ITEM 1. BUSINESS
General
Where you can find more information. We file annual, quarterly and other reports, proxy statements and other information with the Securities and Exchange Commission, or SEC. We also make available free of charge through our website at www.trm.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after they are filed electronically with the SEC.
Overview. We are an independent sales organization, or ISO, servicing businesses in the operation of automated teller machines, or ATMs. We expanded into the ATM business in 1999, leveraging the experience and infrastructure we had established in developing our photocopier operations, which began in 1981. From 1999 to 2004, we expanded our ATM operations through both internal growth and through acquisitions including, in November 2004, the acquisition of a network of over 15,000 ATMs from eFunds Corporation. As a result of financial difficulties that we encountered beginning in 2005, in 2006 we determined to sell assets in order to reduce debt and to focus our business on our U.S. ATM operations. As a result, we sold our United Kingdom photocopy business in June 2006, our United Kingdom, Canadian and German ATM businesses in January 2007, our United States photocopy business in January 2007 and our Canadian photocopy business in June 2007. Currently, we operate ATMs in the United States. During December 2007 our United States ATM networks had 9,307 transacting ATMs.
We locate our ATMs in high traffic retail environments through national merchants such as The Pantry and Cumberland Farms, and through regional and locally-owned supermarkets, convenience and other stores. In addition to providing our merchant customers with supplemental revenues from transaction fees, we believe that the presence of ATMs in a merchant’s store helps to promote higher foot traffic, increased impulse purchases and longer shopping times since they often make the retail site a destination for cash. We attempt to maximize the usefulness of our ATMs to our customers by participating in as many electronic funds transfer networks, or EFTNs, as practical, including NYCE, Visa, Mastercard, Cirrus, Plus, American Express, Discover/Novus, and STAR.
Industry Segments and Geographical Information
Since the sale of our photocopier businesses and our foreign ATM businesses, we have only one operating segment - ATM operations in the United States.
Products and Services
We deploy ATMs under two programs:
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Company-owned program. Under this program there are three basic formats under which an ATM is operated:
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We own the ATM and are responsible for all of the operating expenses including maintenance, cash management and loading, supplies, signage and telecommunication services.
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We own the ATM and are responsible for all operational aspects of the unit except for cash management and loading.
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The merchant owns the ATM and we are responsible for all operational aspects of the unit.
We typically use this program for national and regional merchants.
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Merchant-owned program. Under a merchant-owned arrangement, the merchant typically buys the ATM through us and is responsible for most of the operating expenses, such as maintenance, cash management, supplies, and telecommunication services. We typically provide access to transaction processing services, and the merchants use our maintenance services from time to time. Our rental program is similar to our merchant-owned program, except that the merchant rents the
ATM from us rather than purchasing it, and we provide the maintenance and supplies for the machine.
In December 2007 we had 2,143 ATMs operating under the programs for which we were responsible for cash management and 7,164 ATMs for which merchants were responsible for cash management.
We attempt to place the ATMs in our company-owned program in high visibility, high traffic merchant locations. Our experience has demonstrated that the following locations, among others, often meet these criteria:
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convenience stores;
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combination convenience stores and gas stations;
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supermarkets;
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drug stores;
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entertainment facilities such as bowling alleys, movie theaters, amusement parks and casinos;
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restaurants and bars, particularly chain restaurants; and
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shopping malls.
We have found that the primary factors affecting transaction volume at a given ATM are its location within the site and merchandising, such as indoor and outdoor signage, directing consumers to the location. As a result, we seek to maximize the visibility and accessibility of our ATMs, because we believe that once a customer establishes a pattern of using a particular ATM, the customer will generally continue to use that ATM.
All of our new ATMs feature advanced functionality, diagnostics and ease of use including color displays, personal computer-based operating systems, thermal printing, dial-up and remote monitoring capabilities, and upgrade and capacity-expansion capability. All machines can perform basic cash dispensing and balance inquiry transactions, transmit on-screen marketing, and dispense coupons. Most of our equipment is modular in design, which allows us to be flexible and accommodating to the needs of our clients as technology advances.
Sales and Marketing
We maintain sales and marketing capability in the United States. Our sales and marketing staff consists of four employees, including a vice president.
Our sales force maintains contact with larger accounts: retail, supermarket and convenience chains, mall developers, casinos and others. This contact familiarizes the prospect with our name and our products and services, and also heightens sales staff awareness of contract expirations and requests for proposal issued by the prospects. Additionally, we have telephone salespeople and distributors who call existing customers, independent merchants and small chain accounts to discuss contract expiration and renewal, satisfaction with current levels of service, and future equipment and service needs. We maintain a sales database to log their contacts and enable follow up calls.
Primary Supply Relationships
ATM relationships. We purchase our ATMs from Triton Systems, Hyosung America, Inc., and Tranax Technologies, Inc. We have previously purchased ATMs from NCR Corporation. We believe that the large quantity of ATMs we purchase from these manufacturers enables us to receive favorable pricing and payment terms. In addition, we maintain close working relationships with these manufacturers in the course of our business, allowing us to stay informed regarding product updates and to minimize technical problems with purchased equipment. Although we currently purchase a majority of our ATMs from Triton Systems, we believe that our relationships with Hyosung American, Inc., NCR Corporation, and Tranax Technologies, Inc. are good and that we would be able to purchase the ATMs we required from them if we were no longer able to purchase ATMs from Triton Systems.
Master Services Agreement. In connection with the acquisition of the eFunds ATM business in November 2004, we entered into a Master Services Agreement with eFunds, which we call the MSA. Through this agreement, we consolidated many of the services we had previously obtained from multiple third party service providers with one
provider and transferred to eFunds some of the services we had previously provided in-house. In December 2007, we entered into an agreement in principle with eFunds to terminate the MSA. In connection with the termination of that agreement, we agreed to pay eFunds $2.5 million to settle disputed charges under the agreement. The payment is due upon execution of a mutually acceptable settlement and release agreement. eFunds has agreed to work with us to provide an orderly transition whereby we will assume, either directly or through other outsource providers, the services being performed under the MSA, other than ATM processing which eFunds will continue to provide through November 2011.
Servicing
Through 2006 we had an extensive field servicing operation that maintained our network of ATMs and photocopiers. Through this operation, we provided installation, maintenance, diagnostic and repair services to most of our ATMs and photocopiers. Following the sale of our United States photocopy business in January 2007, we terminated our staff of field service technicians, and entered into contracts with third parties to service our ATMs.
Seasonality
In our ATM operations, we experience higher transaction volumes per machine in the second and third quarters than in the first and fourth quarters. The increased volumes in the summer months coincide with increased vacation travel.
Merchant Customers
We have contracts with national and regional merchants and with numerous independent store operators. ATMs at The Pantry locations accounted for approximately 20% and 25% of our United States ATM net sales in 2006 and 2007, respectively. ATMs at Cumberland Farms locations accounted for approximately 9% and 11% of our United States ATM net sales in 2006 and 2007, respectively.
The terms of our contracts vary as a result of negotiations at the time of execution. The contract terms typically include:
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an initial term of at least three years;
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ATM exclusivity at locations where we install an ATM and, in many cases, a right of first refusal for all other locations;
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a requirement that the merchant provide a highly visible space for the ATM and signage;
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protection for us against underperforming locations by permitting us to increase the withdrawal fee or remove ATMs;
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provisions making the merchant’s fee variable depending on the number of ATM transactions and milestones;
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provisions imposing an obligation on the merchant to operate the ATM at any time its store is open to the public; and
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provisions that require a merchant to use its best efforts to have any purchaser of the merchant’s store assume our contract.
Competition
Individuals seeking ATM-related services have a variety of choices at banking locations and within retail establishments. The convenience cash delivery and balance inquiry market is, and we expect it to remain, highly competitive due to the fact that there are few barriers to entry into the business. Our principal competition arises from other independent sales organizations, or ISOs, similar to us including Innovus, Inc., Global Axcess Corp., International Merchant Services, Inc., Cardtronics, Inc., Access to Money, ATM Express, Inc., and PAI ATM Services in the United States. We also compete with numerous national and regional banks that operate ATMs at their branches and at other non-branch locations. In addition, we believe that there will be continued consolidation in the ATM industry in the United States. Accordingly, new competitors may emerge and quickly acquire significant market share.
Government and Industry Regulation
Our ATM business is subject to government and industry regulations which are subject to change. Our failure to comply with existing or future laws and regulations pertaining to our ATM business could result in restrictions on our ability to provide our products and services, as well as the imposition of civil fines.
Electronic Funds Transfer Act. The United States Electronic Funds Transfer Act, while directed principally at banks and other financial institutions, also has provisions that apply to us. In particular, the act requires ATM operators who impose withdrawal fees to notify a customer of the withdrawal fee before the customer completes a withdrawal and incurs the fee. Notification must be made through signs placed at or on the ATM and by notification either on the ATM screen or through a print-out from the ATM. All of our ATMs in the United States provide both types of notification.
Americans with Disabilities Act. The ADA currently includes provisions regulating the amount of clear floor space required in front of each ATM, prescribing the maximum height and reach depth of each ATM and mandating that instructions and all information for use of the ATM be made accessible to and independently usable by persons with vision impairments. The Department of Justice may adopt new accessibility guidelines under the ADA that will include provisions addressing ATMs and how to make them more accessible to the disabled. Under the proposed guidelines that have been published for comment but not yet adopted, ATM height and reach requirements would be shortened, keypads would be required to be laid out in the manner of telephone keypads, and ATMs would be required to possess speech capabilities, among other modifications. If adopted, these new guidelines would affect the manufacture of ATM equipment going forward and could require us to retrofit ATMs in our network as those ATMs are refurbished or updated for other purposes.
Regulation of transaction fees. The imposition of fees on ATM transactions in the United States is not currently subject to federal regulation. There have been, however, various state and local efforts in the United States to ban or limit transaction fees, generally as a result of activities of consumer advocacy groups that believe that transaction fees are unfair to users. We are not aware of any existing bans or limits on transaction fees applicable to us in any of the jurisdictions in which we currently do business with the exception of Mississippi and Wyoming. Nevertheless, there can be no assurance that transaction fees will not be banned or limited in other cities and states where we operate. Such a ban or limit could have a material adverse effect on us and other ATM operators.
EFTN regulations. EFTNs have adopted extensive regulations that are applicable to various aspects of our operations and the operations of other ATM operators. The Electronic Fund Transfer Act, commonly known as Regulation E, is the major source of EFT network regulations. The regulations promulgated under Regulation E establish the basic rights, liabilities, and responsibilities of consumers who use electronic fund transfer services and of financial institutions that offer these services. The services covered include, among other services, ATM transactions. Generally, Regulation E requires us to provide notice of the fee to be charged the consumer, establish limits on the consumer’s liability for unauthorized use of his card, provide receipts to the consumer, and establish protest procedures for the consumer. We believe that we are in material compliance with these regulations and, if any deficiencies were discovered, that we would be able to correct them before they had a material adverse impact on our business.
Encrypting Pin Pad (“EPP”) and Triple Data Encryption Standard (“Triple DES”). Data encryption makes ATMs more tamper-resistant. Two of the more recently developed advanced data encryption methods are commonly referred to as EPP and Triple DES. In 2005, we adopted a policy that any new ATMs that we acquire from a manufacturer must be both EPP and Triple DES compliant. As of December 31, 2007, fewer than 50 of our owned ATMs in the United States were not compliant with EPP and Triple DES. We plan to upgrade these remaining machines when upgrade parts are received from the manufacturers. These ATMs continue to operate on a limited basis under extension agreements with a few networks. We estimate that these remaining machines will be upgraded by
April 30, 2008; however, our ability to complete these upgrades depends on parts and labor vendors’ availability. We estimate that costs associated with upgrading these remaining machines will not exceed $50,000.
Rehabilitation Act. On December 1, 2006, a United States District Court ruled that the United States’ currencies (as currently designed) violate the Rehabilitation Act, a law that prohibits discrimination in government programs on the basis of disability, as the paper currencies issued by the United States are identical in size and color, regardless of denomination. Under the current ruling, the United States Treasury Department has been ordered to develop ways in which to differentiate paper currencies such that an individual who is visually impaired would be able to distinguish between the different denominations. In response to the December 1, 2006 ruling, the Justice Department has filed an appeal with the United States Court of Appeals for the District of Columbia Circuit, requesting that the decision be overturned on the grounds that varying the size of denominations could cause significant burdens on the vending machine industry and cost the Bureau of Engraving and Printing an initial investment of $178.0 million and up to $50.0 million in new printing plates. While it is still uncertain at this time what the outcome of the appeals process will be, in the event the current ruling is not overturned, our company along with other participants in the ATM industry may be forced to incur significant costs to upgrade current machines’ hardware and software components.
Trademarks
Most of our ATM locations are identified by distinctive yellow, green and black trapezoidal signs bearing “TRM ATM(TM),” “Got Cash?” and “TRM Cash Machine(TM).” We have registered the name “TRM Corporation(TM)” and “TRM ATM(TM)” trademarks for signage used in the United States. Those trademarks currently expire between 2009 and 2011 but can be renewed. We consider our business name and brands to be important to our business.
Employees
As of December 31, 2007, we had 39 employees working in marketing, customer service and administration. None of our employees is represented by a union or covered by a collective bargaining agreement. We believe that our relations with our employees are good.
Risks Related to Our Business Generally
We are uncertain whether our operations can generate sufficient cash to comply with the covenants of our loan agreements and to pay our obligations on an ongoing basis.
We incurred a net loss of $120.1 million in 2006 and $8.4 million in 2007. As a result of our financial performance for the three months ended September 30, 2006, we failed to meet certain financial covenants of our financing agreements with GSO Origination Funding Partners LP and other lenders. On November 20, 2006 we entered into amendments that restructured our loans and waived the failure to meet the loan covenants. Under the restructured loan agreements principal payments of $69.9 million were due in the first quarter of 2007. During the first six months of 2007 we sold our Canadian, United Kingdom and German ATM businesses and our United States and Canadian photocopy businesses and used $98.6 million from the proceeds of those sales to make principal and interest payments under these loans. Following these payments, as of June 30, 2007, the only remaining balance under our term loans and line of credit was $1.9 million on our Term Loan B. As of December 31, 2007, we also owed $5.3 million pursuant to a settlement agreement with the purchaser of our United Kingdom and German ATM businesses and $2.5 million pursuant to the settlement agreement with eFunds Corporation to terminate the MSA. We borrowed $1.0 million pursuant to an agreement with LC Capital Master Fund, Ltd. and Lampe Conway & Co., LLC in February 2008 which provided cash to make a £380,000 payment due on the United Kingdom settlement agreement and have begun efforts to finance the debt payable under the eFunds settlement agreement. We cannot provide assurance that we will be able to obtain further financing on satisfactory terms, or at all. We are uncertain whether our operations can generate sufficient cash to pay our obligations on an ongoing basis. There are cross-default provisions in TRM Inventory Funding Trust’s Loan and Servicing Agreement and our Securities Purchase Agreement with LC Capital Master Fund, Ltd. and Lampe Conway & Co., LLC, which we refer to as the Lampe Facility, whereby if we fail to comply with the covenants of our restructured loan agreements and are declared to be in default by GSO Origination Funding Partners LP and other lenders, we may be declared in default of the provisions of the Loan and Servicing Agreement and the Securities Purchase Agreement as well, and the lenders may demand payment. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary should we be unable to continue as a going concern.
Our continuation as a going concern is contingent upon our ability to generate sufficient cash to pay our obligations on an ongoing basis.
We currently do not comply with several of the covenants in our loan agreement with GSO which may result in a default under our vault cash facility and allow our lenders to accelerate our loans. A failure to obtain waivers of these defaults or obtain new financing can cause significant impairment of our ability to conduct our operations.
We are currently in default of several financial and other covenants under our financing agreements with GSO Origination Funding Partners LP and other lenders. As a result, GSO has the right to declare us in default and accelerate the maturity of the facility. Moreover, because of cross-default provisions under our vault cash facility, a declaration of default by GSO would entitle the vault cash lender to terminate our vault cash facility. The Lampe Facility also contains cross default provisions whereby upon a default, LC Capital Master Fund, Ltd. can accelerate the maturity of our debt under the Lampe Facility, subject to a 180-day standstill with respect to any default or acceleration under the facility with GSO Origination Funding Partners LP and the other lenders. See “Risks Related to our Business Generally - The terms of our credit agreement may restrict our current and future operating and financial flexibility.” It is unlikely that we will be able to cure the defaults within the foreseeable future. If we are unable to obtain further waivers from GSO, or to replace the GSO facility with new financing, our ability to conduct our operations could be significantly impaired and we may not be able to continue as a going concern.
We could be liable for sales price adjustments and warranty/indemnification claims relating to businesses we sold in 2006 and 2007.
In 2006 and 2007 we sold our ATM businesses in the United Kingdom, Germany and Canada, and our photocopy businesses in the United Kingdom, United States and Canada in five separate transactions. In connection with each of these sales, we have made various representations and warranties and/or provided indemnities. The sales prices are subject to adjustment based on working capital amounts, the value of accounts receivable as of the closing of the sale or other factors. The purchasers may make claims against us relating to the representations or warranties or provisions for adjustment of the sales prices, and those claims could be substantial. In November 2007, we entered into a settlement agreement pursuant to which we agreed to repay £3,250,000 (approximately $6.4 million using exchange rates as of December 31, 2007) as a final settlement of all claims under the agreement for the sale of our United Kingdom and German ATM businesses. Currently, none of the other purchasers are pursuing claims against us. Because we used substantially all of the net proceeds from the business sales to reduce our debt, we might not have sufficient cash to pay such claims without additional financing.
The terms of our credit agreement may restrict our current and future operating and financial flexibility.
As a result of our sales of our U.K., German and Canadian ATM businesses and our United Kingdom, United States and Canadian photocopy businesses, we have substantially repaid our outstanding credit facility debt. Approximately $2.1 million of that debt remains outstanding under our facility with GSO Origination Funding Partners LP and $1.0 million of debt remains outstanding under our Lampe Facility. The credit agreements that are in effect with respect to the remaining debt include a number of covenants that, among other things, restrict our ability to:
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engage in mergers, consolidations and asset dispositions;
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pay dividends on or redeem or repurchase stock;
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merge into or consolidate with any third party;
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create, incur, assume or guarantee additional indebtedness;
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incur liens;
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make loans and investments;
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engage in transactions with affiliates;
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prepay, redeem or repurchase subordinated indebtedness;
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enter into sale and leaseback transactions;
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make asset or property dispositions; and
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change the nature of our business.
Our credit agreements also contain covenants that prohibit our consolidated capital expenditures for each month from exceeding certain amounts, require that our operations result in minimum monthly EBITDA (as defined in the agreements) amounts, and that we maintain our common stock’s listing on the NASDAQ Global Market. As further discussed under “Risks Relating to Our Common Stock - We have been notified that our shares will be delisted from the NASDAQ Global Market as a result of our failure to satisfy the minimum stock price requirement of the NASDAQ Global Market,” we have received a NASDAQ Staff Determination Letter stating that our shares will be delisted from the NASDAQ Global Market as a result of our failure to satisfy the minimum stock price requirement of the NASDAQ Global Market. We have requested a hearing to appeal the Staff’s determination.
A failure to comply with the covenants under our credit agreements could result in an event of default. In the event of a default under either of our credit agreements, the lenders of both such facilities could elect to declare all borrowings outstanding, together with accrued and unpaid interest and other fees, to be due and payable, and to require us to apply all of our available cash to repay these borrowings. An acceleration of maturity under our credit agreement with GSO Origination Funding Partners LP and under our Lampe Facility would result in an event of default under the TRM Inventory Funding Trust’s Loan and Servicing Agreement which is the source of cash we use in our ATMs. See “Risks Relating to Our ATM Business - We obtain our ATM vault cash under an arrangement that could cause us to lose our access to the vault cash and to fees that we have earned due to circumstances beyond our control.” If any or all of our debt were to be accelerated, we may not have sufficient liquid assets available to us to repay such indebtedness in full and the lenders may proceed against the collateral securing such indebtedness, which includes the capital stock of our subsidiaries.
We have received a “going concern” opinion from our independent registered public accounting firm, which may negatively impact our business.
We have received a report from McGladrey & Pullen, LLP, our independent registered public accounting firm, regarding our consolidated financial statements for the year ended December 31, 2007, which included an explanatory paragraph stating that the consolidated financial statements were prepared assuming we will continue as a going concern. The report also stated that our uncertainty regarding our ability to meet our future obligations has raised substantial doubt about our ability to continue as a going concern. Any failure to dispel any continuing doubts about our ability to continue as a going concern could adversely affect our ability to enter into collaborative relationships and to raise additional capital, and could have a material adverse effect on our business, financial condition and results of operations.
Our sales depend on transaction fees from our network of ATMs. A decline in either transaction volume or the level of transaction fees could reduce our sales and harm our operating results.
Our operating results depend on both transaction volume and the amount of the transaction fees we receive from our ATM network. Our transaction volume and fees depend principally upon:
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our ability to replace sites lost through non-renewal or termination of our contracts by the merchants in whose stores we currently have placed our ATMs;
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competition, which can result in over-served markets, pressure both to reduce existing fee structures and increase sales discounts to merchants and reduced opportunities to secure merchant or other placements of our machines;
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our ability to service, maintain and repair ATMs in our network promptly and efficiently;
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continued market acceptance of our services; and
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government regulation and network adjustment of our fees.
If our transaction volume or the level of transaction fees we receive decrease, our sales could decline, which would impact our operating results.
We have experienced significant attrition in the number of ATMs in our network.
We have experienced significant attrition in the number of merchant-owned ATMs in our network that were acquired in our acquisition of the ATM business of eFunds Corporation. In 2007 the average number of transacting ATMs in our ATM network decreased by 2,125 ATMs, or 17.2%, from the average number of transacting ATMs in our ATM network during 2006 due to merchants not renewing or terminating their contracts with us. We have sought to halt this attrition through improved merchant service provided by expanded internal operations and strategic partnerships with third party service vendors including Solvport, LLC, NCR Corporation, and Diebold. This attrition has reduced and, if it continues in the future, will further reduce our sales and our ability to become profitable.
If merchant-owned ATM customers terminate their relationships with us prior to the termination of their contract or do not renew their contracts upon their expiration, it could reduce our ATM sales.
Although our merchant-owned ATM customers have multi-year contracts with us for transaction processing services, due to competition, some of these customers may leave us for our competitors prior to the expiration of their contracts, or may not renew their contracts upon their expiration. When this occurs, we pursue these customers to remain processing with us or alternatively, in the event they terminate their relationship with us prior to expiration of their contracts, we seek payment of damages under a breach of contract clause in our contracts. If a substantial number of merchant-owned ATM customers end their relationships with us, it could cause a material reduction in our ATM sales.
Changes in technology could reduce use of ATMs as a result, reduce our sales.
New technology in the ATM industry may result in the existing machines in our networks becoming obsolete, requiring us, or the merchants in our networks who own their machines, to either replace or upgrade our existing machines. Any replacement or upgrade program to machines that we own or that we must upgrade or replace under contracts with merchant owners would involve substantial expense, as was the case with respect to the upgrade of our ATMs to meet triple DES requirements. A failure to either replace or upgrade obsolete machines could result in customers using other ATM networks that could employ newer technology, thereby reducing our sales and reducing or eliminating our operating margins. As a result of our financial situation, we may not have sufficient capital to provide upgrades or replacements to a significant degree, which could impact our operating results.
The ATM market is highly competitive, which could limit our growth or reduce our sales.
Persons seeking ATM services have numerous choices. These choices include ATMs offered by banks or other financial institutions and ATMs offered by ISOs such as ours. Some of our competitors offer services directly comparable to ours while others are only indirect competitors as we describe in “Business - Competition.” In addition, we believe that there will be continued consolidation in the ATM industry in the United States. Accordingly, new competitors may emerge and quickly acquire significant market share. This competition could prevent us from obtaining or maintaining desirable locations for our machines, reduce the use of our machines, and limit or reduce the transaction fees we can charge or require us to increase our merchants’ share of those fees. The occurrence of any of these factors could limit our growth or reduce our sales.
We have agreed to terminate our master services agreement with eFunds and, if we are unable to provide timely and satisfactory replacement services, our relationships with merchants and cardholders could deteriorate and our transaction volume could be reduced.
Our ATM business requires close coordination of merchant relationships, cardholder relationships, cash management activities and telecommunication services. In connection with our acquisition of the eFunds ATM business in 2004, we entered into a master services agreement with eFunds pursuant to which eFunds has provided most of these services to us for merchant contracts we acquired from them. As a result, we have depended on eFunds to provide many services that are necessary to the operations of our ATM business. In December 2007 we entered into a settlement agreement that terminates the master services agreement. eFunds has agreed to work with us to provide an orderly transition whereby we will assume, either directly or through other outsource providers, the services being performed under the master services agreement, other than ATM processing. If we are unable to provide replacement services in a timely and satisfactory manner, our relationships with merchants or cardholders could deteriorate and our transaction volume could be reduced.
We rely on third parties to service our ATMs and their failure to do so may harm our operations, damage our reputation and decrease our transaction volume.
Our success depends upon the proper functioning of our ATMs. We rely on third party service providers to service our ATMs. If our third-party service providers fail to service our ATMs properly, or fail to respond quickly to problems, we may lose customers which will decrease our transaction volume and adversely affect our ability to become profitable. Additionally if our third-party service providers fail to service our ATMs, our reputation and ability to grow may be impaired.
Increases in interest rates will increase our expenses.
We have credit and vault cash facilities that carry variable interest rates. Consequently, increases in interest rates increase our operating costs and expenses. See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk - Interest Rate Risk” for a discussion regarding the impact of changes in interest rates on our expenses.
Our ATM business operates in a changing and unpredictable regulatory environment.
ATM withdrawal transactions involve the electronic transfer of funds through EFTNs. The United States Electronic Funds Transfer Act provides the basic framework establishing the rights, liabilities and responsibilities of participants in EFTNs. In addition, there have been various state and local efforts to ban, limit or otherwise regulate ATM transaction fees, which make up a large portion of our sales. For example, in Tennessee, Nebraska and Iowa only bank-sponsored ATMs can impose withdrawal fees. As a result, in these states we must make arrangements with a local bank to act as a sponsor of ATMs in our networks, which typically involves additional documentation costs and payment of a fee to the bank. Any limitation on our ability to charge withdrawal fees in areas where we have a concentration of ATMs could reduce our ATM sales and reduce the incentive that merchants would have to keep ATMs in our network on their premises. In addition, if existing regulations are made more restrictive or new regulations are enacted, we may incur significant expense to comply with them.
Because of reported instances of fraudulent use of ATMs, including the use of electronic devices to scan ATM card information, or skimming, legislation is pending that would require state or federal licensing and background checks of ATM operators and would regulate the deployment and operation of ATMs. There are proposals pending in some jurisdictions that would require merchants that are not financial institutions to be licensed in order to maintain an ATM on their premises; some jurisdictions currently require such licensing. New licensing, deployment or operating requirements could increase our cost of doing business in those markets.
We may incur substantial expense in upgrading our ATMs to meet new standards, and, if we cannot meet compliance deadlines, we could be required to remove non-compliant ATMs from service.
Data encryption makes ATMs more tamper-resistant. Two of the more recently developed advanced data encryption methods are commonly referred to as EPP and Triple DES. In 2005, we adopted a policy that any new ATMs that we acquire from a manufacturer must be both EPP and Triple DES compliant. As of December 31, 2007, fewer than 50 of our owned ATMs in the United States were not compliant with EPP and Triple DES. We plan to upgrade these remaining machines when upgrade parts are received from the manufacturers. These ATMs continue to operate on a limited basis under extension agreements with a few networks. We estimate that these remaining machines will be upgraded by April 30, 2008; however, our ability to complete these upgrades depends on parts and labor vendors with which our influence may be limited. We estimate that costs associated with upgrading these remaining machines will not exceed $50,000.
The Americans with Disabilities Act, or ADA, currently includes provisions regulating the amount of clear floor space required in front of each ATM, prescribing the maximum height and reach depth of each ATM, and mandating that instructions and all information for use of the ATM be made accessible to and independently usable by persons with vision impairments. The Department of Justice is currently drafting new accessibility guidelines under the ADA that will cover virtually all aspects of commercial activity relating to disabled persons. We expect that these new guidelines will include provisions addressing ATMs and how to make them more accessible to the disabled. Under the current proposals, height and reach requirements would be shortened, keypads would be required to be laid out in the manner of telephone keypads with selected Braille symbols and ATMs would be required to possess speech capabilities. These new guidelines would affect the manufacture of ATM equipment going forward and could require us to retire or upgrade many of the ATMs we own, as well as merchant-owned ATMs where we are responsible for upgrade costs, potentially at significant expense to us. While we anticipate having the resources available to complete any required upgrades to our ATMs, if our projections are not achieved or our circumstances worsen, we may not have sufficient resources without obtaining additional financing, which may not be available to us. The comment period on the proposed guidelines ended May 31, 2005. No guidelines have yet been promulgated. Should the guidelines proposed become final, we anticipate an 18-month phase-in before new equipment in new locations must comply with new accessibility requirements. If ATMs in our network are not compliant with any applicable ADA guidelines by any
established deadlines and we cannot obtain compliance waivers, we could have to remove the non-compliant ATMs from service and, as a result, our ATM net sales could be materially reduced during the period of time necessary to become compliant.
The passing of anti-money laundering legislation could cause us to lose some merchant accounts, thus reducing our revenues.
Recent concerns expressed by the United States federal government regarding the use of ATMs to launder money could lead to the imposition of additional regulations on our sponsoring financial institutions and our merchant customers regarding the source of cash loaded into their ATMs. In particular, such regulations could result in the incurrence of additional costs by individual merchants who load their own cash, thereby making their ATMs less profitable. Accordingly, some individual merchants may decide to discontinue their ATM operations, thus reducing the number of merchant-owned accounts that we currently manage. If such a reduction were to occur, we would see a corresponding decrease in our revenues.
If we, our transaction processors, our EFTNs or our other service providers experience system failures, the ATM products and services we provide could be delayed or interrupted, which would harm our business.
Our ability to provide reliable service largely depends on the efficient and uninterrupted operations of our transaction processors, EFTNs and other service providers. Any significant interruptions could severely harm our business and reputation and result in a loss of sales. Additionally, if we cause any such interruption, we could lose the affected merchants or damage our relationships with them. Our systems and operations, and those of our transaction processors, EFTNs and other service providers, could be exposed to damage or interruption from fire, natural disaster, unlawful acts, terrorist attacks, power loss, telecommunications failure, unauthorized entry and computer viruses. We cannot be certain that any measures we and our service providers have taken to prevent system failures will be successful or that we will not experience service interruptions. Further, our property and business interruption insurance may not be adequate to compensate us for all losses or failures that may occur.
We rely on EFTNs and transaction processors; if we cannot renew our agreements with them, if they are unable to perform their services effectively or if they decrease the level of the transaction fees we receive, it could harm our business.
We rely on several EFTNs and transaction processors to provide card authorization, data capture and settlement services to us and our merchant customers. Any inability on our part to renew our agreements with these or similar service providers or their failure to provide their services efficiently and effectively may damage our relationships with our merchants and may permit those merchants to terminate their agreements with us.
Our ATM net sales depend to a significant extent upon the transaction fees we receive through EFTNs. If one or more of the EFTNs in which we participate reduces the transaction fees it pays us, and we are unable to route transactions to other EFTNs to replace them, our ATM net sales would be reduced.
We could lose access to our ATM vault cash and fees that we have earned due to circumstances beyond our control.
Our current vault cash facility is secured by the cash we draw from it to place in ATMs, as well as by the withdrawal and interchange fees we have earned but not yet collected and a demand letter of credit, so the lender under that arrangement could seize the cash and fees in the event of a default.
We obtain the cash that we use to fill our placement ATMs, which we call vault cash, in the United States pursuant to an agreement with TRM Inventory Funding Trust, for which one of our subsidiaries, TRM ATM Corporation, acts as servicer. Under the terms of the loan and servicing agreement, the Trust and the servicer must make periodic payments of fees related to the arrangement. The obligations under the loan and servicing agreement are secured by pledges of all of the Trust’s assets, including the vault cash, our uncollected withdrawal and interchange fees and a demand letter of credit. If there is a default under the loan and servicing agreement, the lender may terminate the loan and servicing agreement and seize the collateral, including existing vault cash, fees we have not yet received, and draw on the letter of credit. As a result, a default under the loan and servicing agreement could cause us to lose fees we had earned and suspend operations with respect to our placement ATMs unless we were able to rapidly arrange an alternative source of vault cash.
Our vault cash arrangement could go into default as a result of factors over which we have no control.
The loan and servicing agreement for our vault cash facility contains events of default that include:
•
An “event of bankruptcy” with respect to any entity on whose property more than 10% of our ATMs are located, if we are unable to remove all cash from those ATMs within five business days after the event of bankruptcy occurs. An event of bankruptcy includes the filing of a bankruptcy petition with a court, an entity admitting in writing that it is unable to satisfy its obligations as they become due or the board of directors of the entity voting to cause an event of bankruptcy, regardless of whether we are informed of any of these actions.
•
Any depository bank or transportation agent, excepting one pre-approved bank and one pre-approved transportation agent, failing to maintain a specified debt rating.
•
The amount of vault cash held by or maintained on the premises of entities, which would generally be our transportation agents and merchants, that have experienced an event of bankruptcy when added to the amount of cash owed from settlement banks that is past due exceeding a designated level.
Due to these provisions, the bankruptcy or financial difficulty of certain of our merchants or the companies on which we rely for services could cause an event of default under our loan and servicing agreement and prevent us from having access to the vault cash we require to operate our placement ATMs. We do not have any operational control over our merchants or other service providers and may not be able to determine whether any of these entities are facing financial difficulty that could increase our risk of default under the loan and servicing agreement. As a result, we could lose access to our vault cash due to circumstances that we would be unable to foresee and that are beyond our control.
If our vault cash arrangement terminates, we may be unable to obtain vault cash from alternative sources on acceptable terms or at all. If we do not have access to vault cash for our placement ATMs we will have to suspend our operations with respect to these ATMs, our results of operations will be reduced and the value of our shareholders’ investments will decrease. Additionally, there are cross-default provisions in our vault cash facility whereby if we fail to comply with the covenants of our restructured loan agreements and are declared to be in default by GSO Origination Funding Partners LP and other lenders, we may be declared in default of the provisions of the Loan and Servicing Agreement and the Securities Purchase Agreement as well, and the lenders may demand payment.
We have notified our vault cash provider that we intend to terminate our current vault cash arrangement and obtain our vault cash from another source; although we believe that we will have an agreement in place for a new vault cash arrangement that will be more cost-effective than the current arrangement, if we are unable to obtain vault cash for our placement ATMs, it would harm our business.
In March 2008, we notified our current vault cash provider that we intend to terminate our current vault cash arrangement sometime during the second quarter of 2008. We have made arrangements with another provider of vault cash that we believe will provide vault cash for us at a lower cost. We do not anticipate that this change in vault cash providers will cause any significant interruption in our business. We have tested the new vault cash provider’s abilities in a small sample of our ATMs. This test created an exclusivity violation under our current vault cash agreement. Although we expect our current provider to cooperate in our transition to the new provider, they could declare us to be in default of TRM Inventory Funding Trust’s Loan and Servicing Agreement and demand repayment of our vault cash liability before we have finalized arrangements to replace that cash in our ATMs. If we do not have access to vault cash for our company-owned ATMs we will have to suspend our operations with respect to these ATMs and our revenues will be reduced.
We experienced substantial theft losses in our ATM operations in the past. If we were to experience a recurrence of these losses, our results of operations could be harmed.
Our United States ATM operations experienced $569,000 in unreimbursed theft losses in 2005, as a result of which we implemented new measures to counter theft and vandalism. Our unreimbursed theft losses in 2006 were $201,000 and in 2007 were $145,000. We cannot assure you that the anti-theft and anti-vandalism measures we have taken will be sufficient to reduce or even maintain the 2007 level of loss in 2008. Failure to do so or to devise additional measures to counteract theft and vandalism may result in substantial theft and vandalism losses, harming our results of operations.
In the past we have had crime insurance to reimburse us for losses that exceed certain deductible levels. Since July 1, 2005, due to increases in both the deductible level and the cost of the insurance, we have insured only against catastrophic cash losses.
Risks Relating to Our Common Stock
We do not plan to pay dividends on our common stock.
We do not plan to declare dividends on our common stock for the foreseeable future and, in any event, under the terms of our credit facility with GSO Origination Funding Partners LP and other lenders and the Lampe Facility, we are prohibited from doing so.
Our charter documents and Oregon law may inhibit a takeover that shareholders may consider favorable.
The Oregon Business Corporation Act, our restated articles of incorporation and our restated bylaws contain provisions that could have the effect of delaying, deferring or preventing a change in control of our company or our management that shareholders may consider favorable or beneficial, which could reduce the value of our shareholders’ investments. These provisions could discourage proxy contests and make it more difficult for shareholders to elect directors and take other corporate actions. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock. These provisions include:
•
authorization to issue “blank check” preferred stock, which is preferred stock that can be created by our board of directors without prior shareholder approval and with rights senior to those of common stock;
•
a classified board of directors, so that it could take three successive annual meetings to replace all directors;
•
authority for directors to establish the size of the board of directors without shareholder approval;
•
a requirement of a 75% vote of shareholders to remove a director for cause;
•
a requirement of a 75% vote of shareholders for business combinations with a 5% or greater shareholder that is not approved by our board of directors, with only limited exceptions; and
•
an advance notice requirement for shareholder proposals.
The delisting of our common stock from the NASDAQ Global Market may result in impairment of the price at which our common stock trades and the liquidity of the market for it.
On March 12, 2008, we announced that we had failed to comply with NASDAQ’s minimum bid price requirement and as a result, no longer met the requirements for continued listing on the NASDAQ Global Market. We filed an election to transfer to the NASDAQ Capital Market. On March 19, 2007, we were notified by NASDAQ that our application to transfer our shares to the NASDAQ Capital Market was denied due to our failure to demonstrate compliance with the NASDAQ Capital Market’s initial inclusion requirements (other than bid price) as set forth in Marketplace Rule 4310(c). We received an additional NASDAQ Staff Determination Letter dated March 19, 2008, stating that our shares will be delisted from the NASDAQ Global Market as a result of our failure to satisfy the minimum stock price requirement of the NASDAQ Global Market as set forth in Marketplace Rule 4450(a).
NASDAQ’s staff notified us that, unless we requested an appeal of the delisting determination, NASDAQ would suspend trading of our common stock at the opening of business on March 28, 2008, and our common stock would subsequently be delisted. We have appealed the Staff’s determination and requested a hearing, which will stay any delisting action pending the issuance of a decision by the Panel following the hearing.
If our common stock is delisted, it will not be traded on any national stock exchange and it may not be traded on any exchange for the foreseeable future. In addition, even if we regain compliance and seek to be relisted, we cannot be certain that NASDAQ will approve our application for relisting or that any other exchange will approve our common stock for listing. As a consequence, the ability of a stockholder to sell our common stock, and the price obtainable for our common stock could be materially impaired.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
Our principal offices are located at 5208 N.E. 122nd Avenue, Portland, Oregon 97230-1074. We currently lease approximately 44,000 square feet in Portland and sublease approximately 19,000 square feet of that space to other tenants. The lease runs until 2010, with an option for an additional five-year term. We leased 3,100 square feet of office space in Philadelphia, Pennsylvania for use as executive offices under a month-to-month rental agreement until March 31, 2008. Effective March 1, 2008, we entered into a 38-month lease for 3,000 square feet of office space in Cherry Hill, New Jersey for use as executive office space. We vacated most of our warehouse space and storage units during 2007. We continue to be obligated under leases for an aggregate of approximately 14,000 square feet of warehouse space at five locations, including four locations that we no longer use. These leases expire at various times between 2008 and 2010. Following the sales of our ATM businesses in the United Kingdom and Canada and our United States photocopy business in January 2007, we have outsourced our service work and have substantially fewer employees and need less space. If we cannot renew any of the current leases we want to retain, we do not anticipate that we will have difficulty in leasing suitable replacement space.
ITEM 3. LEGAL PROCEEDINGS
We are a defendant in various actions that have arisen in the normal course of business. We believe that the ultimate disposition of these matters will not have a material adverse effect on our business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 2007.
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
NASDAQ Delisting
On September 12, 2007, we were notified by the NASDAQ that our common stock was subject to delisting from the NASDAQ Global Market because we were not in compliance with the Minimum Bid Price Rule because the bid price per share of our common stock closed below $1.00 per share for 30 consecutive business days. We were provided with 180 calendar days, or until March 10, 2007, to regain compliance with the Minimum Bid Price Rule. However, we were not able to do so. On March 12, 2008, we announced that we had failed to comply with NASDAQ’s minimum bid price requirement and as a result, no longer met the requirements for continued listing on the NASDAQ Global Market.
We filed an election to transfer to the NASDAQ Capital Market. On March 19, 2007, we received a NASDAQ Staff Determination Letter denying our application to transfer our shares to the NASDAQ Capital Market due to our failure to demonstrate compliance with the NASDAQ Capital Market’s initial inclusion requirements (other than bid price) as set forth in Marketplace Rule 4310(c). We received an additional NASDAQ Staff Determination Letter dated March 19, 2008, stating that our shares will be delisted from the NASDAQ Global Market as a result of our failure to satisfy the minimum stock price requirement of the NASDAQ Global Market as set forth in Marketplace Rule 4450(a).
NASDAQ’s staff notified us that, unless we requested an appeal of the delisting determination, NASDAQ would suspend trading of our common stock at the opening of business on March 28, 2008, and our common stock would subsequently be delisted. We have requested a hearing to appeal the Staff’s determination which will stay any delisting action pending the issuance of a decision by the Panel following the hearing. See Item 1A, “Risk Factors - Risks Relating to Our Common Stock - The delisting of our common stock from the NASDAQ Global Market may result in impairment of the price at which our common stock trades and the liquidity of the market for it.”
Market Price Range
The following table sets forth the high and low bid prices as reported by the NASDAQ Global Market during the past two years.
As of March 14, 2008, there were 17,213,226 shares of common stock outstanding held by 169 persons of record.
Dividends
We have not paid any dividends on our common stock, and we do not plan to pay dividends on our common stock for the foreseeable future. We intend to retain earnings, if any, to fund our operations. Subject to our credit agreements discussed in the next paragraph, our Board of Directors will determine any changes in our dividend policy based upon its analysis of factors it deems relevant. We expect these factors will include our earnings, financial condition and cash requirements.
Our ability to pay cash dividends on our common stock is subject to restrictions imposed by our credit agreements with GSO Origination Funding Partners LP and the other lenders and the Lampe Facility, which prohibit us from paying cash dividends on our common stock without our lenders’ consent.
Stock Performance Graph
The following graph provides a comparison of the cumulative total shareholder return for the period December 31, 2002 through December 31, 2007 for (i) our common stock, (ii) the NASDAQ Stock Market (US) and (iii) the NASDAQ Retail Trade Index, in each case assuming the investment of $100 on December 31, 2002 and the reinvestment of any dividends.
Securities Authorized for Issuance under Equity Compensation Plans
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data, except for other operating data, presented below as of December 31, 2006 and 2007 and for the years ended December 31, 2005, 2006 and 2007 have been derived from our audited financial statements included in this report. The selected financial data, except for other operating data, presented below as of December 31, 2003, 2004 and 2005 and for the years ended December 31, 2003 and 2004 have been derived from our financial statements not included in this report. 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
Years ended December 31, 2003 - 2007
(In thousands, except per share and other operating data)
Notes regarding comparability of information:
1. During the fourth quarter of 2004, we discontinued efforts in the software development segment of our business. We show the results of the software development segment as discontinued operations.
2. In 2004 we acquired the ATM business of eFunds Corporation and completed four other acquisitions.
3. During the third quarter of 2006 we recorded non-cash charges of $96.1 million for the impairment of certain assets, of which $43.3 million is included in continuing operations and $52.8 million is included in discontinued operations.
4. In June 2006 we sold our United Kingdom photocopier business. In January 2007 we sold our ATM businesses in the United Kingdom, Germany and Canada and our United States photocopy business. In June 2007 we sold our Canadian photocopy business. We show the results of those business segments as discontinued operations. Other operating data shown above excludes the ATMs of the discontinued operations.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report on Form 10-K with respect to our beliefs, plans, objectives, goals, expectations, anticipations, intentions, financial condition, results of operations, future performance and business, including, without limitation, growth of our business (including acquisitions) constitutes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We have based these forward-looking statements on management’s current expectations about future events. These statements can be identified by the fact that they do not relate strictly to historical or current facts, and by words such as “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan” or other similar words or expressions.
Any or all of the forward-looking statements in this report and in any other public statements we make may turn out to be wrong. This can occur as a result of inaccurate assumptions or as a consequence of known or unknown risks and uncertainties. We discuss many of the risks and uncertainties that may impact our business in Item 1A
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates and, until the sale of our foreign operations in January and June 2007, we had operations in the United Kingdom, Germany and Canada exposing us to foreign currency exchange rate risks. We do not hold or issue derivative commodity instruments or other financial instruments for trading purposes. Since the sales of our United Kingdom, German and Canadian ATM operations, we have no further foreign operations. However, we have a liability denominated in British pounds, exposing us to foreign currency exchange rate risk.
Interest Rate Risk
We invest our cash in money market funds. The income earned from these money market funds is subject to changes in interest rates. Interest income was $187,000 for 2006 and $360,000 for 2007. A 10% change in interest rates earned would not have had a material effect on our net income.
Interest on borrowings pursuant to our credit facility with GSO Origination Funding Partners LP is at variable rates. As of December 31, 2007, the interest rate on our $2.1 million term loan was 16.87%. If the interest rates on our borrowings under such syndicated loan facility as of December 31, 2007 increased by 1%, our interest cost would increase by $21,000 per year.
Under our United States vault cash facility, the Trust borrows money pursuant to a note funded by the sale of commercial paper. The Trust owed $71.7 million at December 31, 2006 and $58.5 million at December 31, 2007 under this arrangement. The weighted average interest rate on these borrowings at December 31, 2007 was 7.40%. Interest and fees relating to the Trust’s borrowings, which are included in cost of sales in our consolidated financial statements, totaled $6.5 million and $5.5 million for the years ended December 31, 2006 and 2007, respectively. If the interest rate for the Trust’s borrowings at December 31, 2007 increased by 1%, to a weighted average of 8.40%, our cost of sales would increase by $585,000 per year.
As a result of the sale of our United Kingdom and substantially all of our Canadian ATM operations, we no longer maintain vault cash facilities in those countries and do not have further interest rate risk thereunder.
Foreign Currency Risk
As of December 31, 2007, we owed £2,679,000 ($5.3 million using exchange rates as of December 31, 2007) to the purchaser of our United Kingdom and German ATM businesses. If the value of the British pound were to fluctuate significantly from the December 31, 2007 exchange rate, our financial position would be affected. A 10% increase in the value of the British pound versus the United States dollar would increase our liability by $530,000. A 10% decrease in the value of the British pound versus the United States dollar would decrease our liability by $530,000. Since we pay interest at a rate of 15% per annum on this liability, our interest expense would also be affected by a fluctuation in the exchange rate.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this item are included in this Annual Report on Form 10-K commencing on page 34.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
TRM Corporation
We have audited the consolidated balance sheet of TRM Corporation and subsidiaries as of December 31, 2007, and the related consolidated statements of operations, shareholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 audit provides 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 December 31, 2007, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company incurred net losses in 2006 and 2007 of approximately $120 million and $8 million, respectively. It is uncertain if 2008 operations will generate sufficient cash to enable the Company to comply with the covenants of the Company’s loan agreements and to pay its obligations on an ongoing basis. A default under the Company’s financing agreement with GSO Origination Funding Partners LP may render the debt callable and trigger the cross-default provision in TRM Inventory Funding Trust’s Loan and Servicing Agreement. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We were not engaged to examine management’s assertion about the effectiveness of TRM Corporation’s internal control over financial reporting as of December 31, 2007 included in the accompanying Management’s Report on Internal Control over Financial Reporting and, accordingly, we do not express an opinion thereon.
/s/ McGladrey & Pullen, LLP
Blue Bell, Pennsylvania
March 28, 2008
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
TRM Corporation
In our opinion, the consolidated balance sheet as of December 31, 2006 and the related consolidated statements of operations, of shareholders’ equity and of cash flows for each of the two years in the period ended December 31, 2006 present fairly, in all material respects, the financial position of TRM Corporation and its subsidiaries (the “Company”) at December 31, 2006 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule for each of the two years in the period ended December 31, 2006 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements (not separately presented herein), the Company incurred a net loss for 2006 resulting in its inability to meet certain financial covenants of its financing agreement with GSO Origination Funding Partners LP and other lenders, and based on its projections the Company does not expect to meet the required financial covenants during 2007, which may render the debt callable by the lenders and trigger the cross-default provisions in TRM Funding Trust’s Loan and Servicing Agreement. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As noted in Note 11 to the financial statements, during the year ended December 31, 2007, the Company disposed of its Canadian photocopy business. The financial statements for the each of two years ended December 31, 2006 have been retrospectively restated to reflect the Canadian photocopy business as a discontinued operation.
/s/ PricewaterhouseCoopers LLP
Portland, Oregon
May 23, 2007, except for the retrospective restatement of the Canadian photocopy operations as discontinued operations described in Note 11, which is as of March 28, 2008
TRM Corporation
Consolidated Balance Sheets
December 31, 2006 and 2007
(In thousands)
See accompanying notes to consolidated financial statements.
TRM Corporation
Consolidated Statements of Operations
Years ended December 31, 2005, 2006 and 2007
(In thousands, except per share data)
See accompanying notes to consolidated financial statements.
TRM Corporation
Consolidated Statement of Shareholders’ Equity
Years ended December 31, 2005, 2006 and 2007
(In thousands)
See accompanying notes to consolidated financial statements.
TRM Corporation
Consolidated Statements of Cash Flows
Years ended December 31, 2005, 2006 and 2007
(In thousands)
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
1. Description of Business and Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
TRM Corporation (“we” or “TRM”) provide self-service cash delivery and account balance inquiry through ATM machines.
As of December 2005 we offered ATM services in retail locations in the United States, the United Kingdom, Germany and Canada and photocopier services in the United States, United Kingdom and Canada.
In June 2006 we sold our United Kingdom photocopy business. In January 2007 we sold our ATM businesses in the United Kingdom, Germany and Canada and our United States photocopy business. In June 2007 we sold our Canadian photocopy business. The results of the businesses we have sold are reflected as discontinued operations in our consolidated statement of operations. Our remaining business operates ATMs in the United States. We provide the equipment, maintenance, supplies and point of sale materials required for each of our installations, while the retailer oversees the daily operation of the equipment, provides the necessary floor space and shares in the revenue generated by our offerings. During 2007 our United States ATM networks had an average of 10,253 transacting ATMs.
We incurred a net loss of $120.1 million in the year ended December 31, 2006. As a result of our financial performance for the three months ended September 30, 2006, we failed to meet certain financial covenants of our financing agreements with GSO Origination Funding Partners LP and other lenders. On November 20, 2006, we entered into amendments that restructured our loans and waived the failure to meet the loan covenants. Under the restructured loan agreements principal payments of $69.9 million were due in the first quarter of 2007. During January 2007 we sold our Canadian, United Kingdom and German ATM businesses and our United States photocopy business and used $98.4 million from the proceeds of those sales to make principal and interest payments under these loans, leaving a remaining balance of principal plus accrued interest of $2.0 million as of January 31, 2007. We are uncertain whether our remaining operations can generate sufficient cash to comply with the covenants of our restructured loan agreements and to pay our obligations on an ongoing basis. Because there are cross-default provisions in TRM Inventory Funding Trust’s Loan and Servicing Agreement and the Securities Purchase Agreement under the Lampe Facility, if we fail to comply with the covenants of our restructured loan agreements and are declared to be in default by GSO Origination Funding Partners LP and other lenders, we may be declared in default of the provisions of the Loan and Servicing Agreement and the Securities Purchase Agreement under the Lampe Facility as well, and the lenders may be able to demand payment. Further, in March 2008, we notified our current vault cash provider that we intend to terminate our current vault cash arrangement sometime during the second quarter of 2008 and that we have made arrangements with another provider of vault cash that we believe will provide vault cash for us at a lower cost. We have used the new vault cash provider for a small test sample of our ATMs which is a violation of the covenants of the Loan and Servicing Agreement. Although we expect our current provider to cooperate in our transition to a new provider, they could declare us to be in default of TRM Inventory Funding Trust’s Loan and Servicing Agreement and demand repayment of our vault cash liability before we have finalized arrangements to replace that cash in our ATMs. These factors, among others, may indicate that we may be unable to continue as a going concern for a reasonable period of time. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary should we be unable to continue as a going concern. Our continuation as a going concern is contingent upon our ability to generate sufficient cash to pay our obligations on an ongoing basis.
In connection with the sales of our ATM businesses in the United Kingdom, Germany and Canada, and our photocopy businesses in the United Kingdom, United States and Canada in 2006 and 2007, we have made various representations and warranties and/or provided indemnities. Further, the sales prices are subject to adjustment based on working capital amounts, the value of accounts receivable as of the closing of the sale or other factors. The purchasers may make claims against us relating to the representations or warranties or provisions for adjustment of the sales prices, and those claims could be substantial. The purchaser of our United Kingdom and German ATM businesses asserted claims pursuant to the sales agreement, and, in November 2007, we entered into a settlement agreement described further in Notes 6 and 11 pursuant to which we agreed to repay a portion of the purchase price.
In November 2006 we announced the implementation of a corporate restructuring plan involving an initial reduction of then-existing controllable selling, general and administrative expenses of approximately 15%. Subsequent to that announcement, we have sold operations that accounted for approximately 61% of our net sales in 2006. In
connection with our restructuring plan and the sales of a substantial part of our operations, we have reduced our number of employees from 364 as of December 31, 2006 to 39 as of December 31, 2007.
We expect to be able to refinance the outstanding balances under our financing agreement with GSO Origination Funding Partners and the other lenders and a $2.5 million liability due to eFunds Corporation described in Note 12, and we have begun initial efforts to do so. However, we can provide no assurance that we will be able to do so. If we are unable to refinance our debt or to get our lenders to agree to any further forbearance from calling our loans, we might be forced to seek protection of the courts through reorganization, bankruptcy or insolvency proceedings.
Principles of Consolidation
The consolidated financial statements include the accounts of TRM, its subsidiaries and TRM Inventory Funding Trust (see Note 3). Our subsidiaries at December 31, 2007 included TRM Copy Centers (USA) Corporation, TRM (Canada) Corporation, TRM ATM Corporation, TRM ATM Acquisition Corporation, Access Cash International LLC, and S-3 Corporation. We sold all of the outstanding shares of TRM Copy Centres (U.K.) Limited, our United Kingdom photocopier subsidiary, in June 2006. In January 2007 we sold all of the outstanding shares of TRM ATM (U.K.) Limited which owned TRM ATM Deutschland GmbH. These two companies operated ATMs in the United Kingdom and Germany. The results of operations of the subsidiaries that we have sold are included in our consolidated financial statements only through the dates of sale. Effective December 31, 2003, we adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 46R, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” and, accordingly, consolidate the accounts of TRM Inventory Funding Trust in our consolidated financial statements.
All significant intercompany transactions and accounts are eliminated. During 2005, 2006 and part of 2007 we had subsidiaries operating in Canada, the United Kingdom and Germany, whose functional currencies were the Canadian dollar, British pound and Euro. Assets and liabilities of foreign operations were translated into United States dollars at current exchange rates. Revenue and expense accounts were translated into United States dollars at average rates of exchange prevailing during the periods. Adjustments resulting from translating foreign functional currency financial statements into United States dollars were recorded directly to a separate component of shareholders’ equity.
Fair Value of Financial Instruments
Financial instruments, including cash and cash equivalents, accounts receivable and accounts payable approximate fair market value because of the short maturity of these instruments. Fair value approximates the carrying value of our borrowings under our variable-rate long-term debt, based upon interest rates available for the same or similar instruments.
Restricted Cash
Cash owned by TRM Inventory Funding Trust and held in our United States ATM network is considered to be restricted cash because the cash is only available for use in our ATM network and is not otherwise available for our use. However, as described in Note 3, because of a potential default under the Loan and Servicing Agreement, the Trust’s debt is classified as a current liability and the Trust’s cash is classified as a current asset in our consolidated balance sheet.
We have $3.1 million cash held by a bank as collateral for our letter of credit as of December 31, 2007 that is also classified as restricted cash on our balance sheet.
Revenue Recognition, Discounts and Accounts Receivable
A portion or all, depending upon the arrangement with the retail business, of each ATM surcharge is paid to the retail business. We receive daily reports of ATM transactions electronically from our ATM network processors. On a monthly basis, the ATM transaction data is used to calculate the retailer’s applicable discount, which is generally dependent upon transaction volumes, and we generally remit the discount directly to the retailer’s bank account through electronic funds transfer. We recognize ATM revenue based on the actual monthly transactions reported by the ATM processing network. Total sales activity and discount amounts are reported separately in the consolidated statements of operations to arrive at net sales.
Accounts receivable are shown net of allowance for doubtful accounts of $468,000 and $354,000 at December 31, 2006 and 2007, respectively.
Inventories
During 2007 we began outsourcing our ATM maintenance and no longer use our parts inventory. Accordingly, we have written that inventory down to its estimated net realizable value.
Long-Lived Assets
We account for long-lived assets, primarily equipment and amortizable intangible assets, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires us to review the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Whenever events or changes in circumstances indicate that our merchant contracts or equipment may be impaired, we evaluate the recoverability of the asset by measuring the related carrying amounts against the associated estimated undiscounted future cash flows. Should the sum of the expected future net cash flows be less than the carrying values of the tangible or intangible assets being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying values of the tangible or intangible assets exceeded the calculated fair value.
Equipment
Equipment is recorded at cost plus amounts required to place equipment in service. Depreciation begins when the asset is placed in service. ATMs, furniture and fixtures and computer equipment are generally depreciated using the straight-line method over the estimated remaining useful lives of the related assets. Estimated useful lives are as follows:
Goodwill
As of December 31, 2007, we have goodwill with a carrying amount of $16.7 million. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we test goodwill for impairment annually, or more frequently if events or changes in circumstances indicate that the assets might be impaired. The impairment test consists of a comparison of the fair value of the reporting unit with its carrying amount. An impairment loss is recognized for the difference between the carrying value of the goodwill and its computed fair value.
Investment in marketable equity securities
Our investment in a marketable equity security was classified as available-for-sale and was reported in other assets as of December 31, 2004 at a fair value of $8.3 million. Unrealized gains and losses were excluded from earnings and reported in other comprehensive income (loss). During 2005 we sold this security for $9.6 million and realized a gain of $1.3 million.
Other expense (income), net
Other expense (income), net for 2005 includes a $1.3 million gain on the sale of marketable equity securities, a $700,000 settlement from our directors’ and officers’ liability insurer and $197,000 of interest income. These amounts were partially offset by $233,000 in foreign exchange losses.
Income Taxes
We account for income taxes utilizing the asset and liability method. Under the asset and liability method, we determine deferred tax assets and liabilities based on differences between the financial reporting and income tax bases of assets and liabilities, and measure them by applying enacted tax rates and laws to the taxable years in which such differences are expected to reverse.
Stock-Based Compensation
Prior to 2006 we applied Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and the related interpretations in accounting for stock-based compensation plans. Accordingly, we recognized no compensation expense for our stock-based compensation plans in the accompanying consolidated statements of operations for 2005.
In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,” an amendment of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS 123R eliminates the ability to account for share-based payments using APB No. 25, and instead requires companies to recognize compensation expense using a fair-value based method for costs related to share-based payments, including stock options and employee stock purchase plans. The expense is measured as the fair value of the award at its grant date based on the estimated number of awards that are expected to vest, and recorded over the applicable service period. In the absence of an observable market price for a share-based award, the fair value is based upon a valuation methodology that takes into consideration various factors, including the exercise price of the award, the expected term of the award, the current price of the underlying shares, the expected volatility of the underlying share price, the expected dividends on the underlying shares and the risk-free interest rate. The requirements of SFAS 123R became effective for our first quarter beginning January 1, 2006 and apply to all awards granted, modified or cancelled after that date, and to the portion of previously granted awards that had not vested by the adoption date. We adopted SFAS 123R effective January 1, 2006 on a prospective basis using the modified prospective transition method. SFAS 123R requires that stock-based compensation expense be based on awards that are ultimately expected to vest. We have recognized compensation expense based on the estimated grant date fair value method using the Black-Scholes valuation model. Because the majority of our previously granted stock options had vested prior to the end of 2005 and only 65,000 options were issued during 2006, the effect of adopting SFAS 123R on our results of operations, loss per share and cash flow for 2006 was not material.
The following table illustrates the effect on net income (loss) and earnings per share as if we had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” during 2005 (in thousands, except per share data):
Net Income (Loss) Per Share
Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if convertible preferred shares outstanding at the beginning of each year were converted at those dates with related interest, preferred stock dividend requirements and outstanding common shares adjusted accordingly. It also assumes that outstanding common shares were increased by shares issuable upon exercise of those stock options and warrants for which the market price exceeds exercise price, less shares which we could have purchased with related proceeds. All outstanding options, warrants and outstanding shares of preferred stock were excluded from the calculation of diluted earnings per share for 2005, 2006 and 2007 because their inclusion would have been antidilutive.
Use of Estimates
The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, sales, costs and expenses, and the disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and judgments, including those related to impairments, depreciation, intangible assets, accounts receivable, inventories, and income taxes. We base our estimates and judgments on historical experience and on various assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
New Accounting Standards
In June 2006, the FASB issued FASB Interpretation No. 48, (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” an interpretation of FAS 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements. It prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation became effective for us beginning in 2007. Our adoption of FIN 48 did not have a material impact on our results of operations, financial position or cash flows.
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements.” SFAS 157 establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements. This statement does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, except for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis for which delayed application is permitted until fiscal years beginning after November 15, 2008. We anticipate no material impact on our results of operations, financial position or cash flows as a result of adopting this statement.
In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115,” which allows companies the option to measure certain financial instruments and other items at fair value. The provisions of SFAS No. 159 are effective for us beginning in 2008. We are currently evaluating the impact, if any, this statement will have on our financial statements.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51.” This statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This statement is effective for us beginning in 2009. We are currently evaluating the impact, if any, this statement will have on our financial statements.
Financial Statement Reclassifications
Certain financial statement reclassifications have been made to prior year amounts to conform to the current year presentation. These changes had no impact on total assets, total liabilities, shareholders’ equity or net loss. As discussed in Note 11 we have reclassified the results of operations of our Canadian photocopier operations to discontinued operations for all periods presented.
2. Equipment
Equipment (in thousands):
Depreciation of equipment included in continuing operations for 2005, 2006 and 2007 was $2,412,000, $2,768,000, and $2,016,000, respectively. See Note 14 regarding impairment of equipment in our former United States and Canadian photocopier operations.
3. Vault Cash
On March 14, 2000, a Deposit Trust Agreement (“Agreement”) was entered into between GSS Holdings, Inc. as Depositor, Wilmington Trust Company as Owner Trustee, and TRM ATM Corporation (“Servicer”) as
Administrator. By virtue of the Agreement, TRM Inventory Funding Trust (the “Trust”) was created. Neither Servicer, TRM nor any affiliates have any ownership interest in the Trust. Any risk with regard to the Trust or the ability of the Trust to repay the Trust’s debt resides with the Trust and with GSS Holdings as the Depositor (equity investor in the amount of $15,000 as of December 31, 2007), and with Autobahn Funding Company LLC (“Lender” and equity investor in the amount of $1,485,000 as of December 31, 2007), rather than with Servicer, which merely serves as an administrator and servicer of the Trust. Autobahn Funding Company LLC is related to DZ Bank AG, Deutsche Zentral-Genossenschaftsbank Frankfurt am Main (“DZ Bank”) and is independent of the Servicer and us. The purpose of the Trust is to provide cash to be placed in our United States ATM machines (“vault cash”), by accessing commercial paper markets.
The Trust borrows from and makes repayments to the Lender and makes other payments pursuant to a Loan and Servicing Agreement, and engages the Servicer and other agents and contractors from time to time to perform all duties assigned under the Loan and Servicing Agreement. Borrowings from the Lender are collateralized by the assets of the Trust, principally the vault cash. The Lender issues asset-backed commercial paper notes to fund the loans to the Trust. Interest on the Trust’s borrowings from the Lender, which are evidenced by a note, is at a rate equal to 1.35% plus the interest rate of the commercial paper notes that the Lender issues to fund the loans to the Trust. The Trust also pays to the Lender an amount equal to the Lender’s equity investment in the Trust times 1.35% plus the yield rate of the commercial paper notes outstanding. The Loan and Servicing Agreement contains covenants applicable to us, including a minimum tangible net worth requirement. We entered into an amendment to that agreement in November 2007, which reset the minimum net worth covenant to $12 million. In January 2007 we entered into an amendment which, among other changes, extended the facility for five years and reduced the facility size to $100 million. A liquidity agreement with DZ Bank ensures that the Trust continues to have funds available for the term of the agreement.
When the vault cash is placed in the ATM, the Trust has a security interest in all of the fees and charges earned or received in connection with all revenue generating transactions initiated at the ATMs. The cash at all times remains the property of the Trust, and the Trust is ultimately obligated to repay the Lender. We maintain letters of credit totaling $3.1 million at December 31, 2007 to guarantee the performance of the Servicer. Subcontractors maintain insurance on behalf of the Trust to ensure the cash is safe while stored at correspondent banks, and during delivery to ATM machines and to the vault or bank storage facilities.
Because we are the primary beneficiary of the Trust, the accounts of the Trust have been included in our consolidated financial statements. The Trust’s vault cash, amounting to $61.8 million at December 31, 2007 ($73.7 million at December 31, 2006) is reported as restricted cash in the accompanying consolidated balance sheet, and the balance of the Trust’s note payable to the Lender, which totaled $58.5 million at December 31, 2007 ($71.7 million at December 31, 2006), is reported as a liability. The Loan and Servicing Agreement matures in 2012. However, as discussed further in Notes 1 and 6, we are uncertain whether we can comply with all of the terms of our primary financing agreement. Since the lender has asserted that there are cross-default provisions in TRM Inventory Funding Trust’s Loan and Servicing Agreement, if we fail to comply with the terms of our financing agreement we may be in default of the provisions of the Loan and Servicing Agreement as well. We have also violated certain exclusivity provisions in the Loan and Servicing Agreement, and the lender may be able to demand payment. Therefore, the Trust’s debt is classified as a current liability and the vault cash is classified as a current asset.
The expenses of the Trust, which are primarily interest and fees related to the Trust’s borrowings and bank charges, were $5,830,000 in 2005, $6,711,000 in 2006 and $5,670,000 in 2007 and are included in cost of sales in our consolidated statements of operations.
The Lender issues commercial paper notes with maturities of not more than 270 days. The outstanding commercial paper on December 31, 2007 matured January 2, 2008. Interest rates on the outstanding commercial paper notes ranged from 2.3% to 4.4% during 2005, 4.3% to 5.4% during 2006 and 5.1% to 6.7% during 2007.
Selected information on the Trust’s borrowings for the years ended December 31, 2005, 2006 and 2007 is as follows:
In March 2008, we notified our current vault cash provider that we intend to terminate our current vault cash arrangement sometime during the second quarter of 2008. We have made arrangements with another provider of vault cash that we believe will provide vault cash for us at a lower cost. We do not anticipate that this change in vault cash providers will cause any significant interruption in our business. However, we have only used the new vault cash provider for a small test sample of our ATMs. Further, use of another vault cash provider’s cash in a test sample of our ATMs is a violation of our current agreement. Although we expect our current provider to cooperate in our transition to a new provider, they could declare us to be in default of TRM Inventory Funding Trust’s Loan and Servicing Agreement and demand repayment of our vault cash liability before we have finalized arrangements to replace that cash in our ATMs. If we terminate our current vault cash arrangement prior to its maturity in 2012 and repay the Trust’s borrowings, we will owe a prepayment fee of $750,000. We have accrued the prepayment fee and included it in our 2007 loss on early extinguishment of debt as of the end of the fourth quarter of 2007 when we violated the exclusivity covenant of the Loan and Servicing Agreement and the lender could demand early repayment.
Before its sale in January 2007, our United Kingdom ATM business obtained vault cash under an agreement with a local bank. Vault cash obtained under the program remained the property of the bank.
Before its sale in January 2007, our Canadian ATM business obtained vault cash under an agreement with an armored car carrier that has a corresponding agreement with a local bank. As in our United Kingdom vault cash arrangement, the vault cash obtained under the Canadian program remained the property of the bank.
4. Goodwill and Intangible Assets
Goodwill:
Activity in our goodwill accounts by segment was as follows (in thousands):
Intangible assets (in thousands):
Amortization of intangible and other assets, which is included in selling, general and administrative expense in continuing operations, was $6,504,000, $4,322,000 and $525,000 for 2005, 2006 and 2007, respectively. Estimated amortization expense for the next five years for intangible and other assets held at December 31, 2007 is: 2008 - $471,000; 2009 - $299,000; 2010 - $297,000; 2011 - $88,000, and 2012 - $46,000.
5. Accrued Expenses (in thousands)
6. Term Loans, Line of Credit and Other Debt:
Term loans and lines of credit (in thousands)
The weighted average interest rate on the term loans as of December 31, 2006 was 13.52%, and the interest rate on borrowings under the line of credit was 14.25%. As of December 31, 2007, the interest rate on the term loan was 16.87%.
In June 2006, we established a credit facility which we used to refinance our then-existing term loan and lines of credit. In connection with the repayment of our term loan and lines of credit, we recorded a loss on early extinguishment of debt of $3.5 million of which $372,000 is included in discontinued operations. This loss resulted from writing off costs of $2.6 million we had deferred in conjunction with that debt and payment of a prepayment penalty of $860,000 to our former lenders. The new facility consisted of three related agreements:
•
a $45.5 million credit agreement (the “First Lien Credit Agreement”) with GSO Origination Funding Partners LP (the “GSO Fund”), certain other lenders and Wells Fargo Foothill, Inc., serving as administrative agent, revolving lender, swing line lender and letter of credit issuer (“WFF”);
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a $40 million second lien loan agreement with the GSO Fund, certain other lenders and WFF (the “Second Loan Agreement” and, together with the First Lien Credit Agreement, the “Credit Agreements”); and
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a £12.9 million (approximately $25.5 million based on exchange rates as of December 31, 2006) facility agreement between our wholly-owned subsidiary, TRM (ATM) Limited and GSO Luxembourg Onshore Funding SarL (“GSO Lux”) as the original lender, facility agent and security agent (the “UK Facility Agreement”).
The First Lien Credit Agreement consisted of a $30.5 million term loan facility and $15 million of revolving commitments. There was a letter of credit sublimit of $6.0 million under the revolving loan commitment. The Second Loan Agreement consisted of a $40 million term loan.
Outstanding balances under the three agreements as of December 31, 2006 were as follows (in thousands):
Prior to the restructuring discussed below, under the First Lien Credit Agreement, both the revolving loans and the term loan bore interest at the London Interbank Offered Rate (“LIBOR”) plus 4.0% while, under the Second Loan Agreement, the term loan bore interest at LIBOR plus 7.0%. Interest on all loans was payable quarterly. Under
the First Lien Credit Agreement, we were required to pay quarterly installments of principal of $65,000, with the remaining unpaid principal due at maturity. Under the Second Loan Agreement, we were required to pay the entire principal balance at maturity. The revolving and term loans under the First Lien Credit Agreement were scheduled to mature on June 6, 2011. The term loan under the Second Loan Agreement was scheduled to mature on June 6, 2012.
The UK Facility Agreement consisted of a £12.9 million term loan. Prior to restructuring, discussed below, the loan bore interest at LIBOR plus 4.0% plus an amount intended to compensate GSO Lux for reserve requirements at the Bank of England or the European Central Bank with respect to the loan.
Affirmative covenants in the syndicated loan agreements included requirements to: achieve certain levels of earnings before interest, taxes, depreciation, amortization and certain other non cash expenses (“EBITDA”); maintain certain financial ratios related to funded debt, total debt and fixed charge coverage to earnings before taxes, depreciation, amortization and non cash expenses; and limit capital expenditures.
As of September 30, 2006, our financial performance caused us to not be in compliance with three of the covenants in the Credit Agreements and the UK Facility Agreement: the minimum amount of consolidated EBITDA (annualized), the consolidated leverage ratio and the consolidated fixed charge coverage ratio. Our lenders had the right to seek to accelerate the loan under the operative loan documents, but they did not do so or exercise other remedies. Instead, on November 20, 2006, we entered into agreements under which they waived our defaults and agreed with us to restructure our loans. As restructured, the interest rates on our loans were increased. The increased interest cost was deferred and added to principal. In addition, the maturity dates of the loans were changed so that a total of $69.9 million was due on or before February 28, 2007. The financial covenants were modified to require achievement of certain levels of earnings before interest, taxes, depreciation and amortization and certain other non-cash expenses (“adjusted EBITDA”), adjusted monthly, and to limit capital expenditures. We did not comply with the adjusted EBITDA covenant for the months of December 2006 through October 2007. However, our lenders have granted waivers of our violation of the adjusted EBITDA covenant for those months. The terms of the Second Loan Agreement require that we maintain our common stock’s listing on the NASDAQ Global Market. We received a notice from NASDAQ that our common stock would be suspended from trading on the NASDAQ Global Market as of the opening of business on March 28, 2008 and would be subsequently delisted as a result of our failure to comply with NASDAQ’s Minimum Bid Price Rule unless we request an appeal of the staff’s determination. We have requested a hearing to appeal the staff’s determination.
We also granted warrants to the holders of Term Loan B to purchase 3.1 million shares of our common stock at a price equal to a 5% premium above the weighted average price of our common stock for the seven trading days following November 20, 2006. Based on that formula, the exercise price of the warrants was set at $1.3638 per share. The warrants are exercisable for a period of seven years following November 20, 2006. We agreed to file a registration statement with the SEC covering the resale of the shares issuable upon the exercise of the warrants and to use our best efforts to have the registration statement declared effective by the SEC no later than May 18, 2007. However, we were unable to file the registration statement by May 18, 2007 because we filed our Annual Report on Form 10-K for 2006 and our Quarterly Report on Form 10-Q for the first quarter of 2007 late. We expected to enter into further agreements requiring registration of our securities, and did so in February 2008. As soon as reasonably possible, we plan to file a registration statement covering the shares issuable upon exercise of the November 2006 warrants, shares issuable upon exercise of a warrant issued in February 2008 to LC Capital Master Fund, Ltd. and any other securities that we issue in the near future that require registration. Under the terms of the registration rights agreement, the warrant holders can seek damages due to our inability to file the registration statement. We have not received any demands from the warrant holders to file the registration statement as of the date of this report; we plan to file the registration statement as soon as reasonably practicable. Because the present value of the cash flows under the terms of the revised debt instruments were less than 10% different than the present value of the remaining cash flows under the terms of the original instruments, we accounted for the restructuring of our loans as a modification of the previously outstanding debt. Accordingly, we charged to expense the legal fees we incurred and recorded the fair value of the warrants and loan fees as deferred financing costs.
We estimated the total fair value of the warrants issued to the holders of Term Loan B to be $2.8 million using the Black-Scholes valuation model. We recorded the fair value of the warrants and $1.0 million of loan fees incurred from our lenders in connection with the restructuring of our loans in November 2006 as additional deferred financing costs. These costs, together with $2.8 million of previously unamortized deferred financing costs associated with the credit facility established in June 2006, aggregated $6.6 million. In connection with the early payment of most of our debt in January 2007, substantially all of the remaining unamortized deferred financing costs were charged to expense as a loss on early extinguishment of debt in the first quarter of 2007.
As discussed further in Note 11, during the first six months of 2007 we sold our Canadian, United Kingdom and German ATM businesses and our United States and Canadian photocopy business and used $98.6 million from the proceeds of those sales to make principal and interest payments under our financing agreements with GSO Origination Funding Partners and other lenders. These payments repaid all of our liability under the First Lien Credit Agreement, the UK Facility Agreement and Term Loan A and most of Term Loan B. Following these payments, as of December 31, 2007, the only remaining balance under our term loans and line of credit was $2.1 million on our Term Loan B which is due in June 2012.
The borrowings pursuant to Term Loan B are collateralized by substantially all of our assets and the assets of our subsidiaries, and by a pledge of the stock of our United States subsidiaries and 65% of the stock of our foreign subsidiaries.
Because we are uncertain whether we can comply with all of the terms of the restructured loan, the entire balance of the loan has been classified as a current liability on our balance sheet.
Vault Cash Agreement
Because there are cross-default provisions in TRM Inventory Funding Trust’s Loan and Servicing Agreement, if we fail to comply with the covenants of our restructured loan agreements and are declared to be in default by GSO Origination Funding Partners LP and other lenders, we may be declared in default of the provisions of the Loan and Servicing Agreement as well, and the lender may be able to demand payment. Therefore, the Trust’s debt is classified as a current liability and the vault cash is classified as a current asset on our consolidated balance sheet.
Settlement Agreement
In November 2007, we entered into a settlement agreement with Notemachine Limited, relating to the sale to Notemachine of our United Kingdom and German ATM businesses in January 2007. Pursuant to the settlement agreement, we agreed to repay £3,250,000 ($6.4 million using exchange rates as of December 31, 2007) in full and final settlement of claims by Notemachine relating to the sale. Payment terms under the settlement agreement were: £571,000 upon signing, £33,000 (interest only) in December 2007, £625,000 in January 2008, and 36 monthly payments of £71,212, including interest at 15% per annum, commencing February 1, 2008. The settlement agreement requires us to pay the remaining outstanding balance to Notemachine from the proceeds of any debt or equity financing, to the extent that proceeds are available following payment of any debt with prior or superior liens, including Term Loan B.
We paid the November and December 2007 payments as scheduled, but paid only £250,000 in January. The remainder of the payment scheduled in January 2008 was paid in February 2008 with proceeds from the bridge loan described in the following paragraphs.
Bridge Loan
In February 2008, we entered into a Securities Purchase Agreement with LC Capital Master Fund, Ltd., as lender and Lampe Conway & Co., LLC, as administrative agent, pursuant to which we borrowed $1 million. £380,000 from the proceeds of the loan was used to pay the remainder of the January 2008 payment due to Notemachine, together with interest on the unpaid balance. The loan bears interest equal to adjusted LIBOR (as defined in the Securities Purchase Agreement) plus (i) 5% for each interest period for which we pay interest in cash or (ii) 15% for each interest period for which we do not pay interest in cash. The Securities Purchase Agreement does not allow us to pay interest in cash until our Term Loan B has been paid in full. The loan matures on the earliest of December 6, 2012 or immediately following our repayment of Term Loan B.
In connection with the Securities Purchase Agreement, we granted a warrant to LC Capital Master Fund, Ltd., to purchase up to 2,500,000 shares of our common stock at an exercise price initially equal to $.40 per share, subject to adjustment for any recapitalizations, stock combinations, stock dividends and stock splits. The warrants are exercisable at any time and expire on February 8, 2015. We have agreed to register the shares subject to the warrants.
7. Income Taxes
The components of income tax expense (benefit) are as follows (in thousands):
Income tax expense (benefit) has been allocated as follows (in thousands):
Deferred tax assets (liabilities) are comprised of the following components (in thousands):
We have established a valuation allowance to reduce our deferred tax assets to the amount that we believe we will realize. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, during 2006 we determined that we may not realize all or part of our net deferred tax assets in the future, and, accordingly, we have recorded a full valuation allowance against our net deferred tax assets. If we determine that we will realize deferred tax assets in the future, we will increase income in the period in which we make the determination.
The effective tax rate for income (loss) from continuing operations differs from the federal statutory tax rate as follows:
Non-deductible expenses primarily consist of differences between expense for stock-based compensation and the deduction for stock-based compensation for United States tax purposes, 50% of meals and entertainment that are not deductible for United States tax purposes and certain intercompany interest amounts.
As of December 31, 2007, we have net operating loss carryforwards of approximately $39 million available to offset future taxable income for United States federal income tax purposes which expire in the years 2020 through 2027. The tax benefit of net operating losses of approximately $145,000, relating to the benefit of options exercised, when and if realized, will be credited directly to common stock. Utilization of our United States net operating loss carryforwards may be subject to certain limitations in the event of a change in control of the Company. Our United States federal income tax returns for the years 2004-2007 are subject to examination and adjustment by the Internal Revenue Service.
As of December 31, 2007, our Canadian subsidiary has net operating loss carryforwards of approximately $15 million available to offset future taxable income in Canada which expire in the years 2009 through 2017. However, we have sold the assets of our Canadian subsidiary, and it no longer has any operations.
8. Shareholders’ Equity
Preferred Stock
On June 24, 1998, we 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 $19.8 million. Warrants to purchase 54,000 shares were exercised in 2005, and the remaining warrants expired unexercised.
Each share of Series A Preferred stock was convertible at any time at the option of the holder into 0.7499997 of a share of common stock. In addition, each share of preferred stock was to be automatically converted into 0.7499997 shares of common stock if the price of common stock was at least $20.00 for a period of 90 consecutive days. On March 5, 2005, this condition was satisfied. As a result, as of that date, each share of our Series A preferred stock was converted into 0.7499997 of a share of our common stock, leaving no Series A preferred stock remaining issued and outstanding.
Repurchase of Common Stock
In the fourth quarter of 2005 we announced that our Board of Directors had authorized the repurchase of shares of our common stock for up to $20.0 million. No shares were repurchased in 2006 or 2007. Any such repurchases would require approval from our lenders.
Issuance of Common Stock
During the fourth quarter of 2005, we entered into a Share Purchase Agreement under which we sold 2,778,000 unregistered shares of common stock for $14.54 per share. The sales proceeds, net of placement agent fees and other costs, were $38.2 million. We filed a resale registration statement with respect to shares issued in the transaction. The registration statement was declared effective on December 29, 2005.
Common Stock Warrants
On November 20, 2006, we granted to the holders of our Term B loan warrants to purchase 3,072,074 shares of common stock at $1.3638 per share. These warrants expire in November 2013 (see Note 6).
In February 2008, we granted a lender a warrant to purchase up to 2,500,000 shares of our common stock at an exercise price initially equal to $.40 per share. This warrant expires on February 8, 2015 (see Note 6).
Common Stock Options and Restricted Stock Grants
Non-cash stock compensation expense for 2006 and 2007 is included primarily in selling, general and administrative expense and includes amortization of stock options granted during 2006 and 2007 and previously unvested stock option grants and amortization of restricted shares of common stock granted to our directors and certain executive officers. During 2006 we accelerated the vesting of certain options granted to our former President and Chief Executive Officer and our former Executive Vice President. We recorded non-cash compensation expense of $685,000 in connection with these modifications during 2006.
Non-cash compensation expense (in thousands):
We have reserved 3,700,000 shares of common stock for issuance under our stock incentive plans. Under our plans we are authorized to issue incentive and nonqualified stock options and restricted shares of common stock. All options terminate no more than ten years from the date of grant and vest over various schedules ranging up to five years. We issue new shares upon exercise of options.
A summary of stock option activity during 2006 and 2007 follows:
During the year ended December 31, 2006, options to purchase 306,890 common shares at prices from $1.15 to $6.50 were exercised, including options to purchase 285,140 shares that were exercised on a cashless basis as allowed under the Company’s Omnibus Stock Option Plan. As a result of the exercise of options during 2006, we issued 234,832 common shares. During the year ended December 31, 2007, options to purchase 20,375 common shares at prices from $1.15 to $1.80 were exercised, including options to purchase 4,375 shares that were exercised on a cashless basis. As a result of the exercise of options during 2007, we issued 17,718 common shares.
As of December 31, 2007, options to acquire 213,292 shares at a weighted average exercise price of $5.51 per share were exercisable. As of December 31, 2007, there was approximately $1.6 million of total unrecognized compensation cost related to share-based compensation arrangements granted under our stock award plans that are expected to vest. We expect to recognize that cost over a weighted average period of 1.9 years.
We did not grant any options during 2005. The weighted-average per share grant date fair value of options granted during 2006 and 2007 was $2.43 and $.89, respectively. The total intrinsic value of options exercised during 2005, 2006 and 2007 was $1.7 million, $1.6 million and $30,000, respectively.
Options outstanding that were fully vested or expected to vest as of December 31, 2007:
For purposes of the pro forma calculations for 2005 in the table set forth in Note 1 and to determine the amount of compensation expense beginning in 2006, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing method. The weighted average fair value of options granted during 2006 and 2007 as calculated by the Black-Scholes model, and the assumptions used are shown in the following table. No options were granted in 2005.
We have issued shares of restricted stock to our directors and certain officers. The restricted shares vest annually over periods of three to four years. A summary of restricted stock activity during 2006 and 2007 follows:
The total fair value of restricted shares vested during 2006 and 2007 was $30,000 and $148,000, respectively.
9. Profit Sharing Retirement Plan
We have a profit sharing retirement plan for eligible employees. The plan has profit sharing and 401(k) components. Our 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 pre-tax basis, up to the maximum allowed under the Internal Revenue Code.
No amounts were accrued or paid for profit sharing for 2005, 2006 and 2007. We paid matching contributions of $120,000, $129,000 and $65,000 to our defined contribution plans for the years ended December 31, 2005, 2006, and 2007, respectively.
10. Commitments and Contingent Liabilities
We have operating leases, primarily for office and warehouse space, with expiration dates through 2010. Minimum lease payments for our operating leases are: 2008 - $361,000; 2009 - $352,000; and 2010 - $105,000.
Rental expense included in continuing operations for 2005, 2006 and 2007 was $552,000, $441,000, and $296,000, respectively.
As of December 31, 2007, Wells Fargo Foothill Inc. had issued a letter of credit on our behalf in the amount of $3.1 million to secure our performance in connection with our vault cash agreement.
We guaranteed certain equipment lease payments for TRM Copy Centres (UK) Ltd. when that company was our subsidiary. In June 2006 we sold all of the outstanding shares of that subsidiary to an unrelated third party. In October 2007 (the most recent date for which we have information from the lessor) the remaining balance payable under the leases we guarantee was £331,000 (approximately $655,000 using exchange rates as of December 31, 2007).
11. Discontinued Operations and Sales of Businesses
During 2006 and 2007 we sold all of our photocopy operations and all of our ATM operations outside the United States. As a result, the operations of our Canadian, United Kingdom and German ATM businesses and our Canadian, United Kingdom and United States photocopy businesses are shown as discontinued operations in the accompanying statements of operations for all periods presented.
In June 2006 we sold all of the outstanding shares of our United Kingdom photocopier subsidiary for £2.32 million (approximately $4.3 million using exchange rates as of the date of sale). We recorded a gain on the sale of $1.9 million, including recognition in income of foreign currency translation adjustments of $1.5 million that had previously been recorded in other comprehensive income.
Effective January 1, 2007, we sold substantially all of the assets of our Canadian ATM business for approximately Canadian $13.0 million (U.S. $11.1 million using exchange rates as of January 12, 2007). We have recorded a gain on the sale of $2.3 million.
Effective January 24, 2007, we sold all of the shares of our United Kingdom ATM subsidiary that owned our ATM businesses in the United Kingdom and Germany for approximately £43.2 million (approximately $84.7 million using exchange rates as of January 24, 2007), subject to certain adjustments. In November 2007 we entered into a settlement agreement pursuant to which we agreed to repay £3,250,000 as a final settlement of all claims under the sale and purchase agreement. In December 2007 we paid £571,000 of this liability. Payment terms for the remaining £2.7 million are described in Note 6. After taking into account the settlement agreement, we have recorded a gain on the sale of $4.8 million.
On January 29, 2007, we sold substantially all of the assets of our United States photocopy business for approximately $8.8 million. We have recorded a gain on the sale of approximately $65,000.
On June 19, 2007, we sold substantially all of the assets of our Canadian photocopy business for approximately Canadian $615,000 (approximately U.S. $582,000 using exchange rates as of June 19, 2007) in cash and assumption of liabilities, plus 50% of the cash flows from the operation of the business for seven years. We recorded a gain on the sale of approximately $2.7 million, substantially all due to recognition of currency exchange gains previously recorded in other comprehensive income.
In connection with these sales, we made various representations and warranties and/or provided indemnities. The purchasers may make (and, in the case of the sale of United Kingdom ATM subsidiary, have made) claims against us relating to the representations, warranties or indemnities. Other than the purchaser of our former United Kingdom ATM subsidiary referred to above, none of the purchasers are pursuing claims against us.
The aggregate of the sales prices for the businesses we sold in the first six months of 2007 was approximately $105 million, before selling costs. We used $98.6 million of the net cash proceeds of $102.4 million to make principal and interest payments on our debt. The balance was used to fund escrow deposits and deposits with our bank to collateralize outstanding letters of credit. As of December 31, 2007, $3.1 million was held by our bank as collateral for outstanding letters of credit, and is reported as restricted cash on our balance sheet.
Because the terms of our financing agreements required us to use substantially all of the net proceeds from the sales of businesses to pay debt, we have allocated interest expense to discontinued operations based upon the lesser of the amount repaid or debt outstanding. No general corporate overhead has been allocated to discontinued operations.
Net revenues of discontinued operations through the dates of sale (in thousands):
Pretax income (loss) from discontinued operations through the dates of sale (in thousands):
Subsequent to the sales of our United States photocopy and Canadian photocopy and ATM businesses, we have resolved certain contingencies associated with those sales. In connection with the resolution of those contingencies and our settlement of claims by the purchaser of our United Kingdom ATM business, we recorded additional losses on the sales of discontinued operations of $221,000 in the second quarter of 2007, $1.6 million in the third quarter of 2007 and $213,000 in the fourth quarter of 2007.
A charge of $2.7 million is included in discontinued operations for 2007 to write down the carrying amount of the assets of the Canadian photocopy business to their estimated fair value less cost to sell.
Substantially all of the assets and liabilities of our United States photocopy business and our ATM businesses in Canada, the United Kingdom and Germany, which were sold in January 2007, are presented in the accompanying balance sheet as of December 31, 2006, as held for sale. The carrying amounts of assets reported as held for sale and related liabilities as of December 31, 2006 were as follows (in thousands):
12. Concentrations and Related Party Transactions
We have purchased most of our ATMs from two suppliers, NCR Corporation and Triton Systems. In addition, NCR Corporation provides maintenance services for our company-owned installed ATMs. In 2005 we purchased equipment, parts and services from NCR Corporation in the amount of $4.8 million and from Triton Systems in the amount of $5.0 million. In 2006 we purchased equipment, parts and services from NCR Corporation aggregating $2.7 million and from Triton Systems aggregating $5.5 million. In 2007 we purchased equipment, parts and services from NCR Corporation aggregating approximately $1.6 million and from Triton Systems aggregating approximately $1.2 million. At December 31, 2007 we had $273,000 in accounts payable to NCR Corporation ($325,000 at December 31, 2006). At December 31, 2007 we had $268,000 in accounts payable to Triton Systems ($2.3 million at December 31, 2006).
In connection with the acquisition of the eFunds ATM business, we entered into a Master Services Agreement with eFunds, (the “MSA”). The MSA had an initial term of five years. In December 2007, we entered into an agreement in principle with eFunds to terminate the MSA except for processing services, effective March 31, 2008. We incurred fees for services provided by eFunds of $6.4 million in 2005, $5.7 million in 2006 and $3.2 million in 2007. At December 31, 2007, we owed eFunds $3.3 million ($2.4 million at December 31, 2006). The December 31, 2007 balance owing to eFunds includes $2.5 million pursuant to the agreement to terminate the MSA (see Note 5). The $2.5 million payment is due upon execution of a mutually agreeable settlement and release agreement.
13. Segment Reporting
Prior to the third quarter of 2006 we reported our operations in two segments - ATM and Photocopy. During the third quarter of 2006 our President and Chief Executive Officer began regularly reviewing operating results of our businesses on a geographical basis. Accordingly, we have modified our segment disclosures to reflect this change in our reporting practices. As a result of modifying our segment disclosures, during the third quarter of 2006 we reallocated goodwill of $119.7 million previously reported as an asset of our ATM segment to the new ATM segments as follows (in thousands):
We reallocated the goodwill based on the estimated relative fair values of the segments. See Note 14 regarding impairment of goodwill.
As of September 30, 2006 we had the following six segments: Automated Teller Machine (“ATM”) operations in the United
States, Canada, the United Kingdom and Germany; and photocopy operations in the United States and Canada. The ATM segments owned and/or operated ATMs, sold ATM machines, and serviced equipment for others. The photocopy segments owned and maintained self-service photocopiers in retail establishments.
In June 2006 we sold our United Kingdom photocopier subsidiary. In January 2007 we sold our United Kingdom ATM subsidiary that owned our ATM businesses in the United Kingdom and Germany, and we sold substantially all of the assets of our United States photocopier and Canadian ATM businesses. In June 2007 we sold substantially all of the assets of our Canadian photocopy business. As a result of these sales, we have presented the results of operations of our Canadian, United Kingdom and German ATM businesses and our Canadian, United Kingdom and United States photocopy businesses as discontinued operations for all periods presented in the accompanying statements of operations, and have excluded those operations from the segment information in this footnote. General corporate overhead previously charged to the discontinued operations has been reallocated to our remaining segment.
As a result of the foregoing sales, we now have only one operating segment - ATM operations in the United States. Our United States ATM business owns and/or operates ATM machines, sells ATM machines and services equipment for others.
Substantially all of our revenues from continuing operations for 2005, 2006 and 2007 were derived from sales to customers in the United States. As of December 31, 2007, substantially all of our assets were located in the United States.
All revenues are attributed to external customers. One ATM customer accounted for 16%, 20% and 25% of our net sales from continuing operations in 2005, 2006 and 2007, respectively. A second ATM customer accounted for 8%, 9% and 11% of our net sales from continuing operations in 2005, 2006 and 2007, respectively.
Information about our assets by segment and geographic location as of December 31, 2005 and 2006 follows (in thousands):
14. Impairment Charges
During the third quarter of 2006 we recorded non-cash charges of $96.1 million for the impairment of certain assets, of which $43.3 million is included in continuing operations and $52.8 million is included in discontinued operations.
•
ATM goodwill. Because of continuing decreases in sales and operating margins in the ATM segments and other factors, we re-evaluated our financial forecasts in the third quarter of 2006 and concluded that it was necessary to review goodwill in our United States, Canadian and United Kingdom ATM segments for impairment of value. The review, consisting of a comparison of the carrying value of the goodwill to its implied fair value, resulted in impairment charges of $20.4 million in the United States, $5.8 million in Canada and $17.5 million in the United Kingdom. Our estimate of the implied fair value of the United States ATM segment’s goodwill was based on the quoted market price of our common
stock and the discounted value of estimated future cash flows over a six-year period with residual value, using an 11% discount rate. Our estimate of the implied fair value of the Canadian and United Kingdom ATM segments’ goodwill was based on the estimated selling prices of those ATM segments.
•
Finite-lived intangible assets associated with the ATM businesses. Because of faster than anticipated attrition of customer contracts, operating losses and revised financial forecasts, we concluded that it was necessary to review the carrying value of the long-lived assets of our United States, Canadian and United Kingdom ATM segments. In that review, we determined that the future cash flows from those assets were not adequate to recover those assets, and we recorded impairment charges of $22.9 million in the United States, $272,000 in Canada and $7.7 million in the United Kingdom, based on comparisons of the carrying amounts of the assets to their estimated fair values. Our estimate of the fair value of the United States assets was based on the discounted values of estimated future cash flows over a seven-year period using an 11% discount rate. Our estimates of the fair value of the Canadian and United Kingdom assets were based on the estimated selling prices of those ATM segments.
•
Photocopy equipment in the United States and Canada. Because of operating losses in our United States and Canadian photocopy segments and revised financial forecasts, we concluded that it was necessary to review the carrying value of those segments’ long-lived assets, which consist almost entirely of photocopy equipment. As a result, we determined that future cash flows from the photocopy segments were not adequate to recover the carrying value of that equipment, and we recorded impairment charges of $18.7 million in the United States and $2.7 million in Canada based on a comparison of the carrying amounts of these assets to their estimated fair values. Our estimates of the fair values of the asset groups were based on the estimated selling price of the United States photocopy segment and the discounted value of estimated future cash flows over a ten-year period using an 11% discount rate for the Canadian photocopy segment.
15. Litigation and Potential Claims
We are a defendant in various actions that have arisen in the normal course of business. We believe that the ultimate disposition of these matters will not have a material adverse effect on our business, financial condition or results of operations.
As described in Note 11, in 2006 and 2007 we sold our ATM businesses in the United Kingdom, Germany and Canada, and our photocopy businesses in the United Kingdom, United States and Canada in five separate transactions. In connection with these sales, we have made various representations and warranties and provided indemnities. The purchasers may make claims against us relating to the representations, warranties or indemnities, or provisions for adjustment of the sales prices, and those claims could be substantial. The purchaser of our United Kingdom and German ATM businesses asserted claims pursuant to the sales agreement, and in November 2007, we entered into a settlement agreement described further in Notes 6 and 11 pursuant to which we agreed to repay a portion of the purchase price.
During the second quarter of 2005 we reached a final settlement agreement in the amount of $700,000 with our directors’ and officers’ liability insurer to obtain reimbursement of monies we spent to settle litigation among certain former directors and shareholders, parties related to those former directors and shareholders and ourselves. We received the settlement payment of $700,000 and included it in other expense (income), net during the second quarter of 2005.
16. Corporate Restructuring, Equipment Write-downs and Inventory Write-down
In connection with the corporate restructuring plan we announced in November 2006 and the subsequent sales of a substantial portion of our operations, we have made significant staff reductions, including termination of all of our United States field service employees. We have also vacated leased warehouse and office space occupied by the terminated employees. During the first six months of 2007 we paid severance of $167,000 to terminated employees. During the first quarter of 2007 we vacated warehouse and office space in eleven United States locations. The vacated space was leased under leases with remaining terms up to seven years. We recorded a liability of $796,000 as of March 31, 2007, which was the estimated fair value of the costs that we expect to incur without any economic benefit, and we charged that amount to expense in the first quarter of 2007. We estimated the fair value of the liability based on the discounted value of the remaining lease payments, reduced by estimated sublease payments that we reasonably expect could be obtained for use of the properties.
The costs for both severance payments and vacated leases are included in restructuring charges in our statement of operations for 2007.
In the third quarter of 2007 contracts with three merchants that had TRM-owned ATMs in their stores were terminated, and we began removing those ATMs. In part because we no longer have field service technicians on our staff, we decided that we would not be refurbishing, upgrading and redeploying these ATMs, and we arranged to sell them to third parties. In addition, based on a review of our ATMs in storage, we decided that it would not be cost-effective to refurbish and upgrade most of our stored machines to current standards. As a result, in the third quarter of 2007 we charged $1.1 million to equipment write-offs to write down the equipment to be sold to its estimated net realizable value.
Additionally, since we no longer have field service technicians on our staff, we are no longer using our inventory of parts and used ATMs in the normal course of business, and we have decided to sell or otherwise dispose of that inventory. As a result, in the third quarter of 2007 we charged $270,000 to cost of sales to write down our inventories to their estimated net realizable value.
17. Quarterly Financial Information (Unaudited)
In the second quarter of 2006 we established a new credit facility which we used to refinance our existing term loan and lines of credit, incurring a $3.5 million loss on early extinguishment of debt of which $3.1 million is included in continuing operations. Also in the second quarter of 2006 we sold our United Kingdom photocopier subsidiary and recorded a gain on the sale of $2.2 million.
As discussed in Note 14, during the third quarter of 2006 we recorded impairment charges of $96.1 million for the impairment of equipment, goodwill and finite-lived intangible assets, of which $43.3 million is included in continuing operations and $52.8 million is included in discontinued operations.
The loss from discontinued operations for the fourth quarter of 2006 includes a charge of $1.7 million for estimated value added taxes.
As discussed in Note 11, during the first quarter of 2007 we sold our Canadian, United Kingdom and German ATM businesses and our United States photocopy businesses. We recorded a net gain from these sales of $9.8 million in the first quarter of 2007. We used a substantial portion of the proceeds from the sale of these businesses to repay debt, resulting in a loss on early extinguishment of debt of $4.0 million in the first quarter of 2007. In the second quarter of 2007 we sold our Canadian photocopy business.
As discussed in Note 16, we recorded restructuring charges of $963,000 in the first quarter of 2007, and we recorded equipment and inventory write-downs totaling $1.4 million in the third quarter of 2007.
Subsequent to the sales of our United States photocopy and Canadian photocopy and ATM businesses, we have resolved certain contingencies associated with those sales. In connection with the resolution of those contingencies and our revised estimates and of the ultimate settlement of claims by the purchaser of our Untied Kingdom ATM business, we recorded additional losses on the sales of discontinued operations of $221,000 in the second quarter of 2007, $1.6 million in the third quarter of 2007, and $213,000 in the fourth quarter of 2007.
A charge of $2.7 million is included in discontinued operations for the first quarter of 2007 to write down the carrying amount of the assets of our Canadian photocopy business to their estimated fair value less cost to sell.
In the fourth quarter of 2007 we entered into an agreement with eFunds Corporation terminating our Master Services Agreement. In connection with the termination of that agreement we agreed to make a payment to eFunds that was approximately $2.0 million less than the liability we had recorded for services performed under the agreement. The $2.0 million was credited to expense in the fourth quarter of 2007.
In the fourth quarter of 2007 we closed the bank accounts of our Canadian subsidiary and transferred the cash balances to a United States bank account, substantially liquidating the Canadian subsidiary. In connection with the substantial liquidation of that subsidiary we recognized in income from discontinued operations $2.7 million of currency exchange gains previously recorded in other comprehensive income.
As discussed in Note 3, in the fourth quarter of 2007 we accrued a prepayment fee of $750,000 payable to the lender under TRM Inventory Funding Trust’s Loan and Servicing Agreement. The fee is included in our 2007 loss on early extinguishment of debt.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934, as amended, reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15(d)-15(e) under the Exchange Act) as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2007, our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner.
Management’s Report on Internal Control Over Financial Reporting
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934 as amended. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2007 using criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our management has concluded that our internal control over financial reporting was effective as of December 31, 2007.
Remediation of Previously Disclosed 2006 Material Weaknesses
We have remediated the following material weaknesses first reported as of December 31, 2006:
Ineffective controls over segment disclosures and impairment analysis of goodwill and long-lived assets. Effective beginning in the fourth quarter of 2006, each quarter our senior accounting management prepares a summary and analysis of changes in our operations, organization and financial reporting practices that might affect our operating segments or reporting units, including a conclusion on the appropriateness of the operating segments and reporting units we have identified. Because of business sales, we currently have only one operating segment. Further, whenever we conclude that any of our long-lived assets must be tested for recoverability, our senior accounting management prepares a summary of the significant assumptions and methods used in the resulting analysis. These summaries are reviewed by our Chief Financial Officer.
Inadequate staffing in the United Kingdom. In January 2007 we sold all of our operations in the United Kingdom.
Based on our testing of our enhanced procedures relating to segment disclosures and impairment analysis, and the sale of all of our operations except our United States ATM operations, our management has determined that, as of December 31, 2007, we have remediated the material weaknesses in internal control over financial reporting as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006.
Changes in Internal Control Over Financial Reporting
There were no changes in internal control over financial reporting during the fourth quarter of 2007.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item will be set forth in our definitive proxy statement with respect to our 2008 annual meeting of shareholders to be filed not later than 120 days after December 31, 2007 and is incorporated herein by this reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be set forth in our definitive proxy statement with respect to our 2008 annual meeting of shareholders to be filed not later than 120 days after December 31, 2007 and is incorporated herein by this reference.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item will be set forth in our definitive proxy statement with respect to our 2008 annual meeting of shareholders to be filed not later than 120 days after December 31, 2007 and is incorporated herein by this reference.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be set forth in our definitive proxy statement with respect to our 2008 annual meeting of shareholders to be filed not later than 120 days after December 31, 2007 and is incorporated herein by this reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item will be set forth in our definitive proxy statement with respect to our 2008 annual meeting of shareholders to be filed not later than 120 days after December 31, 2007 and is incorporated herein by this reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report
1. Financial Statements
2. Financial Statement Schedules:
II - Valuation and Qualifying Accounts
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:
(a) The exhibits listed below are filed as part of this report
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 March 31, 2008.
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on March 31, 2008 on behalf of the Registrant and in the capacities indicated:
EXHIBIT INDEX
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 2005, 2006 and 2007
(In thousands)
Reclassified as assets held for sale