Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from July 1, 1998 to December 31, 1998
Commission File Number 0-19657
TRM CORPORATION
(Exact name of registrant as specified in its charter)
Oregon 93-0809419
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
5208 N.E. 122nd Avenue
Portland, Oregon 97230-1074
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 257-8766
-------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g)
of the Act:
Common Stock
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of March 1, 1999 the aggregate market value of the registrant's Common
Stock held by non affiliates of the registrant was $45.2 million. Solely for
purposes of this calculation, the registrant has treated its Board of Directors
and executive officers as affiliates.
As of March 1, 1999, the number of shares of the registrant's Common Stock
outstanding was 7,101,339.
Documents incorporated by reference:
Parts of registrant's Proxy Statement for the annual meeting of
shareholders on May 18, 1999 are incorporated by reference into Part III of this
report.
TRM CORPORATION
TABLE OF CONTENTS
Item Page
No. No.
---- ----
Part I
1. Business.............................................................1
2. Properties...........................................................6
3. Legal Proceedings....................................................6
4. Submission of Matters to a Vote of Security Holders..................6
4(a). Executive Officers of the Registrant.................................6
Part II
5. Market for Registrant's Common Equity and Related Stockholder
Matters..............................................................8
6. Selected Financial Data..............................................8
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................9
7(a). Quantitative and Qualitative Disclosures about Market Risk..........16
8. Financial Statements and Supplemental Data..........................16
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................16
Part III
10. Directors and Executive Officers of the Registrant..................17
11. Executive Compensation..............................................17
12. Security Ownership of Certain Beneficial Owners and Management......17
13. Certain Relationships and Related Transactions......................17
Part IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....18
PART I
ITEM 1. BUSINESS
General
As of December 1998, TRM Corporation (formerly TRM Copy Centers Corporation
(which was founded in 1982 as an Oregon corporation)) owned and maintained
approximately 31,000 self-service photocopiers in retail establishments such as
multi-site retailers, pharmacies, stationery stores, hardware stores and gift
shops in 71 metropolitan areas: 49 in the U.S., 5 in Canada, 15 in the U.K and 2
in France. TRM installs, maintains and supplies its photocopiers and regularly
monitors their usage. Each retail business collects payment from its customers,
shares in the revenue generated by the TRM Copy Center (as defined below) and
benefits from any increase in walk-in traffic. The Company invoices and collects
payment from each retailer monthly.
In the fiscal year ended June 30, 1998, the Company entered into an
agreement with ReadyCash Investment Partners, L.P. ("ReadyCash"), resulting in
an equity investment of $20 million into TRM. In return, ReadyCash was issued
1,777,778 shares of Series A Preferred Stock and warrants to acquire 500,000
shares of Common Stock of the Company. The Company plans to use the proceeds of
this investment to finance the formation of a new Automated Teller Machine (ATM)
Division (see "New Products and Services Under Development" on page 3,
Management's Discussion and Analysis of Financial Condition and Results of
Operations on page 8, and Note 8 to the Consolidated Financial Statements on
page F-12). In January 1999, the Company formed a wholly-owned subsidiary, TRM
ATM Corporation ("TRM ATM") to separately operate the activities related to the
ATM business. Operations commenced during the first quarter of 1999.
Each TRM Copy Center consists of a photocopier, a machine stand,
advertising signs and in some cases a coin-operated unit ("Copy Center" or "TRM
Copy Center"). TRM Copy Centers are identifiable by the Company's trapezoidal
yellow and black "TRM Copies" signs.
TRM has become the leading provider in self-service photocopying in many of
the metropolitan areas it serves by focusing on service and convenience. The
Company strives to conveniently locate high numbers of Copy Centers throughout
its service areas. Information about geographic areas serviced is presented in
Note 11 to the Consolidated Financial Statements included on page F-15 in this
Form 10-K.
The Company services its Copy Centers and provides all necessary supplies.
The retail business supplies space and electrical power for the TRM Copy Center
and supervises its use. Consumers report the number of uses of the TRM Copy
Center to the retail business cashier, who collects payment. Each month, the
retail business keeps a percentage of the TRM Copy Center's revenue, which
generally is based on a sliding scale related to usage, as recorded by the TRM
Copy Center's tamper-proof internal counter, and remits the remainder to TRM.
All accounting, training, purchasing, billing and collection functions, as
well as coordination of customer service, are centralized in the Company's Team
Headquarters in Portland, Oregon. Generally, the only personnel outside the
Portland Team Headquarters are service and sales personnel. TRM minimizes costs
by buying large quantities of new photocopiers and by centrally purchasing large
quantities of parts, paper and toner. The Company believes that its centralized
operating systems and standardized operating procedures enable it to efficiently
open in new geographic areas and to install and service thousands of TRM Copy
Centers.
As part of a Special Meeting of Shareholders in June 1998, the Company's
Shareholders voted to amend its Restated Articles of Incorporation to change the
Company's corporate name from "TRM Copy Centers Corporation" to "TRM
Corporation."
As used in this Form 10-K, the terms "the Company" and "TRM" refer to TRM
Corporation and its subsidiaries, unless the context requires otherwise.
Change of Fiscal Year
During 1998, the Company changed its fiscal year end from June 30 to
December 31 in an effort to align operational objectives with the financial
reporting year. This 10-K transition report is the first report based on the
December 31 fiscal year end date. A 10-K report for the fiscal year ended June
30, 1998 was previously filed. References in this document
1
referring to a specific fiscal year are meant to describe the twelve-month
period ending on June 30 for the years of 1998 and prior. References made to
fiscal year 1999 describe the twelve-month period ending on December 31, 1999.
Locations
Historically, TRM has focused its sales efforts on small independent retail
businesses. Since July of 1997 and going forward, the Company's objective has
been and will be to expand its program of selling to large-format, multi-site
retail establishments to better address the retail industry as it continues to
consolidate. TRM's installed customer base is diversified and no single retailer
accounts for a significant portion of revenues or profits. Further, TRM has
diversified geographically to avoid dependence on one or more market areas. The
Company does not believe that the presence of significant competition in any
single geographic market would have a material adverse effect on the Company.
As of December 31, 1998, the Company has established a local Service Center
(as defined below) in 52 major metropolitan areas. TRM locates its Service
Centers in sites convenient to the concentration of TRM Copy Centers. Each of
these Service Centers consists of leased premises generally staffed by a service
center manager and one or more service technicians and sales representatives.
Service Centers include a warehouse for the storage of photocopiers, other
components, spare parts, paper, toner, and developer. Nineteen metropolitan
areas most recently entered by the Company were opened with resources from
existing Service Centers nearby, most of which have storage unit facilities.
In conjunction with the expansion of multi-site retailer sales activities,
the Company addressed the need to service customers in locations that were not
accessible by existing TRM Service Centers. When the number of customer sites
does not justify the addition of a new TRM Service Center, the Company contracts
with a third-party service provider to install and service photocopiers at those
sites. With this expanded network of third-party service providers, the Company
believes it is positioned to effectively market to large multi-site retailers.
At December 31, 1998, the Company had service agreements in place for 767 TRM
Copy Centers not presently serviced directly by TRM technicians.
Expansion
During fiscal 1999, the Company plans to add approximately 9,700 additional
TRM Copy Centers in new and existing market areas. The Company intends to
continue to actively manage its installed base by removing its low-performing
sites and eliminating sites that fail to meet specified volume performance
expectations. As a result, the Company expects to have an overall increase of
approximately 4,800 (16.0%) in its installed base during 1999. From January 1,
1998 to December 31, 1998, the Company removed 12,888 photocopiers and installed
8,443 photocopiers, for a net decrease of 4,445 (12.6%) photocopier machines as
a result of the planned removal of photocopiers in low-performing sites.
TRM's planned expansion will require an increase in the number of installed
photocopiers and customers. Due to the improved efficiency of the NextGen(TM)
technology, the Company believes this expansion will not require an increase in
service center technicians. The Company believes its existing employee base can
support the planned growth. The Company will open a Service Center in each new
geographic market as it is justified. TRM uses both new and existing
photocopiers to fulfill the requirements of its expansion strategy. The Company
is purchasing new machines to use in high-volume, independent and multi-site
locations (see discussion of NextGen(TM) under "New Products and Services Under
Development"). TRM sells the TRM Copy Center concept to independent retail
businesses through sales lead generation programs and local door-to-door
solicitation using independent and Company sales representatives and service
technicians. The Company recently increased its sales efforts directed toward
regional, national and international multi-site retail chains.
Copy pricing is based on market competition, volume and retailer
preference. Pricing decisions are made by the retailer based on the experience
and recommendations of TRM for individual site pricing strategy.
The Company intends to continue to focus on its core photocopy business
with controlled growth from new and existing U.S. market areas, international
expansion and new products and services that can be delivered to its core
customer base and similar consumers.
New Products and Services Under Development
The Company is positioned to add other products or services to further
optimize the use of its existing network of sales, service, distribution and
support organizations as well as its growing installed customer base. Although
sales generated from additional products currently are insignificant in relation
to total sales, the Company is actively testing multiple new products and
services.
2
During 1998, the Company announced plans to form an ATM division ("ATM
Division") using a $20 million equity investment by ReadyCash. The ATM Division
will enable TRM to offer ATM services to its approximate 31,000 customer
relationship sites worldwide, which in turn will increase utilization of the
distribution and service organization already in place in the US, Canada, and
the United Kingdom. In January 1999, TRM ATM was founded to separately operate
the activities of the ATM business. A key executive management position was
filled in January, and operations are expected to commence in the first quarter
of 1999. Also in January of 1999, the company signed an exclusive seven-year
contract to be the ATM provider of a major convenience store chain which will
result in the installation of up to 700 ATM machines over the next year.
Additionally in fiscal 1998, the Company commenced the purchasing of
thousands of NextGen(TM) copiers for further unit growth. NextGen(TM) is an
important element in TRM's core programs for high-volume, independent retailer
locations and larger retail chains. The Company places NextGen(TM) photocopiers
in accordance with a 36 to 60-month commitment from the retailer and slightly
different discount and billing arrangements. TRM's existing base of installed
copy machines will continue to be used for many convenience copying locations
which do not qualify for upgrading to NextGen(TM) technology.
Additionally in fiscal 1998, the Company continued to expand its placement
of coin-operated convenience photocopiers with large format multi-site
retailers, where TRM's service quality and worldwide infrastructure is a key
advantage, but where host cashiering is not a desired benefit for the retailer.
TRM's intent is to invest in and to develop and market test these and other
new products and services to identify those that clearly deserve to become
country or system-wide offerings.
Competition
A person seeking photocopy services has a variety of alternatives to a TRM
Copy Center. These alternatives include specialty full-service business centers,
copy and print shops, coin-operated photocopiers and other photocopiers located
within retail shops. Each of these alternatives may to some extent compete with
the Company. The Company does not attempt to compete directly with most
alternative suppliers of photocopy services. Instead, the Company seeks to
distinguish itself by blanketing its service areas with large numbers of
convenient photocopiers and by providing high quality service to those
locations.
Full-service business centers and copy and print shops generally serve a
market more interested in high volume and sophisticated copying than in
convenience of location.
Coin-operated photocopiers are sometimes located in retail establishments
similar to TRM's locations. While these coin-operated photocopiers provide a
similar service to TRM Copy Centers, the Company believes they do not pose a
significant competitive threat to the majority of TRM's retailers. As indicated
under the caption "New Products and Services Under Development," the Company is
placing coin-operated copying with major large format chains and retail stores.
The Company is aware of several self-service, non-coin-operated space
photocopier businesses using the retail business concept. To the Company's
knowledge, each is limited to a relatively small geographic market and a
relatively small number of photocopiers. Because of barriers to entry in the
Company's business, such as developing operating systems, establishing sources
of supply and achieving economies of scale, the Company does not believe any of
these competitors currently represents a significant threat to the Company's
business.
Personal copiers provide a substitute for TRM Copy Centers. While these
photocopiers have been on the market for a number of years, the Company does not
believe that they have had a significant adverse effect on its business. The
Company is unable to predict whether a technological or price breakthrough might
increase sales of personal copiers and reduce demand for the Company's copy
services.
Computers with printers allow convenient production of multiple copies. The
Company does not believe that computer printing will have a significant adverse
effect on its Copy Center business. At present, computer duplicating is
primarily used only for a document which is electronically resident on that
particular computer and not for other paper originals. Both computer printers
and personal copiers currently have per copy costs to the user which are similar
to or higher than TRM's retail copy prices so they are not, in general, a lower
cost alternative.
3
The ATM business is and can be expected to remain highly competitive. While
the Company's principal competition is expected to come from national and
regional banks, the Company will also compete with other independent ATM
companies. All of these competitors offer services similar to or substantially
the same as those the Company expects to offer. As the Company enters the ATM
business, such competition could prevent the Company from obtaining or
maintaining desirable locations for its machines or could cause the Company to
reduce its user fees generated by the ATMs and thereby reduce the Company's
revenues and profits. The independent ATM business has become increasingly
competitive as entities other than banks have entered the market with relatively
few barriers to accomplish such entry.
Quarterly Seasonality
Historically, the Company has experienced slightly higher than average
production per TRM Copy Center in the January- March and April-June quarters due
to those quarters being tax season in the U.S. The Company experiences slightly
lower than average production per TRM Copy Center in its July-September quarter
as the European countries have extended holiday periods.
Photocopiers
As of December 31, 1998, TRM owned and maintained approximately 31,000
self-service photocopiers in retail establishments such as multi-site retailers,
pharmacies, stationery stores, hardware stores and gift shops. Generally, new
photocopiers are shipped direct from the manufacturer to a TRM Service Center.
The Company expects to continue to use both new and existing photocopiers to
expand its black and white copying business.
Supply
In 1998, the Company finalized its second major agreement with Konica
Business Machines ("Konica"). In the latest agreement, the Company agreed to
purchase 10,000 new, state-of-the-art black and white NextGen(TM) photocopiers
between October of 1998 and March of 1999. At December 31, 1998, the Company had
purchased over 6,000 units under this agreement. In an earlier agreement which
has been fulfilled with Konica in 1998, the Company was obligated to purchase
7,500 photocopiers. During fiscal 1993, TRM developed a supply relationship with
Mita Copystar America, Inc. ("Mita"), for black and white photocopiers and
related products in North America. The resulting arrangement, as updated,
contains no commitment to purchase any specific number of photocopiers. In the
past, the Company primarily used two similar discontinued models of used
photocopiers originally manufactured by Ricoh Company, Ltd. and its affiliates
("Savin" photocopiers). TRM bought these photocopiers from photocopier brokers
and dealers. These two models of black and white photocopiers have not been
manufactured since 1979 and 1982. A portion of the older model Savin copiers
have been written-off in fiscal 1997 and 1998 as under-performing assets (see
Note 4 to the Consolidated Financial Statements on page F-9 in this Form 10-K.)
The remaining Savin photocopiers owned by the Company are in profitable
locations.
Also during fiscal 1992, a supply arrangement was entered into with Mita
Europe B.V. ("Mita Europe") for black and white photocopiers and related
products in Europe. Under this arrangement, photocopiers and related products
are shipped from Mita Europe directly to the Company's European Service Centers.
The Company continues to monitor and evaluate supplies of new and used
photocopiers in Europe available for its use.
Parts
Currently, parts for Konica and Mita photocopiers are being supplied
primarily by the photocopier manufacturers. The Company acquires a majority of
the parts for its Savin photocopiers directly from various parts fabricators.
Many parts are built to TRM's specifications. While TRM's strategy is to use
multiple sources for its parts to reduce dependence on single sources, some
parts are purchased from single sources. Temporary shortages, increased costs
and quality control problems could result if parts from a single or limited
source became unavailable. The Company will continue to evaluate available
sources of supply for parts.
Paper
Photocopy paper is purchased centrally by the Company's Team Headquarters
and then shipped directly from the mills to the Service Centers. A number of
paper companies are capable of producing the paper usable by the Company. The
Company believes that sufficient paper should be available to supply the
Company's expanding business.
4
Toner
Currently, toner for Konica photocopiers is being supplied by the
photocopier manufacturer. The Company purchases toner for Mita photocopiers and
liquid toner for its black and white rebuilt photocopiers located in North
America directly from three manufacturers. The Company has confirmed that other
acceptable sources are available and could obtain suitable toner on reasonable
terms from other manufacturers, although some start-up delays could occur. The
Company will continue to evaluate available sources of supply for toner.
Employees
As of December 31, 1998, the Company had 531 employees, most of whom were
full-time. 346 are in field service, 164 are in sales, marketing, customer
service, purchasing, billing and administration, and 21 are in training,
production and warehouse functions. None of the Company's employees are
represented by unions. The Company believes it has good relations with its
employees. The Company currently engages 4 independent contractors to sell the
TRM service program, which includes a machine and a service agreement.
Service Marks
Most TRM Copy Centers are identified by distinctive yellow and black
trapezoidal signs bearing "TRM Copies" and the program price. In France the
Company does business under the name of FPC France Ltd. TRM and FPC's signs are
registered service marks. The Company registered "NextGen(TM)" as it relates to
the new black and white technology photocopier the Company is purchasing and
placing in service.
Copy Centers Investment Group, Ltd.
The Company served as general partner of Copy Centers Investment Group,
Ltd., an Oregon limited partnership. The partnership was formed in 1983 to
acquire certain Copy Centers from the Company. The partnership owns 79 Copy
Centers in the states of Oregon and Washington. The Company receives a
management fee of 25% of the gross revenue from these 79 Copy Centers, plus $20
per month for each of the 79 locations for accounting and administrative
functions. The Company also owned a 1% interest in the profits and losses of the
partnership. The partnership was terminated December 31, 1998. The Company
purchased the partnership assets in January of 1999 and have integrated them
into its normal operations. The partnership's operations did not constitute a
material part of the business of the Company.
Governmental Regulation
The Company's photocopier business is not subject to significant
governmental regulation. Local zoning and sign regulations occasionally prohibit
a retail business from displaying the "TRM Copies" sign on an exterior wall or
window. Local zoning and use restrictions may not allow opening a Copy Center in
an otherwise desirable retail business. The Company does not expect such
restrictions to have a material adverse effect on the Company's expansion plans.
The Company believes ATM operations are not subject to any governmental
regulation that will adversely effect the business of the Company's ATM
Division. Various regulations have been proposed to reduce or eliminate amounts
charged to users ("convenience fees") of ATMs. If any of these regulations are
enacted in the jurisdictions where the Company is considering placing ATMs, the
Company's revenues would likely decline, and the Company could be negatively
impacted. The enactment of such regulations may cause the Company to withdraw
from markets in such jurisdictions.
Forward-Looking Statements
This Form 10-K and Annual Report include forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 relating to the Company's goals, plans and
expectations regarding: removing Savin photocopiers, establish and operate the
ATM Division, effectively using a third-party network of service providers,
purchasing and installing additional NextGen(TM) photocopiers, expansion in
existing and new markets, the Year 2000 Issue, and capital expenditures. Risk
factors related to these forward looking statements are discussed in
"Management's Discussion and Analysis" (see Forward-Looking Statements on page
15 of this Form 10-K.)
5
ITEM 2. PROPERTIES
The Company leases approximately 25,750 square feet of office space for its
Team Headquarters in Portland, Oregon. The lease expires in 2010, with an option
to renew for an additional five years. The Company also leases 31,500 square
feet of space that serves as the Portland Service Center and is also used for
training, warehousing and other office space under a lease that also expires in
2010. This facility is located next to the Team Headquarters. Such space is
currently adequate for the Company's business.
The Company leases warehouse space for 52 Service Centers outside Portland,
Oregon. A Service Center typically consists of approximately 2,000 to 7,000
square feet of non-custom warehouse space. The leases typically run for three to
twelve years, some with extensions available upon exercise of renewal options.
The Company does not anticipate any difficulty in locating or, if necessary,
relocating Service Centers.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various claims and legal proceedings from time to
time in the ordinary course of its business. There are no pending or threatened
matters which in the Company's opinion would have a material effect on the
Company's operations or its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the period
covered by this report.
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers of the Company as of March 15, 1999.
Name Age Position
---- --- --------
Frederic P. Stockton 47 Chief Executive Officer and President
of TRM Corporation
Paul M. Brown 45 Vice President of Operations and Chief
Operating Officer of TRM Corporation
Danial J. Tierney 43 Vice President of Corporate Sales of
TRM Corporation
Kathleen O. Hoogerhuis 43 Vice President of Organizational
Development of TRM Corporation
Kurt M. Schusterman 41 Vice President and Chief Operating
Officer of TRM ATM Corporation
Gary M. Cosmer 28 Vice President and Chief Information
Officer of TRM Corporation
6
Frederic P. Stockton was appointed President, Chief Executive Officer and a
director in August 1997. Prior to joining TRM and since 1985, Mr. Stockton was
employed by The Estey Corporation, a privately-held company with six business
groups including vending, equipment distribution, food distribution, mobile
catering, recreational properties and food service. Most recently and since
1994, he served as President and Chief Executive Officer. From 1985 to 1994, Mr.
Stockton served as President of The Estey Corporation's Equipment Distribution
Group. From 1978 to 1985, he was employed by Omark Industries (now the Oregon
Cutting Systems Division of Blount, Inc.) in positions of increasing
responsibility. Mr. Stockton holds a B.A. degree from the University of
Washington.
Paul M. Brown joined the Company as Chief Financial Officer and Vice
President of Finance in September 1997. In December of 1998, Mr. Brown was
promoted to Vice President of Operations and Chief Operating Officer. Prior to
joining the Company and since 1993, Mr. Brown was Senior Vice President and
Chief Financial Officer for SMC Corporation, a manufacturer of motorized
recreational vehicles. Before joining SMC Corporation, Mr. Brown served as Chief
Financial Officer for several privately-held manufacturing companies and also
worked as a consultant with Arthur Andersen & Co. Mr. Brown attended Harvard
University and holds a B.S. degree from Portland State University.
Danial J. Tierney joined the Company in January of 1995 and serves as Vice
President of Sales and Marketing. For 16 years prior to joining TRM, Mr. Tierney
was employed by Spectra Physics Scanning Systems, Inc. and its affiliates in
various locations and in positions of increasing responsibility, most recently
in Eugene, Oregon, as Director of Marketing. He holds a B.S. degree from the
University of California, Berkeley, and an M.B.A. from the University of Santa
Clara.
Kathleen Hoogerhuis was appointed Vice President of Organizational
Development in September 1998. Prior to joining TRM and since 1996, Ms.
Hoogerhuis was the Vice President for Human Resources and Organizational
Development for Cascade Microtech, Inc. Prior to joining Cascade Microtech and
since 1993, Ms. Hoogerhuis was Vice President and Chief Operating Officer for
Superior Transportation Services, a third party contract logistics company.
Before joining Superior Transportation Services and since 1988, Ms. Hoogerhuis
was a human resources executive at Precision Castparts. Ms. Hoogerhuis holds an
M.S. degree in Organization Development from Pepperdine University and a B.A.
degree in Social Ecology from the University of California, Irvine.
Kurt M. Schusterman was named Vice President and Chief Operating Officer of
the newly formed TRM ATM Corporation in February 1999. Prior to joining the
Company and since 1996, Mr. Schusterman was Senior Vice President, Sales and
Marketing for XtraCash ATM, Inc. a venture-capital start up for ATM deployment
and management. Before joining XtraCash, Mr. Schusterman was chief marketing
officer for the retail division of Texas Commerce Bank. From 1987 to 1993, Mr.
Schusterman was co-founder and Regional manager of Brown-Forman Enterprises, a
credit card processing business. In 1993, that company was acquired by NaBANCO
Merchant Services (now First Data merchant Services), where he held several
positions of increasing responsibility.
Gary M. Cosmer was named Chief Information Officer and Vice President of
Information Systems in February 1999. Prior to that and since December 1997, Mr.
Cosmer served the company as Director of Information Systems. Before joining
TRM, Mr. Cosmer was a systems engineer for CTR Business Systems Corporation, a
partner level Microsoft Solutions Provider. Before joining CTR Business Systems,
Mr. Cosmer served as Service and Training Manager for Lucky Distributing, a
privately held distribution company. Mr. Cosmer holds a B.S. degree in Advanced
Technology Studies and an A.A.S. degree in Aviation Technology from Southern
Illinois University.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
System since December 18, 1991 under the symbol TRMM. Information with respect
to the high and low sales prices for the Common Stock is set forth on the inside
back cover of the Company's 1998 Annual Report to Shareholders and is
incorporated by reference herein.
At March 15, 1999 there were 216 shareholders of record of the Company's
Common Stock and 7,101,339 shares were outstanding. The Company believes the
number of beneficial owners is substantially greater than the number of record
holders because a large portion of the Company's outstanding Common Stock is
held of record in broker "street names" for the benefit of individual investors.
The Company did not pay any dividends related to common stock in fiscal
1997 or fiscal 1998 or in the six-month period ended December 31, 1998. The
Company intends to retain future earnings for use in its business and therefore
does not anticipate paying cash dividends to Common Stock shareholders in the
foreseeable future. The Company paid Series A Preferred Stock dividends of
$785,000 during the six-month period ending December 31, 1998.
On June 24, 1998, the Company issued and sold 1,777,778 shares of
unregistered Series A Preferred Stock and Warrants to purchase 500,000 shares of
Common Stock for net proceeds of approximately $19,853,000. The Company claims
exemption from the registration of such shares under the Securities Act of 1933,
as amended, in reliance on the exemption available under Section 4(2) thereof.
Each share is convertible at any time at the option of the holder into .7499997
of a share of Common Stock. In addition, each share of Series A Preferred Stock
is automatically converted into .7499997 shares of Common Stock if the price of
Common Stock is at least $20.00 for a period of 90 consecutive days commencing
after June 30, 1999. The conversion ratio and exercise prices are adjusted for
any combination or subdivision of shares, stock dividend, stock split or
recapitalization. The Series A Preferred Stock bears a dividend rate of 7.5%,
payable quarterly. The Company intends to use the proceeds to fund the
operations of its ATM business operating under TRM ATM.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for, and as of the end of, each
of the years in the five-year period ended June 30, 1998 and the six-month
period ended December 31, 1998 have been derived from the audited financial
statements of the Company. The financial data presented below for the six-month
period ended December 31, 1997 is unaudited, but is provided for comparative
purposes. Quarterly financial data is included in footnote 13 on page F-17 of
this report. This data should be read in conjunction with the financial
statements, related notes and other financial information included elsewhere in
this report.
8
Selected Financial Data
(In thousands, except per share and other operating data)
Six-month period
Fiscal Years Ended June 30 ended December 31
---------------------------------------------------------------------------------
(unaudited)
1994 1995 1996 1997 1998 1997 1998
--------- --------- --------- --------- --------- --------- ---------
Sales $ 47,957 $ 60,544 $ 67,538 $ 69,881 $ 68,352 $ 32,947 $ 33,334
Sales Discount (9,462) (11,138) (11,728) (11,676) (11,331) (5,285) (5,802)
Net Sales 38,495 49,406 55,810 58,205 57,021 27,662 27,532
Gross Profit 19,759 24,150 27,800 29,816 28,797 13,621 13,267
Operating income (loss) 6,248 7,543 8,311 5,283 (220) 3,346 1,830
Net income (loss) 3,354 3,699 4,124 2,575 (582) 1,924 1,311
Preferred Stock Dividend -- -- -- -- -- -- (785)
Net income (loss) available to
common stockholders $ 3,354 $ 3,699 $ 4,124 $ 2,575 (582) $ 1,924 $ 526
Basic net income (loss)
per share $ 0.53 $ 0.58 $ 0.64 $ 0.39 $ (0.08) $ 0.28 $ 0.07
Diluted net income (loss)
per share $ 0.49 $ 0.53 $ 0.57 $ 0.35 $ (0.08) $ 0.26 $ 0.07
Balance Sheet Data:
Working capital $ 8,523 $ 9,543 $ 8,860 $ 9,886 $ 22,277 $ 9,542 $ 14,222
Total assets 43,504 55,736 54,251 50,478 75,606 52,691 79,152
Long-term debt 9,500 14,238 8,128 400 -- -- --
Redeemable preferred stock -- -- -- -- 19,853 -- 19,798
Shareholders' equity 27,155 31,528 35,444 38,828 60,060 41,133 61,325
Other Operating Data:
TRM Copy Centers 25,563 28,995 31,719 34,796 33,349 35,398 30,953
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
TRM continues to expand in new and existing metropolitan service areas. The
number of service areas the Company operates in has increased from 54 to 71
since June of 1995 and now includes 49 in the United States, 5 in Canada, 15 in
the United Kingdom and 2 in France. The number of TRM Copy Centers has increased
6.8 percent over the same period, from 28,995 to 30,953. In addition to
expanding, the Company is also focused on improving the profitability of the
installed base of TRM Copy Centers.
On June 24, 1998, the Company issued and sold to ReadyCash 1,777,778 shares
of a new series of Preferred Stock of the Company, designated the "Series A
Preferred Stock", and warrants (the "Warrants") to purchase 500,000 shares of
the Company's Common Stock at an exercise price of $15.00 a share, for an
aggregate purchase price of $20 million in cash. ReadyCash informed the Company
that it obtained the funds used to purchase the Series A Preferred Stock and
Warrants from its individual limited partners in the form of capital
contributions.
Each share of Series A Preferred Stock has one vote per share and votes
together with the Common Stock on any and all matters submitted to the Company's
shareholders for a vote, except to the extent Oregon law requires otherwise. In
addition, each share of the Series A Preferred Stock is convertible at any time
at the option of the holder into .7499997 fully paid and nonassessable shares of
Common Stock and shall be automatically converted into shares of the Company's
Common Stock on the same basis if the last bid price quoted in the Nasdaq System
as of 4:00 p.m. for a share of the Company's Common Stock is at least $20.00 for
a period of 90 consecutive calendar days commencing after June 30, 1999.
9
The conversion ratio and the price at which the Series A Preferred Stock shall
be automatically converted shall be appropriately adjusted for any combination
or subdivision of shares, stock dividend, stock split or recapitalization.
Results of Operations
The following table sets forth, for the periods indicated, selected
statement of operations data, expressed as a percentage of sales, and the
percentage change in dollar amounts of each item on the Consolidated Statements
of Operations (see page F-3 of this Form 10-K).
Percentage Change As a Percentage of Sales
---------------------------------------------------------------------------------------
Six month
Fiscal years ended periods ended Six month periods
June 30, December 31, Fiscal years ended June 30, ended December 31,
-------------------- ------------- ---------------------------- ------------------
1996-97 1997-98 1997-98 1996 1997 1998 1997 1998
------- ------- ------- ------ ------ ------ ------ ------
Sales 3.5 % (2.2)% 1.2% 100.0% 100.0% 100.0% 100.0% 100.0%
Sales discounts (0.4) (3.0) 9.8 17.4 16.7 16.6 16.0 17.4
Cost of sales 1.4 (0.6) 1.6 41.5 40.6 41.3 42.6 42.9
Selling, general and 4.9 5.1 12.4 28.8 29.3 31.5 30.9 34.2
administrative
Non-cash stock compensation -- -- -- -- -- 1.7 -- --
Special charges -- 84.1 -- -- 5.8 9.3 -- --
Operating income (loss) (36.4) (104.2) (45.3) 12.3 7.6 (0.4) 10.5 5.5
Interest expense, net (58.6) (82.8) 81.8 1.4 0.6 -- 0.1 0.1
Other, net 55.2 (7.4) -- 0.7 1.0 1.0 0.8 (1.0)
Income (loss) before income taxes (39.5) (122.9) (32.9) 10.2 6.0 (1.4) 9.6 6.4
Provision for income taxes (42.4) (123.4) (34.6) 4.1 2.3 0.5 3.8 2.5
Net income (loss) (37.6)% (122.6)% (31.9)% 6.1% 3.7% (0.9)% 5.8% 3.9%
Six Months ended December 31, 1998 Compared to Six Months ended December
31, 1997 (unaudited)
Sales increased by $387,000 (1.2%) to $33.3 million for 1998 from $32.9
million for 1997. The increase was the result of a 15.1% increase in average net
sales per unit, offset by a 9.7% overall decrease in the number of units billed.
The increase in net sales per unit was the result of the higher production
achieved through the installation of thousands of new NextGen(TM) photocopiers
in existing sites and new multi-site retail locations. At the same time, many
low-volume producing sites were eliminated, thus decreasing the total billed
units in the field (see the discussion of NextGen(TM) under "New Products and
Services Under Development" and multi-site retailers under "Locations".)
Sales for products not related to black and white photocopying have been
insignificant, amounting to less than 5 percent of total sales.
Sales discounts are the portion of revenue retained by retail customers.
They generally vary at individual retail businesses depending on volume--the
higher the volume, the greater the discount. The upward trend in sales discounts
as a percentage of sales in 1998 and 1997 reflects changes made in business
agreements with new customers over the periods. In 1998, the Company entered
many more long term contracts with multi-site retail customers. Additional
discounts were granted in an effort to secure the long-term contracts.
Cost of sales increased $224,000 (1.6%) from 1997 to 1998. Costs of paper,
toner and parts decreased by $403,000, while field labor costs decreased by
$504,000. These decreases were the result of increased efficiencies gained by
the installation of the new NextGen(TM) photocopiers. The cost savings were
offset by increased costs of $1.0 million for copier machine depreciation. The
increased copier depreciation relates to the increase in installed NextGen(TM)
copier machines. The Company expects to see a net cost savings as a result of
the NextGen(TM) installations in the future. Other reasons for the
10
increase in cost of sales include a $230,000 increase in third party service
provider costs given the Company's expansion into multi-site retailer locations
(see discussion of third party service providers under "Locations"). Changes in
other individually insignificant items make up the rest of the overall change in
the cost of sales.
Selling, general and administrative expenses increased $1.3 million (12.4%)
from $10.2 million in 1997 to $11.4 million in 1998. Selling, general and
administrative costs were 34.2 percent and 30.9 percent of sales for 1998 and
1997, respectively. Selling, general and administrative costs increased
primarily due to increased costs of legal and accounting fees associated with
the change in fiscal year end of approximately $200,000, costs associated with
the selection of a new enterprise wide information system of approximately
$295,000, and increases as a result of a strategic decision to invest additional
resources to support the selling effort directed towards new accounts in the
multi-site retail channel of approximately $290,000.
Interest expense increased to $40,000 in 1998 from $22,000 in 1997. The
increase was due to a small overall increase in borrowings on the Company's
revolving line of credit during 1998.
Other (expense) income increased by $494,000 during the six-month period
ended June 30, 1998 compared to 1997 primarily due to interest income generated
of $423,000 related to interest earned on short-term investments as a result of
proceeds from the Ready Cash transaction explained above under Item 7.
The Company's effective tax rate for 1998 was 38.1 percent, resulting in an
income tax provision of $807,000, compared to an effective rate of 39.1 percent
and an income tax provision of $1.2 million in 1997. The decrease in the
effective tax rate from 1997 to 1998 is due to a decrease in foreign tax
expense.
Fiscal Year Ended June 30, 1998 ("Fiscal 1998") Compared to Fiscal Year
Ended June 30, 1997 ("Fiscal 97")
Sales decreased by $1.5 million (2.2%) to $68.4 million for 1998 from $69.9
million for 1997. The decrease represents a 7.4 percent decrease in the average
net sales per unit, offset by a 5.8 percent overall increase in the number of
billed units. Sales in North America have declined 5.6 percent over the last
fiscal year, while sales in Europe have increased 5.5 percent during the same
period. The decline in North America represents a maturing market in the small,
independent retail customer base and increasing market demand for new black and
white technology photocopiers. As noted in the discussion of results of the
six-month period ended December 31, 1998, the Company has shifted its marketing
efforts to address the decline by moving to NextGen(TM) photocopier technology
and multi-site retailer customers.
Sales for products not related to black and white photocopying have been
insignificant, amounting to less than 5 percent of total sales.
Sales discounts are the portion of revenue retained by retail customers.
They generally vary at individual retail businesses depending on volume--the
higher the volume, the greater the discount. The downward trend in sales
discounts as a percentage of sales in 1998 and 1997 reflects changes made in
business agreements with new customers over the periods.
Cost of sales decreased $165,000 (0.6%) from 1997 to 1998. Offsetting
factors resulted in relatively unchanged costs of sales compared to fiscal 1997.
Costs of paper, toner and parts decreased by $751,000, but were offset by
increased costs of $548,000 for copier machine depreciation. The increased
copier depreciation relates to the new Konica copier machines purchased and
installed during the year. Other individually insignificant variances explain
the rest of the decrease in cost of sales.
Selling, general and administrative expenses increased $1.1 million (5.1%)
from $20.4 million in 1997 to $21.5 million in 1998. Selling, general and
administrative costs were 31.5 percent and 29.3 percent of sales for 1998 and
1997, respectively. Selling, general and administrative costs increased due to
increased costs of medical, property and auto insurance, higher vehicle costs,
increased legal and accounting fees, and increased office and administrative
payroll costs.
In conjunction with the sale of Series A Preferred Stock (see Note 8 to the
Consolidated Financial Statements on page F-12), the Company amended certain
Board members' stock option agreements to extend the exercise period for the
options to ten years from June 24, 1998. Pursuant to APB No. 25, and due to the
extension of the exercise period, the Company recognized $1.1 million as
non-cash compensation expense in the year ended June 30, 1998.
11
During 1998, the Company recorded a pre-tax special charge of $6.4 million
($3.9 million after tax) related to the write-down of certain under-performing
assets of its photocopy business. The major components of the 1998 special
charge included the disposal of under-performing machines ($4.3 million), the
disposal of replacement parts and inventory relating to under- performing
machines ($1.5 million) and other charges related to the disposal of equipment
($600,000).
Interest expense decreased 82.8 percent to $68,000 in 1998 from $396,000 in
1997. The decrease was due to reduced bank borrowings on the Company's revolving
line of credit during 1998.
The Company's effective tax rate for 1998 was 39.1 percent, resulting in an
income tax benefit of $373,000, compared to an effective rate of 38.2 percent
and an income tax provision of $1.6 million in 1997. The increase in the
effective tax rate from 1997 to 1998 is due to an increase in permanent
differences in the Company's income for financial and tax reporting.
Fiscal Year Ended June 30, 1997 ("Fiscal 97") Compared to Fiscal Year Ended
June 30, 1996 ("Fiscal 96")
Sales increased by $2.3 million (3.5%) to $69.9 million for 1997 from $67.5
million for 1996. The increase was due primarily to a 10.9 percent increase in
the number of revenue-generating photocopiers offset by a 6.0 percent decrease
in average net sales per unit. Sales growth during 1997 came from the Company's
foreign operations. Foreign sales grew to $25.9 million in 1997 from $22.0
million in 1996.
Sales discounts decreased $52,000 (0.4%) from $11.7 million in 1996 to
$11.6 million in 1997. Sales discounts as a percentage of sales decreased from
17.4 percent in 1996 to 16.7 percent in 1997. The downward trend in sales
discounts as a percentage of sales reflects changes made in business agreements
with new customers over the periods.
Cost of sales increased $379,000 (1.4%) from 1996 to 1997. This was below
the percentage increase in sales, despite growth in field service payroll,
headcount additions for opening new TRM Service Centers, and copier depreciation
costs. This was achieved because of lower paper costs and lower paper and toner
usage under the Company's higher-copy-price programs.
Selling, general and administrative expenses increased $956,000 (4.9%) from
$19.5 million in 1996 to $20.5 million in 1997. Selling, general and
administrative costs were 29.3 percent and 28.8 percent of sales for 1997 and
1996, respectively. The increase in selling, general and administrative during
1997 was primarily due to employee health care costs in the U.S. and higher
expansion and start-up expenses in both the U.S. and Europe.
During 1997, the Company recorded a non-cash, accounting charge of $4.1
million pretax ($2.5 million after tax). This charge included impairment write
downs of equipment in three categories: color copiers, custom business card
printing components and certain older generation black and white copiers. It was
concluded during 1997 that the initial equipment purchased in 1993 and 1994 to
support the Company's color and business card business was technologically dated
and that the full asset carrying amounts were not recoverable.
Interest expense decreased 58.6 percent to $396,000 in 1997 from $957,000
in 1996. The Company reduced bank borrowings significantly from mid-1996 through
1997, resulting in the lower interest expense.
The Company's effective tax rate for 1997 was 38.2 percent, resulting in an
income tax provision of $1.6 million, compared to an effective rate of 40.1
percent and an income tax provision of $2.8 million in 1996. The decrease in the
effective tax rate from 1996 to 1997 is due to income in the United Kingdom
flowing through a United Kingdom subsidiary, effective for fiscal year 1997, and
being taxed at a lower rate than income in the United States.
Impact of Year 2000
The Year 2000 ("Y2K") 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.
12
The Company has formed a cross functional Y2K "Business Improvement Team"
that reports to the Company's Chief Information Officer ("CIO"). The CIO has
full authority to establish methodologies, approve expenditures, and marshal
additional resources as necessary. Two full-time project managers who answer
directly to the CIO manage the initiative and oversee the project team. The CIO
is responsible for researching, planning, executing, implementing and completing
the initiative for the Company.
The three primary functional categories evaluated in the Initiative
include:
- Information Technology ("IT") which consists of all internal hardware
and software used to support the Company's financial and
administrative operations.
- Communications Network, which processes voice and data information
relating to the Company's global communications systems, including
voice and data equipment and related software.
- Facilities consisting of all systems necessary to run an office
including security system, fire suppression, generators, HVAC, and
associated systems.
For each of the three functional categories the company is in the process of or
has completed the following three-phase approach to identify and address the
potential impact of Y2K compliance issues.
Phase I - Inventory and Assessment
Inventory and assessment involves each Y2K team member identifying all relevant
systems, providers and information sources within their functional areas. An
assessment is then made on each discovery to determine which items are mission
critical.
Phase I was completed on February 24, 1999 for all primary functional
categories.
Phase II - Remediation
Remediation is the process of making changes to hardware, software or services
in order to become Y2K compliant. During the inventory and assessment phase each
system is evaluated for remediation. Each system requiring remediation under the
Company's direct control will be replace or upgraded as needed.
Phase II is underway and should be completed during the third quarter of 1999
for all categories except voice communication systems which were completed on
February 1, 1999.
Phase III - Testing, and Contingency Planning
All mission-critical systems, including both internal and external, identified
during the inventory stage will be tested by the Company sufficient to confirm
whether the system will continue to operate properly in Y2K and beyond. Proper
contingency planning for all mission-critical items will allow the Company to
mitigate the risk associated with potential Y2K failures. The Company will
consider itself Y2K compliant when all phases of the project have been
successfully completed and approved by the CIO.
Phase III is underway and should be completed by the end of the third quarter of
1999 for all categories. In addition to the replacement of mission critical
accounting and operations systems with ERP (Enterprise Resource Planning)
systems to accommodate for Y2K readiness and overall business improvement, the
Company has also engaged in a converging contingency method for its existing
accounting and operations legacy systems to assure Y2K compliance in the event
any part of the new systems implementation falls behind.
The Costs to Address the Company's Y2K Issues
Independent of the Y2K 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 Y2K issues. The total IT and Communications
Network budget for all systems activities is $2.5 million for calendar 1999.
Expenditures directly related to Y2K issues are estimated to be approximately
$860,000. These costs are related to a new enterprise-wide software system that
will enhance the Company's current information system and will be capitalized.
Expenditures for other planned systems upgrades, totaling $1.64 million, will
address certain Y2K issues as a corollary benefit to the Company, but have been
initiated primarily to enhance system reliability. The Company will utilize
13
both internal and external resources to reprogram, or replace, and test the
software for the Y2K modifications. The Company continues to manage total IT
expenses by re-prioritizing or curtailing less critical investments,
incorporating Y2K readiness into previously planned system enhancements and
using existing staff to implement its Y2K modifications.
The cost of Facilities (non-IT) related Y2K compliance issues is not
expected to be material.
The Risks of the Company's Issues
The Company has initiated 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 Y2K Issues. However, there can be no guarantee
that the systems of other companies on which the Company's systems rely will be
timely converted and will not have an adverse effect on the Company's systems.
Contingencies for systems scheduled for replacement include upgrades and
service packs from manufacturers of third-party software as well as dedicated
programming time from internal Information Systems staff to produce "Hot Fix"
repairs to modify date integer fields and input masks to reflect long integer
format. The Company presently believes that with modifications to existing
software and conversions to new software, the Y2K Issue will not pose
significant operations problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed timely, the Y2K
Issue could have a material adverse 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.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which established requirements for
disclosure of comprehensive income. The objective of SFAS No. 130 is to report
all changes in equity that result from transactions and economic events other
than transactions with owners. Comprehensive income is the total of net income
and all other non-owner changes in equity. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. Reclassification of earlier financial
statements for comparative purposes is required. The Company has adopted SFAS
No. 130 as shown in the financial statements included as part of this report.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." This Statement established
standards for reporting information about operating segments in annual financial
statements. Operating segments are defined as components of an enterprise
evaluated regularly by the Company's senior management in deciding how to
allocate resources and in assessing performance. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. The Company has adopted SFAS No.
131 as shown in the financial statements included as part of this report.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") 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.
On April 3, 1998, the Accounting Standards Executive Committee of the AICPA
released SOP 98-5, "Reporting on the Costs of Start-Up Activities." The SOP
requires that at the beginning of the fiscal year of adoption, the unamortized
portion of deferred start-up costs be written off and reported as a change in
accounting principle. Future costs of start-up activities should then be
expensed as incurred. The Company adopted SOP 98-5, effective July 1, 1998 with
no impact to the financial statements.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in fair values of the derivative
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings, or recognized through
comprehensive income until the hedged item is recognized in earnings. The
Company believes that SFAS 133 will not have a material impact on its financial
statements because it is not currently involved in any hedge positions at this
time, nor are there any plans to adopt such positions in the near future. SFAS
133 is effective for fiscal quarters beginning after June 15, 1999.
14
Liquidity and Capital Resources
During the last six months of 1998 TRM generated $7.1 million in cashflows
from operations and decreased its net working capital from $22.3 million at June
30, 1998 to $14.2 million at December 31, 1998 (including cash and cash
equivalents of $14.3 million). The Company also has a $30.0 million bank line of
credit, with no borrowings outstanding at December 31, 1998. The Company was in
compliance with all loan covenants at December 31, 1998.
During the six months ended December 31, 1998, the Company funded capital
expenditures of $13.8 million primarily from cash which was available as of June
30, 1998. Capital expenditures were primarily for installations of NextGen(TM)
copiers.
The Company currently anticipates capital expenditures of approximately $30
million during calendar 1999. Approximately $15 million will be for acquiring
photocopiers and approximately $2.1 million will be used to acquire computer
related systems. The remainder will be for developing the ATM business and other
general purposes including computer systems. The Company expects to finance
these capital expenditures with cash generated from operations and bank
borrowings. The Company expects that these sources will provide adequate cash to
fund its expansion through at least December 31, 1999.
Disclosure Regarding Euro Conversion
On January 1, 1999, eleven member countries of the European Community began
a process to convert their existing sovereign currencies to a single common
denomination, the Euro. The process of conversion is gradual over the next three
years, culminating in the eventual removal from circulation of all existing
domestic currency for the participating countries. The Company presently
operates in the United Kingdom and France and transacts business in the local
currency of those countries. France will be subject to the Euro Conversion, and
the United Kingdom may become subject to the conversion. The Company believes
that it will be able to accommodate the conversion to the Euro without a
material impact on its financial statements.
Forward-Looking Statements
Information in "Management's Discussion and Analysis," the letter to
shareholders and elsewhere in this Annual Report and Form 10-K about the
Company's goals, plans and expectations regarding: removing Savin photocopiers,
establishing and operating the ATM Division, effectively using a third-party
network of service providers, purchasing and installing additional NextGen(TM)
photocopiers, adding approximately 9,700 additional TRM Copy Centers in new and
existing markets in fiscal year 1999, achieving a net cost savings as a result
of the installation of NextGen(TM) photocopiers, expansion in existing and new
markets, the Y2K Issue, and capital expenditures constitutes forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Factors that could adversely
affect the removal of Savin photocopiers include, but are not limited to, the
availability of third-party brokers to purchase the photocopiers, the Company's
ability to collect amounts due from third-party brokers, and the Company's
ability to execute its removal and disposal plan. Factors that could adversely
affect establishing and operating the ATM Division include, but are not limited
to, competition from existing ATM providers and new entrants into the ATM
market, the Company's ability to attract and retain personnel necessary to
execute its ATM business plan, the Company's ability to manage and achieve
growth in a new line of business, changes in technology affecting ATM
transactions, the Company's ability to expand its current relationships with
retailers and broaden its distribution network, changes in consumer practices
and preferences with respect to the location of, and use of, ATM's, and changes
in the laws and regulations applicable to non-bank ATMs. Factors that could
adversely affect the effectiveness of a third-party network of service providers
include, but are not limited to, the availability of third-party service
providers in the geographic areas needed, the Company's ability to negotiate
contracts with the third-party service provider, and the service quality of the
third-party service provider. Factors that could adversely affect the purchasing
and installing additional NextGen(TM) photocopiers include, but are not limited
to, changes in consumer practices and preferences with respect to the use of
TRM's new photocopy machines, and the performance and profitability of
NextGen(TM) photocopy machines, the Company's ability to purchase the additional
photocopy machines, and the Company's ability to effectively sell the customers
the benefits of the NextGen(TM) program. Factors that could adversely impact the
Company's ability to add approximately 9,700 additional TRM Copy Centers in
fiscal year 1999 include, but are not limited to the Company's ability to sell
the products offered to existing and potential customers, and changes in
consumer practices and preferences with respect to the Company's products.
Factors that could adversely affect the ability to achieve net cost savings from
the installation of NextGen(TM) photocopiers include management's ability to
reduce labor costs to required levels and continued
15
product efficiencies experienced by the NextGen(TM) photocopiers. Factors that
could adversely affect expansion in existing and new markets include, but are
not limited to, business conditions in the market areas the Company targets for
expansion, competitive factors, customer demand for the Company's services and
the Company's ability to execute its plans successfully. Factors that could
adversely affect the Y2K 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, the effect of the
Y2K readiness of suppliers the Company relies on, and the continued availability
of resources internally and externally to implement the Y2K modifications.
Factors that could adversely affect capital expenditures include, but are not
limited to, the items described above regarding the establishment and operation
of the new ATM Division and purchasing additional NextGen(TM) photocopiers, the
continued availability of a credit facility, and the Company's ability to
negotiate favorable purchase agreements with ATM manufacturers. Any
forward-looking statements should be considered in light of these factors.
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to minimal market risks. Sensitivity of results of
operations to these risks is managed by maintaining a conservative investment
portfolio, which is comprised solely of money market funds, and entering into
long-term debt obligations with appropriate price and term characteristics. The
Company does not hold or issue derivative, derivative commodity instruments or
other financial instruments for trading purposes. Financial instruments held for
other than trading purposes do not impose a material market risk.
The Company is exposed to interest rate risk, as additional financing will
be needed due to the capital expenditures associated with expanding the
Company's business operations. The interest rate that the Company will be able
to obtain on debt financing will depend on market conditions at that time, and
may differ from the rates the Company has secured on its current debt.
Additionally, the Company is exposed to interest rate risk related to its credit
facility as of December 31, 1998. Advances against the credit facility
periodically renew, at which point the borrowings are subject to the then
current market interest rates, which may differ from the rates the Company is
currently paying on its borrowings.
The Company is exposed to foreign currency exchange rate risk, as it has
operations in Canada, France and the United Kingdom. The relative amount of
business transacted in these countries is outlined in footnote 11 on page F-16
of this Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements and supplementary data required by this item are
included in this Report on Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company will be included under
"Election of Directors" in the Company's definitive proxy statement for its 1999
annual meeting of shareholders (the "1999 Proxy Statement") to be filed not
later than 120 days after the end of the fiscal year covered by this Report and
is incorporated herein by reference. Information with respect to executive
officers of the Company is included under Item 4(a) of Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation will be included under
"Executive Compensation" in the Company's 1999 Proxy Statement and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners
and management will be included under "Security Ownership of Certain Beneficial
Owners and Management" in the Company's 1999 Proxy Statement and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions
with management will be included under "Certain Transactions" in the Company's
1999 Proxy Statement and is incorporated herein by reference.
17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements Page in this Report.
--------------------
Independent Auditors' Report F-1
Consolidated Balance Sheets as of June 30, 1997 and 1998
and December 31, 1998 F-2
Consolidated Statements of Operations for each of the three years
in the period ended June 30, 1998 and for the six-month periods
ended December 31, 1997 (unaudited) and 1998 F-3
Consolidated Statements of Shareholders' Equity for each of the
three years in the period ended June 30, 1998 and for the
six-month period ended December 31, 1998 F-4
Consolidated Statements of Cash Flows for each of the three years
in the period ended June 30, 1998 and for the six-month periods
ended December 31, 1997 (unaudited) and 1998 F-5
Notes to Consolidated Financial Statements F-6
2. Financial Statement Schedules:
Independent Auditors' Report S-1
III -- Valuation and Qualifying Accounts S-2
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
Exhibit
Number
- -------
3.1(a) Amendments to the Restated Articles of Incorporation (Incorporated
herein by reference to Exhibit 3.1(a) of ) Form 10-K for the fiscal year
ended June 30, 1998)
3.1(b) Restated Articles of Incorporation (Incorporated herein by reference to
Exhibit 3.1(b) of Form 10-K for b) the fiscal year ended June 30, 1998)
3.2 Restated Bylaws (Incorporated herein by reference to Exhibit 3.2 of Form
10-K for the fiscal year ended June 30, 1998)
4.1 Investors' Rights Agreement (Incorporated herein by reference to Exhibit
4.1 of Form 8-K dated July 9, 1998)
4.2 Articles V, VI and VII of the Restated Articles of Incorporation, as
amended (See Exhibit 3.1)
4.3 Articles I, II, V, VII and X of the Restated Bylaws (See Exhibit 3.2)
10.1 Form of Indemnity Agreements with Registrant's directors and executive
officers (Incorporated herein by reference to Exhibit 10.1 of Form 10-K
for the fiscal year ended June 30, 1997)
10.2 Loan Agreement with United States National Bank of Oregon, dated March
31, 1997 (Incorporated herein
18
by reference to Exhibit 10.2 of Form 10-K for the fiscal year ended June
30, 1997)
10.3 a) Lease dated October 14, 1991 between Pacific Realty Associates, L. P.
and Registrant (for Registrant's training facility in Portland,
Oregon) (Incorporated herein by reference to Exhibit 10.7 of Form S-1
dated November 8, 1991 [No. 33-43829])
b) Lease amendment dated February 7, 1994, between Pacific Realty
Associates, L.P. and Registrant (Incorporated herein by reference to
Exhibit 10.7 of Form 10-K for the fiscal year ended June 30, 1994)
c) Lease amendment dated August 10, 1994, between Pacific Realty
Associates, L.P. and Registrant (Incorporated herein by reference to
Exhibit 10.5 of Form 10-K for the fiscal year ended June 30, 1995)
d) Lease dated August 10, 1994 between Pacific Realty Associates, L.P.
and Registrant (for the Registrant's corporate headquarters in
Portland, Oregon) (Incorporated herein by reference to Exhibit 10.4
of Form 10-K for the fiscal year ended June 30, 1995)
10.4 Restated 1986 Stock Incentive Plan (Incorporated herein by reference to
Exhibit 10.8 of Form 10-K for the fiscal year ended June 30, 1994)
10.5 1996 Stock Option Plan, as amended (Incorporated herein by reference to
Exhibit 10.5 of Form 10-K for the fiscal year ended June 30, 1998)
10.6 Employee Stock Purchase Plan (Incorporated herein by reference to
Exhibit 28.1 of Form S-8 dated December 7, 1992 [No. 33-55370])
10.7 Form of Stock Option Agreements:
a) For option grants before fiscal 1994 (Incorporated herein by
reference to Exhibit 10.9 of Form S-1 dated November 8, 1991 [No.
33-43829])
b) For option grants during fiscal 1994 (Incorporated herein by
reference to Exhibit 10.10 of Form 10-K for the fiscal year ended
June 30, 1994)
c) For option grants during fiscal 1995 (Incorporated herein by
reference to Exhibit 10.8 of Form 10-K for the fiscal year ended June
30, 1995)
10.8 Employment Agreements:
a) Employment Agreement dated January 17, 1995 with Michael D. Simon
(Incorporated herein by reference to Exhibit 10.9 of Form 10-K for
the fiscal year ended June 30, 1995)
b) Employment Agreement dated April 25, 1996 with Michael D. Simon
(Incorporated herein by reference to Exhibit 10.9 of Form 10-K for
the fiscal year ended June 30, 1996)
c) Employment Agreement dated August 18, 1997 with Frederic P. Stockton
(Incorporated herein by reference to Exhibit 10.8 of Form 10-K for
the fiscal year ended June 30, 1998)
d) Employment Agreement dated September 18, 1997 with Paul M. Brown
(Incorporated herein by reference to Exhibit 10.8 of Form 10-K for
the fiscal year ended June 30, 1998)
e) Employment Agreement dated June 22, 1998 with Danial J. Tierney
f) Employment Agreement dated September 29, 1998 with Kathleen O.
Hoogerhuis
g) Employment Agreement dated February 8, 1999 with Kurt Schusterman
10.9 Executive Supplemental Retirement Agreement with Edwin S. Chan dated
January 9, 1995 (Incorporated herein by reference to Exhibit 10.9 of
Form 10-K for the fiscal year ended June 30, 1995)
10.10 Preferred Stock and Warrants Purchase Agreement dated March 29, 1998
between the Company and 0 ReadyCash Investment Partners, L.P.
(Incorporated herein by reference to Exhibit 10 of Form 10-Q for the
quarter ended March 31, 1998)
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors
24.1 Power of Attorney (see Signature page)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K on December 9, 1998 which was
dated November 25, 1998 for the purpose of changing its fiscal year end
date to December 31 from June 30.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Portland, Oregon,
on March 30, 1999.
TRM CORPORATION
By: FREDERIC P. STOCKTON
-------------------------------------
Frederic P. Stockton
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Frederic P. Stockton his
attorney-in-fact, with the power of substitution, for him in any and all
capacities, to sign any amendments to this Report, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on March 30, 1999 on
behalf of the Registrant and in the capacities indicated:
Signature Title
- ---------------------------- ------------------------------------------------
FREDERIC P. STOCKTON
- ---------------------------- President, Chief Executive Officer and Director
Frederic P. Stockton (Principal Executive Officer and Principal
Financial Officer)
JOHN L. VARNER
- ---------------------------- Director of Finance and Accounting and Corporate
John L. Varner Controller
(Principal Accounting Officer)
EDWARD E. COHEN
- ---------------------------- Chairman of the Board and Director
Edward E. Cohen
DANIEL G. COHEN
- ---------------------------- Director
Daniel G. Cohen
JOSEPH G. DENTON
- ---------------------------- Director
Joseph G. Denton
KENT B. GODFREY
- ---------------------------- Director
Kent B. Godfrey
JOEL R. MESZNIK
- ---------------------------- Director
Joel R. Mesznik
FREDERICK O.PAULSELL
- ---------------------------- Director
Frederick O. Paulsell
DEBBIE HURD BAPTIST
- ---------------------------- Director
Debbie Hurd Baptist
KENNETH L. TEPPER
- ---------------------------- Director
Kenneth L. Tepper
20
EXHIBIT INDEX
-------------
Exhibit
Number
- -------
3.1(a) Amendments to the Restated Articles of Incorporation (Incorporated
herein by reference to Exhibit 3.1(a) of ) Form 10-K for the fiscal year
ended June 30, 1998)
3.1(b) Restated Articles of Incorporation (Incorporated herein by reference to
Exhibit 3.1(b) of Form 10-K for b) the fiscal year ended June 30, 1998)
3.2 Restated Bylaws (Incorporated herein by reference to Exhibit 3.2 of Form
10-K for the fiscal year ended June 30, 1998)
4.1 Investors' Rights Agreement (Incorporated herein by reference to Exhibit
4.1 of Form 8-K dated July 9, 1998)
4.2 Articles V, VI and VII of the Restated Articles of Incorporation, as
amended (See Exhibit 3.1) 4.3 Articles I, II, V, VII and X of the
Restated Bylaws (See Exhibit 3.2)
10.1 Form of Indemnity Agreements with Registrant's directors and executive
officers (Incorporated herein by reference to Exhibit 10.1 of Form 10-K
for the fiscal year ended June 30, 1997)
10.2 Loan Agreement with United States National Bank of Oregon, dated March
31, 1997 (Incorporated herein by reference to Exhibit 10.2 of Form 10-K
for the fiscal year ended June 30, 1997)
10.3 a) Lease dated October 14, 1991 between Pacific Realty Associates, L. P.
and Registrant (for Registrant's training facility in Portland,
Oregon) (Incorporated herein by reference to Exhibit 10.7 of Form S-1
dated November 8, 1991 [No. 33-43829])
b) Lease amendment dated February 7, 1994, between Pacific Realty
Associates, L.P. and Registrant (Incorporated herein by reference to
Exhibit 10.7 of Form 10-K for the fiscal year ended June 30, 1994)
c) Lease amendment dated August 10, 1994, between Pacific Realty
Associates, L.P. and Registrant (Incorporated herein by reference to
Exhibit 10.5 of Form 10-K for the fiscal year ended June 30, 1995)
d) Lease dated August 10, 1994 between Pacific Realty Associates, L.P.
and Registrant (for the Registrant's corporate headquarters in
Portland, Oregon) (Incorporated herein by reference to Exhibit 10.4
of Form 10-K for the fiscal year ended June 30, 1995)
10.4 Restated 1986 Stock Incentive Plan (Incorporated herein by reference to
Exhibit 10.8 of Form 10-K for the fiscal year ended June 30, 1994)
10.5 1996 Stock Option Plan, as amended (Incorporated herein by reference to
Exhibit 10.5 of Form 10-K for the fiscal year ended June 30, 1998)
10.6 Employee Stock Purchase Plan (Incorporated herein by reference to
Exhibit 28.1 of Form S-8 dated December 7, 1992 [No. 33-55370])
10.7 Form of Stock Option Agreements:
a) For option grants before fiscal 1994 (Incorporated herein by
reference to Exhibit 10.9 of Form S-1 dated November 8, 1991 [No.
33-43829])
b) For option grants during fiscal 1994 (Incorporated herein by
reference to Exhibit 10.10 of Form 10-K for the fiscal year ended
June 30, 1994)
c) For option grants during fiscal 1995 (Incorporated herein by
reference to Exhibit 10.8 of Form 10-K for the fiscal year ended June
30, 1995)
21
10.8 Employment Agreements:
a) Employment Agreement dated January 17, 1995 with Michael D. Simon
(Incorporated herein by reference to Exhibit 10.9 of Form 10-K for
the fiscal year ended June 30, 1995)
b) Employment Agreement dated April 25, 1996 with Michael D. Simon
(Incorporated herein by reference to Exhibit 10.9 of Form 10-K for
the fiscal year ended June 30, 1996)
c) Employment Agreement dated August 18, 1997 with Frederic P. Stockton
(Incorporated herein by reference to Exhibit 10.8 of Form 10-K for
the fiscal year ended June 30, 1998)
d) Employment Agreement dated September 18, 1997 with Paul M. Brown
(Incorporated herein by reference to Exhibit 10.8 of Form 10-K for
the fiscal year ended June 30, 1998)
e) Employment Agreement dated June 22, 1998 with Danial J. Tierney
f) Employment Agreement dated September 29, 1998 with Kathleen O.
Hoogerhuis
g) Employment Agreement dated February 8, 1999 with Kurt Schusterman
10.9 Executive Supplemental Retirement Agreement with Edwin S. Chan dated
January 9, 1995 (Incorporated herein by reference to Exhibit 10.9 of
Form 10-K for the fiscal year ended June 30, 1995)
10.10 Preferred Stock and Warrants Purchase Agreement dated March 29, 1998
between the Company and 0 ReadyCash Investment Partners, L.P.
(Incorporated herein by reference to Exhibit 10 of Form 10-Q for the
quarter ended March 31, 1998)
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors
24.1 Power of Attorney (see Signature page)
27.1 Financial Data Schedule
22
Independent Auditors' Report
To the Stockholders and Board of Directors TRM Corporation
formerly TRM Copy Centers Corporation):
We have audited the accompanying consolidated balance sheets of TRM Corporation
(formerly TRM Copy Centers Corporation) and subsidiaries as of December 31, 1998
and June 30, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity and cash flows for the six months ended
December 31, 1998 and for each of the years in the three-year period ended June
30, 1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TRM Corporation and
subsidiaries as of December 31, 1998 and June 30, 1998 and 1997, and the results
of their operations and their cash flows for six months ended December 31, 1998
and for each of the years in the three-year period ended June 30, 1998, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Portland, Oregon
February 19, 1999
F-1
Consolidated Balance Sheets
(In thousands)
June 30, December 31,
1997 1998 1998
--------- --------- -----------
Assets
Current assets:
Cash and cash equivalents $ 2,528 $ 20,177 $ 14,285
Accounts receivable, net 7,704 7,423 7,436
Income tax receivable -- 645 412
Inventories (note 2) 4,611 3,809 3,486
Prepaid expenses and other 1,399 1,240 1,640
Deferred tax asset (note 7) 318 644 542
--------- --------- ---------
Total current assets 16,560 33,938 27,801
Equipment and vehicles, less accumulated 33,872 41,624 51,211
depreciation (notes 3 and 4)
Other assets 46 44 140
--------- --------- ---------
$ 50,478 $ 75,606 $ 79,152
========= ========= ========
Liabilities and Shareholders' Equity Current liabilities:
Checks in transit $ 1,409 $ 553 $ 1,117
Accounts payable 1,568 7,005 8,875
Accrued expenses (note 5) 3,697 4,103 3,587
--------- --------- ---------
Total current liabilities 6,674 11,661 13,579
Long-term debt (note 6) 400 -- --
Deferred tax liability (note 7) 4,576 3,885 4,248
--------- --------- ---------
Total liabilities 11,650 15,546 17,827
--------- --------- ---------
Commitments (notes 10 and 12)
Shareholders' equity (notes 8 and 9):
Preferred stock, no par value.
Authorized 5,000 shares; 0, 1,778 -- 19,853 19,798
and 1,778 shares issued and
outstanding, respectively
Common stock, no par value.
10,000, 50,000 and 50,000 shares 16,601 18,617 19,143
authorized, respectively; 6,931,
7,057, and 7,091 shares issued and
outstanding, respectively
Accumulated Other comprehensive income (52) (107) 161
Retained earnings 22,279 21,697 22,223
--------- --------- ---------
Total shareholders' equity 38,828 60,060 61,325
--------- --------- ---------
$ 50,478 $ 75,606 $ 79,152
========= ========= =========
See accompanying notes to consolidated financial statements.
F-2
Consolidated Statements of Operations
(In thousands, except per share data)
Six-month period ended
Fiscal year ended June 30, December 31,
1996 1997 1998 1997 1998
--------- ---------- ----------- ---------- ----------
(unaudited)
Sales $ 67,538 $ 69,881 $ 68,352 $ 32,947 $ 33,334
Less discounts 11,728 11,676 11,331 5,285 5,802
Net sales 55,810 58,205 57,021 27,662 27,532
Cost of sales 28,010 28,389 28,224 14,041 14,265
--------- ---------- ----------- ---------- ----------
Gross profit 27,800 29,816 28,797 13,621 13,267
Selling, general and administrative expense 19,489 20,445 21,491 10,175 11,437
Non-cash stock compensation (note 8) -- -- 1,146 -- --
Special charges (note 4) -- 4,088 6,380 -- --
--------- ---------- ----------- ---------- ----------
Operating income (loss) 8,311 5,283 (220) 3,446 1,830
Interest expense 957 396 68 22 40
Other expense (income), net 464 720 667 266 (328)
--------- ---------- ----------- ---------- ----------
Income (loss) before income taxes 6,890 4,167 (955) 3,158 2,118
Provision (benefit) for income taxes (note 7) 2,766 1,592 (373) 1,234 807
--------- ---------- ----------- ---------- ----------
Net income (loss) $ 4,124 $ 2,575 $ (582) $ 1,924 $ 1,311
========= ========== =========== ========== ==========
Earnings per share computation:
Net Income $ 4,124 $ 2,575 $ (582) $ 1,924 $ 1,311
Preferred stock dividends -- -- -- -- (785
--------- ---------- ----------- ---------- ----------
Net income available to common shareholders $ 4,124 $ 2,575 $ (582) $ 1,924 $ 526
========= ========== =========== ========== ==========
Basic net income (loss) per share:
Shares outstanding 6,451 6,666 6,992 6,967 7,074
========= ========== =========== ========== ==========
Net income (loss) per share $ 0.64 $ 0.39 $ (0.08) $ .28 $ .07
========= ========== =========== ========== ==========
Diluted net income (loss) per share:
Shares outstanding 7,262 7,285 6,992 7,356 7,488
========= ========== =========== ========== ==========
Net income (loss) per share $ 0.57 $ 0.35 $ (0.08) $ .26 $ .07
========= ========== =========== ========== ==========
See accompanying notes to consolidated financial statements.
F-3
Consolidated Statement of Shareholders' Equity
(In thousands)
Accumulated
Other
Comprehensive Preferred Stock Common Stock Comprehesive Retained Total
Income Shares Amounts Shares Amounts Income Earnings
--------------------------------------------------------------------------------------------------
Balances, June 30, 1995 $ -- 6,432 $15,940 $ 8 $15,580 $31,528
Comprehensive income -- -- -- -- -- -- --
Net income $4,124 -- -- -- -- -- 4,124 4,124
Other Comprehensive -- -- -- -- -- -- --
income (loss), net of tax
Foreign currency (482) -- -- -- -- (482) -- (482)
------
translation adjustment
Comprehensive income $3,642 -- -- -- -- -- -- --
======
Exercise of stock options -- -- 36 137 -- -- 137
Tax benefit of stock options -- -- -- 26 -- -- 26
Issuance of stock to employees -- -- 16 111 -- -- 111
----- ------- ------ ------- ------- ------- -------
-
Balances, June 30, 1996 -- -- 6,484 16,214 (474) 19,704 35,444
Comprehensive income
Net income $2,575 -- -- -- -- -- 2,575 2,575
Other Comprehensive -- -- -- -- -- -- --
income, net of tax
Foreign currency 422 -- -- -- -- 422 -- 422
------
Translation adjustment
Comprehensive income $2,997 -- -- -- -- -- -- --
======
Exercise of stock options -- -- 468 517 -- -- 517
Tax benefit of stock options -- -- -- 96 -- -- 96
Issuance of stock to employees -- -- 6 53 -- -- 53
Purchase of outstanding shares -- -- (27) (279) -- -- (279)
----- ------- ------ ------- ------- ------- -------
--
Balances, June 30, 1997 -- -- 6,931 16,601 (52) 22,279 38,828
Comprehensive income
Net loss $(582) -- -- -- -- -- (582) (582)
Other Comprehensive -- -- -- -- -- -- --
income (loss), net of tax
Foreign currency (55) -- -- -- -- (55) -- (55)
------
translation adjustment
Comprehensive income (loss) $(637) -- -- -- -- -- -- --
======
Exercise of stock options -- -- 114 571 -- -- 571
Tax benefit of stock options -- -- -- 201 -- -- 201
Issuance of stock to employees -- -- 12 98 -- -- 98
Issuance of preferred stock 1,778 19,853 -- -- -- -- 19,853
Noncash stock compensation -- -- -- 1,146 -- -- 1,146
----- ------- ------ ------- ------- ------- -------
Balances, June 30, 1998 1,778 19,853 7,057 18,617 (107) 21,697 60,060
Comprehensive income
Net income $1,311 -- -- -- -- -- 1,311 1,311
Other Comprehensive -- -- -- -- -- -- --
income, net of tax
Foreign currency 268 -- -- -- -- 268 -- 268
------
translation adjustment
Comprehensive income $1,579 -- -- -- -- -- -- --
======
Exercise of stock options -- -- 28 179 -- -- 179
Tax benefit of stock options -- -- -- 304 -- -- 304
Issuance of stock to employees -- -- 6 43 -- -- 43
Issuance cost of preferred stock -- (55) -- -- -- -- (55)
Preferred stock dividends -- -- -- -- -- (785) (785)
----- ------- ------ ------- ------- ------- -------
--
Balances, December 31, 1998 1,778 $19,798 7,091 $19,143 $ 161 $22,223 $61,325
===== ======= ====== ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
F-4
Consolidated Statements of Cash Flows
(In thousands)
Fiscal year ended June 30, Six-month period ended
December 31,
1996 1997 1998 1997 1998
---------- ------------ ------------ ----------- ---------
(unaudited)
Operating activities:
Net Income (Loss) 4,124 2,575 (582) 1,924 1,311
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation and amortization 5,101 5,591 5,953 2,795 3,787
Loss (gain) on disposal of 40 234 175 79 (8)
Equipment and vehicles
Non-cash stock compensation -- -- 1,146 -- --
Special charges -- 4,088 6,380 -- --
Changes in items affecting
Operations:
Accounts receivable (529) (440) 281 144 (13)
Inventories 1,292 566 (692) (384) 323
Income Taxes Receivable -- -- (645) -- 233
Prepaid expenses and other 146 (189) 5 (402) (400)
Accounts payable 306 (231) 5,437 712 1,870
Accrued expenses 70 324 229 (446) (516)
Deferred income taxes 817 (311) (1,017) 512 465
---------- ------------ ------------ ----------- ---------
Total operating activities 11,367 12,207 16,670 4,934 7,052
---------- ------------ ------------ ----------- ---------
Investing activities:
Proceeds from sale of equipment 146 456 1,780 270 684
Capital expenditures (5,494) (4,562) (20,155) (5,678) (13,811)
Other 44 (33) 2 -- (96)
---------- ------------ ------------ ----------- ---------
Total investing activities (5,304) (4,139) (18,373) (5,408) (13,223)
---------- ------------ ------------ ----------- ---------
Financing activities:
Change in checks in transit (484) 471 (856) (152) 564
Net borrowings on notes payable (6,110) (7,728) (400) (400) --
Net proceeds from issuance of
Common stock 274 387 870 293 526
Net proceeds from issuance of Preferred Stock -- -- 19,853 -- --
Issuance cost of preferred stock -- -- -- -- (55)
Preferred stock dividends -- -- -- -- (785)
---------- ------------ ------------ ----------- ---------
Total financing activities (6,320) (6,870) 19,467 (259) 250
---------- ------------ ------------ ----------- ---------
Effect of exchange rate changes 375 457 (115) 179 29
---------- ------------ ------------ ----------- ---------
Net increase in cash and cash equivalents 118 1,655 17,649 (554) (5,892)
Beginning cash and cash equivalents 755 873 2,528 2,528 20,177
---------- ------------ ------------ ----------- ---------
Ending cash and cash equivalents $ 873 $ 2,528 $ 20,177 $ 1,974 $ 14,285
========== ============ ============ =========== ==========
See accompanying notes to consolidated financial statements.
F-5
Notes to Consolidated Financial Statements
1. Description of Business and Summary of Significant Accounting Policies:
Description of Business
TRM Corporation (formerly TRM Copy Centers Corporation), headquartered in
Portland, Oregon, as its primary business, owns, supplies and maintains
approximately 31,000 self-service photocopiers in large-format, multi-site
retailer locations, pharmacies, stationery stores, hardware stores, convenience
stores and other retail establishments in the United States, Canada, the United
Kingdom, France. Each retail establishment collects payment from its customers,
shares in the revenue of the photocopier and benefits from any increase in
customer traffic within the store.
Principles of Consolidation
The consolidated financial statements include the accounts of the parent
and its subsidiary companies (the Company). All significant intercompany
accounts and profits have been eliminated. Assets and liabilities of foreign
operations are translated into U.S. dollars at current exchange rates. Income
and expense accounts are translated into U.S. dollars at average rates of
exchange prevailing during the periods. Adjustments resulting from translating
foreign functional currency financial statements into U.S. dollars are taken
directly to a separate component of stockholders' equity. Foreign currency
transaction gains and losses are included in income and have been immaterial to
date.
Fair Value of Financial Instruments
Financial instruments, including cash and cash equivalents, accounts
receivable, checks in transit and accounts payable, approximate fair market
value because of the short maturity for these instruments. Fair value
approximates carrying value of the Company's borrowings under its long-term debt
arrangements based upon interest rates available for the same or similar loans.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturity
dates of three months or less to be cash equivalents.
Revenue Recognition and Accounts Receivable
A portion of each copy sale is retained by the retail business, generally
depending on copy volume. The Company invoices each retailer via monthly
billings based on usage at the program price per copy less the applicable
discount (the amount retained by the retailer). Total sales activity and
discount amounts are recorded separately in the accounting records and in the
consolidated statements of operations to arrive at net sales.
Accounts receivable are shown net of allowance for doubtful accounts of
$148,000, $156,000 and $172,000 at June 30, 1997 and 1998 and December 31, 1998,
respectively.
Inventories
Inventories are stated at the lower of FIFO cost or market.
Equipment and Vehicles
Equipment and vehicles are recorded at cost plus amounts required to place
equipment in service. Depreciation begins when the asset is placed in service
and is generally recorded using the straight-line method over the estimated
remaining useful lives of the related assets as follows:
F-6
Photocopy centers 5-10 years
Furniture and fixtures 5-7 years
Computer equipment 5 years
Vehicles 5 years
Income Taxes
The Company accounts for income taxes utilizing the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and income tax bases of assets and liabilities, and are measured by applying
enacted tax rates and laws to the taxable years in which such differences are
expected to reverse.
Stock-Based Compensation
The Company applies APB No. 25, "Accounting for Stock Issued to Employees,"
and the related interpretations in accounting for stock-based compensation
plans. In fiscal 1998, the Company recorded $1.1 million of non-cash
compensation expense related to the revision of stock options of certain
retiring members of the Company's Board of Directors. In accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation," the Company has provided the
required footnote disclosures (see note 8).
Statements of Cash Flows Supplemental Information
Income taxes paid were approximately $2,465,000, $1,635,000 and $1,171,000
for the fiscal years 1996, 1997 and 1998, respectively. During the six-month
period ended December 31, 1997 (unaudited) and December 31, 1998, income taxes
paid were approximately $808,000 and $280,000, respectively. Interest paid does
not materially differ from interest expense.
Net Income (Loss) Per Share
The Company follows the provisions of SFAS 128, "Earnings Per Share" which
requires presentation of both basic and diluted earnings per share (EPS) on the
face of the income statement. Basic EPS is computed using the weighted average
number of common shares outstanding during the period. Diluted EPS 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 for which
market price exceeds exercise price, less shares which could have been purchased
by the Company with related proceeds. The convertible preferred stock was not
included in the computation of diluted earnings per common share for the fiscal
period ended June 30, 1998 or the six-month period ended December 31, 1998,
since it would have resulted in an antidilutive effect. Dilutive common shares
consist of options to purchase common stock.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation. These changes had no impact on previously reported results of
operations or shareholder's equity.
F-7
Risks and Uncertainties
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000.
Based on a recent assessment, the Company determined that it will be
required to modify or replace significant portions of its software so that its
computer systems will function properly with respect to dates in the year 2000
and thereafter. The Company presently believes that with modifications to
existing software and conversions to new software, the Year 2000 Issue will not
pose significant operations problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Company.
This could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send customer invoices, or engage in similar normal business
activities.
Effect of Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes requirements for disclosure of comprehensive income.
The objective of SFAS No. 130 is to report all changes in equity that result
from transactions and economic events other than transactions with owners.
Comprehensive income is the total of net income and all other non-owner changes
in equity. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. Reclassification of earlier financial statements for comparative
purposes is required. The Company has adopted SFAS No. 130 in this report, and
has shown comprehensive income as part of the consolidated statement of
shareholders' equity. Previous financial statements have been retroactively
reclassified for comparative purposes.
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. During the period ended
December 31, 1998, the Company adopted SFAS No. 131. The adoption of SFAS No.
131 did not affect results of operations or financial position but did affect
the disclosure of segment information as shown in note 11 to the financial
statements included as part of this report.
2. Inventories (in thousands):
June 30, December 31,
1997 1998 1998
----------- ----------- -----------
Paper $ 1,231 $ 1,019 795
Toner and developer 692 629 678
Parts 2,688 2,161 2,013
----------- ----------- -----------
$ 4,611 $ 3,809 $ 3,486
=========== =========== ===========
F-8
3. Equipment and Vehicles (in thousands):
June 30, December 31,
1997 1998 1998
----------- ----------- ------------
Photocopiers $ 45,232 $ 50,741 $ 64,094
Furniture and fixtures 1,899 1,436 1,474
Computer equipment 1,381 1,834 1,976
Vehicles 5,109 4,680 3,626
----------- ----------- ------------
53,621 58,691 71,170
Accumulated depreciation 19,749 17,067 19,959
----------- ----------- ------------
$ 33,872 $ 41,624 $ 51,211
=========== =========== ===========
4. Special Charges:
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," during fiscal
1997. This new accounting standard requires long-lived assets to be reviewed for
impairment when circumstances indicate the carrying amount of an asset may not
be recoverable. The Company considers historical performance and future
estimated results in its evaluation of potential impairment and then compares
the carrying amount of the asset to the estimated future cash flows expected to
result from the use of the asset. If the carrying amount of the asset exceeds
estimated expected undiscounted future cash flows, the Company measures the
amount of the impairment by comparing the carrying amount of the asset to its
fair value.
During the period ended June 30, 1997, the Company recognized a non-cash
impairment charge of $4,088,000 pretax ($2,526,000 and $0.35 per share after
tax). This charge included impairment write downs of equipment in three
categories: color copiers, custom business card printing components and certain
older generation black and white copiers. It was concluded during 1997 that the
equipment purchased in 1993 and 1994 to support the Company's color and business
card businesses was technologically dated and that the full asset carrying
amounts were not recoverable. In addition, the Company entered an agreement with
a major copier manufacturer to purchase a new generation black and white copier
("NextGen(TM)") to expand its core black and white photocopy business.
During the period ended June 30, 1998, new management joined the Company
and evaluated the performance of assets in the photocopy business. With the
growth of the NextGen(TM) photocopy program, the Company has decided to retire
over half of its older Savin photocopiers at low-volume locations, resulting in
the recording of special charges as noted hereafter:
Disposal of under-performing machines $4,324
Disposal of replacement parts and inventory relating to under-performing machines 1,494
Other 562
------
Total special charges $6,380
======
F-9
5. Accrued Expenses (in thousands):
June 30, December 31,
1997 1998 1998
-------------- -------------- --------------
Accrued payroll expenses $ 2,550 $ 2,918 $ 2,287
Customer security deposits 250 218 225
Accrued taxes other than income 475 330 358
Other accrued expenses 422 637 717
-------------- -------------- --------------
$ 3,697 $ 4,103 $ 3,587
============== ============== ==============
6. Bank Borrowings (in thousands):
June 30, December 31,
1997 1998 1998
-------------- -------------- --------------
Bank revolving loan, unsecured, maximum limit of $ 400 $ -- $ --
$30.0 million ============== ============== ==============
The revolving loan agreement calls for monthly payments of interest only
until expiration on April 1, 2000, or as renegotiated. At that time, no
additional borrowings will be available, and the outstanding loan balance will
be due and payable. The arrangement allows the Company to choose from interest
rate alternatives based on the bank's reference rate or on LIBOR. It also calls
for a loan fee which was paid at the date of the loan. The interest rate
applicable to bank borrowings as of December 31, 1998 was 7.75%. The loan
agreement contains certain restrictive covenants as to working capital, total
liabilities and stockholders' equity. The Company is in compliance with the
covenants.
7. Income Taxes:
Income (loss) before income taxes is as follows (in thousands):
Six-Month Period
Fiscal Year Ended June 30, Ended December 31
-------------------------- -----------------
(unaudited)
1996 1997 1998 1997 1998
---- ---- ---- ---- ----
United States $ 6,730 $ 1,223 $ (3,900) $ 1,482 $ 971
Foreign 160 2,944 2,945 1,676 1,147
-------------------------------------------------------------------
$ 6,890 $ 4,167 $ (955) $ 3,158 $ 2,118
===================================================================
F-10
The components of income tax expense (benefit) are as follows (in
thousands):
Six-Month Period
Fiscal Year Ended June 30, Ended December 31,
-------------------------- ------------------
1996 1997 1998 1997 1998
---- ---- ---- ---- ----
(unaudited)
Current:
Federal $ 1,459 $ 1,074 $ (537) $ 21 $ --
State 424 459 -- 9 --
Foreign 66 370 877 433 275
Deferred:
Federal 564 (1,097) (598) 329 314
State 164 (320) (384) 70 68
Foreign 89 1,106 269 372 150
-------------------------------------------------------------------------
$ 2,766 $ 1,592 $ (373) $ 1,234 $ 807
=========================================================================
Deferred tax assets (liabilities) are comprised of the following components
(in thousands):
June 30, December 31,
-------- ------------
1997 1998 1998
---- ---- ----
Current:
Accrued liabilities $ 225 $ 432 $ 428
Accounts receivable allowance 55 52 52
Other 38 160 62
---------------------------------------------
$ 318 $ 644 $ 542
==============================================
Noncurrent:
Deferred Compensation $ ---- $ 458 $ 443
Net operating losses ---- 126 498
Tax depreciation in excess
of book depreciation (4,576) (4,469) (5,189)
---------------------------------------------
$ (4,576) $ (3,885) $ (4,248)
=============================================
No valuation allowance has been recorded at June 30, 1997, or 1998, or December
31, 1998.
F-11
The effective tax rate differs from the federal statutory tax rate as
follows:
Six-Month Period
Fiscal Year Ended June 30, Ended December 31
-------------------------- -----------------
(unaudited)
1996 1997 1998 1997 1998
---- ---- ---- ---- ----
Statutory federal rate 34.0% 34.0% 34.0% 34.0% 34.0%
State taxes, net of federal benefit 5.9 7.6 5.0 6.1 1.8
(Benefit) provision for foreign tax rates ---- (4.1) (5.1) (1.8) 0.4
Other 0.2 0.7 5.2 0.8 1.9
----------------------------------------------------------------------
40.1% 38.2% 39.1% 39.1% 38.1%
======================================================================
8. Stockholders' Equity:
Preferred Stock
On June 24, 1998 the Company issued and sold 1,777,778 Series A Preferred
Shares and Warrants to purchase 500,000 shares of Common Stock for net proceeds
of approximately $19.8 million. Each share of Preferred Stock has one vote, and
votes together with the Common Stock as a single class on all matters. Each
share is convertible at any time at the option of the holder into .7499997 of a
share of Common Stock. In addition, each share of Preferred Stock is
automatically converted into .7499997 shares of Common Stock if the price of
Common Stock is at least $20.00 for a period of 90 consecutive days commencing
after June 30, 1999. The conversion ratio and exercise prices are adjusted for
any combination or subdivision of shares, stock dividend, stock split or
recapitalization. Dividends on the Series A Preferred Shares are cumulative from
the date of original issuance and are payable quarterly in March, June,
September and December of each year, commencing June 1998, at the rate of 7-1/2%
per annum. In the event of any liquidation, dissolution or winding up of the
affairs of the Company, each holder of Series A Preferred Stock shall be paid
the aggregate Liquidation Value, $11.25 per share, plus all accumulated and
unpaid dividends to the date of liquidation, dissolution or winding up of
affairs before any payment to holders of Junior Securities. Preferred dividends
totaling $785,000 were paid during the six-month period ending December 31,
1998.
In conjunction with closing the preferred share transaction, the Company
amended certain retiring Board members' stock option agreements to extend the
exercise period for the options to ten years from June 24, 1998. Pursuant to APB
No. 25, and due to the extension of the exercise period, $1.1 million was
recognized as non-cash compensation expense in the year ended June 30, 1998.
Common Stock
On June 24, 1998 the Company announced shareholder approval of an amendment
to the Company's Restated Articles of Incorporation increasing the number of
authorized shares of common stock from 10,000,000 shares to 50,000,000 shares.
Common Stock Warrants
On June 24, 1998 the Company granted Warrants to purchase 500,000 shares of
Common Stock at $15.00 a share . The Warrants are exercisable in whole or in
increments of at least 75,000 shares and expire as to 200,000 shares three years
after the date of grant and as to 300,000 shares seven years after the date of
grant. The Warrants may be exercised by the payment of cash, by payment in
shares of Common Stock, or on a cashless basis whereby the Company will issue
the number of shares of Common Stock equal in value to the difference between
the fair market value of the Warrant shares and the exercise price.
F-12
Common Stock Options
The Company reserved 1,300,000 shares of common stock for issuance under an
incentive and nonqualified stock option plan established in 1986 (the "1986
Plan"). In October 1996, the 1996 Stock Option Plan (the "1996 Plan") was
approved by shareholders of the Company, which provided for the granting of a
maximum of 700,000 options to purchase common shares to key employees of the
Company. In June 1998, shareholders of the Company approved increasing the
maximum options in the 1996 Plan from 700,000 to 1,200,000, bringing the total
shares of common stock for issuance under stock option plans to 2,500,000. Under
both plans ("the Plans"), incentive stock options are granted at no less than
100% of the fair market value per share of the common stock. Nonqualified stock
options under the 1986 Plan were granted at prices determined by the Board of
Directors, while grants under the 1996 Plan are granted at no less than 100% of
fair market value. The options are exercisable over a period of ten years from
the date of grant. Generally, the options vest over five years.
A summary of stock option activity follows:
Shares Price Range Weighted
Under Option Average
Exercise Price
---------------------------------------------------------------------
Balance, June 30, 1996 1,383,050 $ .25 - $ 10.625 $ 4.12
Options granted 146,500 $ 9.875 - $ 10.375 $ 10.28
Options exercised (468,200) $ .25 - $ 6.75 $ 1.11
Options canceled (12,800) $ 6.25 - $ 10.625 $ 7.01
---------------------------------------------------------------------
Balance, June 30, 1997 1,048,550 $ 2.00 - $ 10.625 $ 6.29
Options granted 437,500 $ 9.00 - $ 14.50 $ 9.99
Options exercised (113,850) $ 4.00 - $ 10.375 $ 5.01
Options canceled (32,700) $ 6.25 - $ 10.625 $ 8.39
---------------------------------------------------------------------
Balance, June 30, 1998 1,339,500 $ 2.00 - $ 14.50 $ 7.56
Options granted 256,500 $ 8.00 - $ 10.00 $ 8.85
Options exercised (28,200) $ 4.125 - $ 6.375 $ 6.35
Options canceled (55,400) $ 6.25 - $ 10.375 $ 9.03
---------------------------------------------------------------------
Balance, December 31, 1998
(1,060,320 exercisable,
160,400 available for grant) 1,512,400 $ 2.00 - $ 10.375 $ 7.13
=====================================================================
On December 14, 1998, the Company repriced a total of 608,500 options from
their original granted exercise price to $8.00 which was above the market value
on that date. The weighted average of the original exercise price of the options
was $11.60. No compensation expense was required to be recorded in the financial
statements of the Company as a result of the repricing.
F-13
A summary of stock options outstanding follows:
Options Outstanding Options Exercisable
--------------------------------------------------------------- -----------------------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of Outstanding at Remaining Exercise Exercisable at Exercise
Exercise Price December 31,1998 Contractual Life Price December 31, 1998 Price
- -----------------------------------------------------------------------------------------------------------------------------------
$ 2.00 to $ 4.87 429,900 5.7 $ 3.74 399,900 $ 3.71
$ 5.50 to $ 7.50 124,000 6.7 $ 6.21 73,400 $ 6.07
$10.00 to $10.375 958,500 8.8 $ 8.77 587,020 $ 9.03
- -----------------------------------------------------------------------------------------------------------------------------------
$ 2.00 to $10.375 1,512,400 7.7 $ 7.13 1,060,320 $ 6.82
===================================================================================================================================
The Company applies APB No. 25 and related interpretations in accounting
for its stock-based compensation plans. Accordingly, no compensation expense has
been recognized for its stock-based compensation plans, except for $1,146,000 in
fiscal 1998 for the extension of the exercise period for certain directors. Had
compensation cost for the Company's stock option and stock purchase plans been
determined based upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under SFAS No. 123, "Accounting
for Stock-Based Compensation," the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
Six months
ended
Fiscal Year Ended June 30, December 31,
--------------------------------------------
1996 1997 1998 1998
---- ---- ---- ----
(In thousands except per share amounts)
Net Income As Reported $ 4,124 $ 2,575 $ (582) $ 1,311
Pro Forma $ 4,076 $ 2,395 $ (1,339) $ 1,129
Earnings per share - basic As Reported $ .64 $ .39 $ (.08) $ .07
Pro Forma $ .63 $ .36 $ (.19) $ .05
Earnings per share - diluted As Reported $ .57 $ .35 $ (.08) $ .07
Pro Forma $ .56 $ .33 $ (.19) $ .05
For purposes of the pro forma calculations, 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 for the fiscal years
ended June 30, 1996, 1997, 1998, and for the six-month period ended December 31,
1998 as calculated by the Black-Scholes model, and the assumptions used are
shown in the following table:
Six-month
Period ended
Fiscal Year Ended June 30, December 31,
1996 1997 1998 1998
---- ---- ---- ----
Weighted average fair value of options: $ 4.24 $ 4.13 $ 3.59 $ 2.78
Dividend yield: -- -- -- --
Expected volatility: 43.65% 39.60% 36.80% 35.60%
Risk-free interest rate: 6.46% 6.40% 5.52% 4.61%
Expected life: 4 years 4 years 4 years 4 years
F-14
The results of applying SFAS No. 123 for providing the pro-forma disclosure
for the periods presented above are not likely to be representative of future
years because options are generally granted on an annual basis and vest over
time.
9. Benefit Plans:
Profit Sharing Retirement Plan
On January 1, 1990, the Company established a profit sharing retirement
plan for eligible U.S. employees. The Plan has profit sharing and 401(k)
components. The Company's contribution under the profit sharing portion of the
Plan is discretionary. Under the 401(k) part of the Plan, each employee may
contribute, on a pretax basis, up to 20% of the employee's gross earnings,
subject to certain limitations. The Company also has supplemental retirement
plans in Canada and the United Kingdom. The Company accrued profit sharing
contributions of $240,000 for fiscal 1996, $260,000 for fiscal 1997 and $270,000
for fiscal 1998. No amounts were accrued for profit sharing during the six-month
period ended December 31, 1997 (unaudited) or December 31, 1998.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan permits each eligible employee
to purchase shares of common stock through payroll deductions, not to exceed 10%
of the employee's compensation. The purchase price of the shares is the lower of
85% of the fair market value of the stock at the beginning of each six-month
offering period or 85% of the fair market value at the end of such period.
Amounts accumulated through payroll deductions during the offering period are
used to purchase shares on the last day of the offering period. Of the 100,000
shares authorized to be issued under the Plan, 71,700 shares have been
purchased, and 28,300 shares remain available for purchase as of December 31,
1998.
10. Commitments:
The Company leases vehicles and office and warehouse space in several
locations under operating leases. Minimum lease payments are as follows:
$2,229,000, $1,980,000, $1,660,000, $1,284,000 and $938,000 for calendar years
1999, 2000, 2001, 2002 and 2003, respectively, and $3,647,000 thereafter. Rental
expense for fiscal years 1996, 1997 and 1998 was $1,921,000, $2,358,000 and
$2,818,000, respectively. Rental expenses for the six-month periods ended
December 31, 1997 (unaudited) and 1998 were 1,273,000 and 1,313,000,
respectively.
In 1998, the Company entered an agreement with Konica Business Machines
("Konica") to purchase 10,000 new, state-of-the-art black and white NextGen(TM)
photocopiers over a three year span. At December 31, 1998, the Company had
purchased over 6,000 units under this agreement. The Company fulfilled its
remaining obligation under an earlier contract with Konica to purchase 7500
photocopiers during the six-month period ended December 31, 1998.
11. Information about Geographic Areas:
During the year ended December 31, 1998, the Company adopted SFAS 131,
"Disclosures about Segment of an Enterprise and Related Information." The
Company's chief operating decision maker monitors both consolidated and
disaggregated financial information in deciding how to allocate resources and
assess performance. The Company owns and maintains self-service photocopy
machines in retail establishments. The Company believes similarities in the
nature and delivery of service, type of customers (engaged in retail sales), and
economic characteristics allow for aggregation of the geographies into one
reportable segment under SFAS 131. Accordingly, the Company is engaged in one
reportable segment defined as photocopy services.
Revenues are attributed to geographic areas based on the location of the
assets producing the revenues. All revenues are attributed to external
customers. No customers accounted for 10% or more of the Company's revenue
F-15
for the three-year period ended June 30, 1998, or the six-month period ended
December 31, 1997 or 1998. Information about the Company's domestic and foreign
operations are presented hereafter (in thousands).
SALES LONG LIVED ASSETS
Six-month period
Fiscal year ended June 30, ended December 31, June 30, December 31,
------------------------------------ ------------------------ --------------------------------------
1996 1997 1998 1997 1998 1997 1998 1998
(unaudited)
United States $45,559 $43,949 $41,563 $20,204 $20,813 $16,585 $23,554 $33,975
Foreign:
United Kingdom 14,883 18,335 19,437 9,153 9,113 12,926 12,634 11,691
Canada 4,404 4,543 4,223 2,124 1,894 1,798 2,059 2,135
France 2,692 3,038 3,093 1,442 1,514 2,403 3,421 3,550
Other -- 16 36 24 -- 206 -- --
- ---------------------------------------------------------------------------------------------------------------------------
$67,538 $69,881 $68,352 $32,947 $33,334 $33,918 $41,668 $51,351
===========================================================================================================================
12. Subsequent Event
On January 22, 1999, the Company signed a seven-year contract to be the
exclusive provider of automated teller machine (ATM) services for a chain of
approximately 1,100 convenience stores located primarily in the Southeast region
of the United States. Under the terms of the contract, the Company will be
required to pay a total of $700,000 for the exclusive right to provide ATM
services for the seven-year period upon the first installation of an ATM in one
of the stores. The terms of the contract require that the Company install a
minimum of 630 ATMs over an eighteen-month period.
F-16
13. Quarterly Financial Information (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands except per share amounts)
Fiscal year ended June 30, 1997:
Sales $ 16,577 $ 17,347 $ 18,023 $ 17,934
Net Sales 13,841 14,427 14,981 14,956
Gross Profit 6,917 7,284 7,851 7,764
Net Income (loss) 1,037 1,163 1,365 (990)
Preferred Stock Dividend -- -- -- --
Net income (loss) available to common shareholders 1,037 1,663 1,365 (990)
Basic Net Income (loss) per share .16 .18 .20 (.14)
Diluted Net Income (loss) per share .14 .16 .19 (.14)
Fiscal year ended June 30, 1998:
Sales $ 16,238 $ 16,709 $ 17,648 $ 17,757
Net Sales 13,668 13,994 14,702 14,657
Gross Profit 6,774 6,847 7,288 7,888
Net Income (loss) 1,033 891 (3,173) 667
Preferred Stock Dividend -- -- -- --
Net income (loss) available to common shareholders 1,033 891 (3,173) 667
Basic Net Income (loss) per share .15 .13 (.45) .09
Diluted Net Income (loss) per share .14 .12 (.45) .09
Six-month period ended December 31, 1998:
Sales $ 15,848 $ 17,486 N/A N/A
Net Sales 13,169 14,363
Gross Profit 6,213 7,054
Net Income 484 827
Preferred Stock Dividend (404) (381)
Net income available to common shareholders 80 446
Basic Net Income per share .01 .06
Diluted Net Income per share .01 .06
F-17
Independent Auditors' Report
The Board of Directors
TRM Corporation (formerly TRM
Copy Centers Corporation):
Under date of February 19, 1999, we reported on the consolidated balance sheets
of TRM Corporation (formerly TRM Copy Centers Corporation) as of December 31,
1998 and June 30, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the six months ended
December 31, 1998 and for each of the years in the three-year period ended June
30, 1998, which are included in Form 10-K. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule, as listed in the 14(a)(2) for Form
10-K of TRM Corporation. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Portland, Oregon
February 19, 1999
S-1
TRM Corporation (formerly TRM Copy Centers Corporation) and Subsidiaries
Schedule III - Valuation and Qualifying Accounts
Years ended June 30, 1996, 1997 and 1998
and transition period ended December 31, 1998
(In thousands)
Balance at Charged to Charged to Balance at
Beginning of Costs and Other Deductions - End of
Period Expenses Accounts Write Offs Period
----------------------------------------------------------------------------
Year ended June 30, 1996
Allowance for doubtful accounts $266 $700 $ -- $(679) $287
============================================================================
Year ended June 30, 1997
Allowance for doubtful accounts $287 $835 $ -- $(974) $148
============================================================================
Year ended June 30, 1998
Allowance for doubtful accounts $148 $771 $ -- $(763) $156
----------------------------------------------------------------------------
Reserve for deposit $100 $200 $ -- $ -- $300
----------------------------------------------------------------------------
Six months ended December 31,
1998
Allowance for doubtful accounts $156 $349 $ -- $(333) $172
----------------------------------------------------------------------------
Reserve for deposit $300 $ -- $ -- -- $300
============================================================================
S-2