Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
T
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE
ACT OF 1934
|
For
the
quarterly period ended June 30, 2006
or
£
|
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 105
|
|
|
|
|
Houston,
Texas
|
|
77042
|
|
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
|
Registrant’s
telephone number, including area code: (713) 783-8200
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 T
NO
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
Accelerated Filer o
|
|
Accelerated
Filer o
|
|
Non-Accelerated
Filer x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No
T
The
number of shares of Common Stock outstanding as of the close of business
on
August 14, 2006 was 38,677,210.
TIDEL
TECHNOLOGIES, INC. AND SUBSIDIARIES
TABLE
OF CONTENTS
PART
I. FINANCIAL INFORMATION
|
Item
1.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
2.
|
|
|
Item
3.
|
|
|
Item
4.
|
|
|
PART
II. OTHER INFORMATION
|
Item
1.
|
|
|
Item
1A.
|
|
|
Item
2.
|
|
|
Item
6.
|
|
|
|
|
PART
I. FINANCIAL INFORMATION
ITEM
1. CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
TIDEL
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
June
30,
2006
|
|
September
30,
2005
|
|
ASSETS
|
|
(unaudited)
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5,890,257
|
|
$
|
1,003,663
|
|
Restricted
cash
|
|
|
5,400,000
|
|
|
—
|
|
Marketable
securities - available-for-sale
|
|
|
881,414
|
|
|
—
|
|
Trade
accounts receivable, net
|
|
|
—
|
|
|
250,000
|
|
Notes
and other receivables
|
|
|
13,890
|
|
|
12,965
|
|
Prepaid
expenses and other
|
|
|
41,711
|
|
|
170,231
|
|
Assets
held for sale, net of accumulated depreciation of $1,327,408 and
$5,236,167, respectively (See Note 2)
|
|
|
5,263,786
|
|
|
15,471,113
|
|
Total
current assets
|
|
|
17,491,058
|
|
|
16,907,972
|
|
Property
and equipment, at cost
|
|
|
—
|
|
|
55,641
|
|
Accumulated
depreciation
|
|
|
—
|
|
|
(42,848
|
)
|
Net
property and equipment
|
|
|
—
|
|
|
12,793
|
|
Other
assets
|
|
|
4,000
|
|
|
615,763
|
|
Total
assets
|
|
$
|
17,495,058
|
|
$
|
17,536,528
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
—
|
|
$
|
2,325,000
|
|
Accounts
payable
|
|
|
312,206
|
|
|
431,876
|
|
Accrued
interest payable
|
|
|
2,000,000
|
|
|
2,135,852
|
|
Shares
subject to redemption (See Note 1)
|
|
|
5,400,000
|
|
|
—
|
|
Other
accrued expenses
|
|
|
300,000
|
|
|
290,871
|
|
Liabilities
related to assets held for sale (See Note 2)
|
|
|
3,194,091
|
|
|
7,993,154
|
|
Total
current liabilities
|
|
|
11,206,297
|
|
|
13,176,753
|
|
Long-term
debt, net of current maturities and debt discount of $3,746,531
at
September 30, 2005
|
|
|
—
|
|
|
2,096,457
|
|
Total
liabilities
|
|
|
11,206,297
|
|
|
15,273,210
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity:
|
|
|
|
|
|
|
|
Common
stock, $.01 par value, authorized 100,000,000 shares; issued and
outstanding 38,677,210 shares and 20,677,210 shares,
respectively
|
|
|
386,772
|
|
|
206,772
|
|
Additional
paid-in capital
|
|
|
30,782,187
|
|
|
30,962,187
|
|
Accumulated
deficit
|
|
|
(25,461,612
|
)
|
|
(28,905,810
|
)
|
Accumulated
other comprehensive income
|
|
|
581,414
|
|
|
169
|
|
Total
shareholders’ equity
|
|
|
6,288,761
|
|
|
2,263,318
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
17,495,058
|
|
$
|
17,536,528
|
|
See
accompanying notes to condensed consolidated financial statements.
TIDEL
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three
Months Ended June 30,
|
|
Nine
Months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Revenues
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
662,730
|
|
|
652,007
|
|
|
2,655,647
|
|
|
1,334,541
|
|
Depreciation
and amortization
|
|
|
—
|
|
|
1,421
|
|
|
2,678
|
|
|
3,592
|
|
Operating
(loss)
|
|
|
(662,730
|
)
|
|
(653,428
|
)
|
|
(2,658,325
|
)
|
|
(1,338,133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on investment in 3CI
|
|
|
4,210,577
|
|
|
—
|
|
|
4,210,577
|
|
|
—
|
|
Interest
income (expense), net
|
|
|
21,960
|
|
|
(1,160,459
|
)
|
|
(4,173,612
|
)
|
|
(5,399,974
|
)
|
Gain
on collection of receivable
|
|
|
—
|
|
|
—
|
|
|
598,496
|
|
|
—
|
|
Gain
on CCC bankruptcy settlement
|
|
|
—
|
|
|
—
|
|
|
105,000
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
—
|
|
|
(7,455
|
)
|
|
—
|
|
Total
other income (expense)
|
|
|
4,232,537
|
|
|
(1,160,459
|
)
|
|
733,006
|
|
|
(5,399,974
|
)
|
Income
(loss) before taxes
|
|
|
3,569,807
|
|
|
(1,813,887
|
)
|
|
(1,925,319
|
)
|
|
(6,738,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Income
(loss) from continuing operations
|
|
|
3,569,807
|
|
|
(1,813,887
|
)
|
|
(1,925,319
|
)
|
|
(6,738,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) discontinued operations
|
|
|
683,119
|
|
|
700,739
|
|
|
1,833,411
|
|
|
3,337,763
|
|
Additional
costs incurred on sale of ATM business
|
|
|
(76,403 |
) |
|
—
|
|
|
(76,403 |
) |
|
—
|
|
Gain
(loss) on sale of ATM business
|
|
|
|
|
|
—
|
|
|
3,612,509
|
|
|
—
|
|
Total
income from discontinued operations
|
|
|
606,716
|
|
|
700,739
|
|
|
5,369,517
|
|
|
3,337,763
|
|
Net
income (loss)
|
|
$
|
4,176,523
|
|
$
|
(1,113,148
|
)
|
$
|
3,444,198
|
|
$
|
(3,400,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
0.09
|
|
$
|
(0.09
|
)
|
$
|
(0.06
|
)
|
$
|
(0.33
|
)
|
Income
from discontinued operations
|
|
|
0.02
|
|
|
0.03
|
|
|
0.17
|
|
|
0.17
|
|
Net
income (loss)
|
|
$
|
0.11
|
|
$
|
(0.06
|
)
|
$
|
0.11
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average basic common shares outstanding
|
|
|
38,677,210
|
|
|
20,677,210
|
|
|
31,754,133
|
|
|
20,163,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
0.09
|
|
$
|
(0.09
|
)
|
$
|
(0.06
|
)
|
$
|
(0.33
|
)
|
Income
from discontinued operations
|
|
|
0.02
|
|
|
0.03
|
|
|
0.17
|
|
|
0.17
|
|
Net
income (loss)
|
|
$
|
0.11
|
|
$
|
(0.06
|
)
|
$
|
0.11
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common and dilutive shares outstanding
|
|
|
38,710,044
|
|
|
20,677,210
|
|
|
31,786,967
|
|
|
20,163,250
|
|
See
accompanying notes to condensed consolidated financial statements.
TIDEL
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
|
|
Three
Months Ended June 30,
|
|
Nine
Months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
Income (loss)
|
|
$
|
4,176,523
|
|
$
|
(1,113,148
|
)
|
$
|
3,444,198
|
|
$
|
(3,400,344
|
)
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on marketable securities available-for-sale
|
|
|
581,414
|
|
|
—
|
|
|
581,414
|
|
|
—
|
|
Unrealized
gain (loss) on investment in 3CI
|
|
|
—
|
|
|
(139,778
|
)
|
|
90,855
|
|
|
42,082
|
|
Comprehensive
income (loss)
|
|
$
|
4,757,937
|
|
$
|
(1,252,926
|
)
|
$
|
4,116,467
|
|
$
|
(3,358,262
|
)
|
See
accompanying notes to condensed consolidated financial statements.
TIDEL
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Nine
Months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
3,444,198
|
|
$
|
(3,400,344
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,678
|
|
|
3,592
|
|
Amortization
of debt discount and financing costs
|
|
|
4,078,738
|
|
|
2,830,352
|
|
Gain
on disposal of investment in 3CI pursuant to class-action
settlement
|
|
|
(4,210,577
|
)
|
|
—
|
|
Gain
on sale of ATM business
|
|
|
(3,612,509
|
)
|
|
—
|
|
Other
|
|
|
7,455
|
|
|
—
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Trade
accounts receivable, net
|
|
|
250,000
|
|
|
—
|
|
Notes
and other receivables
|
|
|
(925
|
)
|
|
989,552
|
|
Prepaid
expenses and other assets
|
|
|
128,520
|
|
|
18,041
|
|
Accounts
payable and accrued liabilities
|
|
|
(246,393
|
)
|
|
1,966,289
|
|
Net
cash flows used in discontinued operations
|
|
|
(1,716,566
|
)
|
|
(766,268
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
(1,875,381
|
)
|
|
1,641,214
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Proceeds
from class-action settlement on investment in 3CI
|
|
|
4,489,963
|
|
|
—
|
|
Proceeds
from sale of ATM business
|
|
|
10,440,000
|
|
|
—
|
|
Purchases
of property and equipment
|
|
|
—
|
|
|
(11,566
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
14,929,963
|
|
|
(11,566
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from borrowings
|
|
|
—
|
|
|
2,100,000
|
|
Repayments
of notes payable
|
|
|
(2,767,988
|
)
|
|
(375,000
|
)
|
Borrowings
on revolver
|
|
|
1,204,391
|
|
|
2,251,203
|
|
Payments
on revolver
|
|
|
(1,204,391
|
)
|
|
(2,251,203
|
)
|
Increase
in restricted cash
|
|
|
(5,400,000
|
)
|
|
—
|
|
Increase
in deferred financing costs
|
|
|
—
|
|
|
(280,567
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(8,167,988
|
)
|
|
1,444,433
|
|
Net
increase in cash and cash equivalents
|
|
|
4,886,594
|
|
|
3,074,081
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
1,003,663
|
|
|
258,120
|
|
Cash
and cash equivalents at end of period
|
|
$
|
5,890,257
|
|
$
|
3,332,201
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
371,492
|
|
$
|
622,082
|
|
Supplemental
disclosure of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
Conversion
of debt into common stock held for redemption
|
|
$
|
5,400,000
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Discount
on issuance of debt with beneficial conversion premium and detachable
warrants
|
|
|
—
|
|
|
723,198
|
|
Issuance
of shares to lender in payment of fees
|
|
$
|
—
|
|
$
|
638,010
|
|
Issuance
of shares in connection with settlement of class-action
litigation
|
|
$
|
—
|
|
$
|
1,564,490
|
|
Unrealized
gain on 3CI investment
|
|
$
|
—
|
|
$
|
42,082
|
|
Unrealized
gain on marketable securities available-for-sale
|
|
$
|
581,414
|
|
$
|
—
|
|
Foregiveness
of trade receivable in exchange for investment in available-for-sale
securities
|
|
$ |
300,000 |
|
$ |
—
|
|
See
accompanying notes to condensed consolidated financial
statements.
TIDEL
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
|
Organization
and Summary of Significant Accounting
Policies
|
Organization
and Basis of Presentation
Tidel
Technologies, Inc. (the “Company,” “we,” “us,” or “our”) is a Delaware
corporation which, through its wholly owned subsidiaries, develops,
manufactures, sells and supports 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.
Sales of Cash Security products are generally made to end-users as well as
distributors and manufacturers’ representatives.
The
accompanying condensed unaudited consolidated interim financial statements
have
been prepared in accordance with accounting principles generally accepted
in the
United States of America, assuming we continue as a going concern, which
contemplates the realization of the assets and the satisfaction of liabilities
in the normal course of business. In the opinion of management, the unaudited
condensed consolidated interim financial statements include all adjustments,
consisting only of normal, recurring adjustments, necessary for a fair
presentation of the consolidated financial position as of June 30, 2006,
the
consolidated statements of operations and comprehensive income (loss) for
the
three months and the nine months ended June 30, 2006 and 2005, and the
consolidated statements of cash flows for the nine months ended June 30,
2006
and 2005. Although management believes the unaudited interim disclosures
in
these condensed consolidated interim financial statements are adequate to
make
the information presented not misleading, certain information and footnote
disclosures normally included in annual audited consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules of the Securities and
Exchange Commission (the “SEC”). The unaudited consolidated results of
operations for the three and nine months ended June 30, 2006 are not necessarily
indicative of the results to be expected for any quarterly period or for
the
entire year ending September 30, 2006. The unaudited consolidated interim
financial statements included herein should be read in conjunction with the
audited consolidated financial statements and notes thereto included in our
Annual Report on Form 10-K for the fiscal year ended September 30,
2005.
Status
of Tidel Technologies, Inc.
Sale
of ATM Business
During
the quarter ended December 31, 2004, we committed to a plan to sell our ATM
business. On February 19, 2005, the Company and its wholly-owned subsidiary,
Tidel Engineering, L.P. (“Engineering”), entered into an asset purchase
agreement (the “NCR Asset Purchase Agreement”) with NCR EasyPoint LLC f/k/a NCR
Texas LLC (“NCR EasyPoint”), a wholly owned subsidiary of NCR Corporation, for
the sale of our ATM Business (the “ATM Business Sale”).
On
December 28, 2005, the holders of 62.2% of our shares of outstanding common
stock approved the NCR Asset Purchase Agreement.
On
January 3, 2006, we completed the ATM Business Sale. The total purchase price
was approximately $10.4 million, of which $8.2 million was paid to
Laurus Master Fund, Ltd., (“Laurus”) into a collateral account to be held
by Laurus as collateral for the satisfaction of all monetary obligations
payable
to Laurus, $0.5 million was initially paid into an escrow account and has
since
been released to the Company, and the remaining $1.7 million was paid to
the
Company to be used for necessary working capital. This termination resulted
in a
book gain of approximately $3.6 million during the quarter ended March 31,
2006.
Sale
of the Cash Security Business and Related Agreements with
Laurus
We
entered into an amended and restated asset purchase agreement, dated as of
June
9, 2006 (the “Asset Purchase Agreement”), with Sentinel Operating, L.P.
(“Buyer”) for the sale of substantially all of the assets of our electronic cash
security business, consisting of (a) timed access cash controllers, (b) the
Sentinel products, (c) the servicing, maintenance and repair of the timed
access
cash controllers or Sentinel products and (d) all other assets and business
operations associated with the foregoing (the “Cash Security Business Sale”) to
a Buyer. The Buyer is controlled by a management buyout group that includes
Mark
A. Levenick, our Interim Chief Executive Officer and a member of our board
of
directors, and Raymond P. Laundry, a member of our board of directors. The
Asset
Purchase Agreement amends and restates the asset purchase agreement originally
entered into as of January 12, 2006.
The
Asset
Purchase Agreement provides for the sale of our cash security business to
the
Buyer for a cash purchase price of $15,500,000, less $100,000 as consideration
for the Buyer assuming certain potential liability in connection with ongoing
litigation, and less a working capital deficit adjustment of $1,629,968 as
provided for in the Asset Purchase Agreement, resulting in a net purchase
price
of $13,770,032. In addition, the purchase price is subject to a cash adjustment
of $2,458,718 payable to the Company by the Buyer on closing.
Pursuant
to the Agreement regarding the NCR Transaction and Other Asset Sales, dated
November 26, 2004 (the “Sale Agreement”), by and between the Company and Laurus
Master Fund Ltd. (“Laurus”), the Company agreed to pay to Laurus a portion of
the excess net proceeds from the Cash Security Business Sale.
On
June
9, 2006, we and Laurus entered into an agreement (the “Laurus Termination
Agreement”) which, among other things, provides for the payment of a sale fee of
$8,508,963 to Laurus (the “Sale Fee”) in full satisfaction of all amounts
payable to Laurus under the Sale Agreement, including fees payable in respect
of
ATM Business Sale and the Cash Security Business Sale. The Laurus Termination
Agreement further provides that, upon payment of the Sale Fee and performance
by
the Company of its obligations under the Stock Redemption Agreement described
below: (i) all warrants to purchase common stock of the Company held by Laurus
will terminate and be of no further force or effect; and (ii) thereafter,
neither the Company nor any of its subsidiaries will have any further obligation
to Laurus after we exercise our repurchase of the outstanding shares owned
by
Laurus under the Stock Redemption Agreement. Further, each of the Company
and
Laurus has granted each other and their respective affiliates and subsidiaries
reciprocal releases from and against any claims and causes of action that
may
exist.
After
deducting the Sale Fee, and the cost of redeeming our common shares held
by
Laurus and the other transactional costs, we estimate that the net proceeds
accruing to the Company from the Cash Security Business sale will be
approximately $5,100,000. The Company currently has no plans to distribute
the
proceeds from the Cash Security Business Sale to stockholders.
We
and
Laurus entered into a stock redemption agreement dated as of January 12,
2006
(the “Stock Redemption Agreement”). Pursuant to the terms of the Stock
Redemption Agreement: (i) we agreed, among other things, to repurchase from
Laurus, upon the closing of the Cash Security Business Sale, all shares of
our
common stock held by Laurus, and (ii) Laurus agreed (a) to the cancellation
as
of the closing date of the Cash Security Business Sale of warrants it holds
to
purchase 4,750,000 shares of our common stock at an exercise price of $.30
per
share, and (b) not to exercise such warrants prior to the earlier to occur
of
March 31, 2006 (the “Outside Date”) and the date on which the Asset Purchase
Agreement is terminated. Pursuant to an amendment to the Stock Redemption
Agreement entered into as of February 28, 2006, Laurus agreed to extend the
Outside Date from March 31, 2006 to May 31, 2006. On June 9, 2006, we and
Laurus
entered into a second amendment to Stock Redemption Agreement, pursuant to
which
Laurus has agreed to further extend the Outside Date to September 30, 2006.
The
second amendment to the Stock Redemption Agreement is effective as of April
21,
2006.
We
and
Laurus also entered into an exercise and conversion agreement dated as of
January 12, 2006 (the “Exercise and Conversion Agreement”). The Exercise and
Conversion Agreement provided, among other things, for Laurus to convert,
on or
prior to the record date (“Record Date”) set with respect to the special meeting
of our stockholders to be held for the purpose of voting on the Cash Security
Business Sale (the “Special Meeting”), $5,400,000 of indebtedness outstanding
under our Convertible Note (as defined below) into 18,000,000 shares of our
common stock. As used herein, the term “Convertible Note” means a certain
Convertible Note, dated November 5, 2003, in the original principal amount
of
$6,450,000 together with an additional $292,987 added thereto on November
26,
2004, made by the Company to Laurus. Pursuant to an Amendment to Exercise
and
Conversion Agreement dated as of February 28, 2006, Laurus agreed to extend
the
latest date that we could set as the Record Date from January 13, 2006 to
April
21, 2006. Laurus also agreed to extend the latest date by which we could
mail
proxy materials for the Special Meeting to our stockholders from February
28,
2006 to April 21, 2006 and the latest date by which the Cash Security Business
Sale must occur from March 31, 2006 to May 31, 2006. On June 9, 2006, we
and
Laurus entered into a second amendment to the Exercise and Conversion Agreement
pursuant to which Laurus has agreed to further extend the latest date that
we
can set as the Record Date for the Special Meeting and the latest date by
which
we can mail proxy materials for the Special Meeting to our stockholders to
August 31, 2006 and to further extend the date by which the Cash Security
Business Sale must occur to September 30, 2006. The Second Amendment to Exercise
and Conversion Agreement is effective as of April 21, 2006. As amended, the
Exercise and Conversion Agreement further provides that if the Cash Security
Business Sale does not occur by September 30, 2006, we will immediately redeem
from Laurus the 18,000,000 shares of our common stock for $.30 per share,
or an
aggregate of $5.4 million. Therefore, the $5.4 million is classified as shares
subject to redemption as a liability on the Consolidated Balance.
On
January 12, 2006, we and Laurus entered into a voting agreement (the “Voting
Agreement”) with Sentinel Technologies, Inc., an affiliate of Buyer (“STI”),
which provides, among other things, for Laurus to vote all of the shares
of the
Company’s common stock that Laurus owns and any shares over which Laurus
exercises voting control in favor of the approval and adoption of the Asset
Purchase Agreement, the Cash Security Business Sale and related transactions
and
against any competing transactions proposed to the Company's stockholders.
An
amendment to the Voting Agreement was entered into as of February 28, 2006
whereby Laurus agreed to extend the latest date that we could set as the
Record
Date for the Special Meeting from February 13, 2006 to April 21, 2006 and
to
extend the date on which Laurus will cease to be bound by its obligations
under
the Voting Agreement from February 28, 2006 to May 31, 2006. On June 9, 2006,
we, Laurus and STI entered into a Second Amendment to Voting Agreement pursuant
to which the latest date we can set as the Record Date for the Special Meeting
has been further extended from March 31, 2006 to August 31, 2006 and the
date on
which Laurus will cease to be bound by its obligations under the Voting
Agreement was further extended from May 31, 2006 to September 30, 2006. The
second amendment to the Voting Agreement is effective as of April 21,
2006.
On
June
9, 2006, Engineering entered into an agreement with Mark K. Levenick under
which
Tidel Engineering, LP agreed to make a payment of $350,000 to Mr. Levenick
upon the closing of the Cash Security Business Sale in consideration for
Tidel
Engineering, LP terminating Mr. Levenick's employment agreement and all rights
thereunder (including any rights to vacation pay or other
benefits) other than for accrued pay. This payment had previously been
approved in December, 2005 by the Company's compensation committee, subject
to
the review and approval of definitive documentation. This payment would
represent a stay bonus in respect of Mr. Levenick continuing his employment
with
the Company until the closing of the ATM Business Sale and the Cash Security
Business Sale. Under the terms of the agreement, Mr. Levenick agrees
that all stock options held by him to purchase the Company's common stock,
to the extent exercisable and not previously terminated, may be exercised
by him
at any time prior to 90 days following the closing of the Cash Security Business
Sale. In addition, Mr. Levenick and Engineering agreed that in the event
the Asset Purchase Agreement is terminated or the Cash Security Business
Sale is
not consummated, the agreement would have no effect and his employment agreement
would continue in accordance with its terms.
The
independent members of our Board received an opinion from Capitalink, L.C.,
that
the Cash Security Business Sale was fair from a financial point of view to
the
Company’s unaffiliated shareholders. On May 24, 2006, a special committee of the
board of directors of the Company determined that the Cash Security Business
Sale and related transactions are advisable and fair to and in the best
interests of the Company and its unaffiliated stockholders and recommended
that
the Company’s board of directors approve the Asset Purchase Agreement and the
Cash Security Business Sale. On June 9, 2006, the Company’s board of directors
(with interested directors abstaining) approved the Asset Purchase Agreement
and
the Cash Security Business Sale.
In
the
event that the Cash Security Business Sale is approved by the holders of
a
majority of our outstanding common shares
at
the Special Meeting and the Cash Security Business Sale occurs, the Company
will
be left as a non-operating, shell public company whose principal asset will
be
cash.
Major
Customers and Credit Risk
We
generally retain a security interest in our underlying equipment that is
sold to
customers until we receive 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 our credit arrangements with them.
Sales
of
Sentinel cash security systems are currently to a small number of customers.
The
loss of a single customer could have an adverse effect on our sales. During
the
three months ended June 30, 2006 and 2005, we sold 392 and 471 Sentinel units,
respectively. The decrease was primarily a result of significantly lower
sales
to our largest Sentinel customer compared with the same period last
year.
The
majority of our sales during the third quarter of fiscal year 2006 were to
customers within the United States. Foreign sales accounted for only 8% of
the
Company’s total sales for the quarters ending June 30, 2006 and 2005, all of
which were to one foreign distributor. All sales are transacted in U.S. dollars.
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 was
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 provided 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. In July of 2005, we collected
a
partial payment of approximately $350,000, and we received a commitment that
commenced August 5, 2005, from the distributor to submit at least approximately
$35,000 per week until the balance is paid in full. We received 16 weekly
payments totaling approximately $560,000, pursuant to that commitment. During
the quarter ended December 31, 2005, the distributor stopped making payments
to
us pursuant to that commitment.
The
Share
Warrant Agreement provides for the issuance to our subsidiary of a warrant
to
purchase up to five percent 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 balance outstanding under the Facility Agreement would be
reduced by $300,000. We exercised this option during December 2005, thereby
reducing the receivable by $300,000, which resulted in a balance of $833,000
of
which $598,496 was reserved at December 31, 2005.
On
March
31, 2006, we received approximately $950,000 from the distributor resulting
in
full payment of the outstanding receivable of $833,000 and interest of $117,000.
We recognized income of $598,496, due to reversal of bad debt reserve and
$117,000 of interest income during the quarter ended March 31,
2006.
Marketable
Securities Available- for- Sale
We
own
2,022,000 of the common stock of Cashbox plc pursuant to our exercise of
the
Share Warrant Agreement in September 2005. On or about March 27, 2006, shares
of
Cashbox plc began trading on the AIM Market of the London Stock Exchange
(the
“Exchange”). Prior to Cashbox plc going public, we considered their shares not
marketable, thus the shares were carried at cost. Since the shares are now
public and market value is readily available, we determined the market value
of
the shares as of June 30, 2006 and pursuant to SFAS No. 115 “Accounting for
Investments in Equity and Debt Securities” we classified these shares as
available for sale. Pursuant to the SFAS No. 115 the unrealized change in
fair
value during the three months ended June 30, 2006 was excluded from earnings
and
recorded net of tax as other comprehensive income.
As
of
June 30, 2006, our common stock in Cashbox plc was recorded at a fair value
of
$881,414. Unrealized gains on these shares of common stock are presented
as
accumulated other comprehensive income as a component of stockholders' equity
as
of June 30, 2006, were $581,414.
Pursuant
to a lock-up agreement with Cashbox plc, we were restricted from selling
any
shares for the first three months after the shares began trading on the
Exchange. As of June 30, 2006 we were restricted from selling any shares
until
the second anniversary of its admission to the Exchange unless we (i) consult
with Cashbox’s primary broker prior to the disposal of any shares and (ii)
effect the disposal of the shares through Cashbox’s primary broker from time to
time and in such manner as such broker may require with a view to the
maintenance of an orderly market in the shares of Cashbox.
2.
|
Discontinued
Operations
|
The
Company sold its ATM business on January 3, 2006. The remaining Cash Security
Business has been classified as a discontinued operation since December 31,
2004.
Net
income from discontinued operations for the three and nine months ended June
30,
2006 were $606,716 and $5,369,516, respectively. Net income from discontinued
operations for the three and nine months ended June 30, 2005 were $700,739
and
$3,337,763, respectively,
which
includes an approximate $3.5 million gain from the ATM Business
Sale.
The
following is a summary of the unaudited ATM net assets sold as initially
determined at December 31, 2004 and as finally reported on the closing date
of
January 3, 2006:
|
|
January
3, 2006
|
|
September
30, 2005
|
|
Assets
held for sale:
|
|
|
|
|
|
Trade
accounts receivable
|
|
$
|
1,857,192
|
|
$
|
2,310,262
|
|
Inventories
|
|
|
7,126,918
|
|
|
7,323,439
|
|
Prepaid
expense and other assets
|
|
|
—
|
|
|
392,972
|
|
Property
and equipment, at cost
|
|
|
79,056
|
|
|
121,525
|
|
Other
Assets
|
|
|
27,297
|
|
|
27,297
|
|
Total
assets held for sale
|
|
$
|
9,090,463
|
|
$
|
10,175,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
held for sale:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
1,627,748
|
|
|
1,681,288
|
|
Other
accrued expenses
|
|
|
636,174
|
|
|
1,814,634
|
|
Liabilities
held for sale
|
|
$
|
2,263,922
|
|
$
|
3,495,922
|
|
DISCONTINUED
OPERATIONS — ATM BUSINESS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Three
Months Ended June 30,
|
|
Nine
Months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
Sales
|
|
$
|
|
|
$
|
4,734,044
|
|
$
|
3,847,874
|
|
$
|
11,833,366
|
|
Cost
of sales
|
|
|
—
|
|
|
3,650,721
|
|
|
2,592,268
|
|
|
8,550,479
|
|
Gross
Profit
|
|
|
—
|
|
|
1,083,323
|
|
|
1,255,606
|
|
|
3,282,887
|
|
Selling,
general and administrative
|
|
|
—
|
|
|
1,367,879
|
|
|
880,941
|
|
|
4,151,213
|
|
Depreciation
and amortization
|
|
|
—
|
|
|
48,355
|
|
|
46,048
|
|
|
194,281
|
|
Operating
income (loss)
|
|
|
—
|
|
|
(332,911
|
)
|
|
328,617
|
|
|
(1,062,607
|
)
|
Non-operating
(income) expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
income (loss)
|
|
$
|
|
|
$
|
(332,911
|
)
|
$
|
328,617
|
|
$
|
(1,062,607
|
)
|
Cash
Security Business
Pursuant
to the Asset Purchase Agreement, we have agreed to sell substantially all
of the
assets of our Cash Security business. See Note 1, Status of Tidel Technologies,
Inc.; Sale of our Cash Security Business and Related Agreements with Laurus
for
more detail.
An
analysis of the discontinued operations of the Cash Security business is
as
follows:
DISCONTINUED
OPERATIONS — CASH SECURITY BUSINESS
SELECTED
BALANCE SHEET DATA
(UNAUDITED)
|
|
June
30,
2006
|
|
September
30,
2005
|
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
588,536
|
|
$
|
—
|
|
Trade
accounts receivable, net of allowance of $92,447 and $7,500,
respectively
|
|
|
2,508,653
|
|
|
1,856,523
|
|
Inventories,
net of reserve of $145,000 and $100,558, respectively
|
|
|
1,523,863
|
|
|
3,137,818
|
|
Prepaid
expenses and other
|
|
|
80,923
|
|
|
198,057
|
|
Total
current assets
|
|
|
4,701,975
|
|
|
5,192,398
|
|
Property
and equipment, at cost
|
|
|
1,639,219
|
|
|
1,097,604
|
|
Accumulated
depreciation
|
|
|
(1,327,408
|
)
|
|
(1,020,015
|
)
|
Net
property and equipment
|
|
|
311,811
|
|
|
77,589
|
|
Other
assets
|
|
|
250,000
|
|
|
25,631
|
|
Total
assets
|
|
$
|
5,263,786
|
|
$
|
5,295,618
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Current
maturities of long term debt
|
|
$
|
3,929
|
|
$
|
1,852
|
|
Accounts
payable
|
|
|
973,006
|
|
|
1,397,394
|
|
Other
accrued expenses
|
|
|
2,196,174
|
|
|
3,069,278
|
|
Total
current liabilities
|
|
|
3,173,109
|
|
|
4,468,524
|
|
Long-term
debt, net of current maturities
|
|
|
20,982
|
|
|
28,708
|
|
Total
liabilities
|
|
$
|
3,194,091
|
|
$
|
4,497,232
|
|
DISCONTINUED
OPERATIONS — CASH SECURITY BUSINESS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Three
Months Ended June 30,
|
|
Nine
Months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
Sales
|
|
$
|
4,256,773
|
|
$
|
5,310,146
|
|
$
|
11,986,516
|
|
$
|
16,568,457
|
|
Cost
of sales
|
|
|
2,464,820
|
|
|
2,993,849
|
|
|
7,292,293
|
|
|
8,984,878
|
|
Gross
Profit
|
|
|
1,791,953
|
|
|
2,316,297
|
|
|
4,694,223
|
|
|
7,583,579
|
|
Selling,
general and administrative
|
|
|
1,084,417
|
|
|
1,274,518
|
|
|
3,159,182
|
|
|
3,159,673
|
|
Depreciation
and amortization
|
|
|
23,972
|
|
|
7,560
|
|
|
28,685
|
|
|
22,308
|
|
Operating
income
|
|
|
683,564
|
|
|
1,034,219
|
|
|
1,506,356
|
|
|
4,401,598
|
|
Non-operating
income (expense)
|
|
|
(445
|
)
|
|
570
|
|
|
(1,562
|
)
|
|
1,227
|
|
Net
income
|
|
$
|
683,119
|
|
$
|
1,033,649
|
|
$
|
1,504,794
|
|
$
|
4,400,371
|
|
3.
|
Accounting
policies related to Discontinued Operations which are Classified
as Assets
Held for Sale, Liabilities Related to the Assets Held for Sale
and
Discontinued Operations
|
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.
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 other accrued expenses and is charged to operations at the time
of
sale.
Accounts
Receivable
We
had
significant investments in billed receivables as of June 30, 2006 and September
30, 2005. Billed receivables represent amounts billed upon the shipments
of our
products under our standard contract terms and conditions. Allowances for
doubtful accounts and estimated non-recoverable costs primarily provide for
losses that may be sustained on uncollectible 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.
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 for 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 Cost
Research
and development costs are expensed as incurred. Research and development
costs
charged to expense were approximately $239,642 and $174,000 for the quarters
ended June 30, 2006 and 2005, respectively.
Shipping
and Handling Cost
Shipping
and handling costs billed to customers totaled $107,070 and $79,789 for the
quarters ended June 30, 2006 and 2005, respectively. We incurred shipping
and
handling costs of $118,324 and $85,786 for the quarters ended June 30, 2006
and
2005, respectively. The net expense of $11,254 and $5,997 is included in
selling, general and administrative expenses in the accompanying consolidated
statements of operations for the quarters ended June 30, 2006 and 2005,
respectively.
The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings (loss) per share computation:
|
|
Three
Months Ended June 30,
|
|
Nine
Months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
income(loss) from Continuing operations
|
|
$
|
3,569,807
|
|
$
|
(1,813,887
|
)
|
$
|
(1,925,319
|
)
|
$
|
(6,738,107
|
)
|
Net
income from Discontinued operations
|
|
|
606,716
|
|
|
700,739
|
|
|
5,369,517
|
|
|
3,337,763
|
|
Net
income(loss)
|
|
|
4,176,523
|
|
|
(1,113,148
|
)
|
|
3,444,198
|
|
|
(3,400,344
|
)
|
Weighted
average common shares outstanding denominator for basic earnings
(loss)
per share
|
|
|
38,677,210
|
|
|
20,677,210
|
|
|
31,754,133
|
|
|
20,163,250
|
|
Dilutive
shares outstanding
|
|
|
32,834
|
|
|
|
|
|
32,834
|
|
|
|
|
Weighted
average common and dilutive shares outstanding
|
|
|
38,710,044
|
|
|
20,677,210
|
|
|
31,786,967
|
|
|
20,163,250
|
|
Basic
earnings (loss) per share :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
continuing operations
|
|
$
|
0.09
|
|
$
|
(0.09
|
)
|
$
|
(0.06
|
)
|
$
|
(0.33
|
)
|
>From
discontinued operations
|
|
$
|
0.02
|
|
$
|
0.03
|
|
$
|
0.17
|
|
$
|
0.17
|
|
Diluted
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
>From
continuing operations
|
|
$
|
0.09
|
|
$
|
(0.09
|
)
|
$
|
(0.06
|
)
|
$
|
(0.33
|
)
|
From
discontinued operations
|
|
$
|
0.02
|
|
$
|
0.03
|
|
$
|
(0.17
|
)
|
$
|
0.17
|
|
Earnings
(loss) per share data for all periods presented have been computed pursuant
to
SFAS No. 128; “Earnings Per Share” that requires a presentation of basic
earnings (loss) per share (basic EPS) and diluted earnings (loss) per share
(diluted EPS). Basic EPS excludes dilution and is determined by dividing
income
(loss) available to common shareholders by the weighted average number of
common
shares outstanding during the period. Diluted EPS reflects the potential
dilution that could occur if securities and other contracts to issue common
stock were exercised or converted into common stock. As of June 30, 2006,
we had
outstanding options covering an aggregate of 648,150 shares of common stock,
of
which 424,000 shares of stocks were exercisable. We also had outstanding
warrants covering an aggregate of 5,890,000 shares of common stock. Included
in
the computation of diluted EPS for the three months ended June 30, 2006 are
options to purchase 199,150 shares of common stock at a weighted average
of $.25
per share and excluded from the computation are 449,000 options to purchase
our
common stock as they would be anti-dilutive. Also excluded from the computation
of diluted EPS for the three months ended June 30, 2006 are warrants covering
an
aggregate of 5,890,000 shares of common stock with a remaining exercise price
ranging from $.30 to $.40 as they would be anti-dilutive. Excluded from the
computation of diluted EPS for the nine months ended June 30, 2006 are options
to purchase199,150 shares of common stock at a weighted average of $.25 per
share and outstanding warrants covering an aggregate of 5,890,000 shares
of
common stock with a remaining exercise price ranging from $.30 to $.40 as
they
would be anti-dilutive. Excluded from computation of diluted EPS for the
three
and nine months ended June 30, 2005 are options to purchase 1,100,560 shares
of
common stock at a weighted average price of $1.22 per share and 6,079,473
warrants, with a remaining exercise price ranging from $.30 to $.40, as they
would also be anti-dilutive.
Pursuant
to the terms of the Exercise and Conversion Agreement we entered into with
Laurus on January 13, 2006, as amended on February 28, 2006, Laurus converted
$5,400,000 in aggregate principal amount of convertible Company debt it held
into 18,000,000 shares of our common stock. Following such conversion, Laurus
held 19,251,000 common shares, representing approximately 49.8%, of our
outstanding common stock.
In
addition, we entered into a Stock Redemption Agreement with Laurus, dated
January 12, 2006, See Note 1, Status of Tidel Technologies, Inc. - Sale of
the
Cash Security Business and Related Agreements with Laurus.
6.
|
Long-Term
Debt and Convertible
Debentures
|
Long-term
debt related to continued operations consisted of the following:
|
|
June
30,
2006
|
|
September
30,
2005
|
|
Convertible
notes issued to Laurus, net of debt discount of $3,746,531 at September
30, 2005
|
|
$
|
—
|
|
$
|
4,421,457
|
|
Total
long-term debt
|
|
|
—
|
|
|
4,421,457
|
|
Less:
current maturities
|
|
|
—
|
|
|
(2,325,000
|
)
|
Long-term
debt, less current maturities
|
|
$
|
—
|
|
$
|
2,096,457
|
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND CONSOLIDATED
RESULTS OF OPERATIONS
You
should read the following discussion and analysis together with
our consolidated
financial statements and notes thereto and the discussion “Management’s
Discussion and Analysis of Consolidated Financial Condition and Consolidated
Results of Operations”
and “Cautionary Statements” included in our 2005 Annual Report
on Form
10-K for the Fiscal Year Ended September 30, 2005. The following information
contains forward-looking
statements, which are subject to risks and uncertainties. Should
one or more of these risks or uncertainties materialize, actual
results may
differ from those expressed or implied by the forward-looking
statements.
General
Our
liquidity has historically been negatively impacted by our inability to collect
outstanding receivables and claims as a result of the bankruptcy of JRA222,
Inc.
d/b/a Credit Card Center (“CCC”), the inability to collect outstanding
receivables from certain other 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. On January 3, 2006, the Company completed the
ATM
Business Sale. The total purchase price was approximately $10.4 million of
which
$8.2 million was funded into a collateral account for the benefit of Laurus
to
be applied towards the repayment of our outstanding loans to Laurus. On January
13, 2006, we utilized proceeds from the ATM Business Sale held in the collateral
account to repay outstanding convertible debt to Laurus in the principal
amount
of $2,617,988 plus accrued but unpaid interest in the amount of $113,333.
In
connection therewith, we paid a prepayment penalty to Laurus in the amount
of
$59,180. On January 13, 2006, Laurus converted the remaining outstanding
indebtedness of $5,400,000 into 18,000,000 shares of our common
stock.
We
entered into an amended and restated asset purchase agreement, dated as of
June
9, 2006 (the “Asset Purchase Agreement”), with Sentinel Operating, L.P.
(“Buyer”) for the sale of substantially all of the assets of our electronic cash
security business, consisting of (a) timed access cash controllers, (b) the
Sentinel products, (c) the servicing, maintenance and repair of the timed
access
cash controllers or Sentinel products and (d) all other assets and business
operations associated with the foregoing (the “Cash Security Business Sale”) to
Buyer. The buyer is controlled by a management buyout group that includes
Mark
A. Levenick, our Interim Chief Executive Officer and a member of our board
of
directors, and Raymond P. Laundry, a member of our board of directors. The
Asset
Purchase Agreement amends and restates the asset purchase agreement originally
entered into as of January 12, 2006.
The
Asset
Purchase Agreement provides for the sale of our Cash Security business to
Buyer
for a cash purchase price of $15,500,000, less $100,000 as consideration
for the
Buyer assuming certain potential liability in connection with ongoing
litigation, and less a working capital deficit adjustment of $1,629,968 as
provided for in the Asset Purchase Agreement, resulting in a net purchase
price
of $13,770,032. In addition, the purchase price is subject to a cash adjustment
of $2,458,718 payable to the Company by the Buyer on closing. The independent
members of our Board received an opinion from Capitalink, L.C., as to the
fairness from a financial point of view of the Cash Security Business Sale
to
the Company’s unaffiliated shareholders. On May 24, 2006, a special committee of
the board of directors of the Company determined that the Cash Security Business
Sale and related transactions are advisable and fair to and in the best
interests of the Company and its unaffiliated stockholders and recommended
that
the Company’s board of directors approve the Asset Purchase Agreement and the
Cash Security Business Sale. On June 9, 2006, the Company’s board of directors
(with interested directors abstaining) approved the Asset Purchase Agreement
and
the Cash Security Business Sale. In the event that the Cash Security Business
Sale is approved by the holders of a majority of our outstanding shares at
the
Special Meeting and the Cash Security Business Sale occurs, Tidel will be
left
as a non-operating, shell public company whose principal asset will be cash.
Pursuant
to the Agreement Regarding the NCR Transaction and Other Asset Sales, dated
November 26, 2004 (the “Sale Agreement”), by and between the Company and Laurus
Master Fund Ltd. (“Laurus”), the Company agreed to pay to Laurus a portion of
the excess net proceeds from the Cash Security Business Sale.
On
June
9, 2006, we and Laurus entered into an agreement (the “Laurus Termination
Agreement”) which, among other things, provides for the payment of a sale fee of
$8,508,963 to Laurus (the “Sale Fee”) in full satisfaction of all amounts
payable to Laurus under the Sale Agreement, including fees payable in respect
of
the sale of our ATM business division and the Cash Security Business Sale.
The
Laurus Termination Agreement further provides that, upon payment of the Sale
Fee
and performance by the Company of its obligations under the Stock Redemption
Agreement described below: (i) all warrants to purchase common stock of the
Company held by Laurus will terminate and be of no further force or effect;
and
(ii) thereafter, neither the Company nor any of its subsidiaries will have
any
further obligation to Laurus after we exercise our repurchase of the outstanding
shares owned by Laurus under the Stock Redemption Agreement. Further, each
of
the Company and Laurus has granted each other and their respective affiliates
and subsidiaries reciprocal releases from and against any claims and causes
of
action that may exist.
After
deducting the $8,508,963 sale fee payable to Laurus, under an agreement we
entered into with Laurus on June 9, 2006, and the cost of redeeming our shares
held by Laurus and the other transactional costs, we estimate that the net
proceeds accruing to Tidel from the Asset sale will be approximately $5,100,000.
Proceeds from the Asset Sale will not be distributed to
stockholders.
We
and
Laurus initially entered the Stock Redemption Agreement on January 12, 2006.
Pursuant to the terms of the Stock Redemption Agreement: (i) we agreed, among
other things, to repurchase from Laurus, upon the closing of the Cash Security
Business Sale, all shares of our common stock held by Laurus, and (ii) Laurus
agreed (a) to the cancellation as of the closing date of the Cash Security
Business Sale of warrants it holds to purchase 4,750,000 shares of our common
stock at an exercise price of $.30 per share, and (b) not to exercise such
warrants prior to the earlier to occur of March 31, 2006 (the “Outside Date”)
and the date on which the Asset Purchase Agreement is terminated. Pursuant
to an
Amendment to the Stock Redemption Agreement entered into as of February 28,
2006, Laurus agreed to extend the Outside Date from March 31, 2006 to May
31,
2006. On June 9, 2006, we and Laurus entered into a Second Amendment to Stock
Redemption Agreement, pursuant to which Laurus has agreed to further extend
the
Outside Date to September 30, 2006. The Second Amendment to Stock Redemption
Agreement is effective as of April 21, 2006.
We
and
Laurus also entered into the Exercise and Conversion Agreement on January
12,
2006. The Exercise and Conversion Agreement provided, among other things,
for
Laurus to convert, on or prior to the record date (the “Record Date”) set with
respect to the special meeting of our stockholders to be held for the purpose
of
voting on the Cash Security Business Sale (the “Special Meeting”), $5,400,000 of
indebtedness outstanding under our Convertible Note (as defined below) into
18,000,000 shares of our common stock. As used herein, the term “Convertible
Note” means a certain Convertible Note, dated November 5, 2003, in the original
principal amount of $6,450,000 together with an additional $292,987 added
thereto on November 26, 2004, made by the Company to Laurus. Pursuant to
an
Amendment to Exercise and Conversion Agreement dated as of February 28, 2006,
Laurus agreed to extend the latest date that we could set as the Record Date
from January 13, 2006 to April 21, 2006. Laurus also agreed to extend the
latest
date by which we could mail proxy materials for the Special Meeting to our
stockholders from February 28, 2006 to April 21, 2006 and the latest date
by
which the Cash Security Business Sale must occur from March 31, 2006 to May
31,
2006. On June 9, 2006, we and Laurus entered into a Second Amendment to Exercise
and Conversion Agreement pursuant to which Laurus has agreed to further extend
the latest date that we can set as the Record Date for the Special Meeting
and
the latest date by which we can mail proxy materials for the Special Meeting
to
our stockholders to August 31, 2006 and to further extend the date by which
the
Cash Security Business Sale must occur to September 30, 2006. The Second
Amendment to Exercise and Conversion Agreement is effective as of April 21,
2006. As amended, the Exercise and Conversion Agreement further provides
that if
the Cash Security Business Sale does not occur by September 30, 2006, we
will
immediately redeem from Laurus the 18,000,000 shares of our common stock
for
$.30 per share, or an aggregate of $5.4 million.
On
January 12, 2006, we and Laurus entered into the Voting Agreement with Sentinel
Technologies, Inc. which provides, among other things, for Laurus to vote
all of
the shares of Company common stock that Laurus owns and any shares over which
Laurus exercises voting control in favor of the approval and adoption of
the
Asset Purchase Agreement, the Cash Security Business Sale and related
transactions and against any competing transactions proposed to the Company's
stockholders. An Amendment to Voting Agreement was entered into as of February
28, 2006 whereby Laurus agreed to extend the latest date that we could set
as
the Record Date for the Special Meeting from February 13, 2006 to April 21,
2006
and to extend the date on which Laurus will cease to be bound by its obligations
under the Voting Agreement from February 28, 2006 to May 31, 2006. On June
9,
2006, we, Laurus and STI entered into a Second Amendment to Voting Agreement
pursuant to which the latest date we can set as the Record Date for the Special
Meeting has been further extended from March 31, 2006 to August 31, 2006
and the
date on which Laurus will cease to be bound by its obligations under the
Voting
Agreement was further extended from May 31, 2006 to September 30, 2006. The
Second Amendment to Voting Agreement is effective as of April 21,
2006.
On
June
9, 2006, Engineering entered into an agreement with Mark K. Levenick under
which
Engineering agreed to make a payment of $350,000 to Mr. Levenick upon the
closing of the Cash Security Business Sale in consideration for Engineering
terminating Mr. Levenick's employment agreement and all rights thereunder
(including any rights to vacation pay or other benefits) other than
for accrued pay. This payment had previously been approved in December 2005
by
the Company's compensation committee, subject to the review and approval
of
definitive documentation. This payment would represent a stay bonus in respect
of Mr. Levenick continuing his employment with the Company until the closing
of
the sale of the Company's ATM business division and the Cash Security Business
Sale. Under the terms of the agreement, Mr. Levenick agrees that all
stock options held by him to purchase the Company's common stock, to the
extent
exercisable and not previously terminated, may be exercised by him at any
time
prior to 90 days following the closing of the Cash Security Business Sale.
In
addition, Mr. Levenick and Engineering agreed that in the event the Asset
Purchase Agreement is terminated or the Cash Security Business Sale is not
consummated, the agreement would have no effect and his employment agreement
would continue in accordance with its terms.
On
May
30, 2006, the Company received a settlement payment of $4,489,963.58 arising
out
of the Company’s ownership of 698,889 shares of the common stock of 3CI Complete
Compliance Corporation (“3CI”) under a class action settlement paid out to
minority shareholders of 3CI. Under the terms of the settlement and in order
to
participate in the settlement, the Company tendered all 698,889 shares to
Stericycle, Inc., the majority shareholder of 3CI and the defendant under
the
class action, and accordingly the Company no longer holds any ownership interest
in 3CI. Although the Company has been advised that it may receive further
disbursements as part of the settlement, it believes that the May 30, 2006
disbursement represents the principal portion of the amounts that will be
paid
to the Company under the settlement and there can be no assurance that the
Company will in fact receive further settlement disbursements. As a result,
we
recognized a gain of $4,210,577 on the disposal of these shares during the
quarter ended June 30, 2006, which represented the difference between the
settlement payment amount and our carrying amount.
Following
board approval on July 7, 2006, the Company made a payment of $100,000 to
each
of our three non-employee directors, Raymond P. Landry, Stephen P. Griggs,
and
Jerrell G. Clay, in recognition of the extraordinary efforts of, and time
spent
by, such directors over the past two years in connection with Tidel business
matters, including without limitation, the ATM Business Sale and exploring
strategic alternatives regarding our Cash Security business, and helping
guide
the Company following the serious illness and subsequent death of our former
Chief Executive Officer.
Critical
Accounting Policies
This
discussion and analysis of our consolidated financial condition and consolidated
results of operations is based upon our condensed consolidated unaudited
financial statements. The preparation of these consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts.
On an ongoing basis, we evaluate our estimates, including those related to
bad
debts, inventories, intangible assets, assets held for sale, long-lived assets,
income taxes, and contingencies and litigation. We base our estimates on
historical experience and on various other assumptions and factors that we
believe to be reasonable under the circumstances. Based on our ongoing review,
we make adjustments we consider appropriate under the facts and circumstances.
The accompanying condensed consolidated financial statements are prepared
using
the same critical accounting policies discussed in our 2005 Annual Report
on
Form 10-K.
Available-for-Sale
Securities
Our
short
term investment consist of an equity investment in Cashbox plc classified
as
available-for-sale, which is stated at estimated fair value. Unrealized gains
and losses, net of related tax effect, if any, are reported as a separate
component of accumulated other comprehensive income (loss) in shareholders'
equity until realized. The estimated fair market values of investments are
based
on quoted market prices as of the end of the reporting period.
Results
of Operations
Operating
Segments
We
conduct business within one operating segment, principally in the United
States.
Product
Net Sales for ATM Business and Cash Security Business
A
breakdown of net sales by individual product line is provided in the following
table:
|
|
Three
Months Ended June 30,
|
|
Nine
Months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
ATM
Business
|
|
$
|
—
|
|
$
|
4,734,044
|
|
$
|
3,847,874
|
|
$
|
11,833,366
|
|
Cash
Security Business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TACC
|
|
|
1,204,971
|
|
|
1,237,807
|
|
|
3,085,663
|
|
|
3,777,892
|
|
Sentinel
|
|
|
2,755,547
|
|
|
3,595,237
|
|
|
7,759,810
|
|
|
11,398,656
|
|
Parts
& Other
|
|
|
296,255
|
|
|
477,102
|
|
|
1,141,043
|
|
|
1,391,909
|
|
Total
Cash Security Business
|
|
$
|
4,256,773
|
|
$
|
5,310,146
|
|
$
|
11,986,516
|
|
$
|
16,568,457
|
|
Gross
Profit, Operating Expenses and Non-Operating Items
Continuing
Operations
Due
to
the requirement to classify our only one remaining product line as discontinued
operations, the results of continuing operations consist primarily of the
corporate overhead and debt-related costs.
An
analysis of continuing operations and assets and liabilities is provided
in the
following tables:
CONTINUING
OPERATIONS
SELECTED
BALANCE SHEET DATA
(UNAUDITED)
|
|
June
30,
2006
|
|
September
30,
2005
|
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5,890,257
|
|
$
|
1,003,663
|
|
Restricted
cash
|
|
|
5,400,000
|
|
|
—
|
|
Marketable
securities available-for-sale
|
|
|
881,414
|
|
|
—
|
|
Trade
accounts receivable, net of allowances of $0
|
|
|
—
|
|
|
250,000
|
|
Notes
and other receivables
|
|
|
13,890
|
|
|
12,965
|
|
Prepaid
expenses and other
|
|
|
41,711
|
|
|
170,231
|
|
Total
current assets
|
|
|
12,227,272
|
|
|
1,436,859
|
|
|
|
|
|
|
|
|
|
Property
and equipment, at cost
|
|
|
—
|
|
|
55,641
|
|
Accumulated
depreciation
|
|
|
—
|
|
|
(42,848
|
)
|
Net
property and equipment
|
|
|
—
|
|
|
12,793
|
|
|
|
|
|
|
|
|
|
Investment
in subsidiaries
|
|
|
(2,854,229
|
)
|
|
—
|
|
Due
from (to) subsidiaries
|
|
|
(40,957
|
)
|
|
—
|
|
Other
assets
|
|
|
4,000
|
|
|
615,763
|
|
Total
assets
|
|
$
|
9,336,086
|
|
$
|
2,065,415
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Current
maturities of long term debt
|
|
$
|
—
|
|
$
|
2,325,000
|
|
Accounts
payable
|
|
|
312,206
|
|
|
431,876
|
|
Accrued
interest payable
|
|
|
2,000,000
|
|
|
2,135,852
|
|
Shares
subject to redemption
|
|
|
5,400,000
|
|
|
—
|
|
Other
accrued expenses
|
|
|
300,000
|
|
|
290,871
|
|
Total
current liabilities
|
|
|
8,012,206
|
|
|
5,183,599
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current maturities and debt discount of $3,746,531
at
September 30, 2005
|
|
|
—
|
|
|
2,096,457
|
|
Total
liabilities
|
|
$
|
8,012,206
|
|
$
|
7,280,056
|
|
CONTINUING
OPERATIONS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Three
Months Ended June 30,
|
|
Nine
Months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Revenues
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Selling,
general and administrative
|
|
|
662,730
|
|
|
652,007
|
|
|
2,655,647
|
|
|
1,334,541
|
|
Depreciation
and amortization
|
|
|
—
|
|
|
1,421
|
|
|
2,678
|
|
|
3,592
|
|
Operating
loss
|
|
|
(662,730
|
)
|
|
(653,428
|
)
|
|
(2,658,325
|
)
|
|
(1,338,133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense), net
|
|
|
21,960
|
|
|
(1,160,459
|
)
|
|
(4,173,612
|
)
|
|
(5,399,974
|
)
|
Gain
on investment in 3CI
|
|
|
4,210,577
|
|
|
—
|
|
|
4,210,577
|
|
|
—
|
|
Gain
on collection of receivable
|
|
|
—
|
|
|
—
|
|
|
598,496
|
|
|
—
|
|
Gain
on CCC bankruptcy settlement
|
|
|
—
|
|
|
—
|
|
|
105,000
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
—
|
|
|
(7,455
|
)
|
|
—
|
|
Total
other income (expense)
|
|
|
4,232,537
|
|
|
(1,160,459
|
)
|
|
733,006
|
|
|
(5,399,974
|
)
|
Income
(loss) before taxes
|
|
|
3,569,807
|
|
|
(1,813,887
|
)
|
|
(1,925,319
|
)
|
|
(6,738,107
|
)
|
Income
tax expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Income
(loss) from continuing operations
|
|
$
|
3,569,807
|
|
$
|
(1,813,887
|
)
|
$
|
(1,925,319
|
)
|
$
|
(6,738,107
|
)
|
Quarter
Ended June 30, 2006 Compared to the Quarter Ended June 30,
2005
Selling,
general and administrative expense
for the
quarter ended June 30, 2006 was $662,730 compared with $652,007 for the quarter
ended June 30, 2005. The increase is primarily related to the costs associated
with preparation for the sale of the Cash Security business.
Interest
income (expense)
was
approximately $21,960 for the quarter ended June 30, 2006 compared to
approximately (1.16) million for the same quarter of the previous year. The
decrease was primarily related to the repayment of all monetary obligations
payable to Laurus on January 3, 2006 in connection with the ATM Business
Sale.
Income
tax expense. In
assessing the realizability of deferred tax assets, management considers
whether
it is more likely than not that some portion or all of the deferred tax assets
will be realized. We have 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.
We
recorded net income from continuing operations of $3,569,807 and a net loss
of $(1,813,887) for the quarters ended June 30, 2006 and 2005, respectively.
The
change was primarily related to the gain on disposal of investment in 3CI
of
approximately $4.2 million.
Nine
Months Ended June 30, 2006 Compared to the Nine Months Ended June 30,
2005
Selling,
general and administrative expense
for the nine months ended June 30, 2006 were approximately $2.7 million compared
with approximately $1.3 million for the nine months ended June 30, 2005.
This
increase is primarily related to accounting and legal costs associated with
the
ATM Business Sale, the accrual of bonuses to non-employee directors, certain
employee termination costs related to the closure of the Houston office,
and
costs associated with the preparation for the sale of the Cash Security
business.
Interest
expense, net
was
approximately $4.2 million for the nine months ended June 30, 2006 and $5.4
million for the nine months ended June 30, 2005. The decrease was primarily
related to the repayment of all indebtedness to Laurus on January 3, 2006
from
the proceeds received in connection with the ATM Business Sale.
Income
tax expense. In
assessing the realizability of deferred tax assets, management considers
whether
it is more likely than not some portion or all of the deferred tax assets
will
be realized. We have 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.
We
recorded a net loss from continuing operations of approximately $(1.9) million
and $(6.7) million for the nine months ended June 30, 2006 and 2005,
respectively. The primary decrease was related to a gain of $4.2 million
from
the disposal of our investment in 3CI and the gain of approximately $600,000
recorded due to the collection of receivables related to the supply and credit
facility agreement with a foreign distributor.
Discontinued
Operations (ATM Business)
During
the first quarter ended December 31, 2004, we committed to a plan to sell
our
ATM business. On February 19, 2005, the Company and its wholly-owned subsidiary,
Tidel Engineering, L.P., entered into the NCR Asset Purchase Agreement with
NCR
EasyPoint, a wholly owned subsidiary of NCR Corporation.
On
December 28, 2005, the holders of 62.2% of our shares of outstanding common
stock approved the NCR Asset Purchase Agreement.
On
January 3, 2006, we completed the ATM Business Sale. The total purchase price
was approximately $10.4 million of which $8.2 million was paid to
Laurus into a collateral account held by Laurus as collateral for the
satisfaction of all monetary obligations payable to Laurus, $0.5 million
was
initially paid into an escrow account and has subsequently been released
to the
Company, and the remaining $1.7 million was paid to the Company to be used
for
necessary working capital. This termination resulted in a book gain of
approximately $3.6 million during the quarter ended March 31, 2006.
Subsequently, on January 13, 2006 Laurus converted $5,400,000 in aggregate
principal amount of convertible Company debt it holds into 18,000,000 shares
of
our common stock. Following Laurus’ conversion of such debt, Laurus holds shares
representing approximately 49.8% of our common stock.
The
following is a summary of the net assets sold as initially determined at
December 31, 2004 and as finally reported on the closing date of January
3,
2006:
|
|
January
3,
2006
|
|
September
30,
2005
|
|
Assets
held for sale:
|
|
|
|
|
|
Trade
accounts receivable (net of allowances for bad debt)
|
|
$
|
1,857,192
|
|
$
|
2,310,262
|
|
Inventories
(net of reserve or obsolescence)
|
|
|
7,126,918
|
|
|
7,323,439
|
|
Prepaid
expense and other assets
|
|
|
—
|
|
|
392,972
|
|
Property,
plant and equipment, at cost net of depreciation
|
|
|
79,056
|
|
|
121,525
|
|
Other
Assets
|
|
|
27,297
|
|
|
27,297
|
|
Total
assets held for sale
|
|
$
|
9,090,463
|
|
$
|
10,175,495
|
|
|
|
|
|
|
|
|
|
Liabilities
held for sale:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
1,627,748
|
|
|
1,681,288
|
|
Other
accrued expenses
|
|
|
636,174
|
|
|
1,814,634
|
|
Liabilities
held for sale
|
|
$
|
2,263,922
|
|
$
|
3,495,922
|
|
DISCONTINUED
OPERATIONS — ATM BUSINESS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Three
Months Ended June 30,
|
|
Nine
Months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
Sales
|
|
$
|
—
|
|
$
|
4,734,044
|
|
$
|
3,847,874
|
|
$
|
11,833,366
|
|
Cost
of sales
|
|
|
—
|
|
|
3,650,721
|
|
|
2,592,268
|
|
|
8,550,479
|
|
Gross
Profit
|
|
|
—
|
|
|
1,083,323
|
|
|
1,255,606
|
|
|
3,282,887
|
|
Selling,
general and administrative
|
|
|
—
|
|
|
1,367,879
|
|
|
880,941
|
|
|
4,151,213
|
|
Depreciation
and amortization
|
|
|
—
|
|
|
48,355
|
|
|
46,048
|
|
|
194,281
|
|
Operating
income (loss)
|
|
|
—
|
|
|
(332,911
|
)
|
|
328,617
|
|
|
(1,062,607
|
)
|
Non-operating
(income) expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
income (loss)
|
|
$
|
—
|
|
$
|
(332,911
|
)
|
$
|
328,617
|
|
$
|
(1,062,607
|
)
|
Discontinued
Operations (Cash Security Business)
An
analysis of the discontinued operations of the Cash Security business is
as
follows:
DISCONTINUED
OPERATIONS — CASH SECURITY BUSINESS
SELECTED
BALANCE SHEET DATA
(UNAUDITED)
|
|
June
30,
2006
|
|
September
30,
2005
|
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
588,536
|
|
$
|
—
|
|
Trade
accounts receivable, net of allowance of approximately $92,447
and $7,500,
respectively
|
|
|
2,508,653
|
|
|
1,856,523
|
|
Inventories
|
|
|
1,523,863
|
|
|
3,137,818
|
|
Prepaid
expenses and other
|
|
|
80,923
|
|
|
198,057
|
|
Total
current assets
|
|
|
4,701,975
|
|
|
5,192,398
|
|
Property
and equipment, at cost
|
|
|
1,639,219
|
|
|
1,097,604
|
|
Accumulated
depreciation
|
|
|
(1,327,408
|
)
|
|
(1,020,015
|
)
|
Net
property and equipment
|
|
|
311,811
|
|
|
77,589
|
|
Other
assets
|
|
|
250,000
|
|
|
25,631
|
|
Total
assets
|
|
$
|
5,263,786
|
|
$
|
5,295,618
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Current
maturities
|
|
$
|
3,929
|
|
$
|
1,852
|
|
Accounts
payable
|
|
|
973,006
|
|
|
1,397,394
|
|
Other
accrued expenses
|
|
|
2,196,174
|
|
|
3,069,278
|
|
Total
current liabilities
|
|
|
3,173,109
|
|
|
4,468,524
|
|
Long-term
debt, net of current maturities
|
|
|
20,982
|
|
|
28,708
|
|
Total
liabilities
|
|
$
|
3,194,091
|
|
$
|
4,497,232
|
|
DISCONTINUED
OPERATIONS — CASH SECURITY BUSINESS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Three
Months Ended June 30,
|
|
Nine
Months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
Sales
|
|
$
|
4,256,773
|
|
$
|
5,310,146
|
|
$
|
11,986,516
|
|
$
|
16,568,457
|
|
Cost
of sales
|
|
|
2,464,820
|
|
|
2,993,849
|
|
|
7,292,291
|
|
|
8,984,878
|
|
Gross
Profit
|
|
|
1,791,953
|
|
|
2,316,297
|
|
|
4,694,225
|
|
|
7,583,579
|
|
Selling,
general and administrative
|
|
|
1,084,417
|
|
|
1,274,518
|
|
|
3,159,185
|
|
|
3,159,673
|
|
Depreciation
and amortization
|
|
|
23,972
|
|
|
7,560
|
|
|
28,685
|
|
|
22,308
|
|
Operating
income (loss)
|
|
|
683,564
|
|
|
1,034,219
|
|
|
1,506,355
|
|
|
4,401,598
|
|
Non-operating
income (expense)
|
|
|
(445
|
)
|
|
570
|
|
|
(1,561
|
)
|
|
1,227
|
|
Net
income (loss)
|
|
$
|
683,119
|
|
$
|
1,033,649
|
|
$
|
1,504,794
|
|
$
|
4,400,371
|
|
Quarter
Ended June 30, 2006 Compared to the Quarter Ended June 30, 2005 - Cash Security
Business
Net
Sales from
the
Cash Security business were approximately $4.3 million for the quarter ended
June 30, 2006 compared with net sales of approximately $5.3 million for the
quarter ended June 30, 2005. During the third quarter of fiscal year 2006,
we
sold 398 Sentinel units compared with sales of 473 units during the same
period
last year. The decrease was primarily a result of significantly lower sales
to
our largest Sentinel customer compared with the same period last
year.
Gross
profit for
the
quarter ended June 30, 2006 was approximately $1.8 million, or 42% as
a
percentage of sales,
compared with gross profit of $2.3 million, or 44% as a percentage of sales,
for
the quarter ended June 30, 2005. The decrease is primarily a result of a
change
in product mix and competitive pricing.
Selling,
general and administrative expense
for the
quarter ended June 30, 2006 was approximately $1.1 million compared with
$1.3
million for the same period last year. This decrease is primarily related
to
smaller bonus incentives.
Nine
Months Ended June 30, 2006 Compared to the Nine Months Ended June 30,
2005
Our
net
sales generated from the Cash Security business were approximately $12.0
million
for the nine months ended June 30, 2006 compared with net sales of approximately
$16.6 million in the same period of the prior year. The decrease was primarily
a
result of significantly
lower sales to our largest Sentinel customer.
During
the nine months ended June 30, 2006, we sold 1,071 Sentinel units compared
with
sales of 1,467 units during the same period last year.
Gross
profit on
product sales for the nine months ended June 30, 2006 decreased approximately
$2.9 million compared with the same period of the prior year. The decrease
in
the overall gross profit is primarily a result of lower sales and product
mix.
Selling,
general and administrative expenses
for the
nine months ended June 30, 2006 were essentially unchanged from the same
period
a year ago.
Liquidity
and Capital Resources
General
Our
liquidity was 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 other customers, 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. On January 3, 2006, the Company completed the
ATM
Business Sale.
Cash
Flows
Cash
used
in operations was $1.9 million for the nine months ended June 30, 2006 compared
with cash provided by operations of $1.6 million for the same period last
year.
The change during the nine months of fiscal 2006 was primarily attributable
to
the increase in cash used in the discontinued operations.
Working
Capital
As
of
June 30, 2006, we had working capital of approximately $6.3 million compared
with working capital of $3.7 million at September 30, 2005. The increase
in
working capital was primarily a result of the proceeds from the ATM Business
Sale and the proceeds from disposal of 3CI shares due to the class action
settlement.
Indebtedness
The
Laurus Financings
On
November 25, 2003, we completed a financing of 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 bore 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 resulted in a beneficial conversion
feature, further discounting the carrying value of the notes. As a result,
we
were to 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.
In
connection with the closing of the above financing, all outstanding litigation
was dismissed, and the prior revolving credit facility was repaid through
the
release of the restricted cash used as collateral for such
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 an additional financing, a $3,350,000 financing
transaction with Laurus pursuant to the securities agreement. 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 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.
On
January 13, 2006, the proceeds from the ATM Business Sale to NCR were applied
to
the repayment of approximately $2.6 million of indebtedness to Laurus and
Laurus’ remaining indebtedness of $5.4 million was converted into 18,000,000
shares of our common stock.
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. In July of 2005, we collected
a
partial payment of approximately $350,000, and we received a commitment that
commenced August 5, 2005, from the distributor to pay approximately $35,000
per
week to us until the balance is paid in full. We received 16 weekly payments
totaling approximately $560,000, pursuant to that commitment. During the
quarter
ended December 31, 2005, the distributor stopped making payments to us pursuant
to that commitment.
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. We exercised this option during December of 2005, therefore
reducing the receivable by $300,000 resulting in a balance of $833,000 of
which
$598,496 was reserved at December 31, 2005.
On
March
31, 2006, we received $950,00 from the distributor resulting in full payment
of
the outstanding receivable of $833,000 and interest of $117,000. We recognized
income of approximately $598,496 from the reversal of the bad debt reserve
and
$117,000 of interest income during the nine months ended June 30, 2006 from
the
proceeds.
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, 2005, we had credited back approximately $122,100
to the retailer resulting in an accrued liability of $529,400 for the benefit
of
the Retailer. As of June 30 2006 the accrued liability was
$529,400.
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. At September 30, 2005, we
continued to own 698,889 shares of the common stock of 3CI and the value
of our
investment was marked to the market value of $279,556, or $.40 per
share.
On
May
30, 2006, we received a settlement payment of $4,489,963 arising out of our
ownership of the 3CI shares under a class action settlement paid out to minority
shareholders of 3CI. Under the terms of the settlement and in order to
participate in the settlement, we tendered all 698,889 shares that we owned
to
Stericycle, Inc., the current majority shareholder of 3CI and the defendant
under the class action, and accordingly we no longer hold any ownership interest
in 3CI. Although we have been advised that we may receive further disbursements
as part of the settlement, we believe that the May 30, 2006 disbursement
represents the principal portion of the amounts that will be paid to us under
the settlement and there can be no assurance that we will in fact receive
further settlement disbursements. As a result, we recognized a gain of
$4,210,577 on the disposal of these shares during the quarter ended June
30,
2006, which represented the difference between the settlement payment amount
and
our carrying amount.
Marketable
Securities Available- for- Sale
We
own
2,022,000 of the common stock of Cashbox plc pursuant to our exercise of
the
Share Warrant Agreement in August 2005. On or about March 27, 2006, shares
of
Cashbox plc began trading on the AIM Market of the London Stock Exchange.
Our
investment in Cashbox is held for an indefinite period and thus is classified
as
available-for-sale and recorded at fair value in marketable securities on
the
balance sheet, with the change in fair value during the period excluded from
earnings and recorded net of tax as a component of other comprehensive
income.
As
of
June 30, 2006, our common stock in Cashbox plc was recorded at a fair value
of
$881,414. Unrealized gains on these shares of Common Stock are presented
as
accumulated other comprehensive income as a component of stockholders' equity
as
of June 30, 2006, were $581,414.
Pursuant
to a lock-up agreement with Cashbox plc, we were restricted from selling
any
shares for the first three months after its admission to the AIM Market.
Thereafter, we are restricted from selling any shares until the second
anniversary of its admission to the AIM Market unless we (i) consult with
Cashbox’s primary broker prior to the disposal of any shares and (ii) effect the
disposal of the shares through Cashbox’s primary broker from time to time and in
such manner as such broker may require with a view to the maintenance of
an
orderly market in the shares of Cashbox.
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 consolidated
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.
Indebtedness
We
have
lease payment obligations under one operating lease for a company vehicle
at a
rate of 8% per annum.
Long-term
debt including current maturities and debt discount was $0 as of June 30,
2006
and $8,167,988 as of September 30, 2005.
On
January 13, 2006, we utilized proceeds from the ATM Business Sale to repay
outstanding indebtedness to Laurus in the principal amount of $2,617,988
plus
accrued but unpaid interest in the amount of $113,333. In connection therewith,
we paid a prepayment penalty to Laurus in the amount of $59,180. On January
13,
2006, Laurus converted the remaining outstanding indebtedness of $5,400,000
into
18,000,000 shares of our common stock.
The
following table summarizes our contractual cash obligations as of June 30,
2006:
|
|
Payments
Due By Fiscal Year
|
|
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Thereafter
|
|
Operating
leases
|
|
$
|
37,022
|
|
$
|
222,132
|
|
$
|
222,132
|
|
$
|
222,132
|
|
$
|
222,132
|
|
$
|
185,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37,022
|
|
$
|
222,132
|
|
$
|
222,132
|
|
$
|
222,132
|
|
$
|
222,132
|
|
$
|
185,110
|
|
We
lease
office and warehouse space, transportation equipment and other equipment
under
terms of operating leases, which expired in 2005. We entered into a new lease
to
relocate the Cash Security business on December 1, 2005. The terms of the
new
lease for the Cash Security business requires an annualized base rent of
$222,132 expiring in 2011. Rental expense under these leases for the quarters
ended June 30, 2006 and 2005 was $26,543 and $133,104, respectively. We closed
the corporate office and terminated our month to month lease for the corporate
office located in Houston.
Risk
Factors
Please
see the risk factors contained in our Annual Report on Form 10-K for the
year
ended September 30, 2005, which are hereby incorporated by reference, and
the
risk factors set forth in Part II, Item 1A hereof.
Forward-Looking
Statements
In
addition to historical information, Management’s Discussion and Analysis of
consolidated Financial Condition and consolidated Results of Operations include
certain forward-looking statements regarding events and financial trends
that
may affect our future consolidated operating results and consolidated financial
position. Some important factors that could cause actual results to differ
materially from the anticipated results or other expectations expressed in
our
forward-looking statements include the following:
•
|
the
uncertainty of our future prospects in light of the ATM Business
Sale and
the Cash Security Business Sale;
|
•
|
our
need for additional financing in the future;
|
•
|
the
potential receipt of an audit opinion with a “going concern” explanatory
paragraph from our independent registered public accounting
firm;
|
•
|
our
history of operating losses and our inability to make assurances
that we
will generate operating income in the
future;
|
•
|
our
compliance with the Sarbanes-Oxley Act of 2002 and the significant
expansion of securities law regulation of corporate governance,
accounting
practices, reporting and disclosure that affects publicly traded
companies, particularly related to Section 404 dealing with our
system of
internal controls.
|
Many
of
these factors are beyond our ability to control or predict. We caution investors
not to place undue reliance on forward-looking statements. We disclaim any
intent or obligation to update the forward-looking statements contained in
this
report, whether as a result of receiving new information, the occurrence
of
future events or otherwise.
These
and
other uncertainties related to the business are described in detail under
the
headings of “Risk Factors” and “Forward-Looking Statements” in Part I, Item 1A
and Part II, 7A of our 2005 Annual Report on Form 10-K.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
At
June
30, 2006, we were not exposed to changes in interest rates as a result of
the
debt repayment in January 2006 of the Company’s convertible debt payable to
Laurus. If market interest rates had increased 1% in the first nine months
of
fiscal 2006, there would have been no material impact on our consolidated
results of operations or consolidated financial position.
ITEM
4. CONTROLS AND PROCEDURES
(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. 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 the evaluation of disclosure controls and procedures and the
accounting controls and procedures, it was concluded that the Company had
a
material weakness in its internal controls and procedures related to the
Company’s communication from its principal operating subsidiary, Tidel
Engineering, L.P to the corporate office regarding the recognition of revenues
as of September 30, 2005. The Company revised its revenue recognition policy
in
the fiscal year ended September 30, 2005 to recognize revenue at the time
products are shipped to customers. Approximately $2.0 million of revenues
were
recognized from the sales of the Sentinel product in the fourth quarter of
the
fiscal year ended September 30, 2005 and the majority of the units that related
to the revenue had not been shipped as of September 30, 2005. These sales
were
not communicated to the corporate office, and accordingly our Interim Chief
Executive Officer and the Chief Financial Officer concluded that the Company’s
internal controls and procedures were not effective as of the end of the
year
ended September 30, 2005. We properly adjusted our 2005 consolidated financial
statements included in the Form 10-K for the fiscal year ended September
30,
2005 to be in compliance with our revenue recognition policy.
In
order
to remedy this material weakness, the Company implemented a new internal
control
procedure, which requires the principal operating subsidiary to send a monthly
billing schedule to the corporate office for review by the Chief Financial
Officer. The Chief Financial Officer of the Company is then required to review
the monthly billings with our Chief Executive Officer of the principal operating
subsidiary to ensure that the monthly revenues recorded are consistent with
our
revenue recognition policy.
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
principal executive officer and our principal financial officer have concluded
that, as of the end of the period covered by this report, our disclosure
controls and procedures were effective and adequately designed to ensure
that
the information required to be disclosed by us in the reports we file or
submit
under the Securities Exchange Act of 1934 (i) is recorded, processed,
summarized, and reported within the time periods specified in applicable
rules
and forms and (ii) is accumulated and communicated to our management, including
our chief executive officer and chief financial officer, to allow timely
decisions regarding required disclosures.
(b)
|
Changes
in internal control over financial
reporting
|
There
were no changes in our internal control over financial reporting that occurred
in the quarter ending June 30, 2006 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
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 alleged that the Sentinel product
sold by Tidel Engineering, L.P. infringed on one or more patent claims found
in
CSS patent U.S. Patent No. 6,885,281 (the ‘281 patent). CSS sought 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.
Subsequently
we filed a motion to dismiss the case CSS filed in Illinois, and Tidel
Engineering, L.P. filed a motion to transfer the Illinois case to the Eastern
District of Texas. On August 15, 2005, the Court ordered the transfer of
this
case to the Northern District of Texas. We also filed a declaratory judgment
action pending in the Eastern District of Texas. In that action, we are asking
the Eastern District of Texas to find, among other things that we have not
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 our cash security
business.
We
have
answered the suit denying that the Company's Sentinel products in any way
infringe upon the independent claims of CSS’s patent. We also filed a
counterclaim against CSS wherein the Company seeks to recover damages resulting
from CSS’s violation of a confidential agreement signed by CSS and the Company
and from CSS's intentional interference in the sale of the Sentinel product
line
and related assets. Further, we have filed a Motion for Partial Summary Judgment
("Summary Judgment Motion") and a Motion for Sanctions Pursuant to Rule 11
("Rule 11 Motion") whereby the Company alleges that CSS and/or its counsel
failed to perform the required investigation of the facts before bringing
suit.
We have requested damages from both CSS and its counsel for failure to properly
investigate the validity of the claims by CSS.
Recently,
and just days before the date by which time CSS was to file its responses
to the
Company’s Summary Judgment Motion and Rule 11 Motion, CSS instead filed a Motion
for Entry of Judgment (the “Judgment Motion”) claming that we have destroyed
evidence and/or have obstructed the discovery process. We filed our response
contesting each of the Judgment Motion’s contentions.
On
May
16, 2006, the court issued an order directing the parties to submit a joint
claims construction chart, after which the court would conduct a Markman
hearing. The purpose of a Markman hearing is to narrow the patent claims
issues
to be submitted to the jury; However, CSS failed to do so. Consequently,
the
Court ordered a telephone hearing to address the then-pending Judgment Motion
for additional time within which to attend to the claims construction issues.
During the hearing, the Court admonished CSS’s counsel for failing to comply
with the order, clarified for CSS’s counsel what the Court expected and directed
the parties to file the joint claims construction report on or before August
30,
2006. The court also directed CSS’s counsel to have CSS undertake a meaningful
inspection of the Sentinel safe that had been made available by us, which
invitation CSS had not yet acted upon.
It
is
anticipated that once the joint claims construction is filed by the parties,
the
Court will enter a scheduling order setting
the
Markman hearing sometime this fall. The parties continue to address discovery
issues, including the inspection of the CSS safe and the production of
additional versions of our source code for the Sentinel safes.
We
intend to vigorously defend all of CSS's claims.
On
April
12, 2006, twenty-seven of our former employees filed suit in state district
court alleging that they did not receive vacation benefits and/or severance
benefits from us which they were owed upon transfer of their employment to
NCR
Corporation. This case was moved to the Federal court in Dallas County. We
settled this matter out-of-court and the case was dismissed with prejudice
on
June 27, 2006.
Our
Principal Stockholder, Laurus, Has Interests In The Cash Security Business
Sale
Which Are Different From, Or In Addition To, Our Other
Stockholders.
Upon
the
closing of the Cash Security Business Sale, Laurus, which holds 19,251,000,
or
49.8%, of our outstanding shares of common stock, will receive from the proceeds
of the Cash Security Business Sale payment of the $8,508,963 Sale Fee and
the
redemption price for its shares of common stock under the stock redemption
agreement. In addition, we understand that Laurus may provide debt financing
to
Buyer in order to fund Buyer’s purchase obligations under the Asset Purchase
Agreement. In such event, we understand that Laurus will also receive fees
from
Buyer as a result of providing such debt financing.
Following
the Cash Security Business Sale, the Company will have substantially no
operations. It is the present intention of our Board to review the Company’s
consolidated financial position at that time and consider all options including,
without limitation, to distribute the remaining proceeds to stockholders
or to
acquire a different business. There can be no assurance that the option chosen
will be beneficial to stockholders. Until the closing of the Cash Security
Business Sale, the Company’s revenue and profitability will depend on its
ability to maintain and generate additional customers and to maintain and
grow
the Cash Security business. A reduction in demand for the products and services
of the Cash Security business would have a material adverse effect on the
Company’s business and prospects.
The
Cash Security Asset Purchase Agreement May Expose the Company To Contingent
Liabilities.
The
failure to complete the Cash Security Business Sale may result in a decrease
in
the market value of the Company’s common stock and may create substantial doubt
as to the Company’s ability to grow and implement its current business
strategies.
The
Cash
Security Business Sale is subject to a number of contingencies. As a result,
we
cannot ensure that the Cash Security Business Sale will be completed. If
the
Cash Security Business Sale is not completed for any reason, the market price
of
the Company’s common stock may decline.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
Pursuant
to the terms of the exercise and conversion agreement we entered into with
Laurus dated as of January 12, 2006 and amended as of February 28, 2006 and
as
of June 9, 2006, Laurus converted $5,400,000 in aggregate principal amount
of
our convertible notes into 18,000,000 shares of our common stock.
In
addition, we entered into a stock redemption agreement with Laurus, dated
January 12, 2006 and amended as of February 28, 2006 and as of June 9, 2006.
See
Part I, Item 1, Note 1, Status of Tidel Technologies, Inc. for more
detail.
|
|
Certification
of Interim Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
Certification
of Interim Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
Certification
of Interim Chief Executive Officer pursuant to 18 U.S.C. Section
1350
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
Certification
of Interim Chief Financial Officer pursuant to 18 U.S.C. Section
1350
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
*
-Filed
herewith.
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)
|
|
|
|
|
August
21, 2006
|
/s/
MARK K. LEVENICK
|
|
|
Mark
K. Levenick
|
|
|
Interim
Chief Executive Officer
|
|
|
|
|
August
21, 2006
|
/s/
ROBERT D. PELTIER
|
|
|
Robert
D. Peltier
|
|
|
Interim
Chief Financial Officer
|
|
33