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 June 30, 2005
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
|
|
|
(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 R
NO
£
The
number of shares of Common Stock outstanding as of the close of business
on Aug
9, 2005 was 20,677,210.
TABLE
OF CONTENTS
Description
|
|
Page
|
PART
I. FINANCIAL INFORMATION
|
Item
1.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
2.
|
|
|
|
Item
3.
|
|
|
|
Item
4.
|
|
|
|
PART
II. OTHER INFORMATION
|
Item
1.
|
|
|
|
Item
6.
|
|
|
|
|
|
|
|
|
|
|
|
|
PART
I. FINANCIAL INFORMATION
CONSOLIDATED
BALANCE SHEETS
|
|
June
30,
2005
|
|
September
30,
2004
|
|
|
|
(unaudited)
|
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,332,201
|
|
$
|
258,120
|
|
Trade
accounts receivable
|
|
|
250,000
|
|
|
250,000
|
|
Other
receivables
|
|
|
14,171
|
|
|
1,003,723
|
|
Prepaid
expenses and other
|
|
|
18,112
|
|
|
42,153
|
|
Assets
held for sale, (See Notes 2 and 3)
|
|
|
10,292,585
|
|
|
8,574,739
|
|
Total
current assets
|
|
|
13,907,069
|
|
|
10,128,735
|
|
Property,
plant and equipment, at cost
|
|
|
55,641
|
|
|
44,075
|
|
Accumulated
depreciation
|
|
|
(41,463
|
)
|
|
(37,871
|
)
|
Net
property, plant and equipment
|
|
|
14,178
|
|
|
6,204
|
|
Other
assets
|
|
|
685,211
|
|
|
643,305
|
|
Total
assets
|
|
$
|
14,606,458
|
|
$
|
10,778,244
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Current
maturities, net of debt discount of $0 and $725,259,
respectively
|
|
$
|
2,550,000
|
|
$
|
174,741
|
|
Accounts
payable
|
|
|
287,081
|
|
|
331,576
|
|
Accrued
interest payable
|
|
|
2,106,311
|
|
|
793,577
|
|
Reserve
for settlement of class action litigation
|
|
|
—
|
|
|
1,564,490
|
|
Other
accrued liabilities
|
|
|
386,715
|
|
|
326,675
|
|
Liabilities
held for sale (See Notes 2 and 3)
|
|
|
5,950,314
|
|
|
4,998,736
|
|
Total
current liabilities
|
|
|
11,280,421
|
|
|
8,189,795
|
|
Long-term
debt, net of current maturities and debt discount of $4,672,836
and
$5,767,988, respectively
|
|
|
1,170,152
|
|
|
—
|
|
Total
liabilities
|
|
|
12,450,573
|
|
|
8,189,795
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
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
|
|
|
30,962,187
|
|
|
28,100,674
|
|
Accumulated
deficit
|
|
|
(29,020,232
|
)
|
|
(25,619,888
|
)
|
Receivable
from officer
|
|
|
—
|
|
|
(31,675
|
)
|
Accumulated
other comprehensive income (loss)
|
|
|
7,158
|
|
|
(34,924
|
)
|
Total
shareholders’ equity
|
|
|
2,155,885
|
|
|
2,588,449
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
14,606,458
|
|
$
|
10,778,244
|
|
See
accompanying notes to condensed consolidated financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three
Months Ended June 30,
|
|
Nine
Months Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Revenues
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Selling,
general and administrative
|
|
|
652,007
|
|
|
325,269
|
|
|
1,334,541
|
|
|
966,263
|
|
Depreciation
and amortization
|
|
|
1,421
|
|
|
1,274
|
|
|
3,592
|
|
|
5,012
|
|
Operating
loss
|
|
|
(653,428
|
)
|
|
(326,543
|
)
|
|
(1,338,133
|
)
|
|
(971,275
|
)
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on extinguishment of debt
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18,823,000
|
|
Gain
on sale of securities
|
|
|
—
|
|
|
119,520
|
|
|
—
|
|
|
1,918,012
|
|
Interest
expense, net
|
|
|
(1,160,459
|
)
|
|
(642,450
|
)
|
|
(5,399,974
|
)
|
|
(2,444,856
|
)
|
Total
other income (expense )
|
|
|
(1,160,459
|
)
|
|
(522,930
|
)
|
|
(5,399,974
|
)
|
|
18,296,156
|
|
Income
(loss) before taxes
|
|
|
(1,813,887
|
)
|
|
(849,473
|
)
|
|
(6,738,107
|
)
|
|
17,324,881
|
|
Income
tax (benefit)
|
|
|
—
|
|
|
(81,229
|
)
|
|
—
|
|
|
(81,229
|
)
|
Income
(loss) from continuing operations
|
|
$
|
(1,813,887
|
)
|
$
|
(768,244
|
)
|
$
|
(6,738,107
|
)
|
$
|
17,406,110
|
|
Discontinued
operations (See Notes 2 and 3)
|
|
|
700,739
|
|
|
(959,075
|
)
|
|
3,337,763
|
|
|
(1,324,137
|
)
|
Net
income (loss)
|
|
$
|
(1,113,148
|
)
|
$
|
(1,727,319
|
)
|
$
|
(3,400,344
|
)
|
$
|
16,081,973
|
|
Basic
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
(0.09
|
)
|
$
|
(0.04
|
)
|
$
|
(0.33
|
)
|
$
|
1.00
|
|
Income
(loss) from discontinued operations
|
|
|
0.03
|
|
|
(0.06
|
)
|
|
0.17
|
|
|
(0.08
|
)
|
Net
income (loss)
|
|
$
|
(0.06
|
)
|
$
|
(0.10
|
)
|
$
|
(0.16
|
)
|
$
|
0.92
|
|
Weighted
average common shares outstanding
|
|
|
20,677,210
|
|
|
17,426,210
|
|
|
20,163,250
|
|
|
17,426,210
|
|
Diluted
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
(0.09
|
)
|
$
|
(0.04
|
)
|
$
|
(0.33
|
)
|
$
|
0.42
|
|
Income
(loss) from discontinued operations
|
|
|
0.03
|
|
|
(0.06
|
)
|
|
0.17
|
|
|
(0.03
|
)
|
Net
income (loss)
|
|
$
|
(0.06
|
)
|
$
|
(0.10
|
)
|
$
|
(0.16
|
)
|
$
|
0.39
|
|
Weighted
average common and dilutive shares outstanding
|
|
|
20,677,210
|
|
|
17,426,210
|
|
|
20,163,250
|
|
|
40,939,919
|
|
See
accompanying notes to condensed consolidated financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
|
|
Three
Months Ended June 30,
|
|
Nine
Months Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Net
income (loss)
|
|
$
|
(1,113,148
|
)
|
$
|
(1,727,319
|
)
|
$
|
(3,400,344
|
)
|
$
|
16,081,973
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) on investment in 3CI
|
|
|
(139,778
|
)
|
|
34,923
|
|
|
42,082
|
|
|
62,862
|
|
Comprehensive
income (loss)
|
|
$
|
(1,252,926
|
)
|
$
|
(1,692,396
|
)
|
$
|
(3,358,262
|
)
|
$
|
16,144,835
|
|
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Nine
Months Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(3,400,344
|
)
|
$
|
16,081,973
|
|
Results
of discontinued operations
|
|
|
(3,337,763
|
)
|
|
1,324,137
|
|
Income
(loss) from continuing operations
|
|
|
(6,738,107
|
)
|
|
17,406,110
|
|
Adjustments
to reconcile net income (loss) to net cash used in continuing operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
3,592
|
|
|
5,012
|
|
Amortization
of debt discount and financing costs
|
|
|
2,830,352
|
|
|
1,875,868
|
|
Gain
on extinguishment of convertible debentures
|
|
|
—
|
|
|
(18,823,000
|
)
|
Gain
on sale of securities
|
|
|
—
|
|
|
(1,918,012
|
)
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Notes
and other receivables
|
|
|
989,552
|
|
|
(120,237
|
)
|
Prepaid
expenses and other assets
|
|
|
18,041
|
|
|
2,163
|
|
Accounts
payable and accrued liabilities
|
|
|
1,966,289
|
|
|
398,560
|
|
Net
cash used in continuing operating activities
|
|
|
(930,281
|
)
|
|
(1,173,536
|
)
|
Cash
flows from continuing investing activities:
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment, net
|
|
|
(11,566
|
)
|
|
—
|
|
Gain
from sale of securities
|
|
|
—
|
|
|
2,451,444
|
|
Net
cash provided by (used in) continuing investing activities
|
|
|
(11,566
|
)
|
|
2,451,444
|
|
Cash
flows from continuing financing activities:
|
|
|
|
|
|
|
|
Proceeds
from borrowings
|
|
|
2,100,000
|
|
|
7,370,000
|
|
Repayments
of notes payable
|
|
|
(375,000
|
)
|
|
(3,295,000
|
)
|
Borrowing
on revolver
|
|
|
2,251,203
|
|
|
—
|
|
Repayments
of revolver
|
|
|
(2,251,203
|
)
|
|
—
|
|
Repayments
of convertible debentures
|
|
|
—
|
|
|
(6,000,000
|
)
|
Decrease
in restricted cash
|
|
|
—
|
|
|
2,200,000
|
|
Increase
in deferred financing costs
|
|
|
(280,567
|
)
|
|
(595,765
|
)
|
Net
cash provided by (used in) continuing financing activities
|
|
|
1,444,433
|
|
|
(320,765
|
)
|
Net
increase in cash and cash equivalents from continuing
operations
|
|
|
502,586
|
|
|
957,143
|
|
Net
increase (decrease) in cash and cash equivalents from discontinued
operations
|
|
|
2,571,495
|
|
|
(1,406,817
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
3,074,081
|
|
|
(449,674
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
258,120
|
|
|
915,097
|
|
Cash
and cash equivalents at end of period
|
|
$
|
3,332,201
|
|
$
|
465,423
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
622,082
|
|
$
|
169,083
|
|
Cash
paid for taxes, net of refunds
|
|
$
|
—
|
|
$
|
(81,229
|
)
|
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 in connection with settlement of class-action
litigation
|
|
$
|
1,564,490
|
|
$
|
—
|
|
See
accompanying notes to condensed consolidated financial statements.
NOTES
TO 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 automated teller machines (“ATMs”) and
electronic cash security systems, consisting of the Timed Access Cash Controller
(“TACC”) products and the Sentinel products (together, the “Cash Security”
products), which are designed for the management of cash within various
specialty retail markets, primarily in the United States. Sales of ATM and
Cash
Security 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
ATM
products are low-cost, cash-dispensing automated teller machines that are
primarily designed for the off-premise, or non-bank, markets. We offer a
wide
variety of options and enhancements to the ATM products, including custom
configurations that dispense cash-value products, such as coupons, tickets
and
stored-value cards; accept currency; and perform other functions, such as
check-cashing.
The
TACC
products are essentially stand-alone safes that dispense cash to an operator
in
preset amounts. As a deterrent to robbers, $50 or less in cash is kept in
a
register at any given time. When a customer requires change in denominations
of
$5, $10 and $20 bills, the clerk presses a button on the TACC for the
appropriate denomination and the cash is dispensed in a plastic tube. The
time
and frequency it takes to dispense the cash is pre-determined and adjustable
so
that in high-risk times of operations, transaction times can be slowed to
act as
a deterrent against robberies. When excess cash is collected, the clerk simply
places individual bills back into the plastic tubes and loads them into the
TACC
for safe storage. Other available features include envelope drop boxes for
excess cash, dollar scanners, state lottery interfaces, touch pads requiring
user PINs for increased transaction accuracy and an audit trail and reporting
capabilities.
The
Sentinel products were introduced in 2002. The Sentinel product has all the
functionality of the TACC, but has been designed to also reduce the risk
of
internal theft and increase in-store management efficiencies through its
state-of-the-art integration with a store’s point-of-sale (“POS”) and accounting
systems
The
accompanying 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, and are unaudited. In the opinion of
management, the unaudited consolidated interim financial statements include
all
adjustments, consisting only of normal recurring adjustments, necessary for
a
fair presentation of the financial position as of June 30, 2005, the statements
of operations and comprehensive income (loss) for the three and nine months
ended June 30, 2005 and 2004, and the statements of cash flows for the nine
months ended June 30, 2005 and 2004. 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 generally accepted accounting principles
have been condensed or omitted pursuant to the rules of the Securities and
Exchange Commission (the “SEC”). The unaudited results of operations for the
three and nine months ended June 30, 2005 are not necessarily indicative
of the
results to be expected for the entire year ending September 30, 2005. The
unaudited consolidated interim financial statements included herein should
be
read in conjunction with the audited consolidated financial statements and
notes
thereto included in Comprehensive Annual Report on Form 10-K for the fiscal
years ended September 30, 2003 and September 30, 2004 (the “‘03/’04
10-K”)
Status
of Tidel Technologies, Inc.
Our
liquidity was negatively impacted by our inability to collect the outstanding
receivables and claims from CCC; therefore, we were required to seek additional
financing, resulting in a substantial increase in our debt, as discussed
below.
On
November 25, 2003, we completed a $6,850,000 financing transaction (the
“Financing”) with Laurus Master Fund, Ltd. (“Laurus”) pursuant to that certain
Securities Purchase Agreement by and between the Company and Laurus dated
as of
November 25, 2003 (the “2003 SPA”). The Financing was comprised of a three-year
convertible note in the amount of $6,450,000 and a one-year convertible note
in
the amount of $400,000, both of which bear interest at a rate of prime plus
2%
and were convertible into our common stock at a conversion price of $0.40
per
share. In addition, Laurus received warrants to purchase 4,250,000 shares
of our
common stock at an exercise price of $0.40 per share. The proceeds of the
Financing were allocated to the notes and the related warrants based on the
relative fair value of the notes and the warrants, with the value of the
warrants resulting in a discount against the notes. In addition, the conversion
terms of the notes result in a beneficial conversion feature, further
discounting the carrying value of the notes.
As
a
result, we will record additional interest charges totaling $6,850,000 over
the
terms of the notes related to these discounts. Laurus was also granted
registration rights in connection with the shares of common stock issuable
in
connection with the Financing. Proceeds from the Financing in the amount
of
$6,000,000 were used to fully retire the $18,000,000 in Convertible Debentures
issued to two investors (the “Holders”) in September 2000, together with all
accrued interest, penalties and fees associated therewith. All of the warrants
and Convertible Debentures held by the Holders were terminated and we recorded
a
gain from extinguishment of debt of $18,823,000 (including accrued interest
through the date of extinguishment) in fiscal year 2004 related to this
Financing. In March 2004, the $400,000 note was repaid in full.
In
connection with the closing of the Financing, all outstanding litigation
including, without limitation, the Montrose Litigation, was dismissed, and
a
revolving credit facility with a bank (the “Revolving Credit Facility”) was
repaid through the release of the restricted cash used as collateral for
the
Revolving Credit Facility. See Part II, Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” of the ‘03/’04
10-K
In
August
2004, Laurus notified us that an Event of Default had occurred and had continued
beyond any applicable grace period as a result of our non-payment of interest
and principal on the $6,450,000 convertible note as required under the terms
of
the Financing, as well as noncompliance with certain other covenants of the
Financing documents. In exchange for Laurus’s waiver of the Event of Default
until September 17, 2004, we agreed, among other things, to lower the conversion
price on the $6,450,000 convertible note and the exercise price of the warrants
from $0.40 per share to $0.30 per share. The reduction in conversion price
resulted in an additional discount against the carrying value of the notes.
As a
result, we will record additional interest charges totaling approximately
$1,900,000 over the remaining terms of the notes related to the
discounts.
On
November 26, 2004, we completed a $3,350,000 financing transaction (the
“Additional Financing”) with Laurus pursuant to that certain Securities Purchase
Agreement by and between the Company and Laurus, dated as of November 26,
2004
(the “2004 SPA”). The Additional Financing was comprised of (i) a three-year
convertible note issued to Laurus in the amount of $1,500,000, which bears
interest at a rate of 14% and is convertible into our common stock at a
conversion price of $3.00 per share (the “$1,500,000 Note”), (ii) a one-year
convertible note in the amount of $600,000 which bears interest at a rate
of 10%
and is convertible into our common stock at a conversion price of $0.30 per
share (the “$600,000 Note”), (iii) a one-year convertible note of our
subsidiary, Tidel Engineering, L.P., in the amount of $1,250,000, which is
a
revolving working capital facility for the purpose of financing purchase
orders
of our subsidiary, Tidel Engineering, L.P., (the “Purchase Order Note”), which
bears interest at a rate of 14% and is convertible into our common stock
at a
price of $3.00 per share and (iv) our issuance to Laurus of 1,251,000 shares
of
common stock, or approximately 7% of the total shares outstanding, (the “2003
Fee Shares”) in satisfaction of fees totaling $375,300 incurred in connection
with the convertible term notes issued in the Financing discussed above.
As a
result of the issuance of the 2003 Fee Shares, we recorded an additional
charge
in fiscal 2004 of $638,010 based on the market value on November 26, 2004.
We
also increased the principal balance of the original note by $292,987, of
which
$226,312 bears interest at the default rate of 18%. This amount represents
interest accrued but not paid to Laurus as of August 1, 2004. In addition,
Laurus received warrants to purchase 500,000 shares of our common stock at
an
exercise price of $0.30 per share. The proceeds of the Additional Financing
were
allocated to the notes based on the relative fair value of the notes and
the
warrants, with the value of the warrants resulting in a discount against
the
notes. In addition, the conversion terms of the $600,000 Note resulted in
a
beneficial conversion feature, further discounting the carrying value of
the
notes. As a result, we will record additional interest charges related to
these
discounts totaling $840,000 over the terms of the notes. Laurus was also
granted
registration rights in connection with the 2003 Fee Shares and other shares
issuable pursuant to the Additional Financing. The obligations pursuant to
the
Additional Financing are secured by all of our assets and are guaranteed
by our
subsidiaries. Net proceeds from the Additional Financing in the amount of
$3,232,750 were primarily used for (i) general working capital payments made
directly to vendors, (ii) past due interest on Laurus’s $6,450,000 convertible
note due pursuant to the Financing and (iii) the establishment of an escrow
for
future principal and interest payments due pursuant to the Additional
Financing.
THE
NOTES
AND WARRANTS ISSUED IN THE FINANCING AND THE ADDITIONAL FINANCING ARE
CONVERTIBLE INTO AN AGGREGATE OF 28,226,625 SHARES OF OUR COMMON STOCK AND,
WHEN
COUPLED WITH THE 2003 FEE SHARES, REPRESENT APPROXIMATELY 60% OF OUR OUTSTANDING
COMMON STOCK SUBJECT TO ADJUSTMENT AS PROVIDED IN THE TRANSACTION DOCUMENTS.
IF
THESE NOTES AND WARRANTS WERE COMPLETELY CONVERTED TO COMMON STOCK BY LAURUS,
THEN THE OTHER EXISTING SHAREHOLDERS’ OWNERSHIP IN THE COMPANY WOULD BE
SIGNIFICANTLY DILUTED TO APPROXIMATELY 40% OF THEIR PRESENT OWNERSHIP
POSITION.
In
connection with the Financing, Laurus required that we covenant to become
current in our filings with the Securities and Exchange Commission according
to
a predetermined schedule. Effective November 26, 2004, the Additional Financing
documents require, among other things, that we provide evidence of filing
to
Laurus of our fiscal 2003, fiscal 2004 and year-to-date interim 2005 filings
with the Securities and Exchange Commission on or before July 31,
2005.
On
February 4, 2005, we received a letter from the Securities and Exchange
Commission stating that the Division of Corporate Finance of the SEC would
not
object to the Company filing a comprehensive annual report on Form 10-K which
covers all of the periods during which it has been a delinquent filer, together
with its filing all Forms 10-Q which are due for quarters subsequent to the
latest fiscal year included in that comprehensive annual report. However,
the
SEC Letter also stated that, upon filing such a comprehensive Form 10-K,
the
Company would not be considered “current” for purposes of Regulation S, Rule 144
or filing on Forms S-8, and that the Company would not be eligible to use
Forms
S-2 or S-3 until a sufficient history of making timely filings is established.
Laurus consented to the filing of such a comprehensive annual report in
satisfaction of the Filing Requirements mandated on or before July 31, 2005.
Laurus also consented to a modification of the requirement that a Registration
Statement be filed within 20 days of satisfaction of the Filing Requirements
to
instead require that the Registration Statement be required to be filed by
September 20, 2006.
We
filed
the fiscal 2002 Form 10-K on February 1, 2005, and we filed the ‘03/’04 10-K,
the Form 10-Q for the quarter ending December 31, 2004 and the Form 10-Q
for the
quarter ended March 31, 2005 on Monday, August 1, 2005, which was in accordance
with the requirements of the Additional Financing.
Pursuant
to the Additional Financing, fourteen (14) days following such time as we
became
current in our filings with the SEC, we were required to deliver to Laurus
evidence of the listing of our common stock on the Nasdaq Over The Counter
Bulletin Board (the “Listing Requirement”); however, Laurus has subsequently
extended the delivery date to provide evidence of the satisfaction of the
Listing Requirement to September 15, 2005.
On
November 26, 2004, in connection with the Additional Financing, we entered
into
an agreement with Laurus (the “Asset Sales Agreement”) whereby we agreed to pay
a fee in the amount of at least $2,000,000 (the “Reorganization Fee”) to Laurus
upon the occurrence of certain events as specified below and therein, which
Reorganization Fee is secured by all of our assets, and is guaranteed by
our
subsidiaries. The Asset Sales Agreement provides that (i) once our obligations
to Laurus have been paid in full (other than the Reorganization Fee), we
shall
be able to seek additional financing in the form of a non-convertible bank
loan
in an aggregate principal amount not to exceed $4,000,000, subject to Laurus’s
right of first refusal; (ii) the net proceeds of an asset sale to the party
named therein shall be applied to our obligations to Laurus under the Financing
and the Additional Financing, as described above (collectively, the
“Obligations”), but not to the Reorganization Fee; and (iii) the proceeds of any
of our subsequent sales of equity interests or assets or of our subsidiaries
consummated on or before the fifth anniversary of the Asset Sales Agreement
(each, a “Company Sale”) shall be applied first to any remaining obligations,
then paid to Laurus pursuant to an increasing percentage of at least 55.5%
set
forth therein, which amount shall be applied to the Reorganization Fee. Under
this formula, the existing shareholders could receive less than 45% of the
proceeds of any sale of our assets or equity interests, after payment of
the
Additional Financing and Reorganization Fee as defined. The Reorganization
Fee
shall be $2,000,000 at a minimum, but could equal a higher amount based upon
a
percentage of the proceeds of any company sale, as such term is defined in
the
Asset Sales Agreement. In the event that Laurus has not received the full
amount
of the Reorganization Fee on or before the fifth anniversary of the date
of the
Asset Sales Agreement, then we shall pay any remaining balance due on the
Reorganization Fee to Laurus. We recorded a $2,000,000 charge in the first
quarter of fiscal 2005 to interest expense.
As
of
June 30, 2005, we had approximately $8,932,988 face value of outstanding
debt:
$3,720,152 after debt discount of $4,672,836. Of the $8,392,988 total
outstanding debt at June 30, 2005, $6,292,988 represents the outstanding
balance
of the Financing, and $600,000 and $1,500,000 represent outstanding balances
of
two term notes in connection with the Additional Financing.
Management’s
Current Plans with Regard to Our Liquidity Include the Following:
Proposed
Sale of ATM Business
We
committed to a plan to sell the ATM business during the first quarter ended
December 31, 2004.
On
February 19, 2005, the Company and its wholly-owned subsidiary Tidel
Engineering, L.P. (together with the Company, the “Sellers”) entered into an
asset purchase agreement with NCR Texas LLC, a single member Delaware limited
liability company (“NCR Texas”) that is a wholly-owned subsidiary of NCR
Corporation, a Maryland corporation, for the sale of our ATM business (the
“Asset Purchase Agreement”). The purchase price for the ATM business of the
Sellers is $10,175,000, plus the assumption of certain liabilities related
to
the ATM business and, subject to certain adjustments as provided in the Asset
Purchase Agreement (the “Purchase Price”). The Purchase Price is also subject to
adjustment based upon the actual value of the assets delivered, to the extent
the value of the assets delivered is 5% greater than or less than a
predetermined value as stated in the Asset Purchase Agreement. The Asset
Purchase Agreement contains customary representations, warranties, covenants
and
indemnities.
The
proceeds of the sale of the Sellers’ ATM business will be applied towards the
repayment of our outstanding loans from Laurus Master Fund, Ltd. (“Laurus”).
However, even after the application of net proceeds towards the repayment
of the
loans, Laurus may continue to hold warrants to purchase up to 4,750,000 shares
of our common stock, and will have a contractual right to receive a significant
percentage, or approximately 60%, of the proceeds of any subsequent sale
of all,
or substantially all, of the remaining equity interests and/or other assets
of
the Company in one or more transactions, pursuant to the Agreement Regarding
NCR
Transaction and Other Asset Sales. The Company has retained Stifel, Nicolaus
& Company, Inc. to sell the remainder of the Company’s business, as required
pursuant to the terms of the Additional Financing, as discussed
below.
The
closing of the sale of the ATM business pursuant to the Asset Purchase Agreement
is subject to several conditions, including shareholder approval. The Sellers
do
not contemplate seeking shareholder approval until the Company is current
in its
reporting requirements under the Securities Exchange Act of 1934, as amended.
Pursuant to contractual arrangements with its lenders, the Company is required
to be current no later than July 31, 2005, after which time the Company will
commence seeking shareholder approval for this transaction. The Company believes
that the transaction will likely close during the fourth quarter of calendar
2005.
Following
the closing of the transactions under the Asset Purchase Agreement, it is
contemplated that approximately 50% of our employees would become employees
of
NCR Texas, including up to two executives, subject to their reaching mutually
satisfactory agreements with NCR Texas.
Pursuant
to the Asset Purchase Agreement, until the earlier of the closing of the
transactions contemplated thereby or termination of the Asset Purchase Agreement
(the “Exclusivity Period”), the Sellers have agreed not to communicate with
potential buyers, other than to say that they are contractually obligated
not to
respond. The Sellers are obligated to forward any communications to NCR Texas.
In the event that the Sellers breach these provisions, then as provided in
the
Asset Purchase Agreement, the Sellers are obligated to pay a $2,000,000 fee
to
NCR Texas (the “Fee”). Also as provided in the Asset Purchase Agreement, under
certain limited circumstances the Sellers may consider an unsolicited offer
that
our Board of Directors (the “Board”) deems to be financially superior. However,
immediately following the execution of a definitive agreement for the
transaction contemplated by such superior offer, NCR Texas is to be paid
the
Fee.
The
Asset
Purchase Agreement also contains provisions restricting the Sellers from
owning
or managing any business similar to the ATM business for a period of five
years
after the closing of the transactions contemplated by the Asset Purchase
Agreement. In addition, the agreement contains provisions restricting the
Sellers from soliciting or hiring any employees of NCR Texas for a period
of two
years after the closing and restricting NCR Texas from hiring Sellers’
employees.
We
have
classified the ATM business as Assets Held for Sale as of June 30,
2005.
Engagement
of Investment Banker to Evaluate Strategic Alternatives for the
Sale of
the Cash Security Business
During
the third quarter of 2005, we committed to a plan to sell the Cash Security
Business. We engaged Stifel, Nicolaus & Company, Inc. (“Stifel”) to assist
our 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. We have classified the Cash Security Business as Assets
Held
for Sale as of June 30, 2005.
Major
Customers and Credit Risk
We
generally retain a security interest in the 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.
The
concentration of customers in our 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. The loss of a single
customer could have an adverse effect on our net income. During the three
months
ended June 30, 2005 and the nine months ended June 30, 2005, we shipped 471
and
1,468, units respectively, of the Sentinel product to a national convenience
store operator. This generated sales revenue of $3,869,614, or 73%, and
$11,780,581, or 71%, of revenues for the three and nine months ended June
30,
2005 for the Cash Security business.
The
majority of our sales during the three and nine months ended June 30, 2005
were
to customers within the United States. Foreign sales accounted for 8% and
10% of
our sales during the three and nine months ended June 30, 2005, respectively.
The majority of our sales during the three months ended June 30, 2004 and
nine
months ended June 30, 2004 were to customers within the United States. Foreign
sales accounted for 17% and 21% of the our sales during the three months
ended
June 30, 2004 and nine months ended June 30, 2004, respectively.
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
business. 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 Tidel 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. During the first nine months
of
2005, we increased the reserve to approximately $830,000 due to the delinquency
of payment for the majority of the invoices issued in the fiscal year 2005.
In
July of 2005, we collected a partial payment of approximately $350,000 related
to the 2004 billings. This collection reduced the outstanding balance on
this
facility to approximately $1,700,000, of which we have reserved a total of
$830,000 as of June 30, 2005. We have also received a commitment from the
distributor to submit at least approximately $40,000 per week commencing
August
5, 2005 until the balance is paid in full. We have received the first two
installment payments on time as per the agreement.
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 its articles of incorporation. Upon our exercise of the
warrant, the distributors balance outstanding under the Facility Agreement
would
be reduced by $300,000.
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 No. 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
June 30,
|
|
Nine
Months
Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Net
income (loss) as reported
|
|
$
|
(1,113,148
|
)
|
$
|
(1,727,319
|
)
|
$
|
(3,400,344
|
)
|
$
|
16,081,973
|
|
Deduct:
Total stock-based employee compensation expense determined under
FAS 123,
net of taxes
|
|
|
(6,431
|
)
|
|
(348
|
)
|
|
(13,001
|
)
|
|
(1,044
|
)
|
Net
income (loss), pro forma
|
|
$
|
(1,119,579
|
)
|
$
|
(1,727,667
|
)
|
$
|
(3,413,345
|
)
|
$
|
16,080,929
|
|
Basic
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
|
(0.06
|
)
|
|
(0.10
|
)
|
|
(0.16
|
)
|
|
0.92
|
|
Pro
forma
|
|
|
(0.06
|
)
|
|
(0.10
|
)
|
|
(0.16
|
)
|
|
0.92
|
|
Diluted
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
|
(0.06
|
)
|
|
(0.10
|
)
|
|
(0.16
|
)
|
|
0.43
|
|
Pro
forma
|
|
|
(0.06
|
)
|
|
(0.10
|
)
|
|
(0.16
|
)
|
|
0.43
|
|
During
the nine months ended June 30, 2005, we granted options to purchase 363,810
shares of common stock to certain employees. The options vest over four years
and have an exercise price of $.25 per share, which was the fair market value
on
the date of grant. We used the Black-Scholes method, assuming no dividends,
as
well as the weighted average assumptions included in the following
table:
|
|
Three
and Nine Months
Ended
June
30, 2005
|
|
Expected
option life (in years)
|
|
|
4.0
|
|
Expected
volatility
|
|
|
80.0%
|
|
Risk-free
interest rate
|
|
|
3.42%
|
|
2.
|
Discontinued
Operations (ATM Business)
|
We
committed to a plan to sell the ATM business during the first quarter ended
December 31, 2004. On February 19, 2005, we entered into an Asset Purchase
Agreement with NCR Texas, a wholly-owned subsidiary of NCR Corporation, a
Maryland corporation, for the sale of our ATM business. We have classified
the
ATM business as a discontinued operation since that time, including for the
comparative periods in the prior year. This division manufactures and sells
automated teller machines primarily in the United States. The results of
this
operation are reflected as Assets and Liabilities Held for Sale on the
accompanying balance sheets and segregated on the accompanying statements
of
operations as income or loss from discontinued operations on pages 3 and
4,
respectively. The proceeds of the sale of the Sellers’ ATM business will be
applied towards the repayment of our outstanding loans from Laurus. Even
after
the application of net proceeds towards the repayment of the loans, our lender
may continue to hold warrants to purchase up to 4,750,000 shares of our common
stock, and will have a contractual right to receive a significant percentage
of
the proceeds of any subsequent sale of all, or substantially all, of our
equity
interests and/or other assets in one or more transactions, pursuant to the
Asset
Sales Agreement.
The
ATM
products are low-cost, cash-dispensing automated teller machines that are
primarily designed for the off-premise, or non-bank, markets. We offer a
wide
variety of options and enhancements to the ATM products, including custom
configurations that dispense cash-value products, such as coupons, tickets
and
stored-value cards; accept currency; and perform other functions, such as
check-cashing.
The
sale
of the ATM Business is expected to be consummated after fiscal year ended
September 30, 2005.
An
analysis of the discontinued operations of the ATM Business is as follows:
DISCONTINUED
OPERATIONS — ATM BUSINESS
SELECTED
BALANCE SHEET DATA
(UNAUDITED)
|
|
June
30,
2005
|
|
September
30,
2004
|
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
—
|
|
$
|
—
|
|
Trade
accounts receivable, net of allowance of $1,832,877 and $1,069,825,
respectively
|
|
|
1,932,363
|
|
|
1,983,931
|
|
Inventories
- Net of Allowance for obsolete inventories
|
|
|
4,876,652
|
|
|
3,432,828
|
|
Prepaid
expenses and other
|
|
|
243,387
|
|
|
157,490
|
|
Total
current assets
|
|
|
7,052,402
|
|
|
5,574,249
|
|
Property,
plant and equipment, at cost
|
|
|
4,287,221
|
|
|
4,286,617
|
|
Accumulated
depreciation
|
|
|
(4,175,868
|
)
|
|
(3,977,412
|
)
|
Net
property, plant and equipment
|
|
|
111,353
|
|
|
309,205
|
|
Other
assets
|
|
|
27,297
|
|
|
27,297
|
|
Total
assets
|
|
$
|
7,191,052
|
|
$
|
5,910,751
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,056,774
|
|
$
|
1,686,732
|
|
Other
accrued expenses
|
|
|
1,106,997
|
|
|
836,289
|
|
Total
liabilities
|
|
$
|
2,163,771
|
|
$
|
2,523,021
|
|
DISCONTINUED
OPERATIONS — ATM BUSINESS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Three
Months Ended June 30,
|
|
Nine
Months Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Net
sales
|
|
$
|
4,734,044
|
|
$
|
3,123,145
|
|
$
|
11,833,366
|
|
$
|
11,401,478
|
|
Cost
of sales
|
|
|
3,650,721
|
|
|
2,310,712
|
|
|
8,550,479
|
|
|
8,370,251
|
|
Gross
profit
|
|
|
1,083,323
|
|
|
812,433
|
|
|
3,282,887
|
|
|
3,031,227
|
|
Selling,
general and administrative
|
|
|
1,367,879
|
|
|
1,135,244
|
|
|
4,151,213
|
|
|
3,191,014
|
|
Depreciation
and amortization
|
|
|
48,355
|
|
|
90,195
|
|
|
194,281
|
|
|
361,803
|
|
Operating
loss
|
|
|
(332,911
|
)
|
|
(413,006
|
)
|
|
(1,062,607
|
)
|
|
(521,590
|
)
|
Non-operating
(income) expense
|
|
|
—
|
|
|
2,298
|
|
|
—
|
|
|
40,216
|
|
Net
loss
|
|
$
|
(332,911
|
)
|
$
|
(415,304
|
)
|
$
|
(1,062,607
|
)
|
$
|
(561,806
|
)
|
3.
|
Discontinued
Operations (Cash Security
Business)
|
We
committed to a plan to sell the Cash Security Business during the third quarter
ended June 30, 2005. We have classified the Cash Security Business as a
discontinued operation as of June 30, 2005, including for the comparative
periods in the prior year.
The
TACC
products are essentially stand-alone safes that dispense cash to an operator
in
preset amounts. As a deterrent to robbers, $50 or less in cash is kept in
a
register at any given time. When a customer requires change in denominations
of
$5, $10 and $20 bills, the clerk presses a button on the TACC for the
appropriate denomination and the cash is dispensed in a plastic tube. The
time
and frequency it takes to dispense the cash is pre-determined and adjustable
so
that in high-risk times of operations, transaction times can be slowed to
act as
a deterrent against robberies. When excess cash is collected, the clerk simply
places individual bills back into the plastic tubes and loads them into the
TACC
for safe storage. Other available features include envelope drop boxes for
excess cash, dollar scanners, state lottery interfaces, touch pads requiring
user PINs for increased transaction accuracy and an audit trail and reporting
capabilities.
The
Sentinel products were introduced in 2002. The Sentinel product has all the
functionality of the TACC, but has been designed to also reduce the risk
of
internal theft and increase in-store management efficiencies through its
state-of-the-art integration with a store’s point-of-sale (“POS”) and accounting
systems.
The
sale
of the Cash Security Business is expected to be consummated after the fiscal
year ended September 30, 2005.
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,
2005
|
|
September
30,
2004
|
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
—
|
|
$
|
—
|
|
Trade
accounts receivable, net of allowance of $32,614 and $6,230,
respectively
|
|
|
600,377
|
|
|
1,076,362
|
|
Inventories
|
|
|
2,073,121
|
|
|
1,350,631
|
|
Prepaid
expenses and other
|
|
|
279,513
|
|
|
93,087
|
|
Total
current assets
|
|
|
2,953,011
|
|
|
2,520,080
|
|
Property,
plant and equipment, at cost
|
|
|
1,134,745
|
|
|
1,091,197
|
|
Accumulated
depreciation
|
|
|
(1,011,854
|
)
|
|
(972,920
|
)
|
Net
property, plant and equipment
|
|
|
122,891
|
|
|
118,277
|
|
Other
assets
|
|
|
25,631
|
|
|
25,631
|
|
Total
assets
|
|
$
|
3,101,533
|
|
$
|
2,663,988
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Current
maturities
|
|
$
|
3,672
|
|
$
|
8,951
|
|
Accounts
payable
|
|
|
1,056,775
|
|
|
1,380,054
|
|
Other
accrued expenses
|
|
|
2,697,387
|
|
|
1,058,001
|
|
Total
current liabilities
|
|
|
3,757,834
|
|
|
2,447,006
|
|
Long-term
debt, net of current maturities
|
|
|
28,709
|
|
|
28,709
|
|
Total
liabilities
|
|
$
|
3,786,543
|
|
$
|
2,475,715
|
|
DISCONTINUED
OPERATIONS — CASH SECURITY BUSINESS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Three
Months Ended June 30,
|
|
Nine
Months Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Net
sales
|
|
$
|
5,310,146
|
|
$
|
1,495,737
|
|
$
|
16,568,457
|
|
$
|
6,174,821
|
|
Cost
of sales
|
|
|
2,993,849
|
|
|
1,147,326
|
|
|
8,984,878
|
|
|
4,178,427
|
|
Gross
profit
|
|
|
2,316,297
|
|
|
348,411
|
|
|
7,583,579
|
|
|
1,996,394
|
|
Selling,
general and administrative
|
|
|
1,274,518
|
|
|
858,822
|
|
|
3,159,673
|
|
|
2,743,977
|
|
Depreciation
and amortization
|
|
|
7,560
|
|
|
33,360
|
|
|
22,308
|
|
|
14,748
|
|
Operating
income (loss)
|
|
|
1,034,219
|
|
|
(543,771
|
)
|
|
4,401,598
|
|
|
(762,331
|
)
|
Non-operating
expense
|
|
|
570
|
|
|
—
|
|
|
1,227
|
|
|
—
|
|
Net
income (loss)
|
|
$
|
1,033,649
|
|
$
|
(543,771
|
)
|
$
|
4,400,371
|
|
$
|
(762,331
|
)
|
On
November 25, 2003, we completed the Financing with Laurus, and we completed
the
Additional Financing on November 26, 2004 with Laurus in order to meet our
current liquidity needs.
As
of
June 30, 2005, we had approximately $8,932,988 face value of outstanding
debt:
$3,720,152 after debt discount of $4,672,836. Of the $8,392,988 total
outstanding debt at June 30, 2005, $6,292,988 represents the outstanding
balance
of the Financing, and $600,000 and $1,500,000 represent outstanding balances
of
two term notes in connection with the Additional Financing.
As
of
August 19, 2005, we also have $1,250,000 available for borrowing under the
Purchase Order Note through November 26, 2005. 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
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 1,251.000 SHARES ISSUED TO LAURUS IN CONNECTION WITH THE
ADDITIONAL FINANCING, 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 SEC 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 SEC on or before
July
31, 2005.
On
February 4, 2005, we received a letter from the SEC stating that the Division
of
Corporate Finance of the SEC would not object to our 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, we would not be considered “current” for purposes of
Regulation S, Rule 144 or filing on Forms S-8, and that we 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.
We
filed
the fiscal 2002 Form 10-K on February 1, 2005, and we filed the ‘03/’04 10-K,
the Form 10-Q for the quarter ending December 31, 2004 and the Form 10-Q
for the
quarter ended March 31, 2005 on Monday, August 1, 2005, which was in accordance
with the requirements of the Additional Financing.
Pursuant
to the Additional Financing, fourteen (14) days following such time as we
became
current in our filings with the SEC, we were required to deliver to Laurus
evidence of the listing of our common stock on the Nasdaq Over The Counter
Bulletin Board (the “Listing Requirement”); however, Laurus has subsequently
extended the delivery date to provide evidence of the satisfaction of the
Listing Requirement to September 15, 2005.
The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings per share computation:
|
|
Three
months ended June 30,
|
|
Nine
Months ended June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Net
income (loss) (numerator for basic earnings per share)
|
|
$
|
(1,113,148
|
)
|
$
|
(1,727,319
|
)
|
$
|
(3,400,344
|
)
|
$
|
16,081,973
|
|
Interest
expense attributable to convertible note
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,122,797
|
|
Adjusted
net income (loss) (numerator for diluted earnings per
share)
|
|
$
|
(1,113,148
|
)
|
$
|
(1,727,319
|
)
|
$
|
(3,400,344
|
)
|
$
|
18,204,770
|
|
Weighted
average common shares outstanding (denominator for basic earnings
per
share)
|
|
|
20,667,210
|
|
|
17,426,210
|
|
|
20,163,250
|
|
|
17,426,210
|
|
Dilutive
shares outstanding
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23,512,809
|
|
Weighted
average common and dilutive shares outstanding
|
|
|
20,667,210
|
|
|
17,426,210
|
|
|
20,163,250
|
|
|
40,939,919
|
|
Basic
earnings per share
|
|
$
|
(.06
|
)
|
$
|
(0.10
|
)
|
$
|
(0.16
|
)
|
$
|
0.92
|
|
Diluted
earnings per share
|
|
$
|
(.06
|
)
|
$
|
(0.10
|
)
|
$
|
(0.16
|
)
|
$
|
0.44
|
|
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. As of June 30, 2005, we had outstanding options covering an
aggregate of 1,100,560 shares of common stock, of which 683,500 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 and nine months ended June 30, 2005 are options to purchase 1,100,560
shares to purchase common stock at a weighted average of $1.22 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. Excluded from the computation of diluted
EPS for
the three and nine months ended June 30, 2004 are options to purchase 736,000
shares to purchase common stock at a weighted average of $1.70 per share.
Excluded from computation of diluted EPS for the three months ended June
30,
2004 are 4,890,000 warrants, with a remaining exercise price ranging from
$0.30
to $0.45, as they would also be anti-dilutive. Diluted EPS for the nine months
ended June 30, 2004 include 23,512,809 common stock equivalents which include
21,500,000 shares related to convertible debt and 2,012,809 shares related
to
outstanding warrants.
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 nine months ended June 30, 2005, we issued 2,000,000 shares of our common
stock related to a settlement of a class action litigation. In addition,
we
issued 1,251,000 shares of our common stock to Laurus related to settlement
of
late filing penalties (the “2003 Fee Shares”). 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”
and “Cautionary 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
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. Also, our inability to collect
outstanding receivables continues to impact our liquidity. On November 25,
2003,
we completed a $6,850,000 financing transaction with Laurus Master Fund,
Ltd.
(“Laurus”), and we completed an additional $3,350,000 financing
transaction.
On
November 25, 2003, we completed a $6,850,000 financing transaction (the
“Financing”) with Laurus Master Fund, Ltd. (“Laurus”) pursuant to that certain
Securities Purchase Agreement by and between the Company and Laurus dated
as of
November 25, 2003 (the “2003 SPA”). The Financing was comprised of a three-year
convertible note in the amount of $6,450,000 and a one-year convertible note
in
the amount of $400,000, both of which bear interest at a rate of prime plus
2%
and were convertible into our common stock at a conversion price of $0.40
per
share. In addition, Laurus received warrants to purchase 4,250,000 shares
of our
common stock at an exercise price of $0.40 per share. The proceeds of the
Financing were allocated to the notes and the related warrants based on the
relative fair value of the notes and the warrants, with the value of the
warrants resulting in a discount against the notes. In addition, the conversion
terms of the notes result in a beneficial conversion feature, further
discounting the carrying value of the notes. As a result, we will record
additional interest charges totaling $6,850,000 over the terms of the notes
related to these discounts. Laurus was also granted registration rights in
connection with the shares of common stock issuable in connection with the
Financing. Proceeds from the Financing in the amount of $6,000,000 were used
to
fully retire the $18,000,000 in Convertible Debentures issued to two investors
(the “Holders”) in September 2000, together with all accrued interest, penalties
and fees associated therewith. All of the warrants and Convertible Debentures
held by the Holders were terminated and we recorded a gain from extinguishment
of debt of $18,823,000 (including accrued interest through the date of
extinguishment) in fiscal year 2004 related to this Financing. In March 2004,
the $400,000 note was repaid in full.
In
connection with the closing of the Financing, all outstanding litigation
including, without limitation, the Montrose Litigation, was dismissed, and
a
revolving credit facility with a bank (the “Revolving Credit Facility”) was
repaid through the release of the restricted cash used as collateral for
the
Revolving Credit Facility. See Part II, Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” of the ‘03/’04
10-K
In
August
2004, Laurus notified us that an Event of Default had occurred and had continued
beyond any applicable grace period as a result of our non-payment of interest
and principal on the $6,450,000 convertible note as required under the terms
of
the Financing, as well as noncompliance with certain other covenants of the
Financing documents. In exchange for Laurus’s waiver of the Event of Default
until September 17, 2004, we agreed, among other things, to lower the conversion
price on the $6,450,000 convertible note and the exercise price of the warrants
from $0.40 per share to $0.30 per share. The reduction in conversion price
resulted in an additional discount against the carrying value of the notes.
As a
result, we will record additional interest charges totaling approximately
$1,900,000 over the remaining terms of the notes related to the
discounts.
On
November 26, 2004, we completed a $3,350,000 financing transaction (the
“Additional Financing”) with Laurus pursuant to that certain Securities Purchase
Agreement by and between the Company and Laurus, dated as of November 26,
2004
(the “2004 SPA”). The Additional Financing was comprised of (i) a three-year
convertible note issued to Laurus in the amount of $1,500,000, which bears
interest at a rate of 14% and is convertible into our common stock at a
conversion price of $3.00 per share (the “$1,500,000 Note”), (ii) a one-year
convertible note in the amount of $600,000 which bears interest at a rate
of 10%
and is convertible into our common stock at a conversion price of $0.30 per
share (the “$600,000 Note”), (iii) a one-year convertible note of our
subsidiary, Tidel Engineering, L.P., in the amount of $1,250,000, which is
a
revolving working capital facility for the purpose of financing purchase
orders
of our subsidiary, Tidel Engineering, L.P., (the “Purchase Order Note”), which
bears interest at a rate of 14% and is convertible into our common stock
at a
price of $3.00 per share and (iv) our issuance to Laurus of 1,251,000 shares
of
common stock, or approximately 7% of the total shares outstanding, (the “2003
Fee Shares”) in satisfaction of fees totaling $375,300 incurred in connection
with the convertible term notes issued in the Financing discussed above.
As a
result of the issuance of the 2003 Fee Shares, we recorded an additional
charge
in fiscal 2004 of $638,010 based on the market value on November 26, 2004.
We
also increased the principal balance of the original note by $292,987, of
which
$226,312 bears interest at the default rate of 18%. This amount represents
interest accrued but not paid to Laurus as of August 1, 2004. In addition,
Laurus received warrants to purchase 500,000 shares of our common stock at
an
exercise price of $0.30 per share. The proceeds of the Additional Financing
were
allocated to the notes based on the relative fair value of the notes and
the
warrants, with the value of the warrants resulting in a discount against
the
notes. In addition, the conversion terms of the $600,000 Note resulted in
a
beneficial conversion feature, further discounting the carrying value of
the
notes. As a result, we will record additional interest charges related to
these
discounts totaling $840,000 over the terms of the notes. Laurus was also
granted
registration rights in connection with the 2003 Fee Shares and other shares
issuable pursuant to the Additional Financing. The obligations pursuant to
the
Additional Financing are secured by all of our assets and are guaranteed
by our
subsidiaries. Net proceeds from the Additional Financing in the amount of
$3,232,750 were primarily used for (i) general working capital payments made
directly to vendors, (ii) past due interest on Laurus’s $6,450,000 convertible
note due pursuant to the Financing and (iii) the establishment of an escrow
for
future principal and interest payments due pursuant to the Additional
Financing.
THE
NOTES
AND WARRANTS ISSUED IN THE FINANCING AND THE ADDITIONAL FINANCING ARE
CONVERTIBLE INTO AN AGGREGATE OF 28,226,625 SHARES OF OUR COMMON STOCK AND,
WHEN
COUPLED WITH THE 2003 FEE SHARES, REPRESENT APPROXIMATELY 60% OF OUR OUTSTANDING
COMMON STOCK SUBJECT TO ADJUSTMENT AS PROVIDED IN THE TRANSACTION DOCUMENTS.
IF
THESE NOTES AND WARRANTS WERE COMPLETELY CONVERTED TO COMMON STOCK BY LAURUS,
THEN THE OTHER EXISTING SHAREHOLDERS’ OWNERSHIP IN THE COMPANY WOULD BE
SIGNIFICANTLY DILUTED TO APPROXIMATELY 40% OF THEIR PRESENT OWNERSHIP
POSITION.
In
connection with the Financing, Laurus required that we covenant to become
current in our filings with the Securities and Exchange Commission according
to
a predetermined schedule. Effective November 26, 2004, the Additional Financing
documents require, among other things, that we provide evidence of filing
to
Laurus of our fiscal 2003, fiscal 2004 and year-to-date interim 2005 filings
with the Securities and Exchange Commission on or before July 31,
2005.
We
filed
the fiscal 2002 Form 10-K on February 1, 2005, and we filed the ‘03/’04 10-K,
the Form 10-Q for the quarter ending December 31, 2004 and the Form 10-Q
for the
quarter ended March 31, 2005 on Monday, August 1, 2005, which was in accordance
with the requirements of the Additional Financing.
Pursuant
to the Additional Financing, fourteen (14) days following such time as we
became
current in our filings with the SEC, we were required to deliver to Laurus
evidence of the listing of our common stock on the Nasdaq Over The Counter
Bulletin Board (the “Listing Requirement”); however, Laurus has subsequently
extended the delivery date to provide evidence of the satisfaction of the
Listing Requirement to September 15, 2005.
On
November 26, 2004, in connection with the Additional Financing, we entered
into
an agreement with Laurus (the “Asset Sales Agreement”) whereby we agreed to pay
a fee in the amount of at least $2,000,000 (the “Reorganization Fee”) to Laurus
upon the occurrence of certain events as specified below and therein, which
Reorganization Fee is secured by all of our assets, and is guaranteed by
our
subsidiaries. The Asset Sales Agreement provides that (i) once our obligations
to Laurus have been paid in full (other than the Reorganization Fee), we
shall
be able to seek additional financing in the form of a non-convertible bank
loan
in an aggregate principal amount not to exceed $4,000,000, subject to Laurus’s
right of first refusal; (ii) the net proceeds of an asset sale to the party
named therein shall be applied to our obligations to Laurus under the Financing
and the Additional Financing, as described above (collectively, the
“Obligations”), but not to the Reorganization Fee; and (iii) the proceeds of any
of our subsequent sales of equity interests or assets or of our subsidiaries
consummated on or before the fifth anniversary of the Asset Sales Agreement
(each, a “Company Sale”) shall be applied first to any remaining obligations,
then paid to Laurus pursuant to an increasing percentage of at least 55.5%
set
forth therein, which amount shall be applied to the Reorganization Fee. Under
this formula, the existing shareholders could receive less than 45% of the
proceeds of any sale of our assets or equity interests, after payment of
the
Additional Financing and Reorganization Fee as defined. The Reorganization
Fee
shall be $2,000,000 at a minimum, but could equal a higher amount based upon
a
percentage of the proceeds of any company sale, as such term is defined in
the
Asset Sales Agreement. In the event that Laurus has not received the full
amount
of the Reorganization Fee on or before the fifth anniversary of the date
of the
Asset Sales Agreement, then we shall pay any remaining balance due on the
Reorganization Fee to Laurus. We recorded a $2,000,000 charge in the first
quarter of fiscal 2005 to interest expense.
As
of
June 30, 2005, we had approximately $8,932,988 face value of outstanding
debt:
$3,720,152 after debt discount of $4,672,836. Of the $8,392,988 total
outstanding debt at June 30, 2005, $6,292,988 represents the outstanding
balance
of the Financing, and $600,000 and $1,500,000 represent outstanding balances
of
two term notes in connection with the Additional Financing.
Management’s
Current Plans with Regard to Our Liquidity Include the Following:
Proposed
Sale of ATM Business
We
committed to a plan to sell the ATM business during the first quarter ended
December 31, 2004. 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 and subject to certain adjustments as provided in the Asset
Purchase Agreement (the “Purchase Price”). The Purchase Price is also subject to
adjustment based upon the actual value of the assets delivered, to the extent
the value of the assets delivered is 5% greater than or less than a
predetermined value as stated in the Asset Purchase Agreement.
The
Asset
Purchase Agreement contains customary representations, warranties, covenants
and
indemnities. The proceeds of the sale of the Sellers’ ATM business will be
applied towards the repayment of our outstanding loans from Laurus. We have
classified the ATM business as Assets Held for Sale as of June 30,
2005.
The
ATM
products are low-cost, cash-dispensing automated teller machines that are
primarily designed for the off-premise, or non-bank, markets. We offer a
wide
variety of options and enhancements to the ATM products, including custom
configurations that dispense cash-value products, such as coupons, tickets
and
stored-value cards; accept currency; and perform other functions, such as
check-cashing
Engagement
of Investment Banker to Evaluate Strategic Alternatives for the
Sale of
the Cash Security Business
During
the third quarter of 2005, we committed to a plan to sell the Cash Security
Business. We engaged Stifel, Nicolaus & Company, Inc. (“Stifel”) to assist
our 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. We have classified the Cash Security Business as Assets
Held
for Sale as of June 30, 2005.
The
TACC
products are essentially stand-alone safes that dispense cash to an operator
in
preset amounts. As a deterrent to robbers, $50 or less in cash is kept in
a
register at any given time. When a customer requires change in denominations
of
$5, $10 and $20 bills, the clerk presses a button on the TACC for the
appropriate denomination and the cash is dispensed in a plastic tube. The
time
and frequency it takes to dispense the cash is pre-determined and adjustable
so
that in high-risk times of operations, transaction times can be slowed to
act as
a deterrent against robberies. When excess cash is collected, the clerk simply
places individual bills back into the plastic tubes and loads them into the
TACC
for safe storage. Other available features include envelope drop boxes for
excess cash, dollar scanners, state lottery interfaces, touch pads requiring
user PINs for increased transaction accuracy and an audit trail and reporting
capabilities.
The
Sentinel products were introduced in 2002. The Sentinel product has all the
functionality of the TACC, but has been designed to also reduce the risk
of
internal theft and increase in-store management efficiencies through its
state-of-the-art integration with a store’s point-of-sale (“POS”) and accounting
systems
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
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:
|
|
For
the Three Months
Ended
June 30,
|
|
For
the Nine Months
Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
ATM
BUSINESS
|
|
$
|
4,734,044
|
|
$
|
3,123,145
|
|
$
|
11,833,366
|
|
$
|
11,401,478
|
|
CASH
SECURITY BUSINESS
|
|
|
5,310,146
|
|
|
1,495,737
|
|
|
16,568,457
|
|
|
6,174,821
|
|
TOTAL
|
|
$
|
10,044,190
|
|
$
|
4,618,882
|
|
$
|
28,401,823
|
|
$
|
17,576,299
|
|
Gross
Profit, Operating Expenses and Non-Operating Items
Continued
Operations
Due
to
the requirement to classify our only two product lines as discontinued
operations, the results of continuing operations consist primarily of the
corporate overhead and debt-related costs.
An
analysis of continuing operations is provided in the following tables:
CONTINUED
OPERATIONS
SELECTED
BALANCE SHEET DATA
(UNAUDITED)
|
|
June
30,
2005
|
|
September
30,
2004
|
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,332,201
|
|
$
|
258,120
|
|
Trade
account receivable
|
|
|
250,000
|
|
|
250,000
|
|
Other
receivables
|
|
|
14,171
|
|
|
1,003,723
|
|
Prepaid
expenses and other
|
|
|
18,112
|
|
|
42,153
|
|
Total
current assets
|
|
|
3,614,484
|
|
|
1,553,996
|
|
Property,
plant and equipment, at cost
|
|
|
55,641
|
|
|
44,075
|
|
Accumulated
depreciation
|
|
|
(41,463
|
)
|
|
(37,871
|
)
|
Net
property, plant and equipment
|
|
|
14,178
|
|
|
6,204
|
|
Other
assets
|
|
|
685,211
|
|
|
643,305
|
|
Total
assets
|
|
$
|
4,313,873
|
|
$
|
2,203,505
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Current
maturities of long-term debt, net of discount of $0 and $725,259,
respectively
|
|
$
|
2,550,000
|
|
$
|
174,741
|
|
Accounts
payable
|
|
|
287,081
|
|
|
331,576
|
|
Accrued
expenses
|
|
|
2,493,026
|
|
|
2,684,742
|
|
Total
current liabilities
|
|
|
5,330,107
|
|
|
3,191,059
|
|
Long-term
debt, net of current maturities and debt discount of $4,672,836
and
$5,767,988, respectively
|
|
|
1,170,152
|
|
|
—
|
|
Total
liabilities
|
|
$
|
6,500,259
|
|
$
|
3,191,059
|
|
CONTINUED
OPERATIONS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Three
Months Ended June 30,
|
|
Nine
Months Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Revenues
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Selling,
general and administrative
|
|
|
652,007
|
|
|
325,269
|
|
|
1,334,541
|
|
|
966,263
|
|
Depreciation
and amortization
|
|
|
1,421
|
|
|
1,274
|
|
|
3,592
|
|
|
5,012
|
|
Operating
loss
|
|
|
(653,428
|
)
|
|
(326,543
|
)
|
|
(1,338,133
|
)
|
|
(971,275
|
)
|
Gain
on extinguishment of debt
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18,823,000
|
|
Gain
on sale of securities
|
|
|
—
|
|
|
119,520
|
|
|
—
|
|
|
1,918,012
|
|
Interest
expense
|
|
|
(1,160,459
|
)
|
|
(642,450
|
)
|
|
(5,399,974
|
)
|
|
(2,444,856
|
)
|
Continuing
income (loss) before taxes
|
|
|
(1,813,887
|
)
|
|
(849,473
|
)
|
|
(6,738,107
|
)
|
|
17,324,881
|
|
Income
tax benefit
|
|
|
—
|
|
|
(81,229
|
)
|
|
—
|
|
|
(81,229
|
)
|
Loss
from continuing operations
|
|
$
|
(1,813,887
|
)
|
$
|
(768,244
|
)
|
$
|
(6,738,107
|
)
|
$
|
17,406,110
|
|
Quarter
Ended June 30, 2005 Compared to the Quarter Ended June 30,
2004
Selling,
general and administrative expenses
for the quarter ended June 30, 2005 was $652,007. This is an increase
approximately 100% from the same quarter of the previous year. This is primarily
related to costs associated with becoming current with our SEC filings,
accounting, legal, and audit-related costs, and costs associated with our
marketing efforts.
Depreciation
and amortization for
the
quarter ended June 30, 2005 and 2004 was $1,421 and $1,274,
respectively.
Interest
expense,
was
$1,160,459 for the quarter ended June 30, 2005, compared to $642,450 for
the
same quarter of the previous year. This is as a result of increased level
of
debt related to the Financing and Additional Financing.
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.
We
recorded a net loss from continuing operations of $(1,813,887) and $(768,244)
for the quarters ended June 30, 2005 and 2004, respectively.
Nine
Months Ended June 30, 2005 Compared to the Nine Months Ended June 30,
2004
Selling,
general and administrative expenses
for the nine months ended June 30, 2005 was $1,334,541. This is an increase
of
approximately 38% from the same period last year. This is primarily related
to
costs associated with becoming current with our SEC filings, accounting,
legal
fees , and audit-related costs.
Depreciation
and amortization for
the
nine months ended June 30, 2005 and 2004 were $3,592 and $5,012,
respectively.
Interest
expense net
of
interest income, was $5,399,974 for the nine months ended June 30, 2005 compared
with $2,444,856 for the same period of the previous year. This is as a result
of
increased level of debt and amortization of the debt discount related to
the
Financing and Additional Financing.
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.
We
recorded a net loss from continuing operations of $(6,738,107) and a net
income
of $17,406,110 for the nine months ended June 30, 2005 and 2004, respectively.
The significant decrease in operating income is primarily due to a gain on
extinguishment of debt of $18,823,000 and a gain on the sale of securities
of
$1,918,012 during the nine months ended June 30, 2004.
Discontinued
Operations (ATM Business)
We
committed to a plan to sell the ATM business during the first quarter ended
December 31, 2004. 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 and subject to certain adjustments as provided in the Asset
Purchase Agreement (the “Purchase Price”). The Purchase Price is also subject to
adjustment based upon the actual value of the assets delivered, to the extent
the value of the assets delivered is 5% greater than or less than a
predetermined value as stated in the Asset Purchase Agreement. The Asset
Purchase Agreement contains customary representations, warranties, covenants
and
indemnities. The proceeds of the sale of the Sellers’ ATM business will be
applied towards the repayment of our outstanding loans from Laurus. We have
classified the ATM business as Assets Held for Sale as of June 30,
2005.
The
ATM
products are low-cost, cash-dispensing automated teller machines that are
primarily designed for the off-premise, or non-bank, markets. We offer a
wide
variety of options and enhancements to the ATM products, including custom
configurations that dispense cash-value products, such as coupons, tickets
and
stored-value cards; accept currency; and perform other functions, such as
check-cashing
An
analysis of the discontinued operations of the ATM business is as follows:
DISCONTINUED
OPERATIONS — ATM BUSINESS
SELECTED
BALANCE SHEET DATA
(UNAUDITED)
|
|
June
30,
2005
|
|
September
30,
2004
|
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
—
|
|
$
|
—
|
|
Trade
accounts receivable, net of allowance of $1,832,877 and $1,069,825,
respectively
|
|
|
1,932,363
|
|
|
1,983,931
|
|
Inventories
|
|
|
4,876,652
|
|
|
3,432,828
|
|
Prepaid
expenses and other
|
|
|
243,387
|
|
|
157,490
|
|
Total
current assets
|
|
|
7,052,402
|
|
|
5,574,249
|
|
Property,
plant and equipment, at cost
|
|
|
4,287,221
|
|
|
4,286,617
|
|
Accumulated
depreciation
|
|
|
(4,175,868
|
)
|
|
(3,977,412
|
)
|
Net
property, plant and equipment
|
|
|
111,353
|
|
|
309,205
|
|
Other
assets
|
|
|
27,297
|
|
|
27,297
|
|
Total
assets
|
|
$
|
7,191,052
|
|
$
|
5,910,751
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,056,774
|
|
$
|
1,686,732
|
|
Other
accrued expenses
|
|
|
1,106,997
|
|
|
836,289
|
|
Total
liabilities
|
|
$
|
2,163,771
|
|
$
|
2,523,021
|
|
DISCONTINUED
OPERATIONS — ATM BUSINESS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Three
Months Ended June 30,
|
|
Nine
Months Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Net
sales
|
|
$
|
4,734,044
|
|
$
|
3,123,145
|
|
$
|
11,833,366
|
|
$
|
11,401,478
|
|
Cost
of sales
|
|
|
3,650,721
|
|
|
2,310,712
|
|
|
8,550,479
|
|
|
8,370,251
|
|
Gross
profit
|
|
|
1,083,323
|
|
|
812,433
|
|
|
3,282,887
|
|
|
3,031,227
|
|
Selling,
general and administrative
|
|
|
1,367,879
|
|
|
1,135,244
|
|
|
4,151,213
|
|
|
3,191,014
|
|
Depreciation
and amortization
|
|
|
48,355
|
|
|
90,195
|
|
|
194,281
|
|
|
361,803
|
|
Operating
loss
|
|
|
(332,911
|
)
|
|
(413,006
|
)
|
|
(1,062,607
|
)
|
|
(521,590
|
)
|
Non-operating
(income) expense
|
|
|
—
|
|
|
2,298
|
|
|
—
|
|
|
40,216
|
|
Net
loss
|
|
$
|
(332,911
|
)
|
$
|
(415,304
|
)
|
$
|
(1,062,607
|
)
|
$
|
(561,806
|
)
|
Quarter
Ended June 30, 2005 Compared to the Quarter Ended June 30,
2004
Net
Sales from
the
ATM business were $4,734,044 for the three months ended June 30, 2005,
representing an increase of 52% from net sales of $3,123,145 in the same
period
last year. The increase was a result of increased sales of ATM machines.
We sold
1,303 ATM units and 724 ATM units for the three months ended June 30, 2005
and
June 30, 2004 respectively, an increase of 579 units. The improvement is
primarily related to an increase in confidence from our long time customers,
and
customers having increased capital to install and replace ATMs.
Gross
profit on
product sales for the quarter ended June 30, 2005 increased $270,890 from
the
same quarter a year ago. However, Gross profit as a percentage of sales was
22%
in the quarter ended June 30, 2005, compared with 26 % in the same quarter
last
year. The decrease in gross margin as a percentage of sales is primarily
related
to the current competitive market conditions.
Selling,
general and administrative expenses
for the quarter ended June 30, 2005 increased 20% compared with the same
quarter
of the previous year. The increase is primarily related to costs associated
with
our marketing efforts.
Depreciation
and amortization for
the
quarter ended June 30, 2005 and 2004 was $48,355 and $90,195,
respectively.
The
ATM
business recorded a loss of $(332,911) and $(415,304) for the three months
ended
June 30, 2005 and 2004, respectively.
Nine
Months Ended June 30, 2005 Compared to the Nine Months Ended June 30,
2004
Our
net
sales generated from the ATM business were $11,833,366 for the nine months
ended
June 30, 2005 compared with $11,401,478 net sales in the same period of the
prior year.
Gross
profit on
product sales for the nine months ended June 30, 2005 was $3,282,887,
representing an 8% increase compared with the same period of the prior year.
Gross profit as a percentage of sales was 27% for the nine months ended June
30,
2005.
Selling,
general and administrative expenses
for the nine months ended June 30, 2005 increased 30% from the same period
of
the previous year. The increase in primarily a result of bad debt reserves
related to two significant customers.
Depreciation
and amortization for
the
nine months ended June 30, 2005 and 2004 were $194,281 and $361,803,
respectively. The decrease is a result of assets becoming fully depreciated
during 2005.
The
results of operations of the ATM business 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
sale
of the ATM business is expected to be consummated after the fiscal year ended
September 30, 2005.
Discontinued
Operations (Cash Security Business)
We
committed to a plan to sell the Cash Security Business during the third quarter
ended June 30, 2005. We have classified the Cash Security Business product
as a
discontinued operation as of June 30, 2005, including for the comparative
period
in the prior year.
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. We have classified the Cash Security Business
as
Assets Held for Sale as of June 30, 2005.
The
TACC
products are essentially stand-alone safes that dispense cash to an operator
in
preset amounts. As a deterrent to robbers, $50 or less in cash is kept in
a
register at any given time. When a customer requires change in denominations
of
$5, $10 and $20 bills, the clerk presses a button on the TACC for the
appropriate denomination and the cash is dispensed in a plastic tube. The
time
and frequency it takes to dispense the cash is pre-determined and adjustable
so
that in high-risk times of operations, transaction times can be slowed to
act as
a deterrent against robberies. When excess cash is collected, the clerk simply
places individual bills back into the plastic tubes and loads them into the
TACC
for safe storage. Other available features include envelope drop boxes for
excess cash, dollar scanners, state lottery interfaces, touch pads requiring
user PINs for increased transaction accuracy and an audit trail and reporting
capabilities.
The
Sentinel products were introduced in 2002. The Sentinel product has all the
functionality of the TACC, but has been designed to also reduce the risk
of
internal theft and increase in-store management efficiencies through its
state-of-the-art integration with a store’s point-of-sale (“POS”) and accounting
systems.
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,
2005
|
|
September
30,
2004
|
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
—
|
|
$
|
—
|
|
Trade
accounts receivable, net of allowance of $32,614 and $6,230,
respectively
|
|
|
600,377
|
|
|
1,076,362
|
|
Inventories
|
|
|
2,073,121
|
|
|
1,350,631
|
|
Prepaid
expenses and other
|
|
|
279,513
|
|
|
93,087
|
|
Total
current assets
|
|
|
2,953,011
|
|
|
2,520,080
|
|
Property,
plant and equipment, at cost
|
|
|
1,134,745
|
|
|
1,091,197
|
|
Accumulated
depreciation
|
|
|
(1,011,854
|
)
|
|
(972,920
|
)
|
Net
property, plant and equipment
|
|
|
122,891
|
|
|
118,277
|
|
Other
assets
|
|
|
25,631
|
|
|
25,631
|
|
Total
assets
|
|
$
|
3,101,533
|
|
$
|
2,663,988
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Current
maturities
|
|
$
|
3,672
|
|
$
|
8,951
|
|
Accounts
payable
|
|
|
1,056,775
|
|
|
1,380,054
|
|
Other
accrued expenses
|
|
|
2,697,387
|
|
|
1,058,001
|
|
Total
current liabilities
|
|
|
3,757,834
|
|
|
2,447,006
|
|
Long-term
debt, net of current maturities
|
|
|
28,709
|
|
|
28,709
|
|
Total
liabilities
|
|
$
|
3,786,543
|
|
$
|
2,475,715
|
|
DISCONTINUED
OPERATIONS — CASH SECURITY BUSINESS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Three
Months Ended June 30,
|
|
Nine
Months Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Net
sales
|
|
$
|
5,310,146
|
|
$
|
1,495,737
|
|
$
|
16,568,457
|
|
$
|
6,174,821
|
|
Cost
of sales
|
|
|
2,993,849
|
|
|
1,147,326
|
|
|
8,984,878
|
|
|
4,178,427
|
|
Gross
profit
|
|
|
2,316,297
|
|
|
348,411
|
|
|
7,583,579
|
|
|
1,996,394
|
|
Selling,
general and administrative
|
|
|
1,274,518
|
|
|
858,822
|
|
|
3,159,673
|
|
|
2,743,977
|
|
Depreciation
and amortization
|
|
|
7,560
|
|
|
33,360
|
|
|
22,308
|
|
|
14,748
|
|
Operating
income (loss)
|
|
|
1,034,219
|
|
|
(543,771
|
)
|
|
4,401,598
|
|
|
(762,331
|
)
|
Non-operating
expense
|
|
|
570
|
|
|
—
|
|
|
1,227
|
|
|
—
|
|
Net
income (loss)
|
|
$
|
1,033,649
|
|
$
|
(543,771
|
)
|
$
|
4,400,371
|
|
$
|
(762,331
|
)
|
Quarter
Ended June 30, 2005 Compared to the Quarter Ended June 30,
2004
Net
Sales from
the
Cash Security business were $5,310,146 for the quarter ended June 30, 2005,
representing an increase of $3,814,409 from net sales of $1,495,737in the
same
period of the prior year. The improvement is directly related to an increase
in
sales of the Sentinel units to a national convenience store
operator.
Gross
profit on
product sales for the quarter ended June 30, 2005 increased $1,967,886 from
the
same quarter a year ago. Gross profit as a percentage of sales was 43% in
the
quarter ended June 30, 2005, compared to only 23% in the same quarter last
year.
The improvement is directly related to an increase in the volume of Sentinel
units produced during the quarter ended June 30, 2005.
Selling,
general and administrative expenses
for the quarter ended June 30, 2005 increased $415,696 or 48% from the same
quarter of the previous year. This is primarily related to costs associated
with
our marketing efforts related to the Sentinel Product.
Depreciation
and amortization for
the
quarter ended June 30, 2005 and 2004 was $7,560 and $33,360,
respectively.
Nine
Months Ended June 30, 2005 Compared to the Nine Months Ended June 30,
2004
Our
net
sales generated from the Cash Security business were $16,568,457 for the
nine
months ended June 30, 2005, an increase of $10,393,636 from net sales of
$6,174,821 in the same period of the prior year. The improvement is directly
related to the increase in the volume of TACC units and Sentinel units sold
during the nine months ended June 30, 2005 compared with the nine months
ended
June 30, 2004. We sold 1,467 Sentinel units during the first nine months
of 2005
compared with only 144 units sold during the same period last year.
Gross
profit on
product sales for the nine months ended June 30, 2005 increased $5,587,185
compared with the same period of the prior year. The increase in the overall
gross profit is primarily a result of increased sales of the Sentinel units
during the nine months ended June 30, 2005 compared with the nine months
ended
June 30, 2004.
Selling,
general and administrative expenses
for the nine months ended June 30, 2005 increased $415,696 from the same
period
of the previous year. This is primarily related to costs associated with
our
marketing efforts for the Sentinel Product..
Depreciation
and amortization for
the
nine months ended June 30, 2005 and 2004 were $22,308 and $14,748,
respectively.
The
results of operations of the Cash Security Business 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
sale
of the Cash Security Business is expected to be consummated after the fiscal
year ended September 30, 2005.
Liquidity
and Capital Resources
General
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.
Cash
used
by continuing operations was $(930,281) for the nine months ended June 30,
2005
compared to cash used in continuing operations of $(1,173,536) for the nine
months ended June 30, 2004. Cash used in continuing operations is primarily
attributable to corporate overhead costs.
Cash
used
by continuing investing activities was $(11,566) for the nine months ended
June
30, 2005 compared to cash provided by continuing investing activities of
$2,451,444 for same period of 2004. The decrease is primarily related to
the
gain from sale of securities of $2,451,444 during the nine months ended June
30,
2004.
Cash
provided by continuing financing activities was $1,444,433 for the nine months
ended June 30, 2005 compared with cash used of ($320,765) for the same period
last year. The increase primarily related to the Additional
Financing.
Cash
provided by discontinued operations was $2,571,495 for the nine months ended
June 30, 2005 compared with cash used of ($1,406,817) for the same period
last
year. The is primarily related to the increase sales and collection of the
receivables in both the ATM business and the Cash Security
business.
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.
As
of
June 30, 2005, we had approximately $8,932,988 face value of outstanding
debt:
$3,720,152 after debt discount of $4,672,836. Of the $8,392,988 total
outstanding debt at June 30, 2005, $6,292,988 represents the outstanding
balance
of the Financing, and $600,000 and $1,500,000 represent outstanding balances
of
two term notes in connection with the Additional Financing.
As
of
August 19, 2005, we also have $1,250,000 available for borrowing under the
Purchase Order Note through November 26, 2005. 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.
This,
coupled with increasing debt, has continued to negatively impact our financial
condition. If the operating conditions do not improve, there can be no assurance
we will continue operations. 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
Notes
and 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 1,251,000 SHARES ISSUED TO LAURUS IN CONNECTION WITH
ADDITIONAL FINANCING, 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.
Claims
and Litigation
As
discussed in our ‘03/’04 Annual Report, Corporate Safe Specialists, Inc. (“CSS”)
filed a lawsuit against Tidel Technologies, Inc. and Tidel Engineering, L.P.
Subsequently, Tidel Technologies, Inc. was released from this lawsuit, but
Tidel
Engineering, L.P. remains a defendant. We continue to vigorously defend this
litigation as well as vigorously pursue the declaratory judgment action pending
in the Eastern District of Texas.
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,
net sales 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 June 30,
2005:
PAYMENTS
DUE BY FISCAL YEAR
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
Thereafter
|
|
Long-term
debt, including current portion
|
|
$
|
225,000
|
|
$
|
3,000,000
|
|
$
|
3,667,988
|
|
$
|
1,500,000
|
|
|
—
|
|
|
—
|
|
Risk
Factors
Please
see “Risk Factors” contained in Item 7A of our ‘03/’04 Annual Report.
Forward-Looking
Statements
In
addition to historical information, Management’s Discussion and Analysis of
Financial Condition and Results of Operations include 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
would
likely adversely affect our
operations;
|
|
•
|
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;
|
|
•
|
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;
|
|
•
|
our
ability to consummate the asset sale of the ATM Business; and
|
|
•
|
our
ability to consummate a sale of the Cash Security Business.
|
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
heading “Cautionary Statements” in our ‘03/’04 Annual Report.
At
June
30, 2005, 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
in
November 2003, and the associated overall reduction in outstanding debt
balances, our exposure to interest rate risks has significantly decreased.
If
market interest rates had increased up to 1% in the first nine 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 June 30, 2005.
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. Other than the establishment of new guidelines for completion
of periodic accounting and reporting tasks discussed above, there were no
changes in our internal control over financial reporting that occurred in
the
quarter ending June 30, 2005 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.
Subsequently
we have 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 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.
On
June
22, 2005, we entered into two agreements with Mr. Hudson. The first was a
new
employment agreement that terminated his prior employment agreement and provided
for his continued employment with the Company until the earlier of December
31,
2005 or the closing of the transactions contemplated by the Asset Purchase
Agreement. Under this new employment agreement, Mr. Hudson’s duties and
compensation will continue as under his prior employment agreement.
Mr.
Hudson and the Company also entered into the Settlement Agreement, which
provided for the settlement of outstanding amounts owed by Mr. Hudson to
the
Company. In satisfaction of Mr. Hudson’s obligations to the Company, he agreed
to (i) the delivery of certain shares of the Company’s common stock held by him
for cancellation by the Company; (ii) cancellation by the Company of the
majority of the options to purchase common stock held by him; (iii) application
of certain bonuses (otherwise payable to him) to the payment of his outstanding
obligations to the Company; and (iv) release by Mr. Hudson of any and all
claims
against the Company. Mr. Hudson also resigned from the Board of Directors
of the
Company. For further discussion, see Part III, item 11 in the ‘30/04
10K.
*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.
|
32