Year 2000 is taking its toll on Diebold Inc.

The automated teller machine manufacturer said the so-called Y2K technical challenges and the bank merger climate would cause it to fall short of the 50 cents a share it had projected for second-quarter earnings

It's not that Diebold products are not ready for the millennium. The problem is that banks are "putting all their resources into getting their systems compliant," said Diebold spokesman John Kristoff. "It's a top priority for them. Buying ATMs is not a priority."

Meanwhile, pending mergers are putting major purchasing decisions on hold.

Mr. Kristoff declined to predict the timing of a turnaround, saying, "The new business reality we face is that costs are not in line with revenues and earnings. We are seeing a slowdown not just in the U.S., but internationally."

Diebold made its announcement after the market's close on May 22. It said it would reevaluate 1998 business plans and cost structures, and might take a restructuring charge.

The North Canton, Ohio, company, due to report its quarterly earnings July 16, has 69 million shares outstanding and a market capitalization of $2 billion. It had 1997 revenues of $1.2 billion and manufactures and services an estimated 55% of the domestic ATM market, Mr. Kristoff said. Its closest competitor is NCR Corp.

The cautionary news accelerated a yearlong decline in Diebold's share price, to $29.375 on Friday. That was down $10.375 for the week and 47% below its late February high of $55.3125.

NCR's stock was down $3 last week, closing Friday at $34, up 22% this year.

Matthew Wolfersberger, an analyst at McDonald & Company Securities Inc., Cleveland, downgraded Diebold to "hold" from "buy," saying the company's management will be hard-pressed to develop accurate revenue and earnings projections in the near term.

"I don't see them outperforming the market in the next nine to 12 months," he said.

Signs of trouble became apparent during the first quarter when orders for Diebold machines slowed. The company fell short of first-quarter earnings expectations by a penny a share.

Mr. Wolfersberger said Diebold was also hurt by the expiration of an agreement with Interbold for overseas ATM distribution. Interbold was a joint venture with International Business Machines Corp. that disbanded last year, leaving Diebold without a foreign distribution partner.

Running international operations on its own may have been more costly than Diebold anticipated.

In December, IBM formally exited the Interbold relationship and sold its 30% stake to Diebold for $16 million.

Also eating into profits, Mr. Wolfersberger said, is the fact that Diebold is selling more cash dispensers than ever before, and these are not as profitable as high-end ATMs.

Mr. Kristoff stressed that the problems at Diebold are temporary. He said bank mergers and branch consolidations could lead to an even greater demand for ATMs.

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