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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
OR
[ ] 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
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TRM CORPORATION
(Exact name of registrant as specified in its charter)
Oregon 93-0809419
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
5208 N.E. 122nd Avenue
Portland, Oregon 97230-1074
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 257-8766
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of each class)
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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of August 21, 1998 the aggregate market value of the registrant's Common
Stock held by non affiliates of the registrant was $66.4 million. Solely for
purposes of this calculation, the registrant has treated its Board of Directors
and executive officers as affiliates.
As of August 21, 1998, the number of shares of the registrant's Common
Stock outstanding was 7,065,384.
Documents incorporated by reference:
Parts of registrant's Proxy Statement for the annual meeting of
shareholders on November 16, 1998 are incorporated by reference into Part III of
this report.
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TRM CORPORATION
TABLE OF CONTENTS
Item Page
No. No.
- ---- ----
Part I
1. Business..................................................................2
2. Properties................................................................7
3. Legal Proceedings.........................................................7
4. Submission of Matters to a Vote of Security Holders.......................7
Part II
5. Market for Registrant's Common Equity and Related Stockholder Matters....10
6. Selected Financial Data..................................................10
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................11
8. Financial Statements and Supplemental Data...............................16
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.....................................................16
Part III
10. Directors and Executive Officers of the Registrant.......................17
11. Executive Compensation...................................................17
12. Security Ownership of Certain Beneficial Owners and Management...........17
13. Certain Relationships and Related Transactions...........................17
Part IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.........18
PART I
ITEM 1. BUSINESS
General
As of June 1998, TRM Corporation (formerly TRM Copy Centers Corporation)
owned and maintained over 33,000 self-service photocopiers in retail
establishments such as multi-site retailers, pharmacies, stationery stores,
hardware stores and gift shops in 73 metropolitan areas: 51 in the U.S., 5 in
Canada, 15 in the U.K and 2 in France. TRM installs, maintains and supplies its
photocopiers and regularly monitors their usage. Each retail business collects
payment from its customers, shares in the revenue generated by the TRM Copy
Center (as defined below) and benefits from any increase in walk-in traffic. The
Company invoices and collects payment from each retailer monthly.
Each TRM Copy Center consists of a photocopier, a machine stand,
advertising signs and in some cases a coin-operated unit ("Copy Center" or "TRM
Copy Center"). TRM Copy Centers are identifiable by the Company's trapezoidal
yellow and black "TRM Copies" signs.
TRM has become the leading provider in self-service photocopying in many of
the metropolitan areas it serves by focusing on service and convenience. The
Company strives to conveniently locate high numbers of Copy Centers throughout
its service areas. Operations by geographic area are presented in Note 12 to the
Consolidated Financial Statements included on page F-13 in this Form 10-K.
The Company services its Copy Centers and provides all necessary supplies.
The retail business supplies space and electrical power for the TRM Copy Center
and supervises its use. Consumers report the number of uses of the TRM Copy
Center to the retail business cashier, who collects payment. Each month, the
retail business keeps a percentage of the TRM Copy Center's revenue, which
generally is based on a sliding scale related to usage, as recorded by the TRM
Copy Center's tamper-proof internal counter, and remits the remainder to TRM.
All accounting, training, purchasing, billing and collection functions, as
well as coordination of customer service, are centralized in the Company's Team
Headquarters in Portland, Oregon. Generally, the only personnel outside the
Portland Team Headquarters are service and sales personnel. TRM minimizes costs
by buying large quantities of new photocopiers and by centrally purchasing large
quantities of parts, paper and toner. The Company believes that its centralized
operating systems and standardized operating procedures enable it to efficiently
open in new geographic areas and to install and service thousands of TRM Copy
Centers.
The Company is an Oregon corporation formed in 1982. From the end of fiscal
1993 through June 30, 1998, TRM opened operations in 14 U.S., 2 Canadian, 13
U.K. and 2 French metropolitan areas.
As part of a Special Meeting of Shareholders in June 1998, the Company's
Shareholders voted to amend its Restated Articles of Incorporation to change the
Company's corporate name from "TRM Copy Centers Corporation" to "TRM
Corporation."
As used in this Form 10-K, the terms "the Company" and "TRM" refer to TRM
Corporation and its subsidiaries, unless the context requires otherwise.
Recent Developments
In September 1997, the Company's Board of Directors authorized the Company
to repurchase up to 500,000 shares of its Common Stock through privately
negotiated or open market purchases as market conditions dictate. To date, the
Company has not repurchased any shares of Common Stock.
With the growth in new technology black and white photocopier
("NextGen(TM)") programs, the Company has decided to retire and dispose of over
half of its older model Savin photocopiers. In the third quarter of 1998, the
Company recorded non-cash, special charges of $6.4 million relating to these
under-performing assets of its Photocopy Division, as part of this strategic
decision to eliminate low-volume Savin photocopiers.
2
Also in the third quarter of fiscal 1998, the Company entered into an
agreement with ReadyCash Investment Partners, L.P. ("ReadyCash"), resulting in
an equity investment of $20 million into TRM. In return, ReadyCash was issued
1,777,778 shares of Series A Preferred Stock and warrants to acquire 500,000
shares of Common Stock of the Company. The Company plans to use the proceeds of
this investment to finance the formation of a new Automated Teller Machine (ATM)
Division (see "New Products and Services Under Development," Management's
Discussion and Analysis of Financial Condition and Results of Operations on page
11, and Note 4 to the Consolidated Financial Statements on page F-8).
Locations
Historically, TRM has focused its sales efforts on small independent retail
businesses. During fiscal year 1998 and going forward, the Company is expanding
its program of selling to large-format, multi-site retail establishments to
better address the retail industry as it continues to consolidate. TRM's
installed customer base is diversified and no single retailer accounts for a
significant portion of revenues or profits. Further, TRM has diversified
geographically to avoid dependence on one or more market areas. The Company does
not believe that the presence of significant competition in any single
geographic market would have a material adverse effect on the Company.
As of June 30, 1998, the Company has established a local Service Center (as
defined below) in 52 major metropolitan areas. TRM locates its Service Centers
in sites convenient to the concentration of TRM Copy Centers. Each of these
Service Centers consists of leased premises generally staffed by a service
center manager and one or more service technicians and sales representatives.
Service Centers include a warehouse for the storage of photocopiers, other
components, spare parts, paper and toner. Twenty-one metropolitan areas most
recently entered by the Company were opened with resources from existing Service
Centers nearby, most of which have storage unit facilities ("Service Center").
In conjunction with the expansion of multi-site retailer sales activities,
the Company addressed the need to service customers in locations that were not
accessible by existing TRM Service Centers. When the number of customer sites
does not justify the addition of a new TRM Service Center, the Company contracts
with a third-party service provider to install and service photocopiers at those
sites. With this expanded network of third-party service providers, the Company
believes it is positioned to effectively market to large multi-site retailers.
The Company presently has service agreements in place for 327 TRM Copy Centers
not presently serviced directly by TRM technicians.
Expansion
TRM installed 4,631 additional TRM Copy Centers, net of replacements and
removals, from July 1, 1995 to June 30, 1998. During fiscal 1998, the Company
removed 7,120 photocopiers and installed 6,000 photocopiers, for a net decrease
of 1,120 photocopier machines. During fiscal 1999, the Company plans to add
approximately 10,000 additional TRM Copy Centers in new and existing market
areas. The Company intends to continue to actively manage its installed base by
removing its low-performing sites and eliminating sites that fail to meet
specified volume performance expectations.
TRM's planned expansion will require an increase in the number of installed
photocopiers and customers. Due to the improved efficiency of the NextGen(TM)
technology, the Company believes this expansion will not require an increase in
service center technicians. The Company believes its existing employee base can
support the planned growth. The Company will open a Service Center in each new
geographic market as it is justified. TRM uses both new and existing
photocopiers to fulfill the requirements of its expansion strategy. The Company
is purchasing new machines to use in high-volume, independent and multi-site
locations (see discussion of NextGen(TM) under "New Products and Services Under
Development"). TRM sells the TRM Copy Center concept to independent retail
businesses through sales lead generation programs and local door-to-door
solicitation using independent and Company sales representatives and service
technicians. The Company is increasing its corporate sales efforts directed
toward regional, national and international multi-site retail chains.
Copy pricing is based on market competition, volume and retailer
preference. Pricing decisions are made by the retailer based on the experience
and recommendations of TRM for individual site pricing strategy.
The Company intends to continue to focus on its core photocopy business
with controlled growth from new and existing U.S. market areas, international
expansion and new products and services that can be delivered to its core
customer base and similar consumers.
3
New Products and Services Under Development
The Company is positioned to add other products or services to further
optimize the use of its existing network of sales, service, distribution and
support organizations as well as its growing installed customer base. Although
sales generated from additional products currently represent less than 5% of the
total sales, the Company is actively testing multiple new products and services.
During 1998, the Company announced plans to form an ATM division ("ATM
Division") using a $20 million equity investment by ReadyCash. The ATM Division
will enable TRM to offer ATM services to its 25,000 customer relationships in
North America, which in turn will increase utilization of the distribution and
service organization already in place in the US and Canada. The exact
organizational structure of the ATM Division is still in the development stage.
Current activities include a search for key management as well as evaluation of
potential acquisition opportunities.
Additionally in fiscal 1998, the Company commenced the purchasing of
thousands of NextGen(TM) copiers for further unit growth. NextGen(TM) is an
important element in TRM's core programs for high-volume, independent retailer
locations and larger retail chains. The Company places NextGen(TM) photocopiers
in accordance with a 36-month commitment from the retailer and slightly
different discount and billing arrangements. TRM's existing base of installed
copy machines will continue to be used for many convenience copying locations.
In fiscal 1998, the Company continued to expand its placement of
retailer-serviced coin-operated convenience photocopiers with large format
multi-site retailers, where TRM's service quality and worldwide infrastructure
is a key advantage, but where host cashiering is not a desired benefit for the
retailer.
TRM's intent is to invest in developing and market testing these and other
new products and services to identify those that clearly deserve to become
country or system-wide offerings.
Competition
A person seeking photocopy services has a variety of alternatives to a TRM
Copy Center. These alternatives include specialty full-service business centers,
copy and print shops, coin-operated photocopiers and other photocopiers located
within retail shops. Each of these alternatives may to some extent compete with
the Company. The Company does not attempt to compete directly with most
alternative suppliers of photocopy services. Instead, the Company seeks to
distinguish itself by blanketing its service areas with large numbers of
convenient photocopiers and by providing high quality service to those
locations.
Full-service business centers and copy and print shops generally serve a
market more interested in high volume and sophisticated copying than in
convenience of location.
Coin-operated photocopiers are sometimes located in retail establishments
similar to TRM's locations. While these coin-operated photocopiers provide a
similar service to TRM Copy Centers, the Company believes they do not pose a
significant competitive threat to the majority of TRM's retailers. As indicated
under the caption "New Products and Services Under Development," the Company is
placing coin-operated copying with major large format chains and retail stores.
The Company is aware of several self-service, non-coin-operated photocopier
businesses using the retail business concept. To the Company's knowledge, each
is limited to a relatively small geographic market and a relatively small number
of photocopiers. Because of barriers to entry in the Company's business, such as
developing operating systems, establishing sources of supply and achieving
economies of scale, the Company does not believe any of these competitors
currently represents a significant threat to the Company's business.
Personal copiers provide a substitute for TRM Copy Centers. While these
photocopiers have been on the market for a number of years, the Company does not
believe that they have had a significant adverse effect on its business. The
Company is unable to predict whether a technological or price breakthrough might
increase sales of personal copiers and reduce demand for the Company's copy
services.
Computers with printers allow convenient production of multiple copies. The
Company does not believe that computer printing will have a significant adverse
effect on its Copy Center business. At present, computer duplicating is
primarily used
4
only for a document which is electronically resident on that particular computer
and not for other paper originals. Both computer printers and personal copiers
currently have per copy costs to the user which are similar to or higher than
TRM's retail copy prices so they are not, in general, a lower cost alternative.
The ATM business is and can be expected to remain highly competitive. While
the Company's principal competition is expected to come from national and
regional banks, the Company will also compete with other independent ATM
companies. All of these competitors offer services similar to or substantially
the same as those the Company expects to offer. As the Company enters the ATM
business, such competition could prevent the Company from obtaining or
maintaining desirable locations for its machines or could cause the Company to
reduce its user fees generated by the ATMs and thereby reduce the Company's
revenues and profits. The independent ATM business has become increasingly
competitive as entities other than banks have entered the market with relatively
few barriers to accomplish such entry.
Quarterly Seasonality
Historically, the Company has experienced slightly higher than average
production per TRM Copy Center in its third and fourth fiscal quarters due to
those quarters being tax season in the U.S. The Company experiences slightly
lower than average production per TRM Copy Center in its first fiscal quarter as
the European countries have extended holiday periods.
Photocopiers
As of June 30, 1998, TRM owned and maintained over 33,000 self-service
photocopiers in retail establishments such as multi-site retailers, pharmacies,
stationery stores, hardware stores and gift shops. Generally, new photocopiers
are shipped direct from the manufacturer to a TRM Service Center. The Company
expects to continue to use both new and existing photocopiers to expand its
black and white copying business.
Supply
In fiscal 1998, the Company finalized an agreement with Konica Business
Machines ("Konica") to purchase 7,500 new, state-of-the-art black and white
NextGen(TM) photocopiers over a three year span. At June 30, 1998, the Company
had purchased over 7,000 units under this agreement. During fiscal 1993, TRM
developed a supply relationship with Mita Copystar America, Inc. ("Mita"), for
black and white photocopiers and related products in North America. The
resulting arrangement, as updated, contains no commitment to purchase any
specific number of photocopiers. In the past, the Company primarily used two
similar discontinued models of used photocopiers originally manufactured by
Ricoh Company, Ltd. and its affiliates ("Savin" photocopiers). TRM bought these
photocopiers from photocopier brokers and dealers. These two models of black and
white photocopiers have not been manufactured since 1979 and 1982. A portion of
the older model Savin copiers have been written-off in fiscal 1997 and 1998 as
under-performing assets (see Note 4 to the Consolidated Financial Statements on
page F-8 in this Form 10-K.) The remaining Savin photocopiers owned by the
Company are in profitable locations.
Also during fiscal 1992, a supply arrangement was entered into with Mita
Europe B.V. ("Mita Europe") for black and white photocopiers and related
products in Europe. Under this arrangement, photocopiers and related products
are shipped from Mita Europe directly to the Company's European Service Centers.
The Company continues to monitor and evaluate supplies of new and used
photocopiers in Europe available for its use.
Parts
Currently, parts for Konica and Mita photocopiers are being supplied
primarily by the photocopier manufacturers. The Company acquires a majority of
the parts for its Savin photocopiers directly from various parts fabricators.
Many parts are built to TRM's specifications. While TRM's strategy is to use
multiple sources for its parts to reduce dependence on single sources, some
parts are purchased from single sources. Temporary shortages, increased costs
and quality control problems could result if parts from a single or limited
source became unavailable. The Company will continue to evaluate available
sources of supply for parts.
5
Paper
Photocopy paper is purchased centrally by the Company's Team Headquarters
and then shipped directly from the mills to the Service Centers. A number of
paper companies are capable of producing the paper usable by the Company. The
Company believes that sufficient paper should be available to supply the
Company's expanding business.
Toner
Currently, toner for Konica photocopiers is being supplied primarily by the
photocopier manufacturer. The Company purchases toner for Mita photocopiers and
liquid toner for its black and white rebuilt photocopiers located in North
America directly from three manufacturers. The Company has confirmed that other
acceptable sources are available and could obtain suitable toner on reasonable
terms from other manufacturers, although some start-up delays could occur. The
Company will continue to evaluate available sources of supply for toner.
Employees
As of June 30, 1998, the Company had 593 employees, most of whom were
full-time. 401 are in field service, 170 are in sales, marketing, customer
service, purchasing, billing and administration, and 22 are in training,
production and warehouse functions. None of the Company's employees are
represented by unions. The Company believes it has good relations with its
employees. The Company currently engages 9 independent contractors to sell the
TRM service program, which includes a machine and a service agreement.
Service Marks
Most TRM Copy Centers are identified by distinctive yellow and black
trapezoidal signs bearing "TRM Copies" and the program price. In France the
Company does business under the name of FPC France Ltd. TRM and FPC's signs are
registered service marks. The Company registered "NextGen" as it relates to the
new black and white technology photocopier the Company is purchasing and placing
in service.
Copy Centers Investment Group, Ltd.
The Company serves as general partner of Copy Centers Investment Group,
Ltd., an Oregon limited partnership. The partnership was formed in 1983 to
acquire certain Copy Centers from the Company. The partnership owns 79 Copy
Centers in the states of Oregon and Washington. The Company receives a
management fee of 25% of the gross revenue from these 79 Copy Centers, plus $20
per month for each of the 79 locations for accounting and administrative
functions. The Company also owns a 1% interest in the profits and losses of the
partnership. The partnership will terminate December 31, 1998 according to the
partnership agreement. The partnership's operations do not constitute a material
part of the business of the Company.
Governmental Regulation
The Company's photocopier business is not subject to significant
governmental regulation. Local zoning and sign regulations occasionally prohibit
a retail business from displaying the "TRM Copies" sign on an exterior wall or
window. Local zoning and use restrictions may not allow opening a Copy Center in
an otherwise desirable retail business. The Company does not expect such
restrictions to have a material adverse effect on the Company's expansion plans.
The Company believes ATM operations are not subject to any governmental
regulation that will adversely effect the business of the Company's ATM
Division. Various regulations have been proposed to reduce or eliminate amounts
charged to users of ATMs. If any of these regulations are enacted in the
jurisdictions where the company is considering placing ATMs, the Company's
revenues would decline and the Company would be negatively impacted. The
enactment of any such regulations may effectively prohibit the Company from
placing ATMs in such jurisdiction.
Forward-Looking Statements
This Form 10-K and Annual Report include 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 relating to the Company's goals, plans and
expectations regarding: removing Savin photocopiers, establishing the ATM
Division, effectively using a third-party network
6
of service providers, purchasing and installing additional NextGen(TM)
photocopiers, expansion in existing and new markets, the Year 2000 Issue, and
capital expenditures. Risk factors related to these forward looking statements
are discussed in "Management's Discussion and Analysis" (see Forward-Looking
Statements on page 15 of this Form 10-K.)
ITEM 2. PROPERTIES
The Company leases approximately 25,750 square feet of office space for its
Team Headquarters in Portland, Oregon. The lease expires in 2010, with an option
to renew for an additional five years. The Company also leases 31,500 square
feet of space that serves as the Portland Service Center and is also used for
training, warehousing and other office space under a lease that also expires in
2010. This facility is located next to the Team Headquarters. Such space is
currently adequate for the Company's business.
The Company leases warehouse space for 52 Service Centers outside Portland,
Oregon. A Service Center typically consists of approximately 2,000 to 7,000
square feet of non-custom warehouse space. The leases typically run for three to
twelve years, some with extensions available upon exercise of renewal options.
The Company does not anticipate any difficulty in locating or, if necessary,
relocating Service Centers.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various claims and legal proceedings from time to
time in the ordinary course of its business. There are no pending or threatened
matters which in the Company's opinion would have a material effect on the
Company's operations or its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 24, 1998 the Company held a Special Meeting of Shareholders. The
Shareholders took the actions described below. As of the record date for the
Special Meeting, 7,056,811 shares of Common Stock were issued and outstanding.
1. The Shareholders voted to amend the Company's Restated Articles of
Incorporation to change the Company's corporate name to "TRM Corporation,"
by the votes indicated below:
Votes For: 5,927,184
Votes Against: 980
Votes Abstained: 3,300
2. The Shareholders voted to approve an amendment to the Company's Restated
Articles of Incorporation to increase the authorized number of shares of
Common Stock that the Company may issues from 10,000,000 to 50,000,000, by
the votes indicated below:
Votes For: 4,516,413
Votes Against: 1,414,583
Votes Abstained: 468
3. The Shareholders voted to approve an amendment to the Company's Restated
Articles of Incorporation to create and determine the preferences,
limitations and rights of a new series of Preferred Stock of the Company,
to be designated "Series A Preferred Stock," by the votes indicated below:
Votes For: 3,645,694
Votes Against: 25,960
Votes Abstained: 3,560
Broker Non-votes: 2,256,250
7
4. The Shareholders voted to approve the issuance and sale of 1,777,778 shares
of the Series A Preferred Stock and warrants to purchase an aggregate of
500,000 shares of Common Stock of the Company at an exercise price of
$15.00 a share (the "Warrants") to ReadyCash Investment Partners, L.P. (the
"Purchaser") pursuant to a Preferred Stock and Warrants Purchase Agreement
dated March 29, 1998 between the Company and the Purchaser (the "Purchase
Agreement"), for an aggregate purchase price of $20,000,000, by the votes
indicated below:
Votes For: 3,669,374
Votes Against: 5,290
Votes Abstained: 550
Broker Non-votes: 2,256,250
5. The Shareholders elected each of Daniel G. Cohen, Edward E. Cohen, Joseph
G. Denton, Kent B. Godfrey, Joel R. Mesznik and Kenneth L. Tepper by the
votes, and for the terms indicated below, to serve on the Company's Board
of Directors. All of the elections were effective upon closing of the
issuance and sale of the Series A Preferred Stock and the Warrants to the
Purchaser pursuant to the Purchase Agreement (the "Closing").
Daniel G. Cohen - Term expires in 1999
--------------------------------------
Votes For: 5,929,287
Votes Withheld: 2,177
Edward E. Cohen - Term expires in 2000
--------------------------------------
Votes For: 5,929,337
Votes Withheld: 2,127
Joseph G. Denton - Term expires in 1998
---------------------------------------
Votes For: 5,929,337
Votes Withheld: 2,127
Kent B. Godfrey - Term expires in 1998
--------------------------------------
Votes For: 5,929,337
Votes Withheld: 2,127
Joel R. Mesznik - Term expires in 1999
--------------------------------------
Votes For: 5,929,337
Votes Withheld: 2,127
Kenneth L. Tepper - Term expires in 1999
----------------------------------------
Votes For: 5,929,337
Votes Withheld: 2,127
Frederick O. Paulsell, Michael D. Simon and Frederic P. Stockton's terms of
office as directors continued after the meeting.
8
6. The Shareholders voted to amend the Company's 1996 Stock Option Plan (the
"Plan") to increase the total number of shares of the Company's Common
Stock reserved for issuance under the Plan from 700,000 to 1,200,000, by
the votes indicated below:
Votes For: 2,141,006
Votes Against: 1,534,558
Votes Abstained: 650
Broker Non-votes: 2,255,250
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
System since December 18, 1991 under the symbol TRMM. Information with respect
to the high and low sales prices for the Common Stock is set forth on the inside
back cover of the Company's 1998 Annual Report to Shareholders and is
incorporated by reference herein.
At August 21, 1998 there were 200 shareholders of record of the Company's
Common Stock and 7,065,384 shares were outstanding. The Company believes the
number of beneficial owners is substantially greater than the number of record
holders because a large portion of the Company's outstanding Common Stock is
held of record in broker "street names" for the benefit of individual investors.
The Company did not pay any dividends in fiscal 1997 or fiscal 1998. The
Company intends to retain future earnings for use in its business and therefore
does not anticipate paying cash dividends to Common Stock shareholders in the
foreseeable future.
On June 24, 1998, the Company issued and sold 1,777,778 shares of
unregistered Series A Preferred Stock and Warrants to purchase 500,000 shares of
Common Stock for net proceeds of approximately $19,853,000. The Company claims
exemption from the registration of such shares under the Securities Act of 1933,
as amended, in reliance on the exemption available under Section 4(2) thereof.
Each share is convertible at any time at the option of the holder into .7499997
of a share of Common Stock. In addition, each share of Series A Preferred Stock
is automatically converted into .7499997 shares of Common Stock if the price of
Common Stock is at least $20.00 for a period of 90 consecutive days commencing
after June 30, 1999. The conversion ratio and exercise prices are adjusted for
any combination or subdivision of shares, stock dividend, stock split or
recapitalization. The Series A Preferred Stock bears a dividend rate of 7.5%,
payable quarterly. The Company intends to use the proceeds to form an ATM
Division (see discussion of ATM under "New Products and Services Under
Development").
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for, and as of the end of, each
of the years in the five-year period ended June 30, 1998 have been derived from
the audited financial statements of the Company. This data should be read in
conjunction with the financial statements, related notes and other financial
information included elsewhere in this report.
Selected Financial Data
(In thousands, except per share data)
1994 1995 1996 1997 1998
----------------------------------------------------------------------
Year ended June 30:
Sales $ 47,957 $ 60,544 $ 67,538 $ 69,881 $ 68,352
Net income (loss) 3,354 3,699 4,124 2,575 (582)
Basic net income (loss) per share 0.53 0.58 0.64 0.39 (0.08)
Diluted net income (loss) per share 0.49 0.53 0.57 0.35 (0.08)
As of June 30:
Working capital $ 8,523 $ 9,543 $ 8,860 $ 9,568 $ 21,937
Total assets 43,504 55,736 54,251 50,160 75,266
Long-term debt 9,500 14,238 8,128 400 --
Stockholders' equity 27,155 31,528 35,444 38,828 60,060
10
Selected Operating Data
1994 1995 1996 1997 1998
------------------------------------------------------------------------
TRM Copy Centers as of Year End 25,563 28,995 31,719 34,796 33,349
Selected Quarterly Financial Data
(In thousands, except per share data)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
1997 1998 1997 1998 1997 1998 1997 1998
-------------------------------------------------------------------------------------
Sales $ 16,577 $16,238 $17,347 $16,709 $18,023 $ 17,648 $17,934 $17,757
Gross profit 6,436 6,316 6,797 6,358 7,407 6,798 7,300 7,359
Net income (loss) 1,037 1,033 1,163 891 1,365 (3,173) (990) 667
Basic net income (loss) per share 0.16 0.15 0.18 0.13 0.20 (0.45) (0.14) 0.09
Diluted net income (loss) per share 0.14 0.14 0.16 0.12 0.19 (0.45) (0.14) 0.09
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TRM continues to expand in new and existing metropolitan service areas. The
number of service areas the Company operates in has increased from 54 to 73 over
the last three fiscal years and now includes 51 in the United States, 5 in
Canada, 15 in the United Kingdom and 2 in France. The number of TRM Copy Centers
has increased 15 percent over the same three year period, from 28,995 to 33,349.
In addition to expanding, the Company is also focused on improving the
profitability of the installed base of TRM Copy Centers.
On June 24, 1998, the Company issued and sold to ReadyCash 1,777,778 shares
of a new series of Preferred Stock of the Company, designated the "Series A
Preferred Stock", and warrants (the "Warrants") to purchase 500,000 shares of
the Company's Common Stock at an exercise price of $15.00 a share, for an
aggregate purchase price of $20 million in cash. ReadyCash informed the Company
that it obtained the funds used to purchase the Series A Preferred Stock and
Warrants from its individual limited partners in the form of capital
contributions.
Each share of Series A Preferred Stock has one vote per share and votes
together with the Common Stock on any and all matters submitted to the Company's
shareholders for a vote, except to the extent Oregon law requires otherwise. In
addition, each share of the Series A Preferred Stock is convertible at any time
at the option of the holder into .7499997 fully paid and nonassessable shares of
Common Stock and shall be automatically converted into shares of the Company's
Common Stock on the same basis if the last bid price quoted in the Nasdaq System
as of 4:00 p.m. for a share of the Company's Common Stock is at least $20.00 for
a period of 90 consecutive calendar days commencing after June 30, 1999. The
conversion ratio and the price at which the Series A Preferred Stock shall be
automatically converted shall be appropriately adjusted for any combination or
subdivision of shares, stock dividend, stock split or recapitalization.
Results of Operations
The following table sets forth, for the periods indicated, selected
statement of operations data, expressed as a percentage of sales, and the
percentage change in dollar amounts of each item on the Consolidated Statements
of Operations (see page F-3 of this Form 10-K).
11
Percentage Change As a Percentage of Sales
1996-97 1997-98 1996 1997 1998
----------------------------------------------------------------
Sales 3.5% (2.2)% 100.0% 100.0% 100.0%
Sales discounts (0.4) (3.0) 17.4 16.7 16.6
Cost of sales 1.1 (0.2) 44.3 43.3 44.2
Selling, general and administrative 5.7 5.1 26.0 26.6 28.6
Non-cash stock compensation -- -- -- -- 1.7
Special charges -- 84.1 -- 5.8 9.3
----------------------------------------------------------------
Operating income (loss) (36.4) (104.2) 12.3 7.6 (0.4)
Interest expense, net (58.6) (82.8) 1.4 0.6 --
Other, net 55.2 (7.4) 0.7 1.0 1.0
----------------------------------------------------------------
Income (loss) before income taxes (39.5) (122.9) 10.2 6.0 (1.4)
Provision for income taxes (42.4) (123.4) 4.1 2.3 0.5
----------------------------------------------------------------
Net income (loss) (37.6)% (122.6)% 6.1% 3.7% (0.9)%
================================================================
1998 Compared to 1997
Sales decreased by $1.5 million (2.2%) to $68.4 million for 1998 from $69.9
million for 1997. The decrease represents a 7.4 percent decrease in the average
net sales per unit, offset by a 5.8 percent overall increase in the number of
billed units. Sales in North America have declined 5.6 percent over the last
fiscal year, while sales in Europe have increased 5.5 percent during the same
period. The decline in North America represents a maturing market in the small,
independent retail customer base and increasing market demand for new black and
white technology photocopiers. The Company intends to turn the performance in
North America around by installing thousands of NextGen(TM) photocopiers in
existing sites and attracting new multi-site retail customers (see discussion of
NextGen(TM) under "New Products and Services Under Development" and multi-site
retailers under "Locations").
Sales for products not related to black and white photocopying have been
insignificant, amounting to less than 5 percent of total sales.
Sales discounts are the portion of revenue retained by retail customers.
They generally vary at individual retail businesses depending on volume--the
higher the volume, the greater the discount. The downward trend in sales
discounts as a percentage of sales in 1998 and 1997 reflects changes made in
business agreements with new customers over the periods.
Cost of sales decreased $75,000 (0.2%) from 1997 to 1998. Offsetting
factors resulted in relatively unchanged costs of sales compared to fiscal 1997.
Costs of paper, toner and parts decreased by $751,000, but were offset by
increased costs of $714,000 for copier machine depreciation and field and sales
labor. The increased copier depreciation relates to the new Konica copier
machines purchased and installed during the year.
Selling, general and administrative expenses increased $956,000 (5.1%) from
$18.6 million in 1997 to $19.5 million in 1998. Selling, general and
administrative costs were 28.6 percent and 26.6 percent of sales for 1998 and
1997, respectively. Selling, general and administrative costs increased due to
increased costs of medical, property and auto insurance, higher vehicle costs,
increased legal and accounting fees, and increased office and administrative
payroll costs.
In conjunction with the sale of Series A Preferred Stock (see Note 8 to the
Consolidated Financial Statements on page F-10), the Company amended certain
Board members' stock option agreements to extend the exercise period for the
options to ten years from June 24, 1998. Pursuant to APB No. 25, and due to the
extension of the exercise period, the Company recognized $1.1 million as
non-cash compensation expense in the year ended June 30, 1998.
During 1998, the Company recorded a pre-tax special charge of $6.4 million
($3.9 million after tax) related to the write-down of certain under-performing
assets of its Photocopy Division. The major components of the 1998 special
12
charge included the disposal of under-performing machines ($4.3 million), the
disposal of replacement parts and inventory relating to under-performing
machines ($1.5 million) and other charges related to the disposal of equipment
($600,000).
Interest expense decreased 82.8 percent to $68,000 in 1998 from $396,000 in
1997. The decrease was due to reduced bank borrowings on the Company's revolving
line of credit during 1998.
The Company's effective tax rate for 1998 was 39.1 percent, resulting in an
income tax benefit of $373,000, compared to an effective rate of 38.2 percent
and an income tax provision of $1.6 million in 1997. The increase in the
effective tax rate from 1997 to 1998 is due to an increase in permanent
differences in the Company's income for financial and tax reporting.
1997 Compared to 1996
Sales increased by $2.3 million (3.5%) to $69.9 million for 1997 from $67.5
million for 1996. The increase was due primarily to a 10.9 percent increase in
the number of revenue-generating photocopiers offset by a 6.0 percent decrease
in average net sales per unit. Sales growth during 1997 came from the Company's
foreign operations. Foreign sales grew to $25.9 million in 1997 from $22.0
million in 1996.
Sales discounts decreased $52,000 (0.4%) from $11.7 million in 1996 to
$11.6 million in 1997. Sales discounts as a percentage of sales decreased from
17.4 percent in 1996 to 16.7 percent in 1997. The downward trend in sales
discounts as a percentage of sales reflects changes made in business agreements
with new customers over the periods.
Cost of sales increased $335,000 (1.1%) from 1996 to 1997. This was below
the percentage increase in sales, despite growth in field service payroll,
headcount additions for opening new TRM Service Centers, and copier depreciation
costs. This was achieved because of lower paper costs and lower paper and toner
usage under the Company's higher-copy-price programs.
Selling, general and administrative expenses increased $1.0 million (5.7%)
from $17.6 million in 1996 to $18.6 million in 1997. Selling, general and
administrative costs were 26.6 percent and 26.0 percent of sales for 1997 and
1996, respectively. The increase in selling, general and administrative during
1997 was primarily due to employee health care costs in the U.S. and higher
expansion and start-up expenses in both the U.S. and Europe.
During 1997, the Company recorded a non-cash, accounting charge of $4.1
million pretax ($2.5 million after tax). This charge included impairment write
downs of equipment in three categories: color copiers, custom business card
printing components and certain older generation black and white copiers. It was
concluded during 1997 that the initial equipment purchased in 1993 and 1994 to
support the Company's color and business card business was technologically dated
and that the full asset carrying amounts were not recoverable.
Interest expense decreased 58.6 percent to $396,000 in 1997 from $957,000
in 1996. The Company reduced bank borrowings significantly from mid-1996 through
1997, resulting in the lower interest expense.
The Company's effective tax rate for 1997 was 38.2 percent, resulting in an
income tax provision of $1.6 million, compared to an effective rate of 40.1
percent and an income tax provision of $2.8 million in 1996. The decrease in the
effective tax rate from 1996 to 1997 is due to income in the United Kingdom
flowing through a United Kingdom subsidiary, effective for fiscal year 1997, and
being taxed at a lower rate than income in the United States.
Impact of Year 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any such software
programs may recognize a date using "00" as the year 1900 rather than the year
2000.
The Company relies on computer systems and software to operate its
business, including applications used in account maintenance, purchasing,
inventory management, finance and various administrative functions. Based on a
recent assessment, the Company determined that it will be required to modify or
replace significant portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company presently believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue will not pose
13
significant operations problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Company.
This could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send customer invoices, or engage in similar normal business
activities.
Since December 1997, the Company has been actively engaged in becoming Year
2000 compliant. As of August 1998, sixty percent of the Company's hardware and
software system applications are Year 2000 compliant. The target date for full
compliance is June 30, 1999. The Company's efforts have been divided into three
phases. First, a Year 2000 discovery team was assembled to inventory all
hardware, operating systems and software applications and provide upgrade and/or
contingency recommendations. Second, all upgrade/contingency recommendations
were compiled into a project action plan. Of the twenty-two non-compliant
systems/applications identified, three have been upgraded or replaced, thirteen
more are due for implementation by December 31, 1998, and six more will be
replaced by an enterprise-wide information technology solution due to come on
line during the fourth quarter of fiscal 1999. Third and finally, the Company
re-prioritized existing information technology ("IT") projects to allocate
programming resources to the Company's Year 2000 Issue.
Independent of the Year 2000 project, the Company has initiated significant
systems upgrades to enhance performance and reliability of many of its
computer-based information systems. These upgrades will, as an additional
benefit, rectify certain identified Year 2000 issues. The total IT budget for
all systems activities is $1.5 million for fiscal 1999. Expenditures directly
related to Year 2000 issues are estimated to be approximately $350,000.
Expenditures for other planned systems upgrades, totaling $1,150,000, will
address certain Year 2000 issues as a corollary benefit to the Company, but have
been initiated primarily to enhance system reliability and capability. The
Company will utilize both internal and external resources to reprogram, or
replace, and test the software for the Year 2000 modifications. The Company
continues to manage total IT expenses by re-prioritizing or curtailing less
critical investments, incorporating Year 2000 readiness into previously planned
system enhancements and using existing staff to implement its Year 2000
modifications.
The Company intends to initiate communications with all of its significant
service providers, lenders, and large customers to determine the extent to which
the Company's interface systems are vulnerable in the event any of those third
parties fail to remedy their own Year 2000 Issues. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted and will not have an adverse effect on the
Company's systems.
Contingencies for systems scheduled for replacement include upgrades and
service packs from manufacturers of third-party software as well as dedicated
programming time from internal Information Systems staff to produce "Hot Fix"
repairs to modify date integer fields and input masks to reflect long integer
format. Currently, no other contingency plan has been developed.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which established requirements for
disclosure of comprehensive income. The objective of SFAS No. 130 is to report
all changes in equity that result from transactions and economic events other
than transactions with owners. Comprehensive income is the total of net income
and all other non-owner changes in equity. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. Reclassification of earlier financial
statements for comparative purposes is required. The Company has not quantified
the effect, if any, of adoption of SFAS No. 130.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." This Statement established
standards for reporting information about operating segments in annual financial
statements. Operating segments are defined as components of an enterprise
evaluated regularly by the Company's senior management in deciding how to
allocate resources and in assessing performance. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. The Company has not evaluated
the effect of adoption of SFAS No. 131, but does not believe it will
significantly change the Company's consolidated financial reporting structure.
In March 1998, the American Institute of Certified Public Accountants
Accounting Standards Executive Committee issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal
14
Use" ("SOP 98-1.") SOP 98-1 is applicable to all nongovernmental entities and
provides guidance on accounting for the costs of computer software developed or
obtained for internal use. SOP 98-1 is effective for fiscal years beginning
after December 15, 1998. The Company has not quantified the effect of adoption
of SOP 98-1.
Liquidity and Capital Resources
During 1998 TRM generated $16.7 million in cashflows from operations and
increased its net working capital from $9.6 million at June 30, 1997 to $21.9
million at June 30, 1998 (including cash and cash equivalents of $20.2 million).
On June 24, 1998 the Company received $19.9 million, net of expenses, from the
sale of Series A Preferred Stock described above. The Company also has a $30.0
million bank line of credit, with no borrowings outstanding at June 30, 1998.
The Company was in compliance with all loan covenants at June 30, 1998. This
credit facility expires on April 1, 2000.
During 1998, the Company received extended payment terms on photocopier
purchases. This resulted in a $5.4 million increase in accounts payable. This
interest free financing may not be available in the future.
During the twelve months ended June 30, 1998, the Company funded capital
expenditures of $20.2 million primarily from cash generated from operations,
bank borrowings and proceeds from equipment disposals and the sale of preferred
stock. Capital expenditures increased by $15.6 million over the prior year due
to increased purchases and installations of NextGen(TM) copiers ($14.3 million)
and increased expenditures for other copiers ($4.5 million). Additional capital
expenditures of $770,000, $400,000 and $185,000 were for vehicles, computer
hardware and software, and other normal operating purposes, respectively.
The Company currently anticipates capital expenditures of approximately $30
million during fiscal 1999. Approximately $15 million will be for acquiring
photocopiers. The remainder will be for developing the ATM business and other
general purposes including computer systems. The Company expects to finance
these capital expenditures with cash generated from operations, bank borrowings
and proceeds from the sale of Series A Preferred Stock. The Company expects that
these sources will provide adequate cash to fund its expansion through at least
June 30, 1999.
Forward-Looking Statements
Information in "Management's Discussion and Analysis," the letter to
shareholders and elsewhere in this Annual Report and Form 10-K about the
Company's goals, plans and expectations regarding: removing Savin photocopiers,
establishing the ATM Division, effectively using a third-party network of
service providers, purchasing and installing additional NextGen(TM)
photocopiers, expansion in existing and new markets, the Year 2000 Issue, and
capital expenditures 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. Factors that could adversely affect the removal of Savin
photocopiers include, but are not limited to, the availability of third-party
brokers to purchase the photocopiers, the Company's ability to collect amounts
due from third-party brokers, and the Company's ability to execute its removal
and disposal plan. Factors that could adversely affect establishing the ATM
Division include, but are not limited to, competition from existing ATM
providers and new entrants into the ATM market, the Company's ability to attract
and retain personnel necessary to execute its ATM business plan, the Company's
ability to manage and achieve growth in a new line of business, changes in
technology affecting ATM transactions, the Company's ability to expand its
current relationships with retailers and broaden its distribution network,
changes in consumer practices and preferences with respect to the location of,
and use of, ATM's, and changes in the laws and regulations applicable to
non-bank ATMs. Factors that could adversely affect the effectiveness of a
third-party network of service providers include, but are not limited to, the
availability of third-party service providers in the geographic areas needed,
the Company's ability to negotiate contracts with the third-party service
provider, and the service quality of the third-party service provider. Factors
that could adversely affect the purchasing and installing additional NextGen(TM)
photocopiers include, but are not limited to, changes in consumer practices and
preferences with respect to the use of TRM's new photocopy machines, and the
performance and profitability of NextGen(TM) photocopy machines, the Company's
ability to purchase the additional photocopy machines, and the Company's ability
to sell the variances in the NextGen(TM) program. Factors that could adversely
affect expansion in existing and new markets include, but are not limited to,
business conditions in the market areas the Company targets for expansion,
competitive factors, customer demand for the Company's services and the
Company's ability to execute its plans successfully. Factors that could
adversely affect the Year 2000 Issue include, but are not limited to,
unidentified issues in existing programs or underestimating the resources
necessary to make any required modifications or conversions, the Company's
ability to modify and/or convert the necessary systems and applications timely,
and the continued availability of resources internally
15
and externally to implement the Year 2000 modifications. Factors that could
adversely affect capital expenditures include, but are not limited to, the items
described above regarding establishing the new ATM Division and purchasing
additional NextGen(TM) photocopiers, the continued availability of a credit
facility, and the Company's ability to negotiate favorable purchase agreements
with ATM manufacturers. Any forward-looking statements should be considered in
light of these factors.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements and supplementary data required by this item are
included in this Report on Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
16
PART III
The information required by Part III is incorporated herein by reference
from the indicated pages of the Company's definitive Proxy Statement dated
October 9, 1998 for its 1998 annual meeting of shareholders.
Proxy
Statement
Page No.
---------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 4-6
ITEM 11. EXECUTIVE COMPENSATION 8-13
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 1-3
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 7, 14
17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
Page in
(a) 1. Financial Statements this Report.
------------
Reports of Independent Accountants F-1
Consolidated Balance Sheets as of
June 30, 1998 and 1997 F-3
Consolidated Statements of Operations
for each of the three years in the period
ended June 30, 1998 F-4
Consolidated Statements of Stockholders'
Equity for each of the three years in the
period ended June 30, 1998 F-5
Consolidated Statements of Cash Flows
for each of the three years in the period
ended June 30, 1998 F-6
Notes to Consolidated Financial Statements F-7
2. Financial Statement Schedules:
III -- Valuation and Qualifying Accounts F-15
All other schedules are omitted because they
are not applicable or the required information
is shown in the financial statements or notes
thereto.
3. Exhibits:
Exhibit
Number
- -------
3.1 a) Amendments to the Restated Articles of Incorporation
b) Restated Articles of Incorporation
3.2 Restated Bylaws
4.1 Investors' Rights Agreement (Incorporated herein by reference to
Exhibit 4.1 of Form 8-K dated July 9, 1998)
4.2 Articles V, VI and VII of the Restated Articles of Incorporation, as
amended (See Exhibit 3.1)
4.3 Articles I, II, V, VII and X of the Restated Bylaws (See Exhibit 3.2)
10.1 Form of Indemnity Agreements with Registrant's directors and executive
officers (Incorporated herein by reference to Exhibit 10.1 of Form
10-K for the fiscal year ended June 30, 1997)
10.2 Loan Agreement with United States National Bank of Oregon, dated March
31, 1997 (Incorporated herein by reference to Exhibit 10.2 of Form
10-K for the fiscal year ended June 30, 1997)
18
10.3 a) Lease dated October 14, 1991 between Pacific Realty Associates,
L.P. and Registrant (for Registrant's training facility in
Portland, Oregon) (Incorporated herein by reference to Exhibit
10.7 of Form S-1 dated November 8, 1991 [No. 33-43829])
b) Lease amendment dated February 7, 1994, between Pacific Realty
Associates, L.P. and Registrant (Incorporated herein by reference
to Exhibit 10.7 of Form 10-K for the fiscal year ended June 30,
1994)
c) Lease amendment dated August 10, 1994, between Pacific Realty
Associates, L.P. and Registrant (Incorporated herein by reference
to Exhibit 10.5 of Form 10-K for the fiscal year ended June 30,
1995)
d) Lease dated August 10, 1994 between Pacific Realty Associates,
L.P. and Registrant (for the Registrant's corporate headquarters
in Portland, Oregon) (Incorporated herein by reference to Exhibit
10.4 of Form 10-K for the fiscal year ended June 30, 1995)
10.4 Restated 1986 Stock Incentive Plan (Incorporated herein by reference
to Exhibit 10.8 of Form 10-K for the fiscal year ended June 30, 1994)
10.5 Restated 1996 Stock Option Plan
10.6 Employee Stock Purchase Plan (Incorporated herein by reference to
Exhibit 28.1 of Form S-8 dated December 7, 1992 [No. 33-55370])
10.7 Form of Stock Option Agreements:
a) For option grants before fiscal 1994 (Incorporated herein by
reference to Exhibit 10.9 of Form S-1 dated November 8, 1991 [No.
33-43829])
b) For option grants during fiscal 1994 (Incorporated herein by
reference to Exhibit 10.10 of Form 10-K for the fiscal year ended
June 30, 1994)
c) For option grants during fiscal 1995 (Incorporated herein by
reference to Exhibit 10.8 of Form 10-K for the fiscal year ended
June 30, 1995)
10.8 Employment Agreements:
a) Employment Agreement dated January 17, 1995 with Michael D. Simon
(Incorporated herein by reference to Exhibit 10.9 of Form 10-K
for the fiscal year ended June 30, 1995)
b) Employment Agreement dated April 25, 1996 with Michael D. Simon
(Incorporated herein by reference to Exhibit 10.9 of Form 10-K
for the fiscal year ended June 30, 1996)
c) Employment Agreement dated August 18, 1997 with Frederic P.
Stockton (Incorporated herein by reference to Exhibit 10.8 of
Form 10-K for the fiscal year ended June 30, 1997)
d) Employment Agreement dated September 18, 1997 with Paul M. Brown
10.9 Executive Supplemental Retirement Agreement with Edwin S. Chan dated
January 9, 1995 (Incorporated herein by reference to Exhibit 10.9 of
Form 10-K for the fiscal year ended June 30, 1995)
10.10 Preferred Stock and Warrants Purchase Agreement dated March 29, 1998
between the Company and ReadyCash Investment Partners, L.P.
(Incorporated herein by reference to Exhibit 10 of Form 10-Q for the
quarter ended March 31, 1998)
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors (see Page S-1)
24.1 Power of Attorney (see Signature page)
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company during the last
quarter of fiscal 1998.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in Portland, Oregon,
on September 28, 1998.
TRM CORPORATION
By: /s/ FREDERIC P. STOCKTON
-------------------------------------
Frederic P. Stockton
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Frederic P. Stockton his
attorney-in-fact, with the power of substitution, for him in any and all
capacities, to sign any amendments to this Report, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on September 28, 1998 on
behalf of the Registrant and in the capacities indicated:
Signature Title
- ---------------------------------- ----------------------------------
/s/ FREDERIC P. STOCKTON
- ---------------------------------- President, Chief Executive Officer
Frederic P. Stockton and Director
/s/ EDWARD E. COHEN
- ---------------------------------- Chairman of the Board and Director
Edward E. Cohen
/s/ DANIEL G. COHEN
- ---------------------------------- Director
Daniel G. Cohen
/s/ JOSEPH G. DENTON
- ---------------------------------- Director
Joseph G. Denton
/s/ KENT B. GODFREY
- ---------------------------------- Director
Kent B. Godfrey
/s/ JOEL R. MESZNIK
- ---------------------------------- Director
Joel R. Mesznik
/s/ FREDERICK O. PAULSELL
- ---------------------------------- Director
Frederick O. Paulsell
/s/ MICHAEL D. SIMON
- ---------------------------------- Director
Michael D. Simon
/s/ KENNETH L. TEPPER
- ---------------------------------- Director
Kenneth L. Tepper
20
EXHIBIT INDEX
Exhibit
Number
- -------
3.1 a) Amendments to the Restated Articles of Incorporation
b) Restated Articles of Incorporation
3.2 Restated Bylaws
4.1 Investors' Rights Agreement (Incorporated herein by reference to
Exhibit 4.1 of Form 8-K dated July 9, 1998)
4.2 Articles V, VI and VII of the Restated Articles of Incorporation, as
amended (See Exhibit 3.1)
4.3 Articles I, II, V, VII and X of the Restated Bylaws (See Exhibit 3.2)
10.1 Form of Indemnity Agreements with Registrant's directors and executive
officers (Incorporated herein by reference to Exhibit 10.1 of Form
10-K for the fiscal year ended June 30, 1997)
10.2 Loan Agreement with United States National Bank of Oregon, dated March
31, 1997 (Incorporated herein by reference to Exhibit 10.2 of Form
10-K for the fiscal year ended June 30, 1997)
10.3 a) Lease dated October 14, 1991 between Pacific Realty Associates,
L.P. and Registrant (for Registrant's training facility in
Portland, Oregon) (Incorporated herein by reference to Exhibit
10.7 of Form S-1 dated November 8, 1991 [No. 33-43829])
b) Lease amendment dated February 7, 1994, between Pacific Realty
Associates, L.P. and Registrant (Incorporated herein by reference
to Exhibit 10.7 of Form 10-K for the fiscal year ended June 30,
1994)
c) Lease amendment dated August 10, 1994, between Pacific Realty
Associates, L.P. and Registrant (Incorporated herein by reference
to Exhibit 10.5 of Form 10-K for the fiscal year ended June 30,
1995)
d) Lease dated August 10, 1994 between Pacific Realty Associates,
L.P. and Registrant (for the Registrant's corporate headquarters
in Portland, Oregon) (Incorporated herein by reference to Exhibit
10.4 of Form 10-K for the fiscal year ended June 30, 1995)
10.4 Restated 1986 Stock Incentive Plan (Incorporated herein by reference
to Exhibit 10.8 of Form 10-K for the fiscal year ended June 30, 1994)
10.5 Restated 1996 Stock Option Plan
10.6 Employee Stock Purchase Plan (Incorporated herein by reference to
Exhibit 28.1 of Form S-8 dated December 7, 1992 [No. 33-55370])
10.7 Form of Stock Option Agreements:
a) For option grants before fiscal 1994 (Incorporated herein by
reference to Exhibit 10.9 of Form S-1 dated November 8, 1991 [No.
33-43829])
b) For option grants during fiscal 1994 (Incorporated herein by
reference to Exhibit 10.10 of Form 10-K for the fiscal year ended
June 30, 1994)
c) For option grants during fiscal 1995 (Incorporated herein by
reference to Exhibit 10.8 of Form 10-K for the fiscal year ended
June 30, 1995)
10.8 Employment Agreements:
a) Employment Agreement dated January 17, 1995 with Michael D. Simon
(Incorporated herein by reference to Exhibit 10.9 of Form 10-K
for the fiscal year ended June 30, 1995)
b) Employment Agreement dated April 25, 1996 with Michael D. Simon
(Incorporated herein by reference to Exhibit 10.9 of Form 10-K
for the fiscal year ended June 30, 1996)
c) Employment Agreement dated August 18, 1997 with Frederic P.
Stockton (Incorporated herein by reference to Exhibit 10.8 of
Form 10-K for the fiscal year ended June 30, 1997)
d) Employment Agreement dated September 18, 1997 with Paul M. Brown
10.9 Executive Supplemental Retirement Agreement with Edwin S. Chan dated
January 9, 1995 (Incorporated herein by reference to Exhibit 10.9 of
Form 10-K for the fiscal year ended June 30, 1995)
10.10 Preferred Stock and Warrants Purchase Agreement dated March 29, 1998
between the Company and ReadyCash Investment Partners, L.P.
(Incorporated herein by reference to Exhibit 10 of Form 10-Q for the
quarter ended March 31, 1998)
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors (see Page S-1)
24.1 Power of Attorney (see Signature page)
27.1 Financial Data Schedule
Independent Auditors' Report
To the Board of Directors and Stockholders of
TRM Corporation (formerly TRM Copy Centers Corporation):
We have audited the accompanying consolidated balance sheets of TRM
Corporation (formerly TRM Copy Centers Corporation) and subsidiaries as of June
30, 1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended June 30, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TRM
Corporation and subsidiaries as of June 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1998, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Portland, Oregon
August 17, 1998
F-1
Independent Auditors' Report
The Board of Directors
TRM Corporation (formerly TRM
Copy Centers Corporation)
Under date of August 17, 1998, we reported on the consolidated balance sheets of
TRM Corporation (formerly TRM Copy Centers Corporation) as of June 30, 1998 and
1997, and the related consolidated statements of operations, retained earnings,
and cash flows for each of the years in the three-year period ended June 30,
1998, which are included in Form 10-K. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule, as listed in Item 14(a)(2) for Form
10-K of TRM Corporation. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Portland, Oregon
August 17, 1998
F-2
Consolidated Balance Sheets
(In thousands)
June 30,
1997 1998
-------------------------------
Assets
Current assets:
Cash and cash equivalents $ 2,528 $ 20,177
Accounts receivable, net 7,704 7,423
Income tax receivable -- 949
Inventories (note 2) 4,611 3,809
Prepaid expenses and other 1,399 1,240
-------------------------------
Total current assets 16,242 33,598
Equipment and vehicles, less accumulated depreciation (notes 3 and 4) 33,872 41,624
Other assets 46 44
-------------------------------
$ 50,160 $ 75,266
===============================
Liabilities and Stockholders' Equity
Current liabilities:
Checks in transit $ 1,409 $ 553
Accounts payable 1,568 7,005
Accrued expenses (note 5) 3,697 4,103
-------------------------------
Total current liabilities 6,674 11,661
Long-term debt (note 6) 400 --
Deferred income taxes (note 7) 4,258 3,545
-------------------------------
Total liabilities 11,332 15,206
Commitments (note 11) -- --
Stockholders' equity (notes 8 and 9):
Preferred stock, no par value.
Authorized 5,000 shares; 1,778 and 0
shares issued and outstanding -- 19,853
Common stock, no par value.
Authorized 50,000 and 10,000 shares;
issued and outstanding 7,057 and 6,931 shares 16,601 18,617
Retained earnings 22,279 21,697
Cumulative translation adjustment (52) (107)
-------------------------------
Total stockholders' equity 38,828 60,060
-------------------------------
$ 50,160 $ 75,266
===============================
See accompanying notes to consolidated financial statements.
F-3
Consolidated Statements of Operations
(In thousands, except per share data)
Fiscal year ended June 30,
1996 1997 1998
------------------------------------------------
Sales $ 67,538 $ 69,881 $ 68,352
Less discounts 11,728 11,676 11,331
------------------------------------------------
Net sales 55,810 58,205 57,021
Cost of sales 29,930 30,265 30,190
------------------------------------------------
Gross profit 25,880 27,940 26,831
Selling, general and administrative expense 17,569 18,569 19,525
Non-cash stock compensation (note 8) -- -- 1,146
Special charges (note 4) -- 4,088 6,380
------------------------------------------------
Operating income (loss) 8,311 5,283 (220)
Interest expense 957 396 68
Other expense, net 464 720 667
------------------------------------------------
Income (loss) before income taxes 6,890 4,167 (955)
Provision (benefit) for income taxes (note 7) 2,766 1,592 (373)
-------------------------------------------------
Net income (loss) $ 4,124 $ 2,575 $ (582)
=================================================
Basic net income (loss) per share:
Shares outstanding 6,451 6,666 6,992
================================================
Net income (loss) per share $ 0.64 $ 0.39 $ (0.08)
================================================
Diluted net income (loss) per share:
Shares outstanding 7,262 7,285 6,992
================================================
Net income (loss) per share $ 0.57 $ 0.35 $ (0.08)
================================================
See accompanying notes to consolidated financial statements.
F-4
Consolidated Statements of Stockholders' Equity
(In thousands)
Cumulative
Preferred Stock Common Stock Retained Translation
Shares Amount Shares Amount Earnings Adjustment Total
---------------------------------------------------------------------------------------
Balances, June 30, 1995 -- -- 6,432 $ 15,940 $ 15,580 $ 8 $31,528
Exercise of stock options -- -- 36 137 -- -- 137
Tax benefit of stock options -- -- -- 26 -- -- 26
Issuance of stock to employees -- -- 16 111 -- -- 111
Foreign currency translation adjustment -- -- -- -- -- (482) (482)
Net income -- -- -- -- 4,124 -- 4,124
---------------------------------------------------------------------------------------
Balances, June 30, 1996 -- -- 6,484 16,214 19,704 (474) 35,444
Exercise of stock options -- -- 468 517 -- -- 517
Tax benefit of stock options -- -- -- 96 -- -- 96
Issuance of stock to employees -- -- 6 53 -- -- 53
Purchase of outstanding shares -- -- (27) (279) -- -- (279)
Foreign currency translation adjustment -- -- -- -- -- 422 422
Net income -- -- -- -- 2,575 -- 2,575
---------------------------------------------------------------------------------------
Balances, June 30, 1997 -- -- 6,931 $ 16,601 $ 22,279 $ (52) $38,828
Exercise of stock options -- -- 114 571 -- -- 571
Tax benefit of stock options -- -- -- 201 -- -- 201
Issuance of stock to employees -- -- 12 98 -- -- 98
Issuance of preferred stock 1,778 $19,853 -- -- -- -- 19,853
Non-cash stock compensation -- -- -- 1,146 -- -- 1,146
Foreign currency translation adjustment -- -- -- -- -- (55) (55)
Net loss -- -- -- -- (582) -- (582)
---------------------------------------------------------------------------------------
Balances, June 30, 1998 1,778 $19,853 7,057 $ 18,617 $ 21,697 $ (107) $60,060
See accompanying notes to consolidated financial statements.
F-5
Consolidated Statements of Cash Flows
(In thousands)
Fiscal year ended June 30,
1996 1997 1998
--------------------------------------------
Operating activities:
Net Income (Loss) 4,124 2,575 (582)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,101 5,591 5,953
Loss on disposal of equipment and vehicles 40 234 175
Non-cash stock compensation -- -- 1,146
Special charges -- 4,088 6,380
Changes in items affecting operations:
Accounts receivable (529) (440) 281
Inventories 1,292 566 (692)
Income Taxes Receivable -- -- (949)
Prepaid expenses and other 146 (189) 5
Accounts payable 306 (231) 5,437
Accrued expenses 70 324 229
Deferred income taxes 817 (311) (713)
---------------------------------------------
Total operating activities 11,367 12,207 16,670
---------------------------------------------
Investing activities:
Proceeds from sale of equipment 146 456 1,780
Capital expenditures (5,494) (4,562) (20,155)
Other 44 (33) 2
--------------------------------------------
Total investing activities (5,304) (4,139) (18,373)
---------------------------------------------
Financing activities:
Change in checks in transit (484) 471 (856)
Principal payments on borrowings (9,636) (7,728) (3,527)
Proceeds from borrowings 3,526 -- 3,127
Net proceeds from issuance of preferred stock -- -- 19,853
Net proceeds from issuance of common stock 274 387 870
--------------------------------------------
Total financing activities (6,320) (6,870) 19,467
--------------------------------------------
Effect of exchange rate changes 375 457 (115)
---------------------------------------------
Net increase in cash and cash equivalents 118 1,655 17,649
Beginning cash and cash equivalents 755 873 2,528
--------------------------------------------
Ending cash and cash equivalents $ 873 $ 2,528 $ 20,177
============================================
See accompanying notes to consolidated financial statements.
F-6
Notes to Consolidated Financial Statements
1. Description of Business and Summary of Significant Accounting Policies:
Description of Business
TRM Corporation (formerly TRM Copy Centers Corporation), headquartered in
Portland, Oregon, as its primary business, owns, supplies and maintains over
33,000 self-service photocopiers in large-format, multi-site retailer locations,
pharmacies, stationery stores, hardware stores, convenience stores and other
retail establishments in the United States, Canada, the United Kingdom, France.
Each retail establishment collects payment from its customers, shares in the
revenue of the photocopier and benefits from any increase in customer traffic
within the store.
Principles of Consolidation
The consolidated financial statements include the accounts of the parent
and its subsidiary companies (the Company). All significant intercompany
accounts and profits have been eliminated. Assets and liabilities of foreign
operations are translated into U.S. dollars at current exchange rates. Income
and expense accounts are translated into U.S. dollars at average rates of
exchange prevailing during the periods. Adjustments resulting from translating
foreign functional currency financial statements into U.S. dollars are taken
directly to a separate component of stockholders' equity. Foreign currency
transaction gains and losses are included in income and have been immaterial to
date.
Fair Value of Financial Instruments
Financial instruments, including cash and cash equivalents, accounts
receivable, checks in transit and accounts payable, approximate fair market
value because of the short maturity for these instruments. Fair value
approximates carrying value of the Company's borrowings under its long-term debt
arrangements based upon interest rates available for the same or similar loans.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturity
dates of three months or less to be cash equivalents.
Revenue Recognition and Accounts Receivable
A portion of each copy sale is retained by the retail business, generally
depending on copy volume. The Company invoices each retailer via monthly
billings based on usage at the program price per copy less the applicable
discount (the amount retained by the retailer). Total sales activity and
discount amounts are recorded separately in the accounting records and in the
consolidated statements of operations to arrive at net sales.
Accounts receivable are shown net of allowance for doubtful accounts of
$148,000 and $156,000 at June 30, 1997 and 1998, respectively.
Inventories
Inventories are stated at the lower of FIFO cost or market.
Equipment and Vehicles
Equipment and vehicles are recorded at cost plus amounts required to place
equipment in service. Depreciation begins when the asset is placed in service
and is generally recorded using the straight-line method over the estimated
remaining useful lives of the related assets as follows:
Photocopiers and other centers 5-10 years
Furniture and fixtures 5-7 years
Computer equipment 5 years
Vehicles 5 years
F-7
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and income tax bases of assets and liabilities, and are measured by applying
enacted tax rates and laws to the taxable years in which such differences are
expected to reverse.
Stock-Based Compensation
The Company applies APB No. 25, "Accounting for Stock Issued to Employees,"
and the related interpretations in accounting for stock-based compensation
plans. In fiscal 1998, the Company recorded $1.1 million of non-cash
compensation expense related to the revision of stock options of certain
retiring members of the Company's Board of Directors. In accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation," the Company has provided the
required footnote disclosures (see note 8).
Statements of Cash Flows Supplemental Information
Income taxes paid were approximately $2,465,000, $1,635,000 and $1,171,000
for the fiscal years 1996, 1997 and 1998, respectively. Interest paid does not
materially differ from interest expense.
Net Income Per Share
Net income per share is computed based on the weighted average number of
shares of common stock and dilutive potential common shares outstanding during
the periods. Dilutive potential common shares consist of options to purchase
stock (using the treasury stock method).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Risks and Uncertainties
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000.
Based on a recent assessment, the Company determined that it will be
required to modify or replace significant portions of its software so that its
computer systems will function properly with respect to dates in the year 2000
and thereafter. The Company presently believes that with modifications to
existing software and conversions to new software, the Year 2000 Issue will not
pose significant operations problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Company.
This could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send customer invoices, or engage in similar normal business
activities.
Effect of Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share," which requires companies with complex capital
structures that have publicly held common stock or common stock equivalents to
present both basic and diluted earnings per share ("EPS") on the face of the
income statement. The presentation of basic EPS replaces the presentation of
primary EPS previously required by APB No. 15, "Earnings Per Share." This
statement is effective for financial statements issued for interim and annual
periods ending after December 15, 1997. The adoption of SFAS No. 128 in fiscal
1998 did not have a significant impact on the Company's reported diluted EPS.
F-8
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes requirements for disclosure of comprehensive income.
The objective of SFAS No. 130 is to report all changes in equity that result
from transactions and economic events other than transactions with owners.
Comprehensive income is the total of net income and all other non-owner changes
in equity. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. Reclassification of earlier financial statements for comparative
purposes is required. The Company has not quantified the effect of adoption of
SFAS No. 130.
2. Inventories (in thousands):
June 30,
1997 1998
--------------------------
Paper $ 1,231 $ 1,019
Toner and developer 692 629
Parts 2,688 2,161
--------------------------
$ 4,611 $ 3,809
==========================
3. Equipment and Vehicles (in thousands):
June 30,
1997 1998
--------------------------
Photocopiers $ 45,232 $ 50,741
Furniture and fixtures 1,899 1,436
Computer equipment 1,381 1,834
Vehicles 5,109 4,680
--------------------------
53,621 58,691
Accumulated depreciation 19,749 17,067
--------------------------
$ 33,872 $ 41,624
==========================
4. Special Charges:
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," during fiscal
1997. This new accounting standard requires long-lived assets to be reviewed for
impairment when circumstances indicate the carrying amount of an asset may not
be recoverable. The Company considers historical performance and future
estimated results in its evaluation of potential impairment and then compares
the carrying amount of the asset to the estimated future cash flows expected to
result from the use of the asset. If the carrying amount of the asset exceeds
estimated expected undiscounted future cash flows, the Company measures the
amount of the impairment by comparing the carrying amount of the asset to its
fair value.
During 1997, the Company recognized a non-cash impairment charge of
$4,088,000 pretax ($2,526,000 and $0.35 per share after tax). This charge
included impairment write downs of equipment in three categories: color copiers,
custom business card printing components and certain older generation black and
white copiers. It was concluded during 1997 that the equipment purchased in 1993
and 1994 to support the Company's color and business card businesses was
technologically dated and that the full asset carrying amounts were not
recoverable. In addition, the Company entered an agreement with a major copier
manufacturer to purchase a new generation black and white copier ("NextGen(TM)")
to expand its core black and white photocopy business.
During 1998 new management joined the Company and evaluated the performance
of assets in the Photocopy Division. With the growth of the NextGen(TM)
photocopy program, the Company has decided to retire over half of its older
Savin photocopiers at low-volume locations, resulting in the recording of
special charges as noted hereafter:
F-9
Disposal of under-performing machines $4,324
Disposal of replacement parts and inventory
relating to under-performing machines 1,494
Other 562
------
Total special charges $6,380
======
5. Accrued Expenses (in thousands):
June 30,
1997 1998
--------------------------
Accrued payroll expenses $ 2,550 $ 2,918
Customer security deposits 250 218
Accrued taxes other than income 475 330
Other accrued expenses 422 637
--------------------------
$ 3,697 $ 4,103
==========================
6. Bank Borrowings (in thousands):
June 30,
1997 1998
--------------------------
Bank revolving loan, unsecured,
maximum limit of $30.0 million $ 400 $ --
The revolving loan agreement calls for monthly payments of interest only
until expiration on April 1, 2000, or as renegotiated. At that time, no
additional borrowings will be available, and the outstanding loan balance will
be due and payable. The arrangement allows the Company to choose from interest
rate alternatives based on the bank's reference rate or on LIBOR. It also calls
for a loan fee which was paid at the date of the loan. The interest rate
applicable to bank borrowings as of June 30, 1997 was 8.5%. The loan agreement
contains certain restrictive covenants as to working capital, total liabilities
and stockholders' equity. The Company is in compliance with the covenants.
7. Income Taxes:
Income (loss) before income taxes is as follows (in thousands):
1996 1997 1998
-------------------------------------------
United States $ 6,730 $ 1,223 $ (3,900)
Foreign 160 2,944 2,945
-------------------------------------------
$ 6,890 $ 4,167 $ (955)
===========================================
F-10
The components of income tax expense (benefit) are as follows (in
thousands):
1996 1997 1998
-------------------------------------------
Current:
Federal $ 1,459 $ 1,074 $ (537)
State 424 459 --
Foreign 66 370 877
Deferred:
Federal 564 (1,097) (598)
State 164 (320) (384)
Foreign 89 1,106 269
-------------------------------------------
$ 2,766 $ 1,592 $ (373)
===========================================
Deferred income taxes arise primarily from different depreciation
calculations used for financial statement and income tax purposes.
The effective tax rate differs from the federal statutory tax rate as
follows:
1996 1997 1998
-------------------------------------------
Statutory federal rate 34.0% 34.0% 34.0%
State taxes, net of
federal benefit 5.9 7.6 5.0
Benefit of foreign tax rates -- (4.1) (5.1)
Other 0.2 0.7 5.2
--------------------------------------------
40.1% 38.2% 39.1%
============================================
8. Stockholders' Equity:
Preferred Stock
On June 24, 1998 the Company issued and sold 1,777,778 Series A Preferred
Shares and Warrants to purchase 500,000 shares of Common Stock for net proceeds
of approximately $19.9 million. Each share of Preferred Stock has one vote, and
votes together with the Common Stock as a single class on all matters. Each
share is convertible at any time at the option of the holder into .7499997 of a
share of Common Stock. In addition, each share of Preferred Stock is
automatically converted into .7499997 shares of Common Stock if the price of
Common Stock is at least $20.00 for a period of 90 consecutive days commencing
after June 30, 1999. The conversion ratio and exercise prices are adjusted for
any combination or subdivision of shares, stock dividend, stock split or
recapitalization. Dividends on the Series A Preferred Shares are cumulative from
the date of original issuance and are payable quarterly in March, June,
September and December of each year, commencing June 1998, at the rate of 7-1/2%
per annum. In the event of any liquidation, dissolution or winding up of the
affairs of the Company, each holder of Series A Preferred Stock shall be paid
the aggregate Liquidation Value, $11.25 per share, plus all accumulated and
unpaid dividends to the date of liquidation, dissolution or winding up of
affairs before any payment to holders of Junior Securities.
In conjunction with closing the preferred share transaction, the Company
amended certain retiring Board members' stock option agreements to extend the
exercise period for the options to ten years from June 24, 1998. Pursuant to APB
No. 25, and due to the extension of the exercise period, $1.1 million was
recognized as non-cash compensation expense in the year ended June 30, 1998.
F-11
Common Stock
On June 24, 1998 the Company announced shareholder approval of an amendment
to the Company's Restated Articles of Incorporation increasing the number of
authorized shares of common stock from 10,000,000 shares to 50,000,000 shares.
Common Stock Warrants
On June 24, 1998 the Company granted Warrants to purchase 500,000 shares of
Common Stock at $15.00 a share. The Warrants are exercisable in whole or in
increments of at least 75,000 shares and expire as to 200,000 shares three years
after the date of grant and as to 300,000 shares seven years after the date of
grant. The Warrants may be exercised by the payment of cash, by payment in
shares of Common Stock, or on a cashless basis whereby the Company will issue
the number of shares of Common Stock equal in value to the difference between
the fair market value of the Warrant shares and the exercise price.
Common Stock Options
The Company reserved 1,300,000 shares of common stock for issuance under an
incentive and nonqualified stock option plan established in 1986 (the "1986
Plan"). In October 1996, the 1996 Stock Option Plan (the "1996 Plan") was
approved by shareholders of the Company, which provided for the granting of a
maximum of 700,000 options to purchase common shares to key employees of the
Company. In June 1998, shareholders of the Company approved increasing the
maxinum options in the 1996 Plan from 700,000 to 1,200,000, bringing the total
shares of common stock for issuance under stock option plans to 2,500,000. Under
both plans ("the Plans"), incentive stock options are granted at no less than
100% of the fair market value per share of the common stock. Nonqualified stock
options under the 1986 Plan were granted at prices determined by the Board of
Directors, while grants under the 1996 Plan are granted at no less than 100% of
fair market value. The options are exercisable over a period of ten years from
the date of grant. Generally, the options vest over five years.
A summary of stock option activity follows:
Shares Weighted Average
Under Option Price Range Exercise Price
-------------------------------------- -----------------------------
Balance, June 30, 1996 1,383,050 $ .25 - $ 10.625 $ 4.12
Options granted 146,500 $ 9.875 - $ 10.375 $ 10.28
Options exercised (468,200) $ .25 - $ 6.75 $ 1.11
Options canceled (12,800) $ 6.25 - $ 10.625 $ 7.01
----------------------------------------------------------------
Balance, June 30, 1997 1,048,550 $ 2.00 - $ 10.625 $ 6.29
Options granted 437,500 $ 9.00 - $ 14.50 $ 9.99
Options exercised (113,850) $ 4.00 - $ 10.375 $ 5.01
Options canceled (32,700) $ 6.25 - $ 10.625 $ 8.39
----------------------------------------------------------------
Balance, June 30, 1998 (990,075 exercisable,
361,500 available for grant under the Plans) 1,339,500 $ 2.00 - $ 14.50 $ 7.56
================================================================
F-12
A summary of stock options outstanding follows:
Options Outstanding Options Exercisable
------------------------------------------------------- ------------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Price at June 30, 1998 Contractual Life Price at June 30, 1998 Price
- -----------------------------------------------------------------------------------------------------------------------
$ 2.00 to $ 7.50 599,500 6.4 $ 4.45 505,100 $ 4.21
$ 9.00 to $ 9.875 470,500 9.3 $ 9.69 336,100 $ 9.71
$ 10.00 to $ 14.50 269,500 8.3 $ 10.75 148,875 $ 10.37
- -----------------------------------------------------------------------------------------------------------------------
$ 2.00 to $ 14.50 1,339,500 7.8 $ 7.56 990,075 $ 7.00
=======================================================================================================================
The Company applies APB No. 25 and related interpretations in accounting
for its stock-based compensation plans. Accordingly, no compensation expense has
been recognized for its stock-based compensation plans, except for $1,146,000 in
fiscal 1998 for the extension of the exercise period for certain directors. Had
compensation cost for the Company's stock option and stock purchase plans been
determined based upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under SFAS No. 123, "Accounting
for Stock-Based Compensation," the Company's net income and earnings per share
would have been reduced by approximately $757,000 or $0.11 per share for the
year ended June 30, 1998, and approximately $180,000 or $0.02 per share for the
year ended June 30, 1997. The weighted-average grant-date fair value of options
granted during fiscal 1998 was $2.75 per share using the Black-Scholes option
pricing model with the following assumptions: dividend yield of 0%, volatility
of 36.80%, risk-free interest rate of 5.52% and an expected life of four years.
The weighted-average grant-date fair value of options granted during fiscal 1997
was $4.13 per share using the Black-Scholes option pricing model with the
following assumptions: dividend yield of 0%, volatility of 39.60%, risk-free
interest rate of 6.40% and an expected life of four years.
The effects of applying SFAS No. 123 for providing pro-forma disclosure for
1998 and 1997 are not likely to be representative of the effects on reported net
earnings and earnings per share for future years since options vest over several
years and additional awards may be made.
9. Benefit Plans:
Profit Sharing Retirement Plan
On January 1, 1990, the Company established a profit sharing retirement
plan for eligible U.S. employees. The Plan has profit sharing and 401(k)
components. The Company's contribution under the profit sharing portion of the
Plan is discretionary. Under the 401(k) part of the Plan, each employee may
contribute, on a pretax basis, up to 20% of the employee's gross earnings,
subject to certain limitations. The Company also has supplemental retirement
plans in Canada and the United Kingdom. The Company accrued profit sharing
contributions of $240,000 for fiscal 1996, $260,000 for fiscal 1997 and $270,000
for fiscal 1998.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan permits each eligible employee
to purchase shares of common stock through payroll deductions, not to exceed 10%
of the employee's compensation. The purchase price of the shares is the lower of
85% of the fair market value of the stock at the beginning of each six-month
offering period or 85% of the fair market value at the end of such period.
Amounts accumulated through payroll deductions during the offering period are
used to purchase shares on the last day of the offering period. Of the 100,000
shares authorized to be issued under the Plan, 65,927 shares have been
purchased, and 34,073 shares remain available for purchase as of June 30, 1998.
F-13
10. Related Party Transactions:
Two members of the Company's Board of Directors served as consultants to
the Company on various aspects of the Company's business and strategic issues in
fiscal 1997 and 1998 and were paid $60,000 and $66,000, respectively.
11. Commitments:
The Company leases vehicles and office and warehouse space in several
locations under operating leases. Minimum lease payments are as follows:
$2,195,000, $1,968,000, $1,729,000, $1,319,000 and $1,018,000 for fiscal years
1999, 2000, 2001, 2002 and 2003, respectively, and $3,647,000 thereafter. Rental
expense for fiscal years 1996, 1997 and 1998 was $1,921,000, $2,358,000 and
$2,818,000, respectively.
In fiscal 1998, the Company entered an agreement with Konica Business
Machines ("Konica") to purchase 7,500 new, state-of-the-art black and white
NextGen(TM) photocopiers over a three year span. At June 30, 1998, the Company
had purchased over 7,000 units under this agreement.
12. Operations by Geographic Areas:
The Company operates in one industry segment as a service company
maintaining and supporting its programs, which have been developed and placed
with retail establishments. Information about the Company's domestic and foreign
operations are presented hereafter (in thousands).
Sales Operating Income (Loss) Assets
----------------------------------- --------------------------------- -----------------------------------
1996 1997 1998 1996 1997 1998 1996 1997 1998
- ----------------------------------------------------------------------------------------------------------------------------------
United States $ 45,559 $ 43,949 $ 41,563 $ 5,717 $ 1,416 $ (5,281) $ 31,527 $ 26,451 $ 51,544
Foreign:
Europe 17,575 21,389 22,566 2,310 3,383 4,873 19,786 20,869 20,332
Other 4,404 4,543 4,223 284 484 188 2,938 2,840 3,390
- ----------------------------------------------------------------------------------------------------------------------------------
$ 67,538 $ 69,881 $ 68,352 $ 8,311 $ 5,283 $ (220) $ 54,251 $ 50,160 $ 75,266
==================================================================================================================================
F-14
TRM Corporation (formerly TRM Copy Centers Corporation) and Subsidiaries
Schedule III - Valuation and Qualifying Accounts
Years ended June 30, 1996, 1997 and 1998
(In thousands)
Balance at Charged to Charged to Balance at
Beginning of Costs and Other Deductions - End of
Period Expenses Accounts Write Offs Peiod
--------------------------------------------------------------------------------
Year ended June 30, 1996
Allowance for doubtful accounts $ 266 $ 700 $ --- $ (679) $ 287
================================================================================
Year ended June 30, 1997
Allowance for doubtful accounts $ 287 $ 835 $ --- $ (974) $ 148
================================================================================
Year ended June 30, 1998
Allowance for doubtful accounts $ 148 $ 771 $ --- $ (763) $ 156
================================================================================
Reserve for deposit $ 100 $ 200 $ --- $ --- $ 300
================================================================================
F-15
Independent Auditors' Consent
The Board of Directors
TRM Corporation (formerly TRM
Copy Centers Corporation):
We consent to the incorporation by reference on Form S-8 (Nos. 33-55370 and
33-74354) of TRM Corporation of our reports dated August 17, 1998, relating to
the consolidated balance sheets of TRM Corporation and subsidiaries as of June
30, 1998 and 1997, and the related consolidated statements of operations,
stockholders' equity, cash flows, and related schedule for each of the years in
the three-year period ended June 30, 1998, which reports appear in the June 30,
1998 Form 10-K of TRM Corporation.
KPMG PEAT MARWICK LLP
Portland, Oregon
September 18, 1998
S-1