaccessed amounts ranging from £25.0 million ($45.5 million as of June 30,2004) to £36.1 million ($65.5 million as of June 30, 2004) under thisarrangement and paid a total of $1.5 million for use of the cash.

 

24

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**Contractual Commitments and Obligations**

 

Contractual commitments andobligations as of June 30, 2004 (in thousands):

 
| ** **                               | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------------|------------|----------------------------|------------|
| **Contractual obligations**              | ** ** | **Total**                  | ** ** | **July 1 - December 31,  2004** | ** ** | **2005-2006** | ** ** | **2007-2008** | ** ** | **After 2008** | ** ** |
|                                     |       |                       |       |   |   |   |   |   |   |   |   |
| TRM Corporation and subsidiaries         |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term bank debt                      |       | $                          | 8,183      |   | $ | 1,644 |   | $ | 6,539 |   | $ | — |   | $ | — |   |
| Capital lease obligations                |       | 4,069                      |       | 1,245 |   | 2,289 |   | 535 |   | — |   |
| Operating leases                         |       | 8,813                      |       | 1,463 |   | 4,583 |   | 1,500 |   | 1,267 |   |
| Total TRM Corporation and subsidiaries   |       | 21,065                     |       | 4,352 |   | 13,411 |   | 2,035 |   | 1,267 |   |
| TRM Inventory Funding Trust note payable |       | 38,494                     |       | — |   | — |   | 38,494 |   | — |   |
| Total contractual cash obligations       |       | $                          | 59,559     |   | $ | 4,352 |   | $ | 13,411 |   | $ | 40,529 |   | $ | 1,267 |   |
|                                          |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As of June 30, 2004,$4.5 million was accrued for unpaid Series A preferred stock dividends.  We ceased paying dividends on our Series Apreferred stock after 2000 as a result of the prohibitions contained in ourcredit facility with Bank of America and cash flow concerns.  Payment was resumed in the third and fourthquarters of 2003 and first and second quarters of 2004 pursuant to waiversgranted by Bank of America.  We havereceived a waiver for the third quarter of 2004.

 

**Critical Accounting Policies andEstimates**

 

Our critical accountingpolicies and estimates as of June 30, 2004 are consistent with thosediscussed in our Form 10-K for the year ended December 31, 2003.

 

**New Accounting Standards andEffects on Earnings Per Share**

 

In March 2004, the Financial AccountingStandards Board approved Emerging Issues Task Force (“EITF”) Issue No.03-6 “Participating Securities and the Two-Class Method under FASB StatementNo. 128, Earnings Per Share.”  EITF03-6 supersedes the guidance in Topic No. D-95, “Effect of ParticipatingConvertible Securities on the Computation of Basic Earnings per Share,” andrequires the use of the two-class method for the computation of basic earningsper share for companies that have participating securities.  The two-class method is an earningsallocation formula that determines earnings per share for each class of commonstock and participating security according to dividends declared (oraccumulated) and participation rights in undistributed earnings.  In addition, EITF 03-6 addresses other formsof participating securities, including options, warrants, forwards and othercontracts to issue an entity’s common stock, with the exception of stock-basedcompensation (unvested options and restricted stock) subject to the provisionsof APB Opinion 25 and SFAS 123.  EITF03-6 is effective for reporting periods beginning after March 31, 2004 andmust be applied by restating previously reported earnings per share.  We have adopted the provisions of EITF 03-6in the second quarter of 2004, and, accordingly, have restated previouslyreported earnings per share.  Theapplication of EITF 03-6 as of June 30, 2004 has resulted in a reduction in ourper share earnings, both basic and diluted, for the three and six-month periodsended June 30, 2003.  EITF 03-6provides a new method for calculating per share earnings and does not otherwiseaffect our financial statements or have any economic or operating impact on us.

 

 

25

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**ITEM 3.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to market risk from changes in interest rates andforeign currency exchange rates, which could impact our results of operationsand financial condition.  We do not holdor issue derivative commodity instruments or other financial instruments fortrading purposes.

 

**Interest Rate Risk**

** **

We invest our cash in money market funds.  The income earned from these money marketfunds is subject to changes in interest rates. Interest income was $53,000 and $83,000 for the three and six-monthperiods ended June 30, 2004, respectively, and $25,000 and $48,000,respectively, for the same periods in 2003. An immediate 10% change in interest rates earned would not have a materialeffect on our net income.

 

Additionally, we are exposed to interest rate risk related to our bankloans.  Interest on our term loan fromBank of America is at the bank’s prime rate plus 0.0% to 0.5% depending on ourleverage ratio as defined in the loan agreement.  We also have the option of electing analternative interest rate based on the bank’s London Interbank Offered Rate orits Interbank Offered Rate.  As ofJune 30, 2004, the interest rate on the term loan was 3.63%.  Interest on short-term borrowings under ourrevolving line of credit is at the bank’s prime rate minus one-halfpercent.  As of June 30, 2004, thisrate was 3.5%.  Borrowings from Bank ofAmerica totaled $15 million at June 30, 2003 and $8 million atJune 30, 2004.  Interest expenserelating to these borrowings was $99,000 and $197,000 for the three andsix-month periods ended June 30, 2004, respectively, and $195,000 and$449,000, respectively, for the same periods in 2003.  If the interest rate for our $8 millionborrowings from Bank of America at June 30, 2004 increased by 1%, ourinterest expense would increase by $80,000 per year.

 

The Trust borrows money pursuant to a note funded by the sale ofcommercial paper.  The Trust owed $29.5million at June 30, 2003 and $38.5 million at June 30, 2004 underthis arrangement.  The weighted averageinterest rate on these borrowings at June 30, 2004 was 3.0%.  Interest and fees relating to the Trust’sborrowings, which are included in cost of sales in our consolidated financialstatements, totaled $377,000 and $273,000 for the quarters ended June 30,2003 and 2004, respectively, and $588,000 and $506,000 for the six-monthperiods ended June 30, 2003 and 2004, respectively.  If the interest rate for the Trust’sborrowings at June 30, 2004 increased by 1%, to a weighted average of 4%,our cost of sales would increase by $385,000 per year.

 

Our United Kingdom ATM business obtains vault cash under an agreementwith a local bank.  Vault cash obtainedunder the program remains the property of the bank, and the cash is notincluded in our consolidated balance sheet. During the first six months of 2003 we accessed

 

26

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amounts ranging from £23.3million ($42.4 million as of June 30, 2004) to £35.4 million ($64.3million as of June 30, 2004).  During the first six months of 2004 weaccessed amounts ranging from £25.0 million ($45.5 million as of June 30,2004) to £36.1 million ($65.5 million as of June 30, 2004).  Fees thatwe pay for use of the cash are related to the bank’s interest rates. Based onthe £30.7 million balance being used at June 30, 2004, if the cost of thecash increased by 1%, our cost of sales would increase by £307,000 ($558,000 asof June 30, 2004) per year.

 

**Foreign Currency Risk**

 

We have international subsidiaries subject to foreign currency exchangerate exposure.  We realize sales from,and pay the expenses of our international operations in British pounds andCanadian dollars.  Accordingly, we areexposed to the risk of foreign exchange rate fluctuations.

 

Foreign exchange rate transaction gains, net of losses, were $125,000and $111,000 for the three and six-month periods ended June 30, 2004.  Foreign exchange transactions resulted in again of $8,000 for the three months ended June 30, 2003, and a loss of$5,000 for the six months ended June 30, 2003.  If foreign currency rates were to fluctuatefrom rates at June 30, 2004, our financial position might be materiallyaffected.  Assuming a 10% appreciation inforeign currency values versus the U.S. dollar from the quoted foreign currencyexchange rates at June 30, 2004, the potential increase in the fair valueof foreign currency-denominated assets and liabilities would have been anaggregate of approximately $924,000. Assuming a 10% appreciation in foreign currency values versus the U.S.dollar from the average for the quarter ended June 30, 2004, the impact onsales would have been an aggregate increase of approximately $1.2 million, or4.2%.  The impact on net income for the threemonths ended June 30, 2004 would have been an aggregate increase ofapproximately $182,000, or 6.7%. Assuming a 10% depreciation in foreign currency values versus the U.S.dollar from the quoted foreign currency exchange rates at June 30, 2004, thepotential decrease in the fair value of foreign currency-denominated assets andliabilities would have been an aggregate of approximately $924,000.  Assuming a 10% depreciation in foreigncurrency values versus the U.S. dollar from the average quoted foreign currencyexchanges rates for the quarter ended June 30, 2004, the impact on saleswould have been an aggregate decrease of $1.2 million, or 4.2%.  The impact on net income for the three monthsended June 30, 2004 would have been an aggregate decrease of approximately$182,000, or 6.7%.

## ** **

**ITEM 4.  CONTROLS AND PROCEDURES**

 

Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in our Securities and Exchange Act of 1934reports is recorded, processed, summarized and reported within the periodsspecified in the SEC’s rules and forms, and that such information isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and our Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure. In designing and evaluating the disclosure controls and disclosures, ourmanagement recognized that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control

 

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objectives, and our management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.

 

Underthe supervision of our Chief Executive Officer, Chief Financial Officer andPrincipal Accounting Officer and with the participation of our disclosurecommittee appointed by such officers, we have carried out an evaluation of theeffectiveness of our disclosure controls and procedures as of the end of theperiod covered by this report.  Basedupon that evaluation, our Chief Executive Officer, Chief Financial Officer andPrincipal Accounting Officer concluded that our disclosure controls andprocedures are effective.

 

Therehave been no significant changes in our internal controls over financialreporting that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting during our most recentfiscal quarter.

 

 

## **PART II - OTHER INFORMATION**

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

On May 18, 2004, at ourannual meeting of shareholders, the holders of our outstanding common stock andSeries A preferred stock took theactions described below.  As of therecord date for the annual meeting, 7,184,565 shares of common stock and1,777,778 shares of Series A preferred stock were issued and outstanding.  Each share of preferred stock is entitled toone vote per share and votes together with the common stock as one class.

 

The shareholders electedeach of Nancy Alperin, Hersh Kozlov and Lance Laifer to serve on our Board ofDirectors for the next three years by the votes indicated below:

 
| ** **    | ** ** | **For**   | ** ** | **Withheld** | ** ** |
|---------------|------------|-----------|------------|--------------|------------|
| Nancy Alperin |       | 6,452,090 |       | 40,522       |       |
| Hersh Kozlov  |       | 6,271,360 |       | 221,252      |       |
| Lance Laifer  |       | 6,451,790 |       | 40,822       |       |

 

Daniel G. Cohen, Edward E.Cohen, Slavka B. Glaser, Alan D. Schreiber, M.D., Harmon S. Spolan andKenneth L. Tepper will continue their terms of office as directors.

 

Additionally, the shareholders ratified the selection ofPricewaterhouseCoopers LLP as our registered public accounting firm for the2004 fiscal year.  The result of thevotes was 6,489,021 for and 750 against. No other business came before the meeting or any adjournment thereof.

 

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**ITEM 6.        EXHIBITS ANDREPORTS ON FORM 8-K**

 

**(****a)           Exhibits**

 
|   |
|--------|
| 10.1   | Second Amendment to Business Loan Agreement dated April 30,  2004, between TRM Corporation and Bank of America, N.A. |
|   |   |
| 10.2   | Third Amendment to Business Loan Agreement dated May  31, 2004,  between TRM Corporation and Bank of America, N.A. |
|   |   |
| 10.3   | Fourth Amendment to Business Loan Agreement dated June 30, 2004,  between TRM Corporation and Bank of America, N.A. |
|   |   |
| 31.1   | Certification  of Chief Executive Officer of TRM Corporation pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|   |   |
| 31.2   | Certification of Chief Financial Officer of  TRM Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|   |   |
| 31.3   | Certification of Principal Accounting  Officer of TRM Corporation pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002. |
|   |   |
| 32.1   | Certification  of Chief Executive Officer of TRM Corporation pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
|   |   |
| 32.2   | Certification  of Chief Financial Officer of TRM Corporation pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
|   |   |
| 32.3   | 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. |

 

**(b)           Reports on Form 8-K.**

 

Current Report on Form 8-K dated April 29, 2004,reporting our results of operations for the quarter ended March 31, 2004.

 

Current Report on Form 8-K dated June 17,2004, reporting that we announced completion of an acquisition in Canada.

 

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##### **SIGNATURE**

 

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 theundersigned, thereunto duly authorized.

 
| ** ** | ** **      | **TRM CORPORATION** |
|------------|-----------------|---------------------|
|       |            |                |   |
| Date:      | August 16, 2004 | By:                 | /s/ Daniel E. O’Brien |
|       |            |                | Daniel E. O’Brien |
|       |            |                | Chief Financial Officer |

 

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