ITEM 1. BUSINESS
General
Where you can find more information. We file annual, quarterly and other reports, proxy statements and other information with the Securities and Exchange Commission, or SEC. We also make available free of charge through our website at www.accesstomoney.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after they are filed electronically with the SEC.
Overview. We are an independent sales organization, or ISO, servicing businesses in the operation of automated teller machines, or ATMs. We expanded into the ATM business in 1999, leveraging the experience and infrastructure we had established in developing our photocopier operations, which began in 1981. From 1999 to 2004, we expanded our ATM operations through both internal growth and through acquisitions including, in November 2004, the acquisition of a network of over 15,000 ATMs from eFunds Corporation (“eFunds”). As a result of financial difficulties that we encountered beginning in 2005, in 2006 we determined it necessary to sell assets in order to reduce debt and to focus our business on our U.S. ATM operations. As a result, we sold our United Kingdom photocopy business in June 2006, our United Kingdom, Canadian and German ATM businesses in January 2007, our United States photocopy business in January 2007 and our Canadian photocopy business in June 2007. In April 2008, we acquired LJR Consulting Corp., d.b.a. Access to Money (“Access to Money”), which was a large independently-owned ATM company. This acquisition added 4,200 ATMs to our portfolio and brought with it a service infrastructure that we can continue to build upon. Currently, we operate ATMs in the United States. During December 2008, our United States ATM networks had 11,522 transacting ATMs.
We locate our ATMs in high traffic retail environments through national merchants such as The Pantry and Cumberland Farms, and through regional and locally-owned supermarkets, convenience and other stores. In addition to providing our merchant customers with supplemental revenues from transaction fees, we believe that the presence of ATMs in a merchant’s store helps to promote higher foot traffic, increased impulse purchases and longer shopping times since they often make the retail site a destination for cash. We attempt to maximize the usefulness of our ATMs to our customers by participating in as many electronic funds transfer networks, or EFTNs, as practical, including NYCE, Visa, Mastercard, Cirrus, Plus, American Express, Discover/Novus, and STAR.
Industry Segments and Geographical Information
Since the sale of our photocopier businesses and our foreign ATM businesses, we have only one operating segment - ATM operations in the United States.
Products and Services
We deploy ATMs under two programs:
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Company-owned program. Under this program there are three basic formats under which an ATM is operated:
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We own the ATM and are responsible for all of the operating expenses including maintenance, cash management and loading, supplies, signage and telecommunication services.
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We own the ATM and are responsible for all operational aspects of the unit except for cash management and loading.
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The merchant owns the ATM and we are responsible for all operational aspects of the unit.
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Merchant-owned program. Under a merchant-owned arrangement, the merchant typically buys the ATM through us and is responsible for most of the operating expenses, such as maintenance, cash management, supplies, and telecommunication services. We typically provide access to transaction processing services, and the merchants use our maintenance services from time to time. Our rental program is similar to our merchant-owned program, except that the merchant rents the ATM from us rather than purchasing it, and we provide the maintenance and supplies for the machine.
In December 2008 we had 2,338 ATMs operating under the programs for which we were responsible for cash management and 9,184 ATMs for which merchants were responsible for cash management.
We attempt to place ATMs in our company-owned program in high visibility, high traffic merchant locations. Our experience has demonstrated that the following locations, among others, often meet these criteria:
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convenience stores;
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combination convenience stores and gas stations;
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supermarkets;
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drug stores;
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entertainment facilities such as bowling alleys, movie theaters, amusement parks and casinos;
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restaurants and bars, particularly chain restaurants; and
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shopping malls.
We have found that the primary factors affecting transaction volume at a given ATM are its location within the site and merchandising, such as indoor and outdoor signage directing consumers to the machine location. As a result, we seek to maximize the visibility and accessibility of our ATMs, because we believe that once a customer establishes a pattern of using a particular ATM, the customer will generally continue to use that ATM.
All of our new ATMs feature advanced functionality, diagnostics and ease of use including color displays, personal computer-based operating systems, thermal printing, dial-up and remote monitoring capabilities, and upgrade and capacity-expansion capability. All machines can perform basic cash dispensing and balance inquiry transactions, transmit on-screen marketing, and dispense coupons. Most of our equipment is modular in design, which allows us to be flexible and accommodating to the needs of our clients as technology advances.
Sales and Marketing
We maintain sales and marketing capability in the United States. Our sales and marketing staff consists of four employees, including a vice president.
Our sales force maintains contact with larger accounts: retail, supermarket and convenience chains, mall developers, casinos and others. This contact familiarizes the prospect with our name and our products and services, and also heightens sales staff awareness of contract expirations and requests for proposal issued by the prospects. Additionally, we have telephone salespeople and distributors who call existing customers, independent merchants and small chain accounts to discuss contract expiration and renewal, satisfaction with current levels of service, and future equipment and service needs. We maintain a sales database to log their contacts and enable follow up calls.
Primary Supply Relationships
ATM relationships. We purchase our ATMs from Triton Systems, Hyosung America, Inc., and Tranax Technologies, Inc. We have previously purchased ATMs from NCR Corporation. We believe that the large quantity of ATMs we purchase from these manufacturers enables us to receive favorable pricing and payment terms. In addition, we maintain close working relationships with these manufacturers in the course of our business, allowing us to stay informed regarding product updates and to minimize technical problems with purchased equipment. Although we currently purchase a majority of our ATMs from Triton Systems, we believe that our relationships with Hyosung American, Inc., NCR Corporation, and Tranax Technologies, Inc. are good and that we would be able to purchase the ATMs we required from them if we were no longer able to purchase ATMs from Triton Systems.
Master Services Agreement. In connection with the acquisition of the eFunds Corporation ATM business in November 2004, we entered into a Master Services Agreement with eFunds, which we call the MSA. Through this agreement, we consolidated many of the services we had previously obtained from multiple third party service providers with one provider and transferred to eFunds some of the services we had previously provided in-house. In May 2008, we entered into a Processing Services Agreement with eFunds to terminate the MSA. In connection with
the termination of that agreement, we agreed to pay eFunds $2.5 million for the settlement of disputed charges, transition services and the early termination of the agreement.
Servicing
Through 2006 we had an extensive field servicing operation that maintained our network of ATMs and photocopiers. Through this operation, we provided installation, maintenance, diagnostic and repair services to most of our ATMs and photocopiers. Following the sale of our United States photocopy business in January 2007, we terminated our staff of field service technicians, and entered into contracts with third parties to service our ATMs.
Seasonality
We experience higher transaction volumes per machine in the second and third quarters than in the first and fourth quarters. The increased volumes in the summer months coincide with increased vacation travel.
Merchant Customers
We have contracts with national and regional merchants and with numerous independent store operators. ATMs at The Pantry locations accounted for approximately 25.0% and 18.8 % of our United States ATM net sales in 2007 and 2008, respectively. ATMs at Cumberland Farms locations accounted for approximately 11.0% and 8.2% of our United States ATM net sales in 2007 and 2008, respectively.
The terms of our contracts vary as a result of negotiations at the time of execution. The contract terms typically include:
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an initial term of at least three years;
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ATM exclusivity at locations where we install an ATM and, in many cases, a right of first refusal for all other locations;
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a requirement that the merchant provide a highly visible space for the ATM and signage;
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protection for us against underperforming locations by permitting us to increase the withdrawal fee or remove ATMs;
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provisions making the merchant’s fee variable depending on the number of ATM transactions and milestones;
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provisions imposing an obligation on the merchant to operate the ATM at any time its store is open to the public; and
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provisions that require a merchant to use its best efforts to have any purchaser of the merchant’s store assume our contract.
Competition
Individuals seeking ATM-related services have a variety of choices at banking locations and within retail establishments. The convenience cash delivery and balance inquiry market is, and we expect it to remain, highly competitive due to the fact that there are few barriers to entry into the business. Our principal competition arises from other independent sales organizations, or ISOs, similar to us including Innovus, Inc., Global Axcess Corp., International Merchant Services, Inc., Cardtronics, Inc., ATM Express, Inc., and PAI ATM Services in the United States. We also compete with numerous national and regional banks that operate ATMs at their branches and at other non-branch locations. In addition, we believe that there will be continued consolidation in the ATM industry in the United States. Accordingly, new competitors could emerge and potentially acquire significant market share.
Government and Industry Regulation
Our ATM business is subject to government and industry regulations which are subject to change. Our failure to comply with existing or future laws and regulations pertaining to our ATM business could result in restrictions on our ability to provide our products and services, as well as the imposition of civil fines.
Electronic Funds Transfer Act. The United States Electronic Funds Transfer Act, while directed principally at banks and other financial institutions, also has provisions that apply to us. In particular, the act requires ATM operators who impose withdrawal fees to notify a customer of the withdrawal fee before the customer completes a withdrawal and incurs the fee. Notification must be made through signs placed at or on the ATM and by notification either on the ATM screen or through a print-out from the ATM. All of our ATMs in the United States provide both types of notification.
Americans with Disabilities Act. The ADA currently includes provisions regulating the amount of clear floor space required in front of each ATM, prescribing the maximum height and reach depth of each ATM and mandating that instructions and all information for use of the ATM be made accessible to and independently usable by persons with vision impairments. The Department of Justice may adopt new accessibility guidelines under the ADA that will include provisions addressing ATMs and how to make them more accessible to the disabled. Under the proposed guidelines that have been published for comment but not yet adopted, ATM height and reach requirements would be shortened, keypads would be required to be laid out in the manner of telephone keypads, and ATMs would be required to possess speech capabilities, among other modifications. If adopted, these new guidelines would affect the manufacture of ATM equipment going forward and could require us to retrofit ATMs in our network as those ATMs are refurbished or updated for other purposes.
Regulation of transaction fees. The imposition of fees on ATM transactions in the United States is not currently subject to federal regulation. There have been, however, various state and local efforts in the United States to ban or limit transaction fees, generally as a result of activities of consumer advocacy groups that believe that transaction fees are unfair to users. We are not aware of any existing bans or limits on transaction fees applicable to us in any of the jurisdictions in which we currently do business with the exception of Mississippi and Wyoming. Nevertheless, there can be no assurance that transaction fees will not be banned or limited in other cities and states where we operate. Such a ban or limit could have a material adverse effect on us and other ATM operators.
EFTN regulations. EFTNs have adopted extensive regulations that are applicable to various aspects of our operations and the operations of other ATM operators. The Electronic Fund Transfer Act, commonly known as Regulation E, is the major source of EFT network regulations. The regulations promulgated under Regulation E establish the basic rights, liabilities, and responsibilities of consumers who use electronic fund transfer services and of financial institutions that offer these services. The services covered include, among other services, ATM transactions. Generally, Regulation E requires us to provide notice of the fee to be charged the consumer, establish limits on the consumer’s liability for unauthorized use of his card, provide receipts to the consumer, and establish protest procedures for the consumer. We believe that we are in material compliance with these regulations and, if any deficiencies were discovered, that we would be able to correct them before they had a material adverse impact on our business.
Encrypting Pin Pad (“EPP”) and Triple Data Encryption Standard (“Triple DES”). Data encryption makes ATMs more tamper-resistant. Two of the more recently developed advanced data encryption methods are commonly referred to as EPP and Triple DES. In 2005, we adopted a policy that any new ATMs that we acquire from a manufacturer must be both EPP and Triple DES compliant. As of December 31, 2008, all our owned ATMs in the United States were compliant with EPP and Triple DES and all our merchant-owned ATMs actively operating also met the required standards.
Rehabilitation Act. On December 1, 2006, a United States District Court ruled that the United States’ currencies (as currently designed) violate the Rehabilitation Act, a law that prohibits discrimination in government programs on the basis of disability, as the paper currencies issued by the United States are identical in size and color, regardless of denomination. Under the current ruling, the United States Treasury Department has been ordered to develop ways in which to differentiate paper currencies such that an individual who is visually impaired would be able to distinguish between the different denominations. In response to the December 1, 2006 ruling, the Justice Department has filed an appeal with the United States Court of Appeals for the District of Columbia Circuit, requesting that the decision be overturned on the grounds that varying the size of denominations could cause significant burdens on the vending machine industry and cost the Bureau of Engraving and Printing an initial investment of $178.0 million and up to $50.0 million in new printing plates. While it is still uncertain at this time what the outcome of the appeals process will be, in the event the current ruling is not overturned, our company along with other participants in the ATM industry may be forced to incur significant costs to upgrade current machines’ hardware and software components.
Trademarks
Most of our ATM locations are identified by distinctive yellow, green and black trapezoidal signs bearing “TRM ATM(TM),” “Got Cash?”, and “TRM Cash Machine(TM).” We have registered the name “TRM Corporation(TM)” and “TRM ATM(TM)” trademarks for signage used in the United States. Those trademarks currently expire between 2009 and 2011 but can be renewed. Access to Money claims common law trademark rights in the names “Access to Money”, “Access to Money We’ll Show you the Money”, “Acce$$ to Money”, “Acce$$ to Money We’ll Show you the Money” and its logo, in connection with the goods of automated teller machines, namely, electronic currency dispensing apparatus for installation in retail environments other than banks, and instruction manuals sold as a unit therewith. We consider our business name and brands to be important to our business.
Employees
As of December 31, 2008, we had 61 employees working in marketing, customer service and administration. None of our employees is represented by a union or covered by a collective bargaining agreement. We believe that our relations with our employees are good.
ITEM 1A.
ITEM 1A. RISK FACTORS
Risks Related to Our Business Generally
The terms of our credit agreements may restrict our current and future operating and financial flexibility.
The agreements that are in effect with respect to the remaining debt include a number of covenants that, among other things, restrict our ability to:
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engage in mergers, consolidations and asset dispositions;
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pay dividends on or redeem or repurchase stock;
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merge into or consolidate with any third party;
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create, incur, assume or guarantee additional indebtedness;
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create, incur, assume or permit any liens on any asset;
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make loans and investments;
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engage in transactions with affiliates;
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prepay, redeem or repurchase subordinated indebtedness;
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enter into sale and leaseback transactions;
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make asset or property dispositions; and
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change the nature of our business.
Our credit agreements also contain covenants that require our operations to produce minimum quarterly, six, nine, and twelve month fiscal period EBITDA amounts (as defined in the agreements) and that we maintain a certain level of minimum liquidity.
A failure to comply with the covenants under our credit agreements could result in an event of default. In the event of a default under our credit agreements, the lenders could elect to declare all borrowings outstanding, together with accrued and unpaid interest and other fees, to be due and payable, and to require us to apply all of our available cash to repay these borrowings.
Our sales depend on transaction fees from our network of ATMs. A decline in either transaction volume or the level of transaction fees could reduce our sales and harm our operating results.
Our operating results depend on both transaction volume and the amount of the transaction fees we receive from our ATM network. Our transaction volume and fees depend principally upon:
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our ability to replace sites lost through non-renewal or termination of our contracts by the merchants in whose stores we currently have placed our ATMs;
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competition, which can result in over-served markets, pressure both to reduce existing fee structures and increase sales discounts to merchants and reduced opportunities to secure merchant or other placements of our machines;
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our ability to service, maintain and repair ATMs in our network promptly and efficiently;
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continued market acceptance of our services; and
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government regulation and network adjustment of our fees.
If our transaction volume or the level of transaction fees we receive decrease, our sales could decline, which would impact our operating results.
If merchant-owned ATM customers terminate their relationships with us prior to the termination of their contract or do not renew their contracts upon their expiration, it could reduce our ATM sales.
Although our merchant-owned ATM customers have multi-year contracts with us for transaction processing services, due to competition, some of these customers may leave us for our competitors prior to the expiration of their contracts, or may not renew their contracts upon their expiration. When this occurs, we pursue these customers to remain processing with us or alternatively, in the event they terminate their relationship with us prior to expiration of their contracts, we seek payment of damages under a breach of contract clause in our contracts. If a substantial number of merchant-owned ATM customers end their relationships with us, it could cause a material reduction in our ATM sales.
Changes in technology standards may cause us to incur substantial expense in upgrading or replacing our ATMs and could reduce use of ATMs and reduce our sales.
New technology in the ATM industry may result in the existing machines in our networks becoming obsolete, requiring us, or the merchants in our networks who own their machines, to either replace or upgrade our existing machines. Any replacement or upgrade program to machines that we own or that we must upgrade or replace under contracts with merchant owners would involve substantial expense, as was the case with respect to the upgrade of our ATMs to meet triple DES requirements. A failure to either replace or upgrade obsolete machines could result in customers using other ATM networks that could employ newer technology, thereby reducing our sales and reducing or eliminating our operating margins. As a result of our financial situation, we may not have sufficient capital to provide upgrades or replacements to a significant degree, which could impact our operating results.
The Americans with Disabilities Act, or ADA, currently includes provisions regulating the amount of clear floor space required in front of each ATM, prescribing the maximum height and reach depth of each ATM, and mandating that instructions and all information for use of the ATM be made accessible to and independently usable by persons with vision impairments. The Department of Justice is currently drafting new accessibility guidelines under the ADA that will cover virtually all aspects of commercial activity relating to disabled persons. We expect that these new guidelines will include provisions addressing ATMs and how to make them more accessible to the disabled. Under the current proposals, height and reach requirements would be shortened, keypads would be required to be laid out in the manner of telephone keypads with selected Braille symbols and ATMs would be required to possess speech capabilities. These new guidelines would affect the manufacture of ATM equipment going forward and could require us to retire or upgrade many of the ATMs we own, as well as merchant-owned ATMs where we are responsible for upgrade costs, potentially at significant expense to us. While we anticipate having the resources available to complete any required upgrades to our ATMs, if our projections are not achieved or our circumstances worsen, we may not have sufficient resources without obtaining additional financing, which may not be available to us. The comment period on the proposed guidelines ended May 31, 2005. No guidelines have yet been promulgated. Should the guidelines proposed become final, we anticipate an 18-month phase-in before new equipment in new locations must comply with new accessibility requirements. If ATMs in our network are not compliant with any applicable ADA guidelines by any
established deadlines and we cannot obtain compliance waivers, we could have to remove the non-compliant ATMs from service and, as a result, our ATM net sales could be materially reduced during the period of time necessary to become compliant.
The ATM market is highly competitive, which could limit our growth or reduce our sales.
Persons seeking ATM services have numerous choices. These choices include ATMs offered by banks or other financial institutions and ATMs offered by ISOs such as ours. Some of our competitors offer services directly comparable to ours while others are only indirect competitors as we describe in “Business - Competition.” In addition, we believe that there will be continued consolidation in the ATM industry in the United States. Accordingly, new competitors may emerge and quickly acquire significant market share. This competition could prevent us from obtaining or maintaining desirable locations for our machines, reduce the use of our machines, and limit or reduce the transaction fees we can charge or require us to increase our merchants’ share of those fees. The occurrence of any of these factors could limit our growth or reduce our sales.
We rely on third parties to service our ATMs and their failure to do so may harm our operations, damage our reputation and decrease our transaction volume.
Our success depends upon the proper functioning of our ATMs. We rely on third party service providers to service our ATMs. If our third-party service providers fail to service our ATMs properly, or fail to respond quickly to problems, we may lose customers which will decrease our transaction volume and adversely affect our ability to become profitable. Additionally if our third-party service providers fail to service our ATMs, our reputation and ability to grow may be impaired.
Increases in interest rates will increase our expenses.
We have a cash provisioning agreement that has a variable interest rate formula. Consequently, increases in interest rates increase our operating costs and expenses. See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk - Interest Rate Risk” for a discussion regarding the impact of changes in interest rates on our expenses.
Our ATM business operates in a changing and unpredictable regulatory environment.
ATM withdrawal transactions involve the electronic transfer of funds through EFTNs. The United States Electronic Funds Transfer Act provides the basic framework establishing the rights, liabilities and responsibilities of participants in EFTNs. In addition, there have been various state and local efforts to ban, limit or otherwise regulate ATM transaction fees, which make up a large portion of our sales. For example, in Tennessee, Nebraska and Iowa only bank-sponsored ATMs can impose withdrawal fees. As a result, in these states we must make arrangements with a local bank to act as a sponsor of ATMs in our networks, which typically involves additional documentation costs and payment of a fee to the bank. Any limitation on our ability to charge withdrawal fees in areas where we have a concentration of ATMs could reduce our ATM sales and reduce the incentive that merchants would have to keep ATMs in our network on their premises. In addition, if existing regulations are made more restrictive or new regulations are enacted, we may incur significant expense to comply with them.
Because of reported instances of fraudulent use of ATMs, including the use of electronic devices to scan ATM card information, or skimming, legislation is pending that would require state or federal licensing and background checks of ATM operators and would regulate the deployment and operation of ATMs. There are proposals pending in some jurisdictions that would require merchants that are not financial institutions to be licensed in order to maintain an ATM on their premises; some jurisdictions currently require such licensing. New licensing, deployment or operating requirements could increase our cost of doing business in those markets.
The passing of anti-money laundering legislation could cause us to lose some merchant accounts, thus reducing our revenues.
Recent concerns expressed by the United States federal government regarding the use of ATMs to launder money could lead to the imposition of additional regulations on our sponsoring financial institutions and our merchant customers regarding the source of cash loaded into their ATMs. In particular, such regulations could result in the incurrence of additional costs by individual merchants who load their own cash, thereby making their ATMs less profitable. Accordingly, some individual merchants may decide to discontinue their ATM operations, thus reducing the number of merchant-owned accounts that we currently manage. If such a reduction were to occur, we would see a corresponding decrease in our revenues.
If we, our transaction processors, our EFTNs or our other service providers experience system failures, the ATM products and services we provide could be delayed or interrupted, which would harm our business.
Our ability to provide reliable service largely depends on the efficient and uninterrupted operations of our transaction processors, EFTNs and other service providers. Any significant interruptions could severely harm our business and reputation and result in a loss of sales. Additionally, if we cause any such interruption, we could lose the affected merchants or damage our relationships with them. Our systems and operations, and those of our transaction processors, EFTNs and other service providers, could be exposed to damage or interruption from fire, natural disaster, unlawful acts, terrorist attacks, power loss, telecommunications failure, unauthorized entry and computer viruses. We cannot be certain that any measures we and our service providers have taken to prevent system failures will be successful or that we will not experience service interruptions. Further, our property and business interruption insurance may not be adequate to compensate us for all losses or failures that may occur.
We rely on EFTNs and transaction processors; if we cannot renew our agreements with them, if they are unable to perform their services effectively or if they decrease the level of the transaction fees we receive, it could harm our business.
We rely on several EFTNs and transaction processors to provide card authorization, data capture and settlement services to us and our merchant customers. Any inability on our part to renew our agreements with these or similar service providers or their failure to provide their services efficiently and effectively may damage our relationships with our merchants and may permit those merchants to terminate their agreements with us.
Our ATM net sales depend to a significant extent upon the transaction fees we receive through EFTNs. If one or more of the EFTNs in which we participate reduces the transaction fees it pays us, and we are unable to route transactions to other EFTNs to replace them, our ATM net sales would be reduced.
We could lose access to vault cash used to fill our placement ATMs under a cash provisioning agreement.
We obtain the cash, which we call vault cash, to fill our company-owned ATMs in the United States through a cash provisioning agreement with ELAN Financial Services. If our cash provisioning agreement terminates, we may be unable to obtain cash from alternative sources on acceptable terms or at all. If we do not have access to vault cash for our company-owned ATMs we will have to suspend our operations with respect to these ATMs, our results of operations will be reduced and the value of our shareholders’ investments will decrease.
Risks Relating to Our Common Stock
Our charter documents and Oregon law may inhibit a takeover that shareholders may consider favorable.
The Oregon Business Corporation Act, our restated articles of incorporation and our restated bylaws contain provisions that could have the effect of delaying, deferring or preventing a change in control of our company or our management that shareholders may consider favorable or beneficial, which could reduce the value of our shareholders’ investments. These provisions could discourage proxy contests and make it more difficult for shareholders to elect directors and take other corporate actions. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock. These provisions include:
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authorization to issue “blank check” preferred stock, which is preferred stock that can be created by our board of directors without prior shareholder approval and with rights senior to those of common stock;
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a classified board of directors, so that it could take three successive annual meetings to replace all directors;
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authority for directors to establish the size of the board of directors without shareholder approval;
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a requirement of a 75% vote of shareholders to remove a director for cause;
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a requirement of a 75% vote of shareholders for business combinations with a 5% or greater shareholder that is not approved by our board of directors, with only limited exceptions; and
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an advance notice requirement for shareholder proposals.
Our stock could be removed from the Pink Sheets electronic quotation service through which broker-dealers can make markets and enter orders to buy and sell shares of our stock. Our securities are not technically listed on the Pink Sheets so it is not possible for our stock to be delisted. However, if all market makers stop quoting our stock it could be removed from the service and impede shareholders and investors from buying and selling the shares. Our
stock is also on Bulletin Board quotation services by FINRA. To remain on this service we need to maintain our SEC reporting status. If we encounter regulatory issues with the SEC we could be removed from both quotation services and impede shareholders and investors from buying and selling shares of our stock.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2.
ITEM 2. PROPERTIES
Our principal office is located at 1101 Kings Highway N, Suite G100, Cherry Hill, New Jersey 08034. We currently lease approximately 20,572 square feet in Portland and sublease 18,072 square feet of that space to other tenants. The lease runs until 2010, with an option for an additional five-year term. We leased 3,100 square feet of office space in Philadelphia, Pennsylvania for use as executive offices under a month-to-month rental agreement until March 31, 2008. Effective March 1, 2008, we entered into a 38-month lease for 3,000 square feet of office space in Cherry Hill, New Jersey for use as executive office space. Effective July 1, 2008, we entered into a 60-month lease for 14,289 square feet of office and warehouse space in Whippany, New Jersey. We vacated most of our warehouse space and storage units during 2007 and continue to be obligated under leases that expire in 2010 for approximately 7,230 square feet of warehouse space at two locations. If we cannot renew any of the current leases we want to retain, we do not anticipate that we will have difficulty in leasing suitable replacement space.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are a defendant in one action that has arisen in the normal course of business. We believe that the ultimate disposition of this matter is immaterial to our business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 2008.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
NASDAQ Delisting
On September 12, 2007, we were notified by NASDAQ that our common stock was subject to delisting from the NASDAQ Global Market because we were not in compliance with the Minimum Bid Price Rule because the bid price per share of our common stock closed below $1.00 per share for 30 consecutive business days. We were provided with 180 calendar days, or until March 10, 2008, to regain compliance with the Minimum Bid Price Rule. However, we were not able to do so. On March 12, 2008, we announced that we had failed to comply with NASDAQ’s minimum bid price requirement and as a result, no longer met the requirements for continued listing on the NASDAQ Global Market. We received an additional NASDAQ Staff Determination Letter dated March 19, 2008, stating that our shares would be delisted from the NASDAQ Global Market as a result of our failure to satisfy the minimum stock price requirement of the NASDAQ Global Market as set forth in Marketplace Rule 4450(a).
NASDAQ’s staff notified us that, unless we requested an appeal of the delisting determination, NASDAQ would suspend trading of our common stock at the opening of business on March 28, 2008, and our common stock would subsequently be delisted. We requested a hearing to appeal the Staff’s determination however, due to the close proximity in timing to our transaction to acquire Access to Money we decided to withdraw our request for a hearing and have our shares delisted from the NASDAQ Global Market. Effective April 24, 2008, our common stock was delisted from the NASDAQ Global Market, and is no longer traded on that market. Since April 24, 2008, our stock has been quoted on the Pink Sheets LLC, an electronic quotation service through which participating broker-dealers can make markets and enter orders to buy and sell shares of companies. As a consequence of the delisting, the ability of a stockholder to sell our common stock and the price obtainable for our common stock may be materially impaired. Even if we regain compliance with the minimum stock price requirement and seek to be relisted, we cannot be certain that NASDAQ will approve any application we may make for relisting or that any other exchange will approve our common stock for listing. See Item 1A, “Risk Factors - Risks Relating to Our Common Stock - The delisting of our common stock from the NASDAQ Global Market may result in impairment of the price at which our common stock trades and the liquidity of the market for it.”
Market Price Range
The following table sets forth the high and low bid prices as reported by the NASDAQ Global Market and the Pink Sheets during the past two years.
As of March 18, 2009, there were 21,485,619 shares of common stock outstanding held by 186 persons of record.
Dividends
We have not paid any dividends on our common stock, and we do not plan to pay dividends on our common stock for the foreseeable future. We intend to retain earnings, if any, to fund our operations. Subject to our credit agreements discussed in the next paragraph, our Board of Directors will determine any changes in our dividend policy
based upon its analysis of factors it deems relevant. We expect these factors will include our earnings, financial condition and cash requirements.
Our ability to pay cash dividends on our common stock is subject to restrictions imposed by our credit agreements which prohibit us from paying cash dividends on our common stock without our lenders’ consent.
Securities Authorized for Issuance under Equity Compensation Plans
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data derived from our consolidated financial statements. This data should be read in conjunction with the financial statements, related notes and other financial information included elsewhere in this report. The December 31, 2004 and 2005 financial statements are not included in this report.
Selected Financial Data
Years ended December 31, 2004 - 2008
(In thousands, except per share and other operating data)
Notes regarding comparability of information:
1. During the fourth quarter of 2004, we discontinued efforts in the software development segment of our business. We show the results of the software development segment as discontinued operations.
2. In 2004 we acquired the ATM business of eFunds and completed four other acquisitions.
3. During the third quarter of 2006 we recorded a non-cash charges of $96.1 million for the impairment of certain assets, of which $43.3 million is included in continuing operations and $52.8 million is included in discontinued operations.
4. In June 2006 we sold our United Kingdom photocopier business.
5. In January 2007 we sold our ATM businesses in the United Kingdom, Germany and Canada and our United States photocopy business. In June 2007 we sold our Canadian photocopy business. We show the results of those business segments as discontinued operations. Other operating data shown above excludes the ATMs of the discontinued operations.
6. In April 2008 we acquired the ATM business of Access to Money. During the fourth quarter of 2008 we recorded a non-cash charge of $19.8 million for the impairment of goodwill.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report on Form 10-K with respect to our beliefs, plans, objectives, goals, expectations, anticipations, intentions, financial condition, results of operations, future performance and business, including, without limitation, growth of our business (including acquisitions) constitutes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We have based these forward-looking statements on management’s current expectations about future events. These statements can be
identified by the fact that they do not relate strictly to historical or current facts, and by words such as “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan” or other similar words or expressions.
Any or all of the forward-looking statements in this report and in any other public statements we make may turn out to be wrong. This can occur as a result of inaccurate assumptions or as a consequence of known or unknown risks and uncertainties. We discuss many of the risks and uncertainties that may impact our business in Item 1A - “Risk Factors.” Because of these risks and uncertainties, our actual results may differ materially from those that might be anticipated from our forward-looking statements. Other factors beyond those referred to above could also adversely affect us. Therefore, you are cautioned not to place undue reliance on our forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise except as required under the federal securities laws and the rules and regulations of the SEC.
Overview
ATM operations. We entered the ATM business in 1999, believing it to be a natural extension of our background in providing photocopiers to consumers in retail environments. From 1999 to 2005 we expanded our ATM networks to an average of 19,930 transacting ATMs in 2005. We grew our ATM business by acquiring ATMs or ATM networks, establishing new merchant relationships, expanding existing merchant relationships and displacing existing third-party operators as their contracts expired. As a result of the increasing size of our ATM networks, improved transaction pricing, our institution of a redeployment program for underperforming machines and favorable exchange rate movements, our ATM net sales increased from $34.5 million in 2003 to $50.5 million in 2004 and $90.5 million in 2005. In 2006, as a result of attrition of merchant contracts and limited capital available for expansion, our ATM net sales decreased to $81.7 million, including $39.6 million from our United Kingdom, German and Canadian ATM operations which are now reported as discontinued operations. Since January 2007 we have operated ATMs only in the United States.
ATM acquisitions. From the second half of 2003 through the end of 2005, we actively pursued acquisitions of ATM networks. We acquired a 20-ATM United States network in February 2004 from a company that continues to serve as a distributor for us. In June 2004, we entered the Canadian ATM market through our acquisition of Mighty Cash, which had 72 ATMs. We added 447 ATMs to our UK networks through our acquisition of Inkas Financial in March 2004, and added 350 ATMs to our UK networks by purchasing a portfolio of contracts in July 2004. In November 2004, we acquired the ATM business of eFunds, including ownership and/or management of approximately 14,000 ATMs in the United States and 1,700 ATMs in Canada. During the third quarter of 2005 we entered into agreements to acquire the ATM business of Travelex UK Limited in the United Kingdom. We subsequently determined that we would not complete this acquisition and that of one other ATM business that we had been evaluating, and previously capitalized external costs totaling $5.2 million relating to these acquisitions were charged to expense in the fourth quarter of 2005.
We acquired eFunds’ ATM business in November 2004. As a result, our United States ATM net sales increased from $18.9 million in 2004 to $49.2 million in 2005. In 2006 our net sales decreased to $42.1 million, primarily as a result of attrition of ATM contracts acquired in the acquisition of eFunds’ ATM business. Principally because of decreases in our sales and operating margins, we reviewed the carrying value of substantially all of our long-lived assets, which resulted in our recording non-cash charges of $96.1 million for asset impairments. Also contributing to the increased losses in 2006 were increases in our cost of vault cash and interest expense and a loss on early extinguishment of debt.
Subsequent to the end of fiscal year 2005, based upon our financial performance during the second half of 2005, we determined that we were in default under certain financial covenants contained in our credit facility administered by Bank of America. We entered into a forbearance agreement with the lenders with respect to that facility, and in June 2006 we refinanced our then-existing debt with a new credit facility with GSO Origination Funding Partners LP, Wells Fargo Foothill, and other lenders. However, our financial performance in the third quarter of 2006 caused us not to be in compliance with certain covenants in the new credit facility, and we entered into agreements with the lenders to restructure our loans. Under the modified agreements all but $25 million of our debt was due in the first quarter of 2007. Because of the new repayment terms, during January 2007 we sold our Canadian, United Kingdom and German ATM businesses and our United States photocopier business, and used $98.5 million from the proceeds of those sales to make principal and interest payments under our financing agreements. These payments repaid all but $2.0 million of our principal and accrued interest under the credit facility.
During 2006 we operated ATM networks in the United States, United Kingdom, Canada and Germany, and we operated photocopier networks in the United States, United Kingdom and Canada. In June 2006 we sold our United Kingdom photocopy business. In January 2007 we sold our ATM businesses in the United Kingdom, Germany
and Canada and our United States photocopy business. In June 2007 we sold our Canadian photocopy business. Our remaining business operates ATMs in the United States. During 2008 our United States ATM networks had an average of 10,840 transacting ATMs.
On April 18, 2008, we borrowed $11.0 million pursuant to a Securities Purchase Agreement (the “Securities Purchase Agreement”) with LC Capital Master Fund, Ltd. as lender (the “Lender”) and Lampe, Conway & Co., LLC as administrative and collateral agent (the “Lampe Loan Facility”). We used the proceeds from this loan primarily to pay (1) the remaining balance that we owed to GSO Origination Funding Partners, LP and the other lenders, (2) $1.0 million we borrowed from LC Capital Master Fund, Ltd. in February 2008, (3) $1.0 million we owed under a settlement agreement with the purchaser of our United Kingdom and German ATM businesses, (4) a $2.5 million settlement we owed to eFunds and (5) the cash portion of the purchase price for the acquisition of Access to Money. The $11.0 million note from the Lender bears interest at 13%, payable semiannually, and is due in April 2011. The Lampe Loan Facility includes covenants that require us to maintain a certain balance of cash and investments, to meet quarterly minimum Consolidated EBITDA targets (as defined in the Securities Purchase Agreement) and maintain at least 10,250 ATMs. The borrowings pursuant to the Lampe Loan Facility are collateralized by substantially all of our assets and the assets of our subsidiaries. As of December 31, 2008, we had met all the covenants under the Lampe Loan Facility.
Net sales were $42.1 million in 2006, $33.7 million in 2007, and $31.9 million in 2008.
In 2006 we incurred a net loss of $120.1 million, in 2007 we incurred a net loss of $8.4 million and in 2008 we incurred a net loss of $26.0 million.
Photocopier operations. Before we sold our United Kingdom photocopier business in June 2006, our United States photocopier business in January 2007 and our Canadian photocopier business in June 2007, our photocopier operations had been experiencing declining numbers of photocopies made per machine, from 24,144 in 2004 to 16,387 in 2006. We attribute this to increased competition from specialty full-service business centers, copy and print shops, photocopiers located at other convenient merchant locations and home photocopiers and printers. The number of photocopiers we had in service also decreased from an average of 25,239 during 2004 to an average of 20,289 during 2006 as we discontinued service at unprofitable or marginal locations. These trends, combined with the sale of our United Kingdom photocopy business, resulted in a decline of our photocopier net sales from $42.2 million in 2004 to $27.4 million in 2006. We now report all of our photocopier operations as discontinued operations.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Sales
In 2008, our United States ATM consolidated sales from continuing operations decreased by $1.8 million, or 2.0%, to $88.6 million from $90.4 million in 2007.
ATM sales. We derive most of our ATM sales from transaction-based sales. We also generate ATM sales from the sale of ATM equipment and third-party service sales. We describe these sources of sales below.
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Transaction-based sales - sales we derive from withdrawal fees and interchange fees.
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Withdrawal fees - fees we receive from a processor derived from a customer making an ATM withdrawal. Withdrawal fees are sometimes referred to as surcharge or convenience fees in the industry.
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Interchange fees - fees that an EFTN charges the customer’s financial institution for routing a withdrawal transaction or an account balance inquiry. The interchange fee is shared between the EFTN and us, as the ATM service provider, based on an agreement between us and the EFTN. Interchange fees apply on all transactions on ATMs that we own and ATMs owned by merchants and managed or serviced by us.
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Service and other sales - fees we charge for providing repair and maintenance and other services and parts and supplies to merchants who purchase or rent ATMs from us and to third-party ATM operators.
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Sales of ATM equipment - sales of ATM equipment to merchants in our merchant-owned program and to independent operators.
Transaction-based sales decreased $2.1 million as the result of attrition of merchant contracts in our ATM network in addition to the impact of the general state of the economy and its affect on consumer spending. This was
offset by additional transactional revenue that was added as the result of the acquisition of Access to Money on April 18, 2008. The average number of transacting ATMs in our network during 2008 increased by 5.7% compared to 2007. The increase in transacting ATMs is primarily the result of ATM contracts acquired from the acquisition of Access to Money in April 2008.
The average number of withdrawal transactions per ATM per month decreased in 2008 to 264 from 286 in 2007. This change was due to an increase in the number of merchant-owned machines to the overall ATM population as a result of the acquisition of Access to Money’s ATM portfolio which was predominately merchant based. Average transaction-based sales per withdrawal in 2008 remained constant compared to 2007.
Sales Commissions
Our merchants receive fees from transactions generated by the ATMs on their premises. These fees, or sales commissions, represent a share of transaction fees. The amount of the commission depends on a variety of factors, including the type of arrangement under which we place the ATM with the merchant and the number of transactions at the ATM. Sales commissions in our United States ATM business were 69.6% of transaction-based sales in 2008 and 67.9% in 2007. The average discount per withdrawal transaction increased by $.04 from 2007 to 2008 as a result of a larger number of merchant-owned machines under which the merchant receives a larger portion of the commission.
Cost of Sales
Cost of sales decreased by $4.2 million to $18.6 million or 21.0%, of gross sales in 2008, from $22.9 million or 25.3% of gross sales in 2007.
Prior to the sale of our photocopy business, our field service employees maintained both our photocopy and ATM equipment. As a result of the sale of our United States photocopy business, we determined that it would be more economical to hire third parties to perform maintenance on our equipment and on merchant’s equipment where that is our responsibility. As of December 31, 2006, we had 129 field service employees in the United States doing maintenance on equipment for both our ATM and photocopy businesses. As of June 30, 2007, we terminated all of our field service employees. During the first and second quarters of 2007 we transitioned our ATM maintenance function from our own field service employees to third parties. During 2008, our expense for outsourced ATM service decreased by $501,000 as compared to 2007. This decrease was the result of incurring no internal field service costs and a slight reduction in third party service costs.
Due to the discontinuance of field service technicians in 2007, we stopped inventorying parts and used ATMs in the normal course of business, and we decided to sell or dispose of that inventory. As a result, cost of sales for 2007 included a $270,000 charge to write down our inventories to their estimated net realizable value.
As a result of our restructuring effort that occurred in 2007 and continued in 2008, we saw the following reductions in 2008:
Selling, General and Administrative Expense
Selling, general and administrative expense, excluding the $19.8 million impairment charge discussed below, decreased by $2.4 million to $14.0 million in 2008 from $16.5 million in 2007. Selling, general and administrative expense as a percent of gross sales decreased to 15.8% in 2008 from 18.2% in 2007 excluding the $19.8 million impairment charge. Specific decreases included:
These decreases were offset by increases that were mainly attributable to the acquisition of Access to Money in April 2008. Specific increases included:
No general corporate overhead expenses have been allocated to discontinued operations.
Impairment Charges
As of December 31, 2007, our assets include goodwill of $16.7 million and other intangible assets with a net carrying amount of $585,000. Statement of Financial Accounting Standards No. 142, or SFAS 142, “Goodwill and Other Intangible Assets” provides that goodwill and other intangible assets that have indefinite useful lives will not be amortized, but instead must be tested at least annually for impairment, and intangible assets that have finite useful lives should be amortized over their estimated useful lives. SFAS 142 also provides specific guidance for testing goodwill and other non-amortized intangible assets for impairment. SFAS 142 requires management to make certain estimates and assumptions in order to allocate goodwill to reporting units and to determine the fair value of a reporting unit’s net assets and liabilities, including, among other things, an assessment of market conditions, projected cash flows, interest rates, and growth rates, which could significantly impact the reported value of goodwill and other intangible assets. Furthermore, SFAS 142 exposes us to the possibility that changes in market conditions could result in potentially significant impairment charges in the future.
We evaluate the recoverability of our goodwill by estimating the future discounted cash flows in combination with calculating the market value of the reporting unit to which the goodwill relates. We use discount rates corresponding to our cost of capital, risk adjusted as appropriate, to determine such discounted cash flows, and consider current and anticipated business trends, prospects, and other market and economic conditions when performing our evaluations. Such evaluations are performed at a minimum on an annual basis, or more frequently based on the occurrence of events that might indicate a potential impairment.
During the fourth quarter of 2008 we recorded a non-cash charge of $19.8 million for the impairment of goodwill.
Under the provisions of SFAS No. 142, the first step of our test for impairment of goodwill requires us to estimate the fair value of each reporting unit and compare the fair value to the reporting unit’s carrying value. We determined the fair value of our reporting unit using a discounted cash flow approach and market approach utilizing based on the Company's publicly traded stock price with a control premium. A comparative market multiple approach was also analyzed but only for comparison purposes. The discounted cash flow approach calculated the present value of projected future cash flows using appropriate discount rates. The market approach we utilized was based on the Company's publicly traded stock price with a control premium. The comparative market multiple approach used only for comparative purposes provided indications of value based on market multiples for public companies involved in similar lines of business. The fair values derived from these valuation methods were compared to the carrying value of the reporting unit to determine whether impairment exists. In determining the fair values of our reporting unit as of November 30, 2008 (our measurement date), we applied a weighting of 50% to each approach.
It was determined that the reporting unit’s carrying amount exceeded its fair value and that we had to perform the second step of the impairment test. The second step involved allocating the reporting unit’s fair value to all of its recognized and unrecognized assets and liabilities in order to determine the implied fair value of the goodwill as of the testing date. The implied fair value of the reporting unit’s goodwill is then compared to the carrying amount of goodwill to quantify an impairment charge as of the assessment date.
We prepared our discounted cash flow analysis in the same manner as we have prepared it in prior years. We further updated all significant assumptions in light of current market and regulatory conditions. The key assumptions we used in preparing our discounted cash flow analysis were (1) projected cash flows, (2) risk adjusted discount rate, and (3) expected long term growth rate. We based our projected cash flows on our actual 2008 operating results through November 30 and on budgeted operating amounts for 2009. For 2010 and future periods (through 2014), we assumed a compound revenue growth rate of 6.6%, compound direct operating expense growth rates of 6.6% and compound selling, general and administrative expense growth rate 7.2%. In evaluating our expense growth rates, we assumed that direct expenses would track revenues and that selling, general and administrative expenses would track the growth in inflation. We used a risk-adjusted discount rate of 21.0%.
We used the Capital Asset Pricing Model (“CAPM”) to estimate the required return on common equity capital. CAPM postulates that the opportunity cost of equity capital is equal to the return on risk-free securities plus the systematic risk (beta) of a business multiplied by the market price of risk (equity risk premium) plus an added return for certain business specific characteristics.)
Our valuation methodology estimated the fair values of our reporting unit as determined under both the discounted cash flow analysis and market approach described above, we compared the aggregate weighted fair value for our reporting unit under these approaches to the fair value of the company, as a whole. We computed the company’s fair value, as of November 30, 2008 by (1) multiplying: (a) the closing price for a share of our common stock $0.18 to $0.19, based on the stock price as of the Valuation Date and the 60 day moving average and (b) the number of outstanding shares of our common stock,; and (3) adding a control premium of 20%, which we refer to as the “market capitalization approach.” We have applied a control premium to our market capitalization analysis because such premiums are typically paid in acquisitions of publicly traded companies. These control premiums represent the ability of an acquirer to control the operations of the business. We based our control premium on data over the last 12 months prior to the valuation date. Using the market capitalization approach described above, our company had an estimated fair value of $25.1 million.
After evaluating the results of each of these analyses, we believe that the discounted cash flow and market approach provide reasonable estimates of the fair value of our reporting units because these approaches are based on our 2008 actual results and best estimates of 2009 performance. We have consistently used these approaches in determining the value of our goodwill and these types of analyses are used by the research analysts that follow us.
The value of our company, as established by the market capitalization approach, is driven by a decline in our stock price, which began in 2006 and continued during 2007 and 2008 as a result of the difficulties associated with the acquisition of a large ATM portfolio. A comprehensive restructuring effort was implemented during 2007 and 2008 which has positively impacted operating results over those periods. Further, the daily trading volume in our stock is very low partly as a result of our move to the Pink Sheets market from NASDAQ in 2008. We also believe that the volatility in the overall market has significantly impacted our market capitalization.
Due to the current economic environment there can be no assurances that the Company’s estimates and assumptions regarding the duration of the economic recession, or the period or strength of recovery, made for purposes of the Company’s goodwill impairment testing during the year ended December 31, 2008 will prove to be accurate predictions of the future. If the Company’s assumptions regarding forecasted revenues or margin growth rates of the reporting units are not achieved, the Company may be required to record goodwill impairment losses in future periods. It is not possible at this time to determine if any such future impairment loss would result or, if it does, whether such charge would be material.
The following table reflects the change in the carrying amount of goodwill for the two years ended December 31, 2008 (in millions):
Restructuring Charges
In connection with a corporate restructuring plan we announced in November 2006 and the subsequent sales of a substantial portion of our operations, we made significant staff reductions, including all of our United States field
service employees, by the end of May 2007. We vacated leased warehouse and office space occupied by the terminated employees. During the first six months of 2007 we paid severance of $167,000 to terminated employees.
During the first six months of 2007 we vacated warehouse and office space in eleven United States locations. We leased the vacated space under leases with remaining terms up to seven years. We recorded a liability of $796,000 as of March 31, 2007, which was the estimated fair value of the costs that we expect to incur without any economic benefit, and we charged that amount to expense in the first quarter of 2007. We estimated the fair value of the liability based on the discounted value of the remaining lease payments, reduced by estimated sublease payments that we reasonably expect could be obtained for use of the properties. The costs for both severance payments and vacated leases are included in restructuring charges in our statement of operations for 2007. As of December 31, 2008, we have only one lease for warehouse space which is utilized for records retention.
Equipment Write-offs
In the third quarter of 2007 contracts with three merchants that had TRM-owned ATMs in their stores were terminated, and we began removing those ATMs. In part because we no longer have technicians on our staff, we decided that we would not be refurbishing, upgrading and redeploying these ATMs, and we arranged to sell them to third parties. In addition, based on a review of our ATMs in storage, we decided that it would not be cost-effective to refurbish and upgrade most of our stored machines to current standards. As a result, in the third quarter of 2007 we charged $1.1 million to equipment write-offs to write down the equipment to be sold to its estimated net realizable value.
In 2008, we sold 286 ATMs owned by us to a single customer. As a result of this sale, similar smaller sales, and the disposition of ATMs that could not be repaired, we had losses of $550,000 on these asset dispositions.
Interest Expense and Amortization of Debt Issuance Costs
Interest expense and amortization of debt issuance costs increased to $4.1 million in 2008 from $464,000 in 2007. The terms of our financing agreements required us to use substantially all of the net proceeds from the sales of businesses in June 2006 and January 2007 to pay debt. Accordingly, we have allocated interest on the lesser of the amount repaid or debt outstanding to discontinued operations. On April 18, 2008, we borrowed $11.0 million pursuant to a Securities Purchase Agreement (the “Securities Purchase Agreement”) with the LC Capital Master Fund, Ltd. (the “Lender”) and Lampe, Conway & Co., LLC, as administrative and collateral agent (the “Lampe Loan Facility”) and issued a $9.8 million note to the former owner of Access to Money. Both the notes in connection with the acquisition of Access to Money and in connection with the Lampe Loan Facility bear interest at 13% per annum. In addition, debt issuance costs relating to the Lampe Loan Facility included $5.9 million for the estimated value of the warrants issued to the Lender. The warrants will be amortized over the 3-year term of the $11,000,000 note issued under the Securities and Purchase Agreement. See Note 7 to our consolidated financial statements for a discussion of the Lampe Loan Facility. Interest and amortization of debt issuance costs were allocated between continuing operations and discontinued operations as follows (in thousands):
The increase in total interest and amortization of debt issuance costs in 2008 was primarily due to the interest under the Lampe Securities Purchase Agreement, Warrants associated with the Lampe transaction and interest under the Stock Purchase Agreement with Doug Falcone for the purchase of Access to Money.
Loss on Early Extinguishment of Debt
The $1.5 million loss on early extinguishment of debt in 2008 was from writing off deferred financing costs in conjunction with refinancing our previous debt. The $4.8 million loss on early extinguishment of debt for 2007 resulted from writing off deferred financing costs of $4.1 million in connection with early payment of our term loans and line of credit and a $750,000 payment penalty accrued relating to the early termination of our vault cash arrangement.
Tax Rate
For 2008 we did not allocate any tax provision to continuing operations. Our benefit for income taxes for 2007 was $1.2 million on a pretax loss from continuing operations of $3.0 million. The tax provision differs from the statutory rate due primarily to losses for which no tax benefit can be recorded. We did not record a tax benefit because we are uncertain that we will be able to realize the benefit of our net operating loss carryforwards and future deductible amounts. See Note 8 to our consolidated financial statements.
Loss from Discontinued Operations
On June 28, 2006, we sold all of the outstanding shares of TRM Copy Centres (U.K.) Limited, our United Kingdom photocopier subsidiary, to an unrelated third party for cash.
In December 2006 we entered into agreements to sell substantially all of the assets of our United States photocopy segment and our Canadian ATM segment. The sale of the Canadian ATM business closed January 12, 2007. The sale of the United States photocopy business closed January 29, 2007.
Effective January 24, 2007, we sold all of the shares of our United Kingdom ATM subsidiary that owned our ATM businesses in the United Kingdom and Germany.
On June 19, 2007, we sold substantially all of the assets of our Canadian photocopy business.
The operations of our Canadian, United Kingdom and German ATM businesses and our United Kingdom, United States and Canadian photocopy business are shown as discontinued operations for all periods presented in our consolidated statements of operations.
Our pretax income from discontinued operations was $5.4 million in 2007, compared to zero in 2008. See Note 12 to our consolidated financial statements for additional information regarding our discontinued operations.
Net Income (Loss)
Our net loss increased by $17.7 million to $26.1 million in 2008 from $8.4 million in 2007. The major factors contributing to the 2008 net loss were a $19.8 million impairment of goodwill, a $4.1 million increase in interest expense, both of which were offset by a $4.2 million decrease in cost of sales and a reduction of $2.4 million in sales, general and administrative expense excluding the $19.8 million impairment charge.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Sales
In 2007, consolidated sales from continuing operations decreased by $17.3 million, or 16.0%, to $90.4 million from $107.7 million in 2006.
ATM sales. We derive most of our ATM sales from transaction-based sales. We also generate ATM sales from the sale of ATM equipment and third-party service sales. We describe these sources of sales below.
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Transaction-based sales - sales we derive from withdrawal fees and interchange fees.
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Withdrawal fees - fees we receive from a processor derived from a customer making an ATM withdrawal. Withdrawal fees are sometimes referred to as surcharge or convenience fees in the industry.
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Interchange fees - fees that an EFTN charges the customer’s financial institution for routing a withdrawal transaction or an account balance inquiry. The interchange fee is shared between the EFTN and us, as the ATM service provider, based on an agreement between us and the EFTN. Interchange fees apply on all transactions on ATMs that we own and ATMs owned by merchants and managed or serviced by us.
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Service and other sales - fees we charge for providing repair and maintenance and other services and parts and supplies to merchants who purchase or rent ATMs from us and to third-party ATM operators.
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Sales of ATM equipment - sales of ATM equipment to merchants in our merchant-owned program and to independent operators.
Our United States ATM sales were $90.4 million for 2007 compared to $107.7 million for 2006. The $17.3 million decrease in ATM sales was due to a combination of a $14.9 million decrease in transaction-based sales, a $1.6 million decrease in sales of ATM equipment and an $853,000 decrease in service and other sales.
The $17.3 million decrease in transaction-based sales resulted from attrition of merchant contracts in our ATM network. The average number of transacting ATMs in our network during 2007 decreased by 17.2% compared to 2006. The decrease in transacting ATMs is primarily a result of attrition in ATM contracts acquired from eFunds in 2004. See Item 1A - “Risk Factors - Risks Relating to Our ATM Business - If merchant-owned ATM customers terminate their relationships with us prior to the termination of their contracts or do not renew their contracts upon their expiration, it could reduce our ATM sales.”
The average number of withdrawal transactions per ATM per month stayed almost constant in 2007 as compared to 2006. Average transaction-based sales per withdrawal increased by $.09, or 3.9%, due to increases in withdrawal fees.
Sales Discounts
Our merchants receive fees from transactions generated by the ATMs on their premises. These fees, or sales discounts, represent a share of transaction fees. The amount of the discount depends on a variety of factors, including the type of arrangement under which we place the ATM with the merchant and the number of transactions at the ATM. Sales discounts in our United States ATM business were 67.9% of transaction-based sales in 2007 and 66.6% in 2006. The average discount per withdrawal transaction increased by $.09, matching the increase in transaction-based revenue per transaction.
Cost of Sales
Cost of sales decreased by $608,000, but increased to 25.3% of gross sales in 2007, from 21.8% in 2006.
Prior to the sale of our photocopy business, our field service employees maintained both our photocopy and ATM equipment. As a result of the sale of our United States photocopy business, we determined that it would be more economical to hire third parties to perform maintenance on our equipment and on merchant’s equipment where that is our responsibility. During the first and second quarters of 2007 we transitioned our ATM maintenance function from our own field service employees to third parties. During 2007, our expense for third party ATM service increased by $4.0 million as compared to 2006. This increase was partially offset by a decrease of $1.8 million in our cost of labor, parts and vehicle expense attributed to our United States ATM business. As of December 31, 2006, we had 129 field service employees in the United States doing maintenance on equipment for both our ATM and photocopy businesses. As of June 30, 2007, we had terminated all of our field service employees.
Additionally, since we no longer have field service technicians on our staff, we are no longer using our inventory of parts and used ATMs in the normal course of business, and we have decided to sell or otherwise dispose of that inventory. As a result, cost of sales for 2007 includes a $270,000 charge to write down our inventories to their estimated net realizable value.
The increases in ATM maintenance costs and inventory writedowns charged to cost of sales were offset by:
In the past we have had crime insurance to reimburse us for losses that exceeded certain deductible levels. For the policy year beginning July 1, 2005, due to proposed increases in both the deductible level and the cost of the insurance, we began insuring only against catastrophic cash losses.
Selling, General and Administrative Expense
Selling, general and administrative expense attributed to continuing operations decreased by $14.1 million to $16.5 million in 2007 from $30.5 million in the prior year. Selling, general and administrative expense as a percent of sales decreased to 18.2% in 2007 from 28.4% in the prior year. Specific decreases included:
No general corporate overhead expenses have been allocated to discontinued operations.
Impairment Charges
During the third quarter of 2006 we recorded non-cash charges of $96.1 million for the impairment of certain assets in our ATM and photocopier segments, as follows:
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ATM goodwill. Because of continuing decreases in sales and operating margins in the ATM segments and other factors, we re-evaluated our financial forecasts in the third quarter of 2006 and concluded that it was necessary to review goodwill in our United States, Canadian and United Kingdom ATM segments for impairment of value. The review, consisting of a comparison of the carrying value of the goodwill to its implied fair value, resulted in impairment charges of $20.4 million in the United States, $5.8 million in Canada and $17.5 million in the United Kingdom. Our estimate of the implied fair value of the United States ATM segment’s goodwill was based on the quoted market price of our common stock and the discounted value of estimated future cash flows over a six-year period with residual value, using an 11% discount rate. Our estimate of the implied fair value of the Canadian and United Kingdom ATM segments’ goodwill was based on the estimated selling prices of those ATM segments. The $20.4 million impairment charge relating to our United States ATM operations is included in the results of our continuing operations, while the charges relating to our Canadian and United Kingdom ATM operations are included in discontinued operations.
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Finite-lived intangible assets associated with the ATM businesses. Because of faster than anticipated attrition of customer contracts, operating losses and revised financial forecasts, we concluded that it was necessary to review the carrying value of the long-lived assets of our United States, Canadian and United Kingdom ATM segments. In that review, we determined that the future cash flows from those assets were not adequate to recover those assets, and we recorded impairment charges of $22.9 million in the United States, $272,000 in Canada and $7.7 million in the United Kingdom, based on comparisons of the carrying amounts of the assets to their estimated fair values. Our estimate of the fair value of the United States assets was based on the discounted values of estimated future cash flows over a seven-year period using an 11% discount rate. Our estimates of the fair value of the Canadian and United Kingdom assets were based on the estimated selling price of those ATM segments. The $22.9 million impairment charge relating to our United States ATM operations is included in the results of our
continuing operations, while the charges relating to our Canadian and United Kingdom ATM operations are included in discontinued operations.
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Photocopy equipment in the United States and Canada. Because of operating losses in our United States and Canadian photocopy segments and revised financial forecasts, we concluded that it was necessary to review the carrying value of those segments’ long-lived assets, which consist almost entirely of photocopy equipment. As a result, we determined that future cash flows from the photocopy segments were not adequate to recover the carrying value of that equipment, and we recorded impairment charges of $18.7 million in the United States and $2.7 million in Canada based on a comparison of the carrying amounts of these assets to their estimated fair values. Our estimates of the fair values of the asset groups were based on the estimated selling price of the United States photocopy segment and the discounted value of estimated future cash flows over a ten-year period using an 11% discount rate for the Canadian photocopy segment. Impairment charges relating to photocopy equipment are included in discontinued operations.
Restructuring Charges
In connection with the corporate restructuring plan we announced in November 2006 and the subsequent sales of a substantial portion of our operations, we have made significant staff reductions, including termination by the end of May 2007 of substantially all of our United States field service employees. We have also vacated leased warehouse and office space occupied by the terminated employees. During the first six months of 2007 we paid severance of $167,000 to terminated employees. During the first six months of 2007 we vacated warehouse and office space in eleven United States locations. We leased the vacated space under leases with remaining terms up to seven years. We recorded a liability of $796,000 as of March 31, 2007, which was the estimated fair value of the costs that we expect to incur without any economic benefit, and we charged that amount to expense in the first quarter of 2007. We estimated the fair value of the liability based on the discounted value of the remaining lease payments, reduced by estimated sublease payments that we reasonably expect could be obtained for use of the properties.
The costs for both severance payments and vacated leases are included in restructuring charges in our statement of operations for 2007.
Equipment Write-offs
In the third quarter of 2007 contracts with three merchants that had TRM-owned ATMs in their stores were terminated, and we began removing those ATMs. In part because we no longer have technicians on our staff, we decided that we would not be refurbishing, upgrading and redeploying these ATMs, and we arranged to sell them to third parties. In addition, based on a review of our ATMs in storage, we decided that it would not be cost-effective to refurbish and upgrade most of our stored machines to current standards. As a result, in the third quarter of 2007 we charged $1.1 million to equipment write-offs to write down the equipment to be sold to its estimated net realizable value.
Interest Expense and Amortization of Debt Issuance Costs
Interest expense and amortization of debt issuance costs attributed to continuing operations increased to $464,000 in 2007 from $1,000 in 2006. The terms of our financing agreements required us to use substantially all of the net proceeds from the sales of businesses in June 2006 and January 2007 to pay debt. Accordingly, we have allocated interest on the lesser of the amount repaid or debt outstanding to discontinued operations. Interest and amortization of debt issuance costs were allocated between continuing operations and discontinued operations as follows (in thousands):
The decrease in total interest and amortization of debt issue costs in 2007 was primarily due to decreased amounts owed on our credit facilities. Because the payments we made in January 2007 reduced the balance of our outstanding debt under our credit facility with GSO Origination Funding Partners LP and the other lenders to $2.0 million from $99.3 million at December 31, 2006, we expect our future interest expense to be substantially reduced from the 2005 and 2006 levels.
Loss on Early Extinguishment of Debt
Loss on early extinguishment of debt for 2006 was $3.1 million. This loss resulted from writing off costs we had deferred in conjunction with refinancing our previous debt and payment of a prepayment penalty to our former lenders. The $4.8 million loss on early extinguishment of debt for 2007 resulted from writing off deferred financing costs of $4.1 million in connection with early payment of our term loans and line of credit and a $750,000 payment penalty accrued relating to the early termination of our vault cash arrangement.
Tax Rate
For 2007 we did not allocate any tax provision to continuing operations. Our benefit for income taxes for 2006 was $5.2 million on a pretax loss from continuing operations of $58.8 million. The tax provision differs from the statutory rate due primarily to losses for which no tax benefit can be recorded. We did not record a tax benefit because we are uncertain that we will be able to realize the benefit of our net operating loss carryforwards and future deductible amounts. See Note 8 to our consolidated financial statements.
Loss from Discontinued Operations
On June 28, 2006, we sold all of the outstanding shares of TRM Copy Centres (U.K.) Limited, our United Kingdom photocopier subsidiary, to an unrelated third party for cash.
In December 2006 we entered into agreements to sell substantially all of the assets of our United States photocopy segment and our Canadian ATM segment. The sale of the Canadian ATM business closed January 12, 2007. The sale of the United States photocopy business closed January 29, 2007.
Effective January 24, 2007, we sold all of the shares of our United Kingdom ATM subsidiary that owned our ATM businesses in the United Kingdom and Germany.
On June 19, 2007, we sold substantially all of the assets of our Canadian photocopy business.
See “Risk Factors - Risks Related to our Business Generally - We could be liable for sales price adjustments and warranty/indemnification claims relating to businesses we sold in 2006 and 2007,” for a discussion of possible sales price adjustments and warranty or indemnification claims including those relating to taxation matters.
The operations of our Canadian, United Kingdom and German ATM businesses and our United Kingdom, United States and Canadian photocopy business are shown as discontinued operations for all periods presented in our consolidated statements of operations.
Our pretax income from discontinued operations was $5.4 million in 2007, compared to a pretax loss of $65.9 million in 2006. Discontinued operations for 2006 includes impairment charges relating to goodwill, finite-lived intangible assets and equipment totaling $52.8 million. See Note 12 to our consolidated financial statements for additional information regarding our discontinued operations.
Net Income (Loss)
Our net loss decreased by $111.7 million, to $8.4 million in 2007 from $120.1 million in 2006. The major factors contributing to the decreased net loss were:
Liquidity and Capital Resources
General
We incurred a net loss of $120.1 million in the year ended December 31, 2006. As a result of our financial performance for the three months ended September 30, 2006, we failed to meet certain financial covenants of our financing agreements with GSO Origination Funding Partners LP and other lenders. On November 20, 2006 we entered into amendments that restructured our loans and waived the failure to meet the loan covenants.
Between June 2006 and June 2007, we sold our photocopier businesses and our foreign ATM businesses and used substantially all of the net proceeds from those sales to pay debt. Our remaining debt under a credit facility pursuant to which we owed GSO Origination Funding Partners LP (“GSO”) and the other lenders was $99.3 million and $2.1 million as of December 31, 2006 and 2007, respectively.
In November 2007, we entered into a settlement agreement with Notemachine relating to the sale of our United Kingdom and German ATM businesses to Notemachine in January 2007. Pursuant to the settlement agreement, we agreed to repay £3.0 million ($6.4 million using exchange rates as of December 31, 2007) in full and final settlement of claims by Notemachine relating to the sales. Upon closing the Lampe Loan Facility in April 2008, we paid Notemachine £506,000 plus outstanding interest, reducing the balance outstanding to £1.4 million. We also executed an amended settlement agreement with Notemachine on April 18, 2008 under which the outstanding balance is due in monthly payments of £71,212 including interest at 15% through March 2010. Earlier payment is required if we obtain sufficient financing or accumulate a certain level of surplus cash (both as defined in the amended settlement agreement).
In February 2008, we entered into a Securities Purchase Agreement with LC Capital Master Fund, Ltd. and Lampe Conway & Co., LLC, serving as the administrative agent, pursuant to which we borrowed $1.0 million. £380,000 from the proceeds of the loan was used to pay the remainder of the January 2008 payment due to Notemachine, together with interest on the unpaid balance. The Lampe Facility loan bore interest equal to adjusted LIBOR (as defined in the Securities Purchase Agreement) plus (i) 5% for each interest period for which we pay interest in cash or (ii) 15% for each interest period for which we do not pay interest in cash. We also granted a warrant to LC Capital Master Fund, Ltd., to purchase in the aggregate 2,500,000 shares of our common stock at an exercise price initially equally to $0.40 per share, subject to adjustment for any recapitalizations, stock combinations, stock dividends and stock splits. The warrant may be exercised at any time and expire on February 8, 2015. We have agreed to file a registration statement with the SEC covering the resale of the shares issuable on the exercise of the warrant pursuant to a registration rights agreement between us and LC Capital Master Fund, Ltd.
On April 18, 2008, we borrowed $11.0 million pursuant to the Securities Purchase Agreement. The $11.0 million loan bears interest at 13%, payable semiannually, and is due in April 2011. The Lampe Loan Facility includes covenants that require us to maintain a certain balance of cash and investments and to meet quarterly minimum Consolidated EBITDA targets (as defined in the Securities Purchase Agreement) and maintain at least 10,250 ATMs. The borrowings pursuant to the Lampe Loan Facility are collateralized by substantially all of our assets and the assets of our subsidiaries. We used proceeds from this loan primarily to pay (1) the remaining balance due under our 2006 financing arrangement with GSO and the other lenders, (2) the previous $1.0 million note issued from the Lender (the “Lampe Note”), (3) $1.0 million we owed under a settlement agreement with Notemachine Limited (“Notemachine”), (4) the $2.5 million settlement we owed to eFunds and (5) the cash portion of the purchase price for our acquisition of Access to Money as discussed in Note 2 to our consolidated financial statements.
In connection with the Lampe Loan Facility, we granted warrants to the Lender to purchase up to 12,500,000 shares of our common stock at an exercise price initially equal to $.28 per share subject to adjustment for any recapitalizations, stock combinations, stock dividends and stock splits or if we issue common stock, or securities convertible into common stock, at a lower price. The warrants are exercisable at any time and expire on April 18, 2015. Upon the issuance of the warrants to the Lender in April 2008 with a lower exercise price, the exercise price of the warrants issued in February was automatically reduced to $.28 per share. These warrants are exercisable at any time and expire on February 8, 2015.
The Securities Purchase Agreement provides that as long as the Lender holds an aggregate of 1,250,000 warrant shares or warrants exercisable for 1,250,000 warrant shares, the Lender is entitled to appoint to our board of directors one designee selected by the Lender. If the Lender holds an aggregate of 2,500,000 warrant shares or warrants exercisable for 2,500,000 warrant shares, the Lender is entitled to appoint to our board of directors three designees selected by the Lender. The Lender currently has appointed three directors to our board of directors pursuant to this right.
On May 30, 2008, the Lender transferred 1,250,000 of its warrants to Cadence Special Holding II, LLC (“Cadence”), at an exercise price equal to $0.28 per share. The warrants are exercisable at any time and expire on April 18, 2015. We agreed to register the shares subject to the warrants.
Our principal ongoing funding requirements are for working capital to finance our operations, fund capital expenditures and make payments on our debt.
After borrowing $11.0 million under the Lampe Loan Facility in April 2008 and the repayment of the remaining balance with GSO, the Company eliminated its position of default that could have triggered additional cross defaults raising questions about its ability to continue as a going concern. We believe that our liquidity and capital resources are adequate for our currently anticipated needs and feel that we are positioned to enter into collaborative relationships, raise additional capital, and continue to improve the financial condition and results of operations.
As part of the purchase price for all of the capital stock of Access to Money, in April 2008 we issued a note payable to the former owner in the amount of $9.8 million. The note bears interest at 13% per annum with interest payable quarterly and the principal balance due April 18, 2015. Payments under the promissory note are subordinated to the payment in full of the Lampe Loan Facility and the amended and restated settlement agreement with Notemachine.
During 2008, we used $6.0 million of cash in operating activities as compared to $5.6 million generated from operating activities in 2007. Cash used in operating activities in 2008 includes $1.1 million transferred from restricted cash held as collateral for letters of credit. During 2007 we received $101.5 million cash proceeds from the sale of discontinued operations, and we used $98.6 million of that cash to pay debt, reducing the balance of our syndicated debt to $2.1 million at the end of 2007.
We had cash and cash equivalents of $4.5 million at December 31, 2008, compared to $3.9 million at December 31, 2007, and a net working capital deficit of $4.2 million at December 31, 2008 compared to a net working capital deficit of $2.4 million at December 31, 2007. The working capital deficits were partially caused by the classification of all of our debt facilities as current liabilities due to our loan covenant defaults. As of December 31, 2006, we classified all of the assets of the businesses sold in January 2007 as current assets, because the proceeds from those sales were required to be used to pay debt classified as a current liability. This debt was substantially repaid in January 2007. Subject to the matters discussed in the following paragraphs, we believe that our liquidity and capital resources are adequate for our currently anticipated needs.
Vault Cash Facility
General. In March 2000, we established a facility for funding the cash which is placed in our ATM equipment (which we refer to as “vault cash”) for our United States ATMs. During 2008, we had access to $100.0 million of vault cash under the facility. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - United States Vault Cash Facility” in our Annual Report on Form 10-K/A, filed on April 29, 2008, for a discussion of this vault cash facility.
Termination. In March 2008, we notified the Trust and the other parties to the vault cash facility that we intended to terminate the vault cash arrangement with them and that we had made arrangements with another provider of vault cash to provide similar services. On November 5, 2008, we terminated the vault cash arrangement. TRM Inventory Funding Trust paid $50.9 million in consideration for the termination of the vault cash arrangements. This included a prepayment fee of $750,000. We terminated the letter of credit guaranteeing our performance as servicer of the previous vault cash facility, and used $2.0 million of it to establish a new letter of credit with our new cash provider. The Trust had no assets or liabilities at December 31, 2008, and will be permanently dissolved in 2009.
New Facility
Pursuant to a Cash Provisioning Agreement effective as of August 28, 2007, as amended, between Genpass Technologies, L.L.C., doing business as Elan Financial Services, TRM ATM Corporation (“TRM ATM”), and Pendum, Inc., and an ATM Vault Cash Purchase Agreement effective as of June 26, 2008, between Elan, TRM Inventory Funding Trust, TRM ATM, and DZ Bank AG, Deutsche Zentral-Genossenschaftsbank Frankfurt AM Main (“DZ Bank”), we have transferred the provisioning of cash for 92 ATMs to Elan.
TRM ATM Corporation entered into an ATM Vault Cash Purchase Agreement, effective on November 3, 2008, with Elan, TRM Inventory Funding Trust and DZ Bank (the “ATM Vault Cash Purchase Agreement”). The ATM Vault Cash Purchase Agreement provided that on November 5, 2008, TRM Inventory Funding Trust would sell
the cash in the ATMs to Elan, which Elan would then provide to us. As of December 31, 2008, the TRM Inventory Funding Trust is no longer consolidated in the financial statements due to the termination of the Loan and Servicing Agreement with DZ Bank.
TRM ATM entered into a series of Cash Provisioning Agreements with U.S. Bank National Association, doing business as Elan Financial Services (“Elan”), and various armored car carriers, dated October 31, 2008 (the “Cash Provisioning Agreements”). The Cash Provisioning Agreements provide that Elan will provide cash, through the use of armored car carriers, for our ATMs. The term of the Cash Provisioning Agreements is for a period of five years and automatically renews for additional one year periods unless either party gives the other parties notice of its intent to terminate. We are responsible for the payment of fees related to the use of the cash. We provided Elan with a subordinated lien and security interest in the ATMs, subject to the security interest of Lampe Conway & Co., LLC, Notemachine Limited and Douglas Falcone and any third party providing the direct financing of any ATM equipment and any refinancings of any of the foregoing. The Cash Provisioning Agreements also require us to maintain a positive demand account balance with Elan or, at our option, a letter of credit in favor of Elan in an amount not less than $800,000. Elan may draw on the account balance or letter of credit (i) in the event we materially default in the performance of any duties or obligations, which is not cured within 30 days notice; (ii) if we (A) terminate or suspend our business, (B) become subject to any bankruptcy or insolvency proceeding under federal or state statute, (C) become insolvent or become subject to direct control by a trustee, receiver or similar authority, (D) wind up or liquidate or (E) are required to terminate our involvement in the activities covered by the Cash Provisioning Agreements by order of a court of competent jurisdiction or a regulatory agency which governs the activities of a party; and (iii) in order to obtain payment of any fees, charges or other obligations that have not been paid pursuant to the Cash Provisioning Agreements. The demand account balance or letter of credit must remain open and funded by us for a period of 90 days after the termination of the Cash Provisioning Agreements.
In connection with the Cash Provisioning Agreements and ATM Vault Cash Agreement, we obtained an irrevocable letter of credit in favor of Elan, from Wells Fargo Bank, N.A., dated October 31, 2008, in the amount of $2.0 million. The letter of credit expires on October 31, 2009 but automatically renews for additional one year periods unless Wells Fargo Bank, N.A. sends notice that it elects not to extend the expiration date of the letter of credit. Elan had the ability to draw on the letter of credit for a period of 60 days for the purpose of securing any shortage resulting under the ATM Vault Cash Purchase Agreement or in the event of bankruptcy, reorganization, debt arrangement, notification of termination of the ATM Vault Cash Purchase Agreement or our failure to pay any of our obligations. The expiration period ended January 5, 2009 without the occurrence of any of the aforementioned events and we reduced the letter of credit by $1.2 million down to $800,000 which may be drawn upon by Elan.
United Kingdom Vault Cash Facility
Before its sale in January 2007, our United Kingdom ATM business obtained vault cash under an agreement with a local bank. Vault cash obtained under the program remained the property of the bank, and was not included on our balance sheet.
Canadian Vault Cash Facility
Before its sale in January 2007, our Canadian ATM business obtained vault cash under an agreement with an armored car carrier that had a corresponding agreement with a local bank. As in our U.K. vault cash arrangement, the vault cash obtained under the Canadian program remained the property of the bank, and was not included on our balance sheet.
Off-balance Sheet Arrangements
We have no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Contractual Commitments and Obligations
The following table summarizes our contractual commitments and obligations as of December 31, 2008 (in thousands):
The long-term debt shown above in accordance with their contractual terms.
The above payments include interest where applicable, with interest on variable rate obligations assumed to remain constant at the rate in effect as of December 31, 2008.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with GAAP. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, sales, costs and expenses, and the disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and judgments, including those related to impairments, depreciation, intangible assets, accounts receivable, inventories, and income taxes. We base our estimates and judgments on historical experience and on various assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We have identified the following policies as critical to our business operations and to understanding the results of those operations.
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, we test our goodwill for impairment on an annual basis using a November 30 measurement date. We conduct interim impairment tests of our goodwill whenever circumstances or events indicate that it is more likely than not that the fair value of one of our reporting units is below its carrying value. Circumstances that could represent triggering events and therefore require an interim impairment test of goodwill or evaluation of our finite-lived intangible assets or other long lived assets include the following: loss of key personnel, unanticipated competition, higher or earlier than expected customer attrition, deterioration of operating performance, significant adverse industry, economic or regulatory changes or a significant decline in market capitalization. SFAS No. 142 also provides specific guidance for testing goodwill and other non-amortized intangible assets for impairment. SFAS No. 142 requires management to make certain estimates and assumptions in order to allocate goodwill to reporting units and to determine the fair value of a reporting unit’s net assets and liabilities, including, among other things, an assessment of market conditions, projected cash flows, interest rates, and growth rates, which could significantly impact the reported value of goodwill and other intangible assets. Furthermore, SFAS 142 exposes us to the possibility that changes in market conditions could result in potentially significant impairment charges in the future.
Under the provisions of SFAS No. 142, the first step of our test for impairment of goodwill requires us to estimate the fair value of each reporting unit and compare the fair value to the reporting unit’s carrying value. We determined the fair value of our reporting unit using a discounted cash flow approach and market approach utilizing based on the Company’s publicly traded stock price with a control premium. A comparative market multiple approach was also analyzed but only for comparison purposes. The discounted cash flow approach calculated the present value of projected future cash flows using appropriate discount rates. The market approach we utilized was based on the Company’s publicly traded stock price with a control premium. The comparative market multiple approach used only for comparative purposes provided indications of value based on market multiples for public companies involved in similar lines of business. The fair values derived from these valuation methods were compared to the carrying value of the reporting unit to determine whether impairment exists. In determining the fair values of our reporting unit as of November 30, 2008 (our measurement date), we applied a weighting of 50% to each approach.
It was determined that the reporting unit’s carrying amount exceeded its fair value and that we had to perform the second step of the impairment test. The second step involved allocating the reporting unit’s fair value to all of its recognized and unrecognized assets and liabilities in order to determine the implied fair value of the goodwill as of the testing date. The implied fair value of the reporting unit’s goodwill is then compared to the carrying amount of goodwill to quantify an impairment charge as of the assessment date.
We prepared our discounted cash flow analysis in the same manner as we have prepared it in prior years. We further updated all significant assumptions in light of current market and regulatory conditions. The key assumptions we used in preparing our discounted cash flow analysis were (1) projected cash flows, (2) risk adjusted discount rate, and (3) expected long term growth rate. We based our projected cash flows on our actual 2008 operating results through November 30 and on budgeted operating amounts for 2009. For 2010 and future periods, we assumed a compound revenue growth rate of 3.0%, compound direct operating expense growth rates of 7.0% and compound selling, general and administrative expense growth rate of 8.0%. In evaluating our expense growth rates, we assumed that direct expenses would track revenues and that selling, general and administrative expenses would track the growth in inflation. We used a risk-adjusted discount rate of 23.0%.
We estimated the cost of equity by adding a “risk free” investment rate at November 30, 2008, to an equity risk premium for our size and then adding a risk premium for specific industry risk. The size and industry risk additions were made to account for the risks of (1) being a company with a small market capitalization and (2) being a company with leverage.
We based our market multiple approach on the valuation multiples as of November 30, 2008 (enterprise value divided by EBITDA) of a selected group of peer companies in the ATM and financial services industries. We then used an average of these multiples to determine the fair value for our reporting unit.
As a test of the reasonableness of the estimated fair values for our reporting unit, as determined under both the discounted cash flow analysis and market multiple approach described above, we compared the aggregate weighted fair value for our reporting unit under these approaches to the fair value of the company, as a whole. We computed the company’s fair value, as of November 30, 2008 by (1) multiplying: (a) the closing price for a share of our common stock $0.19 and (b) the number of outstanding shares of our common stock,; and (3) adding a control premium of 20%, which we refer to as the “market capitalization approach.” We have applied a control premium to our market capitalization analysis because such premiums are typically paid in acquisitions of publicly traded companies. These control premiums represent the ability of an acquirer to control the operations of the business. We based our control premium on a study of control premiums made during the period January 1998 through September 2008. Using the market capitalization approach described above, our company had an estimated fair value of $25.1 million.
After evaluating the results of each of these analyses, we believe that the discounted cash flow and market multiple approaches provide reasonable estimates of the fair value of our reporting units because these approaches are based on our 2008 actual results and best estimates of 2009 performance, as well as peer company valuation multiples. We have consistently used these approaches in determining the value of our goodwill and these types of analyses are used by the research analysts that follow us. While the market capitalization is typically a good indicator of the reasonableness of our primary approaches in evaluating the impairment of goodwill, we do not believe it is a meaningful or appropriate indicator of the fair value of our business at this time.
The value of our company, as established by the market capitalization approach, is driven by a decline in our stock price, which began in 2006 and continued during 2007 and 2008 as a result of the difficulties associated with the acquisition of a large ATM portfolio from eFunds. A comprehensive restructuring effort was implemented during 2007 and 2008 which has improved the operating results over those periods. Further, the daily trading volume in our stock is very low partly as a result of our move to the Pink Sheets market from NASDAQ in 2008. We also believe that the volatility in the overall market has significantly impacted our market capitalization.
Due to the current economic environment there can be no assurances that our estimates and assumptions regarding the duration of the economic recession, or the period or strength of recovery, made for purposes of the our goodwill impairment testing during the year ended December 31, 2008 will prove to be accurate predictions of the future. If our assumptions regarding forecasted revenues or margin growth rates of the reporting units are not achieved.
As of December 31, 2007 and 2008, our assets include goodwill of $16.7 million and $10.7 million, respectively, and other intangible assets with a net carrying amount of $585,000 and $2.1 million, respectively.
During 2006 and 2008, we recorded goodwill impairment charges of $96.1 million and $19.8 million, which we discuss in “Item 7. See Management’s Discussion and Analysis of Financial Condition and Results of Operations - Impairment Charges”.
In accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” we test all finite-lived intangible assets and other long-lived assets, such as fixed assets, for impairment only if circumstances indicated that possible impairment exists. Whenever events or changes in circumstances indicate that our merchant contracts or equipment may be impaired, we evaluate the recoverability of the asset by measuring the related carrying amounts against the associated estimated undiscounted future cash flows. We periodically evaluate the estimated economic lives and related amortization expense for our finite-lived intangible assets. To the extent actual useful lives are less than our previously estimated lives, we will increase our amortization expense on a prospective basis. We estimate useful lives of our intangible assets by reference to both contractual arrangements and current and projected
cash flows. Should the sum of the expected future net cash flows be less than the carrying values of the tangible or intangible assets being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying values of the tangible or intangible assets exceeded their fair value.
We have established valuation allowances to reduce our deferred tax assets to the amount that we believe we will realize. Because we are uncertain that we will be able to realize the benefit of our net operating loss carryforwards and future deductible amounts, we have established valuation allowances that reduced the carrying value of our net deferred tax assets to zero as of December 31, 2007 and 2008. If we determine that we will realize deferred tax assets in the future, we will increase (decrease) net income (loss) in the period in which we make the determination.
New Accounting Standards
In June 2006, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 48, or FIN 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FAS 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements. It prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation became effective for us beginning in 2007. Our adoption of FIN 48 did not have a material impact on our results of operations, financial position or cash flows.
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements.” SFAS 157 establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements. This statement does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, except for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis for which delayed application is permitted until fiscal years beginning after November 15, 2008. We are currently evaluating the impact, if any, this statement will have on our financial statements.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51.” This statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This statement is effective for us beginning in 2009. We are currently evaluating the impact, if any, this statement will have on our financial statements.
In April 2008, the FASB and FASB Staff Position (“FSP”) No. 142-3, “Determination of the Useful Life of Intangible Assets” which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. It will be effective for our fiscal year beginning in January 2009. The guidance contained in this FSP for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after the effective date. However, the disclosure requirements of FSP No. 142-3 must be applied to all intangible assets recognized in our financial statements as of the effective date. We are currently evaluating the effect, if any, that FSP No. 142-3 will have on our consolidated financial statements.
In June 2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 mandates a two-step process for evaluating whether an equity-linked financial instrument or embedded feature is indexed to the entity’s own stock. It is effective for our fiscal year beginning January 2009. We are currently evaluating the effect, if any, that EITF 07-5 will have on our consolidated financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates and, until the sale of our foreign operations in January and June 2007, we had operations in the United Kingdom, Germany and Canada exposing us to foreign currency exchange rate risks. We do not hold or issue derivative commodity instruments or other financial instruments for trading purposes. Since the sales of our United Kingdom, German and Canadian ATM operations, we have no further foreign operations. However, we have a liability denominated in British pounds, exposing us to foreign currency exchange rate risk.
Interest Rate Risk
We invest our cash in money market funds. The income earned from these money market funds is subject to changes in interest rates. Interest income was $360,000 for 2007 and $309,000 for 2008. A 10% change in interest rates earned would not have had a material effect on our net income.
Under our United States vault cash facility, the Trust borrowed money pursuant to a note funded by the sale of commercial paper. The Trust owed $58.5 million at December 31, 2007 and zero at December 31, 2008 under this arrangement. The weighted average interest rate on these borrowings at December 31, 2007 was 7.40%. Interest and fees relating to the Trust’s borrowings, which are included in cost of sales in our consolidated financial statements, totaled $5.5 million and $3.8 million for the years ended December 31, 2007 and 2008, respectively.
As a result of the sale of our United Kingdom and substantially all of our Canadian ATM operations, we no longer maintain vault cash facilities in those countries and do not have further interest rate risk thereunder.
Foreign Currency Risk
As of December 31, 2008, we owed £962,000 ($1.3 million using exchange rates as of December 31, 2008) to the purchaser of our United Kingdom and German ATM businesses. The value of the British pound decreased significantly in 2008 providing a gain on the exchange rates of $577,000. A 10% increase in the value of the British pound versus the United States dollar would increase our liability by $140,000. A 10% decrease in the value of the British pound versus the United States dollar would decrease our liability by $140,000. Since we pay interest at a rate of 15% per annum on this liability, our interest expense would also be affected by a fluctuation in the exchange rate.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this item are included in this Annual Report on Form 10-K commencing on page 33.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders TRM Corporation
We have audited the consolidated balance sheets of TRM Corporation and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity (deficit) and cash flows for the years then ended. Our audits also included the financial statement schedule of the Company listed in Item 15(a). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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, 2008 and 2007, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related 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.
We were not engaged to examine management’s assessment about the effectiveness of TRM Corporation’s internal control over financial reporting as of December 31, 2008 included in the accompanying Management’s Report on Internal Control over Financial Reporting and, accordingly, we do not express an opinion thereon.
/s/ McGladrey & Pullen, LLP
Blue Bell, Pennsylvania
March 31, 2009
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of TRM Corporation:
In our opinion, the consolidated statements of operations, of shareholders’ equity and of cash flows for the year ended December 31, 2006 present fairly, in all material respects, the results of operations and cash flows of TRM Corporation and its subsidiaries for the year ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule for the year ended December 31, 2006 listed in the accompanying index appearing under Item 15(a)2 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements (not separately presented herein), the Company incurred a net loss for 2006 resulting in its inability to meet certain financial covenants of its financing agreement with GSO Origination Funding Partners LP and other lenders, and based on its projections the Company does not expect to meet the required financial covenants during 2007, which may render the debt callable by the lenders and trigger the cross-default provisions in TRM Funding Trust’s Loan and Servicing Agreement. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As noted in Note 12 to the financial statements, during the year ended December 31, 2007, the Company disposed of its Canadian photocopy business. The financial statements for the year ended December 31, 2006 have been retrospectively restated to reflect the Canadian photocopy business as a discontinued operation.
/s/ PricewaterhouseCoopers LLP
Portland, Oregon
May 23, 2007, except for the retrospective restatement of the Canadian photocopy operations as discontinued operations described in Note 12, which is as of March 28, 2008
TRM Corporation
Consolidated Balance Sheets
December 31, 2007 and 2008
(In thousands)
See accompanying notes to consolidated financial statements.
TRM Corporation
Consolidated Statements of Operations
Years ended December 31, 2006, 2007 and 2008
(In thousands, except per share data)
See accompanying notes to consolidated financial statements.
TRM Corporation
Consolidated Statement of Shareholders’ Equity (Deficit)
Years ended December 31, 2006, 2007 and 2008
(In thousands)
See accompanying notes to consolidated financial statements.
TRM Corporation
Consolidated Statements of Cash Flows
Years ended December 31, 2006, 2007 and 2008
(In thousands)
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
1. Description of Business and Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
TRM Corporation (“we” or “TRM”) provide self-service cash delivery and account balance inquiry through ATM machines.
As of December 2005 we offered ATM services in retail locations in the United States, the United Kingdom, Germany and Canada and photocopier services in the United States, United Kingdom and Canada.
In June 2006 we sold our United Kingdom photocopy business. In January 2007 we sold our ATM businesses in the United Kingdom, Germany and Canada and our United States photocopy business. In June 2007 we sold our Canadian photocopy business. The results of the businesses we have sold are reflected as discontinued operations in our consolidated statement of operations. Our remaining business operates ATMs in the United States. We provide the equipment, maintenance, supplies and point of sale materials required for each of our installations, while the retailer oversees the daily operation of the equipment, provides the necessary floor space and shares in the revenue generated by our offerings. During 2008 our United States ATM networks had an average of 10,840 transacting ATMs.
In November 2006 we announced the implementation of a corporate restructuring plan involving an initial reduction of then-existing controllable selling, general and administrative expenses of approximately 15%. Subsequent to that announcement, we sold operations that accounted for approximately 61% of our net sales in 2006. In connection with our restructuring plan and the sales of a substantial part of our operations, we have reduced our number of employees from 364 as of December 31, 2006 to 61 as of December 31, 2008.
During 2007, we reduced our cost of sales by approximately 3.0% from 2006. This cost reduction would have been closer to 5.0% but for certain one time inventory write downs and elevated vault cash costs due to spikes in short term interest rates during this period. Even more dramatic was the reduction in selling, general and administrative costs of over 45.0%. We also posted net income in the fourth quarter of 2007 of $906,000 compared to a net loss of $15.2 million in the prior year period.
2008 was primarily devoted to integrating our purchase of Access to Money. During this year, we continued to improve operating performance in all areas. Despite a 2.0% reduction in gross sales and a 5.4% reduction in net sales from 2007, gross profit improved 22.3%. Moreover, cost of sales was reduced 18.5% from 2007 to 2008. Excluding a one time goodwill impairment charge, we reduced selling, general and administrative costs by 35.7% from 2007 to 2008.
In the fourth quarter of 2008, we were able to enjoy the benefits of our agreement with Elan Financial Services to supply cash to our fleet of full placement ATMs. As a result of this relationship, cost of sales for the fourth quarter was 33.5% lower than the same period in 2007. Gross profit in the fourth quarter of 2008 improved 24.0% compared to the same period in 2007.
Principles of Consolidation
The consolidated financial statements include the accounts of TRM and its subsidiaries. Our subsidiaries at December 31, 2008 included TRM Copy Centers (USA) Corporation, TRM (Canada) Corporation, TRM ATM Corporation, TRM ATM Acquisition Corporation, Access Cash International LLC, and S-3 Corporation. We sold all of the outstanding shares of TRM Copy Centres (U.K.) Limited, our United Kingdom photocopier subsidiary, in June 2006. In January 2007 we sold all of the outstanding shares of TRM ATM (U.K.) Limited which owned TRM ATM Deutschland GmbH. These two companies operated ATMs in the United Kingdom and Germany. The results of operations of the subsidiaries that we have sold are included in our consolidated financial statements only through the dates of sale. Effective December 31, 2003, we adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 46R, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” and, accordingly, consolidated the accounts of TRM Inventory Funding Trust in our consolidated financial statements. As of December 31, 2008 the TRM Inventory Funding Trust is no longer consolidated in the financial statements due to the termination of a Loan and Servicing Agreement with DZ Bank.
All significant intercompany transactions and accounts are eliminated. During 2006 and part of 2007 we had subsidiaries operating in Canada, the United Kingdom and Germany, whose functional currencies were the Canadian
dollar, British pound and Euro. Assets and liabilities of foreign operations were translated into United States dollars at current exchange rates. Revenue and expense accounts were translated into United States dollars at average rates of exchange prevailing during the periods. Adjustments resulting from translating foreign functional currency financial statements into United States dollars were recorded directly to a separate component of shareholders’ equity.
Fair Value of Financial Instruments
Financial instruments, including cash and cash equivalents, accounts receivable and accounts payable approximate fair market value because of the short maturity of these instruments. Fair value approximates the carrying value of our borrowings under our variable-rate long-term debt, based upon interest rates available for the same or similar instruments. In 2008, the majority of our debt has fixed interest rates and the fair value is estimated at $20.3 million.
Restricted Cash
At December 31, 2007 and 2008 we had $3.0 million and $2.0 million cash held by a bank as collateral for our letter of credit that is classified as restricted cash on our balance sheet.
Revenue Recognition, Discounts and Accounts Receivable
A portion or all, depending upon the arrangement with the retail business, of each ATM surcharge is paid to the retail business. We receive daily reports of ATM transactions electronically from our ATM network processors. On a monthly basis, the ATM transaction data is used to calculate the retailer’s applicable discount, which is generally dependent upon transaction volumes, and we generally remit the discount directly to the retailer’s bank account through electronic funds transfer. We recognize ATM revenue based on the actual monthly transactions reported by the ATM processing network. Total sales activity and discount amounts are reported separately in the consolidated statements of operations to arrive at net sales.
Accounts receivable are shown net of allowance for doubtful accounts of $354,000 and $648,000 at December 31, 2007 and 2008, respectively.
Inventories
During 2007, we began outsourcing our ATM maintenance, ceased using our parts inventory and adjusted all inventory down to its estimated net realizable value. With the acquisition of Access to Money in April 2008 (see Note 2) we acquired ATMs and parts inventory and do provide maintenance services in addition to outsourcing our ATM maintenance. Inventory is stated at the lower of cost (first-in, first-out method) or market. Inventory consists primarily of ATMs and related parts and equipment. ATMs and parts available for sale are classified as inventory until such time as the machine or part is sold or installed and in service. Once the ATM or part is sold, it is relieved to cost of sale.
Inventories (in thousands)
Long-Lived Assets
We account for long-lived assets, primarily equipment and amortizable intangible assets, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires us to review the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Whenever events or changes in circumstances indicate that our merchant contracts or equipment may be impaired, we evaluate the recoverability of the asset by measuring the related carrying amounts against the associated estimated undiscounted future cash flows. Should the sum of the expected future net cash flows be less than the carrying values of the tangible or intangible assets being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying values of the tangible or intangible assets exceeded their fair value.
Equipment
Equipment is recorded at cost plus amounts required to place equipment in service. Depreciation begins when the asset is placed in service. ATMs, furniture and fixtures and computer equipment are generally depreciated using the straight-line method over the estimated remaining useful lives of the related assets. Estimated useful lives are as follows:
Goodwill
As of December 31, 2007 and 2008, our assets include goodwill of $16.7 million and $10.7 million, respectively, and other intangible assets with a net carrying amount of $585,000 and $2.1 million, respectively. Statement of Financial Accounting Standards No. 142, or SFAS 142, “Goodwill and Other Intangible Assets” provides that goodwill and other intangible assets that have indefinite useful lives will not be amortized, but instead must be tested at least annually for impairment, and intangible assets that have finite useful lives should be amortized over their estimated useful lives. SFAS 142 also provides specific guidance for testing goodwill and other non-amortized intangible assets for impairment. SFAS 142 requires management to make certain estimates and assumptions in order to allocate goodwill to reporting units and to determine the fair value of a reporting unit’s net assets and liabilities, including, among other things, an assessment of market conditions, projected cash flows, interest rates, and growth rates, which could significantly impact the reported value of goodwill and other intangible assets.
Under the provisions of SFAS No. 142, the first step of our test for impairment of goodwill requires us to estimate the fair value of each reporting unit and compare the fair value to the reporting unit’s carrying value. We determined the fair value of our reporting unit using a discounted cash flow approach and a comparative market multiple approach. The discounted cash flow approach calculated the present value of projected future cash flows using appropriate discount rates. The market multiple approach provided indications of value based on market multiples for public companies involved in similar lines of business. The fair values derived from these valuation methods are then compared to the carrying value of the reporting unit to determine whether impairment exists. In determining the fair values of our reporting unit as of November 30, 2008 (our measurement date), we applied a weighting of 50% to each approach.
It was determined that the reporting unit’s carrying amount exceeded its fair value and that we had to perform the second step of the impairment test. The second step involved allocating the reporting unit’s fair value to all of its recognized and unrecognized assets and liabilities in order to determine the implied fair value of the goodwill as of the testing date. The implied fair value of the reporting unit’s goodwill is then compared to the carrying amount of goodwill to quantify an impairment charge as of the assessment date.
During the fourth quarter of 2008 we recorded a non-cash charge of $19.8 million for the impairment of goodwill.
We believe that volatility in the overall market as well as the low trading volume for the Company’s stock has significantly impacted the Company’s market capitalization.
Due to the current economic environment there can be no assurances that the Company’s estimates and assumptions regarding the duration of the economic recession, or the period or strength of recovery, made for purposes of the Company’s goodwill impairment testing during the year ended December 31, 2008 will prove to be accurate predictions of the future. If the Company’s assumptions regarding forecasted revenues or margin growth rates of the reporting units are not achieved, the Company may be required to record additional goodwill impairment losses in future periods. It is not possible at this time to determine if any such future impairment loss would result or, if it does, whether such charge would be material.
The following table reflects the change in the carrying amount of goodwill for the two years ended December 31, 2008 (in millions):
Income Taxes
We account for income taxes utilizing the asset and liability method. Under the asset and liability method, we determine deferred tax assets and liabilities based on differences between the financial reporting and income tax bases of assets and liabilities, and measure them by applying enacted tax rates and laws to the taxable years in which such differences are expected to reverse.
Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,” an amendment of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS 123R eliminated the ability to account for share-based payments using APB No. 25, and instead required companies to recognize compensation expense using a fair-value based method for costs related to share-based payments, including stock options and employee stock purchase plans. The expense is measured as the fair value of the award at its grant date based on the estimated number of awards that are expected to vest, and recorded over the applicable service period. In the absence of an observable market price for a share-based award, the fair value is based upon a valuation methodology that takes into consideration various factors, including the exercise price of the award, the expected term of the award, the current price of the underlying shares, the expected volatility of the underlying share price, the expected dividends on the underlying shares and the risk-free interest rate. The requirements of SFAS 123R became effective for our first quarter beginning January 1, 2006 and apply to all awards granted, modified or cancelled after that date, and to the portion of previously granted awards that had not vested by the adoption date. We adopted SFAS 123R effective January 1, 2006 on a prospective basis using the modified prospective transition method. SFAS 123R requires that stock-based compensation expense be based on awards that are ultimately expected to vest. We have recognized compensation expense based on the estimated grant date fair value method using the Black-Scholes valuation model. See additional details pertaining to stock and option activity under Note 9, Shareholders’ Equity, “Common Stock Options and Restricted Stock Grants.”
Net Income (Loss) Per Share
Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. It also assumes that outstanding common shares were increased by shares issuable upon exercise of those stock options and warrants for which the market price exceeds exercise price, less shares which we could have purchased with related proceeds. All outstanding options and warrants were excluded from the calculation of diluted earnings per share for 2006, 2007 and 2008 because their inclusion would have been antidilutive.
Use of Estimates
The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, sales, costs and expenses, and the disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and judgments, including those related to impairments, depreciation, intangible assets, accounts receivable, inventories, and income taxes. We base our estimates and judgments on historical experience and on various assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
New Accounting Standards
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements.” SFAS 157 establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements. This statement does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, except for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis for which delayed application is permitted until fiscal years beginning after November 15, 2008. We anticipate no material impact on our results of operations, financial position or cash flows as a result of adopting this statement.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51.” This statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This statement is effective for us beginning in 2009. We are currently evaluating the impact, if any, this statement will have on our financial statements.
In April 2008, the FASB and FASB Staff Position (“FSP”) No. 142-3, “Determination of the Useful Life of Intangible Assets” which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. It will be effective for our fiscal year beginning in January 2009. The guidance contained in this FSP for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after the effective date. However, the disclosure requirements of FSP No. 142-3 must be applied to all intangible assets recognized in our financial statements as of the effective date. We are currently evaluating the effect, if any, that FSP No. 142-3 will have on our consolidated financial statements.
In June 2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 mandates a two-step process for evaluating whether an equity-linked financial instrument or embedded feature is indexed to the entity’s own stock. It is effective for our fiscal year beginning January 2009. We are currently evaluating the effect, if any, that EITF 07-5 will have on our consolidated financial statements.
Financial Statement Reclassifications
Certain financial statement reclassifications have been made to prior year amounts to conform to the current year presentation. These changes had no impact on total assets, total liabilities, shareholders’ equity or net loss. As discussed in Note 12 we have reclassified the results of operations of our Canadian photocopier operations to discontinued operations for all periods presented.
2. Acquisition of LJR Consulting Corp.
On April 18, 2008, we acquired all of the capital stock of LJR Consulting Corp., doing business as Access to Money (“Access to Money”), an independent ATM deployer. The purchase price consisted of $4.3 million in cash, 3,550,000 shares of our common stock valued at $995,535, and a note payable to the former owner of Access to Money in the amount of $9.8 million bearing interest at 13% per annum with interest payable quarterly and the principal balance due April 18, 2015. Payments under this promissory note are subordinated to the payment in full of the amount under the Securities Purchase Agreement and the Amended Settlement Agreement with Notemachine. The purchase price was allocated based on the estimated fair value of the assets acquired and liabilities assumed. The allocated fair value of the assets acquired was as follows:
The allocation above is subject to change as management refines the allocation of the acquired intangibles. We intend to amortize on a straight-line basis the intangible assets, with the exception of trademarks, over periods ranging from three to five years. The acquisition is expected to enhance our presence in the marketplace by significantly increasing our market share, enhancing the geographical distribution of our operations and enabling us to increase our productivity. These factors contributed to establishing the purchase price which resulted in the recognition of goodwill. Goodwill is not subject to amortization for financial reporting purposes. All of the intangible assets acquired will be reviewed for impairment at least annually.
Equipment (in thousands):
Depreciation of equipment included in continuing operations for 2006, 2007 and 2008 was $2.8 million, $2.0 million and $1.1 million, respectively. See Note 15 regarding impairment of equipment in our former United States and Canadian photocopier operations.
In 2000, a Deposit Trust Agreement (“Agreement”) was entered into between GSS Holdings, Inc. as Depositor, Wilmington Trust Company as Owner Trustee, and TRM ATM Corporation (“Servicer”) as Administrator. By virtue of the Agreement, TRM Inventory Funding Trust (the “Trust”) was created. Neither Servicer, TRM nor any affiliates have any ownership interest in the Trust. Any risk with regard to the Trust or the ability of the Trust to repay the Trust’s debt resides with the Trust and with GSS Holdings as the Depositor (equity investor in the amount of $15,000 as of December 31, 2007), and with Autobahn Funding Company LLC (“Lender” and equity investor in the amount of $1,485,000 as of December 31, 2007), rather than with Servicer, which merely serves as an administrator and servicer of the Trust. Autobahn Funding Company LLC is related to DZ Bank AG, Deutsche Zentral-Genossenschaftsbank Frankfurt am Main (“DZ Bank”) and is independent of the Servicer and us. The purpose of the
Trust was to provide cash to be placed in our United States ATM machines (“vault cash”), by accessing commercial paper markets. In November 2008 we replaced the provisioning of vault cash by DZ Bank to ELAN Financial Services.
Until the replacement of DZ Bank with ELAN Financial Services, the Trust borrowed from and made repayments to the Lender and made other payments pursuant to a Loan and Servicing Agreement, and engaged the Servicer and other agents and contractors from time to time to perform all duties assigned under the Loan and Servicing Agreement. Borrowings from the Lender were collateralized by the assets of the Trust, principally the vault cash. The Lender issued asset-backed commercial paper notes to fund the loans to the Trust. Interest on the Trust’s borrowings from the Lender, were evidenced by a note, and were at a rate equal to 1.35% plus the interest rate of the commercial paper notes that the Lender issued to fund the loans to the Trust. The Trust also paid to the Lender an amount equal to the Lender’s equity investment in the Trust times 1.35% plus the yield rate of the commercial paper notes outstanding. The Loan and Servicing Agreement contained covenants applicable to us, including a minimum tangible net worth requirement. We entered into an amendment to that agreement in November 2007, which reset the minimum net worth covenant to $12.0 million. In January 2007 we entered into an amendment which, among other changes, extended the facility for five years and reduced the facility size to $100.0 million. A liquidity agreement with DZ Bank ensures that the Trust continued to have funds available for the term of the agreement.
When the vault cash was placed in the ATM under the DZ Bank relationship, the Trust had a security interest in all of the fees and charges earned or received in connection with all revenue generating transactions initiated at the ATMs. The cash at all times remained the property of the Trust, and the Trust was ultimately obligated to repay the Lender. Subcontractors maintained insurance on behalf of the Trust to ensure the cash was safe while stored at correspondent banks, and during delivery to ATM machines and to the vault or bank storage facilities.
Because we were the primary beneficiary of the Trust, the accounts of the Trust have been included in our consolidated financial statements. The Trust’s vault cash, amounting to $61.8 million at December 31, 2007 (and zero at December 31, 2008) is reported as restricted cash in the accompanying consolidated balance sheets, and the balance of the Trust’s note payable to the Lender, which totaled $58.5 million at December 31, 2007, is reported as a liability.
The expenses of the Trust, which are primarily interest and fees related to the Trust’s borrowings and bank charges, were $6.7 million in 2006, $5.7 million in 2007 and $3.8 million in 2008 are included in cost of sales in our consolidated statements of operations.
The Lender issued commercial paper notes with maturities of not more than 270 days. The outstanding commercial paper on December 31, 2007 matured January 2, 2008. Interest rates on the outstanding commercial paper notes ranged from 4.3% to 5.4% during 2006, 5.1% to 6.7% during 2007 and 2.3% to 6.3% in 2008.
Selected information on the Trust’s borrowings for the years ended December 31, 2006, 2007 and 2008 is as follows:
New Facility
Pursuant to a Cash Provisioning Agreement effective as of August 28, 2007, as amended, between Genpass Technologies, L.L.C., doing business as Elan Financial Services, TRM ATM Corporation (“TRM ATM”), and Pendum, Inc., and an ATM Vault Cash Purchase Agreement effective as of June 26, 2008, between Elan, TRM Inventory Funding Trust, TRM ATM, and DZ Bank AG, Deutsche Zentral-Genossenschaftsbank Frankfurt AM Main (“DZ Bank”), we have transferred the provisioning of cash for 92 ATMs to Elan.
TRM ATM Corporation entered into an ATM Vault Cash Purchase Agreement, effective on November 3, 2008, with Elan, TRM Inventory Funding Trust and DZ Bank (the “ATM Vault Cash Purchase Agreement”). The ATM Vault Cash Purchase Agreement provided that on November 5, 2008, TRM Inventory Funding Trust would sell the cash in the ATMs to Elan, which Elan would then provide to us.
TRM ATM entered into a series of Cash Provisioning Agreements with U.S. Bank National Association, doing business as Elan Financial Services (“Elan”), and various armored car carriers, dated October 31, 2008 (the
“Cash Provisioning Agreements”). The Cash Provisioning Agreements provide that Elan will provide cash, through the use of armored car carriers, for our ATMs. The term of the Cash Provisioning Agreements is for a period of five years and automatically renews for additional one year periods unless either party gives the other parties notice of its intent to terminate. We are responsible for the payment of fees related to the use of the cash. We provided Elan with a subordinated lien and security interest in the ATMs, subject to the security interest of Lampe Conway & Co., LLC, Notemachine Limited and Douglas Falcone and any third party providing the direct financing of any ATM equipment and any refinancings of any of the foregoing. The Cash Provisioning Agreements also require us to maintain a positive demand account balance with Elan or, at our option, a letter of credit in favor of Elan in an amount not less than $800,000. Elan may draw on the account balance or letter of credit (i) in the event we materially default in the performance of any duties or obligations, which is not cured within 30 days notice; (ii) if we (A) terminate or suspend our business, (B) become subject to any bankruptcy or insolvency proceeding under federal or state statute, (C) become insolvent or become subject to direct control by a trustee, receiver or similar authority, (D) wind up or liquidate or (E) are required to terminate our involvement in the activities covered by the Cash Provisioning Agreements by order of a court of competent jurisdiction or a regulatory agency which governs the activities of a party; and (iii) in order to obtain payment of any fees, charges or other obligations that have not been paid pursuant to the Cash Provisioning Agreements. The demand account balance or letter of credit must remain open and funded by us for a period of 90 days after the termination of the Cash Provisioning Agreements.
In connection with the Cash Provisioning Agreements and ATM Vault Cash Agreement, we obtained an irrevocable letter of credit in favor of Elan, from Wells Fargo Bank, N.A., dated October 31, 2008, in the amount of $2.0 million. The letter of credit expires on October 31, 2009 but automatically renews for additional one year periods unless Wells Fargo Bank, N.A. sends notice that it elects not to extend the expiration date of the letter of credit. Elan had the ability to draw on the letter of credit for a period of 60 days for the purpose of securing any shortage resulting under the ATM Vault Cash Purchase Agreement or in the event of bankruptcy, reorganization, debt arrangement, notification of termination of the ATM Vault Cash Purchase Agreement or our failure to pay any of our obligations. The expiration period ended January 5, 2009 without the occurrence of any of the aforementioned events and we reduced the letter of credit by $1.2 million down to $800,000 which may be drawn upon by Elan.
Before its sale in January 2007, our United Kingdom ATM business obtained vault cash under an agreement with a local bank. Vault cash obtained under the program remained the property of the bank.
Before its sale in January 2007, our Canadian ATM business obtained vault cash under an agreement with an armored car carrier that has a corresponding agreement with a local bank. As in our United Kingdom vault cash arrangement, the vault cash obtained under the Canadian program remained the property of the bank.
5.
Goodwill and Intangible Assets
Goodwill:
Activity in our goodwill accounts by segment was as follows (in thousands):
Intangible assets (in thousands):
Amortization of intangible and other assets, which is included in selling, general and administrative expense in continuing operations, was $4.3 million, $525,000 and $1.0 million for 2006, 2007 and 2008, respectively. Estimated amortization expense for the next five years for intangible and other assets held at December 31, 2008 is: 2009 - $420,000; 2010 - $420,000; 2011 - $379,000; 2012 - $234,000, and 2013 - $103,000.
6. Accrued Expenses (in thousands)
7. Notes Payable and Other Debt (in thousands)
In June 2006, we established a credit facility which we used to refinance our then-existing term loan and lines of credit. In connection with the repayment of our term loan and lines of credit, we recorded a loss on early extinguishment of debt of $3.5 million of which $372,000 is included in discontinued operations. This loss resulted from writing off costs of $2.6 million we had deferred in conjunction with that debt and payment of a prepayment penalty of $860,000 to our former lenders. The new facility consisted of three related agreements:
•
a $45.5 million credit agreement (the “First Lien Credit Agreement”) with GSO Origination Funding Partners LP (the “GSO Fund”), certain other lenders and Wells Fargo Foothill, Inc., serving as administrative agent, revolving lender, swing line lender and letter of credit issuer (“WFF”);
•
a $40.9 million second lien loan agreement with the GSO Fund, certain other lenders and WFF (the “Second Loan Agreement” and, together with the First Lien Credit Agreement, the “Credit Agreements”); and
•
a £12.9 million (approximately $25.5 million based on exchange rates as of December 31, 2006) facility agreement between our wholly-owned subsidiary, TRM (ATM) Limited and GSO Luxembourg Onshore Funding SarL (“GSO Lux”) as the original lender, facility agent and security agent (the “UK Facility Agreement”).
The First Lien Credit Agreement consisted of a $30.5 million term loan facility and $15.0 million of revolving commitments. There was a letter of credit sublimit of $6.0 million under the revolving loan commitment. The Second Loan Agreement consisted of a $40.9 million term loan.
Outstanding balances under the three agreements as of December 31, 2006 were as follows (in thousands):
Prior to the restructuring discussed below, under the First Lien Credit Agreement, both the revolving loans and the term loan bore interest at the London Interbank Offered Rate (“LIBOR”) plus 4.0% while, under the Second Loan Agreement, the term loan bore interest at LIBOR plus 7.0%. Interest on all loans was payable quarterly. Under the First Lien Credit Agreement, we were required to pay quarterly installments of principal of $65,000, with the remaining unpaid principal due at maturity. Under the Second Loan Agreement, we were required to pay the entire principal balance at maturity. The revolving and term loans under the First Lien Credit Agreement were scheduled to mature on June 6, 2011. The term loan under the Second Loan Agreement was scheduled to mature on June 6, 2012.
The UK Facility Agreement consisted of a £12.9 million term loan. Prior to restructuring, discussed below, the loan bore interest at LIBOR plus 4.0% plus an amount intended to compensate GSO Lux for reserve requirements at the Bank of England or the European Central Bank with respect to the loan.
Affirmative covenants in the syndicated loan agreements included requirements to: achieve certain levels of earnings before interest, taxes, depreciation, amortization and certain other non cash expenses (“EBITDA”); maintain certain financial ratios related to funded debt, total debt and fixed charge coverage to earnings before taxes, depreciation, amortization and non cash expenses; and limit capital expenditures.
As of September 30, 2006, our financial performance caused us to not be in compliance with three of the covenants in the Credit Agreements and the UK Facility Agreement: the minimum amount of consolidated EBITDA (annualized), the consolidated leverage ratio and the consolidated fixed charge coverage ratio. Our lenders had the right to seek to accelerate the loan under the operative loan documents, but they did not do so or exercise other remedies. Instead, on November 20, 2006, we entered into agreements under which they waived our defaults and agreed with us to restructure our loans. As restructured, the interest rates on our loans were increased. The increased interest cost was deferred and added to principal. In addition, the maturity dates of the loans were changed so that a total of $69.9 million was due on or before February 28, 2007. The financial covenants were modified to require achievement of certain levels of earnings before interest, taxes, depreciation and amortization and certain other non-cash expenses (“adjusted EBITDA”), adjusted monthly, and to limit capital expenditures. We did not comply with the adjusted EBITDA covenant for the months of December 2006 through October 2007 and our lenders granted waivers of our violation of the adjusted EBITDA covenant for those months.
We also granted warrants to the holders of Term Loan B to purchase 3.1 million shares of our common stock at a price equal to a 5% premium above the weighted average price of our common stock for the seven trading days following November 20, 2006. Based on that formula, the exercise price of the warrants was set at $1.36 per share. The warrants are exercisable for a period of seven years following November 20, 2006. We agreed to file a registration statement with the SEC covering the resale of the shares issuable upon the exercise of the warrants and to use our best efforts to have the registration statement declared effective by the SEC no later than May 18, 2007. However, we were unable to file the registration statement by May 18, 2007 because we filed our Annual Report on Form 10-K for 2006 and our Quarterly Report on Form 10-Q for the first quarter of 2007 late. We expected to enter into further agreements requiring registration of our securities, and did so in February 2008. Under the terms of the registration rights agreement, the warrant holders can seek damages due to our inability to file the registration statement. We have not received any demands from the warrant holders to file the registration statement as of the date
of this report. Because the present value of the cash flows under the terms of the revised debt instruments were less than 10% different than the present value of the remaining cash flows under the terms of the original instruments, we accounted for the restructuring of our loans as a modification of the previously outstanding debt. Accordingly, we charged to expense the legal fees we incurred and recorded the fair value of the warrants and loan fees as deferred financing costs.
We estimated the total fair value of the warrants issued to the holders of Term Loan B to be $2.8 million using the Black-Scholes valuation model. We recorded the fair value of the warrants and $1.0 million of loan fees incurred from our lenders in connection with the restructuring of our loans in November 2006 as additional deferred financing costs. These costs, together with $2.8 million of previously unamortized deferred financing costs associated with the credit facility established in June 2006, aggregated $6.6 million. In connection with the early payment of most of our debt in January 2007, substantially all of the remaining unamortized deferred financing costs were charged to expense as a loss on early extinguishment of debt in the first quarter of 2007.
As discussed further in Note 12, during the first six months of 2007 we sold our Canadian, United Kingdom and German ATM businesses and our United States and Canadian photocopy business and used $98.6 million from the proceeds of those sales to make principal and interest payments under our financing agreements with GSO Origination Funding Partners and other lenders. These payments repaid all of our liability under the First Lien Credit Agreement, the UK Facility Agreement and Term Loan A and most of Term Loan B. Following these payments, as of December 31, 2007, the only remaining balance under our term loans and line of credit was $2.1 million.
Notemachine Settlement Agreement
In November 2007, we entered into a settlement agreement with Notemachine Limited (“Notemachine”), relating to the sale to Notemachine of our United Kingdom and German ATM businesses in January 2007. Pursuant to the settlement agreement, we agreed to repay £3.3 million (approximately $6.4 million) in full and final settlement of claims by Notemachine relating to the sale. As of December 31, 2008, we owed £962,000 (approximately $1.3 million) pursuant to the settlement agreement. Upon closing the Lampe Loan Facility in April 2008, we paid Notemachine £506,000 plus outstanding interest, reducing the balance outstanding to £1.4 million. We also executed an amended settlement agreement with Notemachine on April 18, 2008 (the “Amended Settlement Agreement”) under which the outstanding balance is due in monthly payments of £71,212 including interest at 15% per annum through March 2010. Earlier payment is required if we obtain sufficient financing or accumulate a certain level of surplus cash (both as defined in the amended settlement agreement). Under the amended settlement agreement, our liability to Notemachine is collateralized by a security interest in substantially all of our assets and the assets of our subsidiaries, which security interest is subordinate to the security interest granted to Lender, under the Lampe Loan Facility.
Bridge Loan
In February 2008, we entered into a Securities Purchase Agreement with LC Capital Master Fund, Ltd., as lender and Lampe Conway & Co., LLC, as administrative agent, pursuant to which we borrowed $1.0 million. £380,000 from the proceeds of the loan was used to pay the remainder of the January 2008 payment due to Notemachine, together with interest on the unpaid balance. The loan bears interest equal to adjusted LIBOR (as defined in the Securities Purchase Agreement) plus (i) 5% for each interest period for which we pay interest in cash or (ii) 15% for each interest period for which we do not pay interest in cash. The Securities Purchase Agreement does not allow us to pay interest in cash until our Term Loan B has been paid in full. The loan matures on the earliest of December 6, 2012 or immediately following our repayment of Term Loan B.
New Lampe Loan Facility
In June 2006, we borrowed approximately $111.0 million from GSO Origination Funding Partners LP and other lenders. Under the Amended and Restated Second Lien Loan Agreement, dated as of November 20, 2006, by and among us, TRM ATM Corporation and TRM Copy Centers (USA) Corporation, as borrowers, the subsidiaries of the borrowers identified therein, as the guarantors, Wells Fargo Foothill, Inc., as administrative agent, GSO Origination Funding Partners, LP, a Delaware limited partnership, and the other lenders from time to time party thereto (the “Term Loan B”), we owed $2.1 million as of December 31, 2007. Interest on Term Loan B was at LIBOR plus 12% (14.70% as of March 31, 2008). The borrowings pursuant to Term Loan B were collateralized by substantially all of our assets and the assets of our subsidiaries. Because we were uncertain whether we could comply with all of the terms of Term Loan B, as of December 31, 2007, we classified the entire balance of the loan as a current liability on our balance sheet.
On April 18, 2008, we borrowed $11.0 million pursuant to a Securities Purchase Agreement (the “Securities Purchase Agreement”) with LC Capital Master Fund, Ltd. as lender (the “Lender”) and Lampe, Conway & Co., LLC as administrative and collateral agent (the “Lampe Loan Facility”). We used proceeds from this loan primarily to pay (1) the remaining balance of Term Loan B that we owed to GSO Origination Funding Partners and the other lenders, (2) $1.0 million we borrowed from LC Capital Master Fund, Ltd. in February 2008, (3) $1.0 million we owed under a settlement agreement with the purchaser of our United Kingdom and German ATM businesses, (4) the $2.5 million settlement we owed to eFunds and (5) the cash portion of the purchase price for the acquisition of Access to Money. The $11.0 million note from the Lender bears interest at 13%, payable semiannually, and is due in April 2011. The Lampe Loan Facility includes covenants that require us to maintain a certain balance of cash and investments and to meet quarterly minimum Consolidated EBITDA targets (as defined in the Securities Purchase Agreement) and maintain at least 10,250 ATMs. The borrowings pursuant to the Lampe Loan Facility are collateralized by substantially all of our assets and the assets of our subsidiaries.
In connection with the Lampe Loan Facility, we granted warrants to the Lender to purchase up to 12,500,000 shares of our common stock at an exercise price initially equal to $.28 per share, subject to adjustment for any recapitalizations, stock combinations, stock dividends and stock splits or if we issue common stock, or securities convertible into common stock, at a lower price. The warrants are exercisable at any time and expire on April 18, 2015. We have agreed to register the shares subject to the warrants. Using the Black-Scholes valuation model, we estimated the total fair value of the warrants issued to the Lender to be approximately $5.9 million. The components of the valuation included an expected term of seven years, a risk free rate of 3.8%, and volatility percentage of 133.4. The fair value of the warrants, together with legal and other fees relating to the Lampe Loan Facility was recorded as deferred financing costs and amortized over the term of the loan.
Note Payable to Former Access to Money Owner
As part of the purchase price for all of the capital stock of Access to Money, in April 2008 we issued a note payable to the former owner in the amount of $9.8 million. The note bears interest at 13% per annum with interest payable quarterly and the principal balance due April 18, 2015. Payments under the promissory note are subordinated to the payment in full of the Lampe Loan Facility and the amended and restated settlement agreement with Notemachine.
Other Debt
The $1.6 million of other debt represents notes payable balances due to the former owner of Access to Money for vault cash and a bank for a lease related to a customer project.
On May 30, 2008, the Lender transferred 1,250,000 of its warrants to Cadence Special Holdings II, LLC (“Cadence”), at an exercise price initially equal to $.28 per share. The warrants are exercisable at any time and expire on April 18, 2015. We have agreed to register the shares subject to the warrants.
In connection with the Securities Purchase Agreement, we granted a warrant to LC Capital Master Fund, Ltd., to purchase up to 2,500,000 shares of our common stock at an exercise price initially equal to $.40 per share, subject to adjustment for any recapitalizations, stock combinations, stock dividends and stock splits. The warrants are exercisable at any time and expire on February 8, 2015. We have agreed to register the shares subject to the warrants.
8. Income Taxes
The components of income tax expense (benefit) are as follows (in thousands):
Income tax expense (benefit) has been allocated as follows (in thousands):
Deferred tax assets (liabilities) are comprised of the following components (in thousands):
We have established a valuation allowance to reduce our deferred tax assets to the amount that we believe we will realize. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, we determined that we may not realize all or part of our net deferred tax assets in the future, and, accordingly, we have recorded a full valuation allowance against our net deferred tax assets. If we determine that we will realize deferred tax assets in the future, we will increase income in the period in which we make the determination.
The effective tax rate for income (loss) from continuing operations differs from the federal statutory tax rate as follows (in thousands except percentage data):
As of December 31, 2008, we have net operating loss carryforwards of approximately $56.1 million available to offset future taxable income for United States federal income tax purposes which expire in the years 2020 through 2027. Utilization of our United States net operating loss carryforwards may be subject to certain limitations in the event of a change in control of the Company. Our United States federal income tax returns for the years 2005-2008 are subject to examination and adjustment by the Internal Revenue Service.
As of December 31, 2008, our Canadian subsidiary has net operating loss carryforwards of approximately $15.0 million available to offset future taxable income in Canada which expire in the years 2009 through 2017. However, we have sold the assets of our Canadian subsidiary, and it no longer has any operations.
FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes,” and provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.
Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
On January 1, 2007, we adopted the provisions of FIN 48. At December 31, 2007 and 2008 we had no unrecognized tax benefits.
We recognize interest and penalty accrued related to unrecognized tax benefits and penalties as income tax expense.
We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions.
We file income tax returns with U.S. various states as well as foreign jurisdictions. With few exceptions, we are subject to income tax examinations by tax authorities for years on or after 2005.
9. Shareholders’ Equity
Repurchase of Common Stock
In the fourth quarter of 2005 we announced that our Board of Directors had authorized the repurchase of shares of our common stock for up to $20.0 million. No shares were repurchased in 2006, 2007 or 2008. Any such repurchases would require approval from our lenders.
Common Stock Warrants
On November 20, 2006, we granted to the holders of our Term B loan warrants to purchase 3,072,074 shares of common stock at $1.36 per share. These warrants expire in November 2013 (see Note 7).
In February 2008, we granted a lender a warrant to purchase up to 2,500,000 shares of our common stock at an exercise price initially equal to $.40 per share. This warrant expires on February 8, 2015 (see Note 7).
In connection with the Lampe Loan Facility, we granted warrants to the Lender to purchase up to 12,500,000 shares of our common stock at an exercise price initially equal to $.28 per share, subject to adjustment for any recapitalizations, stock combinations, stock dividends and stock splits or if we issue common stock, or securities convertible into common stock, at a lower price. The warrants are exercisable at any time and expire on April 18, 2015. We have agreed to register the shares subject to the warrants. Using the Black-Scholes valuation model, we estimated the total fair value of the warrants issued to the Lender to be approximately $5.9 million. The components of the valuation included an expected term of seven years, a risk free rate of 3.8%, and volatility percentage of 133.4. The fair value of the warrants, together with legal and other fees relating to the Lampe Loan Facility was recorded as deferred financing costs and amortized over the term of the loan.
Common Stock Options and Restricted Stock Grants
Non-cash stock compensation expense for 2007 and 2008 is included primarily in selling, general and administrative expense and includes amortization of stock options granted and previously unvested stock option grants and amortization of restricted shares of common stock granted to our directors and certain executive officers. During 2008, we accelerated the vesting of stock options and restricted stock associated with the acquisition of Access to Money.
Non-cash compensation expense (in thousands):
We have reserved 4,700,000 shares of common stock for issuance under our stock incentive plans. Under our plans we are authorized to issue incentive and nonqualified stock options and restricted shares of common stock. All options terminate no more than ten years from the date of grant and vest over various schedules ranging up to five years. We issue new shares upon exercise of options.
A summary of stock option activity during 2007 and 2008 follows:
As of December 31, 2008, options to acquire 223,500 shares at a weighted average exercise price of $4.23 per share were exercisable. As of December 31, 2008, there was approximately $118,000 of total unrecognized compensation cost related to share based compensation arrangements granted under our stock award plans that are expected to vest. We expect to recognize that cost over a weighted average period of 2.3 years.
As of December 31, 2007, options to acquire 213,292 shares at a weighted average exercise price of $5.51 per share were exercisable. As of December 31, 2007, there was approximately $1.6 million of total unrecognized compensation cost related to share-based compensation arrangements granted under our stock award plans that were expected to vest. We recognized that cost over a weighted average period of 1.9 years.
During the year ended December 31, 2006, options to purchase 306,890 common shares at prices from $1.15 to $6.50 were exercised, including options to purchase 285,140 shares that were exercised on a cashless basis as allowed under the Company’s Omnibus Stock Option Plan. As a result of the exercise of options during 2006, we issued 234,832 common shares. During the year ended December 31, 2007, options to purchase 20,375 common shares at prices from $1.15 to $1.80 were exercised, including options to purchase 4,375 shares that were exercised on a cashless basis. As a result of the exercise of options during 2007, we issued 17,718 common shares.
The weighted-average per share grant date fair value of options granted during 2006, 2007 and 2008 was $2.43, $.98 and $.15, respectively. The total intrinsic value of options exercised during 2006, 2007 and 2008 was $1.6 million, $30,000 and $0, respectively.
Options outstanding that were fully vested or expected to vest as of December 31, 2008:
To determine the amount of compensation expense beginning in 2006, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing method. The weighted average fair value of options granted during 2007 and 2008 is calculated by the Black-Scholes model, and the assumptions used are shown in the following table.
We have issued shares of restricted stock to our directors and certain officers. The restricted shares vest annually over periods of one to four years. A summary of restricted stock activity during 2007 and 2008 follows:
The total fair value of restricted shares vested during 2007 and 2008 was $148,000 and $202,270, respectively. The weighted average per share grant date fair value of restricted stock granted during 2006, 2007 and 2008 was $5.98, $1.55 and $0.19, respectively.
10. Profit Sharing Retirement Plan
We have a profit sharing retirement plan for eligible employees. The plan has profit sharing and 401(k) components. Our contribution under the profit sharing portion of the plan is discretionary. Under the 401(k) part of the plan, each employee may contribute, on a pre-tax basis, up to the maximum allowed under the Internal Revenue Code.
No amounts were accrued or paid for profit sharing for 2006, 2007 and 2008. We paid matching contributions of $129,000, $65,000 and $37,000 to our defined contribution plans for the years ended December 31, 2006, 2007 and 2008, respectively.
11. Commitments and Contingent Liabilities
We have operating leases, primarily for office and warehouse space, with expiration dates through 2013. Minimum lease payments for our operating leases are: 2009 - $374,000; 2010 - $306,000; 2011 - $235,000; 2012 - $211,000; and 2013 - $107,000.
Rental expense included in continuing operations for 2006, 2007 and 2008 was $441,000, $296,000 and $182,000, respectively.
As of December 31, 2008, Wells Fargo Foothill Inc. had issued a letter of credit on our behalf in the amount of $2.0 million to secure our performance in connection with our vault cash agreement.
12. Discontinued Operations and Sales of Businesses
During 2006 and 2007 we sold all of our photocopy operations and all of our ATM operations outside the United States. As a result, the operations of our Canadian, United Kingdom and German ATM businesses and our Canadian, United Kingdom and United States photocopy businesses are shown as discontinued operations in the accompanying statements of operations for all periods presented.
In June 2006 we sold all of the outstanding shares of our United Kingdom photocopier subsidiary for £2.32 million (approximately $4.3 million using exchange rates as of the date of sale). We recorded a gain on the sale of $1.9 million, including recognition in income of foreign currency translation adjustments of $1.5 million that had previously been recorded in other comprehensive income.
Effective January 1, 2007, we sold substantially all of the assets of our Canadian ATM business for approximately Canadian $13.0 million (U.S. $11.1 million using exchange rates as of January 12, 2007). We have recorded a gain on the sale of $2.3 million.
Effective January 24, 2007, we sold all of the shares of our United Kingdom ATM subsidiary that owned our ATM businesses in the United Kingdom and Germany for approximately £43.2 million (approximately $84.7 million using exchange rates as of January 24, 2007), subject to certain adjustments. In November 2007 we entered into a settlement agreement pursuant to which we agreed to repay £3.3 million as a final settlement of all claims under the sale and purchase agreement. In December 2007 we paid £571,000 of this liability. Payment terms for the remaining £2.7
million are described in Note 7. After taking into account the settlement agreement, we have recorded a gain on the sale of $4.8 million.
On January 29, 2007, we sold substantially all of the assets of our United States photocopy business for approximately $8.8 million. We have recorded a gain on the sale of approximately $65,000.
On June 19, 2007, we sold substantially all of the assets of our Canadian photocopy business for approximately Canadian $615,000 (approximately U.S. $582,000 using exchange rates as of June 19, 2007) in cash and assumption of liabilities, plus 50% of the cash flows from the operation of the business for seven years. We recorded a gain on the sale of approximately $2.7 million, substantially all due to recognition of currency exchange gains previously recorded in other comprehensive income.
In connection with these sales, we made representations and warranties and/or provided indemnities. The purchasers may make claims against us relating to the representations, warranties or indemnities. Other than the purchaser of our former United Kingdom ATM subsidiary, none of the purchasers have pursued claims against us. The claim by the purchaser of the United Kingdom ATM subsidiary has been settled and is described in Note 7.
The aggregate of the sales prices for the businesses we sold in the first six months of 2007 was approximately $105.0 million, before selling costs. We used $98.6 million of the net cash proceeds of $102.4 million to make principal and interest payments on our debt. The balance was used to fund escrow deposits and deposits with our bank to collateralize outstanding letters of credit.
Because the terms of our financing agreements required us to use substantially all of the net proceeds from the sales of businesses to pay debt, we have allocated interest expense to discontinued operations based upon the lesser of the amount repaid or debt outstanding. No general corporate overhead has been allocated to discontinued operations.
Net revenues of discontinued operations through the dates of sale (in thousands):
Pretax income (loss) from discontinued operations through the dates of sale (in thousands):
Subsequent to the sales of our United States photocopy and Canadian photocopy and ATM businesses, we have resolved certain contingencies associated with those sales. In connection with the resolution of those contingencies and our settlement of claims by the purchaser of our United Kingdom ATM business, we recorded additional losses on the sales of discontinued operations of $221,000 in the second quarter of 2007, $1.6 million in the third quarter of 2007 and $213,000 in the fourth quarter of 2007.
A charge of $2.7 million is included in discontinued operations for 2007 to write down the carrying amount of the assets of the Canadian photocopy business to their estimated fair value less cost to sell.
Substantially all of the assets and liabilities of our United States photocopy business and our ATM businesses in Canada, the United Kingdom and Germany, which were sold in January 2007. The carrying amounts of assets reported as held for sale and related liabilities as of December 31, 2006 were as follows (in thousands):
13. Concentrations and Related Party Transactions
We have purchased most of our ATMs from two suppliers, NCR Corporation and Triton Systems. In addition, NCR Corporation provides maintenance services for our company-owned installed ATMs. In 2006 we purchased equipment, parts and services from NCR Corporation aggregating $2.7 million and from Triton Systems aggregating $5.5 million. In 2007 we purchased equipment, parts and services from NCR Corporation aggregating approximately $1.6 million and from Triton Systems aggregating approximately $1.2 million. In 2008 we purchased equipment, parts and services from NCR Corporation totaling approximately $3.1 million and $2.2 million from Triton Systems. At December 31, 2008 we had no outstanding accounts payable to NCR Corporation, ($273,000 at December 31, 2007). At December 31, 2008 we had $121,000 in accounts payable to Triton Systems, ($268,000 at December 31, 2007).
In connection with the acquisition of the eFunds ATM business, we entered into a Master Services Agreement with eFunds, (the “MSA”). The MSA had an initial term of five years. In May 2008, we entered into a processing services agreement to terminate the MSA except for processing services. We incurred fees for services provided by eFunds of $5.7 million in 2006, $3.2 million in 2007 and $1.3 million in 2008.
In connection with the acquisition of Access to Money we entered into a Vault Cash Agreement with the owner, who is now our Chief Operating Officer. This agreement calls for us to return vault cash, estimated at the date of closing, to Doug Falcone as the company replaces that vault cash with cash supplied by our primary vault cash supplier. The asset and liability associated with this vault cash are accounted for under term loans in current liabilities.
14. Segment Reporting
Prior to the third quarter of 2006 we reported our operations in two segments - ATM and Photocopy. During the third quarter of 2006 our President and Chief Executive Officer began regularly reviewing operating results of our businesses on a geographical basis. Accordingly, we have modified our segment disclosures to reflect this change in our reporting practices. As a result of modifying our segment disclosures, during the third quarter of 2006 we reallocated goodwill of $119.7 million previously reported as an asset of our ATM segment to the new ATM segments as follows (in thousands):
We reallocated the goodwill based on the estimated relative fair values of the segments. See Note 15 regarding impairment of goodwill.
As of September 30, 2006 we had the following six segments: Automated Teller Machine (“ATM”) operations in the United States, Canada, the United Kingdom and Germany; and photocopy operations in the United
States and Canada. The ATM segments owned and/or operated ATMs, sold ATM machines, and serviced equipment for others. The photocopy segments owned and maintained self-service photocopiers in retail establishments.
In June 2006 we sold our United Kingdom photocopier subsidiary. In January 2007 we sold our United Kingdom ATM subsidiary that owned our ATM businesses in the United Kingdom and Germany, and we sold substantially all of the assets of our United States photocopier and Canadian ATM businesses. In June 2007 we sold substantially all of the assets of our Canadian photocopy business. As a result of these sales, we have presented the results of operations of our Canadian, United Kingdom and German ATM businesses and our Canadian, United Kingdom and United States photocopy businesses as discontinued operations for all periods presented in the accompanying statements of operations, and have excluded those operations from the segment information in this footnote. General corporate overhead previously charged to the discontinued operations has been reallocated to our remaining segment.
As a result of the foregoing sales, we now have only one operating segment - ATM operations in the United States. Our United States ATM business owns and/or operates ATM machines, sells ATM machines and services equipment for others.
Substantially all of our revenues from continuing operations for 2006, 2007 and 2008 were derived from sales to customers in the United States. As of December 31, 2008, substantially all of our assets were located in the United States.
All revenues are attributed to external customers. One ATM customer accounted for 20%, 25% and 19% of our net sales from continuing operations in 2006, 2007 and 2008, respectively. A second ATM customer accounted for 9%, 11% and 8% of our net sales from continuing operations in 2006, 2007 and 2008, respectively.
Information about our assets by segment and geographic location as of December 31, 2006 follows (in thousands):
15. Impairment Charges
During the third quarter of 2006 we recorded non-cash charges of $96.1 million for the impairment of certain assets, of which $43.3 million is included in continuing operations and $52.8 million is included in discontinued operations.
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ATM goodwill. Because of continuing decreases in sales and operating margins in the ATM segments and other factors, we re-evaluated our financial forecasts in the third quarter of 2006 and concluded that it was necessary to review goodwill in our United States, Canadian and United Kingdom ATM segments for impairment of value. The review, consisting of a comparison of the carrying value of the goodwill to its implied fair value, resulted in impairment charges of $20.4 million in the United States, $5.8 million in Canada and $17.5 million in the United Kingdom. Our estimate of the implied fair value of the United States ATM segment’s goodwill was based on the quoted market price of our common stock and the discounted value of estimated future cash flows over a six-year period with residual value,
using an 11% discount rate. Our estimate of the implied fair value of the Canadian and United Kingdom ATM segments’ goodwill was based on the estimated selling prices of those ATM segments.
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Finite-lived intangible assets associated with the ATM businesses. Because of faster than anticipated attrition of customer contracts, operating losses and revised financial forecasts, we concluded that it was necessary to review the carrying value of the long-lived assets of our United States, Canadian and United Kingdom ATM segments. In that review, we determined that the future cash flows from those assets were not adequate to recover those assets, and we recorded impairment charges of $22.9 million in the United States, $272,000 in Canada and $7.7 million in the United Kingdom, based on comparisons of the carrying amounts of the assets to their estimated fair values. Our estimate of the fair value of the United States assets was based on the discounted values of estimated future cash flows over a seven-year period using an 11% discount rate. Our estimates of the fair value of the Canadian and United Kingdom assets were based on the estimated selling prices of those ATM segments.
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Photocopy equipment in the United States and Canada. Because of operating losses in our United States and Canadian photocopy segments and revised financial forecasts, we concluded that it was necessary to review the carrying value of those segments’ long-lived assets, which consist almost entirely of photocopy equipment. As a result, we determined that future cash flows from the photocopy segments were not adequate to recover the carrying value of that equipment, and we recorded impairment charges of $18.7 million in the United States and $2.7 million in Canada based on a comparison of the carrying amounts of these assets to their estimated fair values. Our estimates of the fair values of the asset groups were based on the estimated selling price of the United States photocopy segment and the discounted value of estimated future cash flows over a ten-year period using an 11% discount rate for the Canadian photocopy segment.
During the fourth quarter of 2008 we recorded a non-cash charge of $19.8 million for the impairment of goodwill.
We believe that volatility in the overall market as well as the low trading volume for the Company’s stock has significantly impacted the Company’s market capitalization.
Due to the current economic environment there can be no assurances that the Company’s estimates and assumptions regarding the duration of the economic recession, or the period or strength of recovery, made for purposes of the Company’s goodwill impairment testing during the year ended December 31, 2008 will prove to be accurate
predictions of the future. If the Company’s assumptions regarding forecasted revenues or margin growth rates of the reporting units are not achieved.
16. Litigation and Potential Claims
We are a defendant in one action that has arisen in the normal course of business. We believe that ultimate disposition of this matter will not have a material adverse effect on our business, financial condition or results of operations.
As described in Note 12, in 2006 and 2007 we sold our ATM businesses in the United Kingdom, Germany and Canada, and our photocopy businesses in the United Kingdom, United States and Canada in five separate transactions. In connection with these sales, we have made various representations and warranties and provided indemnities. We do not believe any future claims will be made against us relating to the representations, warranties or indemnities, or provisions for adjustment of the sales prices. The purchaser of our United Kingdom and German ATM businesses asserted claims pursuant to the sales agreement. In April 2008, we entered into an amended settlement agreement described further in Notes 6 and 11.
17. Corporate Restructuring, Equipment Write-downs and Inventory Write-down
In connection with the corporate restructuring plan we announced in November 2006 and the subsequent sales of a substantial portion of our operations, we have made significant staff reductions, including termination of all of our United States field service employees. We have also vacated leased warehouse and office space occupied by the terminated employees. During the first six months of 2007 we paid severance of $167,000 to terminated employees. During the first quarter of 2007 we vacated warehouse and office space in eleven United States locations. The vacated space was leased under leases with remaining terms up to seven years. We recorded a liability of $796,000 as of March 31, 2007, which was the estimated fair value of the costs that we expect to incur without any economic benefit, and we charged that amount to expense in the first quarter of 2007. We estimated the fair value of the liability based on the discounted value of the remaining lease payments, reduced by estimated sublease payments that we reasonably expect could be obtained for use of the properties.
The costs for both severance payments and vacated leases are included in restructuring charges in our statement of operations for 2007.
In the third quarter of 2007 contracts with three merchants that had TRM-owned ATMs in their stores were terminated, and we began removing those ATMs. In part because we no longer have field service technicians on our staff, we decided that we would not be refurbishing, upgrading and redeploying these ATMs, and we arranged to sell them to third parties. In addition, based on a review of our ATMs in storage, we decided that it would not be cost-effective to refurbish and upgrade most of our stored machines to current standards. As a result, in the third quarter of 2007 we charged $1.1 million to equipment write-offs to write down the equipment to be sold to its estimated net realizable value.
In the third quarter of 2007 we charged $270,000 to cost of sales to write down our inventories to their estimated net realizable value due to the discontinuance of our field service staff.
18. Quarterly Financial Information (Unaudited)
As discussed in Note 12, during the first quarter of 2007 we sold our Canadian, United Kingdom and German ATM businesses and our United States photocopy businesses. We recorded a net gain from these sales of $9.8 million in the first quarter of 2007. We used a substantial portion of the proceeds from the sale of these businesses to repay debt, resulting in a loss on early extinguishment of debt of $4.0 million in the first quarter of 2007. In the second quarter of 2007 we sold our Canadian photocopy business.
As discussed in Note 17, we recorded restructuring charges of $963,000 in the first quarter of 2007, and we recorded equipment and inventory write-downs totaling $1.4 million in the third quarter of 2007.
Subsequent to the sales of our United States photocopy and Canadian photocopy and ATM businesses, we resolved certain contingencies associated with those sales. In connection with the resolution of those contingencies and our revised estimates and of the ultimate settlement of claims by the purchaser of our Untied Kingdom ATM business, we recorded additional losses on the sales of discontinued operations of $221,000 in the second quarter of 2007, $1.6 million in the third quarter of 2007, and $213,000 in the fourth quarter of 2007.
A charge of $2.7 million is included in discontinued operations for the first quarter of 2007 to write down the carrying amount of the assets of our Canadian photocopy business to their estimated fair value less cost to sell.
In the fourth quarter of 2007 we entered into an agreement with eFunds to terminate our Master Services Agreement. In connection with the termination of that agreement we agreed to make a payment to eFunds that was approximately $2.0 million less than the liability we had recorded for services performed under the agreement. The $2.0 million was credited to expense in the fourth quarter of 2007.
In the fourth quarter of 2007 we closed the bank accounts of our Canadian subsidiary and transferred the cash balances to a United States bank account, substantially liquidating the Canadian subsidiary. In connection with the substantial liquidation of that subsidiary we recognized in income from discontinued operations $2.7 million of currency exchange gains previously recorded in other comprehensive income.
As discussed in Note 4, in the fourth quarter of 2007 we accrued a prepayment fee of $750,000 payable to the lender under TRM Inventory Funding Trust’s Loan and Servicing Agreement. The fee is included in our 2007 loss on early extinguishment of debt.
In April 2008, we acquired LJR Consulting Corp., d.b.a. Access to Money (“Access to Money”), which was a large independently-owned ATM company. This acquisition added 4,200 ATMs to our portfolio and brought with it a service infrastructure that we can continue to build upon.
During the fourth quarter of 2008 we recorded a non-cash charge of $19.8 million for the impairment of goodwill.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934, as amended, reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15(d)-15(e) under the Exchange Act) as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2008, our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner.
Management’s Report on Internal Control Over Financial Reporting
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934 as amended. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008 using criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our management has concluded that our internal control over financial reporting was effective as of December 31, 2008.
Changes in Internal Control Over Financial Reporting
There were no changes in internal control over financial reporting during the fourth quarter of 2008.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item will be set forth in our definitive proxy statement with respect to our 2009 annual meeting of shareholders to be filed not later than 120 days after December 31, 2008 and is incorporated herein by this reference.
The information required by this item will be set forth in our definitive proxy statement with respect to our 2009 annual meeting of shareholders to be filed not later than 120 days after December 31, 2008 and is incorporated herein by this reference.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item will be set forth in our definitive proxy statement with respect to our 2009 annual meeting of shareholders to be filed not later than 120 days after December 31, 2008 and is incorporated herein by this reference.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be set forth in our definitive proxy statement with respect to our 2009 annual meeting of shareholders to be filed not later than 120 days after December 31, 2008 and is incorporated herein by this reference.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item will be set forth in our definitive proxy statement with respect to our 2009 annual meeting of shareholders to be filed not later than 120 days after December 31, 2008 and is incorporated herein by this reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report
1. Financial Statements
2. Financial Statement Schedules:
II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3. Exhibits:
(a) The exhibits listed below are filed as part of this report
a)
Incentive Stock Option Agreement
b)
Non Qualified Stock Option Agreement
c)
Employee Restricted Stock Award
d)
Non-employee Restricted Stock Award
b)
First Amendment and Waiver to Credit Agreement, dated as of November 14, 2005, among TRM Corporation, TRM (ATM) Limited and certain subsidiaries, as Guarantors, and Bank of America, N.A.
10.10 a)
Credit Agreement dated June 6, 2006, among TRM Corporation, TRM ATM Corporation and TRM Copy Centers (USA) Corporation, as Borrowers, the Subsidiaries of the Borrowers identified therein, Wells Fargo Foothill, Inc., as Administrative Agent, Revolving Lender, Swing Line Lender and L/C Issuer, and GSO Origination Funding Partners LP, the other lenders identified therein (incorporated herein by reference to Exhibit 10.8 of Form 10-Q filed for the quarter ended June 30, 2006)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in Portland, Oregon, on March 31, 2009.
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on March 31, 2009 on behalf of the Registrant and in the capacities indicated:
Signature
Title
/s/ Richard B. Stern
Richard B. Stern
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Michael J. Dolan
Michael J. Dolan
Chief Financial Officer
(Principal Financial Officer)
/s/ Douglas B. Falcone
Douglas B. Falcone
Director
/s/ Ethan S. Buyon
Ethan S. Buyon
Director
/s/ Thomas S. McNamara
Thomas S. McNamara
Director
/s/ Kenneth Paull
Kenneth Paull
Director
/s/ Michael E. Venezia
Michael E. Venezia
Director
EXHIBIT INDEX
a)
Incentive Stock Option Agreement
b)
Non Qualified Stock Option Agreement
c)
Employee Restricted Stock Award
d)
Non-employee Restricted Stock Award
10.10 a)
Credit Agreement dated June 6, 2006, among TRM Corporation, TRM ATM Corporation and TRM Copy Centers (USA) Corporation, as Borrowers, the Subsidiaries of the Borrowers identified therein, Wells Fargo Foothill, Inc., as Administrative Agent, Revolving Lender, Swing Line Lender and L/C Issuer, and GSO Origination Funding Partners LP, the other lenders identified therein (incorporated herein by reference to Exhibit 10.8 of Form 10-Q filed for the quarter ended June 30, 2006)
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 2006, 2007 and 2008
(In thousands)
Reclassified as assets held for sale