FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-19657
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TRM CORPORATION
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(Exact name of registrant as specified in its charter)
Oregon 93-0809419
------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5208 N.E. 122nd Avenue
Portland, Oregon 97230
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(Address of principal executive offices) (Zip Code)
(503) 257-8766
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
CLASS OUTSTANDING AT SEPTEMBER 30, 1998
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Common Stock 7,065,784
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TRM CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Audited) (Unaudited)
June 30, September 30,
1998 1998
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,177 $ 17,287
Accounts receivable, net 7,423 7,481
Income tax receivable 949 335
Inventories 3,809 3,488
Prepaid expenses and other 1,240 1,677
--------------- ---------------
Total current assets 33,598 30,268
Equipment and vehicles, less accumulated depreciation 41,624 42,761
Other assets 44 138
--------------- ---------------
$ 75,266 $ 73,167
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks in transit $ 553 $ 889
Accounts payable 7,005 4,150
Accrued expenses 4,103 3,734
--------------- ---------------
Total current liabilities 11,661 8,773
Deferred income taxes 3,545 3,697
--------------- ---------------
Total liabilities 15,206 12,470
--------------- ---------------
Stockholders' equity:
Preferred stock, no par value. Authorized
5,000 shares; 1,778 shares issued
and outstanding 19,853 19,803
Common stock, no par value. Authorized
50,000 shares; issued and
outstanding 7,057 and 7,066 shares 18,617 18,681
Retained earnings 21,697 21,777
Accumulated other comprehensive income (107) 436
--------------- ---------------
Total stockholders' equity 60,060 60,697
--------------- ---------------
$ 75,266 $ 73,167
=============== ===============
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TRM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended
September 30,
-----------------------------
1997 1998
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<S> <C> <C>
Sales $ 16,238 $ 15,848
Less discounts 2,570 2,679
---------- ----------
Net sales 13,668 13,169
Cost of sales 6,829 6,956
---------- ----------
Gross profit 6,839 6,213
Selling, general and administrative
expense 5,066 5,602
---------- ----------
Operating income 1,773 611
Other (income) expense:
Interest 12 (208)
Other, net 53 54
---------- ----------
Income before income taxes 1,708 765
Provision for income taxes 675 281
---------- ----------
$ 1,033 $ 484
Preferred stock dividends -- (404)
---------- ----------
Income available to common stockholders $ 1,033 $ 80
---------- ----------
Basic net income per share
Shares outstanding 6,953 7,065
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Net income per share $ 0.15 $ 0.01
========== ==========
Diluted net income per share
Shares outstanding 7,355 7,592
========== ==========
Net income per share - Assuming Dilution $ 0.14 $ 0.01
========== ==========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TRM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands)
Accumulated
Other
Preferred Stock Common Stock Retained Comprehensive
Shares Amount Shares Amount Earnings Income Total
--------- --------- --------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 1,778 $ 19,853 7,057 $ 18,617 $ 21,697 $ (107) $ 60,060
Exercise of stock options -- -- 3 20 -- -- 20
Issuance of stock to employees -- 6 44 -- -- 44
Cost of issuing preferred stock (50) -- -- -- (50)
Preferred stock dividends -- -- -- -- (404) -- (404)
Foreign currency
translation adjustment -- -- -- -- -- 543 543
Net income -- -- -- -- 484 -- 484
--------- --------- --------- --------- ----------- ------------- ---------
Balance at September 30, 1998 1,778 $ 19,803 7,066 $ 18,681 $ 21,777 $ 436 $ 60,697
========= ========= ========= ========= =========== ============= =========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TRM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
September 30,
-----------------------------
1997 1998
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<S> <C> <C>
Operating activities:
Net income $ 1,033 $ 484
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 1,369 1,789
Loss on disposal of equipment
and vehicles 3 21
Changes in items affecting operations:
Accounts receivable 239 (58)
Inventories (357) 321
Income tax receivable -- 614
Prepaid expenses and other (489) (437)
Accounts payable 790 (2,855)
Accrued expenses (80) (369)
Deferred income tax 234 152
----------- -----------
Total operating activities 2,742 (338)
----------- -----------
Investing activities:
Proceeds from sale of equipment 130 444
Capital expenditures (1,392) (2,848)
Other 2 (94)
----------- -----------
Total investing activities (1,260) (2,498)
----------- -----------
Financing activities:
Change in checks in transit, net (683) 336
Principal payments on long-term debt 84 (3,672)
Proceeds from long-term debt -- 3,672
Cost of issuing preferred stock -- (50)
Net proceeds from issuance of common stock 259 64
Dividends on preferred stock -- (404)
----------- -----------
Total financing activities (340) (54)
----------- -----------
Effect of exchange rate changes (671) --
----------- -----------
Net increase (decrease) in cash and
cash equivalents 471 (2,890)
Cash and cash equivalents at beginning
of period 2,528 20,177
----------- -----------
Cash and cash equivalents at end of period $ 2,999 $ 17,287
=========== ===========
</TABLE>
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<PAGE>
TRM CORPORATION
Notes to Consolidated Financial Statements
1. Interim Financial Data:
The condensed financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and reflect all adjustments, consisting
only of normal recurring adjustments, which, in the opinion of management,
are necessary for a fair statement of the results of the interim periods.
These condensed interim financial data should be read in conjunction with
the Company's latest annual report to shareholders. Certain
reclassifications have been made to prior year amounts to conform to
current year presentation.
2. Net Income Per Share:
Basic and diluted net income per share are based on the weighted average
number of common shares outstanding during each year, with diluted net
income per share including the effect of potentially dilutive common
shares. For the three months ended September 30, 1997 and 1998, the
weighted average number of common shares for basic net income per share
computations was 6,953,000 and 7,065,000, respectively. For diluted net
income per share, 402,000 and 491,000 shares were added to weighted average
shares outstanding for the three months ended September 30, 1997 and 1998,
respectively. The shares represent potential dilution for stock options
outstanding and the conversion of preferred stock, calculated using the
treasury stock method. In calculating basic net income per share, dividends
for preferred stock are deducted to arrive at income available for common
stockholders. For diluted net income per share, the calculation does not
assume the conversion of preferred stock because the effect would be
antidilutive.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------
1997 1998
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<S> <C> <C>
Basic Net Income Per Share
Net income $ 1,033 $ 484
Net income effect of dividends on preferred stock 0 (404)
----------- -----------
Net income available to common stockholders $ 1,033 $ 80
=========== ===========
Weighted average number of common shares outstanding
during the period 6,953 7,065
=========== ===========
Basic net income per share $ 0.15 $ 0.01
=========== ===========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------
1997 1998
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<S> <C> <C>
Diluted Net Income Per Share
Net income $ 1,033 $ 484
Net income effect of dividends on preferred stock 0 (404)
----------- -----------
Net income available to common stockholders $ 1,033 $ 80
=========== ===========
Weighted average number of common shares outstanding
during the period 6,953 7,065
Incremental shares under stock compensation plans 402 491
Incremental shares related to convertible preferred stock 0 0
----------- -----------
Number of shares on which diluted net income per share
is calculated 7,355 7,592
=========== ===========
Diluted net income per share $ 0.14 $ 0.01
=========== ===========
</TABLE>
3. Inventories (in thousands):
<TABLE>
<CAPTION>
June 30, September 30,
1998 1998
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<S> <C> <C>
Paper $ 1,019 $ 769
Toner and developer 629 601
Parts 2,161 2,118
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$ 3,809 $ 3,488
=========== ===========
</TABLE>
4. Comprehensive Income:
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," which was required to
be adopted by TRM Corporation as of July 1, 1998. This change has been
reflected in the Consolidated Statement of Stockholders' Equity. The
adoption of this pronouncement does not result in a cumulative effect of
change in accounting principle.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------
1997 1998
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<S> <C> <C>
Net income $ 1,033 $ 484
Foreign currency translation adjustment (555) 543
----------- -----------
Comprehensive income $ 478 $ 1,027
=========== ===========
</TABLE>
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
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The Company has continued its strategy of installing new NextGen(TM)
photocopiers and of removing and disposing of under-performing photocopiers. As
expected, the number of TRM Copy Centers decreased from 34,796 to 33,349 from
June 30, 1997 to June 30, 1998. During the first three months of fiscal 1999 the
Company installed 1,381 NextGen(TM) photocopiers and removed 2,348 older
technology machines. These changes, coupled with normal customer business,
resulted in a net decrease of 1,236 TRM Copy Centers. As of September 30, 1998,
the Company had 32,113 TRM Centers.
Results of Operations
- ---------------------
Sales decreased by $400,000 (2.4%) to $15.8 million for first quarter of
fiscal 1999 from $16.2 million for the same quarter of fiscal 1998. The decrease
represents an 8.6% decrease in the number of billed units, offset by a 5.5%
increase in average net sales per unit. The Company intends to continue to
implement its strategy of installing thousands of NextGen(TM) photocopiers in
existing sites and attracting multi-site retail customers.
Sales discounts are the portion of revenue retained by retail customers,
which generally vary for individual retail customers depending on volume. Sales
discounts increased 4.2% as a percentage of sales, from 15.8% to 16.9% in the
comparable quarters. This reflects changes made in business agreements with new
customers. Multi-site retail customer agreements often involve larger discounts
in return for large numbers of customer sites, high copy volume and long-term
contractual commitments.
Cost of sales increased 1.9% compared to the prior quarter. Costs of field
labor decreased by $300,000, but was offset by increased costs of $440,000 for
photocopier machine depreciation. The increased photocopier depreciation is due
to the purchase and installation of the new Konica photocopier machines.
Selling, general and administrative costs increased by $536,000 (10.6%)
from $5.1 million in the prior year to $5.6 million in the current quarter.
Selling, general and administrative costs were 31.2% and 35.4% of sales for
first quarter fiscal 1998 and 1999, respectively. The increase reflects costs
related to developing the Company's new ATM Division, pre-selection software
consulting and related costs in connection with the Company's Year 2000 systems
enhancements, increased selling costs associated with multi-site retailer sales
and higher professional services costs.
Interest income/expense changed from $12,000 net interest expense in first
quarter of fiscal 1998 to $208,000 net interest income in the first quarter of
fiscal 1999. The increase in interest income is due to increased cash resulting
from the sale of Series A Preferred Stock in June 1998.
Impact of Year 2000
- -------------------
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any such software
programs may recognize a date using "00" as the year 1900 rather than the year
2000.
The Company relies on computer systems and software to operate its
business, including applications used in account maintenance, purchasing,
inventory management, finance and various administrative functions. Based on a
recent assessment, the Company determined that it will be required to modify or
replace significant portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company presently believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue will not pose significant
operations problems for its computer systems. However, if such
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<PAGE>
modifications and conversions are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Company.
This could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send customer invoices, or engage in similar normal business
activities.
Since December 1997, the Company has been actively engaged in becoming Year
2000 compliant. As of August 1998, sixty percent of the Company's hardware and
software system applications are Year 2000 compliant. The target date for full
compliance is June 30, 1999. The Company's efforts have been divided into three
phases. First, a Year 2000 discovery team was assembled to inventory all
hardware, operating systems and software applications and provide upgrade and/or
contingency recommendations. Second, all upgrade/contingency recommendations
were compiled into a project action plan. Of the twenty-two non-compliant
systems/applications identified, three have been upgraded or replaced, thirteen
more are due for implementation by December 31, 1998, and six more will be
replaced by an enterprise-wide information technology solution due to come on
line during the quarter ended June 30, 1999. Third and finally, the Company
re-prioritized existing information technology ("IT") projects to allocate
programming resources to the Company's Year 2000 Issue.
Independent of the Year 2000 project, the Company has initiated significant
systems upgrades to enhance performance and reliability of many of its
computer-based information systems. These upgrades will, as an additional
benefit, rectify certain identified Year 2000 issues. The total IT budget for
all systems activities is $1.5 million for fiscal 1999. Expenditures directly
related to Year 2000 issues are estimated to be approximately $350,000.
Expenditures for other planned systems upgrades, totaling $1,150,000, will
address certain Year 2000 issues as a corollary benefit to the Company, but have
been initiated primarily to enhance system reliability and capability. The
Company will utilize both internal and external resources to reprogram, or
replace, and test the software for the Year 2000 modifications. The Company
continues to manage total IT expenses by re-prioritizing or curtailing less
critical investments, incorporating Year 2000 readiness into previously planned
system enhancements and using existing staff to implement its Year 2000
modifications.
The Company intends to initiate communications with all of its significant
service providers, lenders, and large customers to determine the extent to which
the Company's interface systems are vulnerable in the event any of those third
parties fail to remedy their own Year 2000 Issues. However, there can be no
assurance that the systems of other companies on which the Company's systems
rely will be timely converted and will not have a material adverse effect on the
Company's business operations and financial conditions.
Contingency plans for systems scheduled for replacement include: (i)
upgrades and service packs from manufacturers of third-party software, and (ii)
dedicated programming time from internal Information Systems staff to produce
"Hot Fix" repairs to modify date integer fields and input masks to reflect long
integer format. These contingency plans would make the software usable until a
permanent solution is implemented. Currently, no other contingency plans have
been developed, but the Company will continually reassess its Year 2000
readiness and will revise its contingency plans, if deemed necessary.
New Accounting Standards
- ------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which established requirements for
disclosure of comprehensive income. The objective of SFAS No. 130 is to report
all changes in equity that result from transactions and economic events other
than transactions with owners. Comprehensive income is the total of net income
and all other non-owner changes in equity. SFAS No. 130 is effective for
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<PAGE>
fiscal years beginning after December 15, 1997. Reclassification of earlier
financial statements for comparative purposes is required. The Company has
adopted SFAS No. 130.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." This Statement established
standards for reporting information about operating segments in annual financial
statements. Operating segments are defined as components of an enterprise
evaluated regularly by the Company's senior management in deciding how to
allocate resources and in assessing performance. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. The Company does not believe it
will significantly change the Company's consolidated financial reporting
structure.
In March 1998, the American Institute of Certified Public Accountants
Accounting Standards Executive Committee issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1.") SOP 98-1 is applicable to all nongovernmental
entities and provides guidance on accounting for the costs of computer software
developed or obtained for internal use. SOP 98-1 is effective for fiscal years
beginning after December 15, 1998. The Company has not quantified the effect of
adoption of SOP 98-1.
Liquidity and Capital Resources
- -------------------------------
During the three months ended September 30, 1998, the Company used $338,000
in cashflows for operations due to a decrease of $2.9 million in accounts
payable relating to photocopier purchases. During the same period net working
capital decreased from $21.9 million at June 30, 1998 to $21.5 million at
September 30, 1998 (including cash and cash equivalents of $17.3 million). The
Company also has a $30.0 million bank line of credit, with no borrowings
outstanding at September 30, 1998. The Company was in compliance with all loan
covenants at September 30, 1998. This credit facility expires on April 1, 2000.
During the three months ended September 30, 1998, the Company funded
capital expenditures of $2.8 million from cash. Capital expenditures for the
quarter increased by $1.5 million over the same quarter in 1998 due to increased
purchases and installations of NextGen copiers totaling $2.7 million. Additional
expenditures of $89,000 and $84,000 were for vehicles and computer hardware and
software, respectively.
The Company currently anticipates capital expenditures of approximately $27
million during fiscal 1999. Approximately $25 million will be for acquiring
photocopiers. The remainder will be used for developing the ATM business and
other general purposes including computer systems. The Company expects to
finance these capital expenditures with cash generated from operations,
available cash and bank borrowings. The Company expects that current cash
balances and amounts available under the Company's existing line of credit will
provide adequate cash to fund its expansion through at least June 30, 1999.
Forward-Looking Statements
- --------------------------
Information in "Management's Discussion and Analysis," and elsewhere in
this Form 10-Q about the Company's goals, plans and expectations regarding:
removing older technology photocopiers, establishing the ATM Division,
purchasing and installing additional NextGen photocopiers, the Year 2000 Issue,
and capital expenditures constitutes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Factors that could adversely affect the removal
of older technology photocopiers include, but are not limited to, the
availability of third-party brokers to purchase the photocopiers, the Company's
ability to collect amounts due from third-party brokers, and the Company's
ability to execute its removal and disposal plan. Factors that could adversely
affect establishing the ATM Division include, abut are not limited to,
competition from existing ATM providers and new entrants into the ATM market,
the Company's ability to attract and retain
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<PAGE>
personnel necessary to execute its ATM business plan, the Company's ability to
manage and achieve growth in a new line of business, changes in technology
affecting ATM transactions, the Company's ability to expand its current
relationships with retailers and broaden its distribution network, changes in
consumer practices and preferences with respect to the location of and use of
ATMs, and changes in the laws and regulation applicable to non-bank ATMs.
Factors that could adversely affect the effectiveness of purchasing and
installing additional NextGen photocopiers include, but are not limited to,
changes in consumer practices and preferences with respect to the use of TRM's
new photocopy machines, and the performance and profitability of NextGen
photocopy machines, the Company's ability to purchase the additional photocopy
machines, and the Company's ability to sell the variances in the NextGen
program. Factors that could adversely affect the Year 2000 Issue include, but
are not limited, to, unidentified issues in existing programs or underestimating
the resources necessary to make any required modifications or conversions, the
Company's ability to modify and/or convert the necessary systems and
applications timely, and the continued availability of resources internally and
externally to implement the Year 2000 modifications. Factors that could
adversely affect capital expenditures include, but are not limited to, the items
described above regarding establishing the new ATM Division and purchasing
additional NextGen photocopiers, the continued availability of a credit
facility, and the Company's ability to negotiate favorable purchase agreements
with ATM manufacturers. Any forward looking statements should be considered in
light of these factors as well as risk factors and business conditions discussed
in the Company's SEC Form 10-K for the year ended June 30, 1998.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K.
On July 9, 1998, the registrant filed a report (Date of Report: June
24, 1998) on Form 8-K.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TRM CORPORATION
Date: November 16, 1998 By: /s/ PAUL M. BROWN
---------------------------- -------------------------------------
Paul M. Brown
Secretary, Vice President, Finance
and Chief Financial Officer
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 17287
<SECURITIES> 0
<RECEIVABLES> 7711
<ALLOWANCES> (230)
<INVENTORY> 3488
<CURRENT-ASSETS> 30268
<PP&E> 61266
<DEPRECIATION> (18505)
<TOTAL-ASSETS> 73167
<CURRENT-LIABILITIES> 8773
<BONDS> 0
18681
0
<COMMON> 19803
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 73167
<SALES> 13169
<TOTAL-REVENUES> 13169
<CGS> 6956
<TOTAL-COSTS> 12558
<OTHER-EXPENSES> 54
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (208)
<INCOME-PRETAX> 765
<INCOME-TAX> 281
<INCOME-CONTINUING> 484
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 484
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
