Access to Money 10Q 2005 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005


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 number0-19657

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 all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YESþ NOo

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

YESo NOþ

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

YESo NOþ

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


CLASS		OUTSTANDING AT SEPTEMBER 30, 2005

Common Stock		14,067,714

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
	ITEM 5. OTHER INFORMATION
PART II — OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 6. EXHIBITS
SIGNATURE
EMPLOYMENT AGREEMENT DATED NOVEMBER 11, 2005
RETAINER AGREEMENT DATED NOVEMBER 11, 2005
FIRST AMENDMENT AND WAIVER TO CREDIT AGREEMENT
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CERTIFICATION OF CHIEF FINANCIAL OFFICER
CERTIFICATION OF PRINCIPAL ACCOUNTING OFFICER
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CERTIFICATION OF CHIEF FINANCIAL OFFICER
CERTIFICATION OF PRINCIPAL ACCOUNTING OFFICER

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TRM Corporation
Consolidated Balance Sheets
(unaudited)
(In thousands)


	December 31,		September 30,
	2004		2005
Assets
Current assets:
Cash and cash equivalents	$	5,576	$	3,132
Accounts receivable, net		12,251		17,522
Income tax receivable		115		393
Inventories		7,319		2,332
Prepaid expenses and other		5,011		3,695
Deferred tax asset		58		399

Total current assets		30,330		27,473
Equipment, less accumulated depreciation and amortization		72,265		75,721
Restricted cash – TRM Inventory Funding Trust		75,547		93,985
Goodwill		118,444		118,846
Other intangible assets, less accumulated amortization		51,241		44,922
Deferred tax asset		—		703
Other assets		9,473		3,021

Total assets	$	357,300	$	364,671


Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	18,234	$	10,169
Accrued expenses		8,891		7,289
Accrued expenses of TRM Inventory Funding Trust		154		176
Current portion of long-term debt		10,059		10,045
Current portion of obligations under capital leases		2,195		1,033

Total current liabilities		39,533		28,712
TRM Inventory Funding Trust note payable		74,105		92,844
Long-term debt		120,177		115,653
Obligations under capital leases		1,644		876
Deferred tax liability		8,168		9,739
Other long-term liabilities		241		103
Preferred dividends payable		220		—

Total liabilities		244,088		247,927


Minority interest		1,500		1,500


Shareholders’ equity:
Preferred stock, no par value - 5,000 shares authorized; no shares issued and outstanding (1,044 at December 31, 2004)		11,620		—
Common stock, no par value - 50,000 shares authorized;14,068 shares issued and outstanding (13,139 at December 31, 2004)		81,075		93,181
Additional paid-in capital		63		63
Accumulated other comprehensive income:
Accumulated foreign currency translation adjustments		4,474		2,934
Unrealized gain on securities		28		—
Other		—		(69	)
Retained earnings		14,452		19,135

Total shareholders’ equity		111,712		115,244

Total liabilities and shareholders’ equity	$	357,300	$	364,671

See accompanying notes to consolidated financial statements.

TRM Corporation
Consolidated Statements of Operations
(unaudited)
(In thousands, except per share data)


	Three months ended						Nine months ended
	September 30,						September 30,
	2004			2005			2004			2005
Sales	$	28,981		$	59,237		$	83,737		$	179,454
Less discounts		6,495			27,885			17,722			81,542

Net sales		22,486			31,352			66,015			97,912
Cost of sales		12,406			18,856			35,116			53,030

Gross profit		10,080			12,496			30,899			44,882
Selling, general and administrative expense		6,640			11,537			19,056			34,077
Asset retirements		69			—			69			—

Operating income		3,371			959			11,774			10,805
Interest expense		141			2,494			635			7,242
Other income, net		(270	)		(1,402	)		(43	)		(2,214	)

Income (loss) from continuing operations before income taxes		3,500			(133	)		11,182			5,777
Provision (benefit) for income taxes		1,257			(451	)		3,577			947

Income from continuing operations		2,243			318			7,605			4,830
Loss from discontinued operations, net of income tax benefit of $37 for the three months and $106 for the nine months ended September 30, 2004		(77	)		—			(218	)		—

Net income	$	2,166		$	318		$	7,387		$	4,830


Basic and diluted per share information:

Income from continuing operations	$	2,243		$	318		$	7,605		$	4,830
Preferred stock dividends		(355	)		—			(1,100	)		(147	)
Excess of cash paid over carrying value of preferred stock redeemed		(46	)		—			(46	)		—
Income allocated to Series A preferred shareholders		(216	)		—			(902	)		(57	)

Net income from continuing operations available to common shareholders	$	1,626		$	318		$	5,557		$	4,626


Weighted average common shares outstanding		9,070			14,041			7,915			13,809
Dilutive effect of stock options		867			730			1,012			803
Dilutive effect of warrants		—			—			8			32

Weighted average common shares outstanding, assuming dilution		9,937			14,771			8,935			14,644


Basic income (loss) per share:
From continuing operations	$	.18		$	.02		$	.70		$	.33
Discontinued operations		(.01	)		—			(.03	)		—

Net income	$	.17		$	.02		$	.67		$	.33

Diluted income (loss) per share:
From continuing operations	$	.17		$	.02		$	.63		$	.32
Discontinued operations		(.01	)		—			(.03	)		—

Net income	$	.16		$	.02		$	.60		$	.32

See accompanying notes to consolidated financial statements.

TRM Corporation
Consolidated Statement of Shareholders’ Equity
(unaudited)
(In thousands)


																Accumulated
														Additional		other
	Comprehensive			Preferred						Common				paid-in		comprehensive			Retained
	income			Shares			Amounts			Shares		Amounts		capital		income			earnings			Total

Balances, December 31, 2004					1,044		$	11,620			13,139	$	81,075	$	63	$	4,502		$	14,452		$	111,712
Comprehensive income:
Net income	$	4,830			—			—			—		—		—		—			4,830			4,830
Other comprehensive income:
Foreign currency translation adjustment		(1,540	)		—			—			—		—		—		(1,540	)		—			(1,540	)
Unrealized gain on securities		(28	)		—			—			—		—		—		(28	)		—			(28	)
Other, net of tax		(69	)		—			—			—		—		—		(69	)		—			(69	)

Comprehensive income	$	3,193

Conversion of Series A preferred stock					(1,044	)		(11,620	)		783		11,620		—		—			—			—
Exercise of stock options					—			—			92		213		—		—			—			213
Exercise of warrants					—			—			54		37		—		—			—			37
Tax benefit of options exercised					—			—			—		236		—		—			—			236
Preferred stock dividends					—			—			—		—		—		—			(147	)		(147	)

Balances, September 30, 2005					—		$	—			14,068	$	93,181	$	63	$	2,865		$	19,135		$	115,244

See accompanying notes to consolidated financial statements.

TRM Corporation
Consolidated Statements of Cash Flows
(unaudited)
(In thousands)


	Nine months ended
	September 30,
	2004			2005
Operating activities:
Net income	$	7,387		$	4,830
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,107			15,341
Loss on disposal of equipment		439			210
Gain on sale of investment in equity security		—			(1,312	)
Changes in items affecting operations, net of effect of business acquisitions:
Accounts receivable, net		1,166			(5,323	)
Income tax receivable		—			(278	)
Inventories		(1,170	)		4,708
Prepaid expenses and other		(1,317	)		1,183
Accounts payable		3,645			(7,731	)
Accrued expenses		(2,045	)		(1,650	)
Income taxes payable		784			—
Deferred taxes		2,525			527

Total operating activities		18,521			10,505

Investing activities:
Proceeds from sale of equipment		50			41
Capital expenditures		(5,618	)		(14,064	)
Proceeds from sale of investment in equity security		—			9,583
Acquisition of businesses, net of cash acquired		(7,153	)		—
Acquisition of intangible and other assets		(5,617	)		(3,346	)

Total investing activities		(18,338	)		(7,786	)

Financing activities:
Borrowings on notes payable		5,501			7,359
Repayment of notes payable		(15,716	)		(11,004	)
Principal payments on capital lease obligations		(1,823	)		(1,702	)
Increase in restricted cash		(7,512	)		(18,438	)
Proceeds from issuance of TRM Inventory Funding Trust note, net of repayments		7,521			18,739
Net proceeds from sale of common stock		52,821			—
Proceeds from exercise of stock options and warrants		4,202			249
Redemption of Series A preferred stock		(4,489	)		—
Preferred stock dividends		(2,166	)		(367	)

Total financing activities		38,339			(5,164	)

Effect of exchange rate changes		47			1

Net increase (decrease) in cash and cash equivalents		38,569			(2,444	)
Beginning cash and cash equivalents		5,724			5,576

Ending cash and cash equivalents	$	44,293		$	3,132


Supplemental disclosure of non-cash transactions:
Conversion of preferred shares to common	$	3,545		$	11,620

See accompanying notes to consolidated financial statements.

TRM Corporation

Notes to Condensed Consolidated Financial Statements (unaudited)

1. Interim Financial Data

The consolidated financial statements of TRM Corporation and its subsidiaries included herein have been prepared by management, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments, consisting only of normal recurring adjustments, which, in the opinion of management, are necessary for a fair statement of the results of the interim periods. These consolidated financial statements should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2004. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The results of operations for the periods presented are not necessarily indicative of the results to be expected for any subsequent interim period or for the year ending December 31, 2005.

2. Financial Statement Reclassifications

Certain financial statement reclassifications have been made to prior period amounts to conform to the current period presentation. These changes had no impact on shareholders’ equity or previously reported net income.

3. Net Income Per Share

In March 2004, the Financial Accounting Standards (“FASB”) approved Emerging Issues Task Force (“EITF”) Issue No. 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings Per Share.” EITF 03-6 supersedes the guidance in Topic No. D-95, “Effect of Participating Convertible Securities on the Computation of Basic Earnings per Share,” and requires the use of the two-class method for the computation of basic earnings per share for companies that have participating securities. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In addition, EITF 03-6 addresses other forms of participating securities, including options, warrants, forwards and other contracts to issue an entity’s common stock, with the exception of stock-based compensation (unvested options and restricted stock) subject to the provisions of APB No. 25 and SFAS No. 123. EITF 03-6 became effective for reporting periods beginning after March 31, 2004 and must be applied by restating previously reported earnings per share information. Our Series A preferred stock qualified as a participating security under EITF 03-6. Accordingly, we adopted the use of the two-class method for the computation of earnings per share in the second quarter of 2004. Our Series A preferred stock was converted into common stock during the first quarter of 2005. As a result, EITF 03-6 had no impact on our net income per share calculation for the second and third quarters of 2005 and will have no impact for the remainder of 2005.

Basic and diluted net income per share are based on the weighted average number of shares outstanding during each period, with diluted net income per share including the effect of

potentially dilutive securities. For diluted net income per share, the calculation includes the effect of potentially dilutive securities, unless such effect is antidilutive. Weighted average common shares outstanding, assuming dilution, include the incremental shares that would be issued upon the assumed exercise of stock options and warrants. The table below identifies those items excluded from the calculation of diluted earnings per share for each three month period ended on the dates shown, because their inclusion would have been antidilutive.


	2004						2005
	March 31		June 30		September 30		March 31		June 30		September 30
			Thousands of shares of common stock

Options to purchase common stock		—		15		15		—		15		15
Preferred shares convertible into common stock		—		1,333		796		—		—		—
Warrants exercisable for common stock		300		—		300		—		—		—

These options and warrants could be dilutive in the future.

4. Inventories (in thousands):


	December 31,		September 30,
	2004		2005
Parts	$	4,349	$	1,023
ATMs held for resale		2,896		1,168
Paper, toner and developer		74		141

Total	$	7,319	$	2,332

5. Long-Term Debt (in thousands):


	December 31,			September 30,
	2004			2005
Syndicated loan facility:
Term loan	$	120,000		$	112,500
Domestic line of credit		3,500			—
Foreign line of credit		6,687			13,153
Other		49			45

		130,236			125,698
Less current portion		(10,059	)		(10,045	)

	$	120,177		$	115,653

As of September 30, 2005, the weighted average interest rate on the term loan was 7.62%, and the weighted average interest rate on borrowings under the foreign line of credit was 7.35%. As of December 31, 2004, the weighted average interest rate on the term loan was 6.46%, the interest rate on borrowings under the domestic line of credit was 6.50%, and the weighted average interest rate on borrowings under the foreign line of credit was 7.68%.

As of September 30, 2005, we failed to meet three financial covenants of the syndicated loan facility. The covenants not met were the consolidated leverage ratio, consolidated fixed charge coverage ratio and capital expenditures limit. We have subsequently been granted a waiver as of September 30, 2005, of the lenders’ rights and remedies with respect to those covenant violations and an amendment of the credit agreement. Violation of the capital expenditures limit was caused by the mandatory upgrading of our ATM estate in the UK which required us to be compliant with triple DES and EMV standards by July 1, 2005. Costs related to these upgrades were higher than expected, which resulted in additional capital expenditures on hardware and installations. As a result of these additional capital expenditures we also did not comply with the consolidated fixed charge coverage ratio. Subsequent to September 30, 2005 we paid off the balance of our foreign line of credit. Had we made this payment prior to September 30, 2005, we would have been in compliance with the consolidated leverage ratio. In addition to the waiver as of September 30, 2005, the lenders have agreed to amend covenants in the facility as follows. The minimum consolidated fixed charge coverage ratio as of the end of December 2005 has been decreased from 1.1:1.0 to 1.0:1.0. The capital expenditures limit has been increased from $12.5 million per year to $17 million for 2005 and $15 million per year thereafter.

We entered into a three-year interest rate cap on March 31, 2005 with a notional amount of $50 million. If the LIBOR interest rate rises above 5% any time through March 31, 2008, we will receive payments that reduce the interest rate on the $50 million notional amount to 5% plus the applicable rate and mandatory costs in accordance with the loan agreement. We have designated the interest rate cap as a hedge of $50 million of our LIBOR-based term loan. The objective of the interest rate cap is to ensure that we are not exposed to interest rate increases beyond 5% on $50 million of our outstanding term loan for the three-year period which began March 31, 2005. Pursuant to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” we have designated the interest rate cap as a cash flow hedge of $50 million of our variable rate term loan. We expect the hedge of the term loan to be highly effective in offsetting potential changes in cash flows attributed to a change in interest rates beyond 5%. Accordingly, we record as a component of accumulated other comprehensive income (loss) all unrealized gains and losses on the interest rate cap. We will record any realized gains on the interest rate cap as a reduction of interest expense on the term loan, if and when the LIBOR interest rate exceeds 5%. We are exposed to credit risk arising from the counterparty to the interest rate cap, but currently believe that our exposure to such credit risk is low.

6. Business Acquisitions

During 2004 our ATM segment acquired three ATM businesses. Effective March 31, 2004, we acquired all of the outstanding shares of Inkas Financial Corp. Ltd. (“Inkas”). In June 2004 we acquired all of the outstanding shares of Mighty Cash Financial Services, Inc. (“Mighty

Cash”). On November 19, 2004, we acquired substantially all of the assets constituting eFunds Corporation’s business of operating ATMs.

The following table reflects the unaudited combined results of TRM, Inkas, Mighty Cash and eFunds’ ATM business as if each of the acquisitions had taken place at the beginning of each period presented. The pro forma information includes adjustments for the amortization of contract rights and other amortizable intangible assets acquired, depreciation of fixed assets, decreased interest income, increased interest expense and the tax effects of these adjustments. The pro forma information does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the combined companies.


	Three months		Nine months
	ended		ended
	September 30, 2004		September 30, 2004
Net sales (in thousands)	$	35,745	$	106,315
Net income (in thousands)	$	577	$	2,299
Basic net income per share	$	.02	$	.12
Diluted net income per share	$	.02	$	.11

7. Shareholders’ Equity

Common Stock Options and Warrants

We apply Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and the related interpretations in accounting for stock-based compensation plans. Accordingly, we have recognized no compensation expense for our stock-based compensation plans. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” (in thousands, except per share data):


	Three months ended						Nine Months ended
	September 30,						September 30,
	2004			2005			2004			2005
Net income, as reported	$	2,166		$	318		$	7,387		$	4,830
Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(533	)		(371	)		(875	)		(1,116	)

Pro forma net income (loss)	$	1,633		$	(53	)	$	6,512		$	3,714


Basic net income (loss) per share:
As reported	$	.17		$	.02		$	.67		$	.33
Pro forma	$	.12		$	.00		$	.58		$	.26

Diluted net income (loss) per share:
As reported	$	.16		$	.02		$	.60		$	.32
Pro forma	$	.11		$	.00		$	.52		$	.24

During the nine months ended September 30, 2005, options were exercised for the purchase of 92,310 common shares at prices ranging from $1.25 to $9.25. In addition, warrants were exercised primarily on a cashless basis, resulting in the issuance of an additional 53,939 common shares during the nine months ended September 30, 2005.

8. Other income, net

During the second quarter of 2005 we reached a final settlement agreement in the amount of $700,000 with our directors’ and officers’ liability insurer to obtain reimbursement of monies we spent to settle litigation described in Note 16 to our audited consolidated financial statements in our 2004 Annual Report on Form 10-K. The settlement payment of $700,000 was made to us, and was included in other income, net during the second quarter of 2005.

During August 2005 we sold our only investment in marketable equity securities for $9.6 million and recorded a gain on the sale of $1.3 million, which was included in other income, net during the third quarter of 2005.

9. Provision for Income Taxes

Our effective tax rate for the first nine months of 2005 was 16.4%, resulting in a tax provision of $947,000. In the second quarter of 2005, we reached an agreement with the United Kingdom taxing authorities allowing the deductibility of certain intercompany interest amounts that we had previously treated as non-deductible. The $720,000 benefit of this additional deductible expense was recognized in the second quarter of 2005. In the third quarter of 2005, we released a valuation allowance relating to capital loss carryforwards resulting in no tax provision on a $1.3 million gain from a sale of equity securities. These factors resulted in an effective tax rate for the first nine months of 2005 which is substantially lower than the United States statutory rate. For the first nine months of 2004, the effective tax rate was 32.0%, and the tax provision was $3.6 million. The effective tax rate for the first nine months of 2004 reflects the release of a valuation allowance.

10. Segment Reporting

We have two reportable segments: ATM and Photocopy. ATM owns and/or operates ATM networks, sells ATM machines, and services equipment for others. Photocopy owns and maintains self-service photocopiers in retail establishments.

The accounting policies of the segments are substantially the same as those described in Note 1 to the financial statements in our Annual Report on Form 10-K for the year ended December 31, 2004. We evaluate each segment’s performance based on operating income or loss

excluding costs of raising capital and pursuing potential acquisitions. Information regarding the operations of these reportable segments is as follows (in thousands):


	Three months ended						Nine months ended
	September 30,						September 30,
	2004			2005			2004			2005
Net sales:
ATM	$	12,566		$	23,387		$	33,660		$	71,879
Photocopy		9,920			7,965			32,355			26,033

	$	22,486		$	31,352		$	66,015		$	97,912


Operating income excluding unallocated costs:
ATM	$	2,451		$	3,418		$	6,522		$	14,277
Photocopy		1,912			82			7,732			2,686

	$	4,363		$	3,500		$	14,254		$	16,963


Reconciliation of segment data to income from continuing operations before income taxes:
Operating income excluding unallocated costs	$	4,363		$	3,500		$	14,254		$	16,963
Unallocated costs		992			2,541			2,480			6,158
Interest expense		141			2,494			635			7,242
Other income, net		(270	)		(1,402	)		(43	)		(2,214	)

Income (loss) from continuing operations before income taxes	$	3,500		$	(133	)	$	11,182		$	5,777

Management periodically reviews the expenses associated with each business segment as well as those expenses that are for general corporate purposes, but not directly related to the operation of any one business segment, such as the cost of raising capital and pursuing acquisitions. Unallocated costs are those expenses management believes are attributable to general corporate purposes.

Total assets (in thousands):


	December 31,		September 30,
	2004		2005
ATM (including goodwill of $118.8 million)	$	309,180	$	316,439
Photocopy		48,120		48,232

	$	357,300	$	364,671

11. Subsequent Events

On September 1, 2005, we entered into agreements with Travelex UK Limited and SNAX 24 Corporation Limited to purchase all of the shares of Travelex ATMs Limited and to purchase the assets of the ATM business of Travelex UK Limited. The cash purchase price to be paid for the assets and the shares is £43.4 million (approximately $78 million based on exchange rates as of September 1, 2005), subject to certain working capital adjustments and adjustments based on the number of operational ATMs at closing. The closing is subject to customary closing conditions, including obtaining financing for the purchase. In accordance with the agreements, Bank of America has issued a £1.5 million letter of credit in favor of the sellers. Under certain circumstances, if we do not complete the acquisitions, the £1.5 million may be paid to the purchasers, and we would have to reimburse Bank of America.

We entered into a Share Purchase Agreement with several buyers under which we sold 2.8 million unregistered shares of common stock for $14.54 per share. The closing date of the sale was October 5, 2005. The sales proceeds (net of placement agent fees and other costs) were $37.9 million. We used $28.4 million of the sales proceeds to reduce the principal balance of our term loan. We have agreed to use our best efforts to file a registration statement registering the shares sold within 60 days of the closing date. If we do not file the registration statement within 60 days of the closing date, or if the registration statement does not become effective within 90 days of the closing date, or if the registration statement becomes unavailable for use by the purchasers, we may be subject to payment of damages that could accumulate up to 10% of the aggregate purchase price.

We expect to finalize an agreement in the fourth quarter of 2005 pursuant to which we will receive a $1.1 million reimbursement from a vendor relating to our photocopier equipment.

12. New Accounting Standards

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment,” an amendment of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS 123R eliminates the ability to account for share-based payments using Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and instead requires companies to recognize compensation expense using a fair-value based method for costs related to share-based payments, including stock options and employee stock purchase plans. The expense will be measured as the fair value of the award at its grant date based on the estimated number of awards that are expected to vest, and recorded over the applicable service period. In the absence of an observable market price for a share-based award, the fair value would be based upon a valuation methodology that takes into consideration various factors, including the exercise price of the award, the expected term of the award, the current price of the underlying shares, the expected volatility of the underlying share price, the expected dividends on the underlying shares and the risk-free interest rate. The

requirements of SFAS 123R are effective January 1, 2006 and apply to all awards granted, modified or cancelled after that date, and to the portion of previously granted awards that have not vested by the adoption date. We are evaluating the requirements of SFAS 123R and expect that the adoption of SFAS 123R may have a significant impact on our consolidated results of operations and earnings per share. We have not yet determined the method of adoption or the financial statement impact of adopting SFAS 123R, and we have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which changes the accounting for the reporting of voluntary changes in accounting principles. SFAS 154 requires changes in accounting principles to be applied retrospectively to prior periods’ financial statements, where practicable, unless specific transition provisions permit alternative transition methods. SFAS 154 will be effective in fiscal years beginning after December 15, 2005. Our adoption of SFAS 154 is not expected to have a material impact on our consolidated financial statements except to the extent that we adopt a voluntary change in accounting principle in a future period that must be accounted for through a restatement of previous financial statements.

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

Forward-Looking Statements

Information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q with respect to our beliefs, plans, objectives, goals, expectations, anticipations, intentions, financial condition, results of operations, future performance and business, including, without limitation, increasing ATM revenues, decreases in photocopy volume and growth of our business (including acquisitions) constitutes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We have based these forward-looking statements on management’s current expectations about future events. These statements can be identified by the fact that they do not relate strictly to historical or current facts, and by words such as “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan” or other similar words or expressions.

Any or all of the forward-looking statements in this report and in any other public statements we make may turn out to be wrong. This can occur as a result of inaccurate assumptions or as a consequence of known or unknown risks and uncertainties. We discuss many of the risks and uncertainties that may impact our business in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2004. Because of these risks and uncertainties, our actual results may differ materially from those that might be anticipated from our forward-looking statements. Other factors beyond those referred to above could also adversely affect us. Therefore, you are cautioned not to place undue reliance on our forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We are one of the largest multinational owners and operators of ATM networks, with operations in the United States, the United Kingdom and Canada. As an independent sales organization, or ISO, we own and operate off-premises, or non-bank branch sited, ATM networks. We have the second largest off-premises, or non-bank branch site ATM network in both the United States and the United Kingdom and the third largest off-premises ATM network in Canada. In addition, we own and operate a photocopier network with self-service photocopiers deployed throughout the United States, the United Kingdom and Canada.

At September 30, 2005, our ATM networks had a total of 22,243 machines deployed throughout the United Kingdom, United States and Canada representing an increase of 17,375 ATM machines (or 357%) when compared to the total at September 30, 2004. The increase in the number of ATMs was principally due to our acquisitions of an ATM network covering approximately 15,700 ATMs during the last quarter of 2004. Our ATM operations produced net sales of $71.9 million during the first nine months of 2005, an increase of $38.2 million (or 114%) as compared to the same period in the prior year.

At September 30, 2005, we had a total of 24,118 photocopiers in the United States, Canada and the United Kingdom, a decrease of 656 photocopiers (or 3%) when compared to

September 2004. The decrease in the number of photocopiers was caused primarily by the elimination of low volume sites. Photocopy net sales were $26.0 million for the nine months ended September 30, 2005, down from $32.4 million during the same period in 2004.

Consolidated Results of Operations

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


	Three months ended						Nine months ended
	September 30						September 30
	2004			2005			2004			2005
Sales		100.0	%		100.0	%		100.0	%		100.0	%
Less discounts		22.4			47.1			21.2			45.4

Net sales		77.6			52.9			78.8			54.6
Cost of sales		42.8			31.8			41.9			29.6

Gross profit		34.8			21.1			36.9			25.0
Selling, general and administrative expense		22.9			19.5			22.7			19.0
Asset retirements		.3			—			.1			—

Operating income		11.6			1.6			14.1			6.0
Interest expense		.5			4.2			.8			4.0
Other income, net		(.9	)		(2.4	)		(.1	)		(1.2	)

Income (loss) from continuing operations before income taxes		12.0			(.2	)		13.4			3.2
Provision (benefit) for income taxes		4.3			(.7	)		4.3			.5

Income from continuing operations		7.7			.5			9.1			2.7
Loss from discontinued operations		(.2	)		—			(.3	)		—

Net income		7.5	%		.5	%		8.8	%		2.7	%

Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004

ATM Results of Operations


	Three months ended September 30,
			% of					% of
	2004		sales			2005		sales
	(in thousands, except operating and percentage data)
Transaction-based sales	$	16,227		95.2	%	$	45,536		91.7	%
Service and other		457		2.7			3,157		6.4
Sales of ATM equipment		357		2.1			935		1.9

Total sales		17,041		100.0			49,628		100.0
Less discounts		4,475		26.3			26,241		52.9

Net sales		12,566		73.7			23,387		47.1
Cost of sales		6,959		40.8			13,476		27.1

Gross profit	$	5,607		32.9	%	$	9,911		20.0	%

Operating Data:
Average number of transacting ATMs		4,747					19,776
Withdrawal transactions		5,722,042					19,974,056
Average withdrawals per ATM per month		402					337
Average transaction-based sales per withdrawal transaction	$	2.83				$	2.28
Average discount per withdrawal transaction	$	.78				$	1.31
Net transaction-based sales per withdrawal transaction	$	2.05				$	0.97

Photocopy Results of Operations

	Three months ended September 30,
			% of					% of
	2004		sales			2005		sales
	(in thousands, except operating and percentage data)
Sales	$	11,940		100.0	%	$	9,609		100.0	%
Less discounts		2,020		16.9			1,644		17.1

Net sales		9,920		83.1			7,965		82.9
Cost of sales		5,447		45.6			5,380		56.0

Gross profit	$	4,473		37.5	%	$	2,585		26.9	%

Operating Data:
Average number of photocopiers		24,966					23,629
Average photocopies per machine per month		1,913					1,590
Average sales per photocopier per month	$	159.42				$	135.55
Average sales per photocopy	$	.083				$	.085
Average discount per photocopy	$	.014				$	.014
Average net sales per photocopy	$	.069				$	.071
Average gross profit per photocopy	$	.031				$	.023

Sales

For the third quarter of 2005, consolidated sales increased by $30.3 million, or 104% to $59.2 million from $29.0 million for the third quarter of 2004. ATM sales increased by

$32.6 million due primarily to acquisitions during 2004, while photocopier sales decreased by $2.3 million due to a decline in installed photocopiers and in the average number of photocopies per machine.

During the third quarter of 2005, sales and expenses were affected by changes in the value of the U.S. dollar as compared to the British pound and the Canadian dollar. Approximately 33% of consolidated sales for the quarter were generated in the United Kingdom and Canada by our subsidiaries in those countries. The average exchange rates during the third quarter of 2005 were $1.788 to £1.00 and U.S. $.825 to Canadian $1.00, compared to $1.813 to £1.00 and U.S. $.756 to Canadian $1.00 during the third quarter of 2004. The decrease in sales resulting from the decrease in the value of the British pound has been more than offset by the increase in sales due to the increase in the value of the Canadian dollar. As a result we reported $302,000 more in sales during the third quarter of 2005 than we would have reported had the exchange rates remained constant at the averages for the third quarter of 2004. This gain was substantially offset by corresponding exchange rate-related increases in discounts and expenses.

ATM sales.ATM sales were $49.6 million for the third quarter of 2005 compared to $17.0 million for the third quarter of 2004. The $32.6 million increase in ATM sales was a combination of a $29.3 million increase in transaction-based sales, a $2.7 million increase in service and other, and a $578,000 increase in sales of ATM equipment.

The $29.3 million increase in transaction-based sales resulted from expansion of our ATM networks. The average number of transacting ATMs in our networks during the third quarter of 2005 increased to more than four times the average in the same period in 2004. The increase of 15,029 average transacting ATMs has resulted primarily from the acquisition in November 2004 of approximately 15,700 existing ATM contracts from eFunds in addition to sales of new contracts by our sales force.

The increase in sales resulting from the increase in the number of ATMs in our network was partially offset by:

	•		A 16% decrease in average withdrawals per ATM per month, to 337 from 402 in the third quarter of 2004. The decrease in average withdrawals per ATM per month is due primarily to the acquisition of the eFunds ATM network in November 2004. The ATMs acquired from eFunds had substantially fewer withdrawals per ATM per month than our historical averages.

	•		A 19% decrease in average transaction-based sales per withdrawal transaction, to $2.28 from $2.83 in the third quarter of 2004. The decrease in average transaction-based sales per withdrawal is due primarily to the acquisition of the eFunds ATM network in November 2004. The ATMs acquired from eFunds had substantially lower transaction-based sales per withdrawal transaction per ATM than our historical averages, since most of the eFunds ATM network is processing only, which is profitable at lower transaction volumes.

Photocopier sales.Photocopier sales in the third quarter of 2005 were $9.6 million compared to $11.9 million in the third quarter of 2004. The $2.3 million decrease resulted primarily from:

•

Declining photocopy volume — Continuing a trend, photocopy volume declined by 21% for the third quarter of 2005 compared to the same period in 2004, to 113 million copies from 143 million copies, due to a combination of:

	•		A decline in installed photocopiers to an average of 23,629 in the third quarter of 2005 from an average of 24,966 for the same period in 2004, as we continued a program of eliminating lower volume sites that were either unprofitable or marginally profitable.

	•		A decline in the average number of photocopies made per unit per month to 1,590 for the third quarter of 2005 from 1,913 for the same period in 2004 due in part to competition from alternative media and copying services.

Sales Discounts

Sales discounts on a consolidated basis as a percentage of sales were 47.1% in the third quarter of 2005 and 22.4% in the third quarter of 2004. Sales discounts in the ATM business increased to 57.6% of transaction-based sales in the third quarter of 2005 from 27.6% in the third quarter of 2004. The increased discounts were caused by an increase in the percentage of merchants who provide their own cash in their ATMs, which we refer to as “self-fill” contracts, and merchants for whom we provide only processing services, which we refer to as “processing only” contracts. The increased percentage of self-fill and processing only contracts resulted from our acquisitions in 2004, since most of the ATMs in the networks we acquired were under either self-fill or processing only contracts. Sales discounts in the photocopier business increased slightly in the third quarter of 2005 to 17.1% of sales from 16.9% in the third quarter of 2004.

Cost of Sales

Cost of sales on a consolidated basis decreased to 31.8% of sales in the third quarter of 2005, from 42.8% in the third quarter of 2004. Cost of sales as a percentage of sales declined in the ATM segment, but increased in the photocopier segment.

ATM cost of sales.Cost of sales in our ATM operations increased by $6.5 million to $13.5 million in the third quarter of 2005 from $7.0 million for the same time period in 2004, as

a result of expansion of our ATM networks to an average of 19,776 transacting ATMs in the third quarter of 2005 compared to an average of 4,747 in the third quarter of 2004.

However, expressed as a percentage of sales, cost of sales in our ATM operations (excluding sales of ATM equipment and the related cost of sales) decreased to 26.2% of sales from 39.8% in the third quarter of 2004 due to the increase in the percentage of self-fill and processing only contracts resulting from our acquisitions.

Specific increases in ATM cost of sales for the third quarter of 2005 compared to the third quarter of 2004 included:


	•		The cost of vault cash increased by $1.3 million, and the cost of armored car services also increased by $1.3 million. These expense increases are a direct result of the increase in full placement ATMs, mostly from the acquisition of eFunds’ ATM business. Cost of cash has also been impacted by increases in interest rates.

	•		Cash losses due to thefts from ATMs increased by $1.1 million. We have hired a risk manager in the United Kingdom where a majority of these losses have occurred to help limit these losses in the future.

	•		Processing and telephone costs have increased by $1.1 million due to the increase in volume of ATM transactions and the increase in the number of our full placement ATMs.

Photocopier cost of sales.Cost of sales in our photocopier operations remained nearly unchanged in the third quarter of 2005 compared to the same time period in 2004 at $5.4 million. The reduction in photocopy volume resulted in a decline in the cost of paper and other supplies by $170,000 and a $157,000 decline in the cost of parts. These declines were partially offset by a $242,000 increase in depreciation expense resulting primarily from the January 2005 increase in the minimum number of copies over which certain Konica copiers are depreciated.

Exchange rate effects caused us to report $105,000 more in consolidated cost of sales in the third quarter of 2005 than we would have reported had the exchange rates for the British pound and Canadian dollar remained at the average for same time period in 2004.

Selling, General and Administrative Expense

Selling, general and administrative expense increased by $4.9 million to $11.5 million in the third quarter of 2005 from $6.6 million in the third quarter of 2004. However, selling, general and administrative expense as a percent of sales decreased to 19.5% in the third quarter of 2005 from 22.9% in the third quarter of 2004. Specific increases included:

	•		Amortization expense increased by $2.0 million, primarily due to the amortization of intangible assets relating to ATM contracts acquired in 2004.

	•		Labor expense increased by $1.2 million due to an increase in administrative and temporary employees necessary to accommodate our expanding business, including integration and operation of businesses acquired in 2004 and a number of one-time special projects.

	•		Fees related to first year compliance with Section 404 of the Sarbanes-Oxley Act of 2002 were approximately $567,000 in the third quarter of 2005. Although we are required to continue to comply with Section 404 in future years, we expect the cost of compliance will be substantially lower after 2005.

	•		Changes in the value of the British pound and Canadian dollar caused a net increase of $46,000 in selling, general and administrative expense.

Interest Expense

Interest expense increased by $2.4 million to $2.5 million in the third quarter of 2005 from $141,000 in the third quarter of 2004. The increase in interest expense is due primarily to the increase in outstanding borrowings related to the eFunds ATM network acquisition.

In the third quarter of 2004 our average interest-bearing debt was $7.8 million. In the third quarter of 2005 our average interest-bearing debt was approximately $131.9 million, mostly

borrowings pursuant to our $150 million syndicated loan facility underwritten and arranged by Bank of America, N.A.

Other Income, Net

Other income, net for the third quarter of 2005 includes a gain of $1.3 million on the sale of our investment in a marketable equity security.

Tax Rate

In the third quarter of 2005, we released a valuation allowance relating to capital loss carryforwards resulting in no tax provision on a $1.3 million gain from a sale of equity securities. The release of the valuation allowance contributed to a tax benefit of $446,000 for the quarter. For the third quarter of 2004, the effective tax rate was 35.9%, and the tax provision was $1.3 million.

Discontinued Operations

Our software development segment, which is shown as discontinued operations, had a loss of $77,000 in the third quarter of 2004. This segment has had no operations since the fourth quarter of 2004.

Net Income

Net income for the third quarter of 2005 was $318,000, a decrease of $1.8 million compared to the $2.2 million in net income for the same period in 2004. After giving effect to Series A preferred stock dividends and a portion of undistributed income allocated to the preferred shareholders in the third quarter of 2004, net income from continuing operations available to common shareholders was $318,000 in the third quarter of 2005 and $1.6 million in the third quarter of 2004. Increased ATM volume primarily contributed to the $2.4 million increase in gross profit to $12.5 million in the third quarter of 2005. An increase in selling, general and administrative expense of $4.9 million and a $2.4 million increase in interest expense offset the increased gross profit. A gain of $1.3 million on the sale of our investment in a marketable equity security and a $451,000 benefit for income taxes contributed to net income of $318,000 for the quarter.

Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004

ATM Results of Operations


	Nine months ended September 30,
			% of					% of
	2004		sales			2005		sales
	(in thousands, except operating and percentage data)
Transaction-based sales	$	42,166		94.9	%	$	135,925		91.8	%
Service and other		1,520		3.4			8,704		5.9
Sales of ATM equipment		757		1.7			3,389		2.3

Total sales		44,443		100.0			148,018		100.0
Less discounts		10,783		24.3			76,139		51.4

Net sales		33,660		75.7			71,879		48.6
Cost of sales		18,541		41.7			36,658		24.8

Gross profit	$	15,119		34.0	%	$	35,221		23.8	%

Operating Data:
Average number of transacting ATMs		4,155					20,153
Withdrawal transactions		14,961,945					59,039,962
Average withdrawals per ATM per month		400					326
Average transaction-based sales per withdrawal transaction	$	2.82				$	2.30
Average discount per withdrawal transaction	$	.72				$	1.29
Net transaction-based sales per withdrawal transaction	$	2.10				$	1.01

Photocopy Results of Operations

	Nine months ended September 30,
			% of					% of
	2004		sales			2005		sales
			(in thousands, except operating and percentage data)
Sales	$	39,294		100.0	%	$	31,436		100.0	%
Less discounts		6,939		17.7			5,403		17.2

Net sales		32,355		82.3			26,033		82.8
Cost of sales		16,575		42.2			16,372		52.1

Gross profit	$	15,780		40.1	%	$	9,661		30.7	%

Operating Data:
Average number of photocopiers		25,468					23,950
Average photocopies per machine per month		2,041					1,735
Average sales per photocopier per month	$	171.43				$	145.84
Average sales per photocopy	$	.084				$	.084
Average discount per photocopy	$	.015				$	.014
Average net sales per photocopy	$	.069				$	.070
Average gross profit per photocopy	$	.034				$	.026

Sales

For the first nine months of 2005, consolidated sales increased by $95.7 million, or 114%, to $179.5 million from $83.7 million for the first nine months of 2004. ATM sales increased by $103.6 million due primarily to acquisitions during 2004, while photocopier sales

decreased by $7.9 million due to a decline in installed photocopiers and in the average number of photocopies per machine.

During the first nine months of 2005, sales and expenses were affected by changes in value of the U.S. dollar as compared to the British pound and the Canadian dollar. Approximately 32% of consolidated sales for the nine months were generated in the United Kingdom and Canada by our subsidiaries in those countries. The average exchange rates during the first nine months of 2005 were $1.852 to £1.00 and U.S. $.815 to Canadian $1.00, compared to $1.821 to £1.00 and U.S. $.751 to Canadian $1.00 during the first nine months of 2004. As a result of these increases in the value of the British pound and Canadian dollar, we reported $2.1 million more in sales during the first nine months of 2005 than we would have reported had the exchange rates remained constant at the averages for the first nine months of 2004. This gain was substantially offset by corresponding exchange rate-related increases in discounts and expenses.

ATM sales.ATM sales were $148.0 million for the first nine months of 2005 compared to $44.4 million for the first nine months of 2004. The $103.6 million increase in ATM sales was a combination of a $93.8 million increase in transaction-based sales, a $7.2 million increase in service and other, and a $2.6 million increase in sales of ATM equipment.

The $93.8 million increase in transaction-based sales resulted from:

	•		Expansion of our ATM networks — The average number of transacting ATMs in our networks during the first nine months of 2005 increased to nearly five times the average in the same period in 2004. The increase of 15,998 average transacting ATMs has resulted primarily from the acquisition during 2004 of approximately 16,600 existing ATM contracts in addition to sales of new contracts by our sales force.

	•		The increase in the number of ATMs in our network was partially offset by:

	-		A 19% decrease in average withdrawals per ATM per month, to 326 from 400 in the first nine months of 2004. The decrease in average withdrawals per ATM per month is due primarily to the acquisition of the eFunds ATM network in November 2004. The ATMs acquired from eFunds had substantially fewer withdrawals per ATM per month than our historical averages.

	-		An 18% decrease in average transaction-based sales per withdrawal transaction, to $2.30 from $2.82 in the first nine months of 2004. The decrease in average transaction-based sales per withdrawal is due primarily to the acquisition of the eFunds ATM network in November 2004. The ATMs acquired from eFunds had substantially lower transaction-based sales per withdrawal transaction per ATM than our historical averages, since most of the eFunds ATM network is processing only, which is profitable at lower transaction volumes.

The value of the British pound and Canadian dollar relative to the U.S. dollar increased for the first nine months of 2005 compared to same period in 2004, resulting in a $1.7 million increase in ATM sales. This increase was substantially offset by exchange rate-related increases in costs.

Photocopier sales.Photocopier sales in the first nine months of 2005 were $31.4 million compared to $39.3 million in the first nine months of 2004. The $7.9 million decrease resulted primarily from:

•

Declining photocopy volume — Continuing a trend, photocopy volume declined by 20% for the first nine months of 2005 compared to the same period in 2004, to 374 million copies from 468 million copies, due to a combination of:

	•		A decline in installed photocopiers to an average of 23,950 in the first nine months of 2005 from an average of 25,468 for the same period in 2004, as we continued a program of eliminating lower volume sites that were either unprofitable or marginally profitable.

	•		A decline in the average number of photocopies made per unit per month to 1,735 for the first nine months of 2005 from 2,041 for the same period in 2004 due primarily to price increases that became effective in late 2003, as well as competition from alternative media and copying services.

The declining volume was partially offset by:

•

Exchange rate benefit — The value of the British pound and Canadian dollar relative to the U.S. dollar increased for the first nine months of 2005 compared to the same period in 2004, resulting in a $323,000 increase in photocopier sales. This increase was substantially offset by exchange rate-related increases in costs.

Sales Discounts

Sales discounts on a consolidated basis as a percentage of sales were 45.4% in the first nine months of 2005 and 21.2% in the first nine months of 2004. Sales discounts in the ATM business increased to 56.0% of transaction-based sales in the first nine months of 2005 from 25.6% in the first nine months of 2004. The increased discounts were caused by an increase in the percentage of self-fill and processing only contracts. The increased percentage of self-fill and processing only contracts resulted from our acquisitions in 2004, since most of the ATMs in the networks we acquired were under either self-fill or processing only contracts. Sales discounts in the photocopier business decreased in the first nine months of 2005 to 17.2% of sales from 17.7% in the first nine months of 2004, as a result of declining volumes and merchant contracts that provide percentage discounts that decrease as copy volume decreases.

Cost of Sales

Cost of sales on a consolidated basis decreased to 29.6% of sales in the first nine months of 2005, from 41.9% in the first nine months of 2004. Cost of sales as a percentage of sales declined in the ATM segment, but increased in the photocopier segment.

ATM cost of sales.Cost of sales in our ATM operations increased by $18.1 million to $36.7 million in the first nine months of 2005 from $18.5 million for the same time period in 2004, as a result of:

	•		Expansion of our ATM networks to an average of 20,153 transacting ATMs in the first nine months of 2005 compared to an average of 4,155 in the first nine months of 2004.

	•		Exchange rate effects — The ATM segment reported approximately $585,000 more in cost of sales in the first nine months of 2005 than it would have reported had the exchange rate for the British pound and Canadian dollar remained at the average for the first nine months of 2004.

However, expressed as a percentage of sales, cost of sales in our ATM operations (excluding sales of ATM equipment and the related cost of sales) decreased to 23.3% of sales from 41.3% in the first nine months of 2004 due to the increase in the percentage of self-fill and processing only contracts resulting from our acquisitions.

Specific increases in ATM cost of sales for the first nine months of 2005 compared to the first nine months of 2004 included:

	•		The cost of vault cash increased by $3.7 million, and the cost of armored car services increased by $3.8 million. These expense increases are a direct result of the increase in full placement ATMs, mostly from the acquisition of eFunds’ ATM business. Cost of cash has also been impacted by increases in interest rates.

	•		The cost of ATM machines sold increased by $2.4 million as a result of a $2.6 million increase in sales of ATM machines.

	•		Processing and telephone costs have increased by $2.0 million due to the increase in volume of ATM transactions and the increase in the number of our full placement ATMs.

	•		Cash losses due to thefts from ATMs increased by $1.3 million. At the beginning of the third quarter of 2005, to keep our insurance premiums at a reasonable level, we substantially increased the deductible on our crime insurance policy, with the result that we are now substantially self-insured for cash losses. We have hired a risk manager in the United Kingdom where a majority of these losses have occurred to help limit these losses in the future.

Photocopier cost of sales.Cost of sales in our photocopier operations decreased to $16.4 million in the first nine months of 2005 compared to $16.6 million for the same time period in 2004. The reduction in photocopy volume resulted in a decline in the cost of paper and other supplies by $622,000. This decline was partially offset by a $354,000 increase in depreciation expense resulting primarily from the January 2005 increase in the minimum number of copies over which certain Konica copiers are depreciated.

Exchange rate effects caused us to report $770,000 more in consolidated cost of sales in the first nine months of 2005 than we would have reported had the exchange rates for the British pound and Canadian dollar remained at the average for same time period in 2004.

Selling, General and Administrative Expense

Selling, general and administrative expense increased by $15.0 million to $34.1 million in the first nine months of 2005 from $19.1 million in the first nine months of 2004. However, selling, general and administrative expense as a percent of sales decreased to 19.0% in the first nine months of 2005 from 22.7% in the first nine months of 2004. Specific increases included:

	•		Amortization expense increased by $6.4 million, primarily due to the amortization of intangible assets relating to ATM contracts acquired in 2004.

	•		Labor expense increased by $4.2 million due to an increase in administrative, and temporary employees necessary to accommodate our expanding business, including integration of businesses acquired in 2004 and a number of one-time special projects.

	•		The cost of outsourced services increased by $1.9 million, primarily due to the selling, general and administrative portion of charges by eFunds Corporation under the services agreement we entered into with eFunds in November 2004 as part of our acquisition of its ATM business.

	•		Fees related to first year compliance with Section 404 of the Sarbanes-Oxley Act of 2002 were approximately $652,000 in the first nine months of 2005.

	•		The increase in the value of the British pound and Canadian dollar caused an increase of $327,000 in selling, general and administrative expense.

Interest Expense

Interest expense increased by $6.6 million to $7.2 million in the first nine months of 2005 from $635,000 in the first nine months of 2004. The increase in interest expense is due primarily to the increase in outstanding borrowings related to the eFunds ATM network acquisition.

In the first nine months of 2004 our average interest-bearing debt was $9.2 million. In the first nine months of 2005 our average interest-bearing debt was approximately $130.8 million, mostly borrowings pursuant to our $150 million syndicated loan facility underwritten and arranged by Bank of America, N.A.

Other Income, Net

Other income, net for the first nine months of 2005 includes collection of a $700,000 settlement from our directors’ and officers’ liability insurer related to previously settled litigation and a gain of $1.3 million on the sale of our investment in a marketable equity security.

Tax Rate

Discontinued Operations

Our software development segment, which is shown as discontinued operations, had a loss of $218,000 in the first nine months of 2004. This segment has had no operations since the fourth quarter of 2004.

Net Income

Net income for the first nine months of 2005 was $4.8 million, a decrease of $2.6 million compared to the $7.4 million in net income for the same period in 2004. After giving effect to Series A preferred stock dividends and a portion of undistributed income allocated to the preferred shareholders, net income from continuing operations available to common shareholders was $4.6 million in the first nine months of 2005 and $5.6 million in the first nine months of 2004. Increased ATM volume primarily contributed to the $14.0 million increase in gross profit to $44.9 million in the first nine months of 2005. An increase in selling, general and administrative expense of $15.0 million and a $6.6 million increase in interest expense offset the increased gross profit. A gain of $1.3 million on the sale of our investment in a marketable equity security contributed to net income of $4.8 million.

Liquidity and Capital Resources

General

Our principal ongoing funding requirements are for working capital to finance the continued operations and growth of our business (including acquisitions), service bank debt and service lease obligations. Unless we receive an additional extension of time, in 2006 we will also be required to fund upgrades to our US ATMs to comply with industry standards.

During the first nine months of 2005, we generated $10.5 million of cash from operating activities as compared to $18.5 million generated from operating activities in the same period in 2004. The decrease in cash flows from operating activities was due primarily to an increase in accounts receivable resulting from a combination of sales growth and timing differences relating to a system conversion completed during the second quarter, and a reduction in accounts payable. Borrowings of $7.4 million helped to finance $14.1 million in capital expenditures, mostly ATM equipment.

We had cash and cash equivalents of $3.1 million at September 30, 2005, compared to $5.6 million at December 31, 2004, and a net working capital deficit of $1.2 million at September 30, 2005 compared to a net working capital deficit of $9.2 million at December 31, 2004.

During August 2005, we sold marketable equity securities for $9.6 million and paid off our $5.3 million domestic line of credit.

We believe that the total cost of upgrading our ATMs to comply with new industry standards known as triple DES will be approximately $3.8 million in the United States. These costs are being capitalized and depreciated over the remaining life of the related assets. As of September 30, 2005, approximately 7% of our ATMs in the United States were compliant with triple DES. Similar upgrades to meet EMV and triple DES standards in the United Kingdom were essentially complete at September 30, 2005, at a cost of approximately $7.4 million.

Bank of America Credit Facility

As of September 30, 2005, we owed $125.7 million pursuant to our $150 million syndicated loan facility ($120 million of which was used to fund the acquisition of eFunds’ ATM business), $112.5 million under the term loan and $13.2 million under the $30 million lines of credit. Bank of America had issued letters of credit in the amounts of $4.4 million to guarantee our performance under our agreements relating to TRM Inventory Funding Trust and £1.5 million ($2.6 million based on exchange rate as of September 30, 2005), in connection with the proposed acquisition of Travelex UK Limited, leaving a balance available under our lines of credit of $9.8 million as of September 30, 2005.

As of September 30, 2005, we failed to meet three financial covenants of the syndicated loan facility. The covenants not met were the consolidated leverage ratio, consolidated fixed charge coverage ratio and capital expenditures limit. We have subsequently been granted a waiver as of September 30, 2005, of the lenders’ rights and remedies with respect to those covenant violations and an amendment to the credit agreement. Violation of the capital expenditures limits was caused by the mandatory upgrading of our ATM estate in the UK which required us to be compliant with triple DES and EMV standards by July 1, 2005. Costs related to these upgrades were higher than expected, which resulted in additional capital expenditures on hardware and installations. As a result of these additional capital expenditures we also did not comply with the consolidated fixed charge coverage ratio. Subsequent to September 30, 2005 we paid off the balance of our foreign line of credit. Had we made this payment prior to September 30, 2005, we would have been in compliance with the consolidated leverage ratio. In addition to the waiver as of September 30, 2005, the lenders have agreed to amend covenants in the facility as follows. The minimum consolidated fixed charge coverage ratio as of the end of December 2005 has been decreased from 1.1:1.0 to 1.0:1.0. The capital expenditures limit has been increased from $12.5 million per year to $17 million for 2005 and $15 million per year thereafter.

U.S. Vault Cash Facility

TRM Inventory Funding Trust, which we refer to as the Trust, provides cash to be placed in our United States ATM machines, which we refer to as vault cash, by accessing commercial paper markets. Because we are the primary beneficiary of the Trust, the Trust’s accounts are included in our consolidated financial statements. Pursuant to the trust agreement, up to $150 million of vault cash is available for use in our United States ATM network, of which $94.0 million was being used at September 30, 2005.

U.K. Vault Cash Facility

Our U.K. ATM business obtains vault cash under an agreement with a local bank. Vault cash obtained under the program remains the property of the bank, and is not included on our balance sheet. During the first nine months of 2005, we accessed amounts ranging from £22.2 million ($39.1 million based on exchange rates as of September 30, 2005) to £40.5 million ($71.1 million based on exchange rates as of September 30, 2005) under this arrangement and paid a total of $2.7 million for use of the cash.

Canadian Vault Cash Facility

Our Canadian ATM business obtains vault cash under an agreement with an armored car carrier that has a corresponding agreement with a local bank. As in our U.K. vault cash arrangement, the vault cash obtained under the Canadian program remains the property of the bank, and is not included on our balance sheet. During the first nine months of 2005, we accessed amounts ranging from Canadian $10.0 million (U.S. $8.5 million based on exchange rate as of September 30, 2005) to Canadian $17.0 million (U.S. $14.6 million based on exchange rates as of September 30, 2005) and paid a total of $647,000 for use of the cash.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Contractual Commitments and Obligations

Contractual commitments and obligations as of September 30, 2005 were as follows (in thousands):


	Payments Due by Period
			October 1 –
			December 31,
Contractual obligations	Total		2005		2006-2007		2008-2009		After 2009
TRM Corporation and subsidiaries
Long-term debt	$	164,430	$	5,015	$	37,516	$	47,389	$	74,510
Capital lease obligations		2,042		433		1,531		78		—
Operating leases		7,990		639		3,969		1,750		1,632
Purchase obligations		20,625		1,250		10,000		9,375		—

Total TRM Corporation and subsidiaries		195,087		7,337		53,016		58,592		76,142
TRM Inventory Funding Trust note payable		100,929		1,277		99,652		—		—

Total contractual cash obligations	$	296,016	$	8,614	$	152,668	$	58,592	$	76,142

The above payments include interest where applicable, with interest on variable rate obligations assumed to remain constant at the rate in effect as of September 30, 2005. Purchase obligations consist of a Master Services Agreement with eFunds, which involves payments totaling $5 million annually through November 2009.

Critical Accounting Policies and Estimates

Our critical accounting policies and estimates as of September 30, 2005 are consistent with those discussed in our Annual Report on Form 10-K for the year ended December 31, 2004.

New Accounting Standards and Effects on Earnings Per Share

In December 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 123R, “Share-Based Payment,” an amendment of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS 123R eliminates the ability to account for share-based payments using Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and instead requires companies to recognize compensation expense using a fair-value based method for costs related to share-based payments, including stock options and employee stock purchase plans. The expense will be measured as the fair value of the award at its grant date based on the estimated number of awards that are expected to vest, and recorded over the applicable service period. In the absence of an observable market price for a share-based award, the fair value would be based upon a valuation methodology that takes into consideration various factors, including the exercise price of the award, the expected term of the award, the current price of the underlying shares, the expected volatility of the underlying share price, the expected dividends on the underlying shares and the risk-free interest rate. The requirements of SFAS 123R are effective January 1, 2006 and apply to all awards granted, modified or cancelled after that date, and to the portion of previously granted awards that have not vested by the adoption date. We are evaluating the requirements of SFAS 123R and expect that the adoption of SFAS 123R may have a significant impact on our

consolidated results of operations and earnings per share. We have not yet determined the method of adoption or the financial statement impact of adopting SFAS 123R, and we have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which changes the accounting for the reporting of voluntary changes in accounting principles. SFAS 154 requires changes in accounting principles to be applied retrospectively to prior periods’ financial statements, where practicable, unless specific transition provisions permit alternative transition methods. SFAS 154 will be effective in fiscal years beginning after December 15, 2005. We do not expect that our adoption of SFAS 154 will have a material impact on our consolidated financial statements except to the extent that we adopt a voluntary change in accounting principle in a future period that must be accounted for through a restatement of previous financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in interest rates and foreign currency exchange rates, which could impact our results of operations and financial condition. We do not hold or issue derivative commodity instruments or other financial instruments for trading purposes.

Interest Rate Risk

We invest our cash in money market accounts. The income earned from these money market accounts is subject to changes in interest rates. Interest income was $131,000 and $359,000 for the three and nine-month periods ended September 30, 2005, respectively, and $129,000 and $201,000, respectively, for the same periods in 2004. If the interest rate we earn on the $3.1 million cash we had available for investment at September 30, 2005 increased or decreased by 1%, our interest income would not change materially.

Interest on borrowings pursuant to our syndicated loan facility is at variable rates based on prime and LIBOR. As of September 30, 2005 the weighted average interest rate on our $112.5 million term loan was 7.62%, and the weighted average interest rate on the $13.2 million outstanding under our foreign line of credit was 7.35%. In the first quarter of 2005 we purchased a three-year interest rate cap. If the LIBOR interest rate rises above 5% through March 31, 2008, the interest rate cap agreement provides for payments to us that reduce the interest rate on $50 million of the term loan to 5% plus the applicable rate and mandatory costs in accordance with the loan agreement. We have designated the interest rate cap as a cash flow hedge on $50 million of the term loan. If the interest rate for the variable-rate portion of our borrowings under the syndicated loan facility increased by 1% from the rates at September 30, 2005, our interest cost would increase by $757,000 per year.

The Trust borrows money pursuant to a note funded by the sale of commercial paper. The Trust owed $92.8 million at September 30, 2005 and $35.0 million at September 30, 2004 under this arrangement. The weighted average interest rate on these borrowings at September 30, 2005 was 5.5%. Interest and fees relating to the Trust’s borrowings, which are included in cost of sales in our consolidated financial statements, totaled $355,000 and $1.5

million for the quarters ended September 30, 2004 and 2005, respectively, and $840,000 and $3.8 million for the nine-month periods ended September 30, 2004 and 2005, respectively. If the interest rate for the Trust’s borrowings at September 30, 2005 increased by 1%, to a weighted average of 6.5%, our cost of sales would increase by $928,000 per year.

Our United Kingdom ATM business obtains vault cash under an agreement with a local bank. Vault cash obtained under the program remains the property of the bank, and the cash is not included on our consolidated balance sheet. During the first nine months of 2004 we accessed amounts ranging from £25.0 million ($45.0 million based upon exchange rates as of September 30, 2004) to £36.3 million ($65.2 million based upon exchange rates as of September 30, 2004) and paid a total of $2.4 million for use of the cash. During the first nine months of 2005 we accessed amounts ranging from £22.2 million ($39.1 million based upon exchange rates as of September 30, 2005) to £40.5 million ($71.1 million based upon exchange rates as of September 30, 2005) and paid a total of $2.7 million for use of the cash. Fees that we pay for use of the cash are related to the bank’s interest rates. Based on the £37.8 million balance being used at September 30, 2005, if the cost of the cash increased by 1%, our cost of sales would increase by £378,000 ($663,000 based upon exchange rates as of September 30, 2005) per year.

Our Canadian ATM business obtains vault cash under an agreement with an armored car carrier that has a corresponding agreement with a local bank. As with our U.K. vault cash arrangement, the vault cash obtained under the Canadian program remains the property of the bank, and is not included on our balance sheet. During the first nine months of 2005, we accessed amounts ranging from Canadian $10.0 million (U.S. $8.5 million based on exchange rates as of September 30, 2005) to Canadian $17.0 million (U.S. $14.6 million based on exchange rates as of September 30, 2005) and paid a total of $647,000 for use of the cash. Fees that we pay are related to the bank’s interest rates. Based on the Canadian $13.9 million balance being used at September 30, 2005, if the cost of cash increased by 1% our cost of sales would increase by Canadian $139,000 ($119,000 based on exchange rates as of September 30, 2005) per year.

Foreign Currency Risk

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

Foreign exchange rate transaction gains, net of losses, were $12,000 and $54,000 for the three and nine-month periods ended September 30, 2005. Foreign exchange transactions resulted in gains of $98,000 and $209,000 for the three and nine-month periods ended September 30, 2004. If foreign currency rates were to fluctuate from rates at September 30, 2005 our financial position might be materially affected. Assuming a 10% appreciation in foreign currency values versus the U.S. dollar from the quoted foreign currency exchange rates at September 30, 2005, the potential increase in the fair value of foreign currency-denominated assets and liabilities would have been an aggregate of approximately $6.0 million. Assuming a 10% appreciation in foreign currency values versus the U.S. dollar from the average for the quarter ended September 30, 2005, the impact on sales would have been an aggregate increase of approximately $1.9 million, or 3.3%. The impact on net income for the three months ended

September 30, 2005 would have been an aggregate increase of approximately $79,000 or 24.8%. Assuming a 10% depreciation in foreign currency values versus the U.S. dollar from the quoted foreign currency exchange rates at September 30, 2005, the potential decrease in the fair value of foreign currency-denominated assets and liabilities would have been an aggregate of approximately $6.0 million. Assuming a 10% depreciation in foreign currency values versus the U.S. dollar from the average quoted foreign currency exchanges rates for the quarter ended September 30, 2005, the impact on sales would have been an aggregate decrease of $1.9 million, or 3.3%. The impact on net income for the three months ended September 30, 2005 would have been an aggregate decrease of approximately $79,000, or 24.8%.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities and Exchange Act of 1934 reports is recorded, processed, summarized and reported within the periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision of our Chief Executive Officer and Chief Financial Officer and with the participation of our disclosure committee appointed by such officers, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at a reasonable assurance level.

There have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during our most recent fiscal quarter.

ITEM 5. OTHER INFORMATION

On November 14, 2005, we entered into the First Amendment and Waiver of Credit Agreement (“First Amendment”) with Bank of America as Lender and as Administrative Agent for syndicated lenders, in which our violations of the Credit Agreement covenants governing our capital expenditures, leverage ratio and fixed charge coverage ratio described previously in this document were waived, and certain of these ratios were amended through the end of 2005. A copy of the First Amendment is provided as Exhibit 10.8(a).

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

During the second quarter of 2005 we reached a final settlement agreement with our directors’ and officers’ liability insurer to obtain reimbursement of monies we spent to settle litigation described in Note 16 to our audited consolidated financial statements in our 2004 Annual Report on Form 10-K. The settlement payment of $700,000 was made to TRM, and was included in other income, during the second quarter of 2005.

ITEM 6. EXHIBITS


(a) Exhibits

	3.1	(a)	Amendments to the Restated Articles of Incorporation (incorporated herein by reference to Exhibit 3.1(a) of Form 10-K for the fiscal year ended June 30, 1998)

	3.1	(b)	Restated Articles of Incorporation (incorporated herein by reference to Exhibit 3.1(b) of Form 10-K for the fiscal year ended June 30, 1998)

	3.2		Restated Bylaws (incorporated herein by reference to Exhibit 3.2 of Form 10-K for the fiscal year ended June 30, 1998)

	4.1		Specimen Stock Certificate (incorporated herein by reference to Exhibit 4.1 of Form S-3/A filed on August 25, 2004 [No. 333-116748])

	4.2		Investors’ Rights Agreement (incorporated herein by reference to Exhibit 4.1 of Form 8-K dated July 9, 1998)

	4.3		Articles V, VI and VII of the Restated Articles of Incorporation, as amended (See Exhibit 3.1)

	4.4		Articles I, II, V, VII and X of the Restated Bylaws (See Exhibit 3.2)

	10.7	(h)	Employment Agreement dated November 11, 2005 by and between TRM Corporation and Kenneth L. Tepper.

	10.7	(i)	Retainer Agreement dated November 11, 2005 by and between TRM Corporation and Daniel G. Cohen.

	10.8	(a)	First Amendment and Waiver to Credit Agreement, dated as of November 14, 2005, among TRM Corporation, TRM (ATM) Limited and certain subsidiaries, as Guarantors, and Bank of America, N.A. and other lenders party thereto.

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

	31.2		Certification of Chief Financial Officer of TRM Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


			31.3			Certification of Principal Accounting Officer of TRM Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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

			32.2			Certification of Chief Financial Officer of TRM Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

			32.3			Certification of Principal Accounting Officer of TRM Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

SIGNATURE

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


	TRM CORPORATION
Date: November 14, 2005	By:	/s/ Jon S. Pitcher
		Jon S. Pitcher
		Principal Accounting Officer

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Access to Money Inactive 10-Q2005 Q3 Quarterly report

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