Tidel Technologies Inc. 10-Q/A #1 12-31-2004
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
__________________________
FORM
10-Q/A
(Mark
One)
R
|
Quarterly
Report Pursuant to Section 13 or 15(d) of the
Securities Exchange
Act of 1934
|
For
the
quarterly period ended December 31, 2004
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 205 Houston,
Texas
|
|
77042
|
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(Address
of principal executive offices)
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(Zip
Code)
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|
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 £
NO
R
The
number of shares of Common Stock outstanding as of the close of business
on July
6, 2005 was 20,677,210.
TABLE
OF CONTENTS
Description
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Page
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PART
I. FINANCIAL INFORMATION
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3
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3
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4
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5
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6
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7
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11
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17
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17
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PART
II. OTHER INFORMATION
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18
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18
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18
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19
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21
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23
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PART
I. FINANCIAL INFORMATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
December
31,
2004
|
|
September
30,
2004
|
|
ASSETS
|
|
(unaudited)
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
725,927
|
|
$
|
258,120
|
|
Restricted
cash
|
|
|
417,833
|
|
|
—
|
|
Trade
accounts receivable, net of allowance of $6,425 and $6,230,
respectively
|
|
|
5,077,596
|
|
|
1,313,918
|
|
Notes
and other receivables
|
|
|
1,014,641
|
|
|
1,016,167
|
|
Inventories
|
|
|
675,699
|
|
|
1,350,630
|
|
Prepaid
expenses and other
|
|
|
160,881
|
|
|
135,240
|
|
Assets
held for sale, net of accumulated depreciation of $4,054,549 and
$3,977,412, respectively
|
|
|
7,032,711
|
|
|
5,910,752
|
|
Total
current assets
|
|
|
15,105,288
|
|
|
9,984,827
|
|
Property,
plant and equipment, at cost
|
|
|
1,174,509
|
|
|
1,151,898
|
|
Accumulated
depreciation
|
|
|
(1,035,663
|
)
|
|
(1,027,417
|
)
|
Net
property, plant and equipment
|
|
|
138,846
|
|
|
124,481
|
|
Other
assets
|
|
|
1,341,064
|
|
|
668,936
|
|
Total
assets
|
|
$
|
16,585,198
|
|
$
|
10,778,244
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
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Current
Liabilities:
|
|
|
|
|
|
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|
Current
maturities, net of debt discount of $0 and $725,259,
respectively
|
|
$
|
2,832,221
|
|
$
|
183,692
|
|
Accounts
payable
|
|
|
1,356,544
|
|
|
1,711,630
|
|
Accrued
interest payable
|
|
|
2,112,291
|
|
|
793,577
|
|
Reserve
for settlement of class action litigation
|
|
|
—
|
|
|
1,564,490
|
|
Other
accrued expenses
|
|
|
1,977,111
|
|
|
1,384,675
|
|
Liabilities
held for sale
|
|
|
2,692,938
|
|
|
2,523,022
|
|
Total
current liabilities
|
|
|
10,971,105
|
|
|
8,161,086
|
|
Long-term
debt, net of current maturities and debt discount of $6,525,446 and
$5,767,988, respectively
|
|
|
696,250
|
|
|
28,709
|
|
Total
liabilities
|
|
|
11,667,355
|
|
|
8,189,795
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
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Shareholders’
Equity:
|
|
|
|
|
|
|
|
Common
stock, $.01 par value, authorized 100,000,000 shares; issued and
outstanding 20,677,210 shares and 17,426,210 shares,
respectively
|
|
|
206,772
|
|
|
174,262
|
|
Additional
paid-in capital
|
|
|
30,993,862
|
|
|
28,100,674
|
|
Accumulated
deficit
|
|
|
(26,775,452
|
)
|
|
(25,619,888
|
)
|
Receivable
from officer
|
|
|
(31,675
|
)
|
|
(31,675
|
)
|
Accumulated
other comprehensive income (loss)
|
|
|
524,336
|
|
|
(34,924
|
)
|
Total
shareholders’ equity
|
|
|
4,917,843
|
|
|
2,588,449
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
16,585,198
|
|
$
|
10,778,244
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three
Months Ended December 31.
|
|
|
|
2004
|
|
2003
|
|
Revenues
|
|
$
|
6,512,542
|
|
$
|
3,035,927
|
|
Cost
of sales
|
|
|
3,467,773
|
|
|
1,891,797
|
|
Gross
profit
|
|
|
3,044,769
|
|
|
1,144,130
|
|
Selling,
general and administrative
|
|
|
1,249,601
|
|
|
1,205,621
|
|
Depreciation
and amortization
|
|
|
8,246
|
|
|
10,904
|
|
Operating
income (loss)
|
|
|
1,786,922
|
|
|
(72,395
|
)
|
Other
income (expense):
|
|
|
|
|
|
|
|
Gain
on extinguishment of debt
|
|
|
—
|
|
|
18,823,000
|
|
Interest
expense, net
|
|
|
(3,075,000
|
)
|
|
(805,515
|
)
|
Total
other income (expense)
|
|
|
(3,075,000
|
)
|
|
18,017,485
|
|
Income
(loss) before discontinued operations
|
|
|
(1,288,078
|
)
|
|
17,945,090
|
|
Discontinued
operations
|
|
|
132,514
|
|
|
25,415
|
|
Net
income (loss)
|
|
$
|
(1,155,564
|
)
|
$
|
17,970,505
|
|
Basic
income (loss) per share:
|
|
|
|
|
|
|
|
Income
(loss) before discontinued operations
|
|
$
|
(0.07
|
)
|
$
|
1.03
|
|
Income
from discontinued operations
|
|
|
0.01
|
|
|
—
|
|
Net
income (loss)
|
|
$
|
(0.06
|
)
|
$
|
1.03
|
|
Weighted
average common shares outstanding
|
|
|
19,152,090
|
|
|
17,426,210
|
|
Diluted
income (loss) per share:
|
|
|
|
|
|
|
|
Income
(loss) before discontinued operations
|
|
$
|
(0.06
|
)
|
$
|
0.45
|
|
Income
from discontinued operations
|
|
|
0.01
|
|
|
—
|
|
Net
income (loss)
|
|
$
|
(0.05
|
)
|
$
|
0.45
|
|
Weighted
average common and dilutive shares outstanding
|
|
|
19,152,090
|
|
|
40,296,299
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements.
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
|
|
Three
Months Ended December 31,
|
|
|
|
2004
|
|
2003
|
|
Net
income (loss)
|
|
$
|
(1,155,564
|
)
|
$
|
17,970,505
|
|
Other
comprehensive gain:
|
|
|
|
|
|
|
|
Unrealized
gain on investment in 3CI
|
|
|
559,260
|
|
|
—
|
|
Comprehensive
income (loss)
|
|
$
|
(596,304
|
)
|
$
|
17,970,505
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Three
Months Ended December 31,
|
|
|
|
2004
|
|
2003
|
|
Cash
flows from continuing operating activities:
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,155,564
|
)
|
$
|
17,970,505
|
|
Income
from discontinued operations
|
|
|
(132,514
|
)
|
|
(25,415
|
)
|
Income
(loss) from continuing operations
|
|
|
(1,288,078
|
)
|
|
17,945,090
|
|
Adjustments
to reconcile net income (loss) to net cash used in continuing operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
8,246
|
|
|
10,904
|
|
Amortization
of debt discount and financing costs
|
|
|
858,698
|
|
|
339,622
|
|
Gain
on extinguishment of convertible debentures
|
|
|
—
|
|
|
(18,823,000
|
)
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Trade
accounts receivable, net
|
|
|
(3,763,678
|
)
|
|
(1,040,829
|
)
|
Notes
and other receivables
|
|
|
1,526
|
|
|
31,860
|
|
Inventories
|
|
|
674,931
|
|
|
(1,340
|
)
|
Prepaid
expenses and other assets
|
|
|
(25,641
|
)
|
|
(116,848
|
)
|
Accounts
payable and accrued expenses
|
|
|
2,194,074
|
|
|
472,050
|
|
Net
cash used in continuing operating activities
|
|
|
(1,339,922
|
)
|
|
(1,182,491
|
)
|
Cash
flows from continuing investing activities:
|
|
|
|
|
|
|
|
(Purchases)
disposals of property, plant and equipment, net
|
|
|
(22,611
|
)
|
|
13,224
|
|
Cash
flows from continuing financing activities:
|
|
|
|
|
|
|
|
Proceeds
from borrowings
|
|
|
2,100,000
|
|
|
7,370,000
|
|
Repayments
of notes payable
|
|
|
(1,731
|
)
|
|
(2,090,000
|
)
|
Borrowing
on revolver
|
|
|
1,250,000
|
|
|
—
|
|
Repayments
of convertible debentures
|
|
|
—
|
|
|
(6,000,000
|
)
|
(Increase)
decrease in restricted cash
|
|
|
(417,833
|
)
|
|
2,200,000
|
|
Increase
in deferred financing costs
|
|
|
(280,567
|
)
|
|
(595,765
|
)
|
Net
cash provided by continuing financing activities
|
|
|
2,649,869
|
|
|
884,235
|
|
Net
change in cash and cash equivalents from continuing
operations
|
|
|
1,287,336
|
|
|
(285,032
|
)
|
Net
change in cash and cash equivalents from discontinued
operations
|
|
|
(817,529
|
)
|
|
299,401
|
|
Net
change in cash and cash equivalents
|
|
|
467,807
|
|
|
14,369
|
|
Cash
and cash equivalents at beginning of period
|
|
|
258,120
|
|
|
915,097
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
725,927
|
|
$
|
929,466
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
258,920
|
|
$
|
173,676
|
|
Supplemental
disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
Discount
on issuance of debt with beneficial conversion premium and detachable
warrants
|
|
$
|
723,198
|
|
$
|
6,899,181
|
|
Warrants
issued for deferred financing costs
|
|
$
|
—
|
|
$
|
229,180
|
|
Issuance
of shares to lender in payment of fees
|
|
$
|
638,010
|
|
$
|
—
|
|
Issuance
of shares and warrants in connection with settlement of class-action
litigation
|
|
$
|
1,564,490
|
|
$
|
—
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
|
Organization
and Summary of Significant Accounting
Policies
|
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 automated teller machines (“ATMs”) and
electronic cash security systems, consisting of the Timed Access Cash Controller
(“TACC”) products and the Sentinel products (together, the “Cash Security”
products), primarily in the United States. Sales of ATM, TACC and Sentinel
products are generally made on a wholesale basis to more than 200 distributors
and manufacturers’ representatives. TACC and Sentinel products are often sold
directly to end-users as well as distributors.
The
accompanying unaudited condensed 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
consolidated interim financial statements include all adjustments, consisting
of
normal recurring adjustments, necessary for a fair presentation of the financial
position as of December 31, 2004, the statements of operations, comprehensive
income (loss) and cash flows for the three months ended December 31, 2004 and
2003. Although management believes the unaudited interim disclosures in these
consolidated interim financial statements are adequate to make the information
presented not misleading, certain information and footnote disclosures normally
included in annual audited financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been condensed or omitted pursuant to the rules of the Securities and Exchange
Commission (the “SEC”). The results of operations for the three months ended
December 31, 2004 are not necessarily indicative of the results to be expected
for the entire year ending September 30, 2005. The consolidated unaudited
interim financial statements included herein should be read in conjunction
with
the audited consolidated financial statements and notes thereto included in
our
Comprehensive Annual Report on Form 10-K for the fiscal years ended September
30, 2003 and September 30, 2004 (the “ ‘03/’04 Annual Report”).
Status
of Tidel Technologies, Inc.
Our
ability to continue as a going concern is dependent on generating sufficient
cash flows from operations for meeting our liquidity needs, servicing our debt
requirements and meeting financial covenants. During the past four years and
for
the first six months of 2005, we have experienced net losses. Also, our
inability to collect outstanding receivables continues to impact our liquidity.
On November 25, 2003, we completed a $6,850,000 financing transaction (the
“Financing”) with Laurus Master Fund, Ltd. (“Laurus”), and we also completed a
$3,350,000 financing transaction (the “Additional Financing”) on November 26,
2004 with Laurus in order to meet our current liquidity needs. We have
substantial debt obligations of approximately $10,053,917 as of December 31,
2004.
Management’s
Current Plans with Regard to Our Liquidity Include the
Following:
Proposed
Sale of ATM Business
On
February 19, 2005, the Company and its wholly-owned subsidiary Tidel
Engineering, L.P. (together with the Company, the “Sellers”) entered into an
asset purchase agreement with NCR Texas LLC, a single member Delaware limited
liability company (“NCR”) that is a wholly-owned subsidiary of NCR Corporation,
a Maryland corporation, for the sale of the registrant’s ATM business (the
“Asset Purchase Agreement”). The purchase price for our ATM business is
$10,175,000 plus the assumption of certain liabilities related to the ATM
business, subject to certain adjustments as provided in the Asset Purchase
Agreement (the “Purchase Price”). The Purchase Price is also subject to
adjustment based upon the actual value of the assets delivered, to the extent
the value of the assets delivered is 5% greater than or less than a
predetermined value as stated in the Asset Purchase Agreement. The Asset
Purchase Agreement contains customary representations, warranties, covenants
and
indemnities. The proceeds from the sale of the Sellers’ ATM business will be
applied towards the repayment of our outstanding loans from Laurus Master Fund,
Ltd. Pursuant to contractual arrangements with Laurus, we are required to be
current in our SEC filings no later than July 31, 2005, after which time we
will
commence seeking shareholder approval for this transaction. We believe that
the
transaction will likely close during the fourth quarter of calendar
2005.
Engagement
of Investment Banker to Evaluate Strategic Alternatives for the
Sale of
the Cash Security Business
We
engaged Stifel, Nicolaus & Company, Inc. (“Stifel”) in October 2004, to
assist the Board of Directors in connection with the proposed sale of our Cash
Security business, deliver a fairness opinion, and render such additional
assistance as we may reasonably request in connection with the proposed sale
of
our Cash Security business. We are currently working with Stifel in connection
with such a proposed sale.
Major
Customers and Credit Risks
We
generally retain a security interest in our underlying equipment that is sold
to
customers until it receives payment in full. We would incur an accounting loss
equal to the carrying value of the accounts receivable, less any amounts
recovered from liquidation of collateral, if a customer failed to perform
according to the terms of our credit arrangements with them.
The
concentration of customers in the ATM market may impact our overall credit
exposure, either positively or negatively, since these customers may be
similarly affected by changes in economic or other conditions. Sales of Sentinel
cash security systems are currently to a small number of customers as well.
The
loss of a single customer could have an adverse effect on our sales revenue.
During the first quarter of fiscal year 2005, we sold 578 Sentinel units to
a
national convenience store operator. This generated sales revenue from
continuing operations of $4,707,000, or 72% of total revenue for the quarter.
This had a significant positive impact on our first quarter
earnings.
The
majority of our sales during the first quarter of fiscal year 2005 were to
customers within the United States. Foreign sales accounted for 15% and 19%
of
the Company’s total sales during the three months ended December 31, 2004 and
2003, respectively, 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 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. Notwithstanding our current
commitment to aggressively pursue our rights to collect the outstanding balance
of the facility and in view of the uncertainty of the ultimate outcome, we
increased the reserve to approximately $500,000 due to the delinquency of
payment during the first quarter of fiscal year 2005
Stock
Based Compensation
Statement
of Financial Accounting Standards No. 123, “Accounting for Stock-Based
Compensation” (“SFAS No. 123”), requires companies to recognize stock-based
expense based on the estimated fair value of employee stock options.
Alternatively, SFAS No. 123 allows companies to retain the current approach
set
forth in APB Opinion 25, “Accounting for Stock Issued to Employees,” provided
that expanded footnote disclosure is presented. We apply APB Opinion No. 25
in
accounting for our Plans and, accordingly, no compensation cost has been
recognized for our stock options in the consolidated financial statements.
Had
we determined compensation cost based on the fair value at the grant date for
our stock options and warrants under SFAS No. 123, our net income (loss) would
have been reduced to the pro forma amounts indicated as follows:
|
|
Three
months ended
December
31,
|
|
|
|
2004
|
|
2003
|
|
Net
income (loss) as reported
|
|
$
|
(1,155,564
|
)
|
$
|
17,970,505
|
|
Deduct:
Total stock-based employee compensation expense determined under
FAS 123,
net of taxes
|
|
|
(139
|
)
|
|
(3,841
|
)
|
Net
income (loss), pro forma
|
|
$
|
(1,155,703
|
)
|
$
|
17,966,664
|
|
Basic
earnings (loss) per share:
|
|
|
|
|
|
|
|
As
reported
|
|
|
(0.06
|
)
|
|
1.03
|
|
Pro
forma
|
|
|
(0.06
|
)
|
|
1.03
|
|
Diluted
earnings (loss) per share:
|
|
|
|
|
|
|
|
As
reported
|
|
|
(0.05
|
)
|
|
0.45
|
|
Pro
forma
|
|
|
(0.05
|
)
|
|
0.45
|
|
Discontinued
Operations
During
the first quarter ended December 31, 2004, we committed to a plan to sell our
ATM business. On February 19, 2005, we entered into an asset purchase agreement
with NCR Texas LLC for the sale of our ATM business. For additional information,
see aforementioned discussion in “Proposed Sale of ATM Business”. We have
classified the ATM business has been classified as a discontinued operation
since October 1, 2004, including for the comparative period in the prior year.
This division manufactures and sells automated teller machines primarily in
the
United States. The results of this operation are segregated on the accompanying
statements of operations as income or loss from discontinued operations and
reflected as Assets and Liabilities Held for Sale on the accompanying balance
sheets.
We
recorded a net loss of $(1,155,564) and net income of $17,970,505 for the
quarters ended December 31, 2004 and 2003, respectively. The discontinued
operation recorded income of $132,514 for the quarter ended December 31, 2004
and income of $25,415 for the quarter ended December 31, 2003. The sale of
this
division is expected to be consummated sometime during the fourth calendar
quarter of 2005.
An
analysis of the assets and liabilities held for sale and revenues is as
follows:
Assets
held for sale:
|
|
|
|
Trade
accounts receivable (net of allowances for bad debt)
|
|
$
|
2,769,028
|
|
Inventories
(net of reserves for obsolescence)
|
|
|
3,820,458
|
|
Prepaid
expenses and other assets
|
|
|
197,724
|
|
Property,
plant and equipment, at cost net of depreciation
|
|
|
218,204
|
|
Other
assets
|
|
|
27,297
|
|
Assets
held for sale
|
|
$
|
7,032,711
|
|
Liabilities
held for sale:
|
|
|
|
|
Accounts
payable
|
|
$
|
1,866,688
|
|
Other
accrued expenses
|
|
|
826,250
|
|
Liabilities
held for sale
|
|
$
|
2,692,938
|
|
Revenues
for the three months ended December 31, 2004 and 2003 for the discontinued
operations were $7,653,835 and $4,617,908, respectively.
On
November 26, 2004, we completed a $3,350,000 financing transaction (the
“Additional Financing”) with Laurus pursuant to that certain Securities Purchase
Agreement by and between the Company and Laurus, dated as of November 26, 2004
(the “2004 SPA”). The Additional Financing was comprised of (i) a three-year
convertible note issued to Laurus in the amount of $1,500,000, which bears
interest at a rate of 14% and is convertible into our common stock at a
conversion price of $3.00 per share (the “$1,500,000 Note”), (ii) a one-year
convertible note in the amount of $600,000 which bears interest at a rate of
10%
and is convertible into our common stock at a conversion price of $0.30 per
share (the “$600,000 Note”), (iii) a one-year convertible note of our
subsidiary, Tidel Engineering, L.P., in the amount of $1,250,000, which is
a
revolving working capital facility for the purpose of financing purchase orders
of our subsidiary, Tidel Engineering, L.P., (the “Purchase Order Note”), which
bears interest at a rate of 14% and is convertible into our common stock at
a
price of $3.00 per share and (iv) our issuance to Laurus of 1,251,000 shares
of
common stock, or approximately 7% of the total shares outstanding, (the “2003
Fee Shares”) in satisfaction of fees totaling $375,300 incurred in connection
with the convertible term notes issued in the Financing discussed above. As
a
result of the sale of the 2003 Fee Shares, we recorded an additional charge
in
fiscal 2004 of $638,010 based on the market value of the stock on November
26,
2004. We also increased the principal balance of the original note by $292,987,
of which $226,312 bears interest at the default rate of 18%. This amount
represents interest accrued but not paid to Laurus as of August 1, 2004. In
addition, Laurus received warrants to purchase 500,000 shares of our common
stock at an exercise price of $0.30 per share. The proceeds of the Additional
Financing were allocated to the notes based on the relative fair value of the
notes and the warrants, with the value of the warrants resulting in a discount
against the notes. In addition, the conversion terms of the $600,000 Note
resulted in a beneficial conversion feature, further discounting the carrying
value of the notes. As a result, we will record additional interest charges
related to these discounts totaling $840,000 over the terms of the notes. Laurus
was also granted registration rights in connection with the 2003 Fee Shares
and
other shares issuable pursuant to the Additional Financing. The obligations
pursuant to the Additional Financing are secured by all of our assets and are
guaranteed by our subsidiaries. Net proceeds from the Additional Financing
in
the amount of $3,232,750 were primarily used for (i) general working capital
payments made directly to vendors, (ii) past due interest on Laurus’s $6,450,000
convertible note due pursuant to the Financing and (iii) the establishment
of an
escrow for future principal and interest payments due pursuant to the Additional
Financing.
THE
NOTES
AND WARRANTS ISSUED IN THE FINANCING AND THE ADDITIONAL FINANCING ARE
CONVERTIBLE INTO AN AGGREGATE OF 28,226,625 SHARES OF OUR COMMON STOCK AND,
WHEN
COUPLED WITH THE 2003 FEE SHARES, REPRESENT APPROXIMATELY 60% OF OUR OUTSTANDING
COMMON STOCK SUBJECT TO ADJUSTMENT AS PROVIDED IN THE TRANSACTION DOCUMENTS.
IF
THESE NOTES AND WARRANTS WERE COMPLETELY CONVERTED TO COMMON STOCK BY LAURUS,
THEN THE OTHER EXISTING SHAREHOLDERS’ OWNERSHIP IN THE COMPANY WOULD BE
SIGNIFICANTLY DILUTED TO APPROXIMATELY 40% OF THEIR PRESENT OWNERSHIP
POSITION.
In
connection with the Financing, Laurus required that we covenant to become
current in our filings with the Securities and Exchange Commission according
to
a predetermined schedule. Effective November 26, 2004, the Additional Financing
documents require, among other things, that we provide evidence of filing to
Laurus of our fiscal 2003, fiscal 2004 and year-to-date interim 2005 filings
with the Securities and Exchange Commission on or before July 31, 2005. The
10-K
for the fiscal year ended September 30, 2002 (the “2002 10-K”) was filed on
February 1, 2005, in accordance with Additional Financing documents
requirements. Fourteen (14) days following such time as we become current in
our
filings with the Securities and Exchange Commission, we must deliver to Laurus
evidence of the listing of our common stock on the Nasdaq Over The Counter
Bulletin Board (the “Listing Requirement”).
On
February 4, 2005, we received a letter from the Securities and Exchange
Commission stating that the Division of Corporate Finance of the SEC would
not
object to the Company filing a comprehensive annual report on Form 10-K which
covers all of the periods during which it has been a delinquent filer, together
with its filing all Forms 10-Q which are due for quarters subsequent to the
latest fiscal year included in that comprehensive annual report. However, the
SEC Letter also stated that, upon filing such a comprehensive Form 10-K, the
Company would not be considered “current” for purposes of Regulation S, Rule 144
or filing on Forms S-8, and that the Company would not be eligible to use Forms
S-2 or S-3 until a sufficient history of making timely filings is established.
Laurus consented to the filing of such a comprehensive annual report in
satisfaction of the Filing Requirements mandated on or before July 31, 2005.
Laurus also consented to a modification of the requirement that a Registration
Statement be filed within 20 days of satisfaction of the Filing Requirements
to
instead require that the Registration Statement be filed by September 20, 2006.
Pursuant
to the terms of the Financing and the Additional Financing, an Event of Default
occurs if, among other things, we do not complete our filings with the
Securities and Exchange Commission on the timetable set forth in the Additional
Financing documents, or we do not comply with the Listing Requirement or any
other material covenant or other term or condition of the 2003 SPA, the 2004
SPA, the notes we issued to Laurus or any of the other documents related to
the
Financing or the Additional Financing. If there is an Event of Default,
including any of the items specified above or in the transaction documents,
Laurus may declare all unpaid sums of principal, interest and other fees due
and
payable within five (5) days after we receive a written notice from Laurus.
If
we cure the Event of Default within that five (5) day period, the Event of
Default will no longer be considered to be occurring.
If
we do
not cure such Event of Default, Laurus shall have, among other things, the
right
to have two (2) of its designees appointed to our Board, and the interest rate
of the notes shall be increased to the greater of 18% or the rate in effect
at
that time.
On
November 26, 2004, in connection with the Additional Financing, we entered
into
an agreement with Laurus (the “Asset Sales Agreement”) whereby we agreed to pay
a fee in the amount of at least $2,000,000 (the “Reorganization Fee”) to Laurus
upon the occurrence of certain events as specified below and therein, which
Reorganization Fee is secured by all of our assets, and is guaranteed by our
subsidiaries. The Asset Sales Agreement provides that (i) once our obligations
to Laurus have been paid in full (other than the Reorganization Fee), we shall
be able to seek additional financing in the form of a non-convertible bank
loan
in an aggregate principal amount not to exceed $4,000,000, subject to Laurus’s
right of first refusal; (ii) the net proceeds of an asset sale to the party
named therein shall be applied to our obligations to Laurus under the Financing
and the Additional Financing, as described above (collectively, the
“Obligations”), but not to the Reorganization Fee; and (iii) the proceeds of any
of our subsequent sales of equity interests or assets or of our subsidiaries
consummated on or before the fifth anniversary of the Assets Sales Agreement
(each, a “Company Sale”) shall be applied first to any remaining obligations,
then paid to Laurus pursuant to an increasing percentage of at least 55.5%
set
forth therein, which amount shall be applied to the Reorganization Fee. Under
this formula, the existing shareholders could receive less than 45% of the
proceeds of any sale of our assets or equity interests, after payment of the
Additional Financing and Reorganization Fee as defined. The Reorganization
Fee
shall be $2,000,000 at a minimum, but could equal a higher amount based upon
a
percentage of the proceeds of any company sale, as such term is defined in
the
Asset Sales Agreement. In the event that Laurus has not received the full amount
of the Reorganization Fee on or before the fifth anniversary of the date of
the
Asset Sales Agreement, then we shall pay any remaining balance due on the
Reorganization Fee to Laurus. We have recorded a $2,000,000 charge in the first
quarter of fiscal 2005 to interest expense.
Earnings
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 per
share (basic EPS) and diluted earnings per share (diluted EPS). Basic EPS
excludes dilution and is determined by dividing income available to common
stockholders 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 December 31, 2004, we had outstanding options covering
an aggregate of 796,000 shares of common stock, of which 731,000 shares were
exercisable. We also had outstanding warrants covering an aggregate of 6,079,473
shares of common stock. Excluded from the computation of diluted EPS for the
three months ended December 31, 2004 are options to purchase 976,000 shares
to
purchase common stock at a weighted average of $1.66 per share and 6,079,473
warrants, with a remaining exercise price ranging from $0.30 to $0.40, as they
would be anti-dilutive. As of December 31, 2003, we had outstanding options
covering an aggregate of 981,000 shares of common stock, of which 811,000 shares
were exercisable. We also had outstanding warrants covering an aggregate of
6,379,473 shares of common stock. Excluded from the computation of diluted
EPS
for the three months ended December 31, 2004 are options to purchase 981,000
shares to purchase common stock at a weighted average of $1.64 per share and
6,079,473 warrants, with a remaining exercise price ranging from $0.30 to
$11.17, as they would be anti-dilutive.
Existing
shareholders’ ownership in the Company will be significantly diluted due to
outstanding warrants. The notes and warrants issued in the Financing and the
Additional Financing are convertible into an aggregate of 28,226,625 shares
of
our common stock and, when coupled with the 2003 Fee Shares, represent
approximately 60% of our outstanding common stock, subject to adjustment as
provided in the transaction documents. If these notes and warrants were
completely converted to common stock by Laurus, then the other existing
shareholders’ ownership in the Company would be significantly diluted to
approximately 40% of their present ownership position.
During
the quarter ended December 31, 2004, we issued issued 2,000,000 shares of our
common stock related to the settlement of the class action litigation. In
addition, we issued 1,251,000 shares of our common stock to Laurus (see Note
2,
“Long-Term Debt”) related to settlement of late filing penalties. As of
September 30, 2004, we accrued $1,564,490 for the settlement of the class action
litigation and $638,010 for the settlement of the late filing
penalties.
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 Financial Condition and Results of Operations,”
“Risk Factors” and “Forward-Looking Statements” included in our 2004
Annual Report on Form 10-K for the Fiscal Years Ended September 30,
2003 and
September 30, 2004 (the “‘03/’04 Annual Report”). 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
During
the past three years, we have experienced operating losses. Our liquidity has
been negatively impacted by our inability to collect outstanding receivables
and
claims as a result of the bankruptcy of our former largest customer, JRA 222,
Inc. d/b/a Credit Card Center (“CCC”) the inability to collect outstanding
accounts receivable from certain customers, under-absorbed fixed costs
associated with the production facilities, and reduced sales of our products
resulting from general difficulties in the ATM market. In order to meet our
liquidity needs during the past three years, we have incurred a substantial
amount of debt. This decline in financial condition is significant, and if
the
operating conditions do not improve there can be no assurance we will continue
operations.
Critical
Accounting Policies
This
discussion and analysis of our financial condition and results of operations
is
based upon our consolidated financial statements. The preparation of these
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 ‘03/’04
Annual Report.
Results
of Operations
Quarter
Ended December 31, 2004 Compared to the Quarter Ended December 31,
2003
Our
revenues from continuing operations were $6,512,542 for the three months ended
December 31, 2004, representing an increase of $3,476,615, or 114%, from
revenues of $3,035,927 in the same quarter of the prior year. This increase
was
primarily related to increased sales of our Sentinel products, as described
more
fully hereinafter in “Product Revenues”.
We
had a
net loss from continuing operations of $(1,288,078) for the three months ended
December 31, 2004, compared to income from continuing operations of $17,945,090
in the same quarter of the prior year. The decrease is mainly attributable
to a
gain on debt extinguishment incurred during the quarter ended December 31,
2003
of $18,823,000, partially offset by a $2,000,000 Reorganization Fee related
to
the Additional Financing that was charged to interest expense in the quarter
ended December 31, 2004.
Operating
Segments
We
conduct business within one operating segment, principally in the United
States.
Product
Revenues
A
breakdown of net sales by individual product line is provided in the following
table, excluding discontinued operations:
|
|
(Dollars
in 000’s)
Three
Months Ended December 31,
|
|
|
|
2004
|
|
2003
|
|
CASH
SECURITY BUSINESS
|
|
$
|
6,050
|
|
$
|
2,797
|
|
OTHER
|
|
|
463
|
|
|
239
|
|
|
|
$
|
6,513
|
|
$
|
3,036
|
|
The
Company’s sales of Cash Security products vary with the timing of large orders
and variances from quarter to quarter are not meaningful.
Gross
Profit, Operating Expenses and Non-Operating Items
A
comparison of certain operating information is provided in the following
table:
|
|
(Dollars
in 000’s)
Three
Months Ended December 31,
|
|
|
|
2004
|
|
2003
|
|
Gross
profit
|
|
$
|
3,045
|
|
$
|
1,144
|
|
Selling,
general and administrative
|
|
|
1,250
|
|
|
1,205
|
|
Depreciation
and amortization
|
|
|
8
|
|
|
11
|
|
Operating
income (loss)
|
|
|
1,787
|
|
|
(72
|
)
|
Gain
on extinguishment of debt
|
|
|
—
|
|
|
18,823
|
|
Interest
expense, net
|
|
|
(3,075
|
)
|
|
(806
|
)
|
Income
(loss) from continuing operations
|
|
|
(1,288
|
)
|
|
17,945
|
|
Income
from discontinued operations
|
|
|
132
|
|
|
26
|
|
Net
Income (loss)
|
|
$
|
(1,156
|
)
|
$
|
17,971
|
|
Revenues
during
the first quarter ended December 31, 2004 were $6,512,542, compared with
$3,035,927 for the quarter ended December 31, 2003. The increase was primarily
a
result of sales of the Sentinel product. We sold 616 sentinel units during
the
first quarter of 2005, compared with 113 units in the first quarter of 2004.
Of
the 616 Sentinel units sold during the first quarter of 2005, 578 units were
sold to a national convenience store operator. This accounted for approximately
$4,707,000 of revenue from continuing operations, or 72% of revenue for the
first quarter ended December 31, 2004.
Gross
profit on
product sales for the quarter ended December 31, 2004, increased $1,901,000
from
the same quarter a year ago. Gross profit as a percentage of sales was 46.8
% in
the quarter ended December 31, 2004, compared to only 37.7 % in the same quarter
of the previous year. The improvement is directly related to the increase in
the
volume of Cash Security Products produced during the quarter ended December
31,
2004.
Selling,
general and administrative expenses
for the quarter ended December 31, 2004 increased only 3.6 % compared with
the
same quarter of the previous year despite increased sales for the period. The
increase is generally attributable to additional costs associated with updating
our filings with the SEC during quarter ended December 31, 2004.
Interest
expense was
$3,075,000 for the quarter ended December 31, 2004, compared to $805,515 for
the
quarter ended December 31, 2003. The net increase is primarily due to the
Reorganization Fee (as hereinafter defined) and additional debt discount
amortization incurred in connection with the Additional Financing (as
hereinafter defined).
Income
tax expense (benefit).
In
assessing the realizability of deferred tax asset, 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.
Discontinued
operations (net of tax).
During
the first quarter ended December 31, 2004, we committed to a plan to sell our
ATM business. On February 19, 2005, we entered into an asset purchase agreement
with NCR Texas LLC for the sale of our ATM business. For additional information,
see aforementioned discussion in Note 1, “Proposed Sale of ATM Business” to the
Notes to Condensed Consolidated Financial Statements in this Quarterly Report
on
Form 10-Q for the fiscal quarter ended December 31, 2004 (this “Quarterly
Report”). The ATM division has been classified as a discontinued operation since
October 1, 2004, including the comparative period in the prior year. This
division manufactures and sells automated teller machines primarily in the
United States. The results of this operation are segregated on the accompanying
statements of operations as income or loss from discontinued operations and
reflected as Assets and Liabilities Held for Sale on the accompanying balance
sheets.
The
discontinued operation recorded income of $132,514 for the quarter ended
December 31, 2004 and income of $25,415 for the quarter ended December 31,
2003.
Such increase was primarily the result of an increase in parts sales and
service. The sale of the ATM division pursuant to the Asset Purchase Agreement
is expected to be consummated within the next twelve months, although there
can
be no assurance that such sale will be consummated in such time frame, if at
all.
An
analysis of the assets and liabilities held for sale and revenues is as
follows:
Assets
held for sale:
|
|
|
|
Trade
accounts receivable
|
|
$
|
2,769,028
|
|
Inventories
|
|
|
3,820,458
|
|
Prepaid
expenses and other assets
|
|
|
197,724
|
|
Property,
plant and equipment, at cost net of depreciation
|
|
|
218,204
|
|
Other
assets
|
|
|
27,297
|
|
Assets
held for sale
|
|
$
|
7,032,711
|
|
Liabilities
held for sale:
|
|
|
|
|
Accounts
payable
|
|
$
|
1,866,688
|
|
Other
accrued expenses
|
|
|
826,250
|
|
Liabilities
held for sale
|
|
$
|
2,692,938
|
|
Revenues
for the three months ended December 31, 2004 and 2003 for the discontinued
operations were $7,653,835 and $4,617,908, respectively.
Liquidity
and Capital Resources
General
During
the past three years, we have experienced operating losses. Our liquidity has
been negatively impacted by our inability to collect outstanding receivables
and
claims as a result of CCC’s bankruptcy, the inability to collect outstanding
receivables from certain customers, under-absorbed fixed costs associated with
the production facilities, and reduced sales of our products resulting from
general difficulties in the ATM market. In order to meet our liquidity needs
during the past three years, we have incurred a substantial amount of
debt.
|
|
(Dollars
in 000’s)
|
|
|
|
December
31, 2004
|
|
September
30, 2004
|
|
Cash
|
|
$
|
726
|
|
$
|
258
|
|
Working
capital
|
|
|
4,143
|
|
|
1,824
|
|
Total
assets
|
|
|
16,585
|
|
|
10,788
|
|
Total
short-term notes payable and long-term debt, net of
discount
|
|
|
3,528
|
|
|
212
|
|
Shareholders’
equity
|
|
|
4,918
|
|
|
2,588
|
|
Cash
used
in continuing operations was $(1,339,992) for the three months ended December
31, 2004 compared to cash used in continuing operations of $(1,182,491) for
the
three months ended December 31, 2003. Cash used in operations is primarily
attributable to increased sales of our TACC line.
Cash
provided by financing activities was $2,649,869 for the three months ended
December 31, 2004 compared to cash provided by financing activities of $884,235
for same period of 2003. The net increase resulted primarily from the proceeds
from the Additional Financing.
After
several months of unsuccessful efforts to remedy its financial difficulties,
CCC
filed for protection under Chapter 11 of the United States Bankruptcy Code
on
June 6, 2001. At that time, we had accounts and a note receivable due from
CCC
totaling approximately $27 million. The proceeding was subsequently converted
to
a Chapter 7 proceeding and a Trustee was appointed in April 2002. We have
written off substantially all of the $24.1 million owed to us by CCC against
the
remaining balance of the note and trade accounts receivable, resulting in a
$250,000 balance in accounts receivable as of December 31, 2004. Our management
intends to continue monitoring this matter and to take all actions that it
determines to be necessary based upon its findings. Our liquidity was negatively
impacted by our inability to collect the outstanding receivables and claims
from
CCC.
Our
ability to continue as a going concern is dependent on generating sufficient
cash flows from operations for meeting our liquidity needs, servicing our debt
requirements and meeting financial covenants. During the past four years and
for
the first six months of 2005, we have experienced operating and net losses.
Also, our inability to collect outstanding receivables continues to impact
our
liquidity. On November 25, 2003, we completed the Financing totaling $6,850,000
with Laurus Master Fund, Ltd. (“Laurus”), and we also completed the Additional
Financing totaling $3,350,000 on November 26, 2004 with Laurus in order to
meet
our current liquidity needs. We have substantial debt obligations of
approximately $10,053,917 as of December 31, 2004.
As
of
July 31, 2005, we have $1,250,000 available for borrowing under the Additional
Financing. There can be no assurance that our current financing facilities
will
be sufficient to meet our current working capital needs or that we will have
sufficient working capital in the future.
The
aforementioned problems, coupled with increasing debt, have continued to
negatively impact our financial condition. If the operating conditions do not
improve, there can be no assurance we will continue operations. There can be
no
assurance that the sale of the ATM business will be consummated. If we need
to
seek additional financing, there can be no assurances that we will obtain such
additional financing for working capital purposes. The failure to obtain such
additional financing could cause a material adverse effect upon our financial
condition.
Management’s
Current Plans with Regard to Our Liquidity Include the
Following:
Proposed
Sale of ATM Business
On
February 19, 2005, We and our wholly-owned subsidiary Tidel Engineering, L.P.
(together with the Company, the “Sellers”) entered into an asset purchase
agreement with NCR Texas LLC, a single member Delaware limited liability company
(“NCR”) that is a wholly-owned subsidiary of NCR Corporation, a Maryland
corporation, for the sale of the registrant’s ATM business (the “Asset Purchase
Agreement”).
Engagement
of Investment Banker to Evaluate Strategic Alternatives for the
Sale of
the Cash Security Business
We
engaged Stifel, Nicolaus & Company, Inc. (“Stifel”) in October 2004, to
assist the Board of Directors in connection with the proposed sale of our Cash
Security business, deliver a fairness opinion, and render such additional
assistance as we may reasonably request in connection with the proposed sale
of
our Cash Security business. We are currently working with Stifel in connection
with such a proposed sale.
Off-Balance
Sheet Arrangements
We
do not
have any significant off-balance sheet arrangements that have, or are reasonably
likely to have, a current or future material effect on our financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures
or
capital resources.
Contractual
Obligations and Capital Expenditures
We
have
fixed debt service and lease payment obligations under notes payable and
operating leases for which we have material contractual cash obligations.
Interest rates on our debt vary from prime rate plus 2% to 14%.
The
following table summarizes our contractual cash obligations as of December
31,
2004:
|
|
PAYMENTS
DUE BY FISCAL YEAR
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
Thereafter
|
|
Operating
leases
|
|
$
|
484,135
|
|
$
|
168,520
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Long-term
debt, including current portion (1)
|
|
|
1,885,929
|
|
|
3,000,000
|
|
|
3,667,988
|
|
|
1,500,000
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
2,370,064
|
|
$
|
3,168,520
|
|
$
|
3,667,988
|
|
$
|
1,500,000
|
|
$
|
—
|
|
$
|
—
|
|
____________
|
(1)
|
Our
total debt was $10,053,917 as of December 31, 2004.
|
Planned
capital expenditures for 2005 and 2006 are estimated to be approximately
$200,000 per year. These expenditures will depend upon available funds, levels
of orders received and future operating activity.
Risk
Factors
Please
see the risk factors contained in the ‘03/’04 Annual Report.
Forward-Looking
Statements
In
addition to historical information, Management’s Discussion and Analysis of
Financial Condition and Results of Operations includes certain forward-looking
statements regarding events and financial trends that may affect our future
operating results and 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:
•
|
our
substantial current indebtedness continues to adversely affect our
financial condition and the availability of cash to fund our working
capital needs;
|
•
|
our
ability to comply with our financial covenants in the future;
|
•
|
our
ability to meet our obligations under the terms of our
indebtedness;
|
•
|
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;
|
•
|
the
outcome of the outstanding receivable from CCC;
|
•
|
the
levels of orders which are received and can be shipped in a
quarter;
|
•
|
customer
order patterns and seasonality;
|
•
|
costs
of labor, raw materials, supplies and equipment; technological
changes;
|
•
|
the
delisting of our common stock from the NASDAQ Small Cap Market, effective
as of the close of business on March 26, 2003, and the possibility
of
devaluation of our common stock as a
result;
|
•
|
the
economic condition of the ATM industry and the possibility that it
is a
mature industry;
|
•
|
the
risks involved in the expansion of our operations into international
offshore oil and gas producing areas, where we have previously not
been
operating;
|
•
|
the
continued active participation of our executive officers and key
operating
personnel; and
|
•
|
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 Item 7A of our
‘03/’04 Annual Report.
At
December 31, 2004, we were exposed to changes in interest rates as a result
of
significant financing through our issuance of variable-rate and fixed-rate
debt.
However, with the retirement of our 6% subordinated convertible debentures
subsequent to September 30, 2002, and the associated overall reduction in
outstanding debt balances, our exposure to interest rate risks has significantly
decreased. If market interest rates had increased 1% in the first three months
of fiscal 2005, there would have been no material impact on our consolidated
results of operations or financial position.
(a)
Evaluation of Disclosure Controls and Procedures
Mark
K.
Levenick, our Interim Chief Executive Officer, and Robert D. Peltier, our
Interim Chief Financial Officer, have evaluated the effectiveness of the design
and operation of our “disclosure controls and procedures”, as such term is
defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). James T. Rash was Chief
Executive and Chief Financial Officer during the fiscal years ended 2002, 2003
and 2004. Mr. Rash died on December 19, 2004. Mr. Levenick was appointed Interim
Chief Executive Officer on December 22, 2004. During fiscal years 2002, 2003
and
2004, Mr. Levenick served as Chief Operating Officer and Director of the
Company, and President and Chief Executive Officer of Tidel Engineering, L.P.,
the Company’s principal operating subsidiary. In February 2005, Mr. Robert D.
Peltier joined the Company as Interim Chief Financial Officer, having had no
prior affiliation with the Company. Mr. Peltier began his assessment of
disclosure controls and internal controls without having ever been in a position
of active management or knowledge over transactions during fiscal years 2002,
2003 or 2004.
In
conducting our evaluation of disclosure controls and procedures, our Chief
Executive Officer and our Chief Financial Officer made inquiries with
accounting, administrative and operational personnel and reviewed the historical
facts, including the Company’s failure to file its periodic reports on a timely
basis. Our Chief Executive Officer and our Chief Financial Officer noted that
the Company had failed to file any periodic report required to be filed under
the Exchange Act from September 30, 2002 to February 1, 2005, on which date
we
filed our Form 10-K for the fiscal year ended September 30, 2002, which was
more
than two years late. Furthermore, it was noted that this Form 10-K for the
fiscal years ended September 2003 and 2004, and the Company’s Forms 10-Q for the
quarterly periods ended December 31, 2004 and March 31, 2005 were filed on
August 1, 2005, were each at least several months delinquent. In their
evaluation, our Chief Executive Officer and our Chief Financial Officer noted
that the Company’s periodic reporting failure was caused by (1) limited
financial and personnel resources at the times such forms were due that
restricted our ability to compile our financial statements and cause such
statements to be reviewed and/or audited by an independent registered public
accounting firm when such forms were due and (2) the prolonged illness and
death
of our former Chairman, Chief Executive Officer and Chief Financial Officer
during the year ended December 31, 2004. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that the Company had
a
significant deficiency in its disclosure controls and procedures related to
timely periodic reporting and such controls and procedures were not effective
as
of the end of the quarter ended December 31, 2004.
In
February 2005, in order to remedy this deficiency the Company began implementing
new disclosure controls and procedures, which consisted of: (1) the hiring
of a
new Chief Financial Officer to oversee the Company’s financial reporting
process, (2) the establishment of a reporting timetable to file all delinquent
reports by August 1, 2005 and return to timely periodic reporting by August
19,
2005, which was submitted and approved by our Board of Directors and (3) the
establishment of new guidelines for completion of periodic accounting and
reporting tasks. Such implementation was completed by August 19, 2005, at which
time we resumed the timely filing of our periodic reports. As of August 19,
2005, our Chief Executive Officer and our Chief Financial Officer believe that
this significant deficiency has been remedied.
In
addition, in a report to the Audit Committee of the Board of Directors of the
Company dated July 28, 2005, the Company’s independent registered public
accountants noted that the following significant deficiencies in our internal
controls and procedures were discovered during the course of their audit of
the
financial statements for fiscal years ended September 30, 2003 and 2004: (1)
established credit policies were overridden on occasion by executive management
based on their business judgment at that time, (2) bookkeeping at the corporate
level was not administrated on a timely basis during 2003 and 2004 and (3)
the
Company’s accounts payable supervisor had access to the check signature and the
ability to prepare check runs without proper review prior to distribution.
In
examining the significant deficiencies, both the Company and our independent
registered public accountants performed expanded reviews of our procedures
and
mitigating controls to determine whether such deficiencies constituted a
material weakness. In the expanded reviews, both the Company and our independent
registered public accountants noted the following controls were in place prior
to the audit of our financial statements for the fiscal years ended September
30, 2003 and 2004: (1) Management of the Company consistently performed weekly
and monthly reviews of actual and budgeted results during the periods, (2)
the
Audit Committee of the Board of Directors of the Company provided additional
oversight with respect to financial reporting beginning immediately after the
death of our Chief Executive and Chief Financial Officer in December 2004,
and
(3) the Company hired a new Chief Financial Officer in February 2005 to oversee
the Company’s financial reporting process. We collectively concluded that since
such additional controls were in place the Company was able to
conclude that none of the deficiencies constituted a material weakness that
resulted in more than a remote likelihood that a material misstatement of the
annual or interim financial statements would not be prevented or detected.
Further, the report of the independent registered public accountants indicated
no inappropriate or unauthorized activity during the periods
reviewed.
In
August
2005, the Company began implementing revised internal controls and procedures
to
correct the significant deficiencies in our internal controls and procedures
noted by our independent registered public accountants, which consisted of:
(1)
the establishment of new credit approval policies, including Board-level
approval for certain amounts, (2) the establishment new guidelines for timely
administration of bookkeeping tasks at the corporate level, including the
implementation of monthly, quarterly and annual closing schedules and (3)
removal of check signature access from the Company’s accounts payable
supervisor. Such implementation was completed by August 30, 2005, and as of
that
date our Chief Executive Officer and our Chief Financial Officer believe that
these significant internal controls and procedures deficiencies no longer
exist.
A
significant deficiency is a control deficiency, or a combination of control
deficiencies, that adversely affect the entity’s ability to authorize, initiate,
record, process or report external financial data reliably in accordance with
generally accepted accounting principles in the United States such that there
is
more than a remote likelihood that a misstatement of the entity’s annual or
interim financial statements that is more than inconsequential will not be
prevented or detected.
A
material weakness is a significant deficiency, or a combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.
A
control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations on all control systems,
no
evaluation of controls can provide absolute assurance that all errors, control
issues and instances of fraud, if any, with a company have been detected. The
design of any system of controls is also based in part on certain assumptions
regarding the likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all potential future
conditions. Therefore, even those systems determined to be effective can provide
only reasonable assurance with respect to financial statement preparation and
presentation. Our Chief Executive Officer and our Chief Financial Officer have
concluded that the Company’s disclosure controls and procedures are effective at
this reasonable assurance level as of August 19, 2005.
(b)
Changes in internal control over financial reporting
Following
the evaluations discussed above and the identification of significant
deficiencies, the Company took the actions and implemented the procedures
described above. There were no changes in our internal control over financial
reporting that occurred in the quarter ending December 31, 2004 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART
II. OTHER INFORMATION
As
discussed in our ‘03/’04 Annual Report, on June 9, 2005, Corporate Safe
Specialists, Inc. (“CSS”) filed a lawsuit against Tidel Technologies, Inc. and
Tidel Engineering, L.P. The lawsuit, Civil Action No. 02-C-3421, was filed
in
the United States District Court of the Northern District of Illinois, Eastern
Division. CSS alleges that the Sentinel product sold by Tidel Engineering,
L.P.
infringes one or more patent claims found in CSS patent U.S. Patent No.
6,885,281 (the ‘281 patent). CSS seeks injunctive relief against future
infringement, unspecified damages for past infringement and attorney’s fees and
costs. Tidel Technologies, Inc. was released from this lawsuit, but Tidel
Engineering, L.P. remains a defendant. We continue to vigorously defend this
litigation.
Also,
as
discussed in our ‘03/’04 Annual Report, we have filed a motion to dismiss the
case CSS filed in Illinois, and Tidel Engineering, L.P. has filed a motion
to
transfer the Illinois case to the Eastern District of Texas. We have 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 are vigorously pursuing this declaratory judgment
action.
We
and
several of our officers and directors were named as defendants (the
“Defendants”) in a purported class action filed on October 31, 2001 in the
United States District Court for the Southern District of Texas (the “Southern
District”), George Lehockey v. Tidel Technologies, et al., H-01-3741. Prior to
the suit’s filing, four identical suits were also filed in the Southern
District. On or about March 18, 2002, the Court consolidated all of the pending
class actions and appointed a lead plaintiff under the Private Securities
Litigation Reform Act of 1995 (“Reform Act”). On April 10, 2002, the lead
plaintiff filed a Consolidated Amended Complaint (“CAC”) that alleged that the
Defendants made material misrepresentations and omissions concerning our
financial condition and prospects between January 14, 2000 and February 8,
2001
(the putative class period). In June 2004, we reached an agreement in principle
to settle these class action lawsuits. The settlement, which was subject to
a
definitive agreement and court approval, provided for a cash payment of $3
million to be funded by our liability insurance carrier and our issuance of
two
million shares of common stock. In addition, in August 2004, we reached an
agreement with the liability insurance carrier to issue warrants to the carrier
to purchase 500,000 shares of our common stock at an exercise price of $0.67
per
share in exchange for the carrier’s acceptance of the terms of the class action
lawsuit. We provided a reserve of $1,564,490 in fiscal 2002 to cover any losses
from this litigation, which consisted of $1,340,000 related to the shares of
common stock issued and $224,490 related to the value of the warrants issued.
The common stock was valued using the stock price on the date issued and the
warrants were valued using the Black-Scholes pricing method. In October 2004,
the Court approved the settlement and the shares were issued in November
2004.
We
and
several of our officers and directors were named as defendants (the
“Defendants”) in a purported class action filed on October 31, 2001 in the
United States District Court for the Southern District of Texas (the “Southern
District”). The settlement, which was subject to a definitive agreement and
court approval, provided for a cash payment of $3 million to be funded by our
liability insurance carrier and our issuance of two million shares of common
stock. In October 2004, the Court approved the settlement and 2,000,000 shares
were issued in November 2004.
Pursuant
to the $3,350,000 Additional Financing with Laurus on November 26, 2004, we
issued 1,251,000 shares of our common stock during November 2004.
*31.1
|
Certification
of Interim Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
*31.2
|
Certification
of Interim Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
*32.1
|
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.
|
|
|
*32.2
|
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)
|
|
|
|
|
|
November
30, 2005
|
|
/s/
MARK K. LEVENICK
|
|
|
|
Mark
K. Levenick
|
|
|
|
Interim
Chief Executive Officer
|
|
|
|
|
|
November
30, 2005
|
|
/s/
ROBERT
D. PELTIER
|
|
|
|
Robert
D. Peltier
|
|
|
|
Interim
Chief Financial Officer
|
|
James
T.
Rash, our former Chairman, Chief Executive Officer and Chief Financial Officer,
died on December 19, 2004. We appointed Mark K. Levenick to the position of
Interim Chief Executive Officer but no permanent Chairman, Chief Executive
Officer or Chief Financial Officer has been hired or appointed as of the date
hereof. Robert D. Peltier was appointed Interim Chief Financial Officer in
February 2005.
Exhibits
|
|
Description
|
|
|
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.
|
21