UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

 

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2004
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                        to

 

Commission file number                0-19657   

 

TRM CORPORATION

(Exact name of registrant as specified in its charter)

 

 

5208 N.E. 122nd Avenue

Portland, Oregon 97230

(Address of principal executive offices) (Zip Code)

 

(503) 257-8766

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

YES ý  NO o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the  Exchange Act).

 

YES o  NO ý

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1.          FINANCIAL STATEMENTS

 

TRM Corporation

Consolidated Balance Sheets

(unaudited)

(In thousands)

 

		December 31, 2003				June 30, 2004
Assets
Current assets:
Cash and cash equivalents		$	5,724			$		6,530
Accounts receivable, net		6,134				5,592
Inventories		1,567				1,949
Prepaid expenses and other		1,405				2,175
Deferred tax asset		423				424
Total current assets		15,253				16,670
Equipment, less accumulated depreciation and amortization		63,991				63,273
Restricted cash - TRM Inventory Funding Trust		28,939				39,942
Deferred tax asset		2,767				2,509
Intangible assets		72				7,323
Other assets		1,253				1,108
Total assets		$	112,275			$	130,825
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$		1,367		$	2,986
Accrued expenses		6,429				5,019
Accrued expenses of TRM Inventory Funding Trust		57				67
Current portion of long-term debt		3,024				3,155
Current portion of obligations under capital leases		2,113				2,234
Total current liabilities		12,990				13,461
TRM Inventory Funding Trust note payable		27,455				38,494
Long-term debt		7,040				5,028
Obligations under capital leases		2,784				1,835
Deferred tax liability		7,049				7,765
Other long-term liabilities		79				173
Preferred dividends payable		4,502				4,498
Total liabilities		61,899				71,254
Minority interest		1,500				1,500
Shareholders’ equity:
Preferred stock, no par value - 5,000 shares authorized; 1,757 shares issued and outstanding (liquidation preference $19,764) (1,778 shares issued and outstanding at December 31, 2003)		19,798				19,559
Common stock, no par value - 50,000 shares authorized; 7,521 shares issued and outstanding (7,060 shares issued and outstanding at December 31, 2003)		19,026				24,044
Additional paid-in capital		63				63
Accumulated other comprehensive income		2,088				2,029
Retained earnings		7,901				12,376
Total shareholders’ equity		48,876				58,071
Total liabilities and shareholders’ equity		$		112,275		$	130,825

 

See accompanying notes to consolidated financial statements.

 

2

 

TRM Corporation

Consolidated Statements of Operations

(unaudited)

(In thousands, except per share data)

 

		Three Months Ended June 30,							Six Months Ended June 30,
		2003				2004			2003			2004
Sales		$	24,366			$	28,840		$	46,780		$	54,769
Less discounts		4,151				6,328			7,877			11,227
Net sales		20,215				22,512			38,903			43,542
Cost of sales		11,950				12,106			23,036			22,782
Gross profit		8,265				10,406			15,867			20,760
Selling, general and administrative expense		6,264				6,371			12,063			12,582
Asset retirements		152				—			216			—
Operating income		1,849				4,035			3,588			8,178
Interest expense		238				251			568			497
Other (income) expense, net		(103			)	74			46			209
Income before income taxes		1,714				3,710			2,974			7,472
Provision for income taxes		566				1,002			1,073			2,251
Net income		$		1,148		$	2,708		$	1,901		$	5,221
Basic and diluted per share information (2003 amounts are restated - see note 3):
Net income		$		1,148		$	2,708		$	1,901		$	5,221
Preferred stock dividend		(375			)	(371		)	(750		)	(746		)
Income allocated to Series A preferred shareholders		(123			)	(350		)	(183		)	(686		)
Income available to common shareholders		$		650		$	1,987		$	968		$	3,789
Net income per common share:
Basic		$		.09		$	.26		$	.14		$	.52
Diluted		$		.09		$	.23		$	.14		$	.45

 

See accompanying notes to consolidated financial statements.

 

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TRM Corporation

Consolidated Statement of Shareholders’ Equity

(unaudited)

(In thousands)

 

 

		Comprehensive			Preferred						Common						Additional paid-in				Accumulated other comprehensive				Retained
		income			Shares		Amount				Shares		Amount				capital				income				earnings				Total
Balances, December 31, 2003					1,778		$	19,798			7,060		$	19,026			$		63		$		2,088		$		7,901		$		48,876
Comprehensive income
Net income		$	5,221		—		—				—		—				—				—				5,221				5,221
Other comprehensive income, net of tax - foreign currency translation adjustment		(59		)	—		—				—		—				—				(59			)	—				(59			)
Comprehensive income		$	5,162		—		—				—		—				—				—				—				—
Conversion of Series A preferred stock					(21	)	(239			)	16		239				—				—				—				—
Exercise of stock options					—		—				445		3,576				—				—				—				3,576
Tax benefit of stock options exercised					—		—				—		1,203				—				—				—				1,203
Preferred stock dividends					—		—				—		—				—				—				(746			)	(746			)
Balances, June 30, 2004					1,757		$		19,559		7,521		$		24,044		$	63			$	2,029			$	12,376			$	58,071

 

See accompanying notes to consolidated financial statements.

 

4

 

TRM Corporation

Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

		Six Months Ended June 30,
		2003			2004
Operating activities:
Net income		$	1,901		$	5,221
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,979			4,643
Loss on disposal of equipment		419			322
Changes in items affecting operations, net of effect of business acquisitions:
Accounts receivable		102			741
Inventories		(732		)	(137		)
Prepaid expenses and other		409			(746		)
Accounts payable		(598		)	1,216
Accrued expenses		(1,106		)	(2,032		)
Income taxes payable		3			—
Deferred taxes		1,213			2,176
Litigation settlement		(1,738		)	—
Total operating activities		4,852			11,404
Investing activities:
Proceeds from sale of equipment		468			49
Capital expenditures		(258		)	(3,255		)
Acquisition of intangible and other assets		(41		)	(651		)
Acquisition of businesses, net of cash acquired		—			(6,324		)
Total investing activities		169			(10,181		)
Financing activities:
Borrowings on notes payable		23,128			3,915
Repayment of notes payable		(24,779		)	(6,074		)
Principal payments on capital lease obligations		(874		)	(1,146		)
Increase in restricted cash		(931		)	(11,003		)
Proceeds from issuance of TRM Inventory Funding Trust note, net of repayments		259			11,039
Proceeds from issuance of equity in TRM Inventory Funding Trust		600			—
Proceeds from exercise of stock options		—			3,576
Preferred stock dividends		—			(750		)
Total financing activities		(2,597		)	(443		)
Effect of exchange rate changes		(142		)	26
Net increase in cash and cash equivalents		2,282			806
Beginning cash and cash equivalents		2,127			5,724
Ending cash and cash equivalents		$	4,409		$	6,530
Supplemental disclosure of non-cash transactions:
Assets acquired under capital lease obligations		$	2,104		$	—

 

See accompanying notes to consolidated financial statements.

 

5

 

TRM Corporation

 

Notes to Consolidated Financial Statements (unaudited)

 

1.           Interim Financial Data:

 

The consolidated financial statements of TRM Corporation and its subsidiaries (collectively, “TRM” or the “Company”) included herein have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments, consisting only of normal recurring adjustments, which, in the opinion of management, are necessary for a fair statement of the results of the interim periods.  These consolidated financial statements should be read in conjunction with our latest annual report on Form 10-K.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.  The results of operations for the periods presented are not necessarily indicative of the results to be expected for any subsequent interim period or for the year ending December 31, 2004.

 

2.             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 shareholders’ equity or previously reported net income.

 

3.             Net Income Per Share

 

In March 2004, the Financial Accounting Standards Board approved Emerging Issues Task Force (“EITF”) Issue No. 03-6 “Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings Per Share,” or EITF 03-6.    EITF 03-6 supersedes the guidance in Topic No.  D-95, “Effect of Participating Convertible Securities on the Computation of Basic Earnings per Share,” and requires the use of the two-class method for the computation of basic earnings per share for companies that have participating securities.  The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings.  In addition, EITF 03-6 addresses other forms of participating securities, including options, warrants, forwards and other contracts to issue an entity’s common stock, with the exception of stock-based compensation (unvested options and restricted stock) subject to the provisions of Accounting Principles Board (“APB”) Opinion No. 25 and Statement of Financial Accounting Standards (“SFAS”) No. 123.  EITF 03-6 became effective for reporting periods beginning after March 31, 2004 and must be applied by restating previously reported earnings per share information.  Our Series A preferred stock qualifies as a participating security under EITF 03-6.  Accordingly, we have adopted the use of the two-class method for the computation of earnings per share in the second quarter of 2004.  The application of EITF 03-6 as of June 30, 2004 has resulted in a reduction in our per share earnings, both basic and diluted, for the three and six-month periods ended June 30, 2003.  EITF 03-6 provides a new method for calculating per share

 

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earnings and does not otherwise affect our financial statements or have any economic or operating impact on us.

 

Previously reported earnings per share amounts for 2003 have been restated, as follows:.

 

 

		Three Months Ended June 30, 2003						Six Months Ended June 30, 2003
		As previously reported			Restated			As previously reported			Restated
Income available to common shareholders (in thousands)		$	773		$	650		$	1,151		$	968
Net income per common share:
Basic		$	.11		$	.09		$	.16		$	.14
Diluted		$	.11		$	.09		$	.16		$	.14

 

Net income per share using the two-class method has been computed as follows (in thousands except per share data):

 

		Three Months Ended June 30,							Six Months Ended June 30,
		2003			2004				2003				2004
Basic:
Net income		$	1,148		$	2,708			$		1,901		$	5,221
Preferred stock dividend		(375		)	(371			)	(750			)	(746			)
Income allocated to Series A preferred shareholders		(123		)	(350			)	(183			)	(686			)
Income available to common shareholders		$	650		$	1,987			$		968		$	3,789
Weighted average common shares outstanding		7,060			7,509				7,060				7,331
Basic net income per common share		$	.09		$	.26			$		.14		$	.52
Diluted:
Net income		$	1,148		$	2,708			$	1,901			$		5,221
Preferred stock dividend		(375		)	(371			)	(750			)	(746			)
Income allocated to Series A preferred shareholders		(123		)	(350			)	(183			)	(686			)
Income available to common shareholders		$	650		$		1,987		$	968			$		3,789
Weighted average common shares outstanding		7,060			7,509				7,060				7,331
Assumed exercise of stock options		37			1,129				19				1,087
Assumed exercise of warrants		—			25				—				12
Adjusted weighted average shares		7,097			8,663				7,079				8,430
Diluted net income per common share		$	.09		$		.23		$	.14			$		.45

 

Basic and diluted net income per share are based on the weighted average number of shares outstanding during each period, with diluted net income per share including the effect of potentially dilutive securities.  For diluted net income per share, the calculation assumes the conversion of common stock equivalents including the conversion of preferred stock unless such conversion is antidilutive.  Weighted average common shares outstanding, assuming dilution, include the incremental shares that would be issued upon the assumed exercise of stock options.  For the three months ended June 30, 2004, options to purchase 15,000 shares of our stock and preferred stock convertible into approximately 1,333,000 common shares were excluded from the calculation of diluted earnings per share because their inclusion would have been antidilutive.  For the three months ended June 30, 2003, approximately 1,258,000 of our stock options were excluded from the calculation as exercise prices were greater than the average share price of the common shares.  In addition, preferred stock convertible into approximately 1,333,000 common shares and warrants exercisable for 300,000 common shares were excluded from the calculation for the three months

 

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ended June 30, 2003 because their inclusion would also have been antidilutive.  These options, preferred shares and warrants could be dilutive in the future.

 

During the second quarter of 2004, our Board of Directors approved payment of a dividend in the amount of $371,000 related to our Series A preferred stock, which equates to $.04 per fully diluted common share.  This payment was made in July 2004 pursuant to a waiver from Bank of America, N.A.

 

4.             Inventories (in thousands):

 

		December 31, 2003			June 30, 2004
Parts		$	1,052		$	1,199
ATMs held for resale		483			730
Paper, toner and developer		32			20
Total		$	1,567		$	1,949

 

5.             Bank Loan Agreement

 

In March 2004 we and our primary lender, Bank of America, N.A., executed an amendment to our loan agreement.  The amendment increased the amount of the revolving line of credit from $4.0 million to $8.0 million and decreased the interest rate on borrowings pursuant to the line of credit from the bank’s prime rate to the bank’s prime rate minus one-half percent (3.5% at June 30, 2004).  The agreement has been further amended to extend the availability period for the line of credit to August 31, 2004.  As of June 30, 2004, we had no outstanding debt under the revolving line of credit, and we were in compliance with all covenants of our loan agreement.

 

6.             Employee Stock Options

 

We account for stock-based compensation utilizing the intrinsic value method in accordance with the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees.”  Accordingly, no compensation expense is recognized for our stock option plans because the exercise prices of employee stock options equal or exceed the market prices of the underlying stock on the measurement dates.  The following table illustrates the effect on net income and net income per common share if we had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation (in thousands, except per share data):

 

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		Three Months Ended June 30,						Six Months Ended June 30,
		2003			2004			2003			2004
Net income, as reported		$	1,148		$	2,708		$	1,901		$	5,221
Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(25		)	(256		)	(39		)	(342		)
Pro forma net income		1,123			2,452			1,862			4,879
Preferred stock dividend		(375		)	(371		)	(750		)	(746		)
Income allocated to Series A preferred shareholders		(119		)	(312		)	(177		)	(635		)
Pro forma net income available to common shareholders		$	629		$	1,769		$	935		$	3,498
Net income per common share:
Basic:
As reported		$	.09		$	.26		$	.14		$	.52
Pro forma		$	.09		$	.24		$	.13		$	.48
Diluted:
As reported		$	.09		$	.23		$	.14		$	.45
Pro forma		$	.09		$	.20		$	.13		$	.41

 

7.             Business Acquisitions

 

In a cash transaction effective March 31, 2004, we acquired all of the outstanding shares of Inkas Financial Corp. Ltd. (“Inkas”), an independent ATM company, for $6,018,000.  As a result of the acquisition, we added 447 ATM processing and management contracts and 85 ATM machines to our United Kingdom operations.  The acquisition was accounted for as a purchase; the purchase price and the related allocation are subject to further refinement and change during 2004.  The results of operations of Inkas are included in our consolidated results of operations starting in the second quarter of 2004.

 

The purchase price was allocated as follows (in thousands):

 

 

Contract rights acquired are being amortized over their estimated useful lives of ten years.

 

Simultaneous to the purchase of Inkas, we entered into an earn-out agreement with the sellers and an Inkas employee.  The earn-out agreement provides that we will make payments to the sellers and the Inkas employee for up to 150 net new ATM contracts entered into by Inkas during the first nine months following the acquisition of Inkas and which reach certain transaction levels. The maximum payment to be made pursuant to the earn-out agreement is £850,000 (approximately $1.5 million based upon currency exchange rates at June 30, 2004).

 

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Any payments to be made pursuant to the earn-out agreement will be accounted for as additional contract rights as they are earned.

 

In June 2004 we acquired all of the outstanding shares of Mighty Cash Financial Services, Inc., a Canadian corporation with a network of 72 ATM locations comprised primarily of ATMs owned by merchants who signed contracts with Mighty Cash to provide processing and management services.  The purchase price of approximately $604,000 was paid in cash and deferred payments and allocated primarily to contract rights.

 

The following table reflects the unaudited combined results of TRM, Inkas and Mighty Cash as if the acquisitions of Inkas and Mighty Cash had taken place at the beginning of each period presented.  The pro forma information includes adjustments for the amortization of the contract  rights, decreased interest income and the tax effect of these adjustments.  The pro forma information does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the combined companies.

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2003			2004			2003			2004
Net sales (in thousands)		$	21,397		$	22,551		$	40,874		$	44,359
Net income (in thousands)		$	1,025		$	2,713		$	1,700		$	5,187
Basic net income per share		$	.08		$	.27		$	.11		$	.51
Diluted net income per share		$	.08		$	.23		$	.11		$	.45

 

On July 8, 2004, we acquired a portfolio of approximately 350 ATM contracts in the United Kingdom.  These contracts are for merchant-filled ATMs.  The purchase price of £1.9 million ($3.5 million) was paid in cash and deferred payments.

 

8.          Segment Reporting (in thousands)

 

We have three reportable segments:  Automated Teller Machines (ATM), Photocopy and Software Development.  ATM owns and operates ATM machines in retail establishments, sells ATM machines, and began servicing equipment for others in the fourth quarter of 2003.  Photocopy owns and maintains self-service photocopiers in retail establishments.  The Software Development business develops software to deliver products and services through ATMs.

 

The accounting policies of the segments are substantially the same as those described in Note 1 to the financial statements in our annual report on Form 10-K for the year ended December 31, 2003.  We evaluate each segment’s performance based on operating income or loss.  In our financial statements for 2003 we reported segment performance based on income or loss before interest, taxes, minority interest, and cumulative effect of accounting changes.  The 2003 information below has been restated to conform to the current presentation.  Information regarding the operations of these reportable segments is as follows (in thousands):

 

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		Three Months Ended June 30,						Six Months Ended June 30,
		2003			2004			2003			2004
Net sales:
ATM		$	8,758		$	11,489		$	16,148		$	21,094
Photocopy		11,105			11,023			21,801			22,434
Software Development		352			—			954			14
		$	20,215		$	22,512		$	38,903		$	43,542
Operating income (loss):
ATM		$	866		$	1,243		$	1,332		$	2,678
Photocopy		1,171			2,881			2,454			5,724
Software Development		(188		)	(89		)	(198		)	(224		)
		$	1,849		$	4,035		$	3,588		$	8,178
Reconciliation of segment data to income before income taxes:
Operating income		$	1,849		$	4,035		$	3,588		$	8,178
Interest expense		238			251			568			497
Other (income) expense, net		(103		)	74			46			209
Income before income taxes		$	1,714		$	3,710		$	2,974		$	7,472
Total assets as of June 30, 2003:
ATM		$	78,306
Photocopy		52,449
Software development		70
		$	130,825

 

ITEM 2.                        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 Quarterly Report on Form 10-Q with respect to our beliefs, plans, objectives, goals, expectations, anticipations, intentions, financial condition, results of operations, future performance and business, including, without limitation, increasing ATM revenues, decreases in photocopy volume, growth of our business (including acquisitions) and the sale of common stock, 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.  Many factors discussed in this report will be important in determining our future performance.  Consequently,

 

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actual results may differ materially from those that might be anticipated from our forward-looking statements.  Other factors beyond those discussed 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.  This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.

 

Overview

 

We are a large-scale, multinational owner and operator of ATMs and photocopiers in the United States, the United Kingdom and Canada.  We have the tenth largest ATM network in the United States and the second largest ATM network in the United Kingdom.  In addition, we believe we have the largest self-service photocopier network in the world.  Our machines are located within high traffic national retailers and regional and locally-owned retail convenience stores.

 

In June 2004 our ATM network had a total of 4,616 revenue-generating machines deployed throughout the United Kingdom, United States and Canada representing an increase of 1,343 ATM machines (or 41%) when compared to the same month in 2003.  The ATM operations produced net sales of $21.1 million during the first six months of 2004, an increase of $4.9 million (or 31%) as compared to the same period in the prior year.  We believe that revenues generated from services delivered through our ATM network will represent a greater percentage of overall net sales in the future.

 

In addition to expanding our ATM operations through placements generated by our internal sales staff, we have been actively pursuing acquisitions of ATM networks since the second half of 2003.  In February 2004, we acquired a 20-ATM network in the United States.  On March 31, 2004, we added 447 ATM contracts and 85 ATM machines to our network through the acquisition of Inkas Financial Corp., Ltd. in the United Kingdom.  In June 2004, we entered the Canadian ATM market through the acquisition of Mighty Cash Financial Services, Inc., which had 72 ATMs in Canada.

 

At June 30, 2004, we had a total of 25,285 installed photocopiers in the United States, Canada and the United Kingdom, a decrease of 2,385 copiers (or 8.6%) when compared to June 30, 2003.  Photocopy net sales were $22.4 million for the six months ended June 30, 2004, up from $21.8 million during the same period in 2003.  The decrease in the number of photocopiers was caused primarily by the elimination of low volume sites.  However, price increases more than offset the decline in photocopy volume, resulting in a 2.9% increase in net photocopy revenue in the six months of 2004 compared to the six months of 2003.

 

Our  Board of Directors approved payment of a dividend for the second quarter of 2004 in the amount of $371,000 related to our Series A preferred stock, which equates to $.04 per fully diluted common share.  This payment was made in July 2004 pursuant to a waiver from Bank of America, N.A.

 

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Consolidated Results of Operations

 

The following table sets forth, for the periods indicated, selected statement of operations data, expressed as a percentage of sales of each item on the Consolidated Statements of Operations (see page 3 of this Quarterly Report on Form 10-Q).

 

		Three Months Ended				Six Months Ended
		June 30, 2003		June 30, 2004		June 30, 2003		June 30, 2004
Sales		100.0	%	100.0	%	100.0	%	100.0	%
Less discounts		17.0		21.9		16.8		20.5
Net sales		83.0		78.1		83.2		79.5
Cost of sales		49.1		42.0		49.3		41.6
Gross profit		33.9		36.1		33.9		37.9
Selling, general and administrative expense		25.7		22.1		25.8		23.0
Asset retirements		0.6		—		0.4		—
Operating income		7.6		14.0		7.7		14.9
Interest expense		1.0		0.9		1.2		0.9
Other (income) expense, net		(0.4	)	0.2		0.1		0.4
Income before income taxes		7.0		12.9		6.4		13.6
Provision for income taxes		2.3		3.5		2.3		4.1
Net income		4.7	%	9.4	%	4.1	%	9.5	%

 

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Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003

 

ATM Results of Operations

 

		Three months ended June 30,
		2003				% of Sales		2004			% of Sales
		(in thousands, except operating and percentage data)
Transaction-based sales		$	9,755			93.3	%	$	14,668		95.1	%
Service sales		28				0.3		496			3.2
Sales of ATM equipment		674				6.4		256			1.7
Total sales		10,457				100.0		15,420			100.0
Less discounts		1,699				16.2		3,931			25.5
Net sales		8,758				83.8		11,489			74.5
Cost of sales		5,040				48.2		6,624			43.0
Gross profit		$		3,718		35.6	%	$	4,865		31.5	%
Operating Data:
Average number of ATMs		3,215						4,264
Withdrawal transactions		3,882,848						5,216,693
Average withdrawals per ATM per month		403						408
Average transaction-based sales per withdrawal transaction		$		2.51				$	2.81
Average discount per withdrawal transaction		$		.44				$	.75
Net transaction-based sales per withdrawal transaction		$		2.07				$	2.06

 

Photocopy Results of Operations

 

		Three months ended June 30,
		2003				% of Sales		2004				% of Sales
		(in thousands, except operating and percentage data)
Sales		$	13,557			100.0	%	$		13,420		100.0	%
Less discounts		2,452				18.1		2,397				17.9
Net sales		11,105				81.9		11,023				82.1
Cost of sales		6,558				48.4		5,467				40.7
Gross profit		$		4,547		33.5	%	$	5,556			41.4	%
Operating Data:
Average number of photocopiers		27,794						25,477
Average photocopies per machine per month		2,775						2,128
Average sales per photocopier per month		$		162.59				$	175.58
Average sales per photocopy		$		.059				$	.083
Average discount per photocopy		$		.011				$	.015
Average net sales per photocopy		$		.048				$	.068
Average gross profit per photocopy		$		.020				$	.034

 

Sales

 

For the second quarter of 2004, consolidated sales increased by $4.5 million, or 18%, to $28.8 million from $24.4 million for the second quarter of 2003.  ATM sales increased by

 

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$4.9 million and photocopier sales decreased by $137,000, while software development sales decreased by $352,000.

 

During the second quarter of 2004, sales and expenses were affected by the decline in value of the U.S. dollar as compared to the British pound and, to a lesser extent, the Canadian dollar.  Approximately 37% of consolidated sales for the quarter were produced in the United Kingdom by our U.K. subsidiaries.  The average exchange rate during the second quarter of 2004 was $1.8233 to £1.00, compared to $1.6046 to £1.00 during the second quarter of 2003.  As a result of this increase in the value of the British pound, we reported $1.5 million more in sales during the second quarter of 2004 than we would have reported had the exchange rate remained constant at the average for the second quarter of 2003.  This gain was substantially offset by a corresponding increase in expenses.

 

ATM sales.  ATM sales were $15.4 million for the second quarter of 2004 compared to $10.5 million for the second quarter of 2003.  The $5.0 million increase in ATM sales was a combination of a $4.9 million increase in transaction-based sales and a $468,000 increase in service sales, which were partially offset by a $418,000 decrease in sales of ATM equipment.

 

The $4.9 million increase in transaction-based sales resulted from:

 

•	Expansion of our ATM network - The average number of transacting ATMs in our network during the second quarter of 2004 increased by 32.6% compared to the same period in 2003. The increase of 1,049 average ATMs includes 447 ATMs acquired in the Inkas acquisition in March 2004.
•	Increased withdrawals per ATM - The average number of withdrawals per unit per month increased by 1.2% to 408 for the second quarter of 2004 compared to 403 for the second quarter of 2003.
•	Price increases - In the second half of 2002 we initiated increases in withdrawal fees. As a result of the price increases and the increase in the value of the British pound, the average transaction-based sales generated per withdrawal transaction increased 12.0% to $2.81 for the second quarter of 2004 compared to $2.51 for the same period in 2003.
•	Exchange rate benefits.

 

The value of the British pound relative to the U.S. dollar increased for the second quarter of 2004 compared to same period in 2003, resulting in a $1.2 million increase in ATM net sales.  This increase was substantially offset by the exchange rate-related increase in costs.

 

Photocopier sales.  Photocopier sales in the second quarter of 2004 were $13.4 million compared to $13.6 million in the second quarter of 2003.  The $137,000 decrease resulted primarily from:

 

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