## ** **

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** **

**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 June 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 by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

YES  ý  NO o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-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 JUNE 30, 2003** |
|--------------|--------|-----------------------------------|
| Common Stock |   | 7,059,790                         |

 

 

----

 

# **PARTI—FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**TRM Corporation**

**Consolidated Balance Sheets**

**(In thousands)**

** **
|                                                                                           |   | **December  31,  2002** |       | **June 30,  2003** |       |
|------------------------------------------------------------------------------------------------|--------|-------------------------|------------|--------------------|------------|
|                                                                                           |   |                    |       | **(unaudited)**    |       |
| **Assets**                                                                                     |   |                    |       |               |       |
| Current assets:                                                                                |   |                    |       |               |       |
| Cash and cash equivalents                                                                      |   | $                       | 2,127      |               | $          | 4,409 |   |
| Accounts receivable, net                                                                       |   | 6,084                   |       | 5,221              |       |
| Inventories, net                                                                               |   | 947                     |       | 1,720              |       |
| Prepaid expenses and other                                                                     |   | 778                     |       | 1,075              |       |
| Deferred tax asset                                                                             |   | 876                     |       | 727                |       |
| Total current assets                                                                           |   | 10,812                  |       | 13,152             |       |
| Equipment, less accumulated depreciation                                                       |   | 67,916                  |       | 66,160             |       |
| Intangible assets                                                                              |   | 72                      |       | 72                 |       |
| Other assets                                                                                   |   | 1,773                   |       | 1,528              |       |
| Total assets                                                                                   |   | $                       | 80,573     |               | $          | 80,912 |   |
|                                                                                           |   |                    |       |               |       |
| **Liabilities and Shareholders’  Equity**                                                 |   |                    | ** ** |               | ** ** |
| Current liabilities:                                                                           |   |                    |       |               |       |
| Accounts payable                                                                               |   | $                       | 2,231      |               | $          | 1,677 |   |
| Accrued expenses                                                                               |   | 7,932                   |       | 6,708              |       |
| 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                   |       | 2,088              |       |
| Total current liabilities                                                                      |   | 12,745                  |       | 13,495             |       |
|                                                                                           |   |                    |       |               |       |
| Litigation settlement                                                                          |   | 738                     |       | —             |       |
| Long-term debt                                                                                 |   | 16,709                  |       | 12,057             |       |
| Obligations under capital leases                                                               |   | 2,579                   |       | 3,406              |       |
| Deferred tax liability                                                                         |   | 2,203                   |       | 3,254              |       |
| Other long-term liabilities                                                                    |   | 128                     |       | 104                |       |
| Preferred dividends payable                                                                    |   | 3,377                   |       | 4,127              |       |
| Total liabilities                                                                              |   | 38,479                  |       | 36,443             |       |
|                                                                                           |   |                    |       |               |       |
| 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 authorized; 7,060 shares issued and  outstanding                                        |   | 19,026                  |       | 19,026             |       |
| Additional paid-in capital                                                                     |   | 63                      |       | 63                 |       |
| Accumulated other comprehensive income (loss)                                                  |   | (738                    | )          | 486                |       |
| Retained earnings                                                                              |   | 3,945                   |       | 5,096              |       |
| Total shareholders’ equity                                                                |   | 42,094                  |       | 44,469             |       |
| Total liabilities and shareholders’ equity                                                |   | $                       | 80,573     |               | $          | 80,912 |   |

 

See accompanying notes to consolidated financial statements.

 

2

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**TRM Corporation**

# **ConsolidatedStatements of Operations**

**(unaudited)**

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

** **
|                                                                     |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended********June 30,** |   |
|--------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------------|--------|
|                                                                     |   | **2002**                          |   | **2003**                              |   | **2002** |   | **2003** |   |
| Sales                                                                    |   | $                                 | 21,556 |                                  | $      | 24,366 |   | $ | 42,172 |   | $ | 46,780 |   |
| Less discounts                                                           |   | 3,866                             |   | 4,151                                 |   | 7,360 |   | 7,877 |   |
| Net sales                                                                |   | 17,690                            |   | 20,215                                |   | 34,812 |   | 38,903 |   |
| Cost of sales                                                            |   | 11,079                            |   | 11,950                                |   | 21,647 |   | 23,036 |   |
| Gross profit                                                             |   | 6,611                             |   | 8,265                                 |   | 13,165 |   | 15,867 |   |
| Selling, general and administrative expense                              |   | 6,810                             |   | 6,264                                 |   | 13,265 |   | 12,063 |   |
| Operating income (loss)                                                  |   | (199                              | )      | 2,001                                 |   | (100 | ) | 3,804 |   |
| Interest expense                                                         |   | 402                               |   | 238                                   |   | 846 |   | 568 |   |
| Other (income) expense, net                                              |   | 73                                |   | 49                                    |   | (1 | ) | 262 |   |
| Income (loss) before minority interest                                   |   | (674                              | )      | 1,714                                 |   | (945 | ) | 2,974 |   |
| Minority interest in losses of consolidated  subsidiary                  |   | —                            |   | —                                |   | 72 |   | — |   |
| Income (loss) from continuing operations before  income taxes            |   | (674                              | )      | 1,714                                 |   | (873 | ) | 2,974 |   |
| Provision (benefit) for income taxes                                     |   | (270                              | )      | 566                                   |   | (396 | ) | 1,073 |   |
| Income (loss) from continuing operations                                 |   | (404                              | )      | 1,148                                 |   | (477 | ) | 1,901 |   |
| Loss from discontinued operations                                        |   | —                            |   | —                                |   | (264 | ) | — |   |
| Net income (loss)                                                        |   | $                                 | (404   | )                                     | $      | 1,148 |   | $ | (741 | ) | $ | 1,901 |   |
|                                                                     |   |                              |   |                                  |   |   |   |   |   |
| Basic and diluted per share information:                                 |   |                              |   |                                  |   |   |   |   |   |
| Income (loss) from continuing operations                                 |   | $                                 | (404   | )                                     | $      | 1,148 |   | $ | (477 | ) | $ | 1,901 |   |
| Preferred stock dividends                                                |   | (375                              | )      | (375                                  | )      | (750 | ) | (750 | ) |
| Income (loss) from continuing operations availableto common shareholders |   | $                                 | (779   | )                                     | $      | 773 |   | $ | (1,227 | ) | $ | 1,151 |   |
|                                                                     |   |                              |   |                                  |   |   |   |   |   |
| Weighted average common shares outstanding                               |   | 7,060                             |   | 7,060                                 |   | 7,060 |   | 7,060 |   |
| Dilutive effect of stock options                                         |   | —                            |   | 37                                    |   | — |   | 19 |   |
| Weighted average common shares outstanding,  assumingdilution            |   | 7,060                             |   | 7,097                                 |   | 7,060 |   | 7,079 |   |
| Basic and diluted income (loss) per share:                               |   |                              |   |                                  |   |   |   |   |   |
| From continuing operations                                               |   | $                                 | (.11   | )                                     | $      | .11 |   | $ | (.17 | ) | $ | .16 |   |
| Discontinued operations                                                  |   | —                            |   | —                                |   | (.04 | ) | — |   |
| Net income (loss)                                                        |   | $                                 | (.11   | )                                     | $      | .11 |   | $ | (.21 | ) | $ | .16 |   |

 

See accompanying notes to consolidated financial statements.

 

3

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** **

**TRM Corporation**

**Consolidated Statement of Shareholders’Equity**

**(unaudited)**

**(In thousands)**

 
|                                    |   | **Comprehensive  Income** |   | **Preferred** |   | **Common** |   | **Additional  Paid-in  Capital** |   | **Accumulated  Other  Comprehensive  Income (Loss)** |   | **Retained  Earnings** |   | **Total** |   |
|-----------------------------------------|--------|---------------------------|--------|---------------|--------|------------|--------|----------------------------------|--------|------------------------------------------------------|--------|------------------------|--------|-----------|--------|
|                                    |   |                      |   |          |   |       |   |
|                                    |   |                      |   |          |   |       |   |
|                                    |   | **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                              |   | $                         | 1,901  |          | — |       | — |                             | — |                                                 | — |                   | — |      | — |   | 1,901 |   | 1,901 |   |
| Other comprehensive income, net of tax: |   |                      |   |          |   |       |   |                             |   |                                                 |   |                   |   |      |   |   |   |   |   |
| Foreign currency translation adjustment |   | 1,224                     |   | —        |   | —     |   | —                           |   | —                                               |   | —                 |   | 1,224     |   | — |   | 1,224 |   |
| Comprehensive income                    |   | $                         | 3,125  |          | — |       | — |                             | — |                                                 | — |                   | — |      | — |   | — |   | — |   |
| Preferred stock dividends               |   |                      |   | —        |   | —     |   | —                           |   | —                                               |   | —                 |   | —    |   | (750 | ) | (750 | ) |
| **Balances, June 30, 2003**             |   |                      |   | 1,778         |   | $          | 19,798 |                             | 7,060  |                                                 | $      | 19,026                 |   | $         | 63     |   | $ | 486 |   | $ | 5,096 |   | $ | 44,469 |   |

 

See accompanying notes to consolidatedfinancial statements.

** **

4

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**TRM Corporation**

**Consolidated Statements of Cash Flows**

**(unaudited)**

**(In thousands)**

** **
|                                                                                      |   | **Six Months  Ended  June 30,** |   |
|-------------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                                      |   | **2002**                        |   | **2003** |   |
| **Operating  activities:**                                                                |   |                            |   |   |   |
| Net income (loss)                                                                         |   | $                               | (741   | ) | $ | 1,901 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |   |                            |   |   |   |
| Restricted  cash                                                                          |   | (400                            | )      | — |   |
| Depreciation  and amortization                                                            |   | 4,870                           |   | 4,979 |   |
| Minority  interest in earnings of consolidated subsidiary                                 |   | (72                             | )      | — |   |
| Other                                                                                     |   | (6                              | )      | — |   |
| Loss on  disposal of equipment and vehicles                                               |   | 244                             |   | 419 |   |
| Changes in  items affecting operations:                                                   |   |                            |   |   |   |
| Accounts receivable                                                                       |   | (550                            | )      | 102 |   |
| Inventories                                                                               |   | 634                             |   | (732 | ) |
| Transfer of ATMs from equipment to  inventories                                           |   | —                          |   | 1,474 |   |
| Income tax receivable                                                                     |   | (398                            | )      | — |   |
| Prepaid expenses and other                                                                |   | (73                             | )      | 409 |   |
| Accounts payable                                                                          |   | (1,612                          | )      | (598 | ) |
| Accrued expenses                                                                          |   | 1,069                           |   | (1,178 | ) |
| Income taxes payable                                                                      |   | —                          |   | 3 |   |
| Deferred taxes                                                                            |   | (79                             | )      | 1,213 |   |
| Litigation settlement                                                                     |   | —                          |   | (1,738 | ) |
| Total operating activities                                                                |   | 2,886                           |   | 6,254 |   |
| **Investing  activities:**                                                                |   |                            |   |   |   |
| Proceeds from sale of equipment                                                           |   | 115                             |   | 468 |   |
| Capital expenditures                                                                      |   | (1,875                          | )      | (1,732 | ) |
| Other                                                                                     |   | (336                            | )      | (41 | ) |
| Total investing activities                                                                |   | (2,096                          | )      | (1,305 | ) |
| **Financing  activities:**                                                                |   |                            |   |   |   |
| Borrowings on line of credit                                                              |   | 10,271                          |   | 8,128 |   |
| Repayment of line of credit                                                               |   | (11,451                         | )      | (24,779 | ) |
| Borrowings on term loan                                                                   |   | —                          |   | 15,000 |   |
| Principal payments on capital lease  obligations                                          |   | (21                             | )      | (874 | ) |
| Purchase of minority interest                                                             |   | (60                             | )      | — |   |
| Total financing activities                                                                |   | (1,261                          | )      | (2,525 | ) |
| Effect of exchange rate changes                                                           |   | 59                              |   | (142 | ) |
| Net increase (decrease) in cash and cash  equivalents                                     |   | (412                            | )      | 2,282 |   |
| Beginning cash and cash equivalents                                                       |   | 1,598                           |   | 2,127 |   |
| Ending cash and cash equivalents                                                          |   | $                               | 1,186  |   | $ | 4,409 |   |
|                                                                                      |   |                            |   |   |   |
| Supplemental disclosure of non-cash  transactions:                                        |   |                            |   |   |   |
| Disposal of assets under a non-cash sales  agreement:                                     |   |                            |   |   |   |
| Current  assets                                                                           |   | $                               | 3      |   | $ | — |   |
| Non-current  assets                                                                       |   | 3,145                           |   | — |   |
| Current liabilities                                                                       |   | (203                            | )      | — |   |
| Assets acquired under capital lease  obligations                                          |   | 72                              |   | 2,104 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

5

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# **TRMCorporation**

 

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

 

1.                                       InterimFinancial Data:

 

The consolidated financial statements of TRM Corporation and itssubsidiaries (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 to shareholders.  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.

 

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 and diluted net income (loss) per share are based on the weightedaverage number of shares outstanding during each period, with diluted includingthe effect of potentially dilutive securities. In calculating basic net income (loss) per share, dividends forpreferred stock are deducted to arrive at income (loss) available for commonshareholders.  For diluted net income(loss) per share, the calculation assumes the conversion of common stockequivalents including the conversion of preferred stock unless such conversionis antidilutive.  Weighted averagecommon shares outstanding, assuming dilution, include the incremental sharesthat would be issued upon the assumed exercise of stock options.  For the three and six months endedJune 30, 2003, approximately 1,258,000 of the Company’s stock options wereexcluded 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.  In addition, preferredstock convertible into approximately 1,333,000 common shares was excluded fromthe calculation because its inclusion would also have been antidilutive.  These options and preferred stock could bedilutive in the future.

 

6

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4.                                       Inventories(in thousands):

 
|                 |   | **December  31,  2002** |   | **June 30,  2003** |   |
|----------------------|--------|-------------------------|--------|--------------------|--------|
|                 |   |                    |   | **(unaudited)**    |   |
| Parts                |   | $                       | 934    |               | $      | 919 |   |
| ATMs held for resale |   | —                  |   | 781                |   |
| Paper                |   | 5                       |   | 6                  |   |
| Toner and developer  |   | 8                       |   | 14                 |   |
| Total                |   | $                       | 947    |               | $      | 1,720 |   |

 

5.                                       Long-termDebt:

 

In May 2003,the Company and its primary lender (Bank of America, N.A.) executed a new loanagreement refinancing the Company’s existing revolving loan.  The new facility includes a $15.0 millionterm loan maturing in March 2006, and a $4.0 million revolving line ofcredit maturing April 30, 2004.

 

As of June 30,2003, the Company had a balance of $15.0 million outstanding pursuant to theterm loan.  Interest is due monthly onthe term loan, and principal is payable in quarterly installments of $750,000starting September 30, 2003. Interest on the term loan is at the bank’s prime rate plus 0.0% to 0.5%depending on the Company’s leverage ratio as defined in the loanagreement.  The Company also has theoption of electing an alternative interest rate based on the bank’s LIBOR orIBOR rates.  As of June 30, 2003,interest on the term loan was 4.52%.

 

As of June 30,2003, the Company did not have any outstanding borrowings under the revolvingline of credit.  However, the bank hadissued standby letters of credit on the Company’s behalf that totaled $1.65million as of June 30, 2003, reducing the balance available under the lineof credit to $2.35 million.  Asdescribed in the "Liquidity and Capital Resources" section of Item 2of this report, these standby letters of credit guarantee the Company'sperformance as servicer of the TRM Inventory Funding Trust.

 

As of June 30, 2003, the Company was in compliance with all of its debtcovenants. 

 

6.                                       EmployeeStock Options:

 

In December 2002, the Financial Accounting Standards Board (FASB or the“Board”) issued Statement of Financial Accounting Standards No. 148 (SFAS 148),“Accounting for Stock-Based Compensation – Transition and Disclosure – anamendment of FASB Statement No. 123.” This Statement amends SFAS No. 123, “Accounting for Stock-Based Compensation”to provide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation.  In addition, this Statement amends thedisclosure requirements of SFAS No. 123 to require prominent disclosures inboth annual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults.  SFAS No. 148 provides for voluntaryadoption of the fair value method for entities with fiscal years ending afterDecember 15, 2002.  The Company hasadopted the prominent disclosure provisions. The following table illustrates the effect on net income and earningsper share if the Company had applied the fair value recognition provisions ofSFAS No. 123 (in thousands, except per share data).

 

7

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| ** **
                                                                                                                             |   | **Three  Months Ended  June 30,** |   | **Six  Months Ended  June 30,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                                                                                         |   | **2002**                          |   | **2003**                        |   | **2002** |   | **2003** |   |
|                                                                                                                                         |   |                              |   |                            |   |   |   |   |   |
| Net income (loss), as reported                                                                                                               |   | $                                 | (404   | )                               | $      | 1,148 |   | $ | (741 | ) | $ | 1,901 |   |
| Deduct total stock-based  employee compensation expense determined under fair value based method for  all awards, net of related tax effects |   | (41                               | )      | (25                             | )      | (81 | ) | (39 | ) |
| Pro forma net income (loss)                                                                                                                  |   | $                                 | (445   | )                               | $      | 1,123 |   | $ | (822 | ) | $ | 1,862 |   |
| Net income (loss) per share-basic and diluted:                                                                                               |   |                              |   |                            |   |   |   |   |   |
| As reported                                                                                                                                  |   | $                                 | (.11   | )                               | $      | .11 |   | $ | (.21 | ) | $ | .16 |   |
| Pro forma                                                                                                                                    |   | $                                 | (.12   | )                               | $      | .11 |   | $ | (.22 | ) | $ | .16 |   |

 

7.                                       SegmentReporting (in thousands):

 

The Companyhas three reportable segments: Photocopy, Automated Teller Machines (ATM) and S-3 Corporation.  Photocopy owns and maintains self-servicephotocopiers in retail establishments. ATM owns and operates ATM machines in retail establishments. S-3Corporation develops software to deliver products and services through ATMs.

 

The accounting policies of the segments are substantially the same asthose described in Note 1 of the Company’s annual report on Form 10-Kfor the year ended December 31, 2002. The Company evaluates each segment’s performance based on income or lossbefore interest, income taxes, and minority interest, excluding non-recurringcharges.  Information regarding theoperations of these reportable segments is as follows:

 
|                                                         |   | **Three Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|--------------------------------------------------------------|--------|---------------------------------|--------|--------------------------------|--------|
|                                                         |   | **2002**                        |   | **2003**                       |   | **2002** |   | **2003** |   |
| Net Sales:                                                   |   |                            |   |                           |   |   |   |   |   |
| Photocopy                                                    |   | $                               | 11,629 |                           | $      | 11,105 |   | $ | 23,250 |   | $ | 21,801 |   |
| ATM                                                          |   | 5,475                           |   | 8,758                          |   | 10,338 |   | 16,148 |   |
| S-3 Corporation                                              |   | 586                             |   | 352                            |   | 1,224 |   | 954 |   |
|                                                         |   | $                               | 17,690 |                           | $      | 20,215 |   | $ | 34,812 |   | $ | 38,903 |   |
|                                                         |   |                            |   |                           |   |   |   |   |   |
| Income (loss) before interest, taxes and  minority interest: |   |                            |   |                           |   |   |   |   |   |
| Photocopy                                                    |   | $                               | 566    |                           | $      | 1,416 |   | $ | 1,670 |   | $ | 2,877 |   |
| ATM                                                          |   | (893                            | )      | 742                            |   | (2,010 | ) | 881 |   |
| S-3 Corporation                                              |   | 55                              |   | (206                           | )      | (23 | ) | (216 | ) |
|                                                         |   | $                               | (272   | )                              | $      | 1,952 |   | $ | (363 | ) | $ | 3,542 |   |

 

8

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Reconciliationof total income (loss) before interest, taxes, and minority interest toconsolidated income (loss) from continuing operations before income taxesfollows (in thousands).

 
|                                                                                 |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|--------------------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                                                 |   | **2002**                         |   | **2003**                       |   | **2002** |   | **2003** |   |
|                                                                                 |   |                             |   |                           |   |   |   |   |   |
| Income (loss) before interest, taxes, and  minority interest                         |   | $                                | (272   | )                              | $      | 1,952 |   | $ | (363 | ) | $ | 3,542 |   |
| Interest expense                                                                     |   | (402                             | )      | (238                           | )      | (846 | ) | (568 | ) |
| 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                        |   | $                                | (674   | )                              | $      | 1,714 |   | $ | (873 | ) | $ | 2,974 |   |

 

8.                                       NewAccounting Standards:

 

In January2003, the FASB issued FASB Interpretation No. 46 “Consolidation of VariableInterest Entities” (“FIN 46”).  FIN 46addresses consolidation by business enterprises of variable interest entities.  Under that interpretation, certain entitiesknown as Variable Interest Entities (“VIEs”) must be consolidated by theprimary beneficiary of the entity.  The primary beneficiary is generally defined as having the majority of therisks and rewards arising from the VIE. For VIEs in which a significant (but not majority) variable interest isheld, certain disclosures are required. FIN 46 applies immediately to variable interest entities created afterJanuary 31, 2003, and applies in the first year or interim period beginningafter June 15, 2003 to variable interest entities in which an enterprise holdsa variable interest that it acquired before February 1, 2003.  The Company will adopt the provisions of FIN46 in the third quarter of 2003 and is currently assessing the impact theadoption of this interpretation will have on its results of operations,financial position and cash flows. The Company believes that adoption of thisinterpretation will likely result in the consolidation of the TRM InventoryFunding Trust (as described in the "Liquidity and Capital Resources"section of Item 2 of this report) in the Company’s financial statements.  As of July 1, 2003 the consolidation of theTRM Inventory Funding Trust would result in an increase in long-term assets andliabilities of $31.0 million and have no effect on its 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.” SFAS No. 149 is effective for the Company prospectively for contractsentered into or modified after June 30, 2003. The Company does not believe that the adoption of this statement willhave a material impact on its results of operations, financial position or cashflows, as the Company 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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instrument that is within its scope as aliability (or an asset in some circumstances). Many of those instruments were previously classified as equity.  SFAS No. 150 is effective for the Companyfor financial instruments entered into or modified after May 31, 2003, andotherwise is effective at the beginning of the first interim period beginningafter June 15, 2003.  The Company doesnot believe that adoption of SFAS No. 150 will have a material effect on itsfinancial position, results of operations or cash flows.

 

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

 

Forward-Looking Statements

 

Information in this quarterly report on Form 10-Q that is nothistorical in nature, including information about the Company’s goals, plansand expectations regarding expansion, capital expenditures, expanding the ATMbusiness, revenues from the ATM business becoming a higher percentage ofoverall revenue, financing of capital expenditures, future cash flows fromoperations and obtaining long-term asset-based financing, constitutesforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934.  We are including this statement for thepurpose of invoking the safe-harbor protection of these sections.  These forward-looking statements are basedon the belief of the Company’s management as well as assumptions made by, andinformation currently available to, the Company’s management.  Factors that could cause the actual resultsto differ materially from the forward-looking statements include, but are notlimited to:  business conditions in themarket areas in which the Company operates, competitive factors, customerdemand for the Company’s services, the Company’s ability to execute its plansin each business segment successfully, the ability of the Company tosuccessfully negotiate and enter into additional financing arrangements onfavorable terms, the Company’s ability to expand its current relationships withretailers and broaden its distribution network, and the volatility of papercosts.  Many of these factors are notwithin the Company’s control.  Anyforward-looking statements should be considered in light of these factors aswell as risk factors and business conditions discussed in the Company’s annualreport on 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.

 

General

 

TRM Corporation and its subsidiaries (collectively "TRM" orthe "Company") currently provide financial services and photocopyresources to consumers through an in-store retail network which exceeds 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 highly specialized contract softwareengineering to the financial services industry, focused upon ATM/Cash machineoperations and communications.

 

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In June 2003, the Company’s ATM network had a total of 3,273revenue-generating machines deployed throughout the United Kingdom and UnitedStates, representing an increase of 594 ATM machines (or 22%) when compared tothe same month in 2002.  The ATM operationsproduced net sales of $16.1 million during the first six months of 2003,representing an increase of $5.8 million (or 56%) as compared to the sameperiod in the prior year.  The Companybelieves that revenues generated from services delivered through its ATMnetwork will represent a greater percentage of overall net sales in the future.

 

In June 2003,the Company had a total of 27,053 revenue-generating photocopiers in the UnitedStates, Canada and the United Kingdom. This represented a decrease of 1,242 (or 4.4%) photocopiers whencompared to the same month in 2002 and was the result of the elimination ofunprofitable locations.  Photocopy netsales were $21.8 million for the six months ended June 30, 2003, down from$23.3 million during the same period in 2002. This decrease in net sales was caused, in part, by the extreme weatherconditions experienced in the Northeastern part of the United States during thefirst two months of 2003 as well as from the elimination of unprofitable sites.

 

The Companymaintains and operates a number of service centers throughout the UnitedStates, Canada, and United Kingdom to support its photocopy and ATMnetworks.  As of June 30, 2003 theCompany had 14 service centers in the United States, 4 in Canada and 1 in theUnited Kingdom.  This represented adecrease of 14 service centers when compared to the same date in 2002 and wasthe result of the Company’s effort to reduce overhead by consolidating sites.

 

S-3Corporation generated $954,000 in sales for the six months ended June 30,2003 as compared to $1.23 million over the same period in 2002, representing adecrease of $271,000 or 22%.  Thedecrease resulted from substantial completion of a development contract with NCRCorporation during the first quarter of 2003.

 

In May 2003,the Company 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 million revolvingline of credit which matures April 30, 2004.  Interest is due monthly and principal is payable in quarterlyinstallments of $750,000 starting September 30, 2003.

 

As furtherdiscussed under the heading “Liquidity and Capital Resources,” cash availablefor use in the Company’s United States ATM network was increased from $30.0million to $50.0 million in April 2003. The cash is made available to the Company by a trust that raises cashfor this purpose by issuing commercial paper.

 

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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 Form 10-Q).

 
|                                                          |   | **Three  Months Ended** |   | **Six Months  Ended**    |   |
|---------------------------------------------------------------|--------|-------------------------|--------|--------------------------|--------|
|                                                          |   | **June 30,  2002**      |   | **June 30,********2003** |   | **June 30,****2002** |   | **June 30,  2003** |   |
| Sales                                                         |   | 100.0                   | %      | 100.0                    | %      | 100.0 | % | 100.0 | % |
| Sales discounts                                               |   | 17.9                    |   | 17.0                     |   | 17.5 |   | 16.8 |   |
| Net sales                                                     |   | 82.1                    |   | 83.0                     |   | 82.5 |   | 83.2 |   |
| Cost of sales                                                 |   | 51.4                    |   | 49.1                     |   | 51.3 |   | 49.3 |   |
| Selling, general and administrative                           |   | 31.6                    |   | 25.7                     |   | 31.5 |   | 25.8 |   |
| Operating income (loss)                                       |   | (0.9                    | )      | 8.2                      |   | (0.3 | ) | 8.1 |   |
| Interest expense, net                                         |   | 1.9                     |   | 1.0                      |   | 2.0 |   | 1.2 |   |
| Other expense, net                                            |   | 0.3                     |   | 0.2                      |   | — |   | 0.5 |   |
| Minority interest                                             |   | —                  |   | —                   |   | 0.2 |   | — |   |
| Income (loss) from continuing operations before  income taxes |   | (3.1                    | )      | 7.0                      |   | (2.1 | ) | 6.4 |   |
| Provision (benefit) for income taxes                          |   | (1.2                    | )      | 2.3                      |   | (0.9 | ) | 2.3 |   |
| Income (loss) from continuing operations                      |   | (1.9                    | )      | 4.7                      |   | (1.2 | ) | 4.1 |   |
| Loss from discontinued operations                             |   | —                  |   | —                   |   | (0.6 | ) | — |   |
| Net income (loss)                                             |   | (1.9                    | )%     | 4.7                      | %      | (1.8 | )% | 4.1 | % |

 

Three and Six Months ended June 30, 2003 Compared to Three and SixMonths ended June 30, 2002

 

For the three and six month periods ended June 30, 2003,consolidated net sales increased by $2.5 million (14.3%) and$4.1 million (11.8%), respectively as compared to the same periods in2002. These increases were due primarily to ATM unit expansion and higherpricing throughout the Company’s ATM network.

 

Net sales from the Company’s ATM businessincreased to $8.8 million and $16.1 million for the quarter and sixmonths ended June 30, 2003, an increase of 60.0% and 56.2% respectivelyfrom the same periods in 2002. The Company experienced these significantincreases in 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 of June30, 2003, the Company had 594 or 22% more ATM machines in operation than atJune 30, 2002.  Withdrawal transactionsincreased 26% to 3.9 million for the quarter ended June 30, 2003 from 3.1million for the second quarter of 2002. For the six months ended June 30, 2003, withdrawal transactions alsoincreased 26% to 7.3 million, from 5.8 million for the first six months of2002.  Gross surcharge (convenience fee)revenue per transaction increased 20% to $2.08 for the quarter ended June 30,2003 from $1.73 for the second quarter of 2002, and also increased 20% for thesix months ended June 30, 2003 to $2.07 from $1.73 for the first six months of 2002.  In addition, the Company had sales of ATMmachines of $674,000 and $1.0 million in the second quarter and first sixmonths of 2003, respectively.  TheCompany did not have any sales of ATM machines in the first six months of 2002.

 

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Photocopy net sales were down $0.5 million (4.5%) and $1.4 million(6.2%) for the quarter and six months ended June 30, 2003, respectively, ascompared to the same periods in 2002. Overall copy volumes decreased by 8.9% for the second quarter of 2003compared to the second quarter of 2002, and decreased by 10.7% for the sixmonths ended June 30, 2003 compared to the six months ended June 30, 2002.  During the second quarter of 2003 theaverage number of billed units decreased to 27,098 from 28,595 during thesecond quarter of 2002, a 5% decrease. During the first six months of 2003 the average number of billed unitsdecreased to 27,471, from 28,915 during the first six months of 2002, a 5%decrease.  The average copies per billedunit for the quarter also declined, to 8,540 in the second quarter of 2003 from8,884 in the second quarter of 2002, a 4% decrease.  The average copies per billed unit for the first six months alsodeclined, to 16,667 in the first six months of 2003 from 17,739 in the firstsix months of 2002, a 6% decrease.  TheCompany believes that the decrease in average copies per unit is attributableprimarily to a decline in demand caused by advances in electronic media andincreasing availability of printers and copiers in the home.  The Company has responded to this decreaseby eliminating certain lower-volume, unprofitable photocopy locations.  The decrease was partially offset by priceincreases.  The average price per copyincreased to $0.059 and $0.058 for the three and six month periods ending June30, 2003 from $.056 for the same periods in 2002, an increase of 5.3% for thethree months of 3.6% for the six months ended June 30, 2003.  Cumulative net sales per billed unitincreased to $409.79 for the second quarter 2003 from $406.67 for the sameperiod in 2002 as a result of the price increase.  For the six months ending June 30, 2003 cumulative net sales perbilled unit decreased to $793.56 from $804.06 in the same period 2002 as aresult of the overall decline in copy volume.

 

A billed unit is a unit that has generated an invoice during themonth.  Due to the timing ofinstallations, removals, or maintenance during any given billing period, billedunits may differ slightly from the average number of units installed during abilling period.  The differences inunits billed and the average number of units installed during a billing perioddoes not result in material timing differences.

 

S-3 Corporation generated $352,000 and $954,000 in sales from contractedsoftware engineering services for the quarter and six months ended June 30,2003 compared with $586,000 and $1.23 million generated for the same periods in2002.  The decrease resulted fromsubstantial completion of a development contract with NCR Corporation duringthe first quarter of 2003.

 

Sales discounts are the portion of revenue retained by retail customersand are based on revenues generated or transaction volumes.  Sales discounts as a percentage of sales(excluding sales of ATM machines) were 17.5% and 17.2% for the quarter and sixmonths ended June 30, 2003, respectively, compared to 17.9% and 17.5% for thecomparable periods in 2002.  Salesdiscounts in the ATM business decreased to 17.4% of sales (excluding sales ofATM machines) for the second quarter of 2003 from 18.4% for the second quarterof 2002 as a result of a decrease in the number of high discountcontracts.  For the first six months,sales discounts in the ATM business have increased to 17.0% in 2003 from 16.9%in 2002.  Sales discounts in thephotocopy business have decreased to 18.1% for the second quarter of 2003 from18.5% for the second quarter of 2002. For the first six months, sales discounts in the photocopy business havedecreased to 18.0% in 2003 from 18.5% 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.

 

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Costs of salesas a percentage of revenue decreased to 49.1% for the quarter endedJune 30, 2003 from 51.4% for the second quarter of 2002, and decreased to49.3% for the first six months of 2003 from 51.3% for the first six months of2002.

 

Cost of****sales****inthe ATM business increased by $1.3 million for the second quarter and by $2.4million for the first six months of 2003. The increase includes $681,000 in the second quarter and $990,000 in thefirst six months of 2003 for the cost of ATM machines sold and relatedcommissions.  Cost of****sales****inthe ATM business decreased as a percentage of sales to 48.2% for the secondquarter of 2003 from 56.2% for the second quarter of 2002, and decreased to48.5% for the first six months of 2003 from 56.0% for the first six months of2002.  These percentage decreasesresulted primarily from increases in revenue per transaction.  Excluding the cost of ATM machines sold andrelated commissions, cost of sales in the ATM business decreased to $1.12 and$1.15 per transaction for the second quarter and first six months of 2003,respectively, as compared to $1.20 per transaction in the second quarter andfirst six months of 2002.

 

Cost of sales forthe photocopy business in the second quarter of 2003 decreased by $521,000 ascompared to the same period in 2002 and $1.1 million for the first six monthsof 2003 as compared to the same periods in 2002.  As a percentage of sales, photocopy cost of sales decreased to48.4% for the second quarter of 2003 from 49.6% for the second quarter of 2002,and decreased to 49.1% for the first six months of 2003 from 49.7% for thefirst six months of 2002.  The $521,000decrease in photocopy cost of sales was caused primarily by a reduction ofmaterials costs.  The decrease in thefirst six months of 2003 was primarily due to a $700,000 reduction in labor,most of which occurred during the first quarter.  On a per-copy basis, cost of sales increased slightly, to $.029in the first six months of 2003 from $.028 in the first six months of 2002primarily due to the lack of linear relationship between reductions intransaction volume and reductions in certain costs.

 

Selling, general and administrative costs decreased $546,000 for thesecond quarter and $1.2 million for the first six months of 2003 as compared tothe same periods in 2002. These costs as a percentage of sales decreased to25.7% from 31.6% for the quarter and decreased to 25.8% from 31.5% for thefirst six months of 2003 as compared to the comparable periods last year.   The decreases are primarily due toreductions in labor costs.  At thebeginning of the third quarter 2002, the Company determined that it wasoverstaffed for current business demands and began a reduction in forcethroughout its operations. The United States reduction in force took placeprimarily in the second half of 2002; the United Kingdom reduction in forcetook place in the first quarter of 2003. The result of these reductions was a decrease in selling, general andadministrative labor of $771,000 for the quarter ended June 30, 2003 and $1.37million for the six months ended June 30, 2003, as compared to the same periodsin 2002.

 

Interest expense decreased $164,000 and$278,000 for the three and six month periods ending June 30, 2003 comparedto the same periods in 2002.  Thedecrease in interest expense is due primarily to reduced interest rates on theCompany’s bank borrowings.  Interest onbank borrowings during the first six months of 2003 ranged from 4.52% to 6.25%,down from a range of 6.75% to 8.25% during the first six months of 2002.  Outstanding bank borrowings during the sixmonths ended June 30, 2003 ranged from $14.1 million to $17.3 million,compared to a range of $20.1 million to $21.8 million during the six monthsended June 30, 2002.  The decreasein

 

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bankborrowings was partially offset by an increase in obligations under capitalleases to $5.5 million at June 30, 2003, from $100,000 at June 30,2002.

 

Other expense for the six months ended June 30, 2003 relates to losseson disposal of certain photocopiers and ATM machines removed from service inthe United Kingdom offset by a refund for expenses incurred during 2000.

 

The Company's effective tax rate for the quarter ended June 30, 2003was 33.0%, resulting in an income tax provision of $566,000, compared to aneffective tax rate of 40.1% and an income tax benefit of $270,000 for the sameperiod in 2002. The effective tax rate for the six months ended June 30, 2003was 36.0%, resulting in an income tax provision of $1.073 million compared toan effective tax rate of 34.8% and an income tax benefit of $396,000 for thesame period in 2002.

 

A reconciliation of the income tax provision (benefit) for the threeand six months ended June 30, 2002 and 2003 is as follows:

 

 
|                                  |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|---------------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                                  |   | **June 30,**            |   | **June 30,**          |   | **June 30,** |   | **June 30,** |   |
| **Components  of Effective Tax Rate** |   | **2002**                |   | **2003**              |   | **2002** |   | **2003** |   |
|                                  |   | **(unaudited)**         |   | **(unaudited)**       |   | **(unaudited)** |   | **(unaudited)** |   |
| Pretax Book Income                    |   | 34.00                   | %      | 34.00                 | %      | 34.00 | % | 34.00 | % |
|                                  |   |                    |   |                  |   |   |   |   |   |
| State Tax Net of Federal Benefit      |   | 4.80                    |   | 3.35                  |   | 4.80 |   | 3.23 |   |
| Nondeductible Expenses                |   | (0.40                   | )      | 0.22                  |   | (0.40 | ) | 0.56 |   |
| Foreign Rate Differential             |   | 3.26                    |   | 1.24                  |   | (2.34 | ) | 0.48 |   |
| PY Perm True-Up                       |   | 0.00                    |   | 0.00                  |   | 0.00 |   | 0.00 |   |
| Change in Valuation Allowance         |   | (0.76                   | )      | (6.40                 | )      | (0.46 | ) | (2.79 | ) |
| Other                                 |   | 0.00                    |   | 0.00                  |   | 0.00 |   | 0.00 |   |
| Intercompany Interest US/UK           |   | (0.80                   | )      | 0.61                  |   | (0.80 | ) | 0.48 |   |
|                                  |   |                    |   |                  |   |   |   |   |   |
| Total Effective Tax Rate              |   | 40.10                   | %      | 33.02                 | %      | 34.80 | % | 35.95 | % |

 

 

For the sixmonths ended June 30, 2003, the Company had net income of $1.9 million,compared to a net loss of $741,000 for the six months ended June 30,2002.  This improvement is primarilyattributable to $2.7 million in increased gross profits and a $1.2 millionreduction in selling, general and administrative expense, less the increase of$1.5 million in the provision for income taxes.

 

Liquidity and Capital Resources

 

During the six months ended June 30, 2003, TRM generated $6.3 millionin cash flows from operations as compared to $2.9 million for the same periodin 2002.  The Company has a workingcapital deficit that decreased to $343,000 at June 30, 2003 from $1.9million at December 31, 2002.  Cashflows from the Company’s operating activities in the first six months of 2003have allowed the Company to pay the litigation settlement accrued at the end of2002, reduce long-term debt and reduce the working capital deficit by $1.6million.

 

In May 2003,the Company 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 $15,000,000three year term loan, which matures in March 2006, and a $4,000,000 revolvingline of credit which matures April 30, 2004.  Interest is due monthly and principal is payable in quarterlyinstallments of $750,000 starting September 30, 2003.

 

In April 2003,DZ Bank AG, Deutsche Zentral-Genossenschaftsbank Frankfurt am Main (DZ Bank)approved a request to increase cash available for use in TRM’s USA ATM network

 

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from $30.0 million to $50.0million.  The additional $20.0 millioncash facility is available to support continued growth in the Company’s ATMnetwork as may be needed from time to time.

 

On March 14, 2000, a Deposit Trust Agreement (“Agreement”) was enteredinto between GSS Holdings, Inc. as Depositor, Wilmington Trust Company as OwnerTrustee, and TRM ATM Corporation (“Servicer”) as Administrator. By virtue ofthe Agreement, TRM Inventory Funding Trust (the “Trust”) was created.  Neither Servicer, TRM nor any affiliateshave any ownership interest in the Trust. The purpose of the Trust is to provide cash to be placed in theCompany’s ATM machines (“Vault Cash”), through accessing commercial papermarkets.  Undivided interests in theTrust (“Certificates”) are sold to individuals and entities, and the liabilityof repaying or redeeming the Certificates resides with the Trust. The Trust hasthe ability to sell the Certificates, borrow and repay funds and make otherpayments under the Loan and Servicing Agreement, and to engage the Servicer andother agents and contractors from time to time to perform all duties assignedunder the Loan and Servicing Agreement. Any risk with regard to the Trust or the ability of the Trust to repaythe Certificates resides with the Trust and with GSS Holdings as the Depositor(equity investor in the amount of $15,000) and with Autobahn Funding CompanyLLC (equity investor in the amount of $1,485,000) in the Trust, rather thanwith Servicer, which merely serves as an administrator and servicer of theTrust.  Both GSS Holdings and AutobahnFunding Company LLC are parties related to DZ Bank and are independent of theServicer and the Company.

 

As borrowerunder the Loan and Servicing Agreement, the Trust, including its equity holders,is the sole 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) wouldbe required to provide monies, the Trust would be obligated to the LiquidityProvider for repayment of monies advanced under the Liquidity PurchaseAgreement.  The obligation of the Trustis backed 97%  by cash in the ATMnetwork 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 Vault Cash at alltimes remains the property of the Trust, and the Trust is ultimately obligatedto repay the Certificateholders.  At notime do the Certificateholders have recourse against the Servicer under theLoan and Servicing Agreement.  TheCompany maintains standby letters of credit totaling $1.65 million atJune 30, 2003 to guarantee the performance of the Servicer; subcontractorsmaintain insurance on behalf of the Trust so as to ensure the cash is safeduring delivery to ATM machines, and as a bailee, TRM ATM maintains insuranceon behalf of the Trust for the time that the cash is in ATM machines.  TRM ATM has chosen to purchase insurancepolicies from A.M. Best rated insurance carriers in the amount of $1.95million, with a deductible of $5,000 to $10,000 per incident, depending on thetype of ATM locations.  In a similarfashion, the banks and armored car carriers maintain insurance to cover lossesof cash due to theft while in the possession of those respective parties.  TRM ATM has assumed the risk of theinsurance deductible, which is not considered significant or material.  The Company has a reserve recorded in itsfinancial statements at December 31, 2002 and June 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.

 

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The Trustincurs expenses, including lending bank’s program fees, correspondent banks’analysis fees, servicing agent fees, certificate yield payment fees, discountson the Trust’s commercial paper borrowings, and collateral agent fees.  As Servicer, TRM ATM reimburses the Trustfor all such expenses except for the servicing agent fees that are retained byTRM ATM.  All of the TRM ATM convenienceand interchange revenues are deposited by the ATM transaction processor into aprimary deposit account owned by the Trust on a daily basis.  These deposits are considered collateral forensuring that all Trust expenses to be reimbursed by TRM ATM are funded on amonthly basis.  Once a month, the Trustautomatically transfers an amount, equal to the reimbursable fees owed by TRMATM, into a secondary account, also owned by the Trust.  From this secondary account, the Trust thendisburses payments directly to the appropriate parties in payment of theTrust’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 $217,000 and $360,000 for the quarters ended June 30, 2002 and 2003,respectively, and $418,000 and $620,000 for the six months ended June 30,2002 and 2003, respectively.

 

The Company’sUnited Kingdom ATM business obtains Vault Cash under an agreement with a localbank.  Vault Cash obtained under theprogram remains the property of the bank; however, the Company is insuredagainst risk of loss while the cash is in or being distributed to its ATMnetwork.

 

The Companyexpects that operations will continue for 2003, with the realization of assets,and discharge of liabilities in the ordinary course of business.  The Company believes that its prospectiveneeds for working capital, capital expenditures and debt service will be metfrom cash flows generated by operations. 

 

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A summary ofthe Company’s contractual commitments and obligations at June 30, 2003 is asfollows:

 

|                               |   | **Payments  Due by Period** |   |
|------------------------------------|--------|-----------------------------|--------|
| **Contractual obligations**        |   | **Total**                   |   | **2003** |   | **2004-2005** |   | **2006-2007** |   | **After 5  years** |   |
|                               |   |                        |   |   |   |   |   |   |   |   |   |
| Long-term bank debt                |   | $                           | 15,079 |   | $ | 1,511 |   | $ | 6,044 |   | $ | 7,524 |   | $ | — |   |
| Capital lease obligations          |   | 5,494                       |   | 1,114 |   | 3,436 |   | 826 |   | 118 |   |
| Operating leases                   |   | 8,036                       |   | 1,410 |   | 4,381 |   | 1,334 |   | 911 |   |
|                               |   |                        |   |   |   |   |   |   |   |   |   |
| Total contractual cash obligations |   | $                           | 28,609 |   | $ | 4,035 |   | $ | 13,861 |   | $ | 9,684 |   | $ | 1,029 |   |

 

Critical Accounting Policies

 

The Company’scritical accounting policies for the six months ended June 30, 2003 areconsistent with those discussed in the Company’s annual report on Form 10-K forthe year ended December 31, 2002.

 

New Accounting Standards

 

In January 2003, the FASB issued FASB Interpretation No. 46“Consolidation of Variable Interest Entities” (“FIN 46”).  FIN 46 addresses consolidation by businessenterprises 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 are required.  FIN 46 applies immediately to variableinterest entities created after January 31, 2003, and applies in the first yearor interim period beginning after June 15, 2003 to variable interest entitiesin which an enterprise holds a variable interest that it acquired beforeFebruary 1, 2003.  The Company willadopt the provisions of FIN 46 in the third quarter of 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 likely result in the consolidation ofthe TRM Inventory Funding Trust in the Company’s financial statements. As ofJuly 1, 2003 the consolidation of the TRM Inventory Funding Trust would resultin an increase in long-term assets and liabilities of $31.0 million and have noeffect on its 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.” SFAS No. 149 is effective for the Company prospectively for contractsentered into or modified after June 30, 2003. The Company does not believe that the adoption of this 

 

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statement will have a material impact on itsresults of operations, financial position or cash flows, as the Company doesnot 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 instrument that is within itsscope as a liability (or an asset in some circumstances).  Many of those instruments were previouslyclassified as equity.  SFAS No. 150 iseffective for the Company for financial instruments entered into or modifiedafter May 31, 2003, and otherwise is effective at the beginning of the firstinterim period beginning after June 15, 2003. The Company does not believe that adoption of SFAS No. 150 will have amaterial effect on its financial position, results of operations or cash flows.

 

**ITEM 3.****     QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The Company isexposed to market risk from changes in interest rates and foreign currencyexchange rates, which could impact its results of operations and financialcondition.

 

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 $25,000 and $48,000 forthe three and six month periods ended June 30, 2003, respectively, and $15,000and $41,000 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 to interestrate risk related to its credit facility. The Company’s $15.0 million term loan bears interest at a variablerate.  A 10% change in the interest ratefrom the June 30, 2003 rate would increase or decrease the Company’sinterest expense by approximately $17,000 per quarter.

 

ForeignCurrency Risk.* *The Company has international subsidiaries subject toforeign currency rate exposure.  TheCompany pays the expenses of its international operations in local currencies,namely, the British pound and Canadian dollar. The international operations are subject to risks typical of aninternational business, including, but not limited to: differing economicconditions, changes in political climate, differing tax structures, otherregulations and restrictions, and foreign exchange rate volatility.  Accordingly, future results could bematerially and adversely affected by changes in these or other factors.

 

The Company isalso exposed to foreign exchange rate fluctuations as they relate to revenuesand operating expenses as the financial results of foreign subsidiaries aretranslated into U.S. dollars in consolidation.  Because exchange rates vary, these results, when translated, mayvary from expectations and adversely impact overall expectedprofitability.  To date, the Company’sexposure to exchange rate volatility has not been significant.  Foreign exchange rate transactions resultedin a gain of $8,000 for the three months ended June 30, 2003 and a loss of$4,500 for the six months ended June 30, 2003. Foreign exchange rate transaction losses, net of gains were $6,800 and$27,800 for the three months and six months ended June 30, 2002.

 

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                If foreign currency rates were to fluctuateby 10% from rates at June 30, 2003, the Company’s financial position wouldbe materially affected.  Assuming a 10percent appreciation or depreciation in foreign currency exchange rates fromthe quoted foreign currency exchange rates at June 30, 2003, the potentialchange in the fair value of foreign currency-denominated assets and liabilitiesin each entity would aggregate approximately $2.6 million.  No assurance can be given that changes inforeign currency rates will not have a material impact on the Company’s resultsof 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**

 

(a)  Evaluation of disclosurecontrols and procedures.  The Companycarried out an evaluation, under the supervision and with the participation ofthe Company’s management, including its chief executive officer and principalaccounting officer, of the effectiveness of the design and operation of theCompany’s “disclosure controls and procedures” (as defined in Rules 13a – 15(e)and 15d – 15(e) of the Securities Exchange Act of 1934 (the “ExchangeAct”)).  Based upon that evaluation, thechief executive officer and principal accounting officer concluded that as ofJune 30, 2003 the Company’s disclosure controls and procedures are effective inensuring that information required to be disclosed by the Company in thereports that it files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms.

 

(b)  Changes in internalcontrols.  There were no changes in theCompany’s internal controls over financial reporting that occurred during theperiod covered by this report that have materially affected, or are reasonablylikely to materially affect these internal controls over financial reporting.

 

 

**PART II—OTHER INFORMATION**

 

**ITEM 4.****     SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

 

On June 17, 2003, at the Company’s annual meeting of shareholders,the holders of the Company’s outstanding common stock and Series APreferred Stock took the actions described below.  As of the record date for the annual meeting, 7,059,790 shares ofcommon stock and 1,777,778 shares of Series A Preferred Stock were issuedand outstanding.  Each share ofpreferred stock is entitled to one vote per share and votes together with thecommon stock as one class.

 

The shareholders elected each of Edward E. Cohen, Slavka B. Glaser, andDr. Alan D. Schreiber to serve on the Company’s Board of Directorsfor the next three years, and elected

 

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Nancy Alperin and Lance Laiferto serve on the Company’s Board of Directors for one year, by the votesindicated below:

 

|                     |   | **For**   |   | **Withheld** |   |
|--------------------------|--------|-----------|--------|--------------|--------|
| Edward E.  Cohen         |   | 5,789,065 |   | 702,603      |   |
| Slavka B.  Glaser        |   | 5,229,883 |   | 1,261,785    |   |
| Alan D.  Schreiber, M.D. |   | 5,788,933 |   | 702,735      |   |
| Nancy  Alperin           |   | 5,788,933 |   | 702,735      |   |
| Lance  Laifer            |   | 5,788,883 |   | 702,785      |   |

 

Daniel G.Cohen, Hersh Kozlov, Harmon S. Spolan and Kenneth Lewis Tepper will continuetheir terms of office as directors.

 

Additionally,the shareholders ratified the selection of PricewaterhouseCoopers LLP as theCompany’s independent auditors for the 2003 fiscal year.  The result of the votes was 6,477,195 forand 13,723 against.  No other businesscame before the meeting or any adjournment thereof.

 

 

**ITEM 6.****     EXHIBITS AND REPORTS ON FORM8-K.**

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

 
| 10.1   |   | Business Loan Agreement dated as of May 15, 2003, between Bank of  America, N.A., and TRM Corporation.                       |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                              |
| 31.1   |   | Certification of Chief Executive Officer pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.                              |
|   |   |                                                                                                                              |
| 31.2   |   | Certification of Principal Accounting Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                         |
|   |   |                                                                                                                              |
| 32.1   |   | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,  18 U.S.C. Section 1350.     |
|   |   |                                                                                                                              |
| 32.2   |   | Certification of Principal Accounting Officer pursuant to Section 906  of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
|   |   |                                                                                                                              |

** **

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

 

Current reporton Form 8-K dated May 5, 2003 reporting the Company’s results ofoperations for the quarter ended March 31, 2003, filed with the Securitiesand Exchange Commission.

 

**SIGNATURE**

 

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

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

 

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