UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K/A
(Mark
One)
R
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the fiscal years ended September 30, 2003 and 2004
*
|
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 000-17288
TIDEL
TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
75-2193593
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification No.)
|
|
|
2900
Wilcrest Drive, Suite 205
|
77042
|
Houston,
Texas
|
(Zip
Code)
|
(Address
of principal executive offices)
|
|
Registrant’s
telephone number, including area code (713) 783-8200
Securities
Registered Pursuant to Section 12(b) of the Act: None
Securities
Registered Pursuant to Section 12(g) of the Act:
common
stock, par value $.01 per share
________________
(Title
of Class)
Indicate
by check mark whether the registrant: (1) has filed all reports required
to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirement
for
the past 90 days. Yes £
No
R
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this Chapter) is not contained herein,
and
will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this
Form 10-K or any amendment to this Form 10-K. R
Indicate
by check mark whether the registrant is an accelerated filer (as defined
in Rule
12b-2 of the Act). Yes £
No
R
The
aggregate market value of the 20,039,605 shares of common stock held by
non-affiliates of the registrant based on the closing sale price on July
6, 2005
of $0.36 was $7,214,258. The number of shares of common stock outstanding
as of
the close of business on July 6, 2005 was 20,677,210.
TABLE
OF CONTENTS *
ANNUAL
REPORT ON FORM 10-K
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____________
*
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This
Table of Contents is inserted for convenience of reference only
and shall
not be considered “filed” as a part of this Annual Report on Form 10-K for
the fiscal years ended September 30, 2003 and
2004.
|
(a)
General Development of Business
Tidel
Technologies, Inc. (and including its wholly-owned subsidiaries, collectively,
the “Company,” “we,” “us,” or “our”) was incorporated under the laws of the
State of Delaware in November 1987 under the name of American Medical
Technologies, Inc., succeeding a corporation established in British Columbia,
Canada in May 1984.
In
September 1992, we acquired Tidel Engineering, Inc., a manufacturer of cash
handling devices and other products. We changed our name to Tidel Technologies,
Inc. in July 1997. The Company is primarily engaged in the development,
manufacturing, sale and support of automated teller machines (“ATMs”) and
electronic cash security systems, consisting of the Timed Access Cash Controller
(“TACC”) products and the Sentinel products (together, the “Cash Security”
products), which are designed for the management of cash within various
specialty retail markets.
Our
Prior Inability to Timely File Forms 10-K and 10-Q
We
filed
our Form 10-K for the fiscal year ended September 30, 2002 on February 1,
2005;
however, we were unable to prepare and file the Forms 10-Q for the quarters
ended December 31, 2002, March 31, 2003, and June 30, 2003, the Form 10-K
for
the fiscal year ended September 30, 2003; the Forms 10-Q for the quarters
ended
December 31, 2003, March 31, 2004, and June 30, 2004, the Form 10-K for the
fiscal year ended September 30, 2004; and the Forms 10-Q for the quarters
ended
December 31, 2004 and March 31, 2005. Our common stock was delisted from
the
Nasdaq SmallCap Market on March 26, 2003; however, our common stock has
continued to trade on the Pink Sheets over-the-counter securities
market.
We
were
unable to timely file the aforementioned forms due to limited financial
resources at the times such forms were due and the time and expense to compile
our financial statements to be audited by an independent registered public
accounting firm, and reviewed by an independent registered public accounting
firm, as applicable.
(b)
Financial Information about Operating Segments
We
conduct business within one operating segment, principally in the United
States.
(c)
Description of Business
We
develop, manufacture, sell and support ATM products and Cash Security products.
Sales of ATM and Cash Security products are generally made on a wholesale
basis
to more than 200 distributors and manufacturers’ representatives. Sentinel
products are often sold directly to end-users as well as
distributors.
The
ATM
products are low-cost, cash-dispensing automated teller machines that are
primarily designed for the off-premise, or non-bank, markets. We offer a
wide
variety of options and enhancements to the ATM products, including custom
configurations that dispense cash-value products, such as coupons, tickets
and
stored-value cards; accept currency; and perform other functions, such as
check-cashing.
The
TACC
products are essentially stand-alone safes that dispense cash to an operator
in
preset amounts. As a deterrent to robbers, $50 or less in cash is kept in
a
register at any given time. When a customer requires change in denominations
of
$5, $10 and $20 bills, the clerk presses a button on the TACC for the
appropriate denomination and the cash is dispensed in a plastic tube. The
time
and frequency it takes to dispense the cash is pre-determined and adjustable
so
that in high-risk times of operations, transaction times can be slowed to
act as
a deterrent against robberies. When excess cash is collected, the clerk simply
places individual bills back into the plastic tubes and loads them into the
TACC
for safe storage. Other available features include envelope drop boxes for
excess cash, dollar scanners, state lottery interfaces, touch pads requiring
user PINs for increased transaction accuracy and an audit trail and reporting
capabilities.
The
Sentinel products were introduced in 2002. The Sentinel product has all the
functionality of the TACC, but has been designed to also reduce the risk
of
internal theft and increase in-store management efficiencies through its
state-of-the-art integration with a store’s point-of-sale (“POS”) and accounting
systems. Our engineering, sales and service departments work closely with
distributors and their customers to continually analyze and fulfill their
needs,
enhance existing products and develop new products. Sales of our ATM and
cash
security products accounted for approximately 86%, 83% and 82% of revenue
in the
fiscal years ended September 30, 2004, 2003 and 2002,
respectively.
The
principal materials and components used by us are pre-fabricated steel cabinets,
custom molded plastic and various electronic parts and components, all of
which
are readily available in quantity at this time. We assemble our products
by
configuring parts and components received from a number of major suppliers
with
our proprietary hardware and software.
We
maintain patents and trademarks on processes and brands associated with our
product lines; however, we do not believe that patents and trademarks, in
general, serve as barriers to entry into the ATM or the cash security system
industry. Our overall success depends upon proprietary technology and other
intellectual property rights. We must be able to obtain patents and register
new
trademarks in order to develop and introduce new product lines.
Our
operating results and the amount and timing of revenue are affected by numerous
factors including production schedules, customer priorities, sales volume
and
sales mix. We ordinarily fill and ship customer orders within 45 days of
receipt; therefore, we historically have had no significant
backlog.
(d)
Recent Developments
Proposed
Sale of ATM Business
On
February 19, 2005, the Company and its wholly-owned subsidiary Tidel
Engineering, L.P. (together with the Company, the “Sellers”) entered into an
asset purchase agreement with NCR Texas LLC, a single member Delaware limited
liability company (“NCR Texas”) that is a wholly-owned subsidiary of NCR
Corporation, a Maryland corporation, for the sale of our ATM business (the
“Asset Purchase Agreement”). The purchase price for the ATM business of the
Sellers is $10,175,000, plus the assumption of certain liabilities related
to
the ATM business and, subject to certain adjustments as provided in the Asset
Purchase Agreement (the “Purchase Price”). The Purchase Price is also subject to
adjustment based upon the actual value of the assets delivered, to the extent
the value of the assets delivered is 5% greater than or less than a
predetermined value as stated in the Asset Purchase Agreement. The Asset
Purchase Agreement contains customary representations, warranties, covenants
and
indemnities.
The
proceeds of the sale of the Sellers’ ATM business will be applied towards the
repayment of our outstanding loans from Laurus Master Fund, Ltd. (“Laurus”).
However, even after the application of net proceeds towards the repayment
of the
loans, Laurus may continue to hold warrants to purchase up to 4,750,000 shares
of our common stock, and will have a contractual right to receive a significant
percentage, or approximately 60%, of the proceeds of any subsequent sale
of all,
or substantially all, of the remaining equity interests and/or other assets
of
the Company in one or more transactions, pursuant to the Agreement Regarding
NCR
Transaction and Other Asset Sales. The Company has retained Stifel, Nicolaus
& Company, Inc. to sell the remainder of the Company’s business, as required
pursuant to the terms of the Additional Financing, as discussed
below.
The
closing of the sale of the ATM business pursuant to the Asset Purchase Agreement
is subject to several conditions, including shareholder approval. The Sellers
do
not contemplate seeking shareholder approval until the Company is current
in its
reporting requirements under the Securities Exchange Act of 1934, as amended.
Pursuant to contractual arrangements with its lenders, the Company is required
to be current no later than July 31, 2005, after which time the Company will
commence seeking shareholder approval for this transaction. The Company believes
that the transaction will likely close during the fourth quarter of calendar
2005.
Following
the closing of the transactions under the Asset Purchase Agreement, it is
contemplated that approximately 50% of our employees would become employees
of
NCR Texas, including up to two executives, subject to their reaching mutually
satisfactory agreements with NCR Texas.
Pursuant
to the Asset Purchase Agreement, until the earlier of the closing of the
transactions contemplated thereby or termination of the Asset Purchase Agreement
(the “Exclusivity Period”), the Sellers have agreed not to communicate with
potential buyers, other than to say that they are contractually obligated
not to
respond. The Sellers are obligated to forward any communications to NCR Texas.
In the event that the Sellers breach these provisions, then as provided in
the
Asset Purchase Agreement, the Sellers are obligated to pay a $2,000,000 fee
to
NCR Texas (the “Fee”). Also as provided in the Asset Purchase Agreement, under
certain limited circumstances the Sellers may consider an unsolicited offer
that
our Board of Directors (the “Board”) deems to be financially superior. However,
immediately following the execution of a definitive agreement for the
transaction contemplated by such superior offer, NCR Texas is to be paid
the
Fee.
The
Asset
Purchase Agreement also contains provisions restricting the Sellers from
owning
or managing any business similar to the ATM business for a period of five
years
after the closing of the transactions contemplated by the Asset Purchase
Agreement. In addition, the agreement contains provisions restricting the
Sellers from soliciting or hiring any employees of NCR Texas for a period
of two
years after the closing and restricting NCR Texas from hiring Sellers’
employees.
Engagement
of Investment Banker to Evaluate Strategic Alternatives for the Sale of the
Cash
Security Business
We
engaged Stifel, Nicolaus & Company, Inc. (“Stifel”) in October 2004, to
assist the Board of Directors in connection with the proposed sale of our
Cash
Security business, deliver a fairness opinion, and render such additional
assistance as we may reasonably request in connection with the proposed sale
of
our TACC business. We are currently working with Stifel in connection with
such
a proposed sale.
Bankruptcy
of Credit Card Center (“CCC”), Impact on Liquidity and Additional
Financing
Sales
to
one customer, JRA 222, Inc. d/b/a Credit Card Center (“CCC”), were $44,825,049
or 61% of net sales for the fiscal year ended September 30, 2000. In the
three
months ended December 31, 2000, sales to CCC were $11,748,018, or 70% of
our net
sales for the quarter. During January 2001, we became aware that CCC was
experiencing financial difficulties and sales to this customer were
discontinued. Prior to CCC’s financial difficulties it was one of the largest
distributors of off-premise ATMs in the U.S. There have been no shipments
to CCC
since January 1, 2001. As a result, sales to CCC for fiscal year 2001 amounted
to 33% of our net sales for the year. The termination of sales to CCC had
a
material adverse effect on our sales and earnings for the fiscal years ended
September 30, 2002 and 2001. In addition, the overall negative reaction to
CCC’s
problems exhibited by the ATM industry reduced the overall demand for the
type
of ATM machines we manufacture. Due to the difficulty end-user purchasers
had in
obtaining sufficient levels of lease financing, the market for our ATM products
deteriorated even further.
After
several months of unsuccessful efforts to remedy its financial difficulties,
CCC
filed for protection under Chapter 11 of the United States Bankruptcy Code
on
June 6, 2001. At that time, we had accounts and a note receivable due from
CCC
totaling approximately $27 million, which were secured by a security interest
in
CCC’s accounts receivable, inventories and transaction income. However, NCR
Corporation (“NCR”) and Fleet National Bank (“Fleet”) also had competing secured
interest claims on the same assets and income of CCC, resulting in our security
interest not adequately covering our liability claim. The proceeding was
subsequently converted to a Chapter 7 proceeding and a Trustee was appointed
in
April 2002.
In
September 2001, we and NCR jointly acquired CCC’s ATM inventory pursuant to, and
in accordance with, the ATM Inventory Purchase Agreement approved by the
Federal
Bankruptcy Court. The total purchase price was $8,000,000, and consisted
of our
cash deposit of $1,000,000 made into escrow and equal credits against the
debt
owed by CCC to both NCR and us. An escrow of $700,000 was established to
cover
any payments to Fleet, which provided banking and related services to CCC,
in
the event that their claim was ultimately determined to be secured. An escrow
of
$300,000 was established to cover any claims of warehousemen, carriers and
storage facilities secured by valid and perfected security interests in such
purchased ATMs. The exact amount of those claims has not yet been
determined.
Pursuant
to a separate but related Intercreditor Agreement, as amended, between NCR
and
us, NCR paid us $1,177,550 in September 2001 to purchase approximately 1,700
ATMs manufactured by NCR that were included in the inventory jointly acquired
from CCC. NCR subsequently paid us an additional $46,200 in January 2002
upon
the resale of the ATMs.
In
addition to the amounts received from NCR during 2001, we acquired a significant
amount of different ATM units manufactured by us, along with various parts
used
for these ATM units. We were able to utilize some of these ATM units during
fiscal years 2001 and 2002 to fill subsequent sales orders from customers.
During fiscal 2003 and 2004, we were able to utilize most of the remaining
recovered parts for production, warranty work and sales to
customers.
Notwithstanding
our commitment to aggressively pursue our rights to collect substantial
additional funds from CCC and in view of the uncertainty of the ultimate
outcome
of the CCC bankruptcy proceedings, in 2001, we increased our reserve to $20.3
million against the trade accounts receivable due from CCC and increased
our
notes receivable reserve to $3.8 million, which represents the total outstanding
balances of the trade accounts note receivable due from CCC. In addition,
we
provided additional reserves of $500,000 due to uncertainties regarding the
full
recovery of our escrow deposits. As of September 30, 2002, our remaining
receivable from the escrow deposits was reduced to $500,000. As of September
30,
2003, we had written off substantially all of the $24.1 million owed to us
by
CCC against the remaining balance of the note and trade accounts receivable,
resulting in a $250,000 balance in accounts receivable at September 30 of
2003
and 2004. Our management intends to continue monitoring this matter and to
take
all actions that it determines to be necessary based upon its findings.
Accordingly, we may incur additional expenses which would be charged to earnings
in future periods.
As
of
July 2005, we are still actively pursuing the collection of monies from CCC,
although it is unlikely that we will receive significant additional funds
from
CCC. See Part I, Item 3 “Legal Proceedings”; Part II, Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”; and
Note 3, “Major Customers and Credit Risks” to Notes to Consolidated Financial
Statements in Part IV of this Annual Report on Form 10-K for the fiscal years
ended September 30, 2004 and September 30, 2003 (the “Annual Report”) for
additional information about our relationship with CCC as a major
customer.
Our
liquidity was negatively impacted by our inability to collect the outstanding
receivables and claims from CCC; therefore, we were required to seek additional
financing, resulting in a substantial increase in our debt, as discussed
below.
On
November 25, 2003, we completed a $6,850,000 financing transaction (the
“Financing”) with Laurus Master Fund, Ltd. (“Laurus”) pursuant to that certain
Securities Purchase Agreement by and between the Company and Laurus dated
as of
November 25, 2003 (the “2003 SPA”). The Financing was comprised of a three-year
convertible note in the amount of $6,450,000 and a one-year convertible note
in
the amount of $400,000, both of which bear interest at a rate of prime plus
2%
and were convertible into our common stock at a conversion price of $0.40
per
share. In addition, Laurus received warrants to purchase 4,250,000 shares
of our
common stock at an exercise price of $0.40 per share. The proceeds of the
Financing were allocated to the notes and the related warrants based on the
relative fair value of the notes and the warrants, with the value of the
warrants resulting in a discount against the notes. In addition, the conversion
terms of the notes result in a beneficial conversion feature, further
discounting the carrying value of the notes. As a result, we will record
additional interest charges totaling $6,850,000 over the terms of the notes
related to these discounts. Laurus was also granted registration rights in
connection with the shares of common stock issuable in connection with the
Financing. Proceeds from the Financing in the amount of $6,000,000 were used
to
fully retire the $18,000,000 in Convertible Debentures issued to two investors
(the “Holders”) in September 2000, together with all accrued interest, penalties
and fees associated therewith. All of the warrants and Convertible Debentures
held by the Holders were terminated and we recorded a gain from extinguishment
of debt of $18,823,000 (including accrued interest through the date of
extinguishment) in fiscal year 2004 related to this Financing. See further
discussion in Part IV, Note 10, “Long-Term Debt and Convertible Debentures” of
this Annual Report. In March 2004, the $400,000 note was repaid in
full.
In
connection with the closing of the Financing, all outstanding litigation
including, without limitation, the Montrose Litigation, was dismissed, and
a
revolving credit facility with a bank (the “Revolving Credit Facility”) was
repaid through the release of the restricted cash used as collateral for
the
Revolving Credit Facility. See Part II, Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” of this Annual Report
for additional information.
In
August
2004, Laurus notified us that an Event of Default had occurred and had continued
beyond any applicable grace period as a result of our non-payment of interest
and principal on the $6,450,000 convertible note as required under the terms
of
the Financing, as well as noncompliance with certain other covenants of the
Financing documents. In exchange for Laurus’s waiver of the Event of Default
until September 17, 2004, we agreed, among other things, to lower the conversion
price on the $6,450,000 convertible note and the exercise price of the warrants
from $0.40 per share to $0.30 per share. The reduction in conversion price
resulted in an additional discount against the carrying value of the notes.
As a
result, we will record additional interest charges totaling approximately
$1,900,000 over the remaining terms of the notes related to the
discounts.
On
November 26, 2004, we completed a $3,350,000 financing transaction (the
“Additional Financing”) with Laurus pursuant to that certain Securities Purchase
Agreement by and between the Company and Laurus, dated as of November 26,
2004
(the “2004 SPA”). The Additional Financing was comprised of (i) a three-year
convertible note issued to Laurus in the amount of $1,500,000, which bears
interest at a rate of 14% and is convertible into our common stock at a
conversion price of $3.00 per share (the “$1,500,000 Note”), (ii) a one-year
convertible note in the amount of $600,000 which bears interest at a rate
of 10%
and is convertible into our common stock at a conversion price of $0.30 per
share (the “$600,000 Note”), (iii) a one-year convertible note of our
subsidiary, Tidel Engineering, L.P., in the amount of $1,250,000, which is
a
revolving working capital facility for the purpose of financing purchase
orders
of our subsidiary, Tidel Engineering, L.P., (the “Purchase Order Note”), which
bears interest at a rate of 14% and is convertible into our common stock
at a
price of $3.00 per share and (iv) our issuance to Laurus of 1,251,000 shares
of
common stock, or approximately 7% of the total shares outstanding, (the “2003
Fee Shares”) in satisfaction of fees totaling $375,300 incurred in connection
with the convertible term notes issued in the Financing discussed above.
As a
result of the issuance of the 2003 Fee Shares, we recorded an additional
charge
in fiscal 2004 of $638,010 based on the market value on November 26, 2004.
We
also increased the principal balance of the original note by $292,987, of
which
$226,312 bears interest at the default rate of 18%. This amount represents
interest accrued but not paid to Laurus as of August 1, 2004. In addition,
Laurus received warrants to purchase 500,000 shares of our common stock at
an
exercise price of $0.30 per share. The proceeds of the Additional Financing
were
allocated to the notes based on the relative fair value of the notes and
the
warrants, with the value of the warrants resulting in a discount against
the
notes. In addition, the conversion terms of the $600,000 Note resulted in
a
beneficial conversion feature, further discounting the carrying value of
the
notes. As a result, we will record additional interest charges related to
these
discounts totaling $840,000 over the terms of the notes. Laurus was also
granted
registration rights in connection with the 2003 Fee Shares and other shares
issuable pursuant to the Additional Financing. The obligations pursuant to
the
Additional Financing are secured by all of our assets and are guaranteed
by our
subsidiaries. Net proceeds from the Additional Financing in the amount of
$3,232,750 were primarily used for (i) general working capital payments made
directly to vendors, (ii) past due interest on Laurus’s $6,450,000 convertible
note due pursuant to the Financing and (iii) the establishment of an escrow
for
future principal and interest payments due pursuant to the Additional
Financing.
THE
NOTES
AND WARRANTS ISSUED IN THE FINANCING AND THE ADDITIONAL FINANCING ARE
CONVERTIBLE INTO AN AGGREGATE OF 28,226,625 SHARES OF OUR COMMON STOCK AND,
WHEN
COUPLED WITH THE 2003 FEE SHARES, REPRESENT APPROXIMATELY 60% OF OUR OUTSTANDING
COMMON STOCK SUBJECT TO ADJUSTMENT AS PROVIDED IN THE TRANSACTION DOCUMENTS.
IF
THESE NOTES AND WARRANTS WERE COMPLETELY CONVERTED TO COMMON STOCK BY LAURUS,
THEN THE OTHER EXISTING SHAREHOLDERS’ OWNERSHIP IN THE COMPANY WOULD BE
SIGNIFICANTLY DILUTED TO APPROXIMATELY 40% OF THEIR PRESENT OWNERSHIP
POSITION.
In
connection with the Financing, Laurus required that we covenant to become
current in our filings with the Securities and Exchange Commission according
to
a predetermined schedule. Effective November 26, 2004, the Additional Financing
documents require, among other things, that we provide evidence of filing
to
Laurus of our fiscal 2003, fiscal 2004 and year-to-date interim 2005 filings
with the Securities and Exchange Commission on or before July 31, 2005. The
10-K
for the fiscal year ended September 30, 2002 (the “2002 10-K”) was filed on
February 1, 2005, in accordance with Additional Financing documents’
requirements. Fourteen (14) days following such time as we become current
in our
filings with the Securities and Exchange Commission, we must deliver to Laurus
evidence of the listing of our common stock on the Nasdaq Over The Counter
Bulletin Board (the “Listing Requirement”).
On
February 4, 2005, we received a letter from the Securities and Exchange
Commission stating that the Division of Corporate Finance of the SEC would
not
object to the Company filing a comprehensive annual report on Form 10-K which
covers all of the periods during which it has been a delinquent filer, together
with its filing all Forms 10-Q which are due for quarters subsequent to the
latest fiscal year included in that comprehensive annual report. However,
the
SEC Letter also stated that, upon filing such a comprehensive Form 10-K,
the
Company would not be considered “current” for purposes of Regulation S, Rule 144
or filing on Forms S-8, and that the Company would not be eligible to use
Forms
S-2 or S-3 until a sufficient history of making timely filings is established.
Laurus consented to the filing of such a comprehensive annual report in
satisfaction of the Filing Requirements mandated on or before July 31, 2005.
Laurus also consented to a modification of the requirement that a Registration
Statement be filed within 20 days of satisfaction of the Filing Requirements
to
instead require that the Registration Statement be required to be filed by
September 20, 2006.
Pursuant
to the terms of the Financing and the Additional Financing, an Event of Default
occurs if, among other things, we do not complete our filings with the
Securities and Exchange Commission on the timetable set forth in the Additional
Financing documents, or we do not comply with the Listing Requirement or
any
other material covenant or other term or condition of the 2003 SPA, the 2004
SPA, the notes we issued to Laurus or any of the other documents related
to the
Financing or the Additional Financing. If there is an Event of Default,
including any of the items specified above or in the transaction documents,
Laurus may declare all unpaid sums of principal, interest and other fees
due and
payable within five (5) days after we receive a written notice from Laurus.
If
we cure the Event of Default within that five (5) day period, the Event of
Default will no longer be considered to be occurring.
If
we do
not cure such Event of Default, Laurus shall have, among other things, the
right
to have two (2) of its designees appointed to our Board, and the interest
rate
of the notes shall be increased to the greater of 18% or the rate in effect
at
that time.
On
November 26, 2004, in connection with the Additional Financing, we entered
into
an agreement with Laurus (the “Asset Sales Agreement”) whereby we agreed to pay
a fee in the amount of at least $2,000,000 (the “Reorganization Fee”) to Laurus
upon the occurrence of certain events as specified below and therein, which
Reorganization Fee is secured by all of our assets, and is guaranteed by
our
subsidiaries. The Asset Sales Agreement provides that (i) once our obligations
to Laurus have been paid in full (other than the Reorganization Fee), we
shall
be able to seek additional financing in the form of a non-convertible bank
loan
in an aggregate principal amount not to exceed $4,000,000, subject to Laurus’s
right of first refusal; (ii) the net proceeds of an asset sale to the party
named therein shall be applied to our obligations to Laurus under the Financing
and the Additional Financing, as described above (collectively, the
“Obligations”), but not to the Reorganization Fee; and (iii) the proceeds of any
of our subsequent sales of equity interests or assets or of our subsidiaries
consummated on or before the fifth anniversary of the Asset Sales Agreement
(each, a “Company Sale”) shall be applied first to any remaining obligations,
then paid to Laurus pursuant to an increasing percentage of at least 55.5%
set
forth therein, which amount shall be applied to the Reorganization Fee. Under
this formula, the existing shareholders could receive less than 45% of the
proceeds of any sale of our assets or equity interests, after payment of
the
Additional Financing and Reorganization Fee as defined. The Reorganization
Fee
shall be $2,000,000 at a minimum, but could equal a higher amount based upon
a
percentage of the proceeds of any company sale, as such term is defined in
the
Asset Sales Agreement. In the event that Laurus has not received the full
amount
of the Reorganization Fee on or before the fifth anniversary of the date
of the
Asset Sales Agreement, then we shall pay any remaining balance due on the
Reorganization Fee to Laurus. We will record a $2,000,000 charge in the first
quarter of fiscal 2005 to interest expense.
As
of
July 31, 2005, we have $1,250,000 available for borrowing under the Purchase
Order Note through November 26, 2005, as part of the Additional Financing
in
November 2004.
Customers
We
develop, manufacture, sell and support ATM products, TACC products and the
Sentinel products, which are designed for specialty retail marketers. Sales
of
ATM and TACC products are generally made on a wholesale basis to more than
200
distributors and manufacturers’ representatives. Sentinel products are often
sold directly to end-users as well as distributors.
The
markets for our ATM products are characterized by intense competition. We
expect
the intensity of competition to increase. A major cause of the intense
competition is the saturation of the U.S. market, which may limit the growth
opportunities in the future. Additionally, the increased use of debit cards
by
consumers, as opposed to cash, may lower the number of transactions per ATM
which could result in lower sales of new ATMs. Large manufacturers such as
Diebold Incorporated, NCR Corporation, Triton Systems (a division of Dover
Corporation) and Tranax (a distributor of Hyosung) compete directly with
us in
the low-cost ATM market. Additionally, demand in fiscal year 2003 compared
with
2002 decreased, due to (i) the declaration of bankruptcy by CCC, our former
largest customer, (ii) the deterioration of the third-party lease finance
market
to the ATM industry, and (iii) the general downturn in the economy. Our direct
competitors for our TACC products include FireKing Industries, Armor Safe
Company and AT Systems. Many smaller manufacturers of ATMs, electronic safes
and
kiosks are also found in the market. Demand for ATMs in fiscal 2004 increased
compared with fiscal 2003 due to an increase in confidence from long time
customers, and customers having increased capital to install and replace
ATMs.
No
one
customer accounted for more than 10% of net sales for the fiscal year 2002.
Only
one customer accounted for more than 10% of net sales for the fiscal year
ended
September 30, 2003, and no customer accounted for more than 10% of net sales
for
the fiscal year ended September 30, 2004.
Our
compliance with federal, state and local environmental protection laws during
2004 and 2003 had no material effect upon our capital expenditures, earnings
or
competitive position. As of September 30, 2004, it was not expected that
compliance with such laws would have a material effect upon our capital
expenditures, earnings or the competitive position in future years.
Employees
At
September 30 of the fiscal years ended in 2004 and 2003, we employed
approximately 107 and 110 people, respectively. At May 15, 2005, we had
approximately 110 employees.
Company
Information and Website
Our
principal executive offices are located at 2900 Wilcrest Drive, Suite 205,
Houston, Texas 77042. Our telephone number is (713) 783-8200. The Internet
address of our principal operating subsidiary is www.tidel.com. Copies of
the
annual, quarterly and current reports that we file with the SEC, and any
amendments to those reports, are available on our subsidiary’s web site free of
charge. The information posted on our web site is not incorporated into this
Annual Report.
(e)
Financial Information about Geographic Areas
The
vast
majority of our sales in fiscal 2004 were to customers within the United
States.
Sales to customers outside the United States, as a percentage of total revenues,
were approximately 16%, 25% and 13%, in the fiscal years ended September
30,
2004, 2003 and 2002, respectively.
Substantially
all of our assets were located within the United States during fiscal year
2004
and 2003, and are still located in the United States today. Inventory in
transit
related to sales to customers outside the United States can be in foreign
countries prior to receipt by the customer.
Our
corporate offices during fiscal 2003 were located in approximately 4,100
square
foot space in Houston, Texas. Our lease expired on December 31, 2002; however,
we continued to lease the space on a month-to-month basis until September
30,
2003. We relocated our corporate offices on October 1, 2003 into an
approximately 2,100 square foot space. On June 1, 2005, we renewed the lease
for
these offices for a term of seven months which expires December 31, 2005,
with
an option to lease on a month-to-month basis thereafter. We believe that
our
present leased space is suitable for our needs.
The
manufacturing, engineering and warehouse operations of Tidel Engineering,
L.P.
are located in two nearby facilities occupying approximately 110,000 square
feet
in Carrollton, Texas, under leases expiring in February 2006 with an option
to
extend for three years. This lease is to be assumed by NCR Texas pursuant
to the
Asset Purchase Agreement, discussed further in Part I, Item 1 of this Annual
Report. This facility is to be assumed by NCR Texas in accordance with the
Asset
Purchase Agreement.
At
September 30, 2004 and 2003, we owned tangible property and equipment with
a
cost basis of approximately $5.4 million and $5.2 million,
respectively.
CCC,
our
largest customer in 2000 and 2001, filed for protection under Chapter 11
of the
United States Bankruptcy Code on June 6, 2001 in the United States Bankruptcy
Court for the Eastern District of Pennsylvania. On or about April 21, 2002,
the
bankruptcy case was converted to a Chapter 7 proceeding and the court
subsequently appointed a trustee. At the time that the original petition
was
filed, CCC owed us approximately $27 million, excluding amounts for interest,
attorney’s fees and other charges. As of September 30, 2001, we had recouped
inventory from CCC’s estate recorded at an approximate value of $3 million. At
the time of the bankruptcy filing, CCC’s obligation to us was secured by a
collateral pledge of accounts receivable, inventories and transaction income,
although the value of our collateral was unclear. Based upon our analysis
of all
available information regarding the CCC bankruptcy proceedings, we had recorded
a reserve in the amount of approximately $24.1 million as of September 30,
2002.
In
connection with CCC’s bankruptcy filing, we filed proofs of claim regarding the
obligations of CCC due and owing us and our interest in certain assets of
CCC.
Others filing similar claims based on alleged security interests in the same
property of the bankruptcy estate were Fleet, which provided banking and
related
services to CCC; NCR, another secured creditor and vendor of CCC; and several
leasing companies.
Notwithstanding
our commitment to aggressively pursue our rights to collect substantial
additional funds from CCC and in view of the uncertainty of the ultimate
outcome
of the CCC bankruptcy proceedings, in 2001, we increased our reserve to $20.3
million against the trade accounts receivable due from CCC and increased
our
notes receivable reserve to $3.8 million, which represents the total outstanding
balances of the trade accounts note receivable due from CCC. In addition,
we
provided additional reserves of $500,000 due to uncertainties regarding the
full
recovery of our escrow deposits. As of September 30, 2002, our remaining
receivable from the escrow deposits was reduced to $500,000. As of September
30,
2003, we had written off substantially all of the $24.1 million owed to us
by
CCC against the remaining balance of the note and trade accounts receivable,
resulting in a $250,000 balance in accounts receivable at September 30 of
2003
and 2004. Our management intends to continue monitoring this matter and to
take
all actions that it determines to be necessary based upon its findings.
Accordingly, we may incur additional expenses which would be charged to earnings
in future periods.
Prior
to
CCC’s bankruptcy filing, we filed an action in the 134th Judicial District Court
of the State of Texas in Dallas County, Texas, against Andrew J. Kallok
(“Kallok”), the principal shareholder and executive officer of CCC for, among
other claims, failure to pay amounts due and owing, breach of contract, and
fraud associated with product sales to CCC. On November 7, 2002, the Court
made
a final judgment, finding for us and ordering Kallok, due to his fraudulent
actions, to pay us damages, including prejudgment interest, in the amount
of
$26.2 million. Due to the current financial condition of Kallok, we have
no
guarantee that we will be able to collect any or all of the damages that
the
Court has awarded to us.
We
and
several of our officers and directors were named as defendants (the
“Defendants”) in a purported class action filed on October 31, 2001 in the
United States District Court for the Southern District of Texas (the “Southern
District”), George Lehockey v. Tidel Technologies, et al., H-01-3741. Prior to
the suit’s filing, four identical suits were also filed in the Southern
District. On or about March 18, 2002, the Court consolidated all of the pending
class actions and appointed a lead plaintiff under the Private Securities
Litigation Reform Act of 1995 (“Reform Act”). On April 10, 2002, the lead
plaintiff filed a Consolidated Amended Complaint (“CAC”) that alleged that the
Defendants made material misrepresentations and omissions concerning our
financial condition and prospects between January 14, 2000 and February 8,
2001
(the putative class period). In June 2004, we reached an agreement in principle
to settle these class action lawsuits. The settlement, which was subject
to a
definitive agreement and court approval, provided for a cash payment of $3
million to be funded by our liability insurance carrier and our issuance
of two
million shares of common stock. In October 2004, the Court approved the
settlement and the shares were issued in November 2004. In addition, in August
2004, we reached an agreement with the liability insurance carrier to issue
warrants to the carrier to purchase 500,000 shares of our common stock at
an
exercise price of $0.67 per share in exchange for the carrier’s acceptance of
the terms of the class action lawsuit. We provided a reserve of $1,564,490
in
fiscal 2002 to cover any losses from this litigation.
On
August
9, 2002, one of the holders of our 6% Convertible Debentures, Montrose
Investments, Ltd. (“Montrose”), commenced an adversary proceeding against us in
the Supreme Court of the State of New York, County of New York, claiming
monies
due under the Convertible Debentures (the “Montrose Litigation”). This action
was dismissed by the Court on March 3, 2003. Montrose filed a Notice of Appeal
with the Supreme Court of the State of New York, Appellate Division, First
Department on May 20, 2003. This litigation was dismissed in conjunction
with
the financing completed in November 2003, as discussed more fully in Part
II,
Item 7, “Management’s Discussion and Analysis of Financial Condition and Results
of Operations,” and Note 16, “Commitments and Contingencies” in Part IV, “Notes
to the Consolidated Financial Statements” of this Annual Report. For a
description of our 6% Convertible Debentures see Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations
—
Liquidity and Capital Resources” of this Annual Report. On or about December 2,
2003, we entered into a stipulation of discontinuance, which dismissed the
appeal.
On
June
9, 2005, Corporate Safe Specialists, Inc. (“CSS”) filed a lawsuit against Tidel
Technologies, Inc. and Tidel Engineering, L.P. The lawsuit, Civil Action
No.
02-C-3421, was filed in the United States District Court of the Northern
District of Illinois, Eastern Division. CSS alleges that the Sentinel product
sold by Tidel Engineering, L.P. infringes one or more patent claims found
in CSS
patent U.S. Patent No. 6,885,281 (the ‘281 patent). CSS seeks injunctive relief
against future infringement, unspecified damages for past infringement and
attorney’s fees and costs. Tidel Technologies, Inc. was released from this
lawsuit, but Tidel Engineering, L.P. remains a defendant. Tidel Engineering,
L.P. is vigorously defending this litigation.
The
Company has filed a motion to dismiss the case CSS filed in Illinois, and
Tidel
Engineering, L.P. has filed a motion to transfer the Illinois case to the
Eastern District of Texas. The Company and Tidel Engineering, L.P. have also
filed a declaratory judgment action pending in the Eastern District of Texas.
In
that action, both the Tidel entities are asking the Eastern District of Texas
to
find, among other things, that neither the Company nor Tidel Engineering
have
infringed on CSS’s ‘281 patent. Both companies have also requested that an
injunction be issued by the Eastern District of Texas against CSS for
intentional interference with the sale or big process for Tidel Engineering
L.P.’s cash security business. The Company is vigorously pursuing this
declaratory judgment action.
|
MARKET
FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
(a)
Market Information
Our
common stock is currently traded over-the-counter on the Pink Sheets under
the
symbol “ATMS.PK.” From March 26, 2002 through March 26, 2003, our common stock
traded on the Nasdaq SmallCap Market. From August 16, 2000 through March
25,
2002, our common stock traded on the Nasdaq National Market. The following
table
sets forth the quarterly high and low bid information for our common stock
for
the three-year period ended September 30, 2004. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and
may not
necessarily represent actual transactions.
|
|
2004
|
|
2003
|
|
2002
|
|
Fiscal
Quarter Ended
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
December
31,
|
|
$
|
.78
|
|
$
|
.33
|
|
$
|
.61
|
|
$
|
.35
|
|
$
|
.69
|
|
$
|
.40
|
|
March
31,
|
|
|
.75
|
|
|
.47
|
|
|
.43
|
|
|
.17
|
|
|
.85
|
|
|
.37
|
|
June
30,
|
|
|
.96
|
|
|
.65
|
|
|
.21
|
|
|
.16
|
|
|
.65
|
|
|
.32
|
|
September
30,
|
|
|
.80
|
|
|
.59
|
|
|
.42
|
|
|
.17
|
|
|
.60
|
|
|
.31
|
|
Fiscal
Year
|
|
$
|
.96
|
|
$
|
.33
|
|
$
|
.61
|
|
$
|
.16
|
|
$
|
.85
|
|
$
|
.31
|
|
On
January 21, 2003, we received notice from The Nasdaq Stock Market, Inc. that,
as
a result of our 10-K filing deficiency, we had failed to comply with the
requirements for continued listing on the Nasdaq SmallCap Market under
Marketplace Rule 4310(c)(14), and that our securities were subject to delisting.
We had previously received notice that we failed to comply with the minimum
bid
price requirement as set forth in Marketplace Rule 4310(c)(4). On February
14,
2003, we received a third notice from The Nasdaq Stock Market, Inc., which
stated we had failed to comply with the minimum shareholders’ equity requirement
for continued listing set forth in Marketplace Rule 4310(c)(2)(B). On February
20, 2003, we had an oral hearing before the Nasdaq Listing Qualifications
Panel
to review these three compliance deficiencies. On March 25, 2003, we were
notified by the Nasdaq Listing Qualifications Panel that our common stock
would
be delisted from the Nasdaq SmallCap Market effective March 26, 2003. Effective
at the opening of business on March 26, 2003, our common stock began trading
over-the-counter on the Pinks Sheets under the ticker symbol
“ATMS.PK”.
(b)
Holders
As
of
June 30, 2005, there were approximately 178 holders of record of our common
stock.
(c)
Dividends
We
have
not paid any dividends in the past, and do not anticipate paying dividends
in
the foreseeable future. From September 30, 2002, until November 25, 2003
our
wholly-owned subsidiary, Tidel Engineering, L.P., was restricted from paying
dividends to us pursuant to the subsidiary’s revolving credit agreement with a
bank in effect at that time. Since November 25, 2003, we have been restricted
from paying dividends by Laurus. For additional information about our
arrangements with Laurus, see Part II, Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” of this Annual
Report.
(d)
Securities Authorized for Issuance under Equity Compensation
Plans
We
adopted the Tidel Technologies, Inc. 1997 Long-Term Incentive Plan (the “1997
Plan”) effective July 15, 1997. The 1997 Plan permits the grant of non-qualified
stock options, incentive stock options, stock appreciation rights, restricted
stock and other stock-based awards to our employees or directors or our
subsidiaries. Under the 1997 Plan, up to 2,000,000 shares of common stock
may be
awarded. The number of shares issued or reserved pursuant to the 1997 Plan
(or
pursuant to outstanding awards) are subject to adjustment on account of mergers,
consolidations, reorganization, stock splits, stock dividends and other dilutive
changes in the common stock. Shares of common stock covered by awards that
expire, terminate, or lapse, will again be available for grant under the
1997
Plan. Our predecessor employee stock option plan, the 1989 Incentive Stock
Option Plan (the “1989 Plan”), was terminated in June 1999. At the date of
termination of the 1989 Plan, there were outstanding options to purchase
438,250
shares of common stock, of which 50,000 were outstanding at September 30,
2004
and 70,000 were outstanding at September 30, 2003. In addition to stock options
granted under the 1997 Plan and 1989 Plan we issued warrants to our directors
as
part of their remuneration.
The
following table provides information regarding common stock authorized for
issuance under our compensation plans as of September 30th of 2004 and 2003.
This table also includes 300,000 warrants issued for directors’ remuneration
that were outstanding as of September 30, 2003. See Note 13 in Part IV, “Notes
to the Consolidated Financial Statements” of this Annual Report for additional
information about these warrants.
Equity
Compensation Plan Information
As
of September 30, 2004
Plan
Category
|
|
Number
of securities to
be
issued upon exercise
of
outstanding options,
warrants
and rights
(a)
|
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
(b)
|
|
Number
of securities remaining available
for future issuance under equity compensation
plans (excluding securities
reflected in column (a) (c)
|
|
Equity
compensation plans approved by security holders
|
|
|
786,000
|
|
$
|
1.67
|
|
|
1,309,203
|
|
Equity
compensation plans not approved by security holders
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
|
786,000
|
|
$
|
1.67
|
|
|
1,309,203
|
|
As
of September 30, 2003
Plan
Category
|
|
Number
of securities to
be
issued upon exercise
of
outstanding options,
warrants
and rights
(a)
|
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
(b)
|
|
Number
of securities remaining available
for future issuance under equity compensation
plans (excluding securities
reflected in column (a) (c)
|
|
Equity
compensation plans approved by security holders
|
|
|
1,281,000
|
|
$
|
1.93
|
|
|
2,472,828
|
|
Equity
compensation plans not approved by security holders
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
|
1,281,000
|
|
$
|
1.93
|
|
|
2,472,828
|
|
(e)
Recent Sales of Unregistered Securities
The
following sales of unregistered securities were sold by the Company during
the
2003 and 2004 fiscal years in reliance on the exemptions from registration
contained in Section 4(2) and Regulation D promulgated under the Securities
Act
of 1933.
At
September 30, 2003, we had outstanding warrants to purchase 1,018,420 shares
of
common stock expiring at various dates through November 2010 including 300,000
warrants to purchase common stock at an exercise price of $2.91 (such price
being equal to the fair market value of the common stock at the date of the
grant) in connection with directors’ remuneration. The warrants had exercise
prices ranging from $0.45 to $11.27 per share and, if exercised, would generate
proceeds to us of approximately $6,735,068. No warrants were exercised during
the years ended September 30, 2001 through 2004.
At
September 30, 2004, we had outstanding warrants to purchase 5,079,473 shares
of
common stock that expire at various dates through November 2010. The warrants
have exercise prices ranging from $0.30 to $11.27 per share and, if exercised,
would generate proceeds to us of approximately $3,626,387.
In
September 2003, we issued a shareholder, Alliance Developments, Ltd.
(“Alliance”), an unsecured, short-term promissory note dated September 26, 2003
in the principal amount of $300,000 due December 24, 2003; plus accrued interest
at 9% per annum, payable at maturity. In consideration for the original loan,
Alliance received three-year warrants to purchase 100,000 shares of common
stock
at $0.45 per share. The note was renewed on December 24, 2003 until March
24,
2004. In consideration for the renewal, Alliance received additional three-year
warrants to purchase 50,000 shares of common stock at $0.45 per share. The
proceeds of the Alliance note were allocated to the note and the related
warrants based on the relative fair value of the note and the warrants, with
the
value of the warrants resulting in a discount against the note. As a result,
we
recorded additional interest charges totaling $20,572 in fiscal 2003 related
to
the discounts. The note was paid in full on March 5, 2004.
In
November of 2003, we issued warrants in connection with the Laurus Financing
discussed further in Part II, Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operation” of this Annual Report. The
financing comprised of a three-year convertible note in the amount of $6,450,000
and a one-year convertible note in the amount of $400,000, both of which
bear
interest at a rate of prime plus 2% and were convertible into our common
stock
at a conversion price of $0.40 per share. In addition, Laurus received warrants
to purchase 4,250,000 shares of our common stock at an exercise price of
$0.40
per share. The proceeds of the Financing were allocated to the notes and
the
related warrants based on the relative fair value of the notes and the warrants,
with the value of the warrants resulting in a discount against the notes.
As a
result, we will record additional interest charges totaling $6,850,000 over
the
terms of the notes related to these discounts. Laurus was also granted
registration rights in connection with the shares of common stock issuable
in
connection with the Financing. Proceeds from the Financing in the amount
of
$6,000,000 were used to fully retire the $18,000,000 in Convertible Debentures.
See further discussion in Note 10, “Laurus Financing” in Part IV, “Notes to
Consolidated Financial Statements” of this Annual Report.
In
August
2004, Laurus notified us that an Event of Default had occurred and had continued
beyond any applicable grace period as a result of our non-payment of interest
and principal on the $6,450,000 convertible note as required under the terms
of
the Financing, as well as noncompliance with certain other covenants of the
Financing documents. In exchange for Laurus’s waiver of the Event of Default
until September 17, 2004, we agreed, among other things, to lower the conversion
price on the $6,450,000 convertible note and the exercise price of the warrants
from $0.40 per share to $0.30 per share.
In
November of 2004, we issued additional securities in connection with the
Additional Financing with Laurus, discussed further in Part II, Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operation” of this Annual Report, which is comprised of (i) a three-year
convertible note issued to Laurus in the amount of $1,500,000, which bears
interest at a rate of 14% and is convertible into our common stock at a
conversion price of $3.00 per share (the “$1,500,000 Note”), (ii) a one-year
convertible in the amount of $600,000 which bears interest at a rate of 10%
and
is convertible into our common stock at a conversion price of $0.30 per share
(the “$600,000 Note”), (iii) a one-year convertible note of our subsidiary,
Tidel Engineering, L.P., in the amount of $1,250,000, which is a revolving
working capital facility for the purpose of financing purchase orders of
our
subsidiary, Tidel Engineering, L.P., (the “Purchase Order Note”), which bears
interest at a rate of 14% and is convertible into our common stock at a price
of
$3.00 per share and (iv) our issuance to Laurus of 1,251,000 shares of common
stock, or approximately 7% of the total shares outstanding, (the “2003 Fee
Shares”) in satisfaction of fees totaling $375,300 incurred in connection with
the convertible term notes issued in the Financing discussed above. We recorded
additional interest expense totaling $638,010 related to the 2003 Fee Shares
based on the fair value of the stock price on the date issued.
In
addition, Laurus received warrants to purchase 500,000 shares of our common
stock at an exercise price of $0.30 per share. The proceeds of the Additional
Financing were allocated to the notes based on the relative fair value of
the
notes and the warrants, with the value of the warrants resulting in a discount
against the notes. In addition, the conversion terms of the $600,000 Note
resulted in a beneficial conversion feature, further discounting the carrying
value of the notes. As a result, we will record additional interest charges
related to these discounts totaling $840,000 over the terms of the notes.
Laurus
was also granted registration rights in connection with the 2003 Fee Shares
and
other shares issuable pursuant to the Additional Financing. The obligations
pursuant to the Additional Financing are secured by all of our assets and
are
guaranteed by our subsidiaries. Net proceeds from the Additional Financing
in
the amount of $3,232,750 were primarily used for (i) general working capital
payments made directly to vendors, (ii) past due interest on Laurus’s $6,450,000
convertible note due pursuant to the Financing and (iii) the establishment
of an
escrow for future principal and interest payments due pursuant to the Additional
Financing.
THE
NOTES
AND WARRANTS ISSUED IN THE FINANCING AND THE ADDITIONAL FINANCING ARE
CONVERTIBLE INTO AN AGGREGATE OF 28,226,625 SHARES OF OUR COMMON STOCK AND,
WHEN
COUPLED WITH THE 2003 FEE SHARES, REPRESENT APPROXIMATELY 60% OF OUR OUTSTANDING
COMMON STOCK SUBJECT TO ADJUSTMENT AS PROVIDED IN THE TRANSACTION DOCUMENTS.
IF
THESE NOTES AND WARRANTS WERE COMPLETELY CONVERTED TO COMMON STOCK BY LAURUS,
THEN THE OTHER EXISTING SHAREHOLDERS’ OWNERSHIP IN THE COMPANY WOULD BE
SIGNIFICANTLY DILUTED TO APPROXIMATELY 40% OF THEIR PRESENT OWNERSHIP
POSITION.
We
issued
to a shareholder and former director an unsecured, short-term promissory
note
dated October 2, 2003 in the principal amount of $120,000 due April 2, 2004;
plus accrued interest at 9% per annum, payable monthly. In consideration
for the
loan, the shareholder received three-year warrants to purchase 40,000 shares
of
common stock at $0.45 per share. The proceeds of the note were allocated
to the
note and the related warrants based on the relative fair value of the note
and
the warrants, with the value of the warrants resulting in a discount against
the
note. As a result, we recorded additional interest charges totaling $7,611
in
fiscal 2004 related to the discounts. The note was paid in full on March
8,
2004.
We
also
issued to the shareholder and former director an unsecured, short-term
promissory note dated October 21, 2003 in the principal amount of $90,000
due
April 21, 2004; plus accrued interest at 9% per annum, payable monthly. In
consideration for the loan, the shareholder received three-year warrants
to
purchase 30,000 shares of common stock at $0.45 per share. The proceeds of
the
note were allocated to the note and the related warrants based on the relative
fair value of the note and the warrants, with the value of the warrants
resulting in a discount against the note. As a result, we recorded additional
interest charges totaling $6,608 in fiscal 2004 related to the discounts.
The
note was paid in full on November 26, 2003.
The
Company issued to an affiliate of a shareholder an unsecured, short-term
promissory note dated November 20, 2003 in the principal amount of $210,000
due
May 20, 2004; plus accrued interest at 8% per annum, payable at maturity.
In
consideration for the loan, the note holder received three-year warrants
to
purchase 70,000 shares of common stock at $0.45 per share. The proceeds of
the
note were allocated to the note and the related warrants based on the relative
fair value of the note and the warrants, with the value of the warrants
resulting in a discount against the note. As a result, the Company will record
additional interest charges totaling $30,619 over the term of the note related
to the discounts. The note was paid in full on March 5, 2004 from proceeds
obtained in the Financing.
The
selected financial data presented below is derived from our Consolidated
Financial Statements. This data should be read in conjunction with the
Consolidated Financial Statements and its notes and with Part II, Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of this Annual Report.
The
Consolidated Financial Statements for 2000 through 2002 were audited by KPMG
LLP. The Consolidated Financial Statements for 2003 through 2004 were audited
by
Hein & Associates LLP.
|
|
Years
Ended September 30,
|
|
SELECTED
STATEMENT OF OPERATIONS DATA:(1)
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
Operating
revenues
|
|
$
|
22,514
|
|
$
|
17,794
|
|
$
|
19,442
|
|
$
|
36,086
|
|
$
|
72,931
|
|
Operating
income (loss)
|
|
|
(5,250
|
)
|
|
(6,637
|
)
|
|
(11,552
|
)
|
|
(24,764
|
)
|
|
15,440
|
|
Net
income (loss)(2)
|
|
|
11,318
|
|
|
(9,237
|
)
|
|
(14,078
|
)
|
|
(25,942
|
)
|
|
9,169
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
.65
|
|
|
(0.53
|
)
|
|
(0.81
|
)
|
|
(1.49
|
)
|
|
0.55
|
|
Diluted
|
|
|
.37
|
|
|
(0.53
|
)
|
|
(0.81
|
)
|
|
(1.49
|
)
|
|
0.50
|
|
|
|
As
of September 30,
|
|
SELECTED
BALANCE SHEET DATA:(1)
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
Current
assets
|
|
$
|
9,648
|
|
$
|
11,773
|
|
$
|
17,263
|
|
$
|
28,797
|
|
$
|
59,933
|
|
Current
liabilities
|
|
|
8,161
|
|
|
32,109
|
|
|
28,487
|
|
|
28,547
|
|
|
11,595
|
|
Working
capital (deficit)
|
|
|
1,487
|
|
|
(20,336
|
)
|
|
(11,224
|
)
|
|
250
|
|
|
48,338
|
|
Total
assets
|
|
|
10,778
|
|
|
14,430
|
|
|
19,907
|
|
|
33,837
|
|
|
64,532
|
|
Total
short-term notes payable and long-term debt (Net of
Discount)
|
|
|
212
|
|
|
2,279
|
|
|
20,000
|
|
|
23,424
|
|
|
22,397
|
|
Shareholders’
equity (deficit)
|
|
|
2,588
|
|
|
(17,679
|
)
|
|
(8,580
|
)
|
|
5,194
|
|
|
30,668
|
|
|
|
Three
Months Ended
|
|
SELECTED
QUARTERLY
FINANCIAL
DATA:(1)
|
|
Sep.
30
2004
|
|
Jun.
30
2004
|
|
Mar.
31
2004
|
|
Dec.
31
2003
|
|
Sep.
30
2003
|
|
Jun.
30
2003
|
|
Mar.
31
2003
|
|
Dec.
31
2002
|
|
Operating
revenues
|
|
$
|
4,938
|
|
$
|
4,619
|
|
$
|
5,304
|
|
$
|
7,654
|
|
$
|
4,243
|
|
$
|
4,343
|
|
$
|
3,274
|
|
$
|
5,934
|
|
Operating
loss from continuing operations
|
|
|
(2,994
|
)
|
|
(1,283
|
)
|
|
(925
|
)
|
|
(47
|
)
|
|
(2,836
|
)
|
|
(1,466
|
)
|
|
(1,800
|
)
|
|
(535
|
)
|
Net
income (loss)
|
|
|
(4,764
|
)
|
|
(1,728
|
)
|
|
(161
|
)
|
|
17,971
|
|
|
(3,509
|
)
|
|
(2,134
|
)
|
|
(2,427
|
)
|
|
(1,167
|
)
|
____________
(1)
|
All
amounts are in thousands, except per share dollar amounts.
|
(2)
|
Income
tax expense (benefit) was $(81,229), $0, $(293,982), $(3,416,030)
and
$4,838,000, for the years ended September 30, 2004, 2003, 2002,
2001 and
2000, respectively.
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
(a)
General
During
the past three years, we have experienced operating losses. Our liquidity
has
been negatively impacted by our inability to collect outstanding receivables
and
claims as a result of CCC’s bankruptcy, the inability to collect outstanding
receivables from certain customers, and under-absorbed fixed costs associated
with the low utilization of our production facilities and reduced sales of
our
products resulting from general difficulties in the ATM market. In order
to meet
our liquidity needs during the past four years, we have incurred a substantial
amount of debt. See “Liquidity and Capital Resources” under this item for a
detailed discussion of these financing transactions.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations
are
based upon our consolidated financial statements. The preparation of financial
statements in conformity with accounting principles generally accepted in
the
United States of America requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements
and
the reported amounts of revenue and expenses during the reporting period.
We
must apply significant, subjective and complex estimates and judgments in
this
process. Among the factors, but not fully inclusive of all factors, that
may be
considered by management in these processes are: the range of accounting
policies permitted by accounting principles generally accepted in the United
States; management’s understanding of our business; expected rates of business
and operational change; sensitivity and volatility associated with the
assumptions used in developing estimates; and whether historical trends are
expected to be representative of future trends. Among the most subjective
judgments employed in the preparation of these financial statements are the
collectibility of contract receivables and claims, the fair value of our
inventory, the depreciable lives of and future cash flows to be provided
by our
equipment and long-lived assets, the expected timing of the sale of products,
estimates for the number and related costs of insurance claims for medical
care
obligations, judgments regarding the outcomes of pending and potential
litigation and certain judgments regarding the nature of income and expenditures
for tax purposes. We review all significant estimates on a recurring basis
and
record the effect of any necessary adjustments prior to publication of our
financial statements. Adjustments made with respect to the use of estimates
often relate to improved information not previously available. Because of
the
inherent uncertainties in this process, actual future results could differ
from
those expected at the reporting date.
The
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States, assuming
the
Company continues as a going concern, which contemplates the realization
of the
assets and the satisfaction of liabilities in the normal course of business.
Our
significant accounting policies are described in Note 1 of the Notes to
Consolidated Financial Statements included in Part IV of this Annual Report.
We
consider certain accounting policies to be critical policies due to the
significant judgments, subjective and complex estimation processes and
uncertainties involved for each in the preparation of our Consolidated Financial
Statements. We believe the following represents our critical accounting
policies. We have discussed our critical accounting policies and estimates,
together with any changes therein, with the audit committee of our Board
of
Directors.
Revenue
Recognition
Revenues
are recognized at the time products are shipped to customers. We have no
continuing obligation to provide services or upgrades to our products, other
than a warranty against defects in materials and workmanship. We only recognize
such revenues if there is persuasive evidence of an arrangement, the products
have been delivered, there is a fixed or determinable sales price and a
reasonable assurance of collectibility from the customer.
Our
products contain imbedded software that is developed for inclusion within
the
equipment. We have not licensed, sold, leased or otherwise marketed such
software separately. We have no continuing obligations after the delivery
of our
products and we do not enter into post-contract customer support arrangements
related to any software embedded into our equipment.
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined using the standard
cost method and includes materials, labor and production overhead which
approximates an average cost method. Reserves are provided to adjust any
slow
moving materials or goods to net realizable values. During the fiscal year
ended
2003, we decreased our reserve by $114,611 and we increased our reserve by
$614,611 in 2004. At September 30, 2004, our reserve was $1,900,000. Our
reserve
generally fluctuates based on the level of production and the introduction
of
new models.
Warranties
Certain
products are sold under warranty against defects in materials and workmanship
for a period of one to two years. A provision for estimated warranty costs
is
included in accrued liabilities and is charged to operations at the time
of
sale.
Federal
Income Taxes
Income
taxes are accounted for under the asset and liability method, whereby deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases. Deferred
tax
assets and liabilities are measured using enacted tax rates expected to apply
to
taxable income in the years in which those temporary differences are expected
to
be recovered or settled. The effect on deferred tax assets and liabilities
of a
change in tax rates is recognized in determining income or loss in the period
that includes the enactment date.
Net
Income (Loss) Per Share
In
accordance with Statement of Financial Accounting Standards No. 128, “Earnings
Per Share” (“SFAS No. 128”), we compute and present both basic and diluted
earnings per share (“EPS”) amounts. Basic EPS is computed by dividing income
(loss) available to common shareholders by the weighted-average number of
common
shares outstanding for the period, and excludes the effect of potentially
dilutive securities (such as options, warrants and convertible securities),
which are convertible into common stock. Dilutive EPS reflects the potential
dilution from options, warrants and convertible securities.
Accounts
Receivable
We
have
significant investments in billed receivables as of September 30, 2004 and
2003.
Billed receivables represent amounts billed upon the shipments of our products
under our standard contract terms and conditions. Allowances for doubtful
accounts and estimated nonrecoverable costs primarily provide for losses
that
may be sustained on uncollectable receivables and claims. In estimating the
allowance for doubtful accounts, we evaluate our contract receivables and
thoroughly review historical collection experience, the financial condition
of
our customers, billing disputes and other factors. When we ultimately conclude
that a receivable is uncollectible, the balance is charged against the allowance
for doubtful accounts. As of September 30, 2004 and 2003, the allowance for
doubtful contract receivables was $1,610,416 and $847,815, respectively.
The
amounts for the provision of doubtful accounts the years ended September
30,
2004, 2003 and 2002 was $729,361, $624,511 and $2,985,744,
respectively.
(b)
Impact of Recently Issued Accounting Standards
In
December 2004, the FASB issued SFAS No. 123(R), which amends SFAS No. 123
and
supersedes APB Opinion No. 25. SFAS No. 123(R) requires compensation expense
to
be recognized for all share-based payments made to employees based on the
fair
value of the award at the date of grant, eliminating the intrinsic value
alternative allowed by SFAS No. 123. Generally, the approach to determining
fair
value under the original pronouncement has not changed. However, there are
revisions to the accounting guidelines established, such as accounting for
forfeitures, that will change our accounting for stock-based awards in the
future.
SFAS
No.
123(R) must be adopted in the first interim or annual period beginning after
June 15, 2005. The statement allows companies to adopt its provisions using
either of the following transition alternatives:
|
•
|
The
modified prospective method, which results in the recognition of
compensation expense using SFAS 123(R) for all share-based awards
granted
after the effective date and the recognition of compensation expense
using
SFAS 123 for all previously granted share-based awards that remain
unvested at the effective date; or
|
|
•
|
The
modified retrospective method, which results in applying the modified
prospective method and restating prior periods by recognizing the
financial statement impact of share-based payments in a manner
consistent
with the pro forma disclosure requirements of SFAS No. 123. The
modified
retrospective method may be applied to all prior periods presented
or
previously reported interim periods of the year of
adoption.
|
We
currently plan to adopt SFAS No. 123(R) on October 1, 2005, using the modified
prospective method. This change in accounting is not expected to materially
impact our financial position. However, because we currently account for
share-based payments to our employees using the intrinsic value method, our
results of operations have not included the recognition of compensation expense
for the issuance of stock option awards. Had we applied the fair-value criteria
established by SFAS No. 123(R) to previous stock option grants, the impact
to
our results of operations would have approximated the impact of applying
SFAS
No. 123, which was a decrease to net income of approximately $1,392 in 2004,
an
increase to our net loss of $15,363 in 2003 and $50,633 in 2002. The impact
of
applying SFAS No. 123 to previous stock option grants is further summarized
in
Note 1 of the Notes to Consolidated Financial Statements.
We
will
be required to recognize expense related to stock options and other types
of
equity-based compensation beginning in fiscal year 2006 and such cost must
be
recognized over the period during which an employee is required to provide
service in exchange for the award. The requisite service period is usually
the
vesting period. The standard also requires us to estimate the number of
instruments that will ultimately be issued, rather than accounting for
forfeitures as they occur. Additionally, we may be required to change our
method
for determining the fair value of stock options.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,”
an amendment of APB No. 29. This amendment eliminates the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. This statement specifies that a nonmonetary exchange
has
commercial substance if the future cash flows of the entity are expected
to
change significantly as a result of the exchange. This statement is effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after
June
15, 2005. Earlier application is permitted for nonmonetary exchanges occurring
in fiscal periods beginning after the date of this statement is issued.
Retroactive application is not permitted. We are analyzing the requirements
of
this new statement and believe that its adoption will not have a significant
impact on our financial position, results of operations or cash
flows.
In
November 2002, FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others.” FIN 45 requires certain guarantees to be
measured at fair value upon issuance and recorded as a liability. In addition,
FIN 45 expands current disclosure requirements regarding guarantees issued
by an
entity, including tabular presentation of the changes affecting an entity’s
aggregate product warranty liability. The recognition and measurement
requirements of the interpretation are effective prospectively for guarantees
issued or modified after December 31, 2002. The disclosure requirements are
effective immediately and are provided in Part II, Item 8, “Financial Statements
and Supplementary Data,” and Note 16, “Commitments and Contingencies.” The
adoption of this statement is not expected to have a material impact on our
consolidated financial position, results of operations or cash
flows.
In
June
2001, the FASB issued SFAS No. 142 entitled “Goodwill and Other Intangible
Assets.” Under SFAS No. 142, existing goodwill is no longer amortized, but is
tested for impairment using a fair value approach. SFAS No. 142 requires
goodwill to be tested for impairment at a level referred to as a reporting
unit,
generally one level lower than reportable segments. SFAS No. 142 required
us to
perform the first goodwill impairment test on all reporting units within
six
months of adoption. We adopted SFAS No. 142 effective October 1, 2002, however,
during the year ended September 30, 2002, we recorded an impairment charge
against our remaining goodwill balance of approximately $464,000. Therefore,
the
adoption of SFAS No. 142 did not have a significant impact on our financial
statements.
In
April
2002, SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB No. 13, and Technical Corrections,” was issued. This statement provides
guidance on the classification of gains and losses from the extinguishment
of
debt and on the accounting for certain specified lease transactions, as well
as
other items. As a result, gains or losses arising from the extinguishment
of
debt are no longer required to be reported as extraordinary items. We reported
a
gain on extinguishment of debt in the fiscal year 2004 in the amount of
$18,823,000.
Effective
for financial statements issued for fiscal years beginning after December
15,
2001, and interim periods within those fiscal years, SFAS No. 144 “Accounting
for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), changed
the criteria for determining when the disposal or sale of certain assets
meets
the definition of “discontinued operations.” At the November 2004 EITF meeting,
the final consensus was reached on EITF Issue No. 03-13, “Applying the
Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether
to
Report Discontinued Operations” (“EITF Issue No. 03-13”). This Issue is
effective prospectively for disposal transactions entered into after January
1,
2005, and provides a model to assist in evaluating (a)which cash flows should
be
considered in the determination of whether cash flows of the disposal component
have been or will be eliminated from the ongoing operations of the entity
and
(b) the types of continuing involvement that constitute significant continuing
involvement in the operations of the disposal component. The Company considered
the model outlined in EITF Issue No. 03-13 in its evaluation of the February
19,
2005 Asset Purchase Agreement of the ATM division with NCR. For additional
discussion, see Note 2, “Liquidity” in Part IV, “Notes to Consolidated Financial
Statements” for more information. We have concluded that we will be required to
report the ATM assets of this sale as discontinued operations net of any
applicable income taxes for the first fiscal quarter 2005.
(c)
Results of Operations
Our
revenues were $22,514,486, $17,794,299, and $19,442,224, for the fiscal years
ended September 30, 2004, 2003 and 2002. Fiscal 2004 revenues increased by
$4,720,187, or 26.5%, from fiscal 2003 and $3,514,393, or 18.0%, from fiscal
2002. We incurred an operating loss of $(5,249,627) in fiscal 2004 compared
to
an operating loss of $(6,637,019) in fiscal 2003 and an operating loss of
$(11,552,363) in fiscal 2002. We reported a net income of $11,317,572 for
the
year ended September 30, 2004, compared with a net loss of $(9,236,717) in
fiscal 2003 and a net loss of $(14,077,678) in fiscal 2002. The net income
for
the fiscal year ended 2004 was largely due to the $18,823,000 gain resulting
from an extinguishment of debt, and a $1,918,012 gain from the sale of
securities.
Demand
for ATMs in fiscal 2004 increased compared with fiscal 2003 due to an increase
in confidence from our long time customers, and customers having increased
capital to install and replace ATMs. The decreases in sales in 2002 and 2003
were primarily due to (i) the discontinuance of business with CCC, formerly
our
largest customer, which incurred financial difficulty in January 2001, filed
for
bankruptcy protection in June 2001, and had accounted for sales of approximately
$45,000,000 in 2000 and $12,000,000 in 2001; (ii) the deterioration of the
third-party lease finance market to the ATM industry and (iii) the general
downturn in the economy. The remaining 2002 and 2003 sales decreases were
due to
lower sales to one customer, previously our second largest ATM
customer.
Product
Revenues
A
breakdown of net sales by individual product line is provided in the following
table:
|
|
(dollars
in 000’s)
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
ATM
|
|
$
|
12,594
|
|
$
|
8,331
|
|
$
|
9,399
|
|
Cash
Security
|
|
|
6,725
|
|
|
6,262
|
|
|
6,513
|
|
Parts
and other
|
|
|
3,195
|
|
|
3,201
|
|
|
3,530
|
|
|
|
$
|
22,514
|
|
$
|
17,794
|
|
$
|
19,442
|
|
ATM
sales
increased approximately 51.2% in fiscal 2004 compared with fiscal 2003. For
the
fiscal year ended 2004, we shipped approximately 3,450 ATMs, or a 49.5% increase
in units compared with approximately 2,307 ATM units shipped in fiscal 2003,
and
an increase of 23.9% compared with 2,785 units shipped in fiscal 2002. For
the
year ended September 30, 2002, we shipped 2,785 units, a decrease of 55.4%
from
the 6,248 units shipped in fiscal 2001, and a decrease of 77.6% from the
12,426
units shipped in fiscal 2000.
We
shipped 2,995 TACC units and 191 units of the Sentinel product in fiscal
2004
compared with 2,374 TACC units and 240 units of the Sentinel product in fiscal
2003 and 3,487 TACC units and no Sentinel units in fiscal 2002. Inflation
played
no significant role in our revenues for the fiscal years 2004, 2003 and 2002.
In
fiscal 2004, our average selling price of ATMs increased by 1.5% compared
with
2003. Similarly, in fiscal 2003, our average selling price of ATMs increased
7.0% from 2002. In fiscal year 2004, our average selling price for Cash Security
units decreased by 6.1% compared with 2003. Conversely, in fiscal 2003, our
average selling price of Cash Security units increased 28.2% from
2002.
Gross
Profit, Operating Expenses and Non-Operating Items
A
comparison of certain operating information is provided in the following
table:
|
|
(dollars
in 000’s)
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
Gross
profit
|
|
$
|
5,459
|
|
$
|
3,182
|
|
$
|
4,390
|
|
Selling,
general and administrative
|
|
|
10,016
|
|
|
8,395
|
|
|
9,770
|
|
Provision
for doubtful accounts and notes receivables
|
|
|
179
|
|
|
624
|
|
|
2,985
|
|
Provision
for settlement of class action litigation
|
|
|
—
|
|
|
—
|
|
|
1,564
|
|
Depreciation
and amortization
|
|
|
514
|
|
|
800
|
|
|
1,159
|
|
Impairment
of goodwill and other intangible assets
|
|
|
—
|
|
|
—
|
|
|
464
|
|
Operating
loss
|
|
|
(5,250
|
)
|
|
(6,637
|
)
|
|
(11,552
|
)
|
Gain
on extinguishments of debt
|
|
|
18,823
|
|
|
—
|
|
|
—
|
|
Gain
on sale of securities
|
|
|
1,918
|
|
|
—
|
|
|
—
|
|
Interest
expense
|
|
|
(4,255
|
)
|
|
(2,600
|
)
|
|
(2,531
|
)
|
Write-down
of investment in 3CI
|
|
|
—
|
|
|
—
|
|
|
(288
|
)
|
Income
(loss) before taxes
|
|
|
11,236
|
|
|
(9,237
|
)
|
|
(14,371
|
)
|
Income
tax benefit
|
|
|
(81
|
)
|
|
—
|
|
|
(294
|
)
|
Net
income (loss)
|
|
$
|
11,317
|
|
$
|
(9,237
|
)
|
$
|
(14,077
|
)
|
Gross
profit on product sales for the year 2004 increased $2,277,455, or 71.2%,
from
fiscal 2003, and increased $1,068,867, or 24.3%, from fiscal 2002. Such
increases primarily arose from production efficiencies and the fixed
manufacturing overhead expenses being allocated to more units produced during
the year, both of which resulted in lower unit costs assigned to each unit
of
product sold and the reduction of indirect labor due to a reduction of
personnel. Gross margin as a percentage of sales was 24.2% in 2004, 17.9%
in
2003, and 22.6% in 2002.
Selling,
general and administrative expenses increased $1,621,590, or 19.3%, in 2004
compared with 2003 primarily as a result of increased legal expenses related
to
the class action lawsuit, collection efforts, other various legal issues
and an
increase in accounting costs related to the time and expense to compile our
financial statements for the fiscal year ended 2002 and the cost to be audited
by an independent registered public accounting firm.
Selling,
general and administrative expenses decreased by $1,375,732, or 14.1%, in
2003
compared with 2002 primarily due to lower personnel costs and general office
operating expenses, legal expenses related associated with the CCC bankruptcy
matter, and decreased accounting costs due to less expenses related to the
time
and expense not to compile our financial statements for the fiscal year ended
2002 and 2003 and the related costs to be audited by an independent registered
public accounting firm and SEC filing costs.
There
was
no change in the provision for doubtful accounts related to notes receivable
in
fiscal 2004 compared with fiscal 2003; however, the provision for doubtful
accounts related to notes receivable substantially decreased by $5,463,416
in
fiscal 2003 compared with fiscal 2002 primarily due to the uncollectability
of a
$3,800,000 note receivable from CCC, notes receivable plus accrued interest
in
the aggregate amount of $1,284,735 from two companies, the Wellness Group
and
Global Supplement Solutions, that we had invested in their development, and
other notes receivables deemed uncollectible.
Provision
for settlement of class action litigation was $1,564,000 for 2002, due to
the
initial establishment of a reserve for the settlement of class action
litigation. This litigation was settled in November 2004. See further discussion
in Part I, Item 3, “Legal Proceedings.”
Depreciation
and amortization was $513,839 for 2004, a decrease of $286,016 from the amount
expensed in 2003, and a decrease of $644,903 from the amount expensed in
2002.
The decrease in expense was due to charges in 2002 related to the impairment
of
goodwill and other intangible assets.
Interest
expense recorded in fiscal 2004 was $3,921,758, an increase of $1,322,060,
or
51%, from $2,599,698 recorded in fiscal 2003. The increase was primarily
due to
penalty interest and financing costs related to the Financing described below.
Interest expense in 2003 increased by only $68,727 from $2,530,971 recorded
in
the fiscal year 2002.
Income
tax benefit of $(81,229) was recorded for the fiscal year 2004 due to tax
refunds received during the year. We recorded no income tax expense (benefit)
for the fiscal year 2003, a benefit of $(293,982) for 2002 due to our
significant losses in that year in which we were able to carry back to prior
periods. The benefit recognized in 2002 primarily related to certain tax
refunds
received during the year.
(d)
Liquidity and Capital Resources
During
the past three years, we have experienced substantial operating losses. Our
liquidity has been negatively impacted by our inability to collect the
outstanding receivables and claims as a result of CCC’s bankruptcy, the
inability to collect outstanding receivables from significant customers,
and
under-absorbed fixed costs associated with the production facilities and
reduced
sales of our products resulting from general difficulties in the ATM market.
In
order to meet our liquidity needs during the past four years, we have incurred
a
substantial amount of debt.
|
|
(dollars
in 000’s)
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
Cash
|
|
$
|
258
|
|
$
|
915
|
|
$
|
1,238
|
|
Restricted
cash
|
|
|
—
|
|
|
2,200
|
|
|
2,213
|
|
Working
capital (deficit)
|
|
|
1,487
|
|
|
(19,802
|
)
|
|
(11,224
|
)
|
Total
assets
|
|
|
10,778
|
|
|
14,430
|
|
|
19,907
|
|
Shareholders’
equity (deficit)
|
|
|
2,588
|
|
|
(17,679
|
)
|
|
(8,580
|
)
|
Cash
Flows
Cash
used
in operations was $(2,589,495) for 2004 compared with cash used in operations
of
$(393,407) for 2003, and cash provided by operations of $4,003,153 for 2002.
The
cash used in operations during fiscal 2004 was primarily attributable to
the
Operating Loss of $(5,340,114), the increase in trade accounts receivable
and
the delays in collection of these receivables. The cash used in operations
during fiscal 2003 was primarily a result of the operating loss of $(6,637,019)
due to the general decrease in sales of our ATM products. Cash provided by
operations of $4,003,153 during fiscal 2002 was largely a result from proceeds
due to a federal income refund of $5,596,383.
Working
Capital
As
of
September 30, 2004, we had a working capital of $934,203, compared with a
working capital deficit of $19,802,344 at September 30, 2003. The increase
in
working capital was primarily a result of the retirement of $18,000,000
convertible debentures along with accrued interest pursuant to the Financing
and
the Additional Financing.
Indebtedness
The
Laurus Financings
On
November 25, 2003, we completed the Financing, a $6,850,000 financing
transaction with Laurus pursuant to the 2003 SPA. The Financing was comprised
of
a three-year convertible note in the amount of $6,450,000 and a one-year
convertible note in the amount of $400,000, both of which bear interest at
a
rate of prime plus 2% and were convertible into our common stock at a conversion
price of $0.40 per share. In addition, Laurus received warrants to purchase
4,250,000 shares of our common stock at an exercise price of $0.40 per share.
The proceeds of the Financing were allocated to the notes and the related
warrants based on the relative fair value of the notes and the warrants,
with
the value of the warrants resulting in a discount against the notes. In
addition, the conversion terms of the notes result in a beneficial conversion
feature, further discounting the carrying value of the notes. As a result,
we
will record additional interest charges totaling $6,850,000 over the terms
of
the notes related to these discounts. Laurus was also granted registration
rights in connection with the shares of common stock issuable in connection
with
the Financing. Proceeds from the Financing in the amount of $6,000,000 were
used
to fully retire the $18,000,000 in Convertible Debentures issued to the two
Holders thereof in September 2000, together with all accrued interest, penalties
and fees associated therewith. All of the warrants and Convertible Debentures
held by the Holders were terminated and we recorded a gain from extinguishment
of debt of $18,823,000 (including accrued interest through the date of
extinguishment) in fiscal year 2004 related to this Financing. See further
discussion in Part IV, Item 9, “Notes to the Consolidated Financials”. In March
2004, the $400,000 note was repaid in full.
In
connection with the closing of the Financing, all outstanding litigation
including, without limitation, the Montrose Litigation, was dismissed, and
the
Revolving Credit Facility was repaid through the release of the restricted
cash
used as collateral for the Revolving Credit Facility.
In
August
2004, Laurus notified us that an Event of Default had occurred and had continued
beyond any applicable grace period as a result of our non-payment of interest
and principal on the $6,450,000 convertible note as required under the terms
of
the Financing, as well as noncompliance with certain other covenants of the
Financing documents. In exchange for Laurus’s waiver of the Event of Default
until September 17, 2004, we agreed, among other things, to lower the conversion
price on the $6,450,000 convertible note and the exercise price of the warrants
from $0.40 per share to $0.30 per share.
On
November 26, 2004, we completed the Additional Financing, a $3,350,000 financing
transaction with Laurus pursuant to the 2004 SPA. The Additional Financing
was
comprised of (i) a three-year convertible note issued to Laurus in the amount
of
$1,500,000, which bears interest at a rate of 14% and is convertible into
our
common stock at a conversion price of $3.00 per share (the “$1,500,000 Note”),
(ii) a one-year convertible in the amount of $600,000 which bears interest
at a
rate of 10% and is convertible into our common stock at a conversion price
of
$0.30 per share (the “$600,000 Note”), (iii) a one-year convertible note of our
subsidiary, Tidel Engineering, L.P., in the amount of $1,250,000, which is
a
revolving working capital facility for the purpose of financing purchase
orders
of our subsidiary, Tidel Engineering, L.P., (the “Purchase Order Note”), which
bears interest at a rate of 14% and is convertible into our common stock
at a
price of $3.00 per share and (iv) our issuance to Laurus of the 2003 Fee
Shares,
which consisted of 1,251,000 shares of common stock, or approximately 7%
of the
total shares outstanding, in satisfaction of fees totaling $375,300 incurred
in
connection with the convertible term notes issued in the Financing discussed
above. As a result of the issuance of the 2003 Fee Shares, we recorded an
additional charge in fiscal 2004 of $638,010. We also increased the principal
balance of the original note by $292,987, of which $226,312 bears interest
at
the default rate of 18%. This amount represents interest accrued but not
paid to
Laurus as of August 1, 2004. In addition, Laurus received warrants to purchase
500,000 shares of our common stock at an exercise price of $0.30 per share.
The
proceeds of the Additional Financing were allocated to the notes based on
the
relative fair value of the notes and the warrants, with the value of the
warrants resulting in a discount against the notes. In addition, the conversion
terms of the $600,000 Note resulted in a beneficial conversion feature, further
discounting the carrying value of the notes. As a result, we will record
additional interest charges related to these discounts totaling $840,000
over
the terms of the notes. Laurus was also granted registration rights in
connection with the 2003 Fee Shares and other shares issuable pursuant to
the
Additional Financing. The obligations pursuant to the Additional Financing
are
secured by all of our assets and are guaranteed by our subsidiaries. Net
proceeds from the Additional Financing in the amount of $3,232,750 were
primarily used for (i) general working capital payments made directly to
vendors, (ii) past due interest on Laurus’s $6,450,000 convertible note due
pursuant to the Financing and (iii) the establishment of an escrow for future
principal and interest payments due pursuant to the Additional
Financing.
THE
NOTES
AND WARRANTS ISSUED IN THE FINANCING AND THE ADDITIONAL FINANCING ARE
CONVERTIBLE INTO AN AGGREGATE OF 28,226,625 SHARES OF OUR COMMON STOCK AND,
WHEN
COUPLED WITH THE 2003 FEE SHARES, REPRESENT APPROXIMATELY 60% OF OUR OUTSTANDING
COMMON STOCK SUBJECT TO ADJUSTMENT AS PROVIDED IN THE TRANSACTION DOCUMENTS.
IF
THESE NOTES AND WARRANTS WERE COMPLETELY CONVERTED TO COMMON STOCK BY LAURUS,
THEN THE OTHER EXISTING SHAREHOLDERS’ OWNERSHIP IN THE COMPANY WOULD BE
SIGNIFICANTLY DILUTED TO APPROXIMATELY 40% OF THEIR PRESENT OWNERSHIP
POSITION.
In
connection with the Financing, Laurus required that we covenant to become
current in our filings with the Securities and Exchange Commission according
to
a predetermined schedule. Effective November 26, 2004, the Additional Financing
documents require, among other things, that we provide evidence of filing
to
Laurus of our fiscal 2003, fiscal 2004 and year-to-date interim 2005 filings
with the Securities and Exchange Commission on or before July 31, 2005. The
2002
10-K was filed on February 1, 2005, in accordance with Additional Financing
documents requirements. Fourteen (14) days following such time as we become
current in our filings with the Securities and Exchange Commission, we must
satisfy the Listing Requirement by delivering to Laurus evidence of the listing
of our common stock on the Nasdaq Over The Counter Bulletin Board.
On
February 4, 2005, we received a letter from the Securities and Exchange
Commission stating that the Division of Corporate Finance of the SEC would
not
object to the Company filing a comprehensive annual report on Form 10-K which
covers all of the periods during which it has been a delinquent filer, together
with its filing all Forms 10-Q which are due for quarters subsequent to the
latest fiscal year included in that comprehensive annual report. However,
the
SEC letter also stated that, upon filing such a comprehensive Form 10-K,
the
Company would not be considered “current” for purposes of Regulation S, Rule 144
or filing on Forms S-8, and that the Company would not be eligible to use
Forms
S-2 or S-3 until a sufficient history of making timely filings is established.
Laurus consented to the filing of such a comprehensive annual report in
satisfaction of the Filing Requirements mandated on or before July 31, 2005.
Laurus also consented to a modification of the requirement that a Registration
Statement be filed within 20 days of satisfaction of the Filing Requirements
to
instead require that the Registration Statement be required to be filed by
September 20, 2006.
Pursuant
to the terms of the Financing and the Additional Financing, an Event of Default
occurs if, among other things, we do not complete our filings with the
Securities and Exchange Commission on the timetable set forth in the Additional
Financing documents, or we do not comply with the Listing Requirement or
any
other material covenant or other term or condition of the 2003 SPA, the 2004
SPA, the notes we issued to Laurus or any of the other documents related
to the
Financing or the Additional Financing. If there is an Event of Default,
including any of the items specified above or in the transaction documents,
Laurus may declare all unpaid sums of principal, interest and other fees
due and
payable within five (5) days after we receive a written notice from Laurus.
If
we cure the Event of Default within that five (5) day period, the Event of
Default will no longer be considered to be occurring.
If
we do
not cure such Event of Default, Laurus shall have, among other things, the
right
to have two (2) of its designees appointed to our Board, and the interest
rate
of the notes shall be increased to the greater of 18% or the rate in effect
at
that time.
ON
NOVEMBER 26, 2004, IN CONNECTION WITH THE ADDITIONAL FINANCING, WE ENTERED
INTO
THE ASSET SALES AGREEMENT WITH LAURUS WHEREBY WE AGREED TO PAY A REORGANIZATION
FEE IN THE AMOUNT OF AT LEAST $2,000,000 TO LAURUS UPON THE OCCURRENCE OF
CERTAIN EVENTS AS SPECIFIED BELOW AND THEREIN, WHICH REORGANIZATION FEE IS
SECURED BY ALL OF OUR ASSETS, AND IS GUARANTEED BY OUR SUBSIDIARIES. THE
ASSET
SALES AGREEMENT PROVIDES THAT (I) ONCE OUR OBLIGATIONS TO LAURUS HAVE BEEN
PAID
IN FULL (OTHER THAN THE REORGANIZATION FEE), WE SHALL BE ABLE TO SEEK ADDITIONAL
FINANCING IN THE FORM OF A NON-CONVERTIBLE BANK LOAN IN AN AGGREGATE PRINCIPAL
AMOUNT NOT TO EXCEED $4,000,000, SUBJECT TO LAURUS’S RIGHT OF FIRST REFUSAL;
(II) THE NET PROCEEDS OF AN ASSET SALE TO THE PARTY NAMED THEREIN SHALL BE
APPLIED TO THE OBLIGATIONS UNDER THE FINANCING AND THE ADDITIONAL FINANCING,
AS
DESCRIBED ABOVE, BUT NOT TO THE REORGANIZATION FEE; AND (III) THE PROCEEDS
OF
ANY OF OUR SUBSEQUENT COMPANY SALES (AS DEFINED IN THE ASSET SALES AGREEMENT)
OF
EQUITY INTERESTS OR ASSETS OR OF OUR SUBSIDIARIES CONSUMMATED ON OR BEFORE
THE
FIFTH ANNIVERSARY OF THE ASSET SALES AGREEMENT SHALL BE APPLIED FIRST TO
ANY
REMAINING OBLIGATIONS, THEN PAID TO LAURUS PURSUANT TO AN INCREASING PERCENTAGE
OF AT LEAST 55.5% SET FORTH THEREIN, WHICH AMOUNT SHALL BE APPLIED TO THE
REORGANIZATION FEE. UNDER THIS FORMULA, THE EXISTING SHAREHOLDERS COULD RECEIVE
LESS THAN 45% OF THE PROCEEDS OF ANY SALE OF OUR ASSETS OR EQUITY INTERESTS,
AFTER PAYMENT OF THE ADDITIONAL FINANCING AND REORGANIZATION FEE. THE
REORGANIZATION FEE SHALL BE $2,000,000 AT A MINIMUM, BUT COULD EQUAL A HIGHER
AMOUNT BASED UPON A PERCENTAGE OF THE PROCEEDS OF ANY COMPANY SALE, AS SUCH
TERM
IS DEFINED IN THE ASSET SALES AGREEMENT. IN THE EVENT THAT LAURUS HAS NOT
RECEIVED THE FULL AMOUNT OF THE REORGANIZATION FEE ON OR BEFORE THE FIFTH
ANNIVERSARY OF THE DATE OF THE ASSET SALES AGREEMENT, THEN WE SHALL PAY ANY
REMAINING BALANCE DUE ON THE REORGANIZATION FEE TO LAURUS. WE WILL RECORD
A
$2,000,000 CHARGE IN THE FIRST QUARTER OF FISCAL 2005 TO INTEREST
EXPENSE.
As
of
July 31, 2005, we have $1,250,000 available for borrowing under the Purchase
Order Note through November 26, 2005, as part of the Additional
Financing.
For
more
information about the Financing and the Additional Financing, see Part I,
Item
1, “Business — Recent Developments” of this Annual Report.
Proposed
Sale of ATM Business
On
February 19, 2005, the Company and its wholly-owned subsidiary, Tidel
Engineering, L.P., (together with the Company, the “Sellers”), entered into the
Asset Purchase Agreement with NCR Texas, a wholly-owned subsidiary of NCR
Corporation, a Maryland corporation, for the sale of the Sellers’ ATM business.
The Purchase Price for the ATM business of the Sellers consists of ten million
one hundred seventy five thousand dollars ($10,175,000) plus the assumption
of
certain liabilities related to the ATM business and, subject to certain
adjustments as provided in the Asset Purchase Agreement: The Purchase Price
is
also subject to adjustment based upon the actual value of the assets delivered,
to the extent the value of the assets delivered is 5% greater than or less
than
a predetermined value as stated in the Asset Purchase Agreement. The Asset
Purchase Agreement contains customary representations, warranties, covenants
and
indemnities.
The
proceeds of the sale of the Sellers’ ATM business will be applied towards the
repayment of our outstanding loans from Laurus. However, even after the
application of net proceeds towards the repayment of the loans, Laurus may
continue to hold warrants to purchase up to 4,750,000 shares of the registrant’s
common stock, and will have a contractual right to receive a significant
percentage of the proceeds of any subsequent sale of all, or substantially
all,
of the equity interests and/or other assets of the registrant in one or more
transactions, pursuant to the Asset Sales Agreement. The Company has retained
Stifel, Nicolaus & Company, Inc. to sell the remainder of the Company’s
business, as required pursuant to the terms of the Additional
Financing.
The
closing of the sale of the ATM business pursuant to the Asset Purchase Agreement
is subject to several conditions, including shareholder approval. The Sellers
do
not contemplate seeking shareholder approval until the Company is current
in its
reporting requirements under the Securities Exchange Act of 1934, as amended.
Pursuant to contractual arrangements with its lenders, the Company is required
to be current no later than July 31, 2005, after which time the Company will
commence seeking shareholder approval for this transaction. The company believes
that the transaction will likely close in the fourth quarter of calendar
2005.
Following
the closing of the transactions under the Asset Purchase Agreement, it is
contemplated that approximately 50% of the Registrant’s employees would become
employees of NCR Texas, including up to two executives, subject to their
reaching mutually satisfactory agreements with NCR Texas.
Pursuant
to the Asset Purchase Agreement, during the Exclusivity Period, the Sellers
have
agreed not to communicate with potential buyers, other than to say that they
are
contractually obligated not to respond. The Sellers are obligated to forward
any
communications to NCR Texas. In the event that the Sellers breach these
provisions, then as provided in the Asset Purchase Agreement, the Sellers
are
obligated to pay the Reorganization Fee of $2,000,000 to NCR Texas. Also
as
provided in the Asset Purchase Agreement, under certain limited circumstances
the Sellers may consider an unsolicited offer that the Board deems to be
financially superior. However, immediately following the execution of a
definitive agreement for the transaction contemplated by such superior offer,
NCR Texas is to be paid the Fee.
The
Asset
Purchase Agreement also contains provisions restricting the Sellers from
owning
or managing any business similar to the ATM business for a period of five
years
after the closing of the transactions contemplated by the Asset Purchase
Agreement, and restricting Sellers from soliciting or hiring any employees
of
NCR for a period of two years after the closing.
Engagement
of Investment Banker to Evaluate Strategic Alternatives for the Sale of the
Cash
Security Business
We
engaged Stifel in October 2004, to assist the Board of Directors in connection
with the proposed sale of our Cash Security business, deliver a fairness
opinion, and render such additional assistance as we may reasonably request
in
connection with the proposed sale of our TACC business. We are currently
working
with Stifel in connection with such a proposed sale.
The
Equipment Purchase Agreement
In
June
2004, our subsidiary entered into an equipment purchase agreement with an
initial term through December 31, 2005 with a national convenience store
operator (the “Buyer”) for the sale of our Sentinel units. We agreed to provide
“Most Favored Nation” pricing to the Buyer and to not increase the price during
the initial term of the agreement. As of June 30, 2005, the Buyer had purchased
approximately 1,531 units under the agreement.
The
Supply, Facility and Share Warrant Agreements
In
September 2004, our subsidiary entered into separate supply and credit facility
agreements (the “Supply Agreement”, the “Facility Agreement” and the “Share
Warrant Agreement” respectively) with a foreign distributor related to our ATM
products. The Supply Agreement required the distributor, during the initial
term
of the agreement, to purchase ATMs only from us, effectively making us its
sole
supplier of ATMs. During each of the subsequent terms, the distributor is
required to purchase from us not less than 85% of all ATMs purchased by the
distributor. The initial term of the agreement was set as of the earlier
of: (i)
the expiration or termination of the debenture, (ii) a termination for default,
(iii) the mutual agreement of the parties, and (iv) August 15,
2009.
The
Facility Agreement provides a credit facility in an aggregate amount not
to
exceed $2,280,000 to the distributor with respect to outstanding invoices
already issued to the distributor and with respect to invoices which may
be
issued in the future related to the purchase of our ATM products. Repayment
of
the credit facility is set by schedule for the last day of each month beginning
November 2004 and continuing through August 2005. The distributor fell into
default due to non-payment during February 2005. As of September 30, 2004,
we
had an outstanding balance of approximately $720,000 related to this facility.
Notwithstanding our current commitment to aggressively pursue our rights
to
collect the outstanding balance of the facility and in view of the uncertainty
of the ultimate outcome, we recorded a reserve in the amount of approximately
$185,000 during the quarter ended September 30, 2004 due to the payment
delinquency of the invoices related to 2004 billings. During 2005, we increased
the reserve to approximately $830,000 due to the payment delinquency of the
majority of the invoices issued in the fiscal year 2005. In July of 2005,
we
collected a partial payment of approximately $350,000 related to the 2004
billings. This collection reduced the outstanding balance on this facility
to
approximately $1,700,000, of which we have reserved a total of $830,000 as
of
July 31, 2005. We have also received a commitment commencing August 5, 2005
from
the distributor to submit at least approximately $35,000 per week until the
balance is paid in full.
The
Share
Warrant Agreement provides for the issuance to our subsidiary of a warrant
to
purchase up to 5% of the issued and outstanding Share Capital of the
distributor. The warrant restricts the distributor from (i) creating or issuing
a new class of stock or allotting additional shares, (ii) consolidating or
altering the shares, (iii) issuing a dividend, (iv) issuing additional warrants
and (v) amending articles of incorporation. Upon our exercise of the warrant,
the distributors balance outstanding under the Facility Agreement would be
reduced by $300,000.
Bridge
Loans
Beginning
in September 2003, we issued the following unsecured, short-term promissory
notes totaling $720,000 to shareholders or their affiliates as part of a
bridge
financing transaction (the “Bridge Loans”):
In
September 2003, we issued Alliance an unsecured, short-term promissory note
dated September 26, 2003 in the principal amount of $300,000 due December
24,
2003; plus accrued interest at 9% per annum, payable at maturity. In
consideration for the original loan, Alliance received three-year warrants
to
purchase 100,000 shares of common stock at $0.45 per share. The note was
renewed
on December 24, 2003 until March 24, 2004. In consideration for the renewal,
Alliance received additional three-year warrants to purchase 50,000 shares
of
common stock at $0.45 per share. The proceeds of the Alliance note were
allocated to the note and the related warrants based on the relative fair
value
of the note and the warrants, with the value of the warrants resulting in
a
discount against the note. As a result, we recorded additional interest charges
totaling $20,572 in fiscal 2003 related to the discounts. The note was paid
in
full on March 5, 2004.
We
issued
to a shareholder and former director an unsecured, short-term promissory
note
dated October 2, 2003 in the principal amount of $120,000 due April 2, 2004;
plus accrued interest at 9% per annum, payable monthly. In consideration
for the
loan, the shareholder received three-year warrants to purchase 40,000 shares
of
common stock at $0.45 per share. The proceeds of the note were allocated
to the
note and the related warrants based on the relative fair value of the note
and
the warrants, with the value of the warrants resulting in a discount against
the
note. As a result, we recorded additional interest charges totaling $7,611
in
fiscal 2004 related to the discounts. The note was paid in full on March
8,
2004.
We
also
issued to the shareholder and former director an unsecured, short-term
promissory note dated October 21, 2003 in the principal amount of $90,000
due
April 21, 2004; plus accrued interest at 9% per annum, payable monthly. In
consideration for the loan, the shareholder received three-year warrants
to
purchase 30,000 shares of common stock at $0.45 per share. The proceeds of
the
note were allocated to the note and the related warrants based on the relative
fair value of the note and the warrants, with the value of the warrants
resulting in a discount against the note. As a result, we recorded additional
interest charges totaling $6,608 in fiscal 2004 related to the discounts.
The
note was paid in full on November 26, 2003.
The
Company issued to an affiliate of a shareholder an unsecured, short-term
promissory note dated November 20, 2003 in the principal amount of $210,000
due
May 20, 2004; plus accrued interest at 8% per annum, payable at maturity.
In
consideration for the loan, the note holder received three-year warrants
to
purchase 70,000 shares of common stock at $0.45 per share. The proceeds of
the
note were allocated to the note and the related warrants based on the relative
fair value of the note and the warrants, with the value of the warrants
resulting in a discount against the note. As a result, the Company will record
additional interest charges totaling $30,619 over the term of the note related
to the discounts. The note was paid in full on March 5, 2004 from proceeds
obtained in the Financing.
Revolving
Credit Facility
As
of
September 30, 2002, our wholly-owned subsidiary was a party to a credit
agreement with a bank (the “First Lender”) (as amended, the “Revolving Credit
Facility”), which was subsequently amended on April 30, 2002, August 30, 2002
and December 30, 2002 to provide for, among other things, an extension of
the
maturity date until June 30, 2003; the reduction of the revolving commitment
from the initial amount of $7,000,000 to $2,000,000; and a modification of
the
collateral requirements to include a pledge of a money market account in
an
amount equal to 110% of the outstanding principal balance, which pledge was
$2,200,000 and is recorded as restricted cash in the September 30, 2002
consolidated balance sheet. At September 30, 2002, $2,000,000 was outstanding
under the Revolving Credit Facility compared to $5,200,000 at September 30,
2001. At September 30, 2002, we were in compliance with the terms of the
credit
agreement or had received waivers for covenant violations. On June 30, 2003,
the
Revolving Credit Facility was assigned to another bank (the “Second Lender”).
The Revolving Credit Facility was repaid on November 25, 2003 in connection
with
the Financing.
The
Development Agreement
In
August
2001, we entered into a Development Agreement (the “Development Agreement”) with
a national petroleum retailer and convenience store operator (the “Retailer”)
for the joint development of a new generation of “intelligent” TACCs, now known
as the Sentinel product. The Development Agreement provided for four phases
of
development with the first three phases to be funded by the Retailer at an
estimated cost of $800,000. In February 2002, we agreed to provide the Retailer
a rebate on each unit of the Sentinel product for the first 1,500 units sold,
provided the product successfully entered production, until the Retailer
had
earned amounts equal to the development costs paid by the Retailer. The
development of the product was completed and production commenced. The aggregate
development costs for the Sentinel product paid for by the Retailer totaled
$651,500. As of September 30, 2004, we had credited back approximately $87,629
to the retailer resulting in an accrued liability of $564,231 for the benefit
of
the Retailer. As of June 30, 2005, 1,527 units of the Sentinel product had
been
sold and rebates or other credits totaling $122,100 had been credited back
to
the Retailer, resulting in rebates or other credits totaling $529,400 accrued
for the benefit of the Retailer.
CashWorks
In
December 2001, we invested $500,000 in CashWorks, Inc. (“CashWorks”), a
development-stage financial technology solutions provider, in the form of
convertible debt of CashWorks, and entered into a License, Development and
Deployment Agreement (“LDDA”) with CashWorks, which provided for certain
marketing rights and future income payments to us in exchange for technical
expertise and our sales support. In December 2002, we converted the notes,
plus
accrued but unpaid interest into 2,133,728 shares of CashWorks’ Series B
preferred shares plus warrants to purchase 125,000 shares of CashWorks’ common
stock at $2.00 per share. In March 2004, we consented to the sale of our
interest in CashWorks to GE Capital Corp. (“GECC”) for approximately $2,451,000,
resulting in the recognition of a gain in the quarter ended March 31, 2004
of
$1,918,012. We retained the marketing rights and future income payments pursuant
to the LDDA, as amended, following the sale to GECC. All of the shares and
warrants related to the CashWorks investment were pledged to secure borrowings
in connection with the Financing (defined herein above). Accordingly, upon
receipt of the consideration for the CashWorks Series B preferred shares
and
warrants, we were obligated to repay in full the $400,000 and $100,000
convertible term notes plus accrued but unpaid interest thereon, and all
outstanding interest due on the $6,450,000 convertible term note, all of
which
were paid as part of the Financing.
Convertible
Debentures
In
September 2000, we issued to two investors (individually, the “Holder”, or
collectively, the “Holders”) an aggregate of $18,000,000 of our 6% Convertible
Debentures, due September 8, 2004 (the “Convertible Debentures”), convertible
into our common stock at a price of $9.50 per share. In addition, we issued
warrants to the Holders to purchase 378,947 shares of our common stock
exercisable at any time through September 8, 2005 at an exercise price of
$9.80
per share.
In
June
2001, the Holders exercised their option to “put” the Convertible Debentures
back to the Company. Accordingly, the principal amount of $18,000,000, plus
accrued and unpaid interest, became due on August 27, 2001. We did not make
such
payment on that date, and at September 30, 2002, did not have the funds
available to make such payments. At September 30, 2002, we were party to
subordination agreements (the “Subordination Agreements”) with each Holder and
the First Lender which provided, among other things, for prohibitions: (i)
on
our making this payment to the Holders, and (ii) on the Holders taking legal
action against us to collect this amount, other than to increase the principal
balance of the Convertible Debentures for unpaid amounts or to convert the
Convertible Debentures into our common stock. The Convertible Debentures
were
retired on November 25, 2003, which resulted in a gain on early extinguishment
of debt of $18,823,000, and in connection with the Financing discussed
above.
Investment
in 3CI Complete Compliance Corporation
We
formerly owned 100% of 3CI Complete Compliance Corporation (“3CI”) a company
engaged in the transportation and incineration of medical waste, until we
divested our majority interest in February 1994. As of September 30, 2004,
we
continue to own 698,889 shares of the common stock of 3CI. We have no immediate
plan for the disposal of these shares. At September 30, 2004, all the shares
were pledged to secure borrowings in connection with the Financing. See Note
7,
“Investment in 3CI” to “Notes to the Consolidated Financial Statements” in Part
IV of this Annual Report. The value of the investment in 698,889 shares of
3CI
was written down by $288,000 at September 30, 2002 to reflect a carrying
amount
of $0.40 per share and was marked to the market values of $209,539 ($0.30
per
share) and $244,462 ($0.35 per share) at September 30, 2003 and 2004,
respectively.
Off-Balance
Sheet Transactions
We
do not
have any significant off-balance sheet arrangements that have, or 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.
Indebtedness
We
have
fixed debt service and lease payment obligations under notes payable and
operating leases for which we have material contractual cash obligations.
Interest rates on our debt vary from prime rate plus 2% to 14%.
The
following table summarizes our contractual cash obligations:
PAYMENTS
DUE BY PERIOD
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
Thereafter
|
|
Operating
leases
|
|
$
|
484,135
|
|
$
|
168,520
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Long-term
debt, including current portion(1)
|
|
|
600,000
|
|
|
3,000,000
|
|
|
3,667,988
|
|
|
1,500,000
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
1,084,135
|
|
$
|
3,168,520
|
|
$
|
3,667,988
|
|
$
|
1,500,000
|
|
$
|
—
|
|
$
|
—
|
|
(1)
|
Long-term
debt including current maturities and debt discount was $6,705,648
as of
September 30, 2004 and $0 as of September 30, 2003. The payment
obligations on the debt include $6,667,988 pursuant to the terms
of the
Financing on November 25, 2003 dated November 25, 2003 and $2,100,000
pursuant to the terms of the Additional Financing on November 26,
2004.
|
Long-term
debt — As of September 30, 2002, our wholly-owned subsidiary was a party to the
Revolving Credit Facility, which was amended on April 30, 2002, August 30,
2002
and December 30, 2002, to provide for, among other things, an extension of
the
maturity date until June 30, 2003. At September 30, 2002, $2,000,000 was
outstanding under the Revolving Credit Facility. At September 30, 2002, we
were
in compliance with the terms of the credit agreement or had received waivers
for
covenant violations. On June 30, 2003, the Revolving Credit Facility was
assigned to another bank. The Revolving Credit Facility was repaid on November
25, 2003, in connection with the Financing as discussed more fully in Part
II,
Item 8, “Financial Statements and Supplementary Data,” and Note 10, “Long-Term
Debt and Convertible Debentures” of this Annual Report.
Operating
Leases — We lease office and warehouse space, transportation equipment and other
equipment under terms of operating leases, which expire in the years up through
2006. Rental expense under these leases for the years ended September 30,
2004,
2003 and 2002 was approximately $519,292, $512,519, and $661,924,
respectively.
Purchase
Obligations — Pursuant to an agreement with a supplier, we were obligated to
purchase certain raw materials with an approximate cost of $952,000 before
December 31, 2002. Subsequent to September 30, 2002, the terms of the purchase
obligation were amended to extend the purchase date and revise the purchase
prices. This agreement terminated on March 31, 2004.
Planned
capital expenditures for 2005 and 2006 are estimated to be approximately
$200,000 per year. These expenditures will depend upon available funds, levels
of orders received and future operating activity.
Research
and Development Expenditures
Our
research and development expenditures for fiscal 2004, 2003, and 2002 were
approximately $2,613,000 and $2,668,472, and $2,700,000 respectively. Our
research and development budget for fiscal 2005 is estimated to be $2,400,000.
The majority of these expenditures are applicable to enhancements of existing
product lines, development of new automated teller machine products and the
development of new technology to facilitate the dispensing of cash and
cash-value products.
Death
of Chief Executive Officer
In
December 2004, James T. Rash, our former Chairman of the Board, Chief Executive
and Financial Officer, died. We have named Mark K. Levenick as Interim Chief
Executive Officer but no permanent Chairman or Chief Executive Officer has
been
hired or appointed as of the date hereof. The Board of Directors approved
the
transfer of a key-man life insurance policy on the life of Mr. Rash in the
amount of $1,000,000 to Mr. Rash in 2002, in connection with Mr. Rash’s then
pending retirement. The proceeds were assigned as collateral for outstanding
promissory notes due from Mr. Rash in the aggregate principal amount of
$1,143,554 plus accrued interest in the amount of $334,980. Proceeds of
$1,009,227 were received from the insurance policy in February 2005, which
were
applied to the principal amount of the notes. Mr. Rash also received bonuses
totaling $350,000 of which $134,327 was applied to the remaining principal
balance of the notes. The accrued interest was charged to bad debt expense
during fiscal 2003.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
At
September 30, 2004 and September 30, 2003, we were exposed to changes in
interest rates as a result of significant financing through our issuance
of
variable-rate and fixed-rate debt. However, with the retirement of the
Convertible Debentures subsequent to September 30, 2002, and the associated
overall reduction in outstanding debt balances, our exposure to interest
rate
risks has significantly decreased. If market interest rates had increased
up to
1% in fiscal 2003 or 2004, there would have been no material impact on our
consolidated results of operations or financial position.
(a)
Risk Factors
There
are
several risks inherent in our business including, but not limited to, the
following:
THE
EXISTING SHAREHOLDERS’ OWNERSHIP IN THE COMPANY WILL BE SIGNIFICANTLY
DILUTED.
IN
NOVEMBER 2003, WE COMPLETED THE FINANCING WHICH WAS COMPRISED OF A THREE-YEAR
CONVERTIBLE NOTE IN THE AMOUNT OF $6,450,000 AND A ONE-YEAR CONVERTIBLE NOTE
IN
THE AMOUNT OF $400,000, BOTH OF WHICH WERE CONVERTIBLE INTO OUR COMMON STOCK
AT
AN EXERCISE PRICE OF $0.40 PER SHARE. IN ADDITION, LAURUS RECEIVED WARRANTS
TO
PURCHASE 4,250,000 SHARES OF OUR COMMON STOCK AT AN EXERCISE PRICE OF $0.40
PER
SHARE. IN MARCH 2004, THE $400,000 NOTE WAS REPAID IN FULL. IN AUGUST 2004,
THE
COMPANY AGREED TO LOWER THE CONVERSION PRICE ON THE $6,450,000 CONVERTIBLE
NOTE
AND THE EXERCISE PRICE OF THE WARRANTS FROM $0.40 PER SHARE TO $0.30 PER
SHARE.
IN
NOVEMBER 2004, WE COMPLETED THE ADDITIONAL FINANCING WHICH WAS COMPRISED
OF A
THREE-YEAR CONVERTIBLE NOTE IN THE AMOUNT OF $1,500,000 AND A ONE-YEAR
CONVERTIBLE NOTE ISSUED BY TIDEL ENGINEERING, L.P., A SUBSIDIARY OF OURS,
IN THE
AMOUNT OF $1,250,000, BOTH OF WHICH ARE CONVERTIBLE INTO OUR COMMON STOCK
AT AN
EXERCISE PRICE OF $3.00 PER SHARE, AND A ONE-YEAR CONVERTIBLE NOTE IN THE
AMOUNT
OF $600,000 WHICH IS CONVERTIBLE INTO OUR COMMON STOCK AT AN EXERCISE PRICE
OF
$0.30 PER SHARE. IN ADDITION, LAURUS RECEIVED WARRANTS TO PURCHASE 500,000
SHARES OF OUR COMMON STOCK AT AN EXERCISE PRICE OF $0.30 PER SHARE AND 1,251,000
2003 FEE SHARES IN FULL SATISFACTION OF CERTAIN FEES INCURRED IN CONNECTION
WITH
THE FINANCING.
THE
NOTES
AND WARRANTS ISSUED IN CONNECTION WITH THE FINANCING AND THE ADDITIONAL
FINANCING ARE CONVERTIBLE INTO AN AGGREGATE OF 28,226,625 SHARES OF OUR COMMON
STOCK, AND, WHEN COUPLED WITH 2003 FEE SHARES, REPRESENT APPROXIMATELY 60%
OF
OUR OUTSTANDING COMMON STOCK, SUBJECT TO ADJUSTMENT AS PROVIDED IN THE
TRANSACTION DOCUMENTS. IF THESE NOTES AND WARRANTS WERE CONVERTED IN THEIR
ENTIRETY TO COMMON STOCK BY LAURUS, THEN THE OTHER EXISTING SHAREHOLDERS’
OWNERSHIP IN THE COMPANY WOULD BE SIGNIFICANTLY DILUTED TO APPROXIMATELY
40% OF
THEIR PRESENT OWNERSHIP POSITION.
AS
A
CONDITION OF THE ADDITIONAL FINANCING, WE ENTERED INTO THE ASSET SALE AGREEMENT
WITH LAURUS WHEREBY WE AGREED TO PAY A REORGANIZATION FEE OF AT LEAST
$2,000,000. THE ASSET SALES AGREEMENT PROVIDES THAT THE NET PROCEEDS OF AN
ASSET
SALE TO THE PARTY NAMED THEREIN SHALL BE APPLIED TO OUR OBLIGATIONS UNDER
THE
FINANCING AND THE ADDITIONAL FINANCING, BUT NOT TO THE REORGANIZATION FEE,
AND
THAT THE NET PROCEEDS OF ANY SUBSEQUENT SALES OF ASSETS OR EQUITY CONSUMMATED
ON
OR PRIOR TO THE FIFTH ANNIVERSARY OF THE DATE OF THE ASSET SALES AGREEMENT
SHALL
BE APPLIED FIRST TO SUCH OBLIGATIONS, THEN PAID TO LAURUS PURSUANT TO AN
INCREASING PERCENTAGE OF AT LEAST 55.5%, AS SET FORTH IN THE ASSET SALES
AGREEMENT. ACCORDINGLY, THE REORGANIZATION FEE COULD BE A SUBSTANTIALLY HIGHER
AMOUNT BASED UPON A PERCENTAGE OF THE PROCEEDS OF ANY COMPANY SALE, AS SPECIFIED
IN THE ASSET SALES AGREEMENT. EVEN IN THE EVENT THAT WE REPAY ALL OF THE
NOTES
PAYABLE OUTSTANDING TO THE PURCHASER IN FULL, THE PROCEEDS FROM ANY COMPANY
SALE
WOULD FIRST BE REDUCED BY THE REORGANIZATION FEE, WHICH WOULD HAVE THE SAME
EFFECT AS DILUTING THE EXISTING SHAREHOLDERS’ OWNERSHIP.
FOR
MORE
INFORMATION, SEE ITEM 7, “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS” FOR ADDITIONAL INFORMATION ON THESE
TRANSACTIONS.
OUR
FUTURE SUCCESS IS UNCERTAIN DUE TO OUR LACK OF LIQUIDITY AND FINANCIAL SITUATION
AT PRESENT.
During
the past three years, we have experienced operating losses. Our liquidity
has
been negatively impacted by our inability to collect outstanding receivables
and
claims as a result of CCC’s bankruptcy, the inability to collect outstanding
receivables from certain customers, under-absorbed fixed costs associated
with
the production facilities, and reduced sales of our products resulting from
general difficulties in the ATM market. In order to meet our liquidity needs
during the past four years, we have incurred a substantial amount of debt.
See
“Liquidity and Capital Resources” under this item for detailed discussion of
these financing transactions. As of January 31, 2005, we have a $1,250,000
purchase order financing facility through November 26, 2005. See Part II,
Item
7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of this Annual Report for information on the purchase order
financing facility. There can be no assurance that this facility will be
sufficient to meet our current working capital needs or that we will have
sufficient working capital in the future. If we need to seek additional
financing, there can be no assurances that we will obtain such additional
financing for working capital purposes. The failure to obtain such additional
financing could cause a material adverse effect upon our financial
condition.
Our
future results of operations involve a number of significant risks and
uncertainties. Factors that could affect our future operating results and
cause
actual results to vary materially from expectations include, but are not
limited
to, lack of a credit facility, dependence on key personnel, product
obsolescence, ability to increase our client base, ability to increase sales
to
our current clients, ability to generate consistent sales, technological
innovations and acceptance, competition, reliance on certain vendors and
credit
risks. If we do not experience sales increases in future periods, we will
have
to reduce our expenses and capital expenditures to maintain cash levels
necessary to sustain our operations. Our future success will depend on
increasing our revenues and reducing our expenses to enable us to regain
profitability.
OUR
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM HAS STATED IN ITS REPORT THAT
THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING
CONCERN.
We
have
limited cash resources and have a working capital deficit. Our independent
registered public accounting firm has stated in its report that there is
substantial doubt about our ability to continue as a going concern. By being
categorized in this manner, we may find it more difficult in the short term
to
either locate financing for future projects or to identify lenders willing
to
provide loans at attractive rates, which may require us to use our cash reserves
in order to expand. Should this occur, and unforeseen events also require
greater cash expenditures than expected, we could be forced to cease all
or a
part of our operations. As a result, you could lose your total
investment.
WE
MAY BE
UNABLE TO SELL DEBT OR EQUITY SECURITIES IN THE EVENT WE NEED ADDITIONAL
FUNDS
FOR OPERATIONS.
We
may
need to sell equity or debt securities in the future to provide working capital
for our operations or to provide funds in the event of future operating losses.
We cannot predict whether we will be successful in raising additional funds.
We
have no commitments, agreements or understandings regarding additional
financings at this time, and we may be unable to obtain additional financing
on
satisfactory terms or at all. The terms of the Financing and of the Additional
Financing restrict our ability to raise additional funds, and there can be
no
assurance that we will be able to obtain a waiver of such restrictions. If
we
were to raise additional funds through the issuance of equity or convertible
debt securities, the current shareholders could be substantially diluted
and
those additional securities could have preferences and privileges that current
security holders do not have.
WE
COULD
LOSE THE SERVICES OF ONE OR MORE OF OUR EXECUTIVE OFFICERS OR KEY EMPLOYEES
AND
WE ARE CURRENTLY OPERATING WITHOUT A PERMANENT CHAIRMAN OR CHIEF EXECUTIVE
OFFICER OR PERMANENT CHIEF FINANCIAL OFFICER.
Our
executive officers and key employees are critical to our business because
of
their experience and acumen. In particular, the loss of the services of Mark
K.
Levenick, our Interim Chief Executive Officer and President of our operating
subsidiaries, could have a material adverse effect on our operations. In
December 2004, James T. Rash, the former Chairman of the Board, Chief Executive
and Financial Officer, died. We have named Mark K. Levenick as Interim Chief
Executive Officer but no permanent Chairman or Chief Executive Officer has
been
hired or appointed as of the date hereof. We engaged Robert D. Peltier as
Interim Chief Financial Officer on a consulting basis in February 2005. Our
future success and growth also depends on our ability to continue to attract,
motivate and retain highly qualified employees, including those with the
expertise necessary to operate our business. These officers and key personnel
may not remain with us, and their loss may harm our development of technology,
our revenues and cash flows. Concurrently, the addition of these personnel
by
our competitors would enable our competitors to compete more effectively
by
diverting customers from us and facilitating more rapid development of their
technology.
OUR
OPERATING RESULTS MAY FLUCTUATE FOR A VARIETY OF REASONS, MANY OF WHICH ARE
BEYOND OUR CONTROL.
Our
business strategies may fail and our quarterly and annual operating results
may
vary significantly from period to period depending on:
|
•
|
the
collection of outstanding receivables,
|
|
•
|
the
volume and timing of orders received during the period,
|
|
•
|
the
timing of new product introductions by us and our
competitors,
|
|
•
|
the
impact of price competition on our selling prices,
|
|
•
|
the
availability and pricing of components for our products,
|
|
•
|
seasonal
fluctuations in operations and sales,
|
|
•
|
changes
in product or distribution channel mix,
|
|
•
|
changes
in operating expenses,
|
|
•
|
changes
in our strategy,
|
|
•
|
personnel
changes and general economic factors,
|
|
•
|
the
dependence of our strong working relationships with our significant
customers, and
|
|
•
|
the
possibility of a terrorist attack or armed conflict could harm
our
business.
|
Many
of
these factors are beyond our control. We are unable to forecast the volume
and
timing of orders received during a particular period. Customers generally
order
our products on an as-needed basis, and accordingly we have historically
operated with a relatively small backlog. We experience seasonal variances
in
our operations. Accordingly, operating results for any particular quarter
may
not be indicative of the results for the future quarter or for the
year.
Even
though it is difficult to forecast future sales and we maintain a relatively
small level of backlog at any given time, we generally must plan production,
order components and undertake our development, sales and marketing activities
and other commitments months in advance. Accordingly, any shortfall in sales
in
a given period may adversely impact our results of operations if we are unable
to adjust expenses or inventory during the period to match the level of sales
for the period.
WE
HAVE
LIMITED MANAGEMENT AND OTHER RESOURCES TO ADDRESS THE ISSUES CONFRONTING
US.
The
problems and issues facing our business could significantly strain our limited
personnel, management, financial controls and other resources. Our ability
to
manage any future complications effectively will require us to hire new
employees, to integrate new management and employees into our overall operations
and to continue to improve our operational, financial and management systems,
controls and facilities. Our failure to handle the issues we face effectively,
including any failure to integrate new management controls, systems and
procedures, could materially adversely affect our business, results of
operations and financial condition.
THE
MARKETS FOR OUR PRODUCTS ARE VERY COMPETITIVE AND, IF WE FAIL TO ADAPT OUR
PRODUCTS AND SERVICES, WE WILL LOSE CUSTOMERS AND FAIL TO COMPETE
EFFECTIVELY.
The
markets for our products are characterized by intense competition. We expect
the
intensity of competition to increase. Large manufacturers such as Diebold
Incorporated, NCR, Triton Systems (a division of Dover Corporation) and Tranax
(a distributor of Hyosung) compete directly with us in the quickly growing,
low-cost ATM market. Our direct competitors for our TACC products include
FireKing Industries, Armor Safe Company and AT Systems. Many smaller
manufacturers of ATMs, electronic safes and kiosks are also found in the
market.
Sales of Sentinel cash security systems are currently to a small number of
customers. The loss of a single customer could have an adverse affect on
TACC
sales.
Competition
is likely to result in price reductions, reduced margins and loss of market
share, any one of which may harm our business. Competitors vary in size,
scope
and breadth of the products and services offered. We may encounter competition
from competitors who offer more functionality and features. In addition,
we
expect competition from other established and emerging companies, as the
market
continues to develop, resulting in increased price sensitivity for our
products.
To
compete successfully, we must adapt to a rapidly changing market by continually
improving the performance, features and reliability of our products and
services, or else our products and services may become obsolete. We may also
incur substantial costs in modifying our products, services or infrastructure
in
order to adapt to these changes.
Many
of
our competitors have greater financial, technical, marketing and other resources
and greater name recognition than we do. In addition, many of our competitors
have established relationships with our current and potential customers and
have
extensive knowledge of our industry. In the past, we have lost potential
customers to competitors. In addition, current and potential competitors
have
established or may establish cooperative relationships among themselves or
with
third parties to increase the ability of their products to address customer
needs. Accordingly, it is possible that new competitors or alliances among
competitors may develop and rapidly acquire significant market
share.
OUR
FUTURE GROWTH WILL DEPEND UPON OUR ABILITY TO CONTINUE TO MANUFACTURE, MARKET
AND SELL PRODUCTS WITH COST-EFFECTIVE CHARACTERISTICS, DEVELOP AND PENETRATE
NEW
MARKET SEGMENTS, EXPAND INTERNATIONALLY, AND ENTER AND DEVELOP NEW
MARKETS.
We
must
design and introduce new products with enhanced features, develop close
relationships with the leading market participants and establish new
distribution channels in each new market or market segment in order to grow.
We
are unable to predict whether any of our new products will gain acceptance
in
the market. Additionally, some of the transactions currently initiated through
ATMs could be accomplished in the future using emerging technologies, such
as
wireless devices, cellular telephones, debit cards and smart cards. We may
be
unable to develop or gain market acceptance of products supporting these
technologies. Our failure to successfully offer products supporting these
emerging technologies could harm our business. Because the protection of
our
proprietary technology is limited, our proprietary technology may be used
by
others without our consent, which may reduce our ability to compete and may
divert resources.
Our
success depends upon proprietary technology and other intellectual property
rights. We must be able to obtain patents, maintain trade-secret protection
and
operate without infringing on the intellectual property rights of others.
We
have relied on a combination of copyright, trade secret and trademark laws
and
nondisclosure and other contractual restrictions to protect proprietary
technology. Our means of protecting intellectual property rights may be
inadequate. It is possible that patents issued to or licensed by us will
be
successfully challenged. We may unintentionally infringe patents of third
parties or we may have to alter our products or processes or pay licensing
fees
or cease certain activities to take into account patent rights of third parties,
thereby causing additional unexpected costs and delays that may adversely
affect
our business.
A
key
element in our future growth is to expand our operations into selected
international areas. International growth is subject to a number of risks
inherent in any business operating in foreign countries including, but not
limited to (i) political, social, and economic instability, (ii) modification
or
renegotiating contracts, (iii) duration and collectability of receivables,
and
(iv) other forms of government regulation which are beyond our control. As
a
result of international growth, we could, at any one time, have a significant
amount of revenues generated by activity in a particular country. Therefore,
our
results of operations could be susceptible to adverse events beyond our control
that occur in the particular country in which we are conducting
business.
In
addition, competitors may obtain additional patents and proprietary rights
relating to products or processes used in, necessary to, competitive with
or
otherwise related to, those we use. The scope and validity of these patents
and
proprietary rights, the extent to which we may be required to obtain licenses
under these patents or under other proprietary rights and the cost and
availability of licenses are unknown, but these factors may limit our ability
to
market our existing or future products.
We
also
rely upon unpatented trade secrets. Other entities may independently develop
substantially the same proprietary information and techniques or otherwise
gain
access to our trade secrets or disclose such technology. In addition, we
may be
unable to meaningfully protect our rights to our unpatented trade secrets.
In
addition, certain previously filed patents relating to our ATM products and
TACC
products have expired.
Litigation
may be necessary to enforce our intellectual property rights, protect trade
secrets, determine the validity and scope of the proprietary rights of others,
or defend against claims of infringement or invalidity. Litigation may result
in
substantial costs and diversion of resources, which may limit our ability
to
develop new services and compete for customers.
IF
THE
ABILITY TO CHARGE ATM FEES IS LIMITED OR PROHIBITED, ATMS MAY BECOME LESS
PROFITABLE AND DEMAND FOR OUR ATM PRODUCTS COULD DECREASE.
The
growth in the market and in our sales of ATMs has been due, in part, to the
ability of ATM owners to charge consumers a surcharge fee for the use of
the
ATM. The market trend to charge fees resulted from the elimination in April
1996
by the Cirrus and Plus national ATM networks of their policies against the
imposition of surcharges on ATM transactions.
ATM
owners are subject to federal and state regulations governing consumers’ rights
with respect to ATM transactions. Some states and municipalities have enacted
legislation in an attempt to limit or eliminate surcharging, and similar
legislation has been introduced in Congress. In addition, it is possible
that
one or more of the national ATM networks will reinstate their former policies
prohibiting surcharging. The adoption of any additional regulations or
legislation or industry policies limiting or prohibiting ATM surcharges could
decrease demand for our products.
ANY
INTERRUPTION OF OUR MANUFACTURING, WHETHER AS A RESULT OF DAMAGED EQUIPMENT,
NATURAL DISASTERS OR OTHERWISE, COULD INJURE OUR BUSINESS.
All
of
our manufacturing occurs at our facility in Carrollton, Texas. Our manufacturing
operations utilize equipment that, if damaged or otherwise rendered inoperable,
would result in the disruption of our manufacturing operations. Although
we
maintain business interruption insurance, our business would be injured by
any
extended interruption of the operations at our manufacturing facility. This
insurance may not continue to be available on reasonable terms or at all.
Our
facilities are also exposed to risks associated with the occurrence of natural
disasters, such as hurricanes and tornadoes.
IF
WE
RELEASE PRODUCTS CONTAINING DEFECTS, WE MAY NEED TO HALT FURTHER SALES AND/OR
SERVICES UNTIL WE FIX THE DEFECTS, AND OUR REPUTATION WOULD BE
HARMED.
We
provide a limited warranty on each of our products covering manufacturing
defects and premature failure. While we believe that our reserves for warranty
claims are adequate, we may experience increased warranty claims. Our products
may contain undetected defects which could result in the improper dispensing
of
cash or other items. Although we have experienced only a limited number of
claims of this nature to date, these types of defects may occur in the future.
In addition, we may be held liable for losses incurred by end users as a
result
of criminal activity which our products were intended to prevent, or for
any
damages suffered by end users as a result of malfunctioning or damaged
components.
WE
REMAIN
LIABLE FOR ANY PROBLEMS OR CONTAMINATION RELATED TO OUR FUEL MONITORING
UNITS.
Although
we discontinued the production and distribution of our fuel monitoring units
more than five years ago, those units which are still in use are subject
to a
variety of federal, state and local laws, rules and regulations governing
storage, manufacture, use, discharge, release and disposal of product and
contaminants into the environment or otherwise relating to the protecting
of the
environment. These regulations include, among others (i) the Comprehensive
Environmental Response, (ii) Compensation and Liability Act of 1980, (iii)
the
Resource Conservation and Recovery Act of 1976, (iv) the Oil Pollution Act
of
1990, (v) the Clean Air Act of 1970, (vi) the Clean Water Act of 1972, (vii)
the
Toxic Substances Control Act of 1976, (viii) the Emergency Planning and
Community Right-to-Know Act and (ix) the Occupational Safety and Health
Administration Act.
Our
fuel
monitoring products, by their very nature, give rise to the potential for
substantial environmental risks. If our monitoring systems fail to operate
properly, releases or discharges of petroleum and related products and
associated wastes could contaminate the environment. If there are releases
or
discharges we may be found liable under the environmental laws, rules and
regulations of the United States, state and local jurisdictions relating
to
contamination or threat of contamination of air, soil, groundwater and surface
waters. This indirect liability could expose us to a monetary liability related
to the failure of the monitoring systems to detect potential leaks in
underground storage tanks. Although we have tried to protect our business
from
environmental claims by limiting the types of services we provide, operating
pursuant to contracts designed to protect us, instituting quality control
operating procedures and, where appropriate, insuring against environmental
claims, we are unable to predict whether these measures will eliminate the
risk
of potential environmental liability entirely.
(b)
Forward-Looking Statements
This
Form
10-K contains certain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which are intended to be covered by the
safe
harbors created thereby. Investors are cautioned that all forward-looking
statements involve risks and uncertainty (including without limitation, our
future gross profit, selling, general and administrative expense, our financial
position, working capital and seasonal variances in our operations, as well
as
general market conditions). Though we believe that the assumptions underlying
the forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance
that
the forward-looking statements included in this Form 10-K will prove to be
accurate. In light of the significant uncertainties inherent in the forward-
looking statements included herein, the inclusion of such information should
not
be regarded as a representation by us or any other person that our objectives
and plans will be achieved.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY
DATA
|
Our
consolidated financial statements, notes thereto and supplementary data appear
on pages 48 through 79 in this report and are incorporated herein by
reference.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
On
March
24, 2005, we engaged Hein & Associates LLP (“Hein”) to serve as our
independent registered public accounting firm and dismissed KPMG LLP (“KPMG”).
The change in independent registered public accounting firms was approved
by the
Audit Committee of our Board of Directors and reported on a Current Report
on
Form 8-K, dated March 24, 2005. KPMG audited our financial statements for
the
fiscal year ended September 30, 2002 and for all the prior years, and Hein
audited our financial statements as of and for the fiscal years ended September
30, 2004 and 2003.
The
audit
report of KPMG on our consolidated financial statements for fiscal year ended
September 30, 2002 did not contain an adverse opinion or disclaimer of opinion,
and such audit report was not qualified or modified as to any uncertainty,
audit
scope or accounting practice.
During
fiscal 2002 and subsequent interim periods through the date we changed
independent registered public accounting firms, there were no disagreements
between us and KPMG on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedures, which
disagreements, if not resolved to the satisfaction of KPMG, would have caused
KPMG to make reference to the subject matter of the disagreement in connection
with its report. In addition, during those same periods, no reportable events,
as defined in Item 304(a)(1)(v) of Regulation S-K, occurred, and we did not
consult with Hein regarding the application of accounting principles to a
specific transaction, either completed or proposed, or the type of audit
opinion
that might be rendered on our consolidated financial statements, or any other
matters or reportable events as set forth in Item 304(a)(2) of Regulation
S-K.
(a)
Evaluation of Disclosure Controls and Procedures
Mark
K.
Levenick,
our Interim Chief Executive Officer, and Robert D. Peltier, our Interim Chief
Financial Officer, have evaluated the effectiveness of the design and operation
of our “disclosure controls and procedures”, as such term is defined in Rules
13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of
1934,
as amended (the “Exchange Act”). James T. Rash was Chief Executive and Chief
Financial Officer during the fiscal years ended 2002, 2003 and 2004. Mr.
Rash
died on December 19, 2004. Mr. Levenick was appointed Interim Chief Executive
Officer on December 22, 2004. During fiscal years 2002, 2003 and 2004, Mr.
Levenick served as Chief Operating Officer and Director of the Company, and
President and Chief Executive Officer of Tidel Engineering, L.P., the Company’s
principal operating subsidiary. In February 2005, Mr. Robert D. Peltier joined
the Company as Interim Chief Financial Officer, having had no prior affiliation
with the Company. Mr. Peltier began his assessment of disclosure controls
and
internal controls without having ever been in a position of active management
or
knowledge over transactions during fiscal years 2002, 2003
or
2004.
In
conducting our evaluation of disclosure controls and procedures, our Chief
Executive Officer and our Chief Financial Officer made inquiries with
accounting, administrative and operational personnel and reviewed the historical
facts, including the Company’s failure to file its periodic reports on a timely
basis. Our Chief Executive Officer and our Chief Financial Officer noted
that
the Company had failed to file any periodic report required to be filed under
the Exchange Act from September 30, 2002 to February 1, 2005, on which date
we
filed our Form 10-K for the fiscal year ended September 30, 2002, which was
more
than two years late. Furthermore, it was noted that this Form 10-K for the
fiscal years ended September 2003 and 2004, and the Company’s Forms 10-Q for the
quarterly periods ended December 31, 2004 and March 31, 2005 were filed on
August 1, 2005, were each at least several months delinquent. In their
evaluation, our Chief Executive Officer and our Chief Financial Officer noted
that the Company’s periodic reporting failure was caused by (1) limited
financial and personnel resources at the times such forms were due that
restricted our ability to compile our financial statements and cause such
statements to be reviewed and/or audited by an independent registered public
accounting firm when such forms were due and (2) the prolonged illness and
death
of our former Chairman, Chief Executive Officer and Chief Financial Officer
during the year ended December 31, 2004. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that the Company
had a
significant deficiency in its disclosure controls and procedures related
to
timely periodic reporting and such controls and procedures were not effective
as
of the end of the years ended September 30, 2003 and 2004.
In
February 2005, in order to remedy this deficiency the Company began implementing
new disclosure controls and procedures, which consisted of: (1) the hiring
of a
new Chief Financial Officer to oversee the Company’s financial reporting
process, (2) the establishment of a reporting timetable to file all delinquent
reports by August 1, 2005 and return to timely periodic reporting by August
19,
2005, which was submitted and approved by our Board of Directors and (3)
the
establishment of new guidelines for completion of periodic accounting and
reporting tasks. Such implementation was completed by August 19, 2005, at
which
time we resumed the timely filing of our periodic reports. As of August 19,
2005, our Chief Executive Officer and our Chief Financial Officer believe
that
this significant deficiency has been remedied.
In
addition, in a report to the Audit Committee of the Board of Directors of
the
Company dated July 28, 2005, the Company’s independent registered public
accountants noted that the following significant deficiencies in our internal
controls and procedures were discovered during the course of their audit:
(1)
established credit policies were overridden on occasion by executive management
based on their business judgment at that time, (2) bookkeeping at the corporate
level was not administrated on a timely basis during 2003 and 2004 and (3)
the
Company’s accounts payable supervisor had access to the check signature and the
ability to prepare check runs without proper review prior to distribution.
In
examining the significant deficiencies, both the Company and our independent
registered public accountants performed expanded reviews of our procedures
and
mitigating controls to determine whether such deficiencies constituted a
material weakness. In the expanded reviews, both the Company and our independent
registered public accountants noted the following controls were in place
prior
to the audit of our financial statements for the fiscal years ended September
30, 2003 and 2004: (1) Management of the Company consistently performed weekly
and monthly reviews of actual and budgeted results during the periods, (2)
the
Audit Committee of the Board of Directors of the Company provided additional
oversight with respect to financial reporting beginning immediately after
the
death of our Chief Executive and Chief Financial Officer in December 2004,
and
(3) the Company hired a new Chief Financial Officer in February 2005 to oversee
the Company’s financial reporting process. We collectively concluded that since
such additional controls were in place the Company was able to
conclude that none of the deficiencies constituted a material weakness that
resulted in more than a remote likelihood that a material misstatement of
the
annual or interim financial statements would not be prevented or detected.
Further, the report of the independent registered public accountants indicated
no inappropriate or unauthorized activity during the periods
reviewed.
In
August
2005, the Company began implementing revised internal controls and procedures
to
correct the significant deficiencies in our internal controls and procedures
noted by our independent registered public accountants, which consisted of:
(1)
the establishment of new credit approval policies, including Board-level
approval for certain amounts, (2) the establishment new guidelines for timely
administration of bookkeeping tasks at the corporate level, including the
implementation of monthly, quarterly and annual closing schedules and (3)
removal of check signature access from the Company’s accounts payable
supervisor. Such implementation was completed by August 30, 2005, and as
of that
date our Chief Executive Officer and our Chief Financial Officer believe
that
these significant internal controls and procedures deficiencies no longer
exist.
A
significant deficiency is a control deficiency, or a combination of control
deficiencies, that adversely affect the entity’s ability to authorize, initiate,
record, process or report external financial data reliably in accordance
with
generally accepted accounting principles in the United States such that there
is
more than a remote likelihood that a misstatement of the entity’s annual or
interim financial statements that is more than inconsequential will not be
prevented or detected.
A
material weakness is a significant deficiency, or a combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.
A
control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there
are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations on all control systems,
no
evaluation of controls can provide absolute assurance that all errors, control
issues and instances of fraud, if any, with a company have been detected.
The
design of any system of controls is also based in part on certain assumptions
regarding the likelihood of future events, and there can be no assurance
that
any design will succeed in achieving its stated goals under all potential
future
conditions. Therefore, even those systems determined to be effective can
provide
only reasonable assurance with respect to financial statement preparation
and
presentation. Our Chief Executive Officer and our Chief Financial Officer
have
concluded that the Company’s disclosure controls and procedures are effective at
this reasonable assurance level as of August 19, 2005.
(b)
Changes in internal control over financial reporting
Following
the evaluations discussed above and the identification of significant
deficiencies, the Company took the actions and implemented the procedures
described above. There were no changes in our internal control over financial
reporting that occurred in the quarter ending September 30, 2004 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE
REGISTRANT
|
Set
forth
below are the names and ages of our directors and executive officers and
their
principal occupations at present and for the past five years. James T. Rash
was
the Chairman of the Board, Chief Executive Officer and Chief Financial Officer
during the years ended September 30, 2003 and 2004. Mr. Rash died in December
2004. There are, to our knowledge, no agreements or understandings by which
these individuals were selected. No family relationships exist between any
directors or executive officers (as such term is defined in Item 401 of
Regulation S-K), except as otherwise stated below.
Name
|
Age
|
The
Company’s Officers
|
Director
Since
|
Mark
K. Levenick
|
46
|
Interim
Chief Executive Officer, President and Chief Executive Officer
of Tidel
Engineering, L.P., and Director
|
1995
|
Michael
F. Hudson
|
53
|
Executive
Vice President, Chief Operating Officer of Tidel Engineering,
L.P.
|
2001
|
Jerrell
G. Clay
|
64
|
Director
|
1990
|
Raymond
P. Landry
|
66
|
Director
|
2001
|
Stephen
P. Griggs
|
47
|
Director
|
2002
|
Robert
D. Peltier
|
41
|
Interim
Chief Financial Officer
|
2005
|
(a)
Business Background
The
following is a summary of the business background and experience of each
of the
persons named above:
MARK
K.
LEVENICK has been our Interim Chief Executive Officer since December 2004
and
has served as Chief Executive Officer of our principal operating subsidiary,
Tidel Engineering, L.P., for in excess of five years. Mr. Levenick has been
a
Director since May 1995. He holds a Bachelor of Science degree from the
University of Wisconsin at Whitewater. Mr. Levenick also had previously acted
as
our Interim Chief Executive Officer from February 2002 to August 2002, during
James T. Rash’s medical leave of absence.
MICHAEL
F. HUDSON is our Executive Vice President and Chief Operating Officer of
our
principal operating subsidiary. Mr. Hudson served as a Director from February
2001 through June 2005, when he resigned on June 22, 2005 in accordance with
the
terms of the Settlement Agreement (see further discussion in Part III, Item
11,
“Employment Contracts, Termination of Employment and Change of Control
Arrangements” of this Annual Report). Prior to joining us in September 1993, he
held various positions with the Southland Corporation and its affiliates
for
more than 18 years, concluding as President and Chief Executive Officer of
MoneyQuick, a large non-bank ATM network. Mr. Hudson currently serves on
the
Board of Directors and Executive Committee of the Electronic Funds Transfer
Association and the International Board of Directors and National Advisory
Board
of the Automated Teller Machine Industry Association.
JERRELL
G. CLAY has served as a Director since December 1990 and is Chief Executive
Officer of 3 Mark Financial, Inc., an independent life insurance marketing
organization, and has served as president of one of its predecessors for
in
excess of five years. Mr. Clay also serves as a member of the Independent
Marketing Organization’s Advisory Committee of Protective Life Insurance Company
of Birmingham, Alabama.
RAYMOND
P. LANDRY has served as a Director since February 2001 and has been engaged
in
private business consulting to various companies, including some other entities
in the ATM industry, for in excess of five years. He has served as a senior
executive or financial officer with three publicly traded companies and several
private concerns over the last 30 years. Prior to that time, he was employed
by
the consulting group of Arthur Andersen & Co. (now known as Accenture) for
10 years. Mr. Landry holds a Bachelor of Science degree in Business
Administration from Louisiana State University.
STEPHEN
P. GRIGGS has served as a Director since June 2002 and has been primarily
engaged in managing his personal investments since 2000. From 1988 to 2000,
Mr.
Griggs held various positions, including President and Chief Operating Officer,
with RoTech Medical Corporation, a Nasdaq-traded company. He holds a Bachelor
of
Science degree in Business Management from East Tennessee State University
and a
Bachelor of Science degree in Accounting from the University of Central Florida.
Mr. Griggs was appointed to the Board of Directors during 2002 to fill the
vacancy created by the mid-term resignation of a former director.
ROBERT
D.
PELTIER has served as Interim Chief Financial Officer since February 2005,
and
has over fourteen years of various accounting and financial experience. Since
1997, he served in several financial capacities with Horizon Offshore
Contractors, Inc., including Vice President of Finance. He has over seven
years
experience with drafting and filing financial reports. Mr. Peltier earned
his
Bachelor of Science Degree in Accounting at the University of North
Texas.
Mr.
Peltier, our Interim Chief Financial Officer, is the nephew of Mr. Landry,
one
of our directors.
The
Company has a separately designated standing Audit Committee established
in
accordance with Section 3(a)(58)(A) of the Exchange Act, which is responsible
for reviewing the financial information which will be provided to shareholders
and others, the systems of internal controls, which management and the Board
of
Directors have established, and the financial reporting processes. The Audit
Committee consists of Messrs. Landry, Griggs, and Clay. The Audit Committee
held
no meetings during the last fiscal years 2004 and 2003, respectively. During
the
fiscal year 2005, the Audit committee has had five meetings as of July 31,
2005.
The Board of Directors has determined that Mr. Landry is an “audit committee
financial expert” as defined in Item 401(h) of Regulation S-K. Except as
identified in the following paragraph, each member of the Audit Committee
is an
“independent director” as defined in Rule 4200 of the Marketplace Rules of the
National Association of Securities Dealers, Inc. (“NASD”).
Subsequent
to the death of Jim Rash, former Chairman, CEO and CFO of the Company, a
meeting
of the Board of Directors was held to address the immediate needs of corporate
governance. At this meeting, Ray Landry was requested by the Board to provide
the Company with guidance in the areas of Financial Management and oversight
in
the negotiations with NCR and the sale of the Cash Security division. On
December 28, 2005, Mr. Landry entered into a consulting arrangement with
the
Company to provide those services enumerated above. Since December 28, 2005,
Landry has performed financial oversight and financial and transactional
consultation for the Company, and has been paid on an hourly basis.
The
Compensation Committee is responsible for reviewing the performance and
development of management in achieving corporate goals and objectives and
ensuring that the Company’s senior executives are compensated effectively in a
manner consistent with the Company’s strategy, competitive practice, and the
requirements of the appropriate regulatory bodies. Toward that end, the
Compensation Committee oversees all of the Company’s compensation, equity and
employee benefit plans and payments. The Compensation Committee held one
meeting
each year during the last fiscal years 2004 and 2003, respectively. Each
of the
members of the Compensation Committee is an “independent director” as defined in
Rule 4200 of the Marketplace Rules of the NASD, and an “outside director” as
defined in Section 162(m) of the Internal Revenue Code of 1986.
In
April
of 2002, we formed a special committee of the Board of Directors to evaluate
any
potential sale of the Company and/or its divisions, any re-financing, or
investment banking relationships and to oversee all mergers and acquisitions
activity. This committee currently consists of all outside
directors.
The
Company has adopted a code of conduct and ethics that applies to the Company’s
Chief Executive Officer, Chief Financial Officer and other persons performing
similar functions. This Code of Conduct and Ethics is filed as an exhibit
to
this Annual Report. Our Code addresses conflicts of interest, usurpation
of
corporate opportunities, the protection and proper use of company assets,
confidentiality, compliance with laws, rules, and regulations, prompt reporting
of any illegal or improper activity to an officer, supervisor, manager, or
other
appropriate personnel of the Company.
(b)
Section 16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires our directors and
officers, and persons who own more than 10% of a registered class of our
equity
securities, to file reports of ownership and changes in ownership of such
equity
securities with the Securities and Exchange Commission (“SEC”). Such entities
are also required by SEC regulations to furnish us with copies of all Section
16(a) forms filed.
Based
solely on a review of the copies of Forms 3, 4 and 5 furnished to us, and
any
amendments thereto, and any written representations with respect to the
foregoing, we believe that our directors and officers, and greater than 10%
beneficial owners, have complied with all Section 16(a) filing
requirements.
The
following table sets forth the amount of all cash and other compensation
we have
paid for services rendered during the fiscal years ended September 30, 2004,
2003, 2002 and 2001 to James T. Rash, the former Chairman of the Board and
Chief
Executive and Financial Officer, Mark K. Levenick, the current Interim Chief
Executive Officer, and our four most highly compensated Executive Officers
(as
such term is defined in Item 402 of Regulation S-K) other than the
CEO.
Summary
Compensation Table
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
|
|
|
|
|
|
|
Annual
Compensation
|
|
Awards
|
|
|
|
|
|
|
|
|
|
|
|
Other
Annual
|
|
Securities
|
|
All
Other
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
Underlying
|
|
Compensation
|
|
Name
and Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
(*)
|
|
Options
|
|
($)(1)
|
|
James
T. Rash(3)
|
|
|
2004
|
|
$
|
236,250
|
|
$
|
—
|
|
$
|
21,811
|
|
|
—
|
|
$
|
—
|
|
Former
Chief Executive
|
|
|
2003
|
|
|
225,000
|
|
|
18,700
|
|
|
20,793
|
|
|
—
|
|
|
—
|
|
and
Financial
|
|
|
2002
|
|
|
225,000
|
|
|
—
|
|
|
*
|
|
|
—
|
|
|
9,875
|
|
Officer
|
|
|
2001
|
|
|
225,000
|
|
|
—
|
|
|
*
|
|
|
—
|
|
|
8,880
|
|
Mark
K. Levenick(3)
|
|
|
2004
|
|
$
|
262,500
|
|
$
|
—
|
|
$
|
18,722
|
|
|
—
|
|
$
|
—
|
|
Interim
Chief Executive
|
|
|
2003
|
|
|
262,500
|
|
|
—
|
|
|
21,172
|
|
|
—
|
|
|
—
|
|
Officer
|
|
|
2002
|
|
|
262,500
|
|
|
—
|
|
|
*
|
|
|
—
|
|
|
4,480
|
|
|
|
|
2001
|
|
|
262,500
|
|
|
—
|
|
|
*
|
|
|
—
|
|
|
4,480
|
|
Michael
F. Hudson
|
|
|
2004
|
|
$
|
204,750
|
|
$
|
—
|
|
$
|
17,522
|
|
|
—
|
|
$
|
8,257
|
|
Executive
Vice President
|
|
|
2003
|
|
|
204,750
|
|
|
—
|
|
|
15,492
|
|
|
—
|
|
|
8,257
|
|
|
|
|
2002
|
|
|
204,750
|
|
|
—
|
|
|
*
|
|
|
—
|
|
|
8,257
|
|
|
|
|
2001
|
|
|
204,750
|
|
|
—
|
|
|
*
|
|
|
—
|
|
|
—
|
|
M.
Flynt Moreland
|
|
|
2004
|
|
$
|
168,269
|
|
$
|
—
|
|
$
|
12,673
|
|
|
—
|
|
$
|
—
|
|
Senior
Vice President —
|
|
|
2003
|
|
|
150,000
|
|
|
|
|
|
11,841
|
|
|
—
|
|
|
—
|
|
Research
& Development
|
|
|
2002
|
|
|
150,000
|
|
|
—
|
|
|
*
|
|
|
—
|
|
|
—
|
|
of
Tidel Engineering, L.P.
|
|
|
2001
|
|
|
150,000
|
|
|
—
|
|
|
*
|
|
|
—
|
|
|
—
|
|
Troy
D. Richard(2)
|
|
|
2004
|
|
$
|
130,000
|
|
$
|
—
|
|
$
|
17,342
|
|
|
—
|
|
$
|
—
|
|
Senior
Vice President —
|
|
|
2003
|
|
|
130,000
|
|
|
—
|
|
|
15,492
|
|
|
—
|
|
|
—
|
|
Operations
of Tidel
|
|
|
2002
|
|
|
130,000
|
|
|
—
|
|
|
*
|
|
|
50,000
|
|
|
—
|
|
Engineering,
L.P.
|
|
|
2001
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
__________
*
|
—
|
We
routinely give certain of our officers benefits, the amounts of
which are
customary in the industry. The aggregate dollar value of such benefits
paid to any named executive officer did not exceed the lesser of
$50,000,
or 10%, of the total annual salary and bonus during each of the
fiscal
years ended September 30, 2004, 2003, 2002 and 2001.
|
|
|
|
(1)
|
—
|
These
amounts relate to the dollar value of insurance premiums we have
paid
during the covered fiscal years with respect to life insurance
for the
benefit of these named executive officers.
|
|
|
|
(2)
|
—
|
Hired
effective June 26, 2002 to replace Gene Moore, who died May 28,
2002.
|
|
|
|
(3)
|
—
|
Mr.
Rash died December 19, 2004. Mr. Levenick was appointed Interim
Chief
Executive Officer on December 22,
2004.
|
Option/SAR
Grants in Last Fiscal Year
We
did
not grant any stock options or stock appreciation rights to any of our executive
officers during the fiscal year ended September 30, 2004, during the fiscal
year
ended September 30, 2003, or in subsequent periods.
Aggregated
Option Exercises in Last Fiscal Year and Option Values at Fiscal Year
End
The
following tables provide (i) the number of options exercisable by the respective
optionees, and (ii) the respective valuations at September 30, 2004 and
September 30, 2003.
|
|
|
|
|
|
Number
of
|
|
|
|
|
|
|
|
|
|
Securities
Underlying
|
|
Value
of Unexercised
|
|
|
|
Shares
|
|
|
|
Unexercised
Options at
|
|
In-the-Money
Options at
|
|
|
|
acquired
|
|
Value
|
|
September
30, 2004
|
|
September
30, 2004
|
|
|
|
on
exercise
|
|
realized
|
|
(Shares)
|
|
($)(2)
|
|
Name
|
|
(#)
|
|
($)
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
|
James
T. Rash(1)
|
|
|
—
|
|
|
—
|
|
|
175,000
|
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Mark
K. Levenick
|
|
|
—
|
|
|
—
|
|
|
325,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Michael
F. Hudson
|
|
|
—
|
|
|
—
|
|
|
150,500
|
|
|
—
|
|
|
—
|
|
|
—
|
|
M.
Flynt Moreland
|
|
|
—
|
|
|
—
|
|
|
42,400
|
|
|
10,000
|
|
|
—
|
|
|
—
|
|
Troy
D. Richard
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
50,000
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Number
of
|
|
|
|
|
|
|
|
|
|
Securities
Underlying
|
|
Value
of Unexercised
|
|
|
|
Shares
|
|
|
|
Unexercised
Options at
|
|
In-the-Money
Options at
|
|
|
|
acquired
|
|
Value
|
|
September
30, 2003
|
|
September
30, 2003
|
|
|
|
on
exercise
|
|
realized
|
|
(Shares)
|
|
($)(2)
|
|
Name
|
|
(#)
|
|
($)
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
|
James
T. Rash(1)
|
|
|
—
|
|
|
—
|
|
|
137,500
|
|
|
37,500
|
|
$
|
—
|
|
$
|
—
|
|
Mark
K. Levenick
|
|
|
—
|
|
|
—
|
|
|
307,500
|
|
|
37,500
|
|
|
—
|
|
|
—
|
|
Michael
F. Hudson
|
|
|
—
|
|
|
—
|
|
|
125,500
|
|
|
25,000
|
|
|
—
|
|
|
—
|
|
M.
Flynt Moreland
|
|
|
—
|
|
|
—
|
|
|
52,400
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Troy
D. Richard
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
50,000
|
|
|
—
|
|
|
—
|
|
____________
(1)
|
Mr.
Rash died December 19, 2004. The 175,000 options exercisable as
of
September 30, 2004, will expire on December 30,
2005.
|
(2)
|
Based
on the closing price of our common stock of $0.59 and $0.32 per
share on
September 30, 2004 and 2003,
respectively.
|
Long-Term
Incentive Plans — Awards in Last Fiscal Year
We
did
not grant any awards to any of our executive officers under any long-term
incentive plans during either of the fiscal years ended September 30, 2003
or
2004.
Director
Compensation
During
the year ended September 30, 2003, each Director received $1,000 per meeting
as
compensation for his service as a member of the Board of Directors and Directors
who serve on board committees received $500 per committee meeting. During
fiscal
year ended September 30, 2004, each outside Director earned compensation
in the
amount of $3,000 per quarter, which was subsequently paid in fiscal year
2005,
with no additional compensation for committee representation.
Employment
Contracts, Termination of Employment and Change of Control
Arrangements
We
have
entered into employment agreements with Messrs. Levenick, Moreland and Richard,
which provide for minimum annual salaries of $262,500, $175,000 and $130,000,
respectively, over a three-year term ending December 2007, with certain change
of control provisions. In the event of a change of control, the executive
officers are entitled to immediate vesting of all restricted stock, performance
units, stock options, stock appreciation rights, warrants and employee benefit
plans.
On
June
22, 2005, we entered into two agreements with Mr. Hudson. The first was a
new
employment agreement that terminated his prior employment agreement and provided
for his continued employment with the Company until the earlier of December
31,
2005 or the closing of the transactions contemplated by the Asset Purchase
Agreement. Under this new employment agreement, Mr. Hudson’s duties and
compensation will continue as under his prior employment agreement.
Mr.
Hudson and the Company also entered into the Settlement Agreement, which
provided for the settlement of outstanding amounts owed by Mr. Hudson to
the
Company. In satisfaction of Mr. Hudson’s obligations to the Company, he agreed
to (i) the delivery of certain shares of the Company’s common stock held by him
for cancellation by the Company; (ii) cancellation by the Company of the
majority of the options to purchase common stock held by him; (iii) application
of certain bonuses (otherwise payable to him) to the payment of his outstanding
obligations to the Company; and (iv) release by Mr. Hudson of any and all
claims
against the Company. Mr. Hudson also resigned from the Board of Directors
of the
Company.
Compensation
Committee Interlocks and Insider Participation
The
Compensation Committee consists of Jerrell G. Clay, Stephen P. Griggs and
Raymond P. Landry. The Estate of James T. Rash, our former Chairman, Chief
Executive and Financial Officer, has a 10% ownership interest in a privately
held corporation controlled by Jerrell G. Clay.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER
MATTERS
|
The
following table sets forth as of June 30, 2005, the number of shares of common
stock beneficially owned by (i) the beneficial owners of more than 5% of
our
voting securities, (ii) each of our directors and executive officers, as
such
terms are defined in Item 402 of Regulation S-K, of the Company individually
and
(iii) by all of our current directors and the executive officers as a group.
Except as otherwise indicated, and subject to applicable community property
laws, each person has sole investment and voting power with respect to the
shares shown. Ownership information is based upon information furnished by
the
respective holders and contained in our records.
Title
of Class
|
Name
and Address of Beneficial Owner
|
Amount
and Nature of
Beneficial
Ownership
|
Percent
of
Class(1)
|
Common
stock
|
Laurus
Master Fund, Ltd
|
1,251,000(2)
|
6.1%
|
|
825
Third Avenue, 14th Floor
|
|
|
|
New
York, New York 10022
|
|
|
Common
stock
|
Alliance
Developments
|
1,180,362(3)
|
5.7%
|
|
One
Yorkdale Rd., Suite 510
|
|
|
|
North
York, Ontario M6A 3A1 Canada
|
|
|
Common
stock
|
Estate
of James T. Rash(9)
|
415,000(4)
|
2.0%
|
|
2900
Wilcrest, Suite 205
|
|
|
|
Houston,
Texas 77042
|
|
|
Common
stock
|
Mark
K. Levenick
|
390,000(5)
|
1.9%
|
|
2310
McDaniel Dr.
|
|
|
|
Carrollton,
Texas 75006
|
|
|
Common
stock
|
Jerrell
G. Clay
|
181,405
|
*
|
|
1600
Highway 6, Suite 400
|
|
|
|
Sugarland,
Texas 77478
|
|
|
Common
stock
|
M.
Flynt Moreland
|
82,400(6)
|
*
|
|
2310
McDaniel Dr.
|
|
|
|
Carrollton,
Texas 75006
|
|
|
Common
stock
|
Raymond
P. Landry
|
38,500
|
*
|
|
2900
Wilcrest, Suite 205
|
|
|
|
Houston,
Texas 77042
|
|
|
Common
stock
|
Troy
D. Richard
|
25,000(7)
|
*
|
|
2310
McDaniel Dr.
|
|
|
|
Carrollton,
Texas 75006
|
|
|
Common
stock
|
Michael
F. Hudson
|
22,700
|
*
|
|
2310
McDaniel Dr.
|
|
|
|
Carrollton,
Texas 75006
|
|
|
Common
stock
|
Stephen
P. Griggs
|
—
|
*
|
|
2900
Wilcrest, Suite 205
|
|
|
|
Houston,
Texas 77042
|
|
|
Common
stock
|
Directors
and Executive
|
632,605(8)
|
3.0%
|
|
Officers
as a group (6 persons)
|
|
|
____________
(1)
|
Based
upon 20,677,210 shares outstanding as of June 30, 2005.
|
(2)
|
The
number of shares currently beneficially owned by Laurus is reflected
above. In addition, Laurus could acquire the following additional
shares,
none of which could be acquired within 60 days of June 30, 2005:
(i)
4,750,000 shares issuable upon exercise of outstanding warrants
at an
exercise price of $0.30 per share, (ii) 22,976,625 shares issuable
upon
conversion of $6,892,988 in debt at $0.30 per share and (iii) 500,000
shares issuable upon conversion of $1,500,000 in debt at $3.00
per share.
Assuming all such shares were acquired, together with the shares
reflected
above, Laurus would hold 29,477,625 shares, representing 60% of
our
outstanding common stock. For more information, see Part II, Item
7,
“Management’s Discussion and Analysis of Financial Condition and Results
of Operations — Subsequent Events” of this Annual
Report.
|
(3)
|
Includes
150,000 shares which could be acquired within 60 days upon exercise
of
outstanding warrants at an exercise price of $0.45 per
share.
|
(4)
|
Includes
175,000 shares which could be acquired within 60 days upon exercise
of
outstanding options at exercise prices of (i) $1.25 per share as
to
100,000 shares and (ii) $1.875 per share as to 75,000
shares.
|
(5)
|
Includes
275,000 shares which could be acquired within 60 days upon exercise
of
outstanding options at exercise prices of (i) $1.25 per share as
to
100,000 shares, (ii) $1.875 per share as to 75,000 shares and (iii)
$2.50
per share as to 100,000 shares.
|
(6)
|
Includes
52,400 shares which could be acquired within 60 days upon exercise
of
outstanding options at exercise prices of (i) $1.25 per share as
to 21,600
shares, (ii) $1.875 per share as to 20,000 shares and (iii) $2.50
per
share as to 10,800 shares.
|
(7)
|
Includes
25,000 shares which could be acquired within 60 days upon exercise
of
outstanding options at exercise prices of $0.42 per
share.
|
(8)
|
Includes
the 275,000 shares referred to in Note (5) above which could be
acquired
within 60 days upon exercise of outstanding
options.
|
(9)
|
Mr.
Rash died on December 19, 2004. These shares are held in the name
of the
Estate of James T. Rash.
|
Change
in Control
WE
COMPLETED FINANCING TRANSACTIONS WITH LAURUS THAT RESULTED IN THE ISSUANCE
OF
$6,850,000 IN CONVERTIBLE NOTES AND 4,250,000 WARRANTS AND $3,350,000 IN
CONVERTIBLE NOTES AND 500,000 WARRANTS, IN 2003 AND 2004, RESPECTIVELY, AS
DESCRIBED MORE FULLY IN ITEM 7, “MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS” OF THIS ANNUAL REPORT. THESE
NOTES AND WARRANTS ARE CONVERTIBLE INTO AN AGGREGATE OF 28,226,625 SHARES
OF OUR
COMMON STOCK. IN ADDITION, ON NOVEMBER 26, 2004, WE ALSO ISSUED 1,251,000
SHARES
OF COMMON STOCK TO LAURUS IN FULL SATISFACTION OF CERTAIN FEES INCURRED IN
CONNECTION WITH THE CONVERTIBLE TERM NOTES ISSUED IN THE FINANCING. IF THESE
NOTES AND WARRANTS WERE COMPLETELY CONVERTED TO COMMON STOCK, LAURUS’S OWNERSHIP
WOULD REPRESENT APPROXIMATELY 60% OF THE COMPANY’S OUTSTANDING SHARES, WHICH
WOULD RESULT IN A CHANGE IN CONTROL OF THE COMPANY.
|
CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS
|
In
September 2000, we loaned $141,563 to Michael F. Hudson, our Executive Vice
President and Chief Operating Officer of our principal operating subsidiary,
pursuant to a promissory note maturing October 1, 2002, and bearing interest
at
10% per annum. During the year ended September 30, 2001, we loaned an additional
$225,000 to Mr. Hudson pursuant to a promissory note maturing October 1,
2002,
and bearing interest at 10% per annum. In June of 2005, pursuant to the terms
of
the Settlement Agreement, these loans were satisfied. See Part III, Item
11,
“Employment Contracts, Termination of Employment and Change of Control
Arrangements” of this Annual Report.
During
the year ended September 30, 2001, we loaned $75,625 to Eugene Moore, our
Senior
Vice President, in a promissory note maturing October 1, 2002, and bearing
interest at 10% per annum. The note from Mr. Moore was secured by a pledge
of
50,000 shares of our common stock. The note related to the exercise of certain
stock option agreements. Mr. Moore died May 28, 2002. We subsequently forgave
the remaining unpaid balance of $75,625 in exchange for the return of the
50,000
shares of our common stock.
James
T.
Rash, our Chairman and CEO, had outstanding promissory notes due to us in
the
aggregate amount of $1,143,554, bearing interest at 10% per annum. The notes
matured on September 30, 2004 and January 14, 2005. Mr. Rash died December
19,
2004. These notes were not repaid by Mr. Rash upon maturity. We also issued
a
convertible note in the amount of $100,000 payable to a private company
controlled by Mr. Rash, in connection with the Financing, which was paid
in full
in March 2004. The Board of Directors approved the transfer of a key-man
life
insurance policy on the life of Mr. Rash in the amount of $1,000,000 to Mr.
Rash
in 2002, in connection with Mr. Rash’s then pending retirement. The proceeds
were assigned as collateral for outstanding promissory notes totaling a
principal balance of $1,143,554 plus accrued interest from Mr. Rash in the
amount of $334,980. Proceeds of $1,009,227 were received from the insurance
policy in February of 2005 and were applied to the principal amount of the
notes. Mr. Rash also received bonuses totaling $350,000, of which $134,327
was
applied to the remaining principal balance of the notes. The accrued interest
was charged to bad debt expense during fiscal 2004.
From
1994
to 1997, we had provided certain office space and administrative services
to two
privately held entities with which Mr. Rash previously had an affiliation.
The
entities are indebted to us in the aggregate amount of $215,866, such amount
being the largest aggregate amount of indebtedness outstanding at any time
during the fiscal year ended September 30, 2002. During the fiscal year ended
September 30, 2002, we wrote off $182,492 deemed to be uncollectible. We
wrote
off the remaining balance of $33,374 during the fiscal year 2003.
From
1997
to 1999, we had provided certain office space and administrative services
to a
privately held corporation in which Mr. Rash and Jerrell G. Clay, one of
our
Directors, each have a greater than 10% ownership interest and in which Mr.
Clay
is an executive officer.
Robert
D.
Peltier was appointed Interim Chief Financial Officer in February 2005; and
he
is the nephew of Raymond P. Landry, one of our current directors.
Leonard
L. Carr, one of our vice presidents, is the son-in-law of Mr. Rash, our former
CEO, CFO and Chairman of the Board. Mr. Carr has a three-year contract, expiring
on December 31, 2007, with certain change of control provisions. Mr. Carr’s
salary was $116,200, $112,000 and $106,400 for the years 2004, 2003 and 2002,
respectively.
|
PRINCIPAL
ACCOUNTING FEES AND
SERVICES
|
(a)
Audit Fees
The
aggregate fees billed by Hein & Associates LLP for professional services
rendered for (i) the audit of our annual financial statements set forth in
the
Annual Report on Form 10-K for the fiscal year ended September 30, 2004 and
fiscal year ended September 30, 2003, and (ii) the reviews of interim financial
statements included in the Quarterly Reports on Form 10-Q for the quarter
ended
December 31, 2004 and quarter ended March 31, 2005, were approximately
$400,000.
(b)
Other Audit-Related Fees
There
were no other audit-related fees incurred during the fiscal year ended September
30, 2004 and 2003.
(c)
Tax Fees
The
aggregate fees billed by Hein & Associates LLP for tax services for the
fiscal year ended September 30, 2004 were $16,000. The aggregate fees billed
by
KPMG LLP for tax services were $17,800 and $42,900, for the fiscal years
ended
September 30, 2003 and 2002, respectively.
(d)
All Other Fees
There
were no fees for other professional services rendered during the fiscal years
ended September 30, 2004 and 2003.
Our
Audit
Committee has advised us that it has determined that the non-audit services
rendered by Hein & Associates LLP during the most recent fiscal year are
compatible with maintaining the independence of such auditors.
The
Audit
Committee’s policy has previously been to approve all professional fees
associated with audit, tax and audit-related work proposed to us by Hein
&
Associates LLP and KPMG LLP upon completion of the work. However, we changed
the
policy effective July 1, 2004, to require the Audit Committee to pre-approve
all
professional fees associated with audit, tax and audit-related services as
they
are proposed to us by Hein & Associates LLP and other professional service
firms. The Audit Committee approved of 100% of the services described in
each of
sections A—D above pursuant to 17 CFR 210.2-01(C)(7)(i)(C).
|
FINANCIAL
STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM
8-K
|
Documents
Filed
Financial
Statements and Financial Statement Schedules
Our
audited consolidated financial statements and related financial statement
schedules and the report of an independent registered public accounting firm
as
required by Item 8 of Form 10-K and Regulation S-X are filed as a part of
this
Annual Report, as set forth in the accompanying Index to Financial Statements.
Such audited financial statements and related financial statement schedules
include, in the opinion of our management, all required disclosures in the
accompanying notes.
Consolidated
Financial Statements of Tidel Technologies, Inc. and
Subsidiaries
Reports
of Independent Registered Public Accounting Firms
Consolidated
Balance Sheets — September 30, 2004 and 2003
Consolidated
Statements of Operations for the years ended September 30, 2004, 2003 and
2002
Consolidated
Statements of Comprehensive Income (Loss) for the years ended September 30,
2004, 2003 and 2002
Consolidated
Statements of Shareholders’ Equity (Deficit) for the years ended September 30,
2004, 2003 and 2002
Consolidated
Statements of Cash Flows for the years ended September 30, 2004, 2003 and
2002
Notes
to
Consolidated Financial Statements
Schedule
I Valuation and Qualifying Accounts — as filed as part of this Annual Report on
Form 10-K
Exhibits
The
Exhibits required by Item 601 of Regulation S-K and Regulation S-X are filed
as
a part of this Report, and are listed in the accompanying Index to
Exhibits.
|
Page
|
CONSOLIDATED
FINANCIAL STATEMENTS OF TIDEL TECHNOLOGIES, INC. AND
SUBSIDIARIES
|
|
|
42
|
|
44
|
|
45
|
|
46
|
|
47
|
|
48
|
|
49
|
|
68
|
All
other
schedules are omitted because they are not required, are not applicable or
the
required information is presented elsewhere herein.
The
Board
of Directors
Tidel
Technologies, Inc.:
We
have
audited the consolidated 2004 and 2003 financial statements of Tidel
Technologies, Inc. and subsidiaries as listed in the accompanying index.
In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedules
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule 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. The Company has determined
that it
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. 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 Tidel Technologies, Inc.
and
subsidiaries as of September 30, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the two-year period
ended September 30, 2004 in conformity with accounting principles generally
accepted in the United States of America. 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.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has suffered recurring losses from operations and
has an
accumulated deficit as of September 30, 2004, items that raise substantial
doubt
about the entity’s ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty.
/s/
HEIN & ASSOCIATES LLP
|
|
|
|
Houston,
Texas
|
|
July
26, 2005
|
|
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors
Tidel
Technologies, Inc.:
We
have
audited the accompanying consolidated statements of operations, comprehensive
income (loss), shareholders’ equity (deficit), and cash flows of Tidel
Technologies, Inc. and subsidiaries for the year ended September 30, 2002.
These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit..
We
conducted our audit 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 audit provides a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the results of operations and the cash flows of
Tidel
Technologies, Inc. and subsidiaries for the year ended September 30, 2002,
in
conformity with U.S. generally accepted accounting principles.
/s/
KPMG LLP
|
|
|
|
Houston,
Texas
|
|
January
10, 2003, except as to the fifth
|
|
paragraph
of Note 16, which is as of
|
|
January
28, 2005
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
SEPTEMBER
30,
|
|
|
|
2004
|
|
2003
|
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
258,120
|
|
$
|
915,097
|
|
Restricted
cash
|
|
|
—
|
|
|
2,200,000
|
|
Trade
accounts receivable, net of allowance of approximately $1,076,000
and
$847,000, at September 30, 2004 and 2003, respectively
|
|
|
3,310,293
|
|
|
2,453,757
|
|
Notes
Receivable and Other Receivables
|
|
|
1,003,723
|
|
|
272,790
|
|
Inventories,
net of reserve for obsolete inventory
|
|
|
4,783,459
|
|
|
5,461,870
|
|
Prepaid
expenses and other
|
|
|
292,730
|
|
|
469,514
|
|
Total
current assets
|
|
|
9,648,325
|
|
|
11,773,028
|
|
Property,
plant and equipment, at cost
|
|
|
5,421,889
|
|
|
5,186,068
|
|
Accumulated
depreciation
|
|
|
(4,988,203
|
)
|
|
(4,474,364
|
)
|
Net
property, plant and equipment
|
|
|
433,686
|
|
|
711,704
|
|
Notes
receivable
|
|
|
—
|
|
|
1,143,554
|
|
Other
assets
|
|
|
696,233
|
|
|
801,915
|
|
Total
assets
|
|
$
|
10,778,244
|
|
$
|
14,430,201
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Current
maturities of long-term debt, net of debt discount of $725,259
and
$20,572, at September 30, 2004 and 2003, respectively
|
|
$
|
183,692
|
|
$
|
2,279,428
|
|
Convertible
debentures
|
|
|
—
|
|
|
18,000,000
|
|
Accounts
payable
|
|
|
3,398,362
|
|
|
2,631,196
|
|
Accrued
interest payable
|
|
|
793,577
|
|
|
6,410,870
|
|
Reserve
for settlement of class action litigation
|
|
|
1,564,490
|
|
|
1,564,490
|
|
Other
accrued expenses
|
|
|
2,220,965
|
|
|
1,222,820
|
|
Total
current liabilities
|
|
|
8,161,086
|
|
|
32,108,804
|
|
Long-term
debt, net of current maturities and debt discount of $5,767,988
at
September 30, 2004
|
|
|
28,709
|
|
|
—
|
|
Total
liabilities
|
|
|
8,189,795
|
|
|
32,108,804
|
|
Commitments
and contingencies (see notes 2, 16, and 17)
|
|
|
|
|
|
|
|
Shareholders’
Equity (Deficit):
|
|
|
|
|
|
|
|
Common
stock, $.01 par value, authorized 100,000,000 shares; issued and
outstanding 17,426,210 shares
|
|
|
174,262
|
|
|
174,262
|
|
Additional
paid-in capital
|
|
|
28,100,674
|
|
|
19,296,005
|
|
Accumulated
deficit
|
|
|
(25,619,888
|
)
|
|
(36,937,460
|
)
|
Receivable
from officer
|
|
|
(31,675
|
)
|
|
—
|
|
Stock
subscriptions receivable
|
|
|
—
|
|
|
(141,563
|
)
|
Accumulated
other comprehensive loss
|
|
|
(34,924
|
)
|
|
(69,847
|
)
|
Total
shareholders’ equity (deficit)
|
|
|
2,588,449
|
|
|
(17,678,603
|
)
|
Total
liabilities and shareholders’ equity (deficit)
|
|
$
|
10,778,244
|
|
$
|
14,430,201
|
|
See
accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
YEARS
ENDED SEPTEMBER 30,
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
Revenues
|
|
$
|
22,514,486
|
|
$
|
17,794,299
|
|
$
|
19,442,224
|
|
Cost
of sales
|
|
|
17,055,179
|
|
|
14,612,447
|
|
|
15,051,784
|
|
Gross
profit
|
|
|
5,459,307
|
|
|
3,181,852
|
|
|
4,390,440
|
|
Selling,
general and administrative
|
|
|
9,966,855
|
|
|
8,394,505
|
|
|
9,770,237
|
|
Provision
for doubtful accounts
|
|
|
228,240
|
|
|
624,511
|
|
|
2,985,744
|
|
Provision
for settlement of class action litigation
|
|
|
—
|
|
|
—
|
|
|
1,564,490
|
|
Depreciation
and amortization
|
|
|
513,839
|
|
|
799,855
|
|
|
1,158,742
|
|
Impairment
of goodwill and other intangible assets
|
|
|
—
|
|
|
—
|
|
|
463,590
|
|
Operating
loss
|
|
|
(5,249,627
|
)
|
|
(6,637,019
|
)
|
|
(11,552,363
|
)
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
Gain
on extinguishment of debt
|
|
|
18,823,000
|
|
|
—
|
|
|
—
|
|
Gain
on sale of securities
|
|
|
1,918,012
|
|
|
—
|
|
|
—
|
|
Interest
expense, net (includes $2,549,280 of debt discount amortization
in
2004)
|
|
|
(4,255,042
|
)
|
|
(2,599,698
|
)
|
|
(2,530,971
|
)
|
Write-down
of investment in 3CI
|
|
|
—
|
|
|
—
|
|
|
(288,326
|
)
|
Total
other income (expense)
|
|
|
16,485,970
|
|
|
(2,599,698
|
)
|
|
(2,819,297
|
)
|
Income
(loss) before taxes
|
|
|
11,236,343
|
|
|
(9,236,717
|
)
|
|
(14,371,660
|
)
|
Income
tax expense (benefit)
|
|
|
(81,229
|
)
|
|
—
|
|
|
(293,982
|
)
|
Net
income (loss)
|
|
$
|
11,317,572
|
|
$
|
(9,236,717
|
)
|
$
|
(14,077,678
|
)
|
Basic
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
0.65
|
|
$
|
(0.53
|
)
|
$
|
(0.81
|
)
|
Weighted
average common shares outstanding
|
|
|
17,426,210
|
|
|
17,426,210
|
|
|
17,426,210
|
|
Diluted
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
0.37
|
|
$
|
(0.53
|
)
|
$
|
(0.81
|
)
|
Weighted
average common and dilutive shares outstanding
|
|
|
38,576,763
|
|
|
17,426,210
|
|
|
17,426,210
|
|
See
accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
|
YEARS
ENDED SEPTEMBER 30,
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
Net
income (loss)
|
|
$
|
11,317,572
|
|
$
|
(9,236,717
|
)
|
$
|
(14,077,678
|
)
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) on investment in 3CI
|
|
|
34,923
|
|
|
41,908
|
|
|
(13,970
|
)
|
Less:
reclassification adjustment for loss included in net income
(loss)
|
|
|
—
|
|
|
—
|
|
|
288,326
|
|
Other
comprehensive income
|
|
|
34,923
|
|
|
41,908
|
|
|
274,356
|
|
Comprehensive
income (loss)
|
|
$
|
11,352,495
|
|
$
|
(9,194,809
|
)
|
$
|
(13,803,322
|
)
|
See
accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
YEARS
ENDED SEPTEMBER 30, 2004, 2003 AND 2002
|
|
SHARES
ISSUED
AND
OUTSTANDING
|
|
COMMON
STOCK
|
|
ADDITIONAL
PAID-IN
CAPITAL
|
|
RETAINED
EARNINGS
(ACCUMULATED
DEFICIT)
|
|
OTHER
|
|
TOTAL
SHAREHOLDERS’
EQUITY
(DEFICIT)
|
|
Balances,
September 30, 2001
|
|
|
17,426,210
|
|
$
|
174,262
|
|
$
|
19,245,958
|
|
$
|
(13,623,065
|
)
|
$
|
(603,299
|
)
|
$
|
5,193,856
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(14,077,678
|
)
|
|
—
|
|
|
(14,077,678
|
)
|
Tax
benefit from disqualifying disposition of ISO’s
|
|
|
—
|
|
|
—
|
|
|
29,475
|
|
|
—
|
|
|
—
|
|
|
29,475
|
|
Unrealized
loss on investment in 3CI
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(13,970
|
)
|
|
(13,970
|
)
|
Reclassification
adjustment for realized loss on investment in 3CI included in net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
288,326
|
|
|
288,326
|
|
Balances,
September 30, 2002
|
|
|
17,426,210
|
|
|
174,262
|
|
|
19,275,433
|
|
|
(27,700,743
|
)
|
|
(328,943
|
)
|
|
(8,579,991
|
)
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,236,717
|
)
|
|
—
|
|
|
(9,236,717
|
)
|
Writedown
of stock subscription receivable
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
75,625
|
|
|
75,625
|
|
Unrealized
gain on investment in 3CI
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
41,908
|
|
|
41,908
|
|
Issuance
of warrants in connection with debt
|
|
|
—
|
|
|
—
|
|
|
20,572
|
|
|
—
|
|
|
—
|
|
|
20,572
|
|
Balances,
September 30, 2003
|
|
|
17,426,210
|
|
|
174,262
|
|
|
19,296,005
|
|
|
(36,937,460
|
)
|
|
(211,410
|
)
|
|
(17,678,603
|
)
|
Net
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,317,572
|
|
|
—
|
|
|
11,317,572
|
|
Receivable
from officer
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(31,675
|
)
|
|
(31,675
|
)
|
Settlement
of Hudson stock subscription receivable
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
141,563
|
|
|
141,563
|
|
Unrealized
gain on investment in 3CI
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
34,923
|
|
|
34,923
|
|
Issuance
of warrants in connection with debt with beneficial conversion
premium on
convertible debt
|
|
|
—
|
|
|
—
|
|
|
8,804,669
|
|
|
—
|
|
|
—
|
|
|
8,804,669
|
|
Balances,
September 30, 2004
|
|
|
17,426,210
|
|
$
|
174,262
|
|
$
|
28,100,674
|
|
$
|
(25,619,888
|
)
|
$
|
(66,599
|
)
|
$
|
2,588,449
|
|
See
accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
YEARS
ENDED SEPTEMBER 30,
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
11,317,572
|
|
$
|
(9,236,717
|
)
|
$
|
(14,077,678
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
513,839
|
|
|
799,855
|
|
|
1,158,742
|
|
Amortization
of debt discount and financing costs
|
|
|
2,529,854
|
|
|
—
|
|
|
—
|
|
Provision
for doubtful accounts
|
|
|
228,240
|
|
|
624,511
|
|
|
2,985,744
|
|
Provision
for settlement of class action litigation
|
|
|
—
|
|
|
—
|
|
|
1,564,490
|
|
Impairment
of goodwill and other intangible assets
|
|
|
—
|
|
|
—
|
|
|
463,590
|
|
Loss
from disposal of fixed assets
|
|
|
—
|
|
|
4,482
|
|
|
—
|
|
Tax
benefits from exercise of warrants and disqualifying disposition
of
ISO’s
|
|
|
—
|
|
|
—
|
|
|
29,475
|
|
Write-down
of investment in 3CI
|
|
|
—
|
|
|
—
|
|
|
288,326
|
|
Gain
on extinguishment of convertible debentures
|
|
|
(18,823,000
|
)
|
|
—
|
|
|
—
|
|
Gain
on sale of securities
|
|
|
(1,918,012
|
)
|
|
—
|
|
|
—
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Trade
accounts receivable, net
|
|
|
(1,090,776
|
)
|
|
1,203,953
|
|
|
2,038,887
|
|
Notes
and other receivables
|
|
|
528,509
|
|
|
1,344,882
|
|
|
(1,320,951
|
)
|
Federal
income tax receivable
|
|
|
—
|
|
|
—
|
|
|
5,596,383
|
|
Inventories
|
|
|
678,411
|
|
|
2,177,215
|
|
|
3,376,136
|
|
Prepaid
expenses and other assets
|
|
|
181,862
|
|
|
(654,139
|
)
|
|
196,634
|
|
Accounts
payable and accrued expenses
|
|
|
3,264,006
|
|
|
3,342,551
|
|
|
1,703,375
|
|
Net
cash provided by (used in) operating activities
|
|
|
(2,589,495
|
)
|
|
(393,407
|
)
|
|
4,003,153
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of securities
|
|
|
2,451,444
|
|
|
—
|
|
|
—
|
|
Purchases
of property, plant and equipment
|
|
|
(235,821
|
)
|
|
(242,573
|
)
|
|
(394,312
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
2,215,623
|
|
|
(242,573
|
)
|
|
(394,312
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from borrowings under notes payable
|
|
|
7,409,921
|
|
|
300,000
|
|
|
—
|
|
Repayments
of notes payable
|
|
|
(3,297,261
|
)
|
|
—
|
|
|
(3,424,000
|
)
|
Repayments
of convertible debentures
|
|
|
(6,000,000
|
)
|
|
—
|
|
|
—
|
|
(Increase)
decrease in restricted cash
|
|
|
2,200,000
|
|
|
13,233
|
|
|
(2,213,233
|
)
|
Increase
in deferred financing costs
|
|
|
(595,765
|
)
|
|
—
|
|
|
—
|
|
Net
cash provided by (used in) financing activities
|
|
|
(283,105
|
)
|
|
313,233
|
|
|
(5,637,233
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(656,977
|
)
|
|
(322,747
|
)
|
|
(2,028,392
|
)
|
Cash
and cash equivalents at beginning of year
|
|
|
915,097
|
|
|
1,237,844
|
|
|
3,266,236
|
|
Cash
and cash equivalents at end of year
|
|
$
|
258,120
|
|
$
|
915,097
|
|
$
|
1,237,844
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
209,957
|
|
$
|
132,891
|
|
$
|
326,313
|
|
Cash
paid for taxes, net of refunds received
|
|
$
|
(81,229
|
)
|
$
|
(437,557
|
)
|
$
|
(5,919,840
|
)
|
Supplemental
disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
Discount
on issuance of debt within beneficial conversion premium and detachable
warrants
|
|
$
|
8,804,669
|
|
$
|
20,572
|
|
$
|
—
|
|
Warrants
issued for deferred financing costs
|
|
$
|
229,180
|
|
$
|
—
|
|
$
|
—
|
|
Conversion
of interest payable to loan principal
|
|
$
|
292,988
|
|
$
|
—
|
|
$
|
—
|
|
See
accompanying Notes to Consolidated Financial Statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2004, 2003 AND 2002
(1)
Summary of Significant Accounting Policies
Description
of Business
Tidel
Technologies, Inc. (the “Company,” “we,” “us,” or “our”) is a Delaware
corporation which, through its wholly-owned subsidiaries, develops,
manufactures, sells and supports automated teller machines (“ATMs”) and
electronic cash security systems, consisting of the Timed Access Cash Controller
(“TACC”) products and the Sentinel products (together, the “Cash Security”
products), which are designed for the management of cash within various
specialty retail markets, primarily in the United States.
Principles
of Consolidation
The
Consolidated Financial Statements include our accounts and our wholly-owned
subsidiaries. All significant intercompany items have been eliminated in
consolidation.
Cash
and Cash Equivalents
For
purposes of consolidated financial statement presentation and reporting cash
flows, all liquid investments with original maturities at the date of purchase
of three months or less are considered cash equivalents. Restricted cash
is
primarily collateral for a revolving credit facility.
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined using the standard
cost method and includes materials, labor and production overhead which
approximates an average cost method. Reserves are provided to adjust any
slow
moving materials or goods to net realizable values.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost. Depreciation is calculated on the
straight-line method over the estimated useful lives of the assets. Expenditures
for major renewals and betterments are capitalized; expenditures for repairs
and
maintenance are charged to expense as incurred.
Intangible
Assets
All
intangible assets are amortized using the straight-line method over a period
ranging from 5 to 10 years, with the exception of goodwill. During fiscal
year
2002, all goodwill was deemed impaired and was written off in its
entirety.
Impairment
of Long-Lived Assets
Our
long-lived assets and certain identifiable intangibles and goodwill are reviewed
for impairment whenever events or changes in circumstances indicate that
the
carrying amount of any assets may not be recoverable. In performing the review
for recoverability, we estimate the future cash flows expected to result
from
the use of our assets and our eventual disposition. If the sum of the expected
future cash flows (undiscounted and without interest charges) is less than
the
carrying amount of the asset, an impairment loss is recognized.
Warranties
Certain
products are sold under warranty against defects in materials and workmanship
for a period of one to two years. A provision for estimated warranty costs
is
included in accrued liabilities and is charged to operations at the time
of
sale.
Revenue
Recognition
Revenues
are recognized at the time products are shipped to customers. We have no
continuing obligation to provide services or upgrades to our products, other
than a warranty against defects in materials and workmanship. We only recognize
such revenues if there is persuasive evidence of an arrangement, the products
have been delivered, there is a fixed or determinable sales price and a
reasonable assurance of our ability to collect from the customer.
Our
products contain imbedded software that is developed for inclusion within
the
equipment. We have not licensed, sold, leased or otherwise marketed such
software separately. We have no continuing obligations after the delivery
of our
products and we do not enter into post-contract customer support arrangements
related to any software embedded into our equipment.
Research
and Development Costs
Research
and development costs are expensed as incurred. Research and development
costs
charged to expense were approximately $2,613,000, $2,668,000 and $2,700,000,
for
the years ended September 30, 2004, 2003 and 2002, respectively.
Shipping
and Handling Costs
Shipping
and handling costs billed to customers totaled $647,459, $599,069 and $590,496,
for the years ended September 30, 2004, 2003 and 2002, respectively. We incurred
shipping and handling costs of $738,340, $623,988 and $706,760 for the years
ended September 30, 2004, 2003 and 2002, respectively. The net expense of
$90,881, $24,919 and $116,264 is included in selling expenses in the
accompanying statement of operations for the years ended September 30, 2004,
2003 and 2002, respectively.
Federal
Income Taxes
Income
taxes are accounted for under the asset and liability method, whereby deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases. Deferred
tax
assets and liabilities are measured using enacted tax rates expected to apply
to
taxable income in the years in which those temporary differences are expected
to
be recovered or settled. The effect on deferred tax assets and liabilities
of a
change in tax rates is recognized in determining income or loss in the period
that includes the enactment date.
Investment
Securities
In
accordance with Statement of Financial Accounting Standards No. 115, “Accounting
for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”), we
classify our investment in 3CI Complete Compliance Corporation (“3CI”) as
available for sale, with unrealized gains and losses excluded from earnings
and
recorded as a component of other comprehensive income. The investment in
3CI is
classified as other assets in the accompanying consolidated balance sheets.
Declines in fair value below the amortized cost basis of the investments
that
are determined to be other than a temporary decline are charged to earnings.
Approximately $288,000 in the year-ended September 30, 2002).
Accumulated
Other Comprehensive Loss
Accumulated
other comprehensive loss includes all non-equity holder changes in shareholders’
equity. As of September 30, 2004 and 2003, our only component of accumulated
other comprehensive loss relates to unrealized losses on our investment in
3CI.
Net
Income (Loss) Per Share
In
accordance with Statement of Financial Accounting Standards No. 128, “Earnings
Per Share” (“SFAS No. 128”), we compute and present both basic and diluted
earnings per share (“EPS”) amounts. Basic EPS is computed by dividing income
(loss) available to common shareholders by the weighted-average number of
common
shares outstanding for the period, and excludes the effect of potentially
dilutive securities (such as options, warrants and convertible securities),
which are convertible into common stock. Dilutive EPS reflects the potential
dilution from options, warrants and convertible securities.
Stock-Based
Compensation
Statement
of Financial Accounting Standards No. 123, “Accounting for Stock-Based
Compensation” (“SFAS No. 123”), requires companies to recognize stock-based
expense based on the estimated fair value of employee stock options.
Alternatively, SFAS No. 123 allows companies to retain the current approach
set
forth in APB Opinion 25, “Accounting for Stock Issued to Employees,” provided
that expanded footnote disclosure is presented. We apply APB Opinion No.
25 in
accounting for our employee stock options and, accordingly, no compensation
cost
has been recognized for our stock options in the consolidated financial
statements. Had we determined compensation cost based on the fair value at
the
grant date for our stock options and warrants under SFAS No. 123, our net
income
(loss) would have been reduced to the pro forma amounts indicated as
follows:
|
|
2004
|
|
2003
|
|
2002
|
|
Net
income (loss) as reported
|
|
$
|
11,317,572
|
|
$
|
(9,236,717
|
)
|
$
|
(14,077,678
|
)
|
Deduct:
|
|
|
|
|
|
|
|
|
|
|
Total
stock-based employee compensation expense determined under SFAS
123, net
of taxes
|
|
|
(1,392
|
)
|
|
(15,363
|
)
|
|
(50,633
|
)
|
Net
income (loss), pro forma
|
|
$
|
11,316,180
|
|
$
|
(9,252,080
|
)
|
$
|
(14,128,311
|
)
|
Basic
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
|
0.65
|
|
|
(0.53
|
)
|
|
(0.81
|
)
|
Pro
forma
|
|
|
0.65
|
|
|
(0.53
|
)
|
|
(0.81
|
)
|
Diluted
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
|
0.37
|
|
|
(0.53
|
)
|
|
(0.81
|
)
|
Pro
forma
|
|
|
0.37
|
|
|
(0.53
|
)
|
|
(0.81
|
)
|
Use
of Estimates
The
preparation of the accompanying Consolidated Financial Statements requires
the
use of estimates by management in determining our assets and liabilities
at the
date of the Consolidated Financial Statements and the reported amount of
revenues and expenses during the period. Actual results could differ from
these
estimates.
Fair
Value of Financial Instruments
Statement
of Financial Accounting Standards No. 107, “Disclosures About Fair Value of
Financial Instruments,” requires the disclosure of estimated fair values for
financial instruments. Fair value estimates are made at discrete points in
time
based on relevant market information. These estimates may be subjective in
nature and involve uncertainties and matters of significant judgment and
therefore, cannot be determined with precision. We believe that the carrying
amounts of our financial instruments included in current assets and current
liabilities approximate the fair value of such items due to their short-term
nature.
The
carrying amount of long-term debt, excluding the discounts related to the
warrants issued with the debt, approximates its fair value because the interest
rates approximate market.
New
Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123(R), which amends SFAS No. 123
and
supersedes APB Opinion No. 25. SFAS No. 123(R) requires compensation expense
to
be recognized for all share-based payments made to employees based on the
fair
value of the award at the date of grant, eliminating the intrinsic value
alternative allowed by SFAS No. 123. Generally, the approach to determining
fair
value under the original pronouncement has not changed. However, there are
revisions to the accounting guidelines established, such as accounting for
forfeitures, that will change our accounting for stock-based awards in the
future.
SFAS
No.
123(R) must be adopted in the first interim or annual period for fiscal year
periods beginning after June 15, 2005. The statement allows companies to
adopt
its provisions using either of the following transition
alternatives:
|
•
|
The
modified prospective method, which results in the recognition of
compensation expense using SFAS 123(R) for all share-based awards
granted
after the effective date and the recognition of compensation expense
using
SFAS 123 for all previously granted share-based awards that remain
unvested at the effective date; or
|
|
•
|
The
modified retrospective method, which results in applying the modified
prospective method and restating prior periods by recognizing the
financial statement impact of share-based payments in a manner
consistent
with the pro forma disclosure requirements of SFAS No. 123. The
modified
retrospective method may be applied to all prior periods presented
or
previously reported interim periods of the year of
adoption.
|
We
currently plan to adopt SFAS No. 123(R) on October 1, 2005, using the modified
prospective method. This change in accounting is not expected to materially
impact our financial position. However, because we currently account for
share-based payments to our employees using the intrinsic value method, our
results of operations have not included the recognition of compensation expense
for the issuance of stock option awards. Had we applied the fair-value criteria
established by SFAS No. 123(R) to previous stock option grants, the impact
to
our results of operations would have approximated the impact of applying
SFAS
No. 123, which was a decrease to net income of approximately $1,392 in 2004,
an
increase to our net loss of $15,363 in 2003 and $50,633 in 2002. The impact
of
applying SFAS No. 123 to previous stock option grants is further summarized
above in Note 1 of the Notes to Consolidated Financial Statements.
We
will
be required to recognize expense related to stock options and other types
of
equity-based compensation beginning in our fiscal year ending in 2006 and
such
cost must be recognized over the period during which an employee is required
to
provide service in exchange for the award. The requisite service period is
usually the vesting period. The standard also requires us to estimate the
number
of instruments that will ultimately be issued, rather than accounting for
forfeitures as they occur. Additionally, we may be required to change our
method
for determining the fair value of stock options.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,”
an amendment of APB No. 29. This amendment eliminates the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. This statement specifies that a nonmonetary exchange
has
commercial substance if the future cash flows of the entity are expected
to
change significantly as a result of the exchange. This statement is effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after
June
15, 2005. Earlier application is permitted for nonmonetary exchanges occurring
in fiscal periods beginning after the date this statement was issued.
Retroactive application is not permitted. We are analyzing the requirements
of
this new statement and believe that its adoption will not have a significant
impact on our financial position, results of operations or cash
flows.
In
November 2002, FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others.” FIN 45 requires certain guarantees to be
measured at fair value upon issuance and recorded as a liability. In addition,
FIN 45 expands current disclosure requirements regarding guarantees issued
by an
entity, including tabular presentation of the changes affecting an entity’s
aggregate product warranty liability. The recognition and measurement
requirements of the interpretation are effective prospectively for guarantees
issued or modified after December 31, 2002. The disclosure requirements are
effective immediately and are provided in Part II, Item 8, “Financial Statements
and Supplementary Data,” and Note 16, “Commitments and Contingencies.” The
adoption of this statement is not expected to have a material impact on our
consolidated financial position, results of operations or cash
flows.
In
June
2001, the FASB issued SFAS No. 142 entitled “Goodwill and Other Intangible
Assets.” Under SFAS No. 142, existing goodwill is no longer amortized, but is
tested for impairment using a fair value approach. SFAS No. 142 requires
goodwill to be tested for impairment at a level referred to as a reporting
unit,
generally one level lower than reportable segments. SFAS No. 142 required
us to
perform the first goodwill impairment test on all reporting units within
six
months of adoption. We adopted SFAS No. 142 effective October 1, 2002, however,
during the year ended September 30, 2002, we recorded an impairment charge
against our remaining goodwill balance of approximately $464,000. Therefore,
the
adoption of SFAS No. 142 did not have a significant impact on our financial
statements.
In
April
2002, SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB No. 13, and Technical Corrections,” was issued. This statement provides
guidance on the classification of gains and losses from the extinguishment
of
debt and on the accounting for certain specified lease transactions, as well
as
other items. As a result, gains or losses arising from the extinguishment
of
debt are no longer required to be reported as extraordinary items. We reported
a
gain on extinguishment of debt in the fiscal year 2004 in the amount of
$18,823,000.
Effective
for financial statements issued for fiscal years beginning after December
15,
2001, and interim periods within those fiscal years, SFAS No. 144 “Accounting
for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), changed
the criteria for determining when the disposal or sale of certain assets
meets
the definition of “discontinued operations.” At the November 2004 EITF meeting,
the final consensus was reached on EITF Issue No. 03-13, “Applying the
Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether
to
Report Discontinued Operations” (“EITF Issue No. 03-13”). This Issue is
effective prospectively for disposal transactions entered into after January
1,
2005, and provides a model to assist in evaluating (i) which cash flows should
be considered in the determination of whether cash flows of the disposal
component have been, or will be, eliminated from the ongoing operations of
the
entity and (ii) the types of continuing involvement that constitute significant
continuing involvement in the operations of the disposal component. The Company
considered the model outlined in EITF Issue No. 03-13 in its evaluation of
the
February 19, 2005 asset purchase agreement of the ATM division with NCR (see
Note 2 below for more information). We have concluded that we will be required
to report the ATM assets of this sale as discontinued operations net of any
applicable income taxes for the first fiscal quarter, 2005.
(2)
Liquidity
During
the past three years, we have experienced operating losses. Our liquidity
has
been negatively impacted by our inability to collect outstanding receivables
and
claims as a result of the bankruptcy of a significant customer in 2001, the
inability to collect outstanding receivables from several other significant
customers, under-absorbed fixed costs associated with the production facilities,
and reduced sales of our products resulting from general difficulties in
the
Automated Teller Machine (“ATM”) market. In order to meet our liquidity needs
during the past four years, we have incurred a substantial amount of
debt.
As
of,
and for the years ended September 30, 2004, we had net income of approximately
$11,560,369 and working capital of approximately $934,203 compared to September
30, 2003 in which we incurred a net loss of $9,236,717 and a working capital
deficit of $20,335,776. As of September 30, 2004 and 2003, we had shareholders’
equity of approximately $2,588,449 and a shareholders’ deficit of $17,678,603,
respectively. This is primarily due to the gain from extinguishment of debt
related to the November 25, 2003 Laurus Master Fund, Ltd. Financing Agreement
(see Note 10, “Laurus Financing”) and subsequent retirement of $18,000,000 in
convertible debentures together with all accrued interest, penalties and
fees
associated therewith. We recorded a gain from extinguishment of debt of
$18,823,000 (including accrued interest through the date of extinguishment)
in
fiscal year 2004 related to the refinancing. Absent the affect of this gain
from
extinguishment of debt, we are continuing to experience operating losses.
This,
coupled with increasing debt, has continued to negatively impact our financial
condition. If the operating conditions do not improve, there can be no assurance
we will continue operations. There can be no assurance that our current
financing facilities will be sufficient to meet our current working capital
needs or that we will have sufficient working capital in the future. There
can
be no assurances that the sale of the ATM business will be consummated. If
we
need to seek additional financing, there can be no assurances that we will
obtain such additional financing for working capital purposes. The failure
to
obtain such additional financing could cause a material adverse effect upon
our
financial condition.
Management’s
Current Plans with Regard to Our Liquidity Include the
Following:
Proposed
Sale of ATM Business
On
February 19, 2005, the Company and its wholly-owned subsidiary Tidel
Engineering, L.P. (together with the Company, the “Sellers”) entered into an
asset purchase agreement with NCR Texas LLC, a single member Delaware limited
liability company (“NCR”) that is a wholly-owned subsidiary of NCR Corporation,
a Maryland corporation, for the sale of the registrant’s ATM business (the
“Asset Purchase Agreement”). The purchase price for the ATM business of the
Sellers consists of $10,175,000 plus the assumption of certain liabilities
related to the ATM business and, subject to certain adjustments as provided
in
the Asset Purchase Agreement (the “Purchase Price”). The Purchase Price is also
subject to adjustment based upon the actual value of the assets delivered,
to
the extent the value of the assets delivered is 5% greater than or less than
a
predetermined value as stated in the Asset Purchase Agreement. The Asset
Purchase Agreement contains customary representations, warranties, covenants
and
indemnities.
The
proceeds of the sale of the Sellers’ ATM business will be applied towards the
repayment of our outstanding loans from our current lender, Laurus Master
Fund,
Ltd. (“Laurus”). However, even after the application of net proceeds towards the
repayment of the loans, our lender may continue to hold warrants to purchase
up
to 4,750,000 shares of our common stock, and will have a contractual right
to
receive a significant percentage of the proceeds of any subsequent sale of
all,
or substantially all, of our equity interests and/or other assets in one
or more
transactions, pursuant to the Asset Sales Agreement. The Company has retained
Stifel, Nicolaus & Company, Inc. to sell the remainder of the Company’s
business, as required pursuant to that certain Securities Purchase Agreement
by
and between the Company and Laurus dated November 26, 2005 (the “2004 SPA”) (see
Note 17, “Additional Laurus Financing”).
The
closing of the sale of the ATM business pursuant to the Asset Purchase Agreement
is subject to several conditions, including shareholder approval. The Sellers
do
not contemplate seeking shareholder approval until the Company is current
in its
reporting requirements under the Securities Exchange Act of 1934, as amended.
Pursuant to contractual arrangements with its lenders, the Company is required
to be current with its SEC filings no later than July 31, 2005, after which
time
the Company will commence seeking shareholder approval for this transaction.
The
Company believes that the transaction will likely not close prior to the
fourth
quarter of calendar 2005.
Following
the closing of the transactions under the Asset Purchase Agreement, it is
contemplated that approximately 50% of our employees would become employees
of
NCR, including up to two executives, subject to their reaching mutually
satisfactory agreements with NCR Texas.
Pursuant
to the Asset Purchase Agreement, until the earlier of the closing of the
transactions contemplated thereby or termination of the Asset Purchase Agreement
(the “Exclusivity Period”), the Sellers have agreed not to communicate with
potential buyers, other than to say that they are contractually obligated
not to
respond. The Sellers are obligated to forward any communications to NCR.
In the
event that the Sellers breach these provisions, then as provided in the Asset
Purchase Agreement, the Sellers are obligated to pay a $2,000,000 fee to
NCR
(the “Fee”). Also as provided in the Asset Purchase Agreement, under certain
limited circumstances, the Sellers may consider an unsolicited offer that
the
Board of Directors (the “Board”) deems to be financially superior. However,
immediately following the execution of a definitive agreement for the
transaction contemplated by such superior offer, NCR is to be paid the
Fee.
The
Asset
Purchase Agreement also contains provisions restricting the Sellers from
owning
or managing any business similar to the ATM business for a period of five
years
after the closing of the transactions contemplated by the Asset Purchase
Agreement, and restricting Sellers from soliciting or hiring any employees
of
NCR for a period of two years after the closing and restricting NCR Texas
from
hiring Sellers’ employees.
Engagement
of Investment Banker to Evaluate Strategic Alternatives for the Sale of the
Cash
Security Business
We
engaged Stifel, Nicolaus & Company, Inc. (“Stifel”) in October 2004, to
assist the Board of Directors in connection with the proposed sale of our
Cash
Security business, deliver a fairness opinion, and render such additional
assistance as we may reasonably request in connection with the proposed sale
of
our TACC business. We are currently working with Stifel in connection with
such
a proposed sale.
(3)
Major Customers and Credit Risks
We
generally retain a security interest in the underlying equipment that is
sold to
customers until it receives payment in full. We would incur an accounting
loss
equal to the carrying value of the accounts receivable, less any amounts
recovered from liquidation of collateral, if a customer failed to perform
according to the terms of the credit arrangements.
No
one
customer accounted for more than 10% of net sales for the fiscal year 2002.
One
customer accounted for 11% of net sales for the fiscal year ended September
30,
2003, and no single customer accounted for more than 10% of net sales for
the
fiscal year ended September 30, 2004. Two customers combined accounted for
approximately 36% of our total outstanding trade receivable as of September
30,
2003, and one customer accounted for approximately 32% of our total outstanding
trade receivable as of September 30, 2004.
The
vast
majority of our sales in fiscal 2004 were to customers within the United
States.
Sales to customers outside the United States, as a percentage of total revenues,
were approximately 16%, 25% and 13%, in the fiscal years ended September
30,
2004, 2003 and 2002, respectively. Most of our foreign sales were to one
customer.
(4)
Notes Receivable — Officers
The
current and long-term portion of notes and other receivables consisted of
the
following at September 30, 2004 and 2003:
|
|
2004
|
|
2003
|
|
Notes
receivable — Officers
|
|
$
|
1,003,723
|
|
|
1,368,554
|
|
Other
accounts receivable
|
|
|
—
|
|
|
47,790
|
|
|
|
|
1,003,723
|
|
$
|
1,416,344
|
|
Allowance
for notes receivable
|
|
|
—
|
|
|
—
|
|
Less:
Current portion
|
|
|
(1,003,723
|
)
|
|
(272,790
|
)
|
Long-term
portion
|
|
$
|
—
|
|
$
|
1,143,554
|
|
In
September 2000, we loaned $141,563 to Michael F. Hudson, our Executive Vice
President and Chief Operating Officer of our principal operating subsidiary,
in
a promissory note maturing October 1, 2002, and bearing interest at 10% per
annum. During the year ended September 30, 2001, we loaned an additional
$225,000 to Mr. Hudson in a promissory note maturing October 1, 2002, and
bearing interest at 10% per annum. The notes from Mr. Hudson are secured
by a
pledge of 83,500 shares of our common stock. The note to Mr. Hudson in the
amount of $141,563 relates to the exercise of certain stock option agreements.
These notes were not repaid by Mr. Hudson upon maturity. Subsequent to September
30, 2004, we entered into a settlement agreement with Mr. Hudson regarding
satisfaction of these notes, including, among other things, recoveries through
the pledged shares and certain salary and bonuses due to Mr. Hudson. As a
result
of the settlement with Mr. Hudson, we recorded a provision for bad debts
totaling $104,055 in fiscal 2003 related to accrued interest on the notes
and a
provision for settlement of the claims totaling $279,918 in fiscal 2004.
In
addition, we reduced the notes receivable balances by $60,750 as an offset
against accrued bonuses due to Mr. Hudson.
In
September 2001, we loaned $843,554 to James T. Rash, our former Chairman
and
CEO, in a promissory note maturing September 30, 2004, and bearing interest
at
10% per annum. In January 2002, we loaned an additional $300,000 to Mr. Rash
in
a promissory note maturing January 14, 2005, and bearing interest at 10%
per
annum. In December 2004, Mr. Rash died. We have named Mark K. Levenick as
Interim Chief Executive Officer but no permanent Chairman or Chief Executive
Officer has been hired or appointed as of the date hereof. The Board of
Directors approved the transfer of a key-man life insurance policy on the
life
of Mr. Rash in the amount of $1,000,000 to Mr. Rash in 2002, in connection
with
Mr. Rash’s then pending retirement. The proceeds were assigned as collateral for
the notes due from Mr. Rash in the aggregate principal amount of $1,143,554.
Proceeds of $1,009,227 were received from the insurance policy in February
2005,
which were applied to the principal amount of the notes. Mr. Rash also received
bonuses totaling $350,000 of which $134,327 was applied to the remaining
principal balance of the notes. We recorded a provision for bad debt totaling
$220,625 in fiscal 2003 related to accrued interest on the notes.
(5)
Inventories
Inventories
consisted of the following at September 30, 2004 and 2003:
|
|
2004
|
|
2003
|
|
Raw
materials
|
|
$
|
5,459,865
|
|
$
|
5,038,223
|
|
Work
in process
|
|
|
605,376
|
|
|
6,395
|
|
Finished
goods
|
|
|
532,804
|
|
|
1,575,393
|
|
Other
|
|
|
85,414
|
|
|
127,248
|
|
|
|
|
6,683,459
|
|
|
6,747,259
|
|
Inventory
reserve
|
|
|
(1,900,000
|
)
|
|
(1,285,389
|
)
|
|
|
$
|
4,783,459
|
|
$
|
5,461,870
|
|
(6)
Investment in CashWorks
In
December 2001, we invested $500,000 in CashWorks, Inc. (“CashWorks”), a
development-stage financial technology solutions provider, in the form of
convertible debt of CashWorks. In December 2002, we converted the notes,
plus
accrued but unpaid interest, into 2,133,728 shares of CashWorks’ Series B
preferred shares plus warrants to purchase 125,000 shares of CashWorks’ common
stock at $2.00 per share. In March 2004, we consented to the sale of our
interest in CashWorks to GE Capital Corp. for approximately $2,451,000,
resulting in the recognition of a gain of $1,918,012.
(7)
Investment in 3CI
We
formerly owned 100% of 3CI Complete Compliance Corporation, a company engaged
in
the transportation and incineration of medical waste, until we divested our
majority interest in February 1994. As of September 30, 2004, we continued
to
own 698,889 shares of the common stock of 3CI. We have no immediate plan
for the
disposal of these shares. At September 30, 2004, all the shares were pledged
to
secure borrowings in connection with the Financing (see Note 10, “Laurus
Financing”). The value of the investment in 698,889 shares of 3CI was written
down by $288,000 at September 30, 2002 to reflect a carrying amount of $0.40
per
share and was marked to the market values of $244,462 ($0.35 per share) and
$209,539 ($0.30 per share) at September 30, 2004 and 2003,
respectively.
(8)
Property, Plant and Equipment
Property,
plant and equipment consisted of the following at September 30, 2004 and
2003:
|
|
2004
|
|
2003
|
|
Useful
Life
|
|
Machinery
and equipment
|
|
$
|
3,204,552
|
|
$
|
2,864,051
|
|
|
2—10
years
|
|
Computer
equipment and systems
|
|
|
1,719,119
|
|
|
781,739
|
|
|
2—7
years
|
|
Furniture,
fixtures and other improvements
|
|
|
498,218
|
|
|
1,540,278
|
|
|
3—5
years
|
|
|
|
$
|
5,421,889
|
|
$
|
5,186,068
|
|
|
|
|
Depreciation
expense was $509,693, $789,112 and $1,120,838, for the years ended September
30,
2004, 2003 and 2002, respectively. Repairs and maintenance expense was $83,532,
$92,376 and $145,437, for the years ended September 30, 2004, 2003 and 2002,
respectively.
(9)
Other Assets
Intangible
assets consisted of the following at September 30, 2004 and 2003:
|
|
2004
|
|
2003
|
|
Deferred
financial costs
|
|
$
|
550,945
|
|
$
|
—
|
|
Investment
in CashWorks (See Note 6)
|
|
|
—
|
|
|
533,432
|
|
Other
|
|
|
298,328
|
|
|
268,483
|
|
Accumulated
amortization
|
|
|
(153,040
|
)
|
|
—
|
|
|
|
$
|
696,233
|
|
$
|
801,915
|
|
Due
to
our recurring operating losses, the intangible assets were deemed impaired
during fiscal year 2002 and were written off in their entirety. As a result,
we
recognized a charge of $463,590, primarily related to the remaining book
value
of the goodwill prior to the impairment charge.
(10)
Long-Term Debt and Convertible Debentures
Long-Term
Debt
Long-term
debt consisted of the following at September 30, 2004 and 2003:
|
|
2004
|
|
2003
|
|
Revolving
credit facility, due June 30, 2003, interest payable monthly at
prime
(4.75% and 6.0% at September 30, 2002 and 2001,
respectively)
|
|
$
|
—
|
|
$
|
2,000,000
|
|
Bridge
loans (net of $20,572 discount)
|
|
|
—
|
|
|
279,428
|
|
Laurus
financing (net of $6,493,247 discount)
|
|
|
174,742
|
|
|
—
|
|
Other-
Five-Year Note
|
|
|
37,659
|
|
|
—
|
|
Total
short-term and long-term debt
|
|
|
212,401
|
|
|
2,279,428
|
|
Less:
current maturities
|
|
|
(183,692
|
)
|
|
(2,279,428
|
)
|
Long-term
debt, less current maturities
|
|
$
|
28,709
|
|
$
|
—
|
|
Laurus
Financing
On
November 25, 2003, we completed a $6,850,000 financing transaction (the
“Financing”) with Laurus pursuant to a Securities Purchase Agreement (the “SPA”)
by and between the Company and Laurus dated as of November 25, 2003. The
Financing was comprised of a three-year convertible note in the amount of
$6,450,000 and a one-year convertible note in the amount of $400,000, both
of
which bear interest at a rate of prime plus 2% and are convertible into our
common stock at a conversion price of $0.40 per share. In addition, Laurus
received warrants to purchase 4,250,000 shares of our common stock at an
exercise price of $0.40 per share. The proceeds of the Financing were allocated
to the notes and the related warrants based on the relative fair value of
the
notes and the warrants (see Note 12 for discussion of warrant valuation)
with
the value of the warrants resulting in a discount against the notes. In
addition, the conversion terms of the notes result in a beneficial conversion
feature, further discounting the carrying value of the notes. As a result,
we
will record additional interest charges totaling $6,850,000 over the terms
of
the notes related to these discounts. Laurus was also granted registration
rights in connection with the shares of common stock issuable in connection
with
the Financing. Proceeds from the Financing in the amount of $6,000,000 were
used
to fully retire the $18,000,000 in convertible debentures issued to two
investors (the “Holders”) in September 2000, together with all accrued interest,
penalties and fees associated therewith. We recorded a gain from extinguishment
of debt of $18,823,000 (including accrued interest through the date of
extinguishment) in fiscal year 2004 related to the Financing. In March 2004,
the
$400,000 note was repaid in full from the proceeds of the CashWorks transaction
described in Note 6. Transaction costs of $550,945 (see Note 9 above) were
incurred relating to the Financing. These costs were a combination of cash
and
warrants (valued at approximately $229,000).
In
connection with the closing of the Financing, all of the warrants and
convertible debentures held by the Holders were terminated, all outstanding
litigation without limitation was dismissed, and a revolving credit facility
with a bank (the “Revolving Credit Facility”) was repaid through the release of
the restricted cash used as collateral for the Revolving Credit Facility
(see
definition below).
In
August
2004, Laurus notified us that an Event of Default had occurred and had continued
beyond any applicable grace period as a result of our non-payment of interest
and principal on the $6,450,000 convertible note as required under the terms
of
the Financing, as well as noncompliance with certain other covenants of the
Financing documents. In exchange for Laurus’s waiver of the Event of Default
until September 17, 2004, we agreed, among other things, to lower the conversion
price on the $6,450,000 convertible note and the exercise price of the warrants
from $0.40 per share to $0.30 per share. The reduction in conversion price
resulted in an additional discount against the carrying value of the notes.
As a
result, we will record additional interest charges totaling approximately
$1,900,000 over the remaining terms of the notes related to the discounts.
See
Note 17 for discussion of additional Laurus funding and modifications of
the
terms of the Financing.
Bridge
Loans
Beginning
in September 2003, we issued the following unsecured, short-term promissory
notes totaling $720,000 to shareholders or their affiliates as part of a
bridge
financing transaction (the “Bridge Loans”):
In
September 2003, we issued a shareholder, Alliance Developments, Ltd.
(“Alliance”), an unsecured, short-term promissory note dated September 26, 2003
in the principal amount of $300,000 due December 24, 2003; plus accrued interest
at 9% per annum, payable at maturity. In consideration for the original loan,
Alliance received three-year warrants to purchase 100,000 shares of common
stock
at $0.45 per share. The note was renewed on December 24, 2003 until March
24,
2004. In consideration for the renewal, Alliance received additional three-year
warrants to purchase 50,000 shares of common stock at $0.45 per share. The
proceeds of the Alliance note were allocated to the note and the related
warrants based on the relative fair value of the note and the warrants, with
the
value of the warrants resulting in a discount against the note. As a result,
we
recorded additional interest charges totaling $20,572 in fiscal 2003 related
to
the discounts. Balance at September 30, 2003 was $300,000. The note was paid
in
full on March 5, 2004.
We
issued
to a shareholder and former director an unsecured, short-term promissory
note
dated October 2, 2003 in the principal amount of $120,000 due April 2, 2004,
plus accrued interest at 9% per annum, payable monthly. In consideration
for the
loan, the shareholder received three-year warrants to purchase 40,000 shares
of
common stock at $0.45 per share. The proceeds of the note were allocated
to the
note and the related warrants based on the relative fair value of the note
and
the warrants, with the value of the warrants resulting in a discount against
the
note. As a result, we recorded additional interest charges totaling $7,611
in
fiscal 2004 related to the discounts. The note was paid in full on March
8,
2004.
We
also
issued to the shareholder and former director an unsecured, short-term
promissory note dated October 21, 2003 in the principal amount of $90,000
due
April 21, 2004, plus accrued interest at 9% per annum, payable monthly. In
consideration for the loan, the shareholder received three-year warrants
to
purchase 30,000 shares of common stock at $0.45 per share. The proceeds of
the
note were allocated to the note and the related warrants based on the relative
fair value of the note and the warrants, with the value of the warrants
resulting in a discount against the note. As a result, we recorded additional
interest charges totaling $6,608 in fiscal 2004 related to the discounts.
The
note was paid in full on November 26, 2003.
The
Company issued to an affiliate of a shareholder an unsecured, short-term
promissory note dated November 20, 2003 in the principal amount of $210,000
due
May 20, 2004, plus accrued interest at 8% per annum, payable at maturity.
In
consideration for the loan, the note holder received three-year warrants
to
purchase 70,000 shares of common stock at $0.45 per share. The proceeds of
the
note were allocated to the note and the related warrants based on the relative
fair value of the note and the warrants, with the value of the warrants
resulting in a discount against the note. As a result, the Company will record
additional interest charges totaling $30,619 over the term of the note related
to the discounts. The note was paid in full on March 5, 2004 from proceeds
obtained in the Financing.
Revolving
Credit Facility
As
of
September 30, 2002, our wholly-owned subsidiary was a party to a credit
agreement with a bank (the “First Lender”) (as amended, the “Revolving Credit
Facility”), which was amended on April 30, 2002, August 30, 2002 and December
30, 2002 to provide for, among other things, an extension of the maturity
date
until June 30, 2003; the reduction of the revolving commitment from the initial
amount of $7,000,000 to $2,000,000; and a modification of the collateral
requirements to include a pledge of a money market account in an amount equal
to
110% of the outstanding principal balance, which pledge was $2,200,000 and
is
recorded as restricted cash in the September 30, 2002 consolidated balance
sheet. At September 30, 2002, $2,000,000 was outstanding under the Revolving
Credit Facility, which amount was repaid on November 25, 2003, in connection
with the closing of the Financing.
Convertible
Debentures
In
September 2000, we issued to two investors (individually, the “Holder”, or
collectively, the “Holders”) an aggregate of $18,000,000 of our 6% Convertible
Debentures, due September 8, 2004 (the “Convertible Debentures”), convertible
into our common stock at a price of $9.50 per share. In addition, we issued
warrants to the Holders to purchase 378,947 shares of our common stock
exercisable at any time through September 8, 2005 at an exercise price of
$9.80
per share.
In
June
2001, the Holders exercised their option to “put” the Convertible Debentures
back to the Company. Accordingly, the principal amount of $18,000,000, plus
accrued and unpaid interest, became due on August 27, 2001. We did not make
such
payment on that date, and at September 30, 2002, did not have the funds
available to make such payments. At September 30, 2002, we were party to
subordination agreements (the “Subordination Agreements”) with each Holder and
the First Lender which provided, among other things, for prohibitions: (i)
on
our making this payment to the Holders, and (ii) on the Holders taking legal
action against us to collect this amount, other than to increase the principal
balance of the Convertible Debentures for unpaid amounts or to convert the
Convertible Debentures into our common stock. The Convertible Debentures
were
retired on November 25, 2003, in connection with the Financing, which resulted
in a gain on early extinguishment of debt of $18,823,000.
(11)
Accrued Expenses
Other
accrued expenses consisted of the following at September 30, 2004 and
2003:
|
|
2004
|
|
2003
|
|
Reserve
for warranty charges
|
|
$
|
1,062,188
|
|
$
|
469,999
|
|
Taxes:
|
|
|
|
|
|
|
|
Sales
and use
|
|
|
179,588
|
|
|
88,820
|
|
Ad
valorem
|
|
|
41,443
|
|
|
150,459
|
|
Wages
and related benefits
|
|
|
391,730
|
|
|
341,209
|
|
Other
|
|
|
546,016
|
|
|
172,333
|
|
|
|
$
|
2,220,965
|
|
$
|
1,222,820
|
|
(12)
Warrants
At
September 30, 2004, we had outstanding warrants to purchase 5,079,473 shares
of
common stock that expire at various dates through November 2010. The warrants
have exercise prices ranging from $0.30 to $11.27 per share and, if exercised,
would generate proceeds to us of approximately $3,626,387. At September 30,
2003, we had outstanding warrants to purchase 1,018,420 shares of common
stock
that expire at various dates through November 2010 including 300,000 warrants
of
common stock at an exercise price of $2.91 (such price being equal to the
fair
market value of the common stock at the date of the grant) in connection
with
directors’ remuneration. The warrants have exercise prices ranging from $0.45 to
$11.27 per share and, if exercised, would generate proceeds to us of
approximately $6,735,068. No warrants were exercised during the years ended
September 30, 2001 through 2004. See table below:
Common
Stock Purchase Warrants:
|
|
Warrants
|
|
Expiration
Date
|
|
Exercise
Price
|
|
Relative
Fair
Value(1)
|
|
VI
Partners, LLC(2)
|
|
|
157,895
|
|
|
9/8/2005
|
|
$
|
10.93
|
|
$
|
348,948
|
|
VI
Partners, LLC(2)
|
|
|
31,578
|
|
|
9/8/2005
|
|
|
11.27
|
|
|
67,577
|
|
New
issue — Alliance Group(3)
|
|
|
100,000
|
|
|
11/24/2010
|
|
|
0.45
|
|
|
22,085
|
|
New
issue — Alliance Group(4)
|
|
|
50,000
|
|
|
11/24/2010
|
|
|
0.45
|
|
|
13,450
|
|
New
issue — Laurus Master Fund(5)
|
|
|
4,250,000
|
|
|
11/24/2010
|
|
|
0.30
|
|
|
1,918,451
|
|
Other
parties in connection with Laurus financing(5)
|
|
|
350,000
|
|
|
11/24/2010
|
|
|
0.40
|
|
|
226,749
|
|
Bridge
Loan(6)
|
|
|
40,000
|
|
|
10/6/2006
|
|
|
0.45
|
|
|
8,186
|
|
Bridge
Loan(7)
|
|
|
30,000
|
|
|
10/21/2006
|
|
|
0.45
|
|
|
7,132
|
|
Bridge
Loan(8)
|
|
|
70,000
|
|
|
11/20/2006
|
|
|
0.45
|
|
|
35,845
|
|
Outstanding
Warrants as of September 30, 2004
|
|
|
5,079,473
|
|
|
|
|
|
|
|
$
|
2,648,423
|
|
____________
(1) Value
calculated using Black-Scholes:
|
|
|
|
Stock
Price
At
Issuance
|
|
Expected
Term
|
|
Volatility
|
|
Risk
Free Rate
|
|
(2)
|
|
|
Variables
|
|
$
|
6.94
|
|
|
5
years
|
|
|
42.75%
|
|
|
6.00%
|
|
(3)
|
|
|
Variables
|
|
$
|
0.35
|
|
|
3
years
|
|
|
111.00%
|
|
|
2.06%
|
|
(4)
|
|
|
Variables
|
|
$
|
0.41
|
|
|
3
years
|
|
|
111.00%
|
|
|
2.06%
|
|
(5)
|
|
|
Variables
|
|
$
|
0.72
|
|
|
7
years
|
|
|
111.00%
|
|
|
3.72%
|
|
(6)
|
|
|
Variables
|
|
$
|
0.33
|
|
|
3
years
|
|
|
111.00%
|
|
|
1.96%
|
|
(7)
|
|
|
Variables
|
|
$
|
0.37
|
|
|
3
years
|
|
|
111.00%
|
|
|
2.41%
|
|
(8)
|
|
|
Variables
|
|
$
|
0.69
|
|
|
3
years
|
|
|
111.00%
|
|
|
2.35%
|
|
(13)
Employee Stock Option Plans
We
adopted a Long-Term Incentive Plan in 1997 (the “1997 Plan”) pursuant to which
our Board of Directors may grant stock options to officers and key employees.
The 1997 Plan, as amended, authorizes grants of options to purchase up to
2,000,000 shares of our common stock. Options are granted with an exercise
price
equal to the fair market value of the common stock at the date of grant.
Options
granted under the 1997 Plan vest over four-year periods and expire no later
than
10 years from the date of grant. Under the 1997 Plan, there were 736,000
options
outstanding and 1,219,700 shares available, and 911,000 options outstanding
and
1,044,700 shares available for grant at September 30, 2004 and 2003,
respectively. At September 30, 2002, there were 974,700 options outstanding
and
981,000 shares available for grant under the 1997 Plan. No stock options
were
granted during the fiscal years ended 2004 and 2003.
Our
predecessor employee stock option plan, the 1989 Incentive Stock Option Plan
(the “1989 Plan”), was terminated in June 1999. At the date of termination of
the 1989 Plan, there were outstanding options to purchase 438,250 shares
of
common stock, of which 50,000 were outstanding at September 30, 2004, and
70,000
were outstanding at September 30, 2003 and 2002.
In
addition to stock options granted under the 1997 Plan and 1989 Plan noted
above,
we have issued warrants to our directors for remuneration (see Note
13).
At
September 30, 2004, the range of exercise prices was $0.88 to $1.44 per share
under the 1989 Plan, $0.42 to $2.50 per share under the 1997 Plan, and $2.91
per
share for warrants issued to directors. At September 30, 2004 and 2003, the
weighted-average remaining contractual life of the outstanding options was
4.0
years and 3.9 years, respectively. Combined stock option and directors’ warrant
activity during the periods indicated was as follows:
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Balance
at September 30, 2001
|
|
|
1,662,700
|
|
$
|
1.88
|
|
Granted
|
|
|
55,000
|
|
|
0.42
|
|
Canceled
|
|
|
(373,000
|
)
|
|
(1.51
|
)
|
Balance
at September 30, 2002
|
|
|
1,344,700
|
|
$
|
1.93
|
|
Granted
|
|
|
—
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
Canceled
|
|
|
(63,700
|
)
|
|
1.85
|
|
Balance
at September 30, 2003
|
|
|
1,281,000
|
|
|
1.93
|
|
Granted
|
|
|
—
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
Canceled
|
|
|
(495,000
|
)
|
|
2.35
|
|
Balance
at September 30, 2004
|
|
|
786,000
|
|
|
1.67
|
|
The
above
table includes warrants issued for directors’ remuneration that are also
included in outstanding warrants in Note 12 (300,000 such warrants were
outstanding as of September 30, 2003 and 2002). At September 30, 2004 and
2003,
the number of options exercisable was 731,000 and 796,000, respectively,
at
weighted average prices of $1.76 per share and $1.67 per share, respectively.
Included in the 495,000 shares cancelled during 2004 were 300,000 warrants
issued to directors.
(14)
Income Taxes
Income
tax benefit attributable to income from operations consisted of the following
for the years ended September 30, 2004, 2003 and 2002:
|
|
2004
|
|
2003
|
|
2002
|
|
Federal
current tax benefit
|
|
$
|
(81,229
|
)
|
$
|
—
|
|
$
|
(293,982
|
)
|
Federal
deferred tax benefit
|
|
|
—
|
|
|
—
|
|
|
—
|
|
State
tax
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
$
|
(81,229
|
)
|
$
|
—
|
|
$
|
(293,982
|
)
|
Income
tax benefit differed from the amounts computed by applying the U.S. statutory
federal income tax rate of 34% to income (loss) before taxes as a result
of the
following:
|
|
2004
|
|
2003
|
|
2002
|
|
Computed
“expected” tax expense (benefit)
|
|
$
|
3,847,974
|
|
$
|
(3,140,484
|
)
|
$
|
(4,886,364
|
)
|
Change
in valuation allowances
|
|
|
(5,278,972
|
)
|
|
2,145,166
|
|
|
3,606,770
|
|
State
taxes, net of benefit
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Nondeductible
items and permanent differences
|
|
|
1,376,064
|
|
|
995,318
|
|
|
985,612
|
|
Other
|
|
|
(26,295
|
)
|
|
—
|
|
|
—
|
|
|
|
$
|
(81,229
|
)
|
$
|
—
|
|
$
|
(293,982
|
)
|
The
tax
effects of temporary differences that were the sources of the deferred tax
assets consisted of the following at September 30, 2004 and 2003:
|
|
2004
|
|
2003
|
|
Deferred
tax assets:
|
|
|
|
|
|
Fixed
assets
|
|
$
|
374,870
|
|
$
|
371,623
|
|
Intangible
assets
|
|
|
129,872
|
|
|
249,023
|
|
Accounts
receivable
|
|
|
547,541
|
|
|
288,257
|
|
Inventories
|
|
|
1,186,753
|
|
|
943,760
|
|
Investment
in 3CI
|
|
|
703,032
|
|
|
703,032
|
|
Accrued
expenses
|
|
|
867,871
|
|
|
806,740
|
|
Other
|
|
|
39,332
|
|
|
39,332
|
|
Minimum
tax credit
|
|
|
144,575
|
|
|
144,575
|
|
Net
operating losses
|
|
|
3,854,123
|
|
|
9,580,598
|
|
Total
gross deferred tax assets
|
|
|
7,847,969
|
|
|
13,126,940
|
|
Less:
valuation allowance
|
|
|
(7,847,969
|
)
|
|
(13,126,940
|
)
|
Net
deferred tax assets
|
|
|
—
|
|
|
—
|
|
Other
deferred tax liabilities
|
|
|
—
|
|
|
—
|
|
Net
deferred tax assets
|
|
$
|
—
|
|
$
|
—
|
|
In
assessing the realizability of deferred assets, management considers whether
it
is more likely than not some portion or all of the deferred tax assets will
be
realized. The Company has established a valuation allowance for such deferred
tax assets to the extent such amounts are not utilized to offset existing
deferred tax liabilities reversing in the same periods.
For
the
period ending September 30, 2004, the Company elected under Internal Revenue
Code Section 108 to reduce its tax attributes, principally its net operating
loss carryforwards, to the extent of its insolvency of approximately
$17,753,000. But for this election, the Company would have had at September
30,
2004, remaining net operating losses of approximately $29,088,000. As a result
of the election, as of September 30, 2004, the Company had remaining net
operating losses of approximately $11,336,000, which will begin to expire
in
2022.
(15)
Earnings Per Share
The
following is a reconciliation of the numerators and denominators of the basic
and diluted computations for the years ended September 30, 2004, 2003 and
2002:
|
|
2004
|
|
2003
|
|
2002
|
|
Net
Income (loss) (numerator for basic earnings per share)
|
|
$
|
11,317,572
|
|
$
|
(9,236,717
|
)
|
$
|
(14,077,678
|
)
|
Interest
expense attributable to convertible note (including
non-cash)
|
|
|
2,898,225
|
|
|
—
|
|
|
—
|
|
Adjusted
net income (loss) (numerator for diluted earnings per
share)
|
|
$
|
14,215,797
|
|
$
|
(9,236,717
|
)
|
$
|
(14,077,678
|
)
|
Weighted
average common shares outstanding (denominator for basic earnings
per
share)
|
|
|
17,426,210
|
|
|
17,426,210
|
|
|
17,426,210
|
|
Dilutive
shares outstanding
|
|
|
21,150,553
|
|
|
—
|
|
|
—
|
|
Weighted
average common and dilutive shares outstanding
|
|
|
38,576,763
|
|
|
17,426,210
|
|
|
17,426,210
|
|
Basic
earnings per share
|
|
$
|
.65
|
|
$
|
(0.53
|
)
|
$
|
(0.81
|
)
|
Diluted
earnings per share
|
|
$
|
.37
|
|
$
|
(0.53
|
)
|
$
|
(0.81
|
)
|
Common
stock equivalents consisting of warrants, options and convertible debt of
4,640,000 and 3,932,857 were excluded from the computation of diluted earnings
per share due to their anti-dilutive effect for the years ended September
30,
2003 and 2002, respectively.
(16)
Commitments and Contingencies
The
Supply, Facility and Share Warrant Agreements
In
September 2004, our subsidiary entered into separate supply and credit facility
agreements (the “Supply Agreement”, the “Facility Agreement” and the “Share
Warrant Agreement,” respectively) with a foreign distributor related to our ATM
products. The Supply Agreement required the distributor, during the initial
term
of the agreement, to purchase ATMs only from us, effectively making us its
sole
supplier of ATMs. During each of the subsequent terms, the distributor is
required to purchase from us not less than 85% of all ATMs purchased by the
distributor. The initial term of the agreement was set as of the earlier
of: (a)
the expiration or termination of the debenture, (b) a termination for default,
(c) the mutual agreement of the parties, and (d) August 15, 2009.
The
Facility Agreement provides a credit facility in an aggregate amount not
to
exceed $2,280,000 to the distributor with respect to outstanding invoices
already issued to the distributor and with respect to invoices which may
be
issued in the future related to the purchase of our ATM products. Repayment
of
the credit facility is set by schedule for the last day of each month beginning
November 2004 and continuing through August 2005. The distributor fell into
default due to non-payment during February 2005. As of September 30, 2004,
we
had an outstanding balance of approximately $720,000 related to this facility.
Notwithstanding our current commitment to aggressively pursue our rights
to
collect the outstanding balance of the facility and in view of the uncertainty
of the ultimate outcome, we recorded a reserve in the amount of approximately
$185,000 during the quarter ended September 30, 2004 due to the payment
delinquency of the invoices related to 2004 billings. During 2005, we increased
the reserve to approximately $830,000 due to the payment delinquency of the
majority of the invoices issued in the fiscal year 2005. In July of 2005,
we
collected a partial payment of approximately $350,000 related to the 2004
billings. This collection reduced the outstanding balance on this facility
to
approximately $1,700,000, of which we have reserved a total of $830,000 as
of
July 31, 2005. We have also received a commitment commencing August 5, 2005
from
the distributor to submit at least approximately $35,000 per week until the
balance is paid in full.
The
Share
Warrant Agreement provides for the issuance to our subsidiary of a warrant
to
purchase up to 5% of the issued and outstanding Share Capital of the
distributor. The warrant restricts the distributor from (i) creating or issuing
a new class of stock or allotting additional shares, (ii) consolidating or
altering the shares, (iii) issuing a dividend, (iv) issuing additional warrants
and (v) amending articles of incorporation. Upon our exercise of the warrant,
the distributor’s balance outstanding under the Facility Agreement would be
reduced by $300,000.
Class
Action Litigation
We
and
several of our officers and directors were named as defendants (the
“Defendants”) in a purported class action filed on October 31, 2001 in the
United States District Court for the Southern District of Texas (the “Southern
District”), George Lehockey v. Tidel Technologies, et al., H-01-3741. Prior to
the suit’s filing, four identical suits were also filed in the Southern
District. On or about March 18, 2002, the Court consolidated all of the pending
class actions and appointed a lead plaintiff under the Private Securities
Litigation Reform Act of 1995 (“Reform Act”). On April 10, 2002, the lead
plaintiff filed a Consolidated Amended Complaint (“CAC”) that alleged that the
Defendants made material misrepresentations and omissions concerning our
financial condition and prospects between January 14, 2000 and February 8,
2001
(the putative class period). In June 2004, we reached an agreement in principle
to settle these class action lawsuits. The settlement, which was subject
to a
definitive agreement and court approval, provided for a cash payment of $3
million to be funded by our liability insurance carrier and our issuance
of two
million shares of common stock. In October 2004, the Court approved the
settlement and the shares were issued in November 2004. In addition, in August
2004, we reached an agreement with the liability insurance carrier to issue
warrants to the carrier to purchase 500,000 shares of our common stock at
an
exercise price of $0.67 per share in exchange for the carrier’s acceptance of
the terms of the class action lawsuit. We provided a reserve of $1,564,490
in
fiscal 2002 to cover any losses from this litigation, which consisted of
$1,340,000 related to the shares of common stock issued and $224,490 related
to
the value of the warrants issued. The common stock was valued using the stock
price on the date issued and the warrants were valued using the Black-Scholes
pricing method.
Montrose
Litigation
On
August
9, 2002, one of the Holders, Montrose Investments Ltd., commenced an adversary
proceeding against us in the Supreme Court of the State of New York, County
of
New York claiming monies due under the Convertible Debentures (the “Montrose
Litigation”). This action was dismissed by the Court on March 3, 2003. Montrose
filed a Notice of Appeal with the Supreme Court of the State of New York,
Appellate Division, First Department on May 20, 2003. This litigation was
dismissed in conjunction with the Laurus Financing completed in November
2003.
On or about December 2, 2003, we entered into a stipulation of discontinuance,
which dismissed the appeal.
The
Development Agreement
In
August
2001, we entered into a Development Agreement (the “Development Agreement”) with
a national petroleum retailer and convenience store operator (the “Retailer”)
for the joint development of a new generation of “intelligent” TACCs, now known
as the Sentinel product. The Development Agreement provided for four phases
of
development with the first three phases to be funded by the Retailer at an
estimated cost of $800,000. In February 2002, we agreed to provide the Retailer
a rebate on each unit of the Sentinel product for the first 1,500 units sold,
provided the product successfully entered production, until the Retailer
had
earned amounts equal to the development costs paid by the Retailer. The
development of the product was completed and production commenced. The aggregate
development costs for the Sentinel product paid for by the Retailer totaled
$651,500. As of September 30, 2004, we had credited back approximately $87,629
to the Retailer resulting in an accrued liability of $564,231 for the benefit
of
the Retailer. As of June 30, 2005, 1,527 units of the Sentinel product had
been
sold and rebates or other credits totaling $122,100 had been credited back
to
the Retailer resulting in rebates or other credits totaling $529,400 accrued
for
the benefit of the Retailer.
Other
Matters
We
and
our subsidiaries are each subject to certain other litigation and claims
arising
in the ordinary course of business. In our management’s opinion, the amounts
ultimately payable, if any, resulting from such litigation and claims will
not
have a materially adverse effect on our financial position.
We
lease
office and warehouse space, transportation equipment and other equipment
under
terms of operating leases which expire through 2006. Rental expense under
these
leases for the years ended September 30, 2004, 2003 and 2002, was approximately
$453,000, $479,000 and $661,000, respectively. We have approximate future
lease
commitments as follows:
|
|
Amount
|
|
Years
Ending September 30:
|
|
|
|
2005
|
|
$
|
484,135
|
|
2006
|
|
|
168,520
|
|
Thereafter
|
|
|
—
|
|
|
|
$
|
652,655
|
|
(17)
Subsequent Events
Additional
Laurus Financing
On
November 26, 2004, we completed a $3,350,000 financing transaction (the
“Additional Financing”) with Laurus pursuant to a Securities Purchase Agreement
by and between the Company and Laurus, dated as of November 26, 2004. The
Additional Financing was comprised of (i) a three-year convertible note issued
to Laurus in the amount of $1,500,000, which bears interest at a rate of
14% and
is convertible into our common stock at a conversion price of $3.00 per share
(the “$1,500,000 Note”), (ii) a one-year convertible in the amount of $600,000
which bears interest at a rate of 10% and is convertible into our common
stock
at a conversion price of $0.30 per share (the “$600,000 Note”), (iii) a one-year
convertible note of our subsidiary, Tidel Engineering, L.P., in the amount
of
$1,250,000, which is a revolving working capital facility for the purpose
of
financing purchase orders of our subsidiary, Tidel Engineering, L.P., (the
“Purchase Order Note”), which bears interest at a rate of 14% and is convertible
into our common stock at a price of $3.00 per share and (iv) our issuance
to
Laurus of 1,251,000 shares of common stock, or approximately 7% of the total
shares outstanding, (the “2003 Fee Shares”) in satisfaction of fees totaling
$375,300 incurred in connection with the convertible term notes issued in
the
Financing discussed above. As a result of the issuance of the 2003 Fee Shares,
we recorded an additional charge in fiscal 2004 of $638,010 based on the
market
value on November 26, 2004. We also increased the principle balance of the
original note by $292,987, of which $226,312 bears interest at the default
rate
of 18%. This amount represents interest accrued but not paid to Laurus as
of
August 1, 2004. In addition, Laurus received warrants to purchase 500,000
shares
of our common stock at an exercise price of $0.30 per share. The proceeds
of the
Additional Financing were allocated to the notes based on the relative fair
value of the notes and the warrants, with the value of the warrants resulting
in
a discount against the notes. In addition, the conversion terms of the $600,000
Note resulted in a beneficial conversion feature, further discounting the
carrying value of the notes. As a result, we will record additional interest
charges related to these discounts totaling $840,000 over the terms of the
notes. Laurus was also granted registration rights in connection with the
2003
Fee Shares and other shares issuable pursuant to the Additional Financing.
The
obligations pursuant to the Additional Financing are secured by all of our
assets and are guaranteed by our subsidiaries. Net proceeds from the Additional
Financing in the amount of $3,232,750 were primarily used for (i) general
working capital payments made directly to vendors, (ii) past due interest
on
Laurus’s $6,450,000 convertible note due pursuant to the Financing and (iii) the
establishment of an escrow for future principal and interest payments due
pursuant to the Additional Financing.
The
notes
and warrants issued in the financing and the additional financing are
convertible into an aggregate of 28,226,625 shares of our common stock and,
when
coupled with the 2003 fee shares, represent approximately 60% of our outstanding
common stock, subject to adjustment as provided in the transaction documents.
If
these notes and warrants were completely converted to common stock by Laurus,
then the other existing shareholders’ ownership in the Company would be
significantly diluted to approximately 40% of their present ownership
position.
In
connection with the Financing, Laurus required that we covenant to become
current in our filings with the Securities and Exchange Commission according
to
a predetermined schedule. Effective November 26, 2004, the Additional Financing
documents require, among other things, that we provide evidence of filing
to
Laurus of our fiscal 2003, fiscal 2004 and year-to-date interim 2005 filings
with the Securities and Exchange Commission on or before July 31, 2005. The
10-K
for the fiscal year ended September 30, 2002 (the “2002 10-K”) was filed on
February 1, 2005, in accordance with Additional Financing documents’
requirements. Fourteen (14) days following such time as we become current
in our
filings with the Securities and Exchange Commission, we must deliver to Laurus
evidence of the listing of our common stock on the Nasdaq Over The Counter
Bulletin Board (the “Listing Requirement”).
On
February 4, 2005, we received a letter from the Securities and Exchange
Commission stating that the Division of Corporate Finance of the SEC would
not
object to the Company filing a comprehensive annual report on Form 10-K which
covers all of the periods during which it has been a delinquent filer, together
with its filing all Forms 10-Q which are due for quarters subsequent to the
latest fiscal year included in that comprehensive annual report. However,
the
SEC Letter also stated that, upon filing such a comprehensive Form 10-K,
the
Company would not be considered “current” for purposes of Regulation S, Rule 144
or filing on Forms S-8, and that the Company would not be eligible to use
Forms
S-2 or S-3 until a sufficient history of making timely filings is established.
Laurus consented to the filing of such a comprehensive annual report in
satisfaction of the Filing Requirements mandated on or before July 31, 2005.
Laurus also consented to a modification of the requirement that a Registration
Statement be filed within 20 days of satisfaction of the Filing Requirements
to
instead require that the Registration Statement be required to be filed by
September 20, 2006.
Pursuant
to the terms of the Financing and the Additional Financing, an Event of Default
occurs if, among other things, we do not complete our filings with the
Securities and Exchange Commission on the timetable set forth in the Additional
Financing documents, or we do not comply with the Listing Requirement or
any
other material covenant or other term or condition of the 2003 SPA, the 2004
SPA, the notes we issued to Laurus or any of the other documents related
to the
Financing or the Additional Financing. If there is an Event of Default,
including any of the items specified above or in the transaction documents,
Laurus may declare all unpaid sums of principal, interest and other fees
due and
payable within five (5) days after we receive a written notice from Laurus.
If
we cure the Event of Default within that five (5) day period, the Event of
Default will no longer be considered to be occurring.
If
we do
not cure such Event of Default, Laurus shall have, among other things, the
right
to have two (2) of its designees appointed to our Board, and the interest
rate
of the notes shall be increased to the greater of 18% or the rate in effect
at
that time.
On
November 26, 2004, in connection with the Additional Financing, we entered
into
an agreement with Laurus (the “Asset Sales Agreement”) whereby we agreed to pay
a fee in the amount of at least $2,000,000 (the “Reorganization Fee”) to Laurus
upon the occurrence of certain events as specified below and therein, which
Reorganization Fee is secured by all of our assets, and is guaranteed by
our
subsidiaries. The Asset Sales Agreement provides that (i) once our obligations
to Laurus have been paid in full (other than the Reorganization Fee), we
shall
be able to seek additional financing in the form of a non-convertible bank
loan
in an aggregate principal amount not to exceed $4,000,000, subject to Laurus’s
right of first refusal; (ii) the net proceeds of an asset sale to the party
named therein shall be applied to our obligations to Laurus under the Financing
and the Additional Financing, as described above (collectively, the
“Obligations”), but not to the Reorganization Fee; and (iii) the proceeds of any
of our subsequent sales of equity interests or assets or of our subsidiaries
consummated on or before the fifth anniversary of the Assets Sales Agreement
(each, a “Company Sale”) shall be applied first to any remaining obligations,
then paid to Laurus pursuant to an increasing percentage of at least 55.5%
set
forth therein, which amount shall be applied to the Reorganization Fee. Under
this formula, the existing shareholders could receive less than 45% of the
proceeds of any sale of our assets or equity interests, after payment of
the
Additional Financing and Reorganization Fee as defined. The Reorganization
Fee
shall be $2,000,000 at a minimum, but could equal a higher amount based upon
a
percentage of the proceeds of any company sale, as such term is defined in
the
Asset Sales Agreement. In the event that Laurus has not received the full
amount
of the Reorganization Fee on or before the fifth anniversary of the date
of the
Asset Sales Agreement, then we shall pay any remaining balance due on the
Reorganization Fee to Laurus. We will record a $2,000,000 charge in the first
quarter of fiscal 2005 to interest expense.
Engagement
of Investment Banker to Evaluate Strategic Alternatives for the Sale of the
Cash
Security Business
We
engaged Stifel, Nicolaus & Company, Inc. (“Stifel”) in October 2004, to
assist the Board of Directors in connection with the proposed sale of our
Cash
Security business, deliver a fairness opinion, and render such additional
assistance as we may reasonably request in connection with the proposed sale
of
our TACC business. We are currently working with Stifel in connection with
such
a proposed sale.
Related
Party Transactions
At
September 30, 2002, James T. Rash, our Chairman and CEO, had outstanding
promissory notes due to us in the aggregate amount of $1,143,554, bearing
interest at 10% per annum. The notes matured on September 30, 2004 and January
14, 2005. Mr. Rash died December 19, 2004. These notes were not repaid by
Mr.
Rash upon maturity. We also issued a convertible note in the amount of $100,000
payable to a private company controlled by Mr. Rash in connection with the
Financing. The note payable to Mr. Rash, which was convertible at any time
into
a maximum of 250,000 shares of our common stock, was paid in full in March
2004.
The Board of Directors approved the transfer of a key-man life insurance
policy
on the life of Mr. Rash in the amount of $1,000,000 to Mr. Rash in 2002,
in
connection with Mr. Rash’s then pending retirement. The proceeds were assigned
as collateral for outstanding promissory notes due from Mr. Rash. This amount,
which we have not yet received, will be applied to the repayment of the notes.
The remaining receivable amount will be collected from anticipated bonuses
due
to Mr. Rash.
In
September 2000, we loaned $141,563 to Michael F. Hudson, our Executive Vice
President and Chief Operating Officer of our principal operating subsidiary,
in
a promissory note maturing October 1, 2002, and bearing interest at 10% per
annum. During the year ended September 30, 2001, we loaned an additional
$225,000 to Mr. Hudson in a promissory note maturing October 1, 2002, and
bearing interest at 10% per annum. The notes from Mr. Hudson are secured
by a
pledge of 83,500 shares of our common stock. The note to Mr. Hudson in the
amount of $141,563 relates to the exercise of certain stock option agreements.
These notes were not repaid by Mr. Hudson upon maturity. We negotiated with
Mr.
Hudson regarding satisfaction of these notes, including, among other things,
recoveries through certain salary and bonuses due to Mr.
Hudson.
On
June
22, 2005, we entered into two agreements with Mr. Hudson. The first was a
new
employment agreement that terminated his prior employment agreement and provided
for his continued employment with the Company until the earlier of December
31,
2005 or the closing of the transactions contemplated by the Asset Purchase
Agreement. Under this new employment agreement, Mr. Hudson’s duties and
compensation will continue as under his prior employment agreement.
Mr.
Hudson and the Company also entered into the Settlement Agreement, which
provided for the settlement of outstanding amounts owed by Mr. Hudson to
the
Company. In satisfaction of Mr. Hudson’s obligations to the Company, he agreed
to (a) the delivery of certain shares of the Company’s common stock held by him
for cancellation by the Company; (b) cancellation by the Company of the majority
of the options to purchase common stock held by him; (c) application of certain
bonuses (otherwise payable to him) to the payment of his outstanding obligations
to the Company; and (d) release by Mr. Hudson of any and all claims against
the
Company. Mr. Hudson also resigned from the Board of Directors of the
Company.
Patent
Litigation
On
June
9, 2005, Corporate Safe Specialists, Inc. (“CSS”) filed a lawsuit against Tidel
Technologies, Inc. and Tidel Engineering, L.P. The lawsuit, Civil Action
No.
02-C-3421, was filed in the United States District Court of the Northern
District of Illinois, Eastern Division. CSS alleges that the Sentinel product
sold by Tidel Engineering, L.P. infringes one or more patent claims found
in CSS
patent U.S. Patent No. 6,885,281 (the ‘281 patent). CSS seeks injunctive relief
against future infringement, unspecified damages for past infringement and
attorney’s fees and costs. Tidel Technologies, Inc. was released from this
lawsuit, but Tidel Engineering, L.P. remains a defendant. Tidel Engineering,
L.P. is vigorously defending this litigation.
The
Company has filed a motion to dismiss the case CSS filed in Illinois, and
Tidel
Engineering, L.P. has filed a motion to transfer the Illinois case to the
Eastern District of Texas. The Company and Tidel Engineering, L.P. have also
filed a declaratory judgment action pending in the Eastern District of Texas.
In
that action, both the Tidel entities are asking the Eastern District of Texas
to
find, among other things, that neither the Company nor Tidel Engineering
have
infringed on CSS’s ‘281 patent. Both companies have also requested that an
injunction be issued by the Eastern District of Texas against CSS for
intentional interference with the sale or bid process for Tidel Engineering
L.P.’s cash security business. The Company is vigorously pursuing this
declaratory judgment action.
(18)
Quarterly Financial Information (Unaudited)
Summarized
quarterly financial information for the years ended September 30, 2004 and
2003
is as follows:
TIDEL
TECHNOLOGIES, INC. AND SUBSIDIARIES
QUARTERLY
FINANCIAL INFORMATION
FOR
THE YEAR ENDED SEPTEMBER 30, 2004
(UNAUDITED)
Fiscal
Year 2004
|
|
Quarters
Ended
|
|
|
|
12/31/2003
|
|
3/31/2004
|
|
6/30/2004
|
|
9/30/2004
|
|
Revenues
|
|
$
|
7,653,835
|
|
$
|
5,303,582
|
|
$
|
4,618,882
|
|
$
|
4,938,187
|
|
Cost
of sales
|
|
|
5,257,945
|
|
|
3,832,695
|
|
|
3,458,039
|
|
|
4,506,500
|
|
Gross
profit
|
|
|
2,395,890
|
|
|
1,470,887
|
|
|
1,160,843
|
|
|
431,687
|
|
Selling,
general and administrative
|
|
|
2,312,149
|
|
|
2,269,770
|
|
|
2,319,334
|
|
|
3,065,602
|
|
Provision
for doubtful accounts
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
228,240
|
|
Depreciation
and amortization
|
|
|
130,721
|
|
|
126,013
|
|
|
124,829
|
|
|
132,276
|
|
Operating
loss
|
|
|
(46,980
|
)
|
|
(924,896
|
)
|
|
(1,283,320
|
)
|
|
(2,994,431
|
)
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on extinguishment of debt
|
|
|
18,823,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Gain
on sale of securities
|
|
|
—
|
|
|
1,798,492
|
|
|
119,520
|
|
|
—
|
|
Interest
expense, net
|
|
|
(805,515
|
)
|
|
(1,034,809
|
)
|
|
(644,748
|
)
|
|
(1,769,970
|
)
|
Total
other income (expense)
|
|
|
18,017,485
|
|
|
763,683
|
|
|
(525,228
|
)
|
|
(1,769,970
|
)
|
Income
(loss) before taxes
|
|
|
17,970,505
|
|
|
(161,213
|
)
|
|
(1,808,548
|
)
|
|
(4,764,401
|
)
|
Income
tax benefit
|
|
|
—
|
|
|
—
|
|
|
(81,229
|
)
|
|
—
|
|
Net
income (loss)
|
|
$
|
17,970,505
|
|
$
|
(161,213
|
)
|
$
|
(1,727,319
|
)
|
$
|
(4,764,401
|
)
|
Basic
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1.03
|
|
$
|
(0.01
|
)
|
$
|
(0.10
|
)
|
$
|
(0.26
|
)
|
Weighted
average common shares outstanding
|
|
|
17,426,210
|
|
|
17,426,210
|
|
|
17,426,210
|
|
|
17,426,210
|
|
Diluted
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
0.45
|
|
$
|
(0.01
|
)
|
$
|
(0.10
|
)
|
$
|
(0.26
|
)
|
Weighted
average common and dilutive shares outstanding
|
|
|
40,296,299
|
|
|
17,426,210
|
|
|
17,426,210
|
|
|
17,426,210
|
|
TIDEL
TECHNOLOGIES, INC. AND SUBSIDIARIES
QUARTERLY
FINANCIAL INFORMATION
FOR
THE YEAR ENDED SEPTEMBER 30, 2003
(UNAUDITED)
Fiscal
Year 2003
|
|
Quarters
Ended
|
|
|
|
12/31/2002
|
|
3/31/2003
|
|
6/30/2003
|
|
9/30/2003
|
|
Revenues
|
|
$
|
5,934,231
|
|
$
|
3,273,666
|
|
$
|
4,342,840
|
|
$
|
4,243,562
|
|
Cost
of sales
|
|
|
4,163,478
|
|
|
2,639,858
|
|
|
3,465,276
|
|
|
4,343,835
|
|
Gross
profit
|
|
|
1,770,753
|
|
|
633,808
|
|
|
877,564
|
|
|
(100,273
|
)
|
Selling,
general and administrative
|
|
|
2,082,011
|
|
|
2,218,853
|
|
|
2,035,083
|
|
|
2,058,558
|
|
Provision
for doubtful accounts
|
|
|
—
|
|
|
—
|
|
|
127,415
|
|
|
497,096
|
|
Depreciation
and amortization
|
|
|
223,760
|
|
|
214,620
|
|
|
180,955
|
|
|
180,520
|
|
Operating
loss
|
|
|
(535,018
|
)
|
|
(1,799,665
|
)
|
|
(1,465,889
|
)
|
|
(2,836,447
|
)
|
Interest
expense, net
|
|
|
631,750
|
|
|
627,055
|
|
|
668,153
|
|
|
672,740
|
|
Loss
before taxes
|
|
|
(1,166,768
|
)
|
|
(2,426,720
|
)
|
|
(2,134,042
|
)
|
|
(3,509,187
|
)
|
Income
tax benefit
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
loss
|
|
$
|
(1,166,768
|
)
|
$
|
(2,426,720
|
)
|
$
|
(2,134,042
|
)
|
$
|
(3,509,187
|
)
|
Basic
loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(0.07
|
)
|
$
|
(0.14
|
)
|
$
|
(0.12
|
)
|
$
|
(0.20
|
)
|
Weighted
average common shares outstanding
|
|
|
17,426,210
|
|
|
17,426,210
|
|
|
17,426,210
|
|
|
17,426,210
|
|
Diluted
loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(0.07
|
)
|
$
|
(0.14
|
)
|
$
|
(0.12
|
)
|
$
|
(0.20
|
)
|
Weighted
average common and dilutive shares outstanding
|
|
|
17,426,210
|
|
|
17,426,210
|
|
|
17,426,210
|
|
|
17,426,210
|
|
TIDEL
TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION
AND QUALIFYING ACCOUNTS
Classification
|
|
Balance
at
Beginning
of
Period
|
|
Additions
Charged
to
Costs
and
Expenses
|
|
Charged
to
Other
Accounts
|
|
Deductions
|
|
Balance
at
End
of Period
|
|
For
the year ended September 30, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts and notes receivable
|
|
$
|
847,815
|
|
$
|
228,240
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,076,055
|
|
Reserve
for settlement of class action litigation
|
|
|
1,564,490
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,564,490
|
|
Inventory
reserve
|
|
|
1,285,389
|
|
|
614,611
|
|
|
—
|
|
|
—
|
|
|
1,900,000
|
|
|
|
$
|
3,697,694
|
|
$
|
1,343,972
|
|
$
|
—
|
|
$
|
33,240
|
|
$
|
5,074,906
|
|
For
the year ended September 30, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts and notes receivable
|
|
$
|
27,713,416
|
|
$
|
624,511
|
|
$
|
—
|
|
$
|
27,490,112
|
|
$
|
847,815
|
|
Reserve
for settlement of class action litigation
|
|
|
1,564,490
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,564,490
|
|
Inventory
reserve
|
|
|
1,400,000
|
|
|
615,000
|
|
|
—
|
|
|
729,611
|
|
|
1,285,389
|
|
|
|
$
|
30,677,906
|
|
$
|
1,239,511
|
|
$
|
—
|
|
$
|
28,219,723
|
|
$
|
3,697,694
|
|
For
the year ended September 30, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts and notes receivable
|
|
$
|
25,427,042
|
|
$
|
2,985,744
|
|
$
|
—
|
|
$
|
699,370
|
|
$
|
27,713,416
|
|
Reserve
for settlement of class action litigation
|
|
|
—
|
|
|
1,564,490
|
|
|
—
|
|
|
—
|
|
|
1,564,490
|
|
Inventory
reserve
|
|
|
90,050
|
|
|
1,370,671
|
|
|
—
|
|
|
60,721
|
|
|
1,400,000
|
|
|
|
$
|
25,517,092
|
|
$
|
5,920,905
|
|
$
|
—
|
|
$
|
760,091
|
|
$
|
30,677,906
|
|
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.
|
TIDEL
TECHNOLOGIES, INC. (Company)
|
|
|
November
30, 2005
|
/s/
MARK K. LEVENICK
|
|
Mark
K. Levenick
|
|
Interim
Chief Executive Officer
|
|
|
November
30, 2005
|
/s/
ROBERT D. PELTIER
|
|
Robert
D. Peltier
|
|
Interim
Chief Financial Officer
|
James
T.
Rash, our former Chairman, Chief Executive Officer and Chief Financial Officer,
died on December 19, 2004. We appointed Mark K. Levenick to the position
of
Interim Chief Executive Officer but no permanent Chairman, Chief Executive
Officer or Chief Financial Officer has been hired or appointed as of the
date
hereof. Robert D. Peltier was appointed Interim Chief Financial Officer in
February 2005.
POWER
OF ATTORNEY
Tidel
Technologies, Inc. and each of the undersigned do hereby appoint Mark K.
Levenick its or his true and lawful attorney to execute on behalf of Tidel
Technologies, Inc. and the undersigned any and all amendments to this Annual
Report on Form 10-K and to file the same with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission;
each of such attorneys shall have the power to act hereunder with or without
the
other.
Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report
has
been signed below by the following persons on behalf of the Registrant and
in
the capacities and on the dates indicated:
SIGNATURE
|
|
TITLE
|
Date
|
/s/
Jerrell G. Clay
|
|
Director
|
November
30, 2005
|
Jerrell
G. Clay
|
|
|
|
|
|
|
|
/s/
Mark K. Levenick
|
|
Interim
Chief Executive Officer,
|
|
Mark
K. Levenick
|
|
President
and Director
|
|
|
|
|
|
/s/
Raymond P. Landry
|
|
Director
|
|
Raymond
P. Landry
|
|
|
|
|
|
|
|
/s/
Stephen P. Griggs
|
|
Director
|
|
Stephen
P. Griggs
|
|
|
|
|
|
|
|
/s/
Robert D. Peltier
|
|
Interim
Chief Financial Officer
|
|
Robert
D. Peltier
|
|
|
|
Except
as
otherwise indicated, the following documents are incorporated by reference
as
Exhibits to this Report:
Exhibit
Number
|
|
Description
|
*2.01.
|
|
Asset
Purchase Agreement dated February 19, 2005 by and among Tidel Engineering,
L.P., NCR Texas LLC and us.
|
|
|
|
3.01.
|
|
Certificate
of Incorporation of American Medical Technologies, Inc. (filed
as Articles
of Domestication with the Secretary of State, State of Delaware
on
November 6, 1987 and incorporated by reference to Exhibit 2 of
our Form 10
dated November 7, 1988 as amended by Form 8 dated February 2,
1989).
|
|
|
|
3.02.
|
|
Amendment
to Certificate of Incorporation dated July 16, 1997 (incorporated
by
reference to Exhibit 3 of our Quarterly Report on Form 10-Q for
the
quarterly period ended June 30, 1997).
|
|
|
|
3.03.
|
|
Our
By-Laws (incorporated by reference to Exhibit 3 of our Form 10
dated
November 7, 1988 as amended by Form 8 dated February 2,
1989).
|
|
|
|
4.01.
|
|
Credit
Agreement dated April 1, 1999 by and among Tidel Engineering, L.P.,
Chase
Bank of Texas, N.A. and us (incorporated by reference to Exhibit
4.02 of
our Annual Report on Form 10-K for the fiscal year ended September
30,
1999).
|
|
|
|
4.02.
|
|
First
Amendment to Credit Agreement dated April 1, 1999 by and between
Tidel
Engineering, L.P., Chase Bank of Texas, N.A. and us (incorporated
by
reference to Exhibit 4.19 of our Annual Report on Form 10-K for
the fiscal
year ended September 30, 1999).
|
|
|
|
4.03.
|
|
Second
Amendment to Credit Agreement dated September 8, 2000 by and among
Tidel
Engineering, L.P., The Chase Manhattan Bank and us (incorporated
by
reference to Exhibit 10.4 of our Current Report on Form 8-K dated
September 8, 2000).
|
|
|
|
4.04.
|
|
Third
Amendment to Credit Agreement dated September 29, 2000 by and among
Tidel
Engineering, L.P., The Chase Manhattan Bank, and us (incorporated
by
reference to Exhibit 10.4 of our Current Report on Form 8-K dated
September 29, 2000).
|
|
|
|
4.05.
|
|
Fourth
Amendment to Credit Agreement dated November 30, 2000 by and among
Tidel
Engineering, L.P., The Chase Manhattan Bank, and us (incorporated
by
reference to Exhibit 10.5 of our Quarterly Report on Form 10-Q
for the
quarterly period ended December 31, 2000).
|
|
|
|
4.06.
|
|
Fifth
Amendment to Credit Agreement and Forbearance Agreement dated June
1, 2001
by and among Tidel Engineering, L.P., The Chase Manhattan Bank,
and us
(incorporated by reference to Exhibit 4.01 of our Quarterly Report
on Form
10-Q for the quarterly period ended June 30, 2001).
|
|
|
|
4.07.
|
|
Sixth
Amendment to Credit Agreement and Waiver dated December 18, 2001
by and
among Tidel Engineering, L.P., JP Morgan Chase, and us (incorporated
by
reference to Exhibit 4.07 of our Annual Report on Form 10-K for
the fiscal
year ended September 30, 2001).
|
|
|
|
4.08.
|
|
Seventh
Amendment to Credit Agreement and Waiver Agreement dated April
30, 2002 by
and among JP Morgan Chase Bank, Tidel Engineering, L.P. and us
(incorporated by reference to Exhibit 4.01 of our Quarterly Report
on Form
10-Q for the quarterly period ended June 30, 2002).
|
|
|
|
4.09.
|
|
Promissory
Note dated April 1, 1999 executed by Tidel Engineering, L.P. payable
to
the order of Chase Bank of Texas Commerce, N.A. (incorporated by
reference
to Exhibit 4.03 of our Annual Report on Form 10-K for the fiscal
year
ended September 30, 1999).
|
|
|
|
4.10.
|
|
Term
Note dated April 1, 1999, executed by Tidel Engineering, L.P. and
us,
payable to the order of Chase Bank of Texas, N.A. (incorporated
by
reference to Exhibit 4.04 of our Annual Report on Form 10-K for
the fiscal
year ended September 30, 1999).
|
4.11.
|
|
Revolving
Credit Note dated September 30, 1999, executed by Tidel Engineering,
L.P.,
payable to the order of Chase Bank of Texas, Inc. (incorporated
by
reference to Exhibit 4.18 of our Annual Report on Form 10-K for
the fiscal
year ended September 30, 1999).
|
4.12.
|
|
Amended
and Restated Revolving Credit Note dated November 30, 2000
by and between
Tidel Engineering, L.P. and The Chase Manhattan Bank (incorporated
by
reference to Exhibit 10.6 of our Quarterly Report on Form 10-Q
for the
quarterly period ended December 31, 2000).
|
|
|
|
4.13.
|
|
Amended
and Restated Revolving Credit Note dated April 30, 2002 by
and between
Tidel Engineering, L.P. and JP Morgan Chase Bank (incorporated
by
reference to Exhibit 4.02 of our Quarterly Report on Form 10-Q
for the
quarterly period ended June 30, 2002).
|
|
|
|
4.14.
|
|
Security
Agreement (Personal Property) dated as of April 1, 1999, by
and between
Tidel Engineering, L.P. and Chase Bank of Texas, N.A. (incorporated
by
reference to Exhibit 4.05 of our Annual Report on Form 10-K
for the fiscal
year ended September 30, 1999).
|
|
|
|
4.15.
|
|
Security
Agreement (Personal Property) dated as of April 1, 1999, by
and between
Tidel Cash Systems, Inc. and Chase Bank of Texas, N.A. (incorporated
by
reference to Exhibit 4.06 of our Annual Report on Form 10-K
for the fiscal
year ended September 30, 1999).
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4.16.
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Security
Agreement (Personal Property) dated as of April 1, 1999, by
and between
Tidel Services, Inc. and Chase Bank of Texas, N.A. (incorporated
by
reference to Exhibit 4.07 of our Annual Report on Form 10-K
for the fiscal
year ended September 30, 1999).
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4.17.
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Unconditional
Guaranty Agreement dated April 1, 1999, executed by Tidel Technologies,
Inc. for the benefit of Chase Bank of Texas, N.A. (incorporated
by
reference to Exhibit 4.08 of our Annual Report on Form 10-K
for the fiscal
year ended September 30, 1999).
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4.18.
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Unconditional
Guaranty Agreement dated April 1, 1999, executed by Tidel Services,
Inc.
for the benefit of Chase Bank of Texas, N.A. (incorporated
by reference to
Exhibit 4.09 of our Annual Report on Form 10-K for the fiscal
year ended
September 30, 1999).
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4.19.
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Unconditional
Guaranty Agreement dated April 1, 1999, executed by Tidel Cash
Systems,
Inc. for the benefit of Chase Bank of Texas, N.A. (incorporated
by
reference to Exhibit 4.10 of our Annual Report on Form 10-K
for the fiscal
year ended September 30, 1999).
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4.20.
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Pledge
and Security Agreement (Stock) dated April 1, 1999, executed
by Tidel
Technologies, Inc. for the benefit of Chase Bank of Texas,
N.A.
(incorporated by reference to Exhibit 4.11 of our Annual Report
on Form
10-K for the fiscal year ended September 30, 1999).
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4.21.
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Pledge
and Security Agreement (Limited Partnership Interest) dated
April 1, 1999,
executed by Tidel Services, Inc. for the benefit of Chase Bank
of Texas,
N.A. (incorporated by reference to Exhibit 4.12 of our Annual
Report on
Form 10-K for the fiscal year ended September 30,
1999).
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4.22.
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Pledge
and Security Agreement (Limited Partnership Interest) dated
April 1, 1999,
executed by Tidel Cash Systems, Inc. for the benefit of Chase
Bank of
Texas, N.A. (incorporated by reference to Exhibit 4.13 of our
Annual
Report on Form 10-K for the fiscal year ended September 30,
1999).
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4.23.
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Form
of Agreement under our 1997 Long-Term Incentive Plan (incorporated
by
reference to Exhibit 4.3 of our Form S-8 dated February 14,
2000).
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(1)4.24.
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Form
of Agreement under our 1989 Incentive Stock Option Plan (incorporated
by
reference to Exhibit 4.4 of our Form S-8 dated February 14,
2000).
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4.25.
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Common
stock Purchase Warrant issued to Montrose Investments Ltd.
dated September
8, 2000 (incorporated by reference to Exhibit 4.2 of our Current
Report on
Form 8-K dated September 8, 2000).
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4.26.
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Common
stock Purchase Warrant issued to Montrose Investments Ltd.
dated September
8, 2000 (incorporated by reference to Exhibit 4.2 of our Current
Report on
Form 8-K dated September 8, 2000).
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4.27.
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Registration
Rights Agreement dated September 8, 2000 by and between Montrose
Investments Ltd. and us (incorporated by reference to Exhibit
4.2 of our
Current Report on Form 8-K dated September 8,
2000).
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4.28.
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Joinder
and Amendment to Registration Rights Agreement dated September
29, 2000 by
and between Acorn Investment Trust and us (incorporated by
reference to
Exhibit 10.2 of our Current Report on Form 8-K dated September
29,
2000).
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4.29.
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Amendment
and Supplement to Intercreditor Agreement dated September 6,
2001 by and
among Tidel Engineering, L.P., NCR Corporation, and us (incorporated
by
reference to Exhibit 10.26 of our Annual Report on Form 10-K
for the
fiscal year ended September 30, 2001).
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4.30.
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Amended
and Restated Intercreditor Agreement dated September 24, 2001
by and among
Tidel Engineering, L.P., NCR Corporation, and us (incorporated
by
reference to Exhibit 10.25 of our Annual Report on Form 10-K
for the
fiscal year ended September 30, 2001).
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4.31.
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Our
Convertible Debenture issued to Montrose Investments, Ltd.
dated September
8, 2000 (incorporated by reference to Exhibit 4.1 of our Current
Report on
Form 8-K dated September 8, 2000).
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4.32.
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Subordination
Agreement dated September 8, 2000 by and among Tidel Engineering,
L.P.,
Montrose Investments, Ltd., The Chase Manhattan Bank, and us
(incorporated
by reference to Exhibit 10.3 of our Current Report on Form
8-K dated
September 8, 2000).
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4.33.
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Convertible
Debenture issued to Acorn Investment Trust dated September
29, 2000
(incorporated by reference to Exhibit 4.1 of our Current Report
on Form
8-K dated September 29, 2000).
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4.34.
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Subordination
Agreement dated September 29, 2000 by and among Tidel Engineering,
L.P.,
Acorn Investment Trust, The Chase Manhattan Bank, and us (incorporated
by
reference to Exhibit 10.3 of our Current Report on Form 8-K
dated
September 29, 2000).
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4.35.
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Convertible
Term Note in favor of Laurus Master Fund, Ltd. in the principal
amount of
$6,450,000 dated November 25, 2003 (incorporated by reference
to Exhibit
4.35 of our Annual Report on Form 10-K for the fiscal year
ended September
30, 2002, filed February 1, 2005).
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4.36.
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Convertible
Term Note in favor of Laurus Master Fund, Ltd. in the principal
amount of
$400,000 dated November 25, 2003 (incorporated by reference
to Exhibit
4.36 of our Annual Report on Form 10-K for the fiscal year
ended September
30, 2002, filed February 1, 2005).
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4.37.
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Convertible
Term Note in favor of Laidlaw Southwest, LLC in the principal
amount of
$100,000 dated November 25, 2003 (incorporated by reference
to Exhibit
4.37 of our Annual Report on Form 10-K for the fiscal year
ended September
30, 2002, filed February 1, 2005).
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4.38.
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Security
Agreement by and among Tidel Engineering, L.P., Tidel Cash
Systems, Inc.,
AnyCard International, Inc., Tidel Services, Inc., and us,
dated November
25, 2003 (incorporated by reference to Exhibit 4.38 of our
Annual Report
on Form 10-K for the fiscal year ended September 30, 2002,
filed February
1, 2005).
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4.39.
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Equity
Pledge Agreement by and between Laurus Master Fund, Ltd. and
us dated
November 25, 2003 (incorporated by reference to Exhibit 4.39
of our Annual
Report on Form 10-K for the fiscal year ended September 30,
2002, filed
February 1, 2005).
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4.40.
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Partnership
Interest Pledge Agreement by and among Tidel Cash Systems,
Inc., Tidel
Services, Inc. and Laurus Master Fund, Ltd., dated as of November
25, 2003
(incorporated by reference to Exhibit 4.40 of our Annual Report
on Form
10-K for the fiscal year ended September 30, 2002, filed February
1,
2005).
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4.41.
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Registration
Rights Agreement by and between Laurus Master Fund, Ltd. and
us, dated
November 25, 2003 (incorporated by reference to Exhibit 4.41
of our Annual
Report on Form 10-K for the fiscal year ended September 30,
2002, filed
February 1, 2005).
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4.42.
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Our
common stock Purchase Warrant issued to Laurus Master Fund,
Ltd. dated
November 25, 2003 (incorporated by reference to Exhibit 4.42
of our Annual
Report on Form 10-K for the fiscal year ended September 30,
2002, filed
February 1, 2005).
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4.43.
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Blocked
Account Control Agreement by and among Tidel Engineering, L.P.,
Laurus
Master Fund, Ltd. and JP Morgan Chase Bank, dated as of November
25, 2003
(incorporated by reference to Exhibit 4.43 of our Annual Report
on Form
10-K for the fiscal year ended September 30, 2002, filed February
1,
2005).
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4.44.
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Guaranty
by and among Tidel Engineering, L.P., Tidel Cash Systems, Inc.,
Tidel
Services, Inc., Laurus Master Fund, Ltd. and us, dated as of November
25,
2003 (incorporated by reference to Exhibit 4.44 of our Annual Report
on
Form 10-K for the fiscal year ended September 30, 2002, filed February
1,
2005).
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4.45.
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Payoff
Letter of Wallis State Bank dated November 24, 2003 (incorporated
by
reference to Exhibit 4.45 of our Annual Report on Form 10-K for
the fiscal
year ended September 30, 2002, filed February 1, 2005).
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4.46.
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Convertible
Term Note in favor of Laurus Master Fund, Ltd. in the principal
amount of
$600,000 dated November 26, 2004 (incorporated by reference to
Exhibit
10.2 of our Current Report on Form 8-K dated November 26,
2004).
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4.47.
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Convertible
Term Note in favor of Laurus Master Fund, Ltd. in the principal
amount of
$1,500,000 dated November 26, 2004 (incorporated by reference to
Exhibit
10.3 of our Current Report on Form 8-K dated November 26,
2004).
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4.48.
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Common
Stock Purchase Warrant issued to Laurus Master Fund, Ltd. dated
November
26, 2004 (incorporated by reference to Exhibit 10.4 of our Current
Report
on Form 8-K dated November 26, 2004).
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4.49.
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Agreement
of Amendment and Reaffirmation by and among Tidel Engineering,
L.P., Tidel
Cash Systems, Inc., AnyCard International, Inc., Tidel Services,
Inc.,
Laurus Master Fund, Ltd., and us, dated as of November 26, 2004
(incorporated by reference to Exhibit 10.5 of the Current Report
on Form
8-K dated November 26, 2004).
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4.50.
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Convertible
Promissory Note in favor of Laurus Master Fund, Ltd. in the principal
amount of $1,250,000 dated November 26, 2004 (incorporated by reference
to
Exhibit 10.3 of our Current Report on Form 8-K dated November 26,
2004).
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4.51.
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Guaranty
in favor of Laurus Master Fund, Ltd. dated as of November 26, 2004
(incorporated by reference to Exhibit 10.8 to our Current Report
on Form
8-K dated November 26, 2004).
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(1)10.01.
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1997
Long-Term Incentive Plan (incorporated by reference to Exhibit
4.1 of our
Form S-8 dated February 14, 2000).
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(1)10.02.
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1989
Incentive Stock Option Plan (incorporated by reference to Exhibit
4.2 of
our Form S-8 dated February 14, 2000).
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10.03.
|
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Lease
Agreement dated February 21, 1992 between San Felipe Plaza, Ltd.
and us,
related to the occupancy of our executive offices (incorporated
by
reference to Exhibit 10.10 of our Annual Report on Form 10-K for
the
fiscal year ended September 30, 1992).
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10.04.
|
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Amendment
to Lease Agreement dated September 15, 1997 between San Felipe
Plaza, Ltd.
and us, related to the occupancy of our executive offices (incorporated
by
reference to Exhibit 10.14 of our Annual Report on Form 10-K for
the
fiscal year ended September 30, 1997).
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10.05.
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Lease
dated as of December 9, 1994 (together with the Addendum and Exhibits
thereto) between Booth, Inc. and Tidel Engineering, Inc. related
to the
occupancy of our principal operating facility in Carrollton, Texas
(incorporated by reference to Exhibit 10.7 of our Annual Report
on Form
10-K for the fiscal year ended September 30, 1994).
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10.06.
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Agreement
dated October 30, 1991 between Affiliated Computer Services, Inc.
(“ACS”)
and Tidel Engineering, Inc. (incorporated by reference to Exhibit
10.14 of
our Annual Report on Form 10-K for the fiscal year ended September
30,
1992).
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10.07.
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EFT
Processing Services Agreement dated February 3, 1995 by, between
and among
ACS, AnyCard International, Inc. and us (incorporated by reference
to
Exhibit 10.9 of our Annual Report on Form 10-K for the fiscal year
ended
September 30, 1995).
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10.08.
|
|
Amendment
to EFT Processing Services Agreement dated as of September 14,
1995 by,
between and among ACS, AnyCard International, Inc. and us (incorporated
by
reference to Exhibit 10.10 of our Annual Report on Form 10-K for
the year
fiscal ended September 30, 1995).
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10.09.
|
|
Purchase
Agreement dated February 3, 1995 between ACS and AnyCard International,
Inc. related to the purchase by ACS of ATMs (incorporated by reference
to
Exhibit 10.11 of our Annual Report on Form 10-K for the fiscal
year ended
September 30, 1995).
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10.10.
|
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Amendment
to Purchase Agreement dated September 14, 1995 between ACS and
AnyCard
International, Inc. related to the purchase by ACS of ATMs (incorporated
by reference to Exhibit 10.12 of our Annual Report on Form 10-K
for the
fiscal year ended September 30, 1995).
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(1)10.11.
|
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Employment
Agreement dated January 1, 2000 between James T. Rash and us (incorporated
by reference to Exhibit 99.1 of our Quarterly Report on Form 10-Q
for the
quarterly period ended March 31, 2000).
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(1)10.12.
|
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Form
of Employment Agreement dated January 1, 2000 between Tidel Engineering,
L.P. and Mark K. Levenick, Michael F. Hudson, M. Flynt Moreland
and Eugene
Moore, individually (incorporated by reference to Exhibit 10.14
of our
Annual Report on Form 10-K for the fiscal year ended September
30,
2001).
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10.13.
|
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Convertible
Debenture Purchase Agreement dated September 8, 2000 by and between
Montrose Investments Ltd. and us (incorporated by reference to
Exhibit
10.1 of our Current Report on Form 8-K dated September 8,
2000).
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10.14.
|
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Convertible
Debenture Purchase Agreement dated September 29, 2000 by and between
Acorn
Investment Trust and us (incorporated by reference to Exhibit 10.1
of our
Current Report on Form 8-K dated September 29, 2000).
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10.15.
|
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ATM
Inventory Purchase Agreement dated September 7, 2001 by and among
Tidel
Engineering, L.P., NCR Corporation, and us (incorporated by reference
to
Exhibit 10.27 of our Annual Report on Form 10-K for the fiscal
year ended
September 30, 2001).
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10.16.
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Note
Purchase Agreement by and between JPMorgan Chase Bank, N.A. and
Wallis
State Bank, with the consent and agreement of Tidel Engineering,
L.P.,
Tidel Technologies, Inc., Tidel Services, Inc., and Tidel Cash
Systems,
Inc. dated June 30, 2003 (incorporated by reference to Exhibit
10.16 of
our Annual Report on Form 10-K for the fiscal year ended September
30,
2002, filed February 1, 2005).
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10.17.
|
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Securities
Purchase Agreement by and between Laurus Master Fund, Ltd. and
us dated
November 25, 2003 (incorporated by reference to Exhibit 10.17 of
our
Annual Report on Form 10-K for the fiscal year ended September
30, 2002,
filed February 1, 2005).
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10.18.
|
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Termination
Agreement by and between Montrose Investments Ltd. and us dated
November
24, 2003 (incorporated by reference to Exhibit 10.18 of our Annual
Report
on Form 10-K for the fiscal year ended September 30, 2002, filed
February
1, 2005).
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10.19.
|
|
Termination
Agreement by and between Columbia Acorn Trust and us dated November
25,
2003 (incorporated by reference to Exhibit 10.19 of our Annual
Report on
Form 10-K for the fiscal year ended September 30, 2002, filed February
1,
2005).
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10.20.
|
|
Securities
Purchase Agreement by and between Laurus Master Fund, Ltd. and
us dated
November 26, 2004 (incorporated by reference to Exhibit 10.1 of
our
Current Report on Form 8-K dated November 26, 2004).
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10.21.
|
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Purchase
Order Finance and Security Agreement dated as of November 26, 2004
between
Laurus Master Fund, Ltd. and Tidel Engineering, L.P. (incorporated
by
reference to Exhibit 10.6 of our Current Report on Form 8-K dated
November
26, 2004).
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*10.22.
|
|
Agreement
Regarding NCR Transaction and Other Asset Sales by and between
Laurus
Master Fund, Ltd., and us, dated November 26, 2004.
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(1)10.23.
|
|
Tidel/Peltier
Agreement dated February 23, 2005 (incorporated by reference to
Exhibit
99.1 to this Annual Report on Form 8-K dated February 23,
2005).
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(1)*10.24.
|
|
Settlement
Agreement by and between Tidel Engineering, L.P., Michael F. Hudson
and
us, dated June 22, 2005.
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*14.01.
|
|
Code
of Conduct and Ethics of Tidel Technologies, Inc.
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21.01.
|
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Subsidiaries.
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|
|
Certification
of Interim Chief Executive Officer, Mark K. Levenick, pursuant
to Section
302 of the Sarbanes-Oxley Act of 2002.
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|
|
Certification
of Interim Chief Financial Officer, Robert D. Peltier, pursuant
to Section
302 of the Sarbanes-Oxley Act of 2002.
|
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|
|
Certification
of Interim Chief Executive Officer, Mark K. Levenick, pursuant
to 18
U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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|
|
Certification
of Interim Chief Financial Officer, Robert D. Peltier, pursuant
to 18
U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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____________
(1)
|
Indicates
management contract or compensatory plan or arrangement.
|