**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

 

**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 September 30, 2003**                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                   |
| **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**                                                                                                                                                                                                                                                                    |
| (Exact name 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) (Zip Code)                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                   |
| **(503) 257-8766**                                                                                                                                                                                                                                                                     |
| (Registrant’s telephone  number, including area code)                                                                                                                                                                                                                             |

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

YES  ý    NO o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act).

 

YES  o    NO ý

 

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

 

| **CLASS**    |   | **OUTSTANDING AT SEPTEMBER 30, 2003** |
|--------------|--------|--------------------------------------------|
| Common Stock |   | 7,059,790                                  |

 

 

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# **PART I—FINANCIAL INFORMATION**

# ** **

**ITEM 1. FINANCIAL STATEMENTS**

 

**TRM Corporation**

**Consolidated Balance Sheets**

**(In thousands)**

** **
|                                                                                                                           |   | **December 31,  2002** |       | **September 30,  2003** |       |
|--------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|------------------------------|------------|
|                                                                                                                           |   |                        |       | **(unaudited)**              |       |
| **Assets**                                                                                                                     |   |                        |       |                         |       |
| Current assets:                                                                                                                |   |                        |       |                         |       |
| Cash and  cash equivalents                                                                                                     |   | $                           | 2,127      |                         | $          | 6,917 |   |
| Accounts receivable, net                                                                                                       |   | 6,084                       |       | 5,614                        |       |
| Inventories, net                                                                                                               |   | 947                         |       | 1,391                        |       |
| Prepaid expenses and other                                                                                                     |   | 778                         |       | 1,369                        |       |
| Deferred tax asset                                                                                                             |   | 876                         |       | 727                          |       |
| Total current assets                                                                                                           |   | 10,812                      |       | 16,018                       |       |
| Equipment, less  accumulated depreciation                                                                                      |   | 67,916                      |       | 64,341                       |       |
| Intangible assets                                                                                                              |   | 72                          |       | 72                           |       |
| Other assets                                                                                                                   |   | 1,773                       |       | 1,380                        |       |
| Total assets                                                                                                                   |   | $                           | 80,573     |                         | $          | 81,811 |   |
|                                                                                                                           |   |                        |       |                         |       |
| **Liabilities and Shareholders’  Equity**                                                                                 |   |                        | ** ** |                         | ** ** |
| Current  liabilities:                                                                                                          |   |                        |       |                         |       |
| Accounts payable                                                                                                               |   | $                           | 2,231      |                         | $          | 1,394 |   |
| Accrued expenses                                                                                                               |   | 7,932                       |       | 6,932                        |       |
| Income taxes payable                                                                                                           |   | 3                           |       | —                       |       |
| Current portion of  litigation settlement                                                                                      |   | 1,050                       |       | —                       |       |
| Current portion of long-term debt                                                                                              |   | 21                          |       | 3,022                        |       |
| Current  portion of obligations under capital leases                                                                           |   | 1,508                       |       | 2,053                        |       |
| Total current liabilities                                                                                                      |   | 12,745                      |       | 13,401                       |       |
|                                                                                                                           |   |                        |       |                         |       |
| Litigation settlement                                                                                                          |   | 738                         |       | —                       |       |
| Long-term debt                                                                                                                 |   | 16,709                      |       | 11,293                       |       |
| Obligations under capital  leases                                                                                              |   | 2,579                       |       | 2,905                        |       |
| Deferred tax liability                                                                                                         |   | 2,203                       |       | 4,059                        |       |
| Other long-term  liabilities                                                                                                   |   | 128                         |       | 91                           |       |
| Preferred dividends  payable                                                                                                   |   | 3,377                       |       | 4,502                        |       |
| Total liabilities                                                                                                              |   |                        | 38,479     |                         |       | 36,251 |   |
|                                                                                                                           |   |                        |       |                         |       |
| Shareholders’ equity:                                                                                                     |   |                        |       |                         |       |
| Preferred  stock, no par value  Authorized 5,000 shares; 1,778 shares issued and outstanding  (liquidation preference $20,003) |   |                        | 19,798     |                         |       | 19,798 |   |
| Common  stock, no par value  50,000 shares authorized; 7,060 shares issued and outstanding                                     |   | 19,026                      |       | 19,026                       |       |
| Additional  paid-in capital                                                                                                    |   | 63                          |       | 63                           |       |
| Accumulated other  comprehensive income (loss)                                                                                 |   | (738                        | )          | 432                          |       |
| Retained earnings                                                                                                              |   | 3,945                       |       | 6,241                        |       |
| Total shareholders’ equity                                                                                                |   | 42,094                      |       | 45,560                       |       |
| Total liabilities and  shareholders’ equity                                                                               |   | $                           | 80,573     |                         | $          | 81,811 |   |

 

See accompanying notes to consolidated financial statements.

 

2

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**TRM Corporation**

# **Consolidated Statements of Operations**

**(unaudited)**

**(In thousands, except per share data)**

 
|                                                                      |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|---------------------------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                                                                      |   | **2002**                                   |   | **2003**                                  |   | **2002** |   | **2003** |   |
| Sales                                                                     |   | $                                          | 21,675 |                                      | $      | 24,097 |   | $ | 63,848 |   | $ | 70,877 |   |
| Less discounts                                                            |   | 3,664                                      |   | 4,271                                     |   | 11,025 |   | 12,148 |   |
| Net sales                                                                 |   | 18,011                                     |   | 19,826                                    |   | 52,823 |   | 58,729 |   |
| Cost of sales                                                             |   | 10,794                                     |   | 10,996                                    |   | 32,439 |   | 34,032 |   |
| Gross profit                                                              |   | 7,217                                      |   | 8,830                                     |   | 20,384 |   | 24,697 |   |
| Selling, general and  administrative expense                              |   | 6,375                                      |   | 6,061                                     |   | 19,641 |   | 18,124 |   |
| Operating income                                                          |   | 842                                        |   | 2,769                                     |   | 743 |   | 6,573 |   |
| Interest expense                                                          |   | 357                                        |   | 232                                       |   | 1,202 |   | 800 |   |
| Other expense, net                                                        |   | 242                                        |   | 166                                       |   | 243 |   | 428 |   |
| Income (loss) before  minority interest                                   |   | 243                                        |   | 2,371                                     |   | (702 | ) | 5,345 |   |
| Minority interest in  losses of consolidated subsidiary                   |   | —                                     |   | —                                    |   | 72 |   | — |   |
| Income (loss) from  continuing operations before income taxes             |   | 243                                        |   | 2,371                                     |   | (630 | ) | 5,345 |   |
| Provision (benefit) for  income taxes                                     |   | 61                                         |   | 851                                       |   | (336 | ) | 1,924 |   |
| Income (loss) from  continuing operations                                 |   | 182                                        |   | 1,520                                     |   | (294 | ) | 3,421 |   |
| Loss from discontinued  operations                                        |   | —                                     |   | —                                    |   | (264 | ) | — |   |
| Net income (loss)                                                         |   | $                                          | 182    |                                      | $      | 1,520 |   | $ | (558 | ) | $ | 3,421 |   |
|                                                                      |   |                                       |   |                                      |   |   |   |   |   |
| Basic and diluted per  share information:                                 |   |                                       |   |                                      |   |   |   |   |   |
| Income (loss) from  continuing operations                                 |   | $                                          | 182    |                                      | $      | 1,520 |   | $ | (294 | ) | $ | 3,421 |   |
| Preferred stock dividends                                                 |   | (375                                       | )      | (375                                      | )      | (1,127 | ) | (1,125 | ) |
| Income (loss) from  continuing operations availableto common shareholders |   | $                                          | (193   | )                                         | $      | 1,145 |   | $ | (1,421 | ) | $ | 2,296 |   |
|                                                                      |   |                                       |   |                                      |   |   |   |   |   |
| Weighted average common  shares outstanding                               |   | 7,060                                      |   | 7,060                                     |   | 7,060 |   | 7,060 |   |
| Dilutive effect of stock  options                                         |   | —                                     |   | 419                                       |   | — |   | 151 |   |
| Weighted average common  shares outstanding, assumingdilution             |   | 7,060                                      |   | 7,479                                     |   | 7,060 |   | 7,211 |   |
| Basic income (loss) per  share:                                           |   |                                       |   |                                      |   |   |   |   |   |
| From continuing operations                                                |   | $                                          | (.03   | )                                         | $      | .16 |   | $ | (.20 | ) | $ | .33 |   |
| From discontinued  operations                                             |   | —                                     |   | —                                    |   | (.04 | ) | — |   |
| Net income (loss)                                                         |   | $                                          | (.03   | )                                         | $      | .16 |   | $ | (.24 | ) | $ | .33 |   |
| Diluted income (loss) per  share:                                         |   |                                       |   |                                      |   |   |   |   |   |
| From continuing operations                                                |   | $                                          | (.03   | )                                         | $      | .15 |   | $ | (.20 | ) | $ | .32 |   |
| From discontinued  operations                                             |   | —                                     |   | —                                    |   | (.04 | ) | — |   |
| Net income (loss)                                                         |   | $                                          | (.03   | )                                         | $      | .15 |   | $ | (.24 | ) | $ | .32 |   |

 

See accompanying notes to consolidated financial statements.

 

3

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**TRM CorporationConsolidated Statement of Shareholders’ Equity(unaudited)(In thousands)**

 
|                                          |       | **Comprehensive  Income** |       |   |        |   |   |   |   |   |   | **Additional  Paid-in  Capital** |   | **Accumulated  Other  Comprehensive  Income (Loss)** |   | **Retained  Earnings** |   | **Total** |   |
|-----------------------------------------------|------------|---------------------------|------------|--------|-------------|--------|--------|--------|--------|--------|--------|---------------------------------------|--------|------------------------------------------------------|--------|------------------------|--------|-----------|--------|
|                                          |       |                      |       |   |        |
| **Preferred**                                 | **Common** |
| **Shares**                                    |       | **Amounts**               | **Shares** |   | **Amounts** |
|                                          |       |                      |       |   |        |   |   |   |   |   |   |                                  |   |                                                 |   |                   |   |      |   |
| **Balances, December 31, 2002**          |       |                      |       | 1,778  |        | $      | 19,798 |   | 7,060  |   | $      | 19,026                                |   | $                                                    | 63     |                   | $      | (738      | )      | $ | 3,945 |   | $ | 42,094 |   |
| Comprehensive income                          |       |                      |       |   |        |   |   |   |   |   |   |                                  |   |                                                 |   |                   |   |      |   |
| Net income                                    |       | $                         | 3,421      |   | —      |   | — |   | — |   | — |                                  | — |                                                 | — |                   | 3,421  |      | 3,421  |   |
| Other comprehensive  income:             |       |                      |       |   |        |   |   |   |   |   |   |                                  |   |                                                 |   |                   |   |      |   |
| Foreign currency  translation adjustment |       | 1,170                     |       | — |        | — |   | — |   | — |   | —                                |   | 1,170                                                |   | —                 |   | 1,170     |   |
| Comprehensive income                          |       | $                         | 4,591      |   |        |   |   |   |   |   |   |                                  |   |                                                 |   |                   |   |      |   |   |
| Preferred stock dividends                     |       |                      |       | — |        | — |   | — |   | — |   | —                                |   | —                                               |   | (1,125                 | )      | (1,125    | )      |
| **Balances, September 30, 2003**         |       |                      |       | 1,778  |        | $      | 19,798 |   | 7,060  |   | $      | 19,026                                |   | $                                                    | 63     |                   | $      | 432       |   | $ | 6,241 |   | $ | 45,560 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

4

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**TRM Corporation**

**Consolidated Statements of Cash Flows**

**(unaudited)**

**(In thousands)**

 
|                                                                                      |   | **Nine Months Ended  September 30,** |   |
|-------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                      |   | **2002**                                  |   | **2003** |   |
| **Operating activities:**                                                                 |   |                                      |   |   |   |
| Net income  (loss)                                                                        |   | $                                         | (558   | ) | $ | 3,421 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |   |                                      |   |   |   |
| Restricted  cash                                                                          |   | (400                                      | )      | — |   |
| Depreciation  and amortization                                                            |   | 7,183                                     |   | 7,359 |   |
| Minority  interest in losses of consolidated subsidiary                                   |   | (72                                       | )      | — |   |
| Other                                                                                     |   | 46                                        |   | (12 | ) |
| Loss on  disposal of equipment and vehicles                                               |   | 493                                       |   | 687 |   |
| Changes in  items affecting operations:                                                   |   |                                      |   |   |   |
| Accounts  receivable                                                                      |   | (593                                      | )      | 421 |   |
| Inventories                                                                               |   | 690                                       |   | (367 | ) |
| Income tax  receivable                                                                    |   | (165                                      | )      | — |   |
| Prepaid  expenses and other                                                               |   | 142                                       |   | (593 | ) |
| Accounts  payable                                                                         |   | (3,773                                    | )      | (888 | ) |
| Accrued  expenses                                                                         |   | 199                                       |   | (941 | ) |
| Deferred tax liability                                                                    |   | 731                                       |   | 1,901 |   |
| Litigation settlement                                                                     |   | —                                    |   | (1,738 | ) |
| Total  operating activities                                                               |   | 3,923                                     |   | 9,250 |   |
| **Investing activities:**                                                                 |   |                                      |   |   |   |
| Proceeds  from sale of equipment                                                          |   | 916                                       |   | 477 |   |
| Capital  expenditures                                                                     |   | (3,367                                    | )      | (1,074 | ) |
| Other                                                                                     |   | (341                                      | )      | (41 | ) |
| Total  investing activities                                                               |   | (2,792                                    | )      | (638 | ) |
| **Financing activities:**                                                                 |   |                                      |   |   |   |
| Borrowings  on line of credit                                                             |   | 15,042                                    |   | 8,128 |   |
| Repayment of  line of credit                                                              |   | (17,074                                   | )      | (24,772 | ) |
| Borrowings  on term loan                                                                  |   | —                                    |   | 14,228 |   |
| Principal  payments on capital lease obligations                                          |   | (74                                       | )      | (1,328 | ) |
| Purchase of  minority interest                                                            |   | (60                                       | )      | — |   |
| Total financing  activities                                                               |   | (2,166                                    | )      | (3,744 | ) |
| Effect of  exchange rate changes                                                          |   | 1,801                                     |   | (78 | ) |
| Net increase  in cash and cash equivalents                                                |   | 766                                       |   | 4,790 |   |
| Beginning  cash and cash equivalents                                                      |   | 1,598                                     |   | 2,127 |   |
| Ending cash  and cash equivalents                                                         |   | $                                         | 2,364  |   | $ | 6,917 |   |
|                                                                                      |   |                                      |   |   |   |
| Supplemental  disclosure of non-cash transactions:                                        |   |                                      |   |   |   |
| Disposal of  assets under a non-cash sales agreement:                                     |   |                                      |   |   |   |
| Current assets                                                                            |   | $                                         | 31     |   | $ | — |   |
| Non-current assets                                                                        |   | 3,307                                     |   | — |   |
| Negative  goodwill recorded                                                               |   | 227                                       |   | — |   |
| Minority  interest eliminated                                                             |   | 3,565                                     |   | — |   |
| Assets  acquired under capital lease obligations                                          |   | 2,559                                     |   | 1,915 |   |
| ATMs  transferred to inventory from fixed assets                                          |   | —                                    |   | 1,474 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

5

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# **TRM Corporation**

# ** **

**Notes to Condensed Consolidated FinancialStatements (unaudited)**

 

1.                                       InterimFinancial Data

 

The consolidated financial statements of TRMCorporation and its subsidiaries (collectively, “TRM” or the “Company”)included herein have been prepared by the Company, without audit, pursuant tothe rules and regulations of the Securities and Exchange Commission and reflectall adjustments, consisting only of normal recurring adjustments, which, in theopinion of management, are necessary for a fair statement of the results of theinterim periods.  These consolidatedfinancial statements should be read in conjunction with the Company’s latestannual report on Form 10-K.  Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted pursuant to such rules and regulations.  The results of operations for the periodspresented are not necessarily indicative of the results to be expected for anysubsequent interim period or for the year ended December 31, 2003.

 

2.                                       FinancialStatements Reclassification

 

Reclassifications have been made to amounts in prior years to conformto the current year presentation.  Thesechanges had no effect on previously reported results of operations orshareholders’ equity.

 

3.                                       NetIncome (Loss) Per Share

 

Basic anddiluted net income (loss) per share are based on the weighted average number ofshares outstanding during each period, with diluted including the effect ofpotentially dilutive securities. In calculating basic net income (loss) pershare, dividends for preferred stock are deducted to arrive at income (loss)available for common shareholders. For diluted net income (loss) per share, thecalculation assumes the conversion of common stock equivalents including theconversion of preferred stock unless such conversion is antidilutive. Weightedaverage common shares outstanding, assuming dilution, include the incrementalshares that would be issued upon the assumed exercise of stock options.  For the three and nine months endedSeptember 30, 2003, approximately 1,173,000 of the Company’s stock optionswere excluded from the calculation of diluted earnings per share because theexercise prices of the stock options were equal to or greater than the averageshare price of the common shares, and therefore their inclusion would have beenantidilutive.  For the three and ninemonths ended September 30, 2002, all of the Company's 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 was excluded from the calculation because its inclusion would also havebeen antidilutive.  These options andpreferred stock could be dilutive in the future.

 

For the thirdquarter 2003, the Company's Board of Directors approved issuance of a dividendpayment in the amount of $375,000 related to its Series A Preferred Shares,which equates to $.05 per fully diluted share. This payment was made in October 2003 pursuant to a waiver from Bank ofAmerica, N.A.

 

6

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4.                                       Inventories(in thousands):

 
|                  |   | **December 31,  2002** |   | **September 30,  2003** |   |
|-----------------------|--------|-----------------------------|--------|------------------------------|--------|
|                  |   |                        |   | **(unaudited)**              |   |
| Parts                 |   | $                           | 934    |                         | $      | 809 |   |
| ATMs held  for resale |   | —                      |   | 562                          |   |
| Paper                 |   | 5                           |   | 7                            |   |
| Toner and  developer  |   | 8                           |   | 13                           |   |
| Total                 |   | $                           | 947    |                         | $      | 1,391 |   |

 

5.                                       Long-termDebt

 

In May 2003, the Company and its primary lender (Bank of America,N.A.) executed a new loan agreement refinancing the Company’s existingrevolving loan.  The new facilityincludes a $15.0 million term loan maturing in March 2006, and a $4.0million revolving line of credit maturing April 30, 2004.

 

As ofSeptember 30, 2003, the Company had a balance of $14.25 millionoutstanding pursuant to the term loan. Interest is due monthly on the term loan, and principal is payable inquarterly installments of $750,000 with the remaining balance due in fullMarch 2006.  Interest on the term loanis at the bank’s prime rate plus 0.0% to 0.5% depending on the Company’sLeverage Ratio as defined in the loan agreement.  The Company also has the option of electing an alternativeinterest rate based on the bank’s LIBOR or IBOR rates.  As of September 30, 2003, interest on$13,000,000 of the term loan was at 3.77%, and interest on the remaining$1,250,000 was at 4.00%.

 

As of September 30, 2003, the Company did not have any outstandingborrowings under the revolving line of credit. However, the bank had issued standby letters of credit on the Company’sbehalf that totaled $1.65 million as of September 30, 2003, reducing thebalance available under the line of credit to $2.35 million. As described inthe “Liquidity and Capital Resources” section of Item 2 of this report,these standby letters of credit guarantee the Company’s performance as Servicerfor the TRM Inventory Funding Trust.

 

As of September 30, 2003 the Company was in compliance with all ofits debt covenants.

 

6.                                       EmployeeStock Options

 

In December 2002, the FinancialAccounting Standards Board (FASB or the “Board”) issued Statement of FinancialAccounting Standards No. 148 (SFAS 148), “Accounting for Stock-BasedCompensation – Transition and Disclosure – an amendment of FASB Statement No. 123.”  This Statement amends SFAS No. 123,“Accounting for Stock-Based Compensation” to provide alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFASNo. 123 to require prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results.  SFAS No. 148 provides for 

 

7

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voluntary adoption of the fair value method for entities with fiscalyears ending after December 15, 2002. The Company has adopted the prominent disclosure provisions.  The following table illustrates the effecton net income and earnings per share if the Company had applied the fair valuerecognition provisions of SFAS No. 123 (in thousands, except per share data).

 
|                                                                                                                                         |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|
|                                                                                                                                         |   | **2002**                                    |   | **2003**                                   |   | **2002** |   | **2003** |   |
|                                                                                                                                         |   |                                        |   |                                       |   |   |   |   |   |
| Net income (loss), as reported                                                                                                               |   | $                                           | 182    |                                       | $      | 1,520 |   | $ | (558 | ) | $ | 3,421 |   |
| Deduct total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | (40                                         | )      | (131                                       | )      | (121 | ) | (170 | ) |
| Pro forma net income (loss)                                                                                                                  |   | $                                           | 142    |                                       | $      | 1,389 |   | $ | (679 | ) | $ | 3,251 |   |
| Net income (loss) per share - basic:                                                                                                         |   |                                        |   |                                       |   |   |   |   |   |
| As reported                                                                                                                                  |   | $                                           | (.03   | )                                          | $      | .16 |   | $ | (.24 | ) | $ | .33 |   |
| Pro forma                                                                                                                                    |   | $                                           | (.03   | )                                          | $      | .14 |   | $ | (.26 | ) | $ | .30 |   |
| Net income (loss) per share -  diluted:                                                                                                 |   |                                        |   |                                       |   |   |   |   |   |
| As reported                                                                                                                                  |   | $                                           | (.03   | )                                          | $      | .15 |   | $ | (.24 | ) | $ | .32 |   |
| Pro forma                                                                                                                                    |   | $                                           | (.03   | )                                          | $      | .14 |   | $ | (.26 | ) | $ | .30 |   |

 

7.                                       SegmentReporting (in thousands)

 

The Companyhas three reportable segments: Photocopy, Automated Teller Machines (ATM) and softwaredevelopment.  Photocopy owns andmaintains self-service photocopiers in retail establishments.  ATM owns and operates ATM machines in retailestablishments and began selling ATM machines in 2003. The software developmentbusiness develops software to deliver products and services through ATMs.

 

The accounting policies of the segments aresubstantially the same as those described in Note 1 of the Company’sannual report on Form 10-K for the year ended December 31, 2002.  The Company evaluates each segment’sperformance based on income or loss before interest, income taxes, and minorityinterest, excluding non-recurring charges. Information regarding the operations of these reportable segments is asfollows:

 
|                                                         |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|--------------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                                                         |   | **2002**                                   |   | **2003**                                  |   | **2002** |   | **2003** |   |
| Net sales:                                                   |   |                                       |   |                                      |   |   |   |   |   |
| Photocopy                                                    |   | $                                          | 10,918 |                                      | $      | 10,514 |   | $ | 34,168 |   | $ | 32,315 |   |
| ATM                                                          |   | 6,238                                      |   | 9,265                                     |   | 16,575 |   | 25,414 |   |
| Software development                                         |   | 855                                        |   | 47                                        |   | 2,080 |   | 1,000 |   |
|                                                         |   | $                                          | 18,011 |                                      | $      | 19,826 |   | $ | 52,823 |   | $ | 58,729 |   |
|                                                         |   |                                       |   |                                      |   |   |   |   |   |
| Income (loss) before interest, taxes and  minority interest: |   |                                       |   |                                      |   |   |   |   |   |
| Photocopy                                                    |   | $                                          | 893    |                                      | $      | 1,141 |   | $ | 2,676 |   | $ | 4,016 |   |
| ATM                                                          |   | (576                                       | )      | 1,837                                     |   | (2,700 | ) | 2,720 |   |
| Software development                                         |   | 283                                        |   | (375                                      | )      | 260 |   | (591 | ) |
|                                                         |   | $                                          | 600    |                                      | $      | 2,603 |   | $ | 236 |   | $ | 6,145 |   |

 

8

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Reconciliation of total income before interest, taxes, and minorityinterest to consolidated income (loss) from continuing operations before incometaxes follows (in thousands).

 
|                                                                                        |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|---------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                        |   | **2002**                                   |   | **2003**                                  |   | **2002** |   | **2003** |   |
|                                                                                        |   |                                       |   |                                      |   |   |   |   |   |
| Income before interest, taxes, and minority  interest                                       |   | $                                          | 600    |                                      | $      | 2,603 |   | $ | 236 |   | $ | 6,145 |   |
| Interest expense                                                                            |   | (357                                       | )      | (232                                      | )      | (1,202 | ) | (800 | ) |
| Minority interest in losses of consolidated  subsidiary                                     |   | —                                     |   | —                                    |   | 72 |   | — |   |
| Add back loss from discontinued operations  included  in software development  segment |   | —                                     |   | —                                    |   | 264 |   | — |   |
| Income (loss) from continuing operations  before  income taxes                         |   | $                                          | 243    |                                      | $      | 2,371 |   | $ | (630 | ) | $ | 5,345 |   |

 

8.                                       NewAccounting Standards

 

In January 2003, the FASB issued FASBInterpretation No. 46 “Consolidation of Variable Interest Entities” (“FIN46”).  FIN 46 addresses consolidation bybusiness enterprises of variable interest entities.  Under thatinterpretation, certain entities known as Variable Interest Entities (“VIEs”)must be consolidated by the primary beneficiary of the entity.  The  primary beneficiary is generallydefined as having the majority of the risks and rewards arising from theVIE.  For VIEs in which a significant(but not majority) variable interest is held, certain disclosures arerequired.  FIN 46 is to be applied immediatelyto variable interest entities created after January 31, 2003, and originallywas to be applied in the first year or interim period beginning afterJune 15, 2003 to variable interest entities in which an enterprise holds avariable interest that it acquired before February 1, 2003.  However, in October 2003, the FASBissued a FASB Staff Position deferring the effective date for applying certainprovisions of FIN 46.  According to theFASB Staff Position, a public entity need not apply the provisions of FIN 46 toan interest held in a VIE until the end of the first interim or annual periodending after December 15, 2003, if the VIE was created beforeFebruary 1, 2003 and the public entity has not issued financial statementsreporting that VIE in accordance with FIN 46 other than in certain requireddisclosures.  The Company intends toadopt the provisions of FIN 46 as of December 31, 2003, and is currentlyassessing the impact the adoption of this interpretation will have on itsresults of operations, financial position and cash flows. The Company believesthat adoption of this interpretation will result in the consolidation of theTRM Inventory Funding Trust in the Company’s financial statements. As ofSeptember 30, 2003, the consolidation of the TRM Inventory Funding Trustwould result in increases in long-term assets of $32.9 million, long-termliabilities of $31.4 million, and minority interest of $1.5 million, and wouldhave no effect on the Company’s results of operations.

 

InApril 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 onDerivative Instruments and Hedging Activities.”  SFAS No. 149 amends and clarifies financial accounting andreporting for derivative instruments, including certain derivative instrumentsembedded in other contracts (collectively referred to as derivatives) and forhedging activities under FASB Statement No. 133, “Accounting for DerivativeInstruments and Hedging 

 

9

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Activities.”  SFAS No. 149 became effective for theCompany prospectively for contracts entered into or modified after June 30,2003.  The adoption of this statementhas not had a material impact on the Company’s results of operations, financialposition or cash flows, as the Company does not hold any derivative or hedginginstruments.

 

InMay 2003, the FASB issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of Both Liabilities and Equity.”  This Statement establishes standards for howan issuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity.  Itrequires that an issuer classify a financial instrument that is within itsscope as a liability (or an asset in some circumstances).  Many of those instruments were previouslyclassified as equity.  SFAS No. 150became effective for the Company for financial instruments entered into ormodified after May 31, 2003, and otherwise became effective at thebeginning of the first interim period beginning after June 15, 2003.  The adoption of SFAS No. 150 has not had amaterial effect on the Company’s financial position, results of operations orcash flows, as the Company does not hold any of this type of instrument.

 

**ITEM2.****                             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Forward-LookingStatements**

 

Information in this Form 10-Q that is not historical in nature,including information about the Company’s goals, plans and expectationsregarding expansion, capital expenditures, expanding the ATM business, revenuesfrom the ATM business becoming a higher percentage of overall revenue,financing of capital expenditures and future cash flows from operations,constitutes forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934.  We are including thisstatement for the purpose of invoking the safe-harbor protection of thesesections.  These forward-lookingstatements are based on the belief of the Company’s management as well asassumptions made by, and information currently available to, the Company’smanagement.  Factors that could causethe actual results to differ materially from the forward-looking statementsinclude, but are not limited to: business conditions in the market areas in which the Company operates,competitive factors, customer demand for the Company’s services, the Company’sability to execute its plans in each business segment successfully, the abilityof the Company to successfully negotiate and enter into additional financingarrangements on favorable terms, the Company’s ability to expand its currentrelationships with retailers and broaden its distribution network, and thevolatility of paper costs.  Many ofthese factors are not within the Company’s control.  Any forward-looking statements should be considered in light ofthese factors as well as risk factors and business conditions discussed in theCompany’s Form 10-K for the year ended December 31, 2002.  Based upon changing conditions, should anyone or more of these risks or uncertainties materialize, or should anyunderlying assumptions prove incorrect, actual results may vary materially fromthose described herein as anticipated, believed, estimated, expected orintended.  The Company does not intendto update these forward-looking statements.

 

10

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**General**

 

TRM Corporation and its subsidiaries (collectively, “TRM” or the“Company”) currently provide financial services and photocopy resources toconsumers through an in-store retail network of approximately 30,000locations.  Financial services consistof surcharge based cash delivery and bank account balance inquiries throughboth owned and leased ATM/cash machines. The Company also provides certainspecialized software engineering focused upon ATM/cash machine operations andcommunications.

 

In September 2003, theCompany’s ATM network had a total of 3,352 revenue-generating machines deployedthroughout the United Kingdom and United States, representing an increase of549 ATM machines (or 19.6%) when compared to the same month in 2002.  The ATM operations produced net sales of$25.4 million during the first nine months of 2003, an increase of $8.8 million(or 53.3%) as compared to the same period in the prior year.  The Company believes that revenues generatedfrom services delivered through its ATM network will represent a greaterpercentage of overall net sales in the future.

 

AtSeptember 30, 2003, the Company had a total of 26,603 billed units in theUnited States, Canada and the United Kingdom, a decrease of 2,870 billed units(or 9.7%) when compared to the same month in 2002.  Photocopy net sales were $32.3 million for the nine months endedSeptember 30, 2003, down from $34.2 million during the same period in2002.  The decreases in the number ofphotocopiers and net sales was caused primarily by the elimination ofunprofitable sites.

 

The Company maintains and operates a number of service centersthroughout the United States, Canada, and the United Kingdom to support itsphotocopy and ATM networks.  As of September 30,2003 the Company had 14 service centers in the United States, 4 in Canada and 1in the United Kingdom.  This representeda decrease of 22 service centers when compared to the same date in 2002 and wasthe result of the Company’s effort to reduce overhead by consolidating sites.

 

The Company’s software development segment generated $1.0 million insales for the nine months ended September 30, 2003 as compared to $2.1million for the same period in 2002, representing a decrease of $1.1 million or52.4%. The decrease resulted from substantial completion of a developmentcontract with NCR Corporation during the first quarter of 2003.

 

As further discussed under the heading “Liquidity and CapitalResources,” cash available for use in the Company’s United States ATM networkwas increased from $30.0 million to $50.0 million in April 2003.  The cash is made available to the Company bya trust that raises cash for this purpose by accessing commercial paper markets.

 

InMay 2003, the Company and its primary lender (Bank of America, N.A.)executed a new loan agreement to refinance the Company’s revolving loan onsubstantially more favorable terms, including a reduction in interest rate fromprime plus 200 basis points to a maximum of prime plus 50 basis points.  The new facility includes a $15.0 millionthree-year term loan, which matures in March 2006, and a $4.0 millionrevolving line of credit which matures April 30, 2004.

 

11

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Interest is due monthly.  Principal of the term loan is payable inquarterly installments of $750,000, with the remaining balance due in fullMarch 2006.

 

For the third quarter 2003, the Company’s Board of Directors approvedissuance of a dividend payment in the amount of $375,000 related to its SeriesA Preferred Shares, which equates to $.05 per fully diluted share.  This payment was made in October 2003pursuant to a waiver from Bank of America, N.A.

 

## **Results of Operations**

 

The followingtable sets forth, for the periods indicated, selected statement of operationsdata, expressed as a percentage of sales of each item on the ConsolidatedStatements of Operations (see page 3 of this quarterly report on Form 10-Q).

 
|                                                          |   | **Three Months Ended  September 30,** |       | **Nine Months Ended  September 30** |       |
|---------------------------------------------------------------|--------|--------------------------------------------|------------|------------------------------------------|------------|
|                                                          |   | **2002**                                   | ** ** | **2003**                                 | ** ** | **2002** | ** ** | **2003** | ** ** |
| Sales                                                         |   | 100.0                                      | %          | 100.0                                    | %          | 100.0 | % | 100.0 | % |
| Sales discounts                                               |   | 16.9                                       |       | 17.7                                     |       | 17.3 |   | 17.1 |   |
| Net sales                                                     |   | 83.1                                       |       | 82.3                                     |       | 82.7 |   | 82.9 |   |
| Cost of sales                                                 |   | 49.8                                       |       | 45.6                                     |       | 50.8 |   | 48.0 |   |
| Selling, general and administrative expense                   |   | 29.4                                       |       | 25.2                                     |       | 30.7 |   | 25.6 |   |
| Operating income                                              |   | 3.9                                        |       | 11.5                                     |       | 1.2 |   | 9.3 |   |
| Interest expense                                              |   | 1.7                                        |       | 1.0                                      |       | 1.9 |   | 1.2 |   |
| Other expense, net                                            |   | 1.1                                        |       | 0.7                                      |       | 0.4 |   | 0.6 |   |
| Minority interest in losses of consolidated  subsidiary       |   | —                                     |       | —                                   |       | (0.1 | ) | — |   |
| Income (loss) from continuing operations  before income taxes |   | 1.1                                        |       | 9.8                                      |       | (1.0 | ) | 7.5 |   |
| Provision (benefit) for income taxes                          |   | 0.3                                        |       | 3.5                                      |       | (0.5 | ) | 2.7 |   |
| Income (loss) from continuing operations                      |   | 0.8                                        |       | 6.3                                      |       | (0.5 | ) | 4.8 |   |
| Loss from discontinued operations                             |   | —                                     |       | —                                   |       | (0.4 | ) | — |   |
| Net income (loss)                                             |   | 0.8                                        | %          | 6.3                                      | %          | (0.9 | %) | 4.8 | % |

 

**Three Monthsended September 30, 2003 Compared to Three Months ended September 30,2002**

** **

For the three months ended September 30, 2003, consolidated netsales increased by $1.8 million (10.1%) as compared to the same period in 2002.This increase was due primarily to ATM unit expansion and higher pricingthroughout the Company’s ATM network.

 

The Company’s ATM business derives revenues from operating ATM machinesand, beginning in 2003, from sales of ATM machines.  Net sales from the Company’s ATM business increased to $9.3million for the quarter ended September 30, 2003, an increase of 48.5%from the same period in 2002. The Company experienced this significant increasein ATM net sales due to (1) the addition of ATM machines and increasedwithdrawal transactions, (2) an increase in net revenue per transaction, and(3) sales of ATM machines.  As ofSeptember 30, 2003, the Company had 549 more ATM machines in operationthan at September 30, 2002, a 19.6% increase.  Withdrawal transactions increased 20.1% to 4.1 million for thequarter ended September 30, 2003 from 3.4 million for the third quarter of2002.  Gross revenue from ATM operationsper transaction increased 14.9% to $2.55 for the quarter endedSeptember 30, 2003, from $2.22 for the third quarter of 2002.  The increase in revenue per transaction is aresult of 

 

12

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increases in the withdrawal fee per transaction on a substantialportion of the Company’s ATM machines starting in the second half of 2002 andcontinuing into 2003.  In addition, theCompany had sales of ATM machines of $865,000 in the third quarter of2003.  The Company did not have anysales of ATM machines in 2002.

 

Photocopy net sales were down by $404,000 (3.7%) for the quarter endedSeptember 30, 2003, as compared to the same period in 2002.  Overall copy volumes decreased by 12.6% forthe third quarter of 2003 compared to the third quarter of 2002.  During the third quarter of 2003 the averagenumber of billed units decreased to 26,665 from 28,485 during the third quarterof 2002, a 6.4% decrease.  The averagecopies per billed unit for the quarter also declined, to 7,625 in the thirdquarter of 2003 from 8,170 in the third quarter of 2002, a 6.7% decrease.  The Company believes that the decrease inaverage copies per unit is attributable primarily to a decline in demand causedby advances in electronic media and increasing availability of printers andcopiers in the home.  The Company hasresponded to this decrease by eliminating certain lower-volume, unprofitablephotocopy locations.  The decrease inaverage copies per unit was partially offset by price increases.  The average sales price per copy increasedto $.063 for the three-month period ended September 30, 2003 from $.057for the same period in 2002, an increase of 10.5%.  Cumulative net sales per billed unit increased to $394 for thethird quarter 2003 from $383 for the same period in 2002 as a result of priceincreases that outpaced the decline in per-copier volume.

 

A billed unit is a photocopier that has generated an invoice during themonth. Due to the timing of installations, removals, or maintenance during anygiven billing period, billed units may differ slightly from the average numberof units installed during a billing period. The differences in units billed andthe average number of units installed during a billing period does not resultin material timing differences.

 

S-3 Corporation generated $47,000 in sales (0.2% of net sales) fromcontracted software engineering services for the quarter endedSeptember 30, 2003 compared with $855,000 (4.8% of net sales) generatedfor the same period in 2002.  Thedecrease resulted from substantial completion of a development contract withNCR Corporation during the first quarter of 2003.

 

Sales discounts are the portion of revenueretained by retail customers and are based on revenues generated or transactionvolumes.  Sales discounts as apercentage of sales (excluding sales of ATM machines) were 18.4% for thequarter ended September 30, 2003, compared to 17.3% for the third quarterof 2002.  Sales discounts in the ATMbusiness increased to 19.3% of sales (excluding sales of ATM machines) for thethird quarter of 2003 from 17.2% for the third quarter of 2002 as a result ofthe transaction volume based discount structure for retail customers.  This structure provides the customer with ahigher revenue percentage as the transaction volume per ATM machine increases.  Sales discounts in the photocopy business havedecreased to 17.7% for the third quarter of 2003 from 17.8% for the thirdquarter of 2002.  The decrease in salesdiscounts in the photocopy business are due primarily to moving customers tolower discount programs based upon review of their actual usage.  The reduced discounts as a percentage ofsales provide the Company better recovery on the cost of low volumephotocopiers.

 

Costs of sales as a percentage of revenuedecreased to 45.6% for the quarter ended September 30, 2003 from 49.8% forthe same quarter of 2002.

 

13

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Cost of****sales****in the ATM business increased by $668,000for the third quarter of 2003.  Theincrease includes $626,000 for the cost of ATM machines sold and relatedcommissions.  Cost of****sales****inthe ATM business (excluding sales and cost of ATM machines sold) decreased as apercentage of sales to 38.6% for the third quarter of 2003 from 52.8% for thethird quarter of 2002.  This percentagedecrease resulted from increases in revenue per transaction in addition to adecrease in per transaction cost due primarily to renegotiation of certainprocessing contracts.  Excluding thecost of ATM machines sold and related commissions, cost of sales in the ATMbusiness decreased to $.98 per transaction for the third quarter of 2003, ascompared to $1.17 per transaction in the third quarter of 2002.

 

Cost of sales for the photocopy business inthe third quarter of 2003 decreased by $292,000 as compared to the same periodin 2002.  As a percentage of sales,photocopy cost of sales was 49.0% for both the third quarter of 2003 and thethird quarter of 2002.  The decrease inphotocopy cost of sales in the third quarter of 2003 was primarily a reductionin labor costs.  On a per-copy basis,cost of sales increased to $.031 in the third quarter of 2003 from $.028 in thethird quarter of 2002.  This per copyincrease was primarily due to the lack of linear relationship between thereduction in transaction volume and reductions in certain costs.

 

Selling, general and administrative costs decreased by $314,000 for thethird quarter of 2003 as compared to the same period in 2002.  These costs as a percentage of salesdecreased to 25.2% from 29.4% for the quarter as compared to the comparableperiod last year.  The decrease isprimarily due to reductions in labor costs. At the beginning of the third quarter 2002, the Company determined thatit was overstaffed for current business demands and began a reduction in forcethroughout its operations.  The UnitedStates reduction in force took place primarily in the second half of 2002; theUnited Kingdom reduction in force took place in the first quarter of 2003.  The result of these reductions was adecrease in selling, general and administrative labor of $472,000 for thequarter ended September 30, 2003, as compared to the third quarter of2002.

 

Interest expense decreased by $125,000 for the three month period endedSeptember 30, 2003 compared to the same period in 2002.  The decrease in interest expense is dueprimarily to reduced interest rates and principle reductions in the Company’sbank borrowings.  Interest on bankborrowings during the third quarter of 2003 ranged from 3.77% to 4.52%, downfrom a range of 6.25% to 6.75% during the third quarter of 2002.  Outstanding bank borrowings during thequarter ended September 30, 2003 ranged from $14.3 million to $15.1million, compared to a range of $18.6 million to $20.9 million during the thirdquarter ended September 30, 2002.

 

The Company’s effective tax rate, for the quarter endedSeptember 30, 2003 was 35.9%, resulting in an income tax provision of$851,000, compared to an effective tax rate of 25.1% and an income taxprovision of $61,000 for the same period in 2002.  The Company’s effective tax rate for the three months endedSeptember 30, 2002 was 25.1% due to benefits from foreign losses at tax rateslower than domestic tax rates, that are not being realized in the current year.

 

A reconciliation of the income tax provision for the three months endedSeptember 30, 2002 and 2003 is as follows:

 

14

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|                                 |   | **Three  Months Ended  September 30,** |   |
|--------------------------------------|--------|---------------------------------------------|--------|
| **Components of Effective Tax Rate** |   | **2002**                                    |   | **2003** |   |
|                                 |   | **(unaudited)**                             |   | **(unaudited)** |   |
| Federal                              |   | 34.0                                        | %      | 34.0 | % |
|                                 |   |                                        |   |   |   |
| State Tax Net of Federal Benefit     |   | 2.9                                         |   | 3.1 |   |
| Nondeductible Expenses               |   | 0.6                                         |   | 0.5 |   |
| Foreign                              |   | (14.9                                       | )      | (0.8 | ) |
| Change in Valuation Allowance        |   | 2.5                                         |   | (0.9 | ) |
|                                 |   |                                        |   |   |   |
| Total Effective Tax Rate             |   | 25.1                                        | %      | 35.9 | % |

 

**Nine Monthsended September 30, 2003 Compared to Nine Months ended September 30,2002**

** **

For the nine month period ended September 30, 2003, consolidatednet sales increased by $5.9 million (11.2%), as compared to the same period in2002. This increase was due primarily to ATM unit expansion and higher pricingthroughout the Company’s ATM network.

 

Net sales from the Company’s ATM business increased to $25.4 millionfor the nine months ended September 30, 2003, an increase of 53.3% fromthe same period in 2002. This increase is attributable to (1) the addition ofATM machines and increased withdrawal transactions, (2) an increase in netrevenue per transaction, and (3) sales of ATM machines.  As of September 30, 2003, the Companyhad 19.6% more ATM machines in operation than at September 30, 2002.  Withdrawal transactions increased 23.9% to11.4 million for the nine months ended September 30, 2003, from 9.2million for the first nine months of 2002. Gross revenue from ATM operations per transaction increased 16.1% forthe nine months ended September 30, 2003, to $2.52 from $2.17 for the firstnine months of 2002.  The increase inrevenue per transaction is a result of increases in the withdrawal fee pertransaction on a substantial portion of the Company’s ATM machines.  In addition, the Company had sales of ATMmachines of $1.9 million in the first nine months of 2003.

 

Photocopy net sales were down $1.9 million (5.4%) for the ninemonths ended September 30, 2003, as compared to the same period in2002.  Overall copy volumes decreased by11.3% for the nine months ended September 30, 2003 compared to the ninemonths ended September  30, 2002. During the first nine months of 2003 the average number of billed unitsdecreased to 27,202 from 28,772 during the first nine months of 2002, a 5.5%decrease.  The average copies per billedunit for the first nine months also declined, to 24,307 in the first ninemonths of 2003 from 25,913 in the first nine months of 2002, a 6.2%decrease.  The decrease in copy volumewas partially offset by price increases. The average sales price per copy increased to $.060 for the nine-monthperiod ended September 30, 2003 from $.056 for the same period in

 

15

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2002, an increase of 7.1%. Cumulative net sales per billed unit for the nine months endedSeptember 30, 2003 and 2002 was $1,188 as the decline in copy volume perunit offset the increase in the average net sales price per copy.

 

A billed unit is a photocopier that has generated an invoice during themonth. Due to the timing of installations, removals, or maintenance during anygiven billing period, billed units may differ slightly from the average numberof units installed during a billing period. The differences in units billed andthe average number of units installed during a billing period does not result inmaterial timing differences.

 

S-3 Corporation generated $1.0 million in sales (1.7% of net sales)from contracted software engineering services for the nine months endedSeptember 30, 2003 compared with $2.1 million (3.9% of net sales)generated for the same period in 2002. The decrease resulted from substantial completion of a developmentcontract with NCR Corporation during the first quarter of 2003.

 

Sales discounts are the portion of revenueretained by retail customers and are based on revenues generated or transactionvolumes.  Sales discounts as apercentage of sales (excluding sales of ATM machines) were 17.6% for the ninemonths ended September 30, 2003, compared to 16.9% for the comparableperiod in 2002.  Sales discounts in theATM business have increased to 17.9% of sales (excluding sales of ATM machines)for the nine months ended September 30, 2003 from 17.0% for the same period in2002 as a result of the transaction volume based discount structure for retailcustomers.  This structure provides thecustomer with a higher revenue percentage as the transaction volume per ATMmachine increases.  For the first ninemonths, sales discounts in the photocopy business have decreased to 17.9% forthe same period in 2003 from 18.3% in 2002. The decreases in sales discounts in the photocopy business are dueprimarily to moving customers to lower discount programs based upon review oftheir actual usage.  The reduceddiscounts as a percentage of sales provide the Company better recovery on thecost of low volume photocopiers.

 

Costs of sales as a percentage of revenuedecreased to 48.0% for the first nine months of 2003 from 50.8% for the firstnine months of 2002.

 

Cost of****sales****in the ATM business increased by $3.0million for the first nine months of 2003. This increase includes $1.6 million for the cost of ATM machines soldand related commissions.  Cost of****sales****inthe ATM business (excluding sales and cost of ATM machines sold) decreased as apercentage of sales to 43.2% for the first nine months of 2003 from 54.8% forthe first nine months of 2002.  Thispercentage decrease resulted from increases in revenue per transaction inaddition to a decrease in per transaction cost due primarily to renegotiationof certain processing contracts. Excluding the cost of ATM machines sold and related commissions, cost ofsales in the ATM business decreased to $1.09 per transaction for the first ninemonths of 2003, as compared to $1.19 in the first nine months of 2002.

 

Cost of sales for the photocopy business decreasedby $1.4 million for the first nine months of 2003 as compared to the sameperiod in 2002, mostly due to a reduction of labor costs.  As a percentage of sales, photocopy cost ofsales decreased to 49.1% for the first nine months of 2003 from 49.5% for thefirst nine months of 2002.  On aper-copy basis, cost of sales increased to $.029 in the first nine months of2003 from $.028 in the first nine months of 2002.  The per copy increase was primarily due to the lack of linearrelationship between the reduction in transaction volume and reductions incertain costs.

 

16

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Selling, general and administrative costs decreased by $1.5 million forthe first nine months of 2003 as compared to the same period in 2002.  These costs as a percentage of salesdecreased to 25.6% from 30.7% for the first nine months of 2003 as compared tothe first nine months of 2002.  Thedecrease is primarily due to reductions in labor costs.  The Company’s reductions in force resulted ina decrease in selling, general and administrative labor of $1.8 million for thenine months ended September 30, 2003, as compared to the same period in2002.

 

Interest expense decreased by $402,000 for nine month period endedSeptember 30, 2003 compared to the same period in 2002.  The decrease in interest expense is dueprimarily to reduced interest rates and principle reductions in the Company’sbank borrowings.  Interest on bankborrowings during the first nine months of 2003 ranged from 3.77% to 6.25%,down from a range of 6.25% to 8.25% during the first nine months of 2002.  Outstanding bank borrowings during the ninemonths ended September 30, 2003 ranged from $14.3 million to $17.4million, compared to a range of $18.6 million to $21.9 million during the ninemonths ended September 30, 2002. The decrease in bank borrowings was offset by an increase in obligationsunder capital leases to $5.0 million at September 30, 2003, from $2.7million at September 30, 2002.

 

Other expense for the nine months endedSeptember 30, 2003 relates to losses on disposal of certain photocopiersand ATM machines removed from service in the United Kingdom offset by a refundfrom a vendor related to an over billing in 2000.

 

The Company’s effective tax rate for the nine months endedSeptember 30, 2003 was 36.4%, resulting in an income tax provision of $1.9million compared to an effective tax rate of 37.6% and an income tax benefit of$336,000 for the same period in 2002.

 

A reconciliation of the income tax provision (benefit) for the ninemonths ended September 30, 2002 and 2003 is as follows:

 
|                                 |   | **Nine  Months Ended  September 30,** |   |
|--------------------------------------|--------|---------------------------------------|--------|
| **Components of Effective Tax Rate** |   | **2002**                              |   | **2003** |   |
|                                 |   | **(unaudited)**                       |   | **(unaudited)** |   |
| Federal                              |   | 34.0                                  | %      | 34.0 | % |
|                                 |   |                                  |   |   |   |
| State Tax Net of Federal Benefit     |   | 2.8                                   |   | 3.1 |   |
| Nondeductible Expenses               |   | (4.2                                  | )      | 0.9 |   |
| Foreign                              |   | 13.1                                  |   | 0.6 |   |
| Change in Valuation Allowance        |   | (8.1                                  | )      | (2.6 | ) |
|                                 |   |                                  |   |   |   |
| Total Effective Tax Rate             |   | 37.6                                  | %      | 36.0 | % |

 

17

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For the nine months ended September 30, 2003, the Company had netincome of $3.4 million, compared to a net loss of $558,000 for the nine monthsended September 30, 2002.  Thisimprovement is primarily attributable to $4.3 million in increased grossprofits and a $1.5 million reduction in selling, general and administrativeexpense, less the increased provision for income taxes.

 

**Liquidityand Capital Resources**

 

The Company’s ongoing funding requirements are to finance workingcapital and continued growth of its business, and to service its bank debt andlease obligations.  During the ninemonths ended September 30, 2003, TRM generated $9.3 million in cash flowsfrom operating activities as compared to $3.9 million for the same period in2002.  Cash flows, primarily from theCompany’s operating activities, in the first nine months of 2003 have allowedthe Company to pay the litigation settlement of $1.8 million accrued at the endof 2002, reduce long-term debt by $2.4 million and make capital expenditures of$1.1 million.  The Company had cash andcash equivalents of $6.9 million at September 30, 2003 compared to $2.1million at December 31, 2002 and net working capital of $2.6 million atSeptember 30, 2003 compared to a working capital deficit of $1.9 millionat December 31, 2002.

 

In April 2003, DZ Bank AG, Deutsche Zentral-GenossenschaftsbankFrankfurt am Main (DZ Bank) approved a request to increase cash available foruse in TRM’s USA ATM network from $30.0 million to $50.0 million.  The additional $20.0 million cash facilityis available to support increased demand for vault cash in the Company’s ATMnetwork as may be needed from time to time.

 

On March 14, 2000, aDeposit Trust Agreement (“Agreement”) was entered into between GSS Holdings,Inc. as Depositor, Wilmington Trust Company as Owner Trustee, and TRM ATMCorporation (“Servicer”) as Administrator. By virtue of the Agreement, TRMInventory Funding Trust (the “Trust”) was created.  Neither Servicer, TRM nor any affiliates have any ownershipinterest in the Trust.  The purpose ofthe Trust is to provide cash to be placed in the Company’s ATM machines (“VaultCash”), through accessing commercial paper markets.  Undivided interests in the Trust (“Certificates”) are sold toindividuals and entities, and the liability of repaying or redeeming theCertificates resides with the Trust. The Trust has the ability to sell theCertificates, borrow and repay funds and make other payments under the Loan andServicing Agreement, and to engage the Servicer and other agents andcontractors from time to time to perform all duties assigned under the Loan andServicing Agreement.  Any risk withregard to the Trust or the ability of the Trust to repay the Certificatesresides with the Trust and with GSS Holdings, Inc., as the Depositor (equityinvestor in the amount of $15,000) and with Autobahn Funding Company LLC(equity investor in the amount of $1,485,000), rather than with Servicer, whichmerely serves as an administrator and servicer of the Trust.  Autobahn Funding Company LLC is a partyrelated to DZ Bank; both GSS Holding, Inc., and Autobahn Funding Company LLC are independent of the Servicer and theCompany.

 

As borrower under theLoan and Servicing Agreement, the Trust, including its equity holders, is thesole obligor for repayment of commercial paper holders.  In the event that the Liquidity Providers(currently DZ Bank serves as both Liquidity Agent and Liquidity Provider)

 

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would be required to provide monies, the Trust wouldbe obligated to the Liquidity Provider for repayment of monies advanced underthe Liquidity Purchase Agreement.  Theobligation of the Trust is backed 97% by cash in the ATM network and 3% by equity investment in the Trust.

 

When the Vault Cash is placed in the ATM, the Trust has a securityinterest in all of the fees and charges earned or received in connection withall revenue generating transactions initiated at ATMs. The cash at all timesremains the property of the Trust, and the Trust is ultimately obligated torepay the Certificateholders.  At notime do the Certificateholders have recourse against the Servicer under theLoan and Servicing Agreement.  TheCompany maintains letters of credit totaling $1.65 million atSeptember 30, 2003 to guarantee the performance of the Servicer;subcontractors maintain insurance on behalf of the Trust so as to ensure thecash is safe during delivery to ATM machines, and as a bailee, TRM ATMmaintains insurance on behalf of the Trust for the time that the cash is in ATMmachines.  TRM ATM has chosen topurchase insurance policies from A.M. Best rated insurance carriers in theamount of $1.95 million, with a deductible of $5,000 to $10,000 per incident,depending on the type of ATM locations. In a similar fashion, the banks and armored car carriers maintaininsurance to cover losses of cash due to theft while in the possession of thoserespective parties.  TRM ATM has assumedthe risk of the insurance deductible, which is not considered significant or material.  The Company has a reserve recorded in itsfinancial statements at December 31, 2002 and September 30, 2003 fordeductible payments and losses that were not large enough to qualify forinsurance coverage amounting to $10,000. The commercial paper facility matures in 2007.

 

The Trust incurs expenses, including lending bank’s program fees,correspondent banks’ analysis fees, servicing agent fees, certificate yieldpayment fees, discounts on the Trust’s commercial paper borrowings, andcollateral agent fees.  As Servicer, TRMATM reimburses the Trust for all such expenses except for the servicing agentfees that are retained by TRM ATM.  Allof the TRM ATM convenience and interchange revenues are deposited by the ATMtransaction processor into a primary deposit account owned by the Trust on adaily basis.  These deposits areconsidered collateral for ensuring that all Trust expenses to be reimbursed byTRM ATM are funded on a monthly basis. Once a month, the Trust automatically transfers an amount, equal to thereimbursable fees owed by TRM ATM, into a secondary account, also owned by theTrust.  From this secondary account, theTrust then disburses payments directly to the appropriate parties in payment ofthe Trust’s expenses noted above.  Afterensuring that TRM ATM has sufficiently funded its reimbursements to the Trust,TRM ATM, as Servicer has authority to transfer convenience and interchangerevenues remaining in the Trust’s primary deposit account to TRM ATM.  Expenses reimbursed by TRM ATM to the Trustwere $236,000 and $362,000 for the quarters ended September 30, 2002 and2003, respectively, and $655,000 and $982,000 for the nine months endedSeptember 30, 2002 and 2003, respectively.

 

The Company intends to adopt the provisions of FIN 46 as ofDecember 31, 2003, and is currently assessing the impact the adoption ofthis interpretation will have on its results of operations, financial positionand cash flows.  The Company believesthat adoption of this interpretation will result in the consolidation of theTRM Inventory Funding Trust in the Company’s financial statements.  As of September 30, 2003, theconsolidation of the TRM Inventory Funding Trust would result in increases inlong-term assets of $32.9 million, long-term

 

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liabilities of $31.4 million, and minority interest of $1.5 million,and would have no effect on the Company’s results of operations.

 

The Company’s United Kingdom ATM business obtains Vault Cash under anagreement with a local bank.  Vault Cashobtained under the program remains the property of the bank, however, theCompany is insured against risk of loss while the cash is in or beingdistributed to its ATM network.

 

In May 2003, theCompany and its primary lender (Bank of America, N.A.) executed a new loanagreement to refinance the Company’s revolving loan on substantially morefavorable terms, including a reduction in interest rate from prime plus 200basis points to a maximum of prime plus 50 basis points.  The new facility includes a $15.0 millionthree-year term loan, which matures in March 2006, and a $4.0 millionrevolving line of credit which matures April 30, 2004. Interest is duemonthly and principal is payable in quarterly installments of $750,000 startingSeptember 30, 2003.  As ofSeptember 30, 2003, the Company did not have any outstanding borrowingsunder the revolving line of credit. However, the bank had issued standby letters of credit on the Company’sbehalf that totaled $1.65 million as of September 30, 2003, reducing thebalance available under the line of credit to $2.35 million.

 

For the third quarter 2003, the Company’s Board of Directors approvedissuance of a dividend payment in the amount of $375,000 related to its SeriesA Preferred Shares, which equates to $.05 per fully diluted share.  This payment was made in October 2003pursuant to a waiver from Bank of America, N.A.

 

The Company expects that operations will continue for 2003, with therealization of assets, and discharge of liabilities in the ordinary course ofbusiness.  The Company believes that itsprospective needs for working capital, capital expenditures and debt servicewill be met from cash flows generated by operations.

 

A summary of the Company’s contractualcommitments and obligations as September 30, 2003 is as follows:

 
|                          |   | **Payments  Due by Period** |   |
|-------------------------------|--------|-----------------------------|--------|
| **Contractual obligations**   |   | **Total**                   |   | **2003** |   | **2004-2005** |   | **2006-2007** |   | **After 2007** |   |
|                          |   |                        |   |   |   |   |   |   |   |   |   |
| Long-term bank debt           |   | $                           | 14,315 |   | $ | 756 |   | $ | 6,044 |   | $ | 7,515 |   | $ | — |   |
| Capital lease obligations     |   | 4,958                       |   | 621 |   | 3,446 |   | 829 |   | 62 |   |
| Operating leases              |   | 7,499                       |   | 756 |   | 4,535 |   | 1,297 |   | 911 |   |
|                          |   |                        |   |   |   |   |   |   |   |   |   |
| Total contractual obligations |   | $                           | 26,772 |   | $ | 2,133 |   | $ | 14,025 |   | $ | 9,641 |   | $ | 973 |   |
|                               |        |                             |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**CriticalAccounting Policies**

 

The Company’s critical accounting policies for the nine months endedSeptember 30, 2003 are consistent with those discussed in the Company’sForm 10-K for the year ended December 31, 2002.

 

**NewAccounting Standards**

 

In January 2003, the FASB issued FASBInterpretation No. 46 “Consolidation of Variable Interest Entities” (“FIN46”).  FIN 46 addresses consolidation bybusiness enterprises of variable interest entities.  Under thatinterpretation, certain entities known as Variable Interest Entities (“VIEs”)must be consolidated by the primary beneficiary of the entity.  The  primary beneficiary is generallydefined as having the majority of the risks and rewards arising from theVIE.  For VIEs in which a significant(but not majority) variable interest is held, certain disclosures arerequired.  FIN 46 is to be appliedimmediately to variable interest entities created after January 31, 2003,and originally was to be applied in the first year or interim period beginningafter June 15, 2003 to variable interest entities in which an enterpriseholds a variable interest that it acquired before February 1, 2003.  However, in October 2003, the FASBissued a FASB Staff Position deferring the effective date for applying certainprovisions of FIN 46.  According to theFASB Staff Position, a public entity need not apply the provisions of FIN 46 toan interest held in a VIE until the end of the first interim or annual periodending after December 15, 2003, if the VIE was created beforeFebruary 1, 2003 and the public entity has not issued financial statementsreporting that VIE in accordance with FIN 46 other than in certain requireddisclosures.  The Company intends toadopt the provisions of FIN 46 as of December 31, 2003, and is currentlyassessing the impact the adoption of this interpretation will have on itsresults of operations, financial position and cash flows. The Company believesthat adoption of this interpretation will result in the consolidation of theTRM Inventory Funding Trust in the Company’s financial statements. As ofSeptember 30, 2003, the consolidation of the TRM Inventory Funding Trustwould result in increases in long-term assets of $32.9 million, long-termliabilities of $31.4 million, and minority interest of $1.5 million, and wouldhave no effect on the Company’s results of operations.

 

InApril 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 onDerivative Instruments and Hedging Activities.”  SFAS No. 149 amends and clarifies financial accounting andreporting for derivative instruments, including certain derivative instrumentsembedded in other contracts (collectively referred to as derivatives) and forhedging activities under FASB Statement No. 133, “Accounting for DerivativeInstruments and Hedging Activities.”  SFASNo. 149 became effective for the Company prospectively for contracts enteredinto or modified after June 30, 2003. The adoption of this statement has not had a material impact on theCompany’s results of operations, financial position or cash flows, as theCompany does not hold any derivative or hedging instruments.

 

InMay 2003, the FASB issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of Both Liabilities and Equity.”  This Statement establishes standards for howan issuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity.  Itrequires that an issuer classify a financial

 

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instrumentthat is within its scope as a liability (or an asset in some circumstances).  Many of those instruments were previouslyclassified as equity.  SFAS No. 150became effective for the Company for financial instruments entered into ormodified after May 31, 2003, and otherwise became effective at thebeginning of the first interim period beginning after June 15, 2003.  The adoption of SFAS No. 150 has not had amaterial effect on the Company’s financial position, results of operations orcash flows, as the Company does not hold any of this type of instrument.

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

The Company is exposed to market risk from changes in interest ratesand foreign currency exchange rates, which could impact its results ofoperations and financial condition.

 

Interest Rate Risk.  The Companymaintains an investment portfolio that is comprised solely of money marketfunds.  The income earned from thesemoney market funds is subject to changes in interest rates.  Interest income was $18,000 and $65,000 forthe three and nine-month periods ended September 30, 2003, respectively,and $18,000 and $59,000 for the same periods in 2002, respectively.  An immediate 10% change in interest rateswould not have a material effect on the Company’s net income.  Additionally, the Company is exposed tointerest rate risk related to its credit facility.  The Company’s term loan bears interest at a variable rate.  A 10% change in the interest rate from theSeptember 30, 2003 rate would increase or decrease the Company’s interestexpense by approximately $16,000 per quarter.

 

Foreign Currency Risk.* *The Company has internationalsubsidiaries subject to foreign currency rate exposure.  The Company pays the expenses of itsinternational operations in local currencies, namely, the British pound andCanadian dollar.  The internationaloperations are subject to risks typical of an international business,including, but not limited to: differing economic conditions, changes inpolitical climate, differing tax structures, other regulations andrestrictions, and foreign exchange rate volatility.  Accordingly, future results could be materially and adverselyaffected by changes in these or other factors.

 

The Company is also exposed to foreignexchange rate fluctuations as they relate to revenues and operating expenses asthe financial results of foreign subsidiaries are translated intoU.S. dollars in consolidation. Because exchange rates vary, these results, when translated, may varyfrom expectations and adversely impact overall expected profitability.  Foreign exchange rate transactions resultedin gains, net of losses, of $105,000 for the three months endedSeptember 30, 2003 and $100,000 for the nine months endedSeptember 30, 2003.  Foreignexchange rate transaction losses, net of gains were ($9,000) and ($17,000) forthe three months and nine months ended September 30, 2002.

 

Fluctuations in foreign currency exchangerates could materially affect the Company’s financial position.  Assuming a 10% appreciation or depreciationin foreign currency exchange rates from the quoted foreign currency exchangerates at September 30, 2003, the potential change in the fair value offoreign currency-denominated assets and liabilities in each entity wouldaggregate approximately $2.4 million. No assurance can be given that changes in 

 

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foreign currency rates will not have amaterial impact on the Company’s results of operations in the future.

 

The Company does not hold or issue derivative commodity instruments orother financial instruments for trading purposes.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

The Registrantcarried out an evaluation, under the supervision and with the participation ofthe Registrant’s management, including the Registrant’s Chief Executive Officerand Principal Accounting Officer, of the effectiveness of the Registrant’sdisclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)of the Securities and Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer, Senior VicePresident, Financial Services, and Principal Accounting Officer have concludedthat the Registrant’s disclosure controls and procedures as of September 30,2003 were effective to ensure that information required to be disclosed by theRegistrant in reports that it files or submits under the Securities ExchangeAct of 1934 is recorded, processed, summarized and reported within the timeperiods specified in Securities and Exchange Commission’s rules and forms.

 

The Companydoes not expect that its disclosure controls and procedures will prevent allerror and all fraud.  A controlprocedure, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the controlprocedure are met.  Because of the inherentlimitations in all control procedures, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any,within the Company have been detected. These inherent limitations include the realities that judgments indecision-making can be faulty, and that breakdowns can occur because of simpleerror or mistake.  Additionally,controls can be circumvented by the individual acts of some persons, bycollusion of two or more people, or by management override of the control.  The design of any control procedure also isbased in part upon certain assumptions about the likelihood of future events,and there can be no assurance that any design will succeed in achieving itsstated goals under all potential future conditions; over time, controls maybecome inadequate because of changes in conditions, or the degree of compliancewith the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective controlprocedure, misstatements due to error or fraud may occur and not be detected.

 

There were nochanges in the Registrant’s internal control over financial reporting thatoccurred during the quarter ended September 30, 2003 that have materiallyaffected, or are reasonably likely to materially affect, the Registrant’sinternal control over financial reporting.

 

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# **PART II—OTHER INFORMATION**

# ** **

**ITEM 6.****                             EXHIBITSAND REPORTS ON FORM 8-K.**

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

 

31.1                                                   Certification of Chief Executive Officer ofTRM Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2                                                   Certification of Senior Vice President,Financial Services of TRM Corporation pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

31.3                                                   Certification of Principal Accounting Officerof TRM Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

 

32.1                                                   Certification of Chief Executive Officer ofTRM Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,18 U.S.C. Section 1350.

 

32.2                                                   Certification of Senior Vice President,Financial Services of TRM Corporation pursuant to Section 906 of theSarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

 

32.3                                                   Certification of Principal Accounting Officerof TRM Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of2002, 18 U.S.C. Section 1350.

 

**(b)****                                  Reportson Form 8-K.**

 

Current report on Form 8-K datedNovember 7, 2003, reporting the Company’s results of operations for thequarter ended September 30, 2003.

 

Current report on Form 8-K dated September 29,2003, reporting that the Company announced the third quarter 2003 Series APreferred Stock dividend.

 

**SIGNATURE**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, Registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
|   |                   | TRM CORPORATION |
|--------|------------------------|-----------------|
|   |                   |            |   |
|   |                   |            |   |
| Date:  | November 14, 2003 | By:             | /s/ Rebecca J. Demy |
|   |                   |            | Rebecca J. Demy |
|   |                   |            | Principal Accounting Officer |

 

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