Secure Alliance Holdings Corporation 10-K 9-30-2006
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
T |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended September 30, 2006
*
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the transition period
from
to
Commission
file Number 000-17288
SECURE
ALLIANCE HOLDINGS CORPORATION
(formerly
known as Tidel Technologies, Inc.)
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Delaware
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75-2193593
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification No.)
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2900
Wilcrest Drive, Suite 105
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77042
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Houston,
Texas
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(Zip
Code)
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(Address
of principal executive offices)
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Registrant’s
telephone number, including area code (713) 783-8200
Securities
Registered Pursuant to Section 12(b) of the Act: None
Securities
Registered Pursuant to Section 12(g) of the Act:
common
stock, par value $.01 per share
(Title
of Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes * No T
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes * No T
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirement
for
the past 90 days. Yes T
No *
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this Chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. *
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule
12b-2 of the Act). Yes *
No T
The
aggregate market value of the 18,793,605 shares of common stock held by
non-affiliates of the registrant based on the closing sale price on December
15,
2006 of $0.44 was $8,269,186. The number of shares of common stock outstanding
as of the close of business on December 15, 2006 was 19,426,210.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
SECURE
ALLIANCE HOLDINGS CORPORATION
TABLE
OF CONTENTS
ANNUAL
REPORT ON FORM 10-K
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PAGE
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PART
I
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3
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7
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8
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8
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9
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PART
II
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10
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12
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13
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27
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28
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28
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28
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PART
III
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30
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31
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35
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36
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36
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PART
IV
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38
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41
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67
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69
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PART
I
(a) |
General
Development of
Business
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Secure
Alliance Holdings Corporation (formerly known as Tidel Technologies, Inc. and
hereinafter referred to as the “Company,” “we,” “us,” or “our”) is a Delaware
corporation which, through its wholly owned subsidiaries, developed,
manufactured, sold and supported automated teller machine (“ATM”) products and
electronic cash security systems, consisting of the Timed Access Cash Controller
(“TACC”) products and the Sentinel products (together, the “Cash Security”
products).
We
completed the sale of our ATM business on January 3, 2006 and the sale of our
Cash Security business on October 2, 2006 as described more fully below. On
October 2, 2006, we became a shell public company with approximately $12.9
million in cash, cash equivalents and marketable securities held-to-maturity;
and we have had substantially no operations since that time.
On
September 25, 2006, the holders of a majority of shares of our outstanding
stock
also approved a proposal that the Company amend its certificate of incorporation
and change its name from "Tidel Technologies, Inc." to "Secure Alliance Holdings
Corporation." On October 3, 2006, the Company filed an amendment to its
certificate of incorporation with the office of the Secretary of State of
Delaware to effect this change of name. In addition, the Company's subsidiaries
effected the following name changes at or about the same time: Tidel
Engineering, L.P. changed its name to Secure Alliance, L.P., Tidel Cash Systems,
Inc. changed its name to Secure Alliance Cash Systems, Inc. and Tidel Services,
Inc. changed its name to Secure Alliance Services, Inc.
The
Company was primarily engaged in the development, manufacturing, sale and
support of ATM products and the Cash Security products which were designed
for
the management of cash within various specialty retail markets.
Sale
of Cash Security Business
On
January 12, 2006, we entered into an asset purchase agreement with Sentinel
Operating, L.P., a purchaser led by a management buyout group that included
our
former director and Interim Chief Executive Officer, Mark K. Levenick, and
our
former director, Raymond P. Landry, pursuant to which we agreed to sell (the
"Cash Security Business Sale") our electronic cash security business, consisting
of (a) timed access cash controllers, (b) the Sentinel products, (c) the
servicing, maintenance and repair of the timed access cash controllers or
Sentinel products and (d) all other assets and business operations associated
with the foregoing. We and Sentinel Operating, L.P. amended and restated the
asset purchase agreement as of June 9, 2006 (as amended, the “Cash Security
Asset Purchase Agreement”). The two members of our Board who were unaffiliated
with the management buyout of the Cash Security business negotiated the terms
of
the Cash Security Asset Purchase Agreement with the management buyout
group.
The
independent members of our Board received an opinion from an investment advisory
firm, Capitalink, L.C., as to the fairness of the Cash Security Business Sale
from a financial point of view to our unaffiliated shareholders. On June 9,
2006, our Board, with Messrs. Levenick and Landry abstaining, voted to approve
the Cash Security Asset Purchase Agreement and the Cash Security Business
Sale.
On
September 25, 2006, the holders of a majority of shares of our outstanding
common stock approved the Cash Security Business Sale. The Cash Security Asset
Purchase Agreement provided for a cash purchase price of $15,500,000, less
$100,000 as consideration for Sentinel Operating, L.P. assuming certain
potential liability in connection with ongoing litigation, and less a working
capital deficit adjustment of $1,629,968, resulting in a net purchase price
of
$13,770,032. In addition, Sentinel Operating, L.P. paid a cash adjustment of
$2,458,718 to the Company at closing. The Cash Security Business Sale was
completed on October 2, 2006.
Sale
of ATM Business
On
February 19, 2005, the Company and its wholly-owned subsidiary, Secure Alliance,
L.P. (formerly known as Tidel Engineering, L.P.), entered into an asset purchase
agreement (the “NCR Asset Purchase Agreement”) with NCR EasyPoint LLC f/k/a NCR
Texas LLC (“NCR EasyPoint”), a wholly owned subsidiary of NCR Corporation, for
the sale of our ATM Business (the “ATM Business Sale”).
On
December 28, 2005, the holders of a majority of our shares of outstanding common
stock approved the NCR Asset Purchase Agreement.
On
January 3, 2006, we completed the ATM Business Sale. The ATM Business Sale
purchase price was approximately $10.4 million of which $8.2 million was paid
to
Laurus into a collateral account to be held by Laurus as collateral for the
satisfaction of all monetary obligations payable to Laurus, $0.5 million was
paid into an escrow account pending a post-closing net asset value adjustment,
and the remaining $1.7 million was paid to the Company to be used for necessary
working capital. This transaction resulted in a book gain of approximately
$3.5
million.
(b) |
Financial
Information about Operating
Segments
|
We
conducted business within one operating segment, principally in the United
States. Since October 3, 2006, we have had substantially no
operations.
(c) |
Description
of Business
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We
developed, manufactured, sold and supported ATM and Cash Security products.
Sales of ATM and Cash Security products were generally made on a wholesale
basis
to more than 200 distributors and manufacturers’ representatives. Sentinel
products were often sold directly to end-users as well as distributors. We
completed the sale of our ATM business on January 3, 2006 and the sale of our
Cash Security business on October 2, 2006.
The
ATM
products were low-cost, cash-dispensing automated teller machines that were
primarily designed for the off-premise, or non-bank, markets. We offered 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 were essentially stand-alone safes that dispensed cash to an operator
in preset amounts. As a deterrent to robbers, $50 or less in cash was kept
in a
register at any given time. When a customer required change in denominations
of
$5, $10 and $20 bills, the clerk pressed a button on the TACC for the
appropriate denomination and the cash was dispensed in a plastic tube. The
time
and frequency 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
placed individual bills back into the plastic tubes and loads them into the
TACC
for safe storage. Other available features included 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 had all the
functionality of the TACC, but had also been designed to also reduce the risk
of
internal theft and increase in-store management efficiencies through its
state-of-the-art integration with a store’s point-of-sale (“POS”) and accounting
systems. Our engineering, sales and service departments worked closely with
distributors and their customers to continually analyze and fulfill their needs,
enhance existing products and develop new products. Sales of our ATM and Cash
Security products accounted for approximately 92%, 86% and 86% of revenue in
the
fiscal years ended September 30, 2006, 2005 and 2004, respectively.
The
principal materials and components used by us were pre-fabricated steel
cabinets, custom molded plastic and various electronic parts and components,
all
of which were readily available. We assembled our products by configuring parts
and components received from a number of major suppliers with our proprietary
hardware and software.
We
maintained patents and trademarks on processes and brands associated with our
product lines; however, we do not believe that patents and trademarks, in
general, serve as barriers to entry into the ATM or the cash security system
industry. Our overall success depended upon proprietary technology and other
intellectual property rights.
Our
operating results and the amount and timing of revenue were affected by numerous
factors including production schedules, customer priorities, sales volume and
sales mix. We ordinarily filled and shipped customer orders within 45 days
of
receipt; therefore, we historically had no significant backlog.
After
several months of unsuccessful efforts to remedy its financial difficulties,
our
former largest customer, JRA 222, Inc., d/b/a Credit Card Center (“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 $27.1 million, which were secured by a security interest in CCC’s
accounts receivable, inventories and transaction income.
In
September 2001, we recovered inventory from CCC in the approximate amount of
$3.0 million. In October 2005, a court order for summary judgment was entered,
which confirmed that Fleet Bank had a first lien on all of the assets of CCC
followed by the liens of Tidel and NCR, respectively. In December 2005, we
entered into a settlement agreement in the matter of Fleet v. Tidel Engineering
L.P., et al, whereby we received a cash payment of $430,000 in exchange for
an
assignment of our claims to NCR Corporation and a waiver of our rights to any
future payments from such claims.
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 bore interest at a rate of prime plus
2%
and were convertible into our common stock at a conversion price of $0.40 per
share. In addition, Laurus received warrants to purchase 4,250,000 shares of
our
common stock at an exercise price of $0.40 per share. The proceeds of the
Financing were allocated to the notes and the related warrants based on the
relative fair value of the notes and the warrants, with the value of the
warrants resulting in a discount against the notes. In addition, the conversion
terms of the notes resulted in a beneficial conversion feature, further
discounting the carrying value of the notes. As a result, we recorded additional
interest charges totaling $3,092,911 during the fiscal year ended September
30,
2006 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
to
Laurus was repaid in full.
In
connection with the closing of the Financing, all outstanding 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
Form 10-K for the fiscal years ended September 30, 2003 and 2004.
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’ 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.
In
November, 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 bore interest at a
rate
of 14% and was 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 bore interest at a rate of 10% and was 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, Secure Alliance, L.P.,
in
the amount of $1,250,000, which was a revolving working capital facility for
the
purpose of financing purchase orders of our subsidiary, Secure Alliance, L.P.,
(the “Purchase Order Note”), which bore interest at a rate of 14% and was
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 then 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 of our common stock on November 26, 2004. We also increased
the
principal balance of the original note by $292,987 for unpaid accrued interest
as of August 1, 2004 which included $226,312 of interest at the default rate
of
18%. 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. 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
were
secured by all of our assets and were 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’ $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. We
indefeasibly repaid all indebtedness to Laurus, excluding the Reorganization
Fee
(defined below), on January 13, 2006.
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
covered all of the periods during which we had been a delinquent filer, together
with us filing all Forms 10-Q which were 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 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.
Agreements
with Laurus
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. Such
Reorganization Fee was secured by all of our assets, and was guaranteed by
our
subsidiaries. The Asset Sales Agreement provided, among other things, that
(i)
the net proceeds of the ATM Business Sale 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 would 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 would be applied to the Reorganization Fee. Under this
formula, the existing shareholders could receive less than 45% of the proceeds
of any sale of our assets or equity interests, after payment of the Additional
Financing and Reorganization Fee. The Reorganization Fee was to 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 had 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 were obliged to 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.
We
and
Laurus entered a Stock Redemption Agreement on January 12, 2006 and as
subsequently amended (as amended, the “Stock Redemption Agreement”). Pursuant to
the terms of the Stock Redemption Agreement: (i) we agreed, among other things,
to repurchase from Laurus, upon the closing of the Cash Security Business Sale,
all shares of our common stock held by Laurus, and (ii) Laurus agreed to the
cancellation as of the closing date of the Cash Security Business Sale of
warrants it held to purchase 4,750,000 shares of our common stock at an exercise
price of $.30 per share, and
We
and
Laurus also entered into an Exercise and Conversion Agreement on January 12,
2006 and as subsequently amended (as amended, the “Exercise and Conversion
Agreement”). The Exercise and Conversion Agreement provided, among other things,
for Laurus to convert, on or prior to the record date set with respect to the
special meeting of our stockholders to be held for the purpose of voting on
the
Cash Security Business Sale, $5,400,000 of indebtedness outstanding under our
Convertible Note dated November 25, 2003 in the original principal amount of
$6,450,000 together with an additional $292,987 added thereto on November 26,
2004, made by the Company to Laurus into 18,000,000 shares of our common stock.
On
June
9, 2006, we and Laurus entered into an agreement (the “Laurus Termination
Agreement”) which, among other things, provided for the payment of a sale fee of
$8,508,963 to Laurus (the “Sale Fee”) in full satisfaction of all amounts
payable to Laurus under the Asset Sales Agreement, including fees payable in
respect of the sale of our ATM business and the Cash Security Business Sale
Upon
closing of the Cash Security Business Sale, we paid the Sale Fee to Laurus.
The
Laurus Termination Agreement further provided that, upon payment of the Sale
Fee
and performance by the Company of its obligations owing to Laurus, including
the
repurchase
from Laurus, upon the closing of the Cash Security Business Sale, of all shares
of our common stock held by Laurus:
(i) all
warrants to purchase common stock of the Company held by Laurus would terminate
and be of no further force or effect; and (ii) thereafter, neither the Company
nor any of its subsidiaries would have any further obligation to Laurus.
Further, each of the Company and Laurus granted each other and their respective
affiliates and subsidiaries reciprocal releases from and against any claims
and
causes of action that may have existed.
Customers
We
currently have no operations or customers. Only one customer accounted for
more
than 10% of net sales for the fiscal years ended 2006, 2005 and 2003. No one
customer accounted for more than 10% of net sales for the fiscal year ended
2004.
Our
compliance with federal, state and local environmental protection laws during
2006, 2005 and 2004 had no material effect upon our capital expenditures,
earnings or competitive position. As of September 30, 2006, it was not expected
that compliance with such laws would have a material effect upon our capital
expenditures, earnings or the competitive position in future years.
Employees
Following
the closing of the Cash Security Asset Sale on October 2, 2006, we have no
employees. At September 30, 2006, we had 57 employees, which consisted of
employees of the Cash Security business. At September 30, 2005 and 2004, we
employed approximately 107 people. On January 3, 2006, 56 employees associated
with our ATM Business became employees of NCR EasyPoint following the closing
of
the ATM Business Sale.
Company
Information
In
February 2006, we did not renew the lease of our premises located in Houston,
Texas, and we closed our corporate office located in Houston, Texas on March
31,
2006.
The
manufacturing, engineering and warehouse operations of the ATM Business were
located in two nearby facilities occupying approximately 110,000 square feet
in
Carrollton, Texas, under leases expiring in February 2006 with an option to
extend for three years. This lease was assumed by NCR EasyPoint pursuant to
the
NCR Asset Purchase Agreement, discussed further in Part I, Item 1 of this Annual
Report on Form 10-K. After the ATM Business Sale, the Cash Security Business
was
relocated to a warehouse facility occupying approximately 50,000 square feet
under a new lease. The address of the facility is 2025 W. Beltline Road, Suite
114 Carrollton, Texas 75006.
(e) |
Financial
Information about Geographic
Areas
|
The
vast
majority of our sales in fiscal 2006 were to customers within the United States.
Sales to customers outside the United States, as a percentage of total revenues,
were approximately 7%, 14% and 16%, in the fiscal years ended September 30,
2006, 2005 and 2004, respectively.
Substantially
all of our assets were located within the United States during fiscal years
2006, 2005 and 2004.
There
are
several risks inherent in our business including, but not limited to, the
following:
Following
the Cash Security Business Sale, the Company has no
operations.
Following
the consummation of the ATM Business Sale on January 3, 2006 and the closing
of
the Cash Security Business Sale on October 2, 2006, we have substantially no
operations and no employees.
We
may be unable to sell debt or equity securities in the event we need additional
funds for operations.
We
may
need to sell equity or debt securities in the future to provide working capital
for our operations or to provide funds in the event of future operating losses.
We cannot predict whether we will be successful in raising additional funds.
We
have no commitments, agreements or understandings regarding additional
financings at this time, and we may be unable to obtain additional financing
on
satisfactory terms or at all. If we were to raise additional funds through
the
issuance of equity or convertible debt securities, our current shareholders
could be substantially diluted and those additional securities could have
preferences and privileges that current shareholders do not have.
We
have limited management and other resources.
Our
ability to manage any future operations effectively will require us to hire
new
employees, to integrate new management and employees into any future operations,
financial and management systems, controls and facilities. Our failure to handle
the issues we face effectively, including any failure to integrate new
management controls, systems and procedures, could materially adversely affect
our company, results of operations and financial condition.
In
February 2006, we did not renew the lease of our premises located in Houston,
Texas, and we closed our corporate office located in Houston, Texas on March
31,
2006.
The
manufacturing, engineering and warehouse operations of the ATM Business were
located in two facilities occupying approximately 110,000 square feet in
Carrollton, Texas, under leases expiring in February 2006 with an option to
extend for three years. This lease was assumed by NCR EasyPoint pursuant to
the
NCR Asset Purchase Agreement, discussed further in Part I, Item 1 of this Annual
Report. After the ATM Business Sale, the Cash Security business was relocated
to
a warehouse facility occupying approximately 50,000 square feet under a new
lease. The address of the facility is 2025 W. Beltline Road, Suite 114
Carrollton, Texas 75006.
At
September 30, 2006, 2005 and 2004, we owned tangible property and equipment
with
a cost basis of approximately $1.4 million, $5.5 million and $5.4 million,
respectively, which included assets held for sale from discontinued
operations.
ITEM
3.
|
LEGAL
PROCEEDINGS
|
CCC
Bankruptcy
In
September 2001, we recovered inventory from CCC in the approximate amount of
$3.0 million; however, in view of the uncertainty of the ultimate outcome of
the
CCC bankruptcy proceedings, we increased our reserves to $24.1 million, which
represented the total remaining balances of the trade accounts and note
receivable due from CCC. In addition, we provided additional reserves of
$500,000 due to uncertainties regarding the full recovery of our escrow
deposits. At September 30, 2003, our remaining receivable from the escrow
deposits was reduced to $250,000. In October 2005, an order for summary judgment
was entered by the court, which confirmed that Fleet Bank had a first lien
on
all of the assets of CCC followed by the liens of Tidel and NCR Corporation
,
respectively. In December 2005, we entered into a settlement agreement in the
matter of Fleet v. Tidel Engineering L.P., et al, whereby we received a cash
payment of $430,000 in exchange for an assignment of our claims to NCR
Corporation and a waiver of our rights to any future payments from such
claims.
CSS
Litigation
On
June
9, 2005, Corporate Safe Specialists, Inc. (“CSS”) filed a lawsuit against Secure
Alliance Holdings Corporation and Secure Alliance, 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 Secure Alliance, L.P. infringes on 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. Secure Alliance Holdings Corporation
was released from this lawsuit, but Secure Alliance, L.P. remained a defendant.
Subsequently
we filed a motion to dismiss the case CSS filed in Illinois, and Secure
Alliance, L.P. filed a motion to transfer the Illinois case to the Eastern
District of Texas. On August 15, 2005, The Court ordered the transfer of this
case to the Northern District of Texas. We also filed a declaratory judgment
action pending in the Eastern District of Texas. In that action, we are asking
the Eastern District of Texas to find, among other things that we have not
infringed on CSS's `281 patent. Both companies have also requested that an
injunction be issued by the Eastern District of Texas against CSS for
intentional interference with the sale or bid process for our cash security
business. We have vigorously pursued this declaratory judgment
action.
We
answered the suit denying that the Company's Sentinel products in any way
infringe upon the independent claims of CSS’s patent. We also filed a
counterclaim against CSS wherein the Company seeks to recover damages resulting
from CSS’s violation of a confidential agreement signed by CSS and the Company
and from CSS's intentional interference in the sale of the Sentinel product
line
and related assets. Further, we filed a Motion for Partial Summary Judgment
("Summary Judgment Motion") and a Motion for Sanctions Pursuant to Rule 11
("Rule 11 Motion") whereby the Company alleges that CSS and/or its counsel
failed to perform the required investigation of the facts before bringing suit.
We requested damages from both CSS and its counsel for failure to properly
investigate the validity of the claims by CSS.
Prior
to
the date by which CSS was to file its responses to the Company's Summary
Judgment Motion and Rule 11 Motion, CSS instead filed a Motion for Entry of
Judgment ("CSS's Motion") claiming that we have destroyed evidence and/or have
obstructed the discovery process. We are in the process of preparing a response
to CSS’s Motion by which response the Company vigorously disputes CSS's Motion
and, as with all claims asserted by CSS, the Company intends to vigorously
defend all of CSS's claims.
On
May
16, 2006, the court issued an order directing the parties to submit a joint
claims construction chart, after which the court would conduct a Markman
hearing. The purpose of a Markman hearing is to narrow the patent claims issues
to be submitted to the jury; however, CSS failed to do so. Consequently, the
Court ordered a telephone hearing to address the then-pending Judgment Motion
for additional time within which to attend to the claims construction issues.
During the hearing, the Court admonished CSS’s counsel for failing to comply
with the order, clarified for CSS’s counsel what the Court expected and directed
the parties to file the joint claims construction report on or before August
30,
2006. The court also directed CSS’s counsel to have CSS undertake a meaningful
inspection of the Sentinel safe that had been made available by us, which
invitation CSS had not yet acted upon.
As
part
of the Cash Security Business Sale, the buyer of the Cash Security business,
Sentinel Operating, L.P., agreed to undertake and have the sole right to direct
on behalf of itself and us, the defense of the CSS litigation, with counsel
of
its choice, provided that in the event we incur any adverse consequences in
connection with the litigation subsequent to the Cash Security Business Sale,
then Sentinel Operating, L.P. will indemnify us from and against the entirety
of
any such adverse consequences to the extent they are incurred as a result of
the
breach of the Cash Security Asset Purchase Agreement or our negligent action
or
inaction.
Employment
Suit
On
April
12, 2006, twenty-seven of our former employees filed suit in state district
court alleging that they did not receive vacation benefits and/or severance
benefits from us which they were owed upon transfer of their employment to
NCR
Corporation. This case was moved to the Federal court in Dallas County. We
settled this matter out-of-court and the case was dismissed with prejudice
on
June 27, 2006.
ITEM
4
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
On
September 25, 2006, at a special meeting of the Company’s stockholder’s duly
called and held, the holders of 27,682,767, or approximately 72%, of the shares
of our outstanding common stock approved the proposal to consummate Cash
Security Business Sale. The holders of 1,260,933 shares voted against this
proposal and the holders of 40,036 shares abstained from voting on this
proposal. There were 6,919,551 non-votes on this proposal.
In
addition, at this special meeting of the Company’s stockholders on September 25,
2006, the holders of 34,654,340, or approximately 90%, of the shares of our
outstanding common stock approved the proposal to file a certificate of
amendment to our certificate of incorporation to change our name from “Tidel
Technologies, Inc.” to “Secure Alliance Holdings Corporation. The holders of
1,217,514 shares voted against this proposal and the holders of 31,433 shares
abstained from voting on this proposal.
PART
II
ITEM
5.
|
MARKET
FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
Our
common stock is currently traded over-the-counter on the Pink Sheets under
the
symbol “ATMS.PK.” From March 26, 2002 through March 26, 2003, our common stock
traded on the NASDAQ SmallCap Market. From August 16, 2000 through March 25,
2002, our common stock traded on the NASDAQ National Market. The following
table
sets forth the quarterly high and low bid information for our common stock
for
the three-year period ended September 30, 2006. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may
not
necessarily represent actual transactions.
|
|
2006
|
|
2005
|
|
2004
|
|
Fiscal
Quarter Ended:
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
December
31,
|
|
$
|
.40
|
|
$
|
.22
|
|
$
|
.72
|
|
$
|
.45
|
|
$
|
.78
|
|
$
|
.33
|
|
March
31,
|
|
|
.37
|
|
|
.23
|
|
|
.47
|
|
|
.14
|
|
|
.75
|
|
|
.47
|
|
June
30,
|
|
|
.35
|
|
|
.27
|
|
|
.36
|
|
|
.12
|
|
|
.96
|
|
|
.65
|
|
September
30,
|
|
|
.42
|
|
|
.31
|
|
|
.50
|
|
|
.27
|
|
|
.80
|
|
|
.59
|
|
Fiscal
Year
|
|
|
.42
|
|
|
.22
|
|
|
.72
|
|
|
.12
|
|
|
.96
|
|
|
.33
|
|
On
February 20, 2003, we had an oral hearing before the NASDAQ Listing
Qualifications Panel to review these three compliance deficiencies. On March
25,
2003, we were notified by the NASDAQ Listing Qualifications Panel that our
common stock would be delisted from the NASDAQ SmallCap Market effective March
26, 2003. Effective at the opening of business on March 26, 2003, our common
stock began trading over-the-counter on the Pink Sheets under the ticker symbol
“ATMS.PK”.
As
of
November 30, 2006, there were approximately 991 holders of record of our common
stock.
We
have
not paid any dividends in the past, and do not anticipate paying dividends
in
the foreseeable future. From September 30, 2002 until November 25, 2003, our
wholly-owned subsidiary, Secure Alliance, L.P., was restricted from paying
dividends to us pursuant to the subsidiary’s revolving credit agreement with a
bank in effect at that time. We were restricted from paying dividends pursuant
to financing arrangements with Laurus which were terminated on October 2, 2006.
For additional information about our arrangements with Laurus, see Part II,
Item
7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of this Annual Report on Form 10-K.
(d) |
Securities
Authorized for Issuance under Equity Compensation
Plans
|
We
adopted the Tidel Technologies, Inc. 1997 Long-Term Incentive Plan (the “1997
Plan”) effective July 15, 1997. The 1997 Plan permits the grant of non-qualified
stock options, incentive stock options, stock appreciation rights, restricted
stock and other stock-based awards to our employees or directors or our
subsidiaries. Under the 1997 Plan, up to 2,000,000 shares of common stock may
be
awarded. The number of shares issued or reserved pursuant to the 1997 Plan
(or
pursuant to outstanding awards) are subject to adjustment on account of mergers,
consolidations, reorganization, stock splits, stock dividends and other dilutive
changes in the common stock. Shares of common stock covered by awards that
expire, terminate, or lapse, will again be available for grant under the 1997
Plan. As a result of the termination of the employment of all our then employees
in connection with the Cash Security Business Sale, all stock option grants
expired if they had not been exercised on or before December 29, 2006.
The
following table provides information regarding common stock authorized for
issuance under our compensation plans as of September 30, 2006.
Equity
Compensation Plan Information
As
of September 30, 2006
Plan
Category
|
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
(a)
|
|
Weighted-average
exercise price of outstanding options, warrants and
rights
(b)
|
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a)
(c)
|
|
Equity
compensation plans approved by security holders
|
|
|
648,150
|
|
$
|
1.24
|
|
|
1,310,800
|
|
Equity
compensation plans not approved by security holders
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
|
648,150
|
|
$
|
1.24
|
|
|
1,310,800
|
|
(e) |
Recent
Sales of Unregistered
Securities
|
At
September 30, 2006, we had outstanding warrants to purchase 5,790,000 shares
of
common stock that expire at various dates through November 2010. The warrants
had exercise prices ranging from $0.30 to $0.68 per share and, if exercised,
would generate proceeds to us of approximately $1,990,500. On October 2, 2006,
pursuant to the terms of the Stock Redemption Agreement we cancelled warrants
issued in favor of Laurus to purchase 4,750,000 shares of our common stock
at an
exercise price of $.30 per share.
The
following sales of unregistered securities were sold by the Company during
the
2003 and 2005 fiscal years in reliance on the exemptions from registration
contained in Section 4(2) and Regulation D promulgated under the Securities
Act
of 1933:
In
September 2003, we issued a shareholder, Alliance Developments, Ltd.
(“Alliance”), an unsecured, short-term promissory note dated September 26, 2003
in the principal amount of $300,000 due December 24, 2003; plus accrued interest
at 9% per annum, payable at maturity. In consideration for the original loan,
Alliance received three-year warrants to purchase 100,000 shares of common
stock
at $0.45 per share. The note was renewed on December 24, 2003 until March 24,
2004. In consideration for the renewal, Alliance received additional three-year
warrants to purchase 50,000 shares of common stock at $0.45 per share. The
proceeds of the Alliance note were allocated to the note and the related
warrants based on the relative fair value of the note and the warrants, with
the
value of the warrants resulting in a discount against the note. As a result,
we
recorded additional interest charges totaling $20,572 in fiscal 2003 related
to
the discounts. The note was paid in full on March 5, 2004.
In
November 2003, we issued warrants in connection with the Laurus Financing
discussed further in Part II, Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operation” of this Annual Report. The
financing comprised of a three-year convertible note in the amount of $6,450,000
and a one-year convertible note in the amount of $400,000, both of which bear
interest at a rate of prime plus 2% and were convertible into our common stock
at a conversion price of $0.40 per share. In addition, Laurus received warrants
to purchase 4,250,000 shares of our common stock at an exercise price of $0.40
per share. The proceeds of the Financing were allocated to the notes and the
related warrants based on the relative fair value of the notes and the warrants,
with the value of the warrants resulting in a discount against the notes. As
a
result, we recorded additional interest charges totaling $7,437,195 over the
term of the notes related to these discounts. Laurus was also granted
registration rights in connection with the shares of common stock issuable
in
connection with the Financing. Proceeds from the Financing in the amount of
$6,000,000 were used to fully retire the $18,000,000 in Convertible Debentures.
See further discussion in Note 10, “Laurus Financing” in Part IV, “Notes to
Consolidated Financial Statements” of this Annual Report on Form
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’ 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. As a result of the reduction of the
conversion price, we recorded additional interest charges totaling $1,905,488
over the terms of the notes related to the discounts.
In
November of 2004, we issued additional securities in connection with the
Additional Financing with Laurus, discussed further in Part II, Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operation” of this Form 10-K, which is comprised of (i) a three-year convertible
note issued to Laurus in the amount of $1,500,000, which bore interest at a
rate
of 14% and is convertible into our common stock at a conversion price of $3.00
per share (the “$1,500,000 Note”), (ii) a one-year convertible in the amount of
$600,000 which bore 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, Secure Alliance, L.P., in the
amount of $1,250,000, which was a revolving working capital facility for the
purpose of financing purchase orders of our subsidiary, Secure Alliance, L.P.,
(the “Purchase Order Note”), which bore interest at a rate of 14% and is
convertible into our common stock at a price of $3.00 per share and (iv) our
issuance to Laurus of 1,251,000 shares of common stock, or approximately 7%
of
the total shares outstanding, (the “2003 Fee Shares”) in satisfaction of fees
totaling $375,300 incurred in connection with the convertible term notes issued
in the Financing discussed above. We recorded additional interest expense
totaling $638,010 related to the 2003 Fee Shares based on the fair value of
the
stock price on the date issued.
In
addition, Laurus received warrants to purchase 500,000 shares of our common
stock at an exercise price of $0.30 per share. The proceeds of the Additional
Financing were allocated to the notes based on the relative fair value of the
notes and the warrants, with the value of the warrants resulting in a discount
against the notes. In addition, the conversion terms of the $600,000 Note
resulted in a beneficial conversion feature, further discounting the carrying
value of the notes. As a result, we recorded 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 were secured by all of our assets and
were
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’ $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.
As
previously described above, on October 2, 2006, pursuant to the terms of the
Stock Redemption Agreement (i)
we
agreed, among other things, to repurchase from Laurus, upon the closing of
the
Cash Security Business Sale, all shares of our common stock held by Laurus,
and
(ii) Laurus agreed to the cancellation as of the closing date of the Cash
Security Business Sale of warrants it held to purchase 4,750,000 shares of
our
common stock at an exercise price of $.30 per share
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
The
selected financial data presented below is derived from our Consolidated
Financial Statements. This data should be read in conjunction with the
Consolidated Financial Statements and its notes and with Part II, Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of this Annual Report on Form 10-K.
The
Consolidated Financial Statements for 2002 were audited by KPMG LLP. The
Consolidated Financial Statements for 2003 through 2006 were audited by Hein
& Associates LLP.
|
|
Years
Ended September 30,
|
|
SELECTED
STATEMENT OF OPERATIONS DATA:(1)
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Net
income (loss) (2)
|
|
$
|
4,862
|
|
$
|
(3,286
|
)
|
$
|
11,318
|
|
$
|
(9,237
|
)
|
$
|
(14,078
|
)
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.15
|
|
|
(0.16
|
)
|
|
0.65
|
|
|
(0.53
|
)
|
|
(0.81
|
)
|
Diluted
|
|
|
0.15
|
|
|
(0.16
|
)
|
|
0.37
|
|
|
(0.53
|
)
|
|
(0.81
|
)
|
|
|
As
of September 30,
|
|
SELECTED
BALANCE SHEET DATA: (1)
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Current
assets
|
|
$
|
19,081
|
|
$
|
16,908
|
|
$
|
10,129
|
|
$
|
11,773
|
|
$
|
17,263
|
|
Current
liabilities
|
|
|
11,408
|
|
|
13,177
|
|
|
8,190
|
|
|
32,109
|
|
|
28,487
|
|
Working
capital (deficit)
|
|
|
7,673
|
|
|
3,731
|
|
|
1,939
|
|
|
(20,336
|
)
|
|
(11,224
|
)
|
Total
assets
|
|
|
19,085
|
|
|
17,537
|
|
|
10,778
|
|
|
14,430
|
|
|
19,907
|
|
Total
short-term notes payable and long-term debt, net of debt
discount
|
|
|
—
|
|
|
4,421
|
|
|
175
|
|
|
2,279
|
|
|
20,000
|
|
Shareholders’
equity (deficit)
|
|
|
7,677
|
|
|
2,263
|
|
|
2,588
|
|
|
(17,679
|
)
|
|
(8,580
|
)
|
(1) |
All
amounts are in thousands, except per share dollar amounts.
|
(2) |
Income
tax expense (benefit) was $88,584, $0, $(81,229), $0, and $(293,982),
for
the years ended September 30, 2006, 2005, 2004, 2003 and 2002,
respectively.
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Our
liquidity was negatively impacted by our inability to collect outstanding
receivables and claims as a result of CCC’s bankruptcy, the inability to collect
outstanding receivables from certain customers, and under-absorbed fixed costs
associated with the low utilization of our production facilities and reduced
sales of our products resulting from general difficulties in the ATM market.
In
order to meet our liquidity needs during the past four years, we incurred a
substantial amount of debt. On January 3, 2006, we completed the ATM Business
Sale. The total purchase price was $10.4 million of which $8.2 million was
funded into a collateral account for the benefit of Laurus to be applied towards
the repayment of our outstanding obligations due Laurus. See “Liquidity and
Capital Resources” under this item for a detailed discussion of these financing
transactions with Laurus.
On
October 2, 2006 we completed the Cash Security Business Sale. The Cash Security
Asset Purchase Agreement provided for a cash purchase price of $15,500,000,
less
$100,000 as consideration for the buyer, Sentinel Operating, L.P. assuming
certain potential liability in connection with ongoing litigation and less
a
working capital deficit adjustment of $1,629,968, which resulted in a net
purchase price of $13,770,032. In addition, Sentinel Operating, L.P. paid a
cash
adjustment of $2,458,718 to us at closing. We applied the net purchase price,
the cash adjustment, and $5,400,000 in proceeds (together with accrued interest
of $206,798.72) from the ATM Business Sale, to pay the following amounts to
Laurus: (i) $8,508,963 pursuant to the terms of the Laurus Termination Agreement
and (ii) $6,545,340 representing the purchase from Laurus by us of 19,251,000
shares of our common stock pursuant to the terms of the Stock Redemption
Agreement. Following both such payments to Laurus, we received $6,781,245 in
net
proceeds from the Cash Security Business Sale.
Upon
closing of the Cash Security Business Sale, we had cash, cash equivalents and
marketable securities held-to-maturity of approximately $12.9 million, or
approximately $0.66 per share based upon 19,426,210 shares
outstanding.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations
are
based upon our consolidated financial statements. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. We
must apply significant, subjective and complex estimates and judgments in this
process. Among the factors, but not fully inclusive of all factors, that may
be
considered by management in these processes are: the range of accounting
policies permitted by accounting principles generally accepted in the United
States; management’s understanding of our business; expected rates of business
and operational change; sensitivity and volatility associated with the
assumptions used in developing estimates; and whether historical trends are
expected to be representative of future trends. Among the most subjective
judgments employed in the preparation of these financial statements are the
collectibility of contract receivables and claims, the fair value of our
inventory, the depreciable lives of and future cash flows to be provided by
our
equipment and long-lived assets, the expected timing of the sale of products,
estimates for the number and related costs of insurance claims for medical
care
obligations, judgments regarding the outcomes of pending and potential
litigation and certain judgments regarding the nature of income and expenditures
for tax purposes. We review all significant estimates on a recurring basis
and
record the effect of any necessary adjustments prior to publication of our
financial statements. Adjustments made with respect to the use of estimates
often relate to improved information not previously available. Because of the
inherent uncertainties in this process, actual future results could differ
from
those expected at the reporting date.
The
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States, assuming
the
Company continues as a going concern, which contemplates the realization of
the
assets and the satisfaction of liabilities in the normal course of business.
Our
significant accounting policies are described in Note 1 of the Notes to
Consolidated Financial Statements included in Part IV of this Annual Report.
We
consider certain accounting policies to be critical policies due to the
significant judgments, subjective and complex estimation processes and
uncertainties involved for each in the preparation of our Consolidated Financial
Statements. We believe the following represents our critical accounting
policies. We have discussed our critical accounting policies and estimates,
together with any changes therein, with the audit committee of our Board of
Directors.
Since
October 2, 2006, we have had substantially no operations.
Revenue
Recognition
Revenues
are recognized at the time products are shipped to customers. We have no
continuing obligation to provide services or upgrades to our products, other
than a warranty against defects in materials and workmanship. We only recognize
such revenues if there is persuasive evidence of an arrangement, the products
have been delivered, there is a fixed or determinable sales price and a
reasonable assurance of collectibility from the customer.
Our
products contain imbedded software that is developed for inclusion within the
equipment. We have not licensed, sold, leased or otherwise marketed such
software separately. We have no continuing obligations after the delivery of
our
products and we do not enter into post-contract customer support arrangements
related to any software embedded into our equipment.
Securities
held to maturity and securities available for sale
Securities held to maturity are carried at amortized cost. Securities are
designated as held to maturity only if the Company has the positive intent
and
ability to hold these securities to maturity. Securities available for sale
are
carried at fair value with the resulting unrealized gains or losses recorded
in
equity, net of tax. Premiums are amortized and discounts are accreted using
the
interest
method over the estimated remaining term of the underlying
security.
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined using the standard
cost method and includes materials, labor and production overhead which
approximates an average cost method. Reserves are provided to adjust any slow
moving materials or goods to net realizable values. At September 30, 2006,
our
reserve was $45,000, which related to the inventory of the Cash Security
business. As a condition of the ATM Business Sale, NCR paid full value for
all
inventory related to the ATM business. During the fiscal year ended 2005, we
reduced our reserve by $1,799,442 and we increased our reserve by $614,611
and
$615,000 in 2004 and in 2003, respectively. Our reserve generally fluctuated
based on the level of production and the introduction of new
models.
Warranties
Certain
products are sold under warranty against defects in materials and workmanship
for a period of one to three years. A provision for estimated warranty costs
is
included in accrued liabilities and is charged to operations at the time of
sale.
Federal
Income Taxes
Income
taxes are accounted for under the asset and liability method, whereby deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to
taxable income in the years in which those temporary differences are expected
to
be recovered or settled. The effect on deferred tax assets and liabilities
of a
change in tax rates is recognized in determining income or loss in the period
that includes the enactment date.
Net
Income (Loss) Per Share
In
accordance with Statement of Financial Accounting Standards No. 128, “Earnings
Per Share” (“SFAS No. 128”), we compute and present both basic and diluted
earnings per share (“EPS”) amounts. Basic EPS is computed by dividing income
(loss) available to common shareholders by the weighted-average number of common
shares outstanding for the period, and excludes the effect of potentially
dilutive securities (such as options, warrants and convertible securities),
which are convertible into common stock. Dilutive EPS reflects the potential
dilution from options, warrants and convertible securities.
Accounts
Receivable
We
had
significant investments in billed receivables as of September 30, 2006 and
2005.
Billed receivables represent amounts billed upon the shipments of our products
under our standard contract terms and conditions. Allowances for doubtful
accounts and estimated nonrecoverable costs primarily provide for losses that
may be sustained on uncollectible receivables and claims. In estimating the
allowance for doubtful accounts, we evaluate our contract receivables and
thoroughly review historical collection experience, the financial condition
of
our customers, billing disputes and other factors. When we ultimately conclude
that a receivable is uncollectible, the balance is charged against the allowance
for doubtful accounts. As of September 30, 2006, 2005 and 2004, the allowance
for doubtful contract receivables was approximately $45,000, $1,100,000, and
$1,000,000, respectively.
(b) |
Impact
of Recently Issued Accounting
Standards
|
In
July 2006, the FASB issued Interpretation No. 48 (“FIN 48”),
Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting
for
uncertainty in income taxes recognized in an enterprise’s financial statements
in accordance with SFAS No. 109, Accounting for Income Taxes . FIN 48
prescribes a recognition threshold and measurement attributable for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures and transitions. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
impact on its financial statements of FIN 48 upon adoption effective in fiscal
year 2008.
In
December 2004, the FASB issued SFAS No. 123(R), which amends SFAS No. 123 and
supersedes APB Opinion No. 25. SFAS No. 123(R) requires compensation expense
to
be recognized for all share-based payments made to employees based on the fair
value of the award at the date of grant, eliminating the intrinsic value
alternative allowed by SFAS No. 123. Generally, the approach to determining
fair
value under the original pronouncement has not changed. However, there are
revisions to the accounting guidelines established, such as accounting for
forfeitures, that will change our accounting for stock-based awards in the
future.
The
statement allows companies to adopt its provisions using either of the following
transition alternatives:
|
•
|
The
modified prospective method, which results in the recognition of
compensation expense using SFAS 123(R) for all share-based awards
granted
after the effective date and the recognition of compensation expense
using
SFAS 123 for all previously granted share-based awards that remain
unvested at the effective date; or
|
|
•
|
The
modified retrospective method, which results in applying the modified
prospective method and restating prior periods by recognizing the
financial statement impact of share-based payments in a manner consistent
with the pro forma disclosure requirements of SFAS No. 123. The modified
retrospective method may be applied to all prior periods presented
or
previously reported interim periods of the year of
adoption.
|
We
adopted SFAS No. 123(R) on October 1, 2006, using the modified prospective
method. This change in accounting has not materially impacted our financial
position. We applied the fair-value criteria established by SFAS No. 123(R)
to
previous stock option grants, the impact to our results of operations would
have
approximated the impact of applying SFAS No. 123, which was a decrease to net
income of approximately $9,801 in 2006, $19,433 in 2005, a decrease to net
income of approximately $1,392 in 2004, and an increase to our net loss of
$15,363. The impact of applying SFAS No. 123 to previous stock option grants
is
further summarized in Note 1 of the Notes to Consolidated Financial
Statements.
We
recognize expense related to stock options and other types of equity-based
compensation beginning in fiscal year 2006 and such cost must be recognized
over
the period during which an employee is required to provide service in exchange
for the award. The requisite service period is usually the vesting period.
The
standard also requires us to estimate the number of instruments that will
ultimately be issued, rather than accounting for forfeitures as they occur.
Additionally, we may be required to change our method for determining the fair
value of stock options.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,”
an amendment of APB No. 29. This amendment eliminates the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. This statement specifies that a nonmonetary exchange
has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This statement is effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after
June
15, 2005. Earlier application is permitted for nonmonetary exchanges occurring
in fiscal periods beginning after the date of this statement is issued.
Retroactive application is not permitted. We are analyzing the requirements
of
this new statement and believe that its adoption will not have a significant
impact on our financial position, results of operations or cash
flows.
Effective
for financial statements issued for fiscal years beginning after December 15,
2001, and interim periods within those fiscal years, SFAS No. 144 “Accounting
for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), changed
the criteria for determining when the disposal or sale of certain assets meets
the definition of “discontinued operations.” At the November 2004 EITF meeting,
the final consensus was reached on EITF Issue No. 03-13, “Applying the
Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether
to
Report Discontinued Operations” (“EITF Issue No. 03-13”). This Issue is
effective prospectively for disposal transactions entered into after January
1,
2005, and provides a model to assist in evaluating (a) which cash flows should
be considered in the determination of whether cash flows of the disposal
component have been or will be eliminated from the ongoing operations of the
entity and (b) the types of continuing involvement that constitute significant
continuing involvement in the operations of the disposal component. The Company
considered the model outlined in EITF Issue No. 03-13 in its evaluation of
the
February 19, 2005 Asset Purchase Agreement of the ATM business with NCR. For
additional discussion, see Note 2, “Liquidity” in Part IV, “Notes to
Consolidated Financial Statements” for more information. We reported the ATM
assets and the Cash Security assets as discontinued operations net of any
applicable income taxes for the fiscal year 2005. We reported only the Cash
Security assets as discontinued operations net of any applicable income taxes
for the fiscal year 2006.
(c) |
Results
of Operations
|
Operating
Segments
We
conducted 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:
|
|
(dollars
in thousands)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
ATM
Business
|
|
$
|
3,848
|
|
$
|
15,498
|
|
$
|
15,047
|
|
Cash
Security Business:
|
|
|
|
|
|
|
|
|
|
|
TACC
|
|
|
4,219
|
|
|
5,269
|
|
|
5,631
|
|
Sentinel
|
|
|
10,342
|
|
|
12,468
|
|
|
972
|
|
Parts
& Other
|
|
|
1,519
|
|
|
1,696
|
|
|
864
|
|
Total
Cash Security Business
|
|
|
16,080
|
|
|
19,433
|
|
|
7,467
|
|
Total
|
|
$
|
19,928
|
|
$
|
34,931
|
|
$
|
22,514
|
|
Gross
Profit, Operating Expenses and Non-Operating Items
Continuing
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 and assets and liabilities is provided in
the
following tables:
CONTINUING
OPERATIONS
SELECTED
BALANCE SHEET DATA
(UNAUDITED)
|
|
September
30,
2006
|
|
September
30,
2005
|
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,264,463
|
|
$
|
1,003,663
|
|
Restricted
cash
|
|
|
5,400,000
|
|
|
—
|
|
Marketable
securities held-to-maturity
|
|
|
4,899,249
|
|
|
—
|
|
Marketable
securities available-for-sale
|
|
|
851,939
|
|
|
—
|
|
Trade
account receivable
|
|
|
—
|
|
|
250,000
|
|
Notes
and other receivables
|
|
|
220,689
|
|
|
12,965
|
|
Inventories
|
|
|
—
|
|
|
—
|
|
Prepaid
expenses and other
|
|
|
132,036
|
|
|
170,231
|
|
Total
current assets
|
|
|
12,768,376
|
|
|
1,436,859
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, at cost
|
|
|
—
|
|
|
55,641
|
|
Accumulated
depreciation
|
|
|
—
|
|
|
(42,848
|
)
|
Net
property, plant and equipment
|
|
|
—
|
|
|
12,793
|
|
Other
assets
|
|
|
4,000
|
|
|
615,763
|
|
Total
assets
|
|
$
|
12,772,376
|
|
$
|
2,065,415
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Current
maturities of long-term debt, net of discount of $0 and $0,
respectively
|
|
$
|
—
|
|
$
|
2,325,000
|
|
Accounts
payable
|
|
|
221,295
|
|
|
431,876
|
|
Accrued
interest payable
|
|
|
2,000,000
|
|
|
2,135,852
|
|
Shares
to be redeemed
|
|
|
5,400,000
|
|
|
—
|
|
Other
accrued liabilities
|
|
|
150,194
|
|
|
290,871
|
|
Total
current liabilities
|
|
|
7,771,489
|
|
|
5,183,599
|
|
Long-term
debt, net of current maturities
|
|
|
—
|
|
|
2,096,457
|
|
Total
liabilities
|
|
$
|
7,771,489
|
|
$
|
7,280,056
|
|
CONTINUING
OPERATIONS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Years
Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Revenues
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Selling,
general and administrative
|
|
|
3,065,064
|
|
|
1,805,484
|
|
|
2,011,257
|
|
Depreciation
and amortization
|
|
|
2,678
|
|
|
4,977
|
|
|
4,146
|
|
Operating
loss
|
|
|
(3,067,742
|
)
|
|
(1,810,461
|
)
|
|
(2,015,403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
Gain
on investment in 3CI
|
|
|
5,380,121
|
|
|
—
|
|
|
—
|
|
Gain
on collection of account receivable
|
|
|
598,496
|
|
|
—
|
|
|
—
|
|
Gain
on extinguishment of debt
|
|
|
—
|
|
|
—
|
|
|
18,823,000
|
|
Gain
on sale of securities
|
|
|
—
|
|
|
—
|
|
|
1,918,012
|
|
Loss
on disposal of fixed assets
|
|
|
(7,455
|
)
|
|
—
|
|
|
—
|
|
Recovery
from CCC bankruptcy
|
|
|
105,000
|
|
|
—
|
|
|
—
|
|
Amortization
of debt discount and deferred financing costs
|
|
|
(4,078,738
|
)
|
|
(3,816,178
|
)
|
|
(2,529,864
|
)
|
Interest
income
|
|
|
392,564
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(235,765
|
)
|
|
(2,732,891
|
)
|
|
(1,670,804
|
)
|
Total
other income expense
|
|
|
2,154,223
|
|
|
(6,549,069
|
)
|
|
16,540,344
|
|
Loss
before income tax expense (benefit)
|
|
|
(913,519
|
)
|
|
(8,359,530
|
)
|
|
14,524,941
|
|
Income
tax expense (benefit)
|
|
|
159,546
|
|
|
—
|
|
|
(81,229
|
)
|
Net
income (loss) from continuing operations
|
|
|
(1,073,065
|
)
|
|
(8,359,530
|
)
|
|
14,606,170
|
|
Gain
on sale of ATM business
|
|
|
3,536,105
|
|
|
—
|
|
|
—
|
|
Net
income (loss)
|
|
$
|
2,463,040
|
|
$
|
(8,359,530
|
)
|
$
|
14,606,170
|
|
Year
Ended September 30, 2006 Compared with the Year Ended September 30,
2005
Selling,
general and administrative expenses
for the year ended September 30, 2006 were $3,065,064, which is an increase
of
approximately 70% from the year ended September 30, 2005. The increase primarily
related to increased legal and consulting fees and employee
bonuses.
Depreciation
and amortization for
the
year ended September 30, 2006 and 2005 was $2,678 and $4,977,
respectively.
Interest
expense
was
$4,314,503 for the year ended September 30, 2006 compared with $6,549,069 for
the year ended September 30, 2005. The decrease is a result of the payoff of
Laurus debt with the proceeds from the sale of the ATM Business.
Income
tax expense (benefit).
In
assessing the realizability of deferred tax asset, management considers whether
it is more likely than not, that some portion or all of the deferred tax assets
will be realized. We have established a valuation allowance for such deferred
tax assets to the extent such amounts are not utilized to offset existing
deferred tax liabilities reversing in the same periods.
We
recorded a net loss from continuing operations of $(1,073,065) and $(8,359,530)
for the years ended September 30, 2006 and 2005, respectively.
Year
Ended September 30, 2005 Compared with the Year Ended September 30,
2004
Selling,
general and administrative expenses
for the year ended September 30, 2005 were $1,805,484, which is a decrease
of
approximately 10% from the year ended September 30, 2004. The decrease is
primarily related to reduced legal, accounting, and audit-related
costs.
Depreciation
and amortization for
the
year ended September 30, 2005 and 2004 was $4,977 and $4,146,
respectively.
Interest
expense
was
$6,549,069 for the year ended September 30, 2005 compared with $4,200,668 for
the year ended September 30, 2004. The increase is a result of additional
charges related to the Additional Financing and the amortization of the debt
discount related to the Laurus debt.
Income
tax expense (benefit).
In
assessing the realizability of deferred tax asset, management considers whether
it is more likely than not, that some portion or all of the deferred tax assets
will be realized. We have established a valuation allowance for such deferred
tax assets to the extent such amounts are not utilized to offset existing
deferred tax liabilities reversing in the same periods.
We
recorded a net income (loss) from continuing operations of $(8,359,530) and
$14,606,170 for the years ended September 30, 2005 and 2004, respectively.
The
significant decrease in operating profit was due to a gain on early
extinguishment of debt of approximately $18.8 million recorded during the fiscal
year ended September 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, Secure Alliance, L.P., entered into the NCR Asset Purchase Agreement
with NCR EasyPoint, a wholly owned subsidiary of NCR Corporation, for the sale
of our ATM Business. We classified our ATM Business as Assets Held for Sale
as
of September 30, 2005. On December 28, 2005, the holders of 62.2% of our shares
of outstanding common stock approved the NCR Asset Purchase Agreement.
On
January 3, 2006, we completed the ATM Business Sale. The total purchase price
was approximately $10.4 million of which $8.2 million was paid to Laurus into
a
collateral account to be held by Laurus as collateral for the satisfaction
of
all monetary obligations payable to Laurus, $0.5 million was paid into an escrow
account pending a post closing net asset value adjustment, and the remaining
$1.7 million was paid to the Company to be used for necessary working capital.
This termination resulted in a book gain of approximately $3.8
million.
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)
|
|
September
30,
2006
|
|
September
30,
2005
|
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
—
|
|
$
|
—
|
|
Trade
accounts receivable, net of allowance of approximately $0 and $1,125,000,
respectively
|
|
|
—
|
|
|
2,310,262
|
|
Inventories
|
|
|
—
|
|
|
7,323,439
|
|
Prepaid
expenses and other
|
|
|
—
|
|
|
392,972
|
|
Total
current assets
|
|
|
—
|
|
|
10,026,673
|
|
Property,
plant and equipment, at cost
|
|
|
—
|
|
|
4,337,677
|
|
Accumulated
depreciation
|
|
|
—
|
|
|
(4,216,152
|
)
|
Net
property, plant and equipment
|
|
|
—
|
|
|
121,525
|
|
Other
assets
|
|
|
—
|
|
|
27,297
|
|
Total
assets
|
|
$
|
—
|
|
$
|
10,175,495
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
—
|
|
$
|
1,681,288
|
|
Other
accrued expenses
|
|
|
—
|
|
|
1,814,634
|
|
Total
liabilities
|
|
$
|
—
|
|
$
|
3,495,922
|
|
DISCONTINUED
OPERATIONS — ATM BUSINESS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Years
Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Net
sales
|
|
$
|
3,847,874
|
|
$
|
15,497,834
|
|
$
|
15,047,292
|
|
Cost
of sales
|
|
|
2,592,268
|
|
|
9,508,120
|
|
|
11,762,082
|
|
Gross
profit
|
|
|
1,255,606
|
|
|
5,989,714
|
|
|
3,285,210
|
|
Selling,
general and administrative
|
|
|
880,941
|
|
|
4,768,880
|
|
|
4,709,478
|
|
Depreciation
and amortization
|
|
|
46,048
|
|
|
255,967
|
|
|
292,543
|
|
Operating
income (loss)
|
|
|
328,617
|
|
|
964,867
|
|
|
(1,716,811
|
)
|
Non-operating
expense
|
|
|
—
|
|
|
—
|
|
|
16,456
|
|
Net
income (loss)
|
|
$
|
328,617
|
|
$
|
964,867
|
|
$
|
(1,733,267
|
)
|
Year
ended September 30, 2006 Compared with Year Ended September 30,
2005
Net
Sales from
the
ATM Business were $3.8 million for the year ended September 30, 2006,
representing a decrease of 75% from net sales of $15.5 million for the year
ended September 30, 2005. The decrease was a result of the sale of the ATM
Business completed on January 3, 2006.
Gross
profit on
net
sales for the year ended September 30, 2006 decreased by approximately $4.7
million from a year ago. Gross profit as a percentage of sales was 33% and
39%
for the year ended September 30, 2006 and 2005, respectively. The decrease
in
gross profit is primarily related to the sale of the ATM Business completed
on
January 3, 2006.
Selling,
general and administrative expenses
for the year ended September 30, 2006 decreased 82% compared with the year
ended
September 30, 2005. The decrease is primarily related to the sale of the ATM
Business completed on January 3, 2006.
Depreciation
and amortization for
the
year ended September 30, 2006 and 2005 was $46,048 and $255,967,
respectively.
The
ATM
Business recorded a net income of $328,617 and $964,867 for the year ended
September 30, 2006 and 2005, respectively.
Year
ended September 30, 2005 Compared with Year Ended September 30,
2004
Net
Sales from
the
ATM Business were $15,497,834 for the year ended September 30, 2005,
representing an increase of 3% from net sales of $15,047,292 for the year ended
September 30, 2004. The increase was a result of the slight increase in sales
of
ATM machines. We sold 3,646 ATM units during fiscal 2005 compared with 3,488
units sold during fiscal 2004.
Gross
profit on
net
sales for the year ended September 30, 2005 increased $2,704,504 from a year
ago. Gross profit as a percentage of sales was 39% and 22% for the year ended
September 30, 2005 and 2004, respectively. The increase in gross profit is
primarily related to the reversal of $1.8 million in obsolete inventory reserve
in 2005 and the opposite result of $615,000 recognized in 2004.
Selling,
general and administrative expenses
for the year ended September 30, 2005 increased 1% compared with the year ended
September 30, 2004. The increase is primarily related to costs associated with
our marketing efforts.
Depreciation
and amortization for
the
year ended September 30, 2005 and 2004 was $255,967 and $292,543,
respectively.
The
ATM
Business recorded a net income (loss) of $964,867 and $(1,733,267) for the
year
ended September 30, 2005 and 2004, respectively.
Discontinued
Operations (Cash Security Business)
We
completed the Cash Security Business Sale on October 2, 3006. We classified
the
Cash Security Business as Assets Held for Sale as of September 30, 2006. An
analysis of the discontinued operations of the Cash Security Business is as
follows:
DISCONTINUED
OPERATIONS — CASH SECURITY BUSINESS
SELECTED
BALANCE SHEET DATA
(UNAUDITED)
|
|
September
30,
2006
|
|
September
30,
2005
|
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,048,275
|
|
$
|
—
|
|
Trade
accounts receivable, net of allowance of approximately $45,000
and $7,500,
respectively
|
|
|
1,591,522
|
|
|
1,856,523
|
|
Inventories
|
|
|
2,051,764
|
|
|
3,137,818
|
|
Prepaid
expenses and other
|
|
|
73,089
|
|
|
198,057
|
|
Total
current assets
|
|
|
5,764,650
|
|
|
5,192,398
|
|
Property,
plant and equipment, at cost
|
|
|
316,608
|
|
|
1,097,604
|
|
Accumulated
depreciation
|
|
|
(18,595
|
)
|
|
(1,020,015
|
)
|
Net
property, plant and equipment
|
|
|
298,013
|
|
|
77,589
|
|
Other
assets
|
|
|
250,000
|
|
|
25,631
|
|
Total
assets
|
|
$
|
6,312,663
|
|
$
|
5,295,618
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Current
maturities
|
|
|
1,981
|
|
|
1,852
|
|
Accounts
payable
|
|
|
1,514,731
|
|
|
1,397,394
|
|
Other
accrued expenses
|
|
|
2,098,675
|
|
|
3,069,278
|
|
Total
current liabilities
|
|
|
3,615,387
|
|
|
4,468,524
|
|
Long-term
debt, net of current maturities
|
|
|
20,982
|
|
|
28,708
|
|
Total
liabilities
|
|
$
|
3,636,369
|
|
$
|
4,497,232
|
|
DISCONTINUED
OPERATIONS — CASH SECURITY BUSINESS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Years
Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Net
sales
|
|
$
|
16,080,069
|
|
$
|
19,435,222
|
|
$
|
7,467,194
|
|
Cost
of sales
|
|
|
9,476,386
|
|
|
10,870,947
|
|
|
5,350,108
|
|
Gross
profit
|
|
|
6,603,683
|
|
|
8,564,275
|
|
|
2,117,086
|
|
Selling,
general and administrative
|
|
|
4,541,774
|
|
|
4,449,550
|
|
|
3,550,491
|
|
Depreciation
and amortization
|
|
|
—
|
|
|
29,868
|
|
|
84,008
|
|
Operating
income (loss)
|
|
|
2,061,907
|
|
|
4,084,857
|
|
|
(1,517,413
|
)
|
Non-operating
expense
|
|
|
(8,529
|
)
|
|
(23,884
|
)
|
|
(37,918
|
)
|
Net
income (loss)
|
|
$
|
2,070,436
|
|
$
|
4,108,741
|
|
$
|
(1,555,331
|
)
|
Year
ended September 30, 2006 Compared with Year Ended September 30,
2005
Net
Sales from
the
Cash Security business were $16.1 million for the year ended September 30,
2006,
representing a decrease of $3.4 million from net sales of $19.4 million for
the
year ended September 30, 2005. This decrease was primarily a result of decreased
sales to a major convenient store.
Gross
profit on
product sales for the year ended September 30, 2006 decreased approximately
$2.0
million from the year ended September 30, 2005. Gross profit as a percentage
of
sales was 41% for the year ended September 30, 2006, compared to 44% for the
year ended September 30, 2005. The decline is directly related to a decrease
in
the volume of Sentinel units produced during the fiscal year ended September
30,
2006.
Selling,
general and administrative expenses
for the year ended September 30, 2006 decreased $92,225 or 2% from the year
ended September 30, 2005.
Depreciation
and amortization for
the
years ended September 30, 2006 and 2005 was $0 and $29,868,
respectively.
Year
ended September 30, 2005 Compared with Year Ended September 30,
2004
Net
Sales from
the
Cash Security business were $19,435,222 for the year ended September 30, 2005,
representing an increase of $11,968,028 from net sales of $7,467,194 for the
year ended September 30, 2004. 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 year ended September 30, 2005 increased $6,447,189 from
the year ended September 30, 2004. Gross profit as a percentage of sales was
44%
for the year ended September 30, 2005, compared to only 28% for the year ended
September 30, 2004. The improvement is directly related to an increase in the
volume of Sentinel units produced during the fiscal year ended September 30,
2005.
Selling,
general and administrative expenses
for the year ended September 30, 2005 increased $899,059 or 25% from the year
ended September 30, 2004. This is primarily related to costs associated with
our
marketing efforts related to the Sentinel products.
Depreciation
and amortization for
the
years ended September 30, 2005 and 2004 was $29,868 and $84,008,
respectively.
(d) |
Liquidity
and Capital Resources
|
Our
liquidity was negatively impacted by our inability to collect outstanding
receivables and claims as a result of CCC’s bankruptcy, the inability to collect
outstanding receivables from certain customers, and under-absorbed fixed costs
associated with the low utilization of our production facilities and reduced
sales of our products resulting from general difficulties in the ATM market.
In
order to meet our liquidity needs during the past four years, we have incurred
a
substantial amount of debt. On January 3, 2006, we completed the ATM Business
Sale. The total purchase price was $10.4 million of which $8.2 million was
funded into a collateral account for the benefit of Laurus to be applied towards
the repayment of our outstanding loans from Laurus.
We
completed the Cash Security Business Sale on October 2, 3006 pursuant to the
Cash Security Asset Purchase Agreement. The Cash Security Asset Purchase
Agreement provided for a cash purchase price of $15,500,000, less $100,000
as
consideration for the Sentinel Operating, L.P., as buyer, assuming certain
potential liability in connection with ongoing litigation, and less a working
capital deficit adjustment of $1,629,968, resulting in a net purchase price
of
$13,770,032. In addition, the buyer paid a cash adjustment of $2,458,718 to
the
Company at closing. The Company applied the net purchase price, the cash
adjustment, and $5,400,000 in proceeds (together with accrued interest of
$206,798 from the ATM Business Sale, to pay the following amounts to Laurus:
(i)
$8,508,963 pursuant to the terms of the Laurus Termination Agreement and (ii)
$6,545,340 representing the purchase from Laurus by the Company of 19,251,000
shares of Company common stock pursuant to the terms of the Stock Redemption
Agreement. Following both such payments to Laurus, the Company received
$6,781,245.72 in net proceeds from the Cash Security Business Sale.
On
October 2, 2006, we became a shell public company with approximately $12.9
million in cash, cash equivalents and marketable securities held-to-maturity;
or
approximately $0.66 per share based upon 19,426,210 shares
outstanding.
Following
the foregoing payments to Laurus pursuant to the terms of the Laurus Termination
Agreement and the Stock Redemption Agreement, no further fees remain payable
by
the Company to Laurus and, to our knowledge, Laurus does not own any shares
of
the Company.
On
January 13, 2006, we repaid all of our remaining outstanding debt to Laurus
in
the principal amount of $2,617,988 plus accrued but unpaid interest in the
amount of $113,333. In connection therewith, the Company paid a prepayment
penalty to Laurus in the amount of $59,180. On October 2, 2006, we became a
shell public company with approximately $12.9 million in cash, cash equivalents
and marketable securities held-to-maturity; or approximately $0.66 per share
based upon 19,426,210 shares outstanding.
|
|
(dollars
in 000’s)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Cash
|
|
$
|
6,164
|
|
$
|
1,004
|
|
$
|
258
|
|
Restricted
cash
|
|
|
5,400
|
|
|
—
|
|
|
—
|
|
Working
capital
|
|
|
7,762
|
|
|
3,731
|
|
|
1,939
|
|
Total
assets
|
|
|
19,085
|
|
|
17,537
|
|
|
10,778
|
|
Shareholders’
equity
|
|
|
7,677
|
|
|
2,263
|
|
|
2,588
|
|
Cash
Flows
Cash
used
in operations was $(2,771,470) for 2006 compared with cash used in operations
of
$(462,324) for 2005, and cash used in operations of $(2,825,316) for 2004.
The
cash used in operations during fiscal 2006 and fiscal 2005 was primarily
attributable to operating losses, the increase in trade accounts receivable
and
the delays in collection of these receivables.
Working
Capital
As
of
September 30, 2006, we had a working capital of $7,673,181, compared with a
working capital of $3,731,219 at September 30, 2005. The increase is primarily
related to the ATM Business Sale.
Indebtedness
The
Laurus Financings
On
November 25, 2003, we completed a $6,850,000 financing transaction (the
“Financing”) with 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 recorded additional interest charges totaling $7,437,195 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
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. As a result of the reduction of the
conversion price, we recorded additional interest charges totaling $1,905,488
over the terms of the notes related to the discounts.
On
November 26, 2004, we completed the Additional Financing, a $3,350,000 financing
transaction with Laurus pursuant to the 2004 SPA. The Additional Financing
was
comprised of (i) a three-year convertible note issued to Laurus in the amount
of
$1,500,000, which bears interest at a rate of 14% and was convertible into
our
common stock at a conversion price of $3.00 per share (the “$1,500,000 Note”),
(ii) a one-year convertible in the amount of $600,000 which bears interest
at a
rate of 10% and was 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, Secure Alliance, L.P., in the amount of $1,250,000, which was a
revolving working capital facility for the purpose of financing purchase orders
of our subsidiary, Secure Alliance, L.P., (the “Purchase Order Note”), which
bears interest at a rate of 14% and is convertible into our common stock at
a
price of $3.00 per share and (iv) our issuance to Laurus of the 2003 Fee Shares,
which consisted of 1,251,000 shares of common stock, or approximately 7% of
the
total shares outstanding, in satisfaction of fees totaling $375,300 incurred
in
connection with the convertible term notes issued in the Financing discussed
above. As a result of the issuance of the 2003 Fee Shares, we recorded an
additional charge in fiscal 2004 of $638,010. We also increased the principal
balance of the original note by $292,987, of which $226,312 bears interest
at
the default rate of 18%. This amount represents interest accrued but not paid
to
Laurus as of August 1, 2004. In addition, Laurus received warrants to purchase
500,000 shares of our common stock at an exercise price of $0.30 per share.
The
proceeds of the Additional Financing were allocated to the notes based on the
relative fair value of the notes and the warrants, with the value of the
warrants resulting in a discount against the notes. In addition, the conversion
terms of the $600,000 Note resulted in a beneficial conversion feature, further
discounting the carrying value of the notes. As a result, we would have to
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.
Pursuant
to the Agreement Regarding the NCR Transaction and Other Asset Sales, dated
November 26, 2004 (the “Asset Sales Agreement”), by and between the Company and
Laurus, the Company agreed to pay to Laurus a portion of the excess net proceeds
from the ATM Business Sale and the Cash Security Business Sale.
On
June
9, 2006, we and Laurus entered into the Laurus Termination Agreement which,
among other things, provided for the payment of a sale fee of $8,508,963 to
Laurus (the “Sale Fee”) in full satisfaction of all amounts payable to Laurus
under the Asset Sales Agreement, including fees payable in respect of the ATM
Business Sale and the Cash Security Business Sale. The Laurus Termination
Agreement further provided that, upon payment of the Sale Fee and performance
by
the Company of its obligations under the Stock Redemption Agreement described
below, neither the Company nor any of its subsidiaries will have any further
obligation to Laurus. Further, each of the Company and Laurus have granted
each
other and their respective affiliates and subsidiaries reciprocal releases
from
and against any claims and causes of action that may exist.
We
and
Laurus entered a Stock Redemption Agreement on January 12, 2006 and as
subsequently amended. Pursuant to the terms of the Stock Redemption Agreement:
(i) we agreed, among other things, to repurchase from Laurus, upon the closing
of the Cash Security Business Sale, all shares of our common stock held by
Laurus, and (ii) Laurus agreed to the cancellation as of the closing date of
the
Cash Security Business Sale of warrants it holds to purchase 4,750,000 shares
of
our common stock at an exercise price of $.30 per share, and
We
and
Laurus also entered into an Exercise and Conversion Agreement on January 12,
2006 and as subsequently amended. The Exercise and Conversion Agreement
provided, among other things, for Laurus to convert, on or prior to the record
date set with respect to the special meeting of our stockholders to be held
for
the purpose of voting on the Cash Security Business Sale, $5,400,000 of
indebtedness outstanding under our Convertible Note dated November 5, 2003
in
the original principal amount of $6,450,000 together with an additional $292,987
added thereto on November 26, 2004, made by the Company to Laurus. into
18,000,000 shares of our common stock.
On
January 13, 2006, the proceeds from the ATM Business Sale to NCR Corporation
were applied to the repayment of approximately $2,600,000 of indebtedness to
Laurus and Laurus’ remaining indebtedness of $5,400,000 was converted into
18,000,000 shares of our common stock.
Following
the Cash Security Business Sale, on October 2, 2006, the Company applied the
net
purchase price, the cash adjustment, and $5,400,000 in proceeds (together with
accrued interest of $206,798.72) from the ATM Business Sale, to pay the
following amounts to Laurus: (i) $8,508,963 pursuant to the terms of the Laurus
Termination Agreement and (ii) $6,545,340 representing the purchase from Laurus
by the Company of 19,251,000 shares of Company common stock pursuant to the
terms of the Stock Redemption Agreement. Following both such payments to Laurus,
the Company received $6,781,246 in net proceeds from the Cash Security Business
Sale.
The
Supply, Facility and Share Warrant Agreements
In
September 2004, our subsidiary entered into separate supply and credit facility
agreements (the “Supply Agreement”, the “Facility Agreement” and the “Share
Warrant Agreement” respectively) with
Cashbox
plc,
a
foreign distributor related to our ATM products. The Supply Agreement required
the distributor, during the initial term of the agreement, to purchase ATMs
only
from us, effectively making us its sole supplier of ATMs. During each of the
subsequent terms, the distributor was required to purchase from us not less
than
85% of all ATMs purchased by the distributor. The initial term of the agreement
was set as of the earlier of: (i) the expiration or termination of the
debenture, (ii) a termination for default, (iii) the mutual agreement of the
parties, and (iv) August 15, 2009.
The
Facility Agreement provided a credit facility in an aggregate amount not to
exceed $2,280,000 to the distributor with respect to outstanding invoices
already issued to the distributor and with respect to invoices which may be
issued in the future related to the purchase of our ATM products. Repayment
of
the credit facility was set by schedule for the last day of each month beginning
November 2004 and continuing through August 2005. The distributor fell into
default due to non-payment during February 2005. As of September 30, 2004,
we
had an outstanding balance of approximately $720,000 related to this facility,
and we recorded a reserve in the amount of approximately $185,000 during the
quarter ended September 30, 2004 due to the payment delinquency of the invoices
related to 2004 billings. During 2005, we increased the reserve to approximately
$830,000 due to the payment delinquency of the majority of the invoices issued
in the fiscal year 2005. In July of 2005, we collected a partial payment of
approximately $350,000 related to the 2004 billings. This collection reduced
the
outstanding balance on this facility to approximately $1,700,000, of which
we
reserved a total of $830,000 as of July 31, 2005. We received a commitment
commencing August 5, 2005 from the distributor to submit at least approximately
$35,000 per week until the balance is paid in full. We received approximately
$560,000 consisting of 16 weekly payments reducing the accounts receivable
balance.
The
balance at December 31, 2005 was
$833,000, of which we had provided a reserve in the amount of
$598,496.
On
March
31, 2006, we received $950,000 from the distributor resulting in full payment
of
the outstanding receivable of $833,000 and interest of $117,000. We recognized
income of approximately $598,000 from the reversal of the bad debt reserve
and
$117,000 of interest income during the year ended September 30, 2006 from the
proceeds.
The
Share
Warrant Agreement provided 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 restricted the distributor from (i) creating or issuing
a new class of stock or allotting additional shares, (ii) consolidating or
altering the shares, (iii) issuing a dividend, (iv) issuing additional warrants
and (v) amending articles of incorporation. The exercise price of the warrant
was payable either in cash or by reducing the distributors balance outstanding
under the Facility Agreement by $300,000. We exercised this option during
September 2005 by reducing the distributors balance outstanding under the
Facility Agreement by $300,000. As of September 30, 2006, we continued to own
these shares. See “Marketable Securities Available-for-Sale” below.
Marketable
Securities Available- for- Sale
We
own
2,022,000 of the common stock of Cashbox plc pursuant to our exercise of the
Share Warrant Agreement in September 2005. On or about March 27, 2006, shares
of
Cashbox plc began trading on the AIM Market of the London Stock Exchange. Prior
to Cashbox plc going public, we considered their shares not marketable, thus
the
shares were carried at cost. Since the shares are now public and market value
is
readily available, we determined the market value of the shares as of June
30,
2006 and pursuant to SFAS No. 115 “Accounting for Investments in Equity and Debt
Securities” we classified these shares as available for sale. Pursuant to the
SFAS No. 115 the unrealized change in fair value during the three months ended
June 30, 2006 was excluded from earnings and recorded net of tax as other
comprehensive income.
As
of
September 30, 2006, our common stock in Cashbox plc was recorded at a fair
value
of $851,939. Unrealized gains on these shares of common stock, which were added
to stockholders' equity as of September 30, 2006, were $551,939.
As
of
September 30, 2006 we were restricted from selling any shares until the second
anniversary of its admission to the London Stock Exchange unless we (i) consult
with Cashbox’s primary broker prior to the disposal of any shares and (ii)
effect the disposal of the shares through Cashbox’s primary broker from time to
time and in such manner as such broker may require with a view to the
maintenance of an orderly market in the shares of Cashbox.
The
Development Agreement
In
August
2001, we entered into a Development Agreement (the “Development Agreement”) with
a national petroleum retailer and convenience store operator (the “Retailer”)
for the joint development of a new generation of “intelligent” TACCs, now known
as the Sentinel product. The Development Agreement provided for four phases
of
development with the first three phases to be funded by the Retailer at an
estimated cost of $800,000. In February 2002, we agreed to provide the Retailer
a rebate on each unit of the Sentinel product for the first 1,500 units sold,
provided the product successfully entered production, until the Retailer had
earned amounts equal to the development costs paid by the Retailer. The
development of the product was completed and production commenced. The aggregate
development costs for the Sentinel product paid for by the Retailer totaled
$651,500. As of September 30, 2004, we had credited back approximately $122,100
to the retailer resulting in an accrued liability of $529,400 for the benefit
of
the Retailer. As of September 30, 2006, the accrued balance was
$529,400.
Investment
in 3CI Complete Compliance Corporation
We
formerly owned 100% of 3CI Complete Compliance Corporation (“3CI”), a company
engaged in the transportation and incineration of medical waste, until we
divested our majority interest in February 1994. At September 30, 2005, we
continued to own 698,889 shares of the common stock of 3CI and the value of
our
investment was marked to the market value of $279,556, or $.40 per
share.
On
May
30, 2006, we received a settlement payment of $4,489,963 and on September
6, 2006, the Company received an additional settlement payment in the amount
of
$1,169,544 arising
out
of our ownership of the 3CI shares under a class action settlement paid out
to
minority shareholders of 3CI. Under the terms of the settlement and in order
to
participate in the settlement, we tendered all 698,889 shares that we owned
to
Stericycle, Inc., the current majority shareholder of 3CI and the defendant
under the class action, and accordingly we no longer hold any ownership interest
in 3CI. As a result, we recognized a gain of $5,659,507 on the disposal of
these
shares during the year ended September 30, 2006, which represented the
difference between the settlement payment amount and our carrying
amount.
The
Company estimates additional federal income tax of approximately $400,000 due
to
this additional settlement payment resulting in an estimated federal income
tax
expense of approximately $250,000 for the fiscal year ended September 30, 2006.
The Company does not expect to receive any further significant payments in
this
matter.
Off-Balance
Sheet Transactions
We
do not
have any significant off-balance sheet arrangements that have, or are reasonably
likely to have, a current or future material effect on our financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures
or
capital resources.
Indebtedness
We
have
fixed debt service and lease payment obligations under notes payable and
operating leases for which we have material contractual cash obligations.
Interest rates on our debt vary from prime rate plus 2% to 14%.
The
following table summarizes our contractual cash obligations:
PAYMENTS
DUE BY PERIOD
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Thereafter
|
|
Long-term
debt, including current portion (1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
(1) |
Long-term
debt including current maturities and debt discount was $0, $8,167,988,
$5,942,729 as of September 30, 2006, 2005 and 2004, respectively.
|
Research
and Development Expenditures
Our
research and development expenditures for fiscal 2006, 2005 and 2004 were
approximately $1,229,617, $2,060,071 and $2,613,000, respectively. The majority
of these expenditures were applicable to enhancements of existing product lines
and the development of new technology to facilitate the dispensing of cash
and
cash-value products.
ITEM
7A. |
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
At
September 30, 2006 and September 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 convertible
debentures subsequent to September 30, 2002, and the associated overall
reduction in outstanding debt balances, our exposure to interest rate risks
has
significantly decreased. If market interest rates had increased up to 1% in
fiscal 2005 or 2006, there would have been no material impact on our
consolidated results of operations or financial position.
Forward-Looking
Statements
This
Form
10-K contains certain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which are intended to be covered by the safe
harbors created thereby. Investors are cautioned that all forward-looking
statements involve risks and uncertainty (including without limitation, our
future gross profit, selling, general and administrative expense, our financial
position, working capital, as well as general market conditions). Though we
believe that the assumptions underlying the forward-looking statements contained
herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward-looking statements
included in this Annual Report on Form 10-K will prove to be accurate. In light
of the significant uncertainties inherent in the forward- looking statements
included herein, the inclusion of such information should not be regarded as
a
representation by us or any other person that our objectives and plans will
be
achieved.
ITEM
8
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY
DATA
|
Our
consolidated financial statements, notes thereto and supplementary data appear
on pages 45 through 72 in this report and are incorporated herein by reference.
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
On
March
24, 2005, we engaged Hein & Associates LLP (“Hein”) to serve as our
independent registered public accounting firm and dismissed KPMG LLP (“KPMG”).
The change in independent registered public accounting firms was approved by
the
Audit Committee of our Board of Directors and reported on a Current Report
on
Form 8-K, dated March 24, 2005. KPMG audited our financial statements for the
fiscal year ended September 30, 2002 and for all the prior years, and Hein
audited our financial statements as of and for the fiscal years ended September
30, 2006, 2005, 2004 and 2003.
The
audit
report of KPMG on our consolidated financial statements for fiscal year ended
September 30, 2002 did not contain an adverse opinion or disclaimer of opinion,
and such audit report was not qualified or modified as to any uncertainty,
audit
scope or accounting practice.
During
fiscal 2002 and subsequent interim periods through the date we changed
independent registered public accounting firms, there were no disagreements
between us and KPMG on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedures, which
disagreements, if not resolved to the satisfaction of KPMG, would have caused
KPMG to make reference to the subject matter of the disagreement in connection
with its report. In addition, during those same periods, no reportable events,
as defined in Item 304(a)(1)(v) of Regulation S-K, occurred, and we did not
consult with Hein regarding the application of accounting principles to a
specific transaction, either completed or proposed, or the type of audit opinion
that might be rendered on our consolidated financial statements, or any other
matters or reportable events as set forth in Item 304(a)(2) of Regulation
S-K.
ITEM
9A. |
CONTROLS
AND PROCEDURES
|
(a) |
Evaluation
of Disclosure Controls and
Procedures
|
Mark
K.
Levenick, our former Interim Chief Executive Officer and Robert D. Peltier,
our
Acting 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 Secure Alliance, L.P.,
the
Company's principal operating subsidiary. In February 2005, Mr. Robert D.
Peltier joined the Company as Interim Chief Financial Officer and later as
Acting Chief Financial Officer. Mr. Peltier began his assessment of disclosure
controls and internal controls without having ever been in a position of active
management or knowledge over transactions during fiscal years 2002, 2003 or
2004. Mr. Levenick resigned his position with the Company effective September
30, 2006, in connection with the Cash Security Business Sale.
In
conducting the evaluation of disclosure controls and procedures and the
accounting controls and procedures, it was concluded that for the fiscal year
ended September 30, 2005, the Company had a material weakness in its internal
controls and procedures related to the company’s communication from its
principal operating subsidiary, Secure Alliance, L.P. (formerly Tidel
Engineering, L.P.) to the corporate office regarding the recognition of
revenues. The Company revised its revenue recognition policy in the fiscal
year
ended September 30, 2000 to recognize revenue at the time products are shipped
to customers. Approximately $2.0 million of revenues were recognized from the
sales of the Sentinel product in the fourth quarter of the fiscal year ended
September 30, 2005 and the majority of the units that related to the revenue
had
not been shipped as of September 30, 2005. These sales were not communicated
to
the corporate office, and accordingly our former Chief Executive Officer and
our
Chief Financial Officer concluded that the Company’s internal controls and
procedures were not effective as of the end of the year ended September 30,
2005. We properly adjusted our 2005 consolidated financial statements included
in this Annual Report on Form 10-K for the fiscal year ended September 30,
2005
to be in compliance with our revenue recognition policy.
In
order
to remedy this material weakness, the Company implemented a new internal control
procedure, which requires the principal operating subsidiary to send a monthly
billing schedule to the corporate office for review by the Chief Financial
Officer. The Chief Financial Officer is then required to review the monthly
billings with the Chief Executive Officer in Dallas to ensure that the monthly
revenues recorded are consistent with our revenue recognition
policy.
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 September 30, 2006
(b) |
Changes
in Internal Controls
|
In
the
ordinary course of business, we routinely enhance our information systems by
either upgrading our current systems or implementing new systems. Following
the
evaluations discussed above, the Company took the actions and implemented the
procedures described above. There were no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to date of the evaluation.
PART
III
ITEM
10. |
DIRECTORS
AND EXECUTIVE OFFICERS OF THE
REGISTRANT
|
Set
forth
below are the names and ages of our directors and executive officers and their
principal occupations at present and for the past five years. There are, to
our
knowledge, no agreements or understandings by which these individuals were
selected. No family relationships exist between any directors or executive
officers (as such term is defined in Item 401 of Regulation S-K), except as
otherwise stated below.
Name
|
|
Age
|
|
The
Company’s Officers
|
|
Director
Since
|
Mark
K. Levenick (1)
|
|
47
|
|
Interim
Chief Executive Officer, President and Chief Executive Officer of
Secure
Alliance, L.P., and Director
|
|
1995
|
Jerrell
G. Clay (2)
|
|
65
|
|
Director
|
|
1990
|
Raymond
P. Landry (3)
|
|
68
|
|
Director
|
|
2001
|
Stephen
P. Griggs (4)
|
|
49
|
|
Director
|
|
2002
|
Robert
D. Peltier
|
|
43
|
|
Acting
Chief Financial Officer
|
|
2005
|
|
(1) |
Mark
K. Levenick resigned from our Board and all positions with the Company
and
its subsidiaries effective September 30,
2006.
|
|
(2) |
Jerrell
G. Clay was appointed Chief Executive Officer of the Company effective
October 3, 2006.
|
|
(3) |
Raymond
P. Landry resigned from our Board effective September 30,
2006.
|
|
(4) |
Stephen
P. Griggs was appointed President and Chief Operating Officer of
the
Company effective October 3, 2006.
|
The
following is a summary of the business background and experience of each of
the
persons named above:
MARK
K.
LEVENICK served as our Interim Chief Executive Officer from December 2004 to
September
30, 2006 and
served as Chief Executive Officer of our principal operating subsidiary, Secure
Alliance, L.P., for in excess of five years. Mr. Levenick has been a Director
from May 1995 until his resignation effective September 30, 2006. He holds
a
Bachelor of Science degree from the University of Wisconsin at Whitewater.
Mr.
Levenick also had previously acted as our Interim Chief Executive Officer from
February 2002 to August 2002, during James T. Rash’s medical leave of
absence.
JERRELL
G. CLAY has served as a Director since December 1990, and as Chief Executive
Officer since October 3, 2006. Mr. Clay is also the Chief Executive Officer
of 3
Mark Financial, Inc., an independent life insurance marketing organization,
and
has served as president of one of its predecessors for in excess of five years.
Mr. Clay also serves as a member of the Independent Marketing Organization’s
Advisory Committee of Protective Life Insurance Company of Birmingham,
Alabama.
RAYMOND
P. LANDRY served as a Director from February 2001 to September 30, 2006 and
has
been engaged in private business consulting to various companies, including
some
other entities in the ATM industry, for in excess of five years. He has served
as a senior executive or financial officer with three publicly traded companies
and several private concerns over the last 30 years. Prior to that time, he
was
employed by the consulting group of Arthur Andersen & Co. (now known as
Accenture) for 10 years. Mr. Landry holds a Bachelor of Science degree in
Business Administration from Louisiana State University.
STEPHEN
P. GRIGGS has served as a Director since June 2002, and as President and Chief
Operating Officer since October 3, 2006. Mr. Griggs has been primarily engaged
in managing his personal investments since 2000. From 1988 to 2000, Mr. Griggs
held various positions, including President and Chief Operating Officer, with
RoTech Medical Corporation, a NASDAQ-traded company. He holds a Bachelor of
Science degree in Business Management from East Tennessee State University
and a
Bachelor of Science degree in Accounting from the University of Central Florida.
Mr. Griggs was appointed to the Board of Directors during 2002 to fill the
vacancy created by the mid-term resignation of a former director.
ROBERT
D.
PELTIER has served as Acting Chief Financial Officer since February 2005, and
has over fourteen years of experience in various accounting and financial
positions. Since 1997, he served in several financial capacities with Horizon
Offshore Contractors, Inc., including Vice President of Finance. He has more
than eight years experience in the preparation and filing of periodic reports
with the SEC. Mr. Peltier holds a Bachelor of Science Degree in Accounting
from
the University of North Texas. Mr. Peltier is the nephew of Mr. Landry, one
of
our directors that resigned effective September 30, 2006.
The
Company had a separately designated standing Audit Committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act, which is responsible
for reviewing the financial information which will be provided to shareholders
and others, the systems of internal controls, which management and the Board
of
Directors have established, and the financial reporting processes. On September
30, 2005 the Audit Committee consisted of Messrs, Griggs, and Clay. The Audit
Committee held no meetings during the last fiscal years 2004 and 2003,
respectively. During the fiscal year 2006 and 2005, the Audit committee held
three and six meetings. Except as identified in the following paragraph, each
member of the Audit Committee was an “independent director” as defined in Rule
4200 of the Marketplace Rules of the National Association of Securities Dealers,
Inc. (“NASD”) as of September 30, 2005. Effective August 26, 2005, Mr. Landry
resigned from the Audit Committee and Mr. Griggs was appointed as Chairman
of
the Audit Committee, and the Board of Directors determined that Mr. Griggs
is an
“audit committee financial expert” as defined in Item 401(h) of Regulation
S-K.
Subsequent
to the death of Jim Rash, our former Chairman, CEO and CFO, a meeting of the
Board of Directors was held to address the immediate needs of corporate
governance. At this meeting, Ray Landry was requested by the Board to provide
the Company with guidance in the areas of financial management and oversight
in
the negotiations with NCR and the sale of the Cash Security division. On
December 28, 2004, Mr. Landry entered into a consulting arrangement with the
Company to provide such services. From December 28, 2004 until his resignation,
effective September 30, 2006, Mr. Landry performed financial oversight and
financial and transactional consultation for the Company, and was paid on an
hourly basis.
The
Compensation Committee is responsible for reviewing the performance and
development of management in achieving corporate goals and objectives and
ensuring that the Company’s senior executives are compensated effectively in a
manner consistent with the Company’s strategy, competitive practice, and the
requirements of the appropriate regulatory bodies. Toward that end, the
Compensation Committee oversees all of the Company’s compensation, equity and
employee benefit plans and payments. The Compensation Committee held one meeting
each year during the last fiscal years 2006 and 2005, respectively. Each of
the
members of the Compensation Committee was an “independent director” as defined
in Rule 4200 of the Marketplace Rules of the NASD, and an “outside director” as
defined in Section 162(m) of the Internal Revenue Code of 1986.
Code
of Conduct and Ethics
The
Company has adopted a Code of Conduct and Ethics that applies to the Company’s
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions. This Code of
Conduct and Ethics was filed as an exhibit to the our Annual Report on Form
10-K
for the 2005 fiscal year. Our Code of Conduct and Ethics addresses conflicts
of
interest, usurpation of corporate opportunities, the protection and proper
use
of company assets, confidentiality, compliance with laws, rules, and
regulations, prompt reporting of any illegal or improper activity to an officer,
supervisor, manager, or other appropriate personnel of the Company. A copy
of
the Code of Conduct and Ethics is available in print, free of charge, to any
stockholder who requests a copy. Interested parties may address a written
request for a printed copy of the Code of Conduct and Ethics to: Secure Alliance
Holdings Corporation, 2900 Wilcrest, Suite 105, Houston, Texas 77042, Attention:
Corporate Secretary.
(b) |
Section
16(a) Beneficial Ownership Reporting
Compliance
|
Section
16(a) of the Securities Exchange Act of 1934 requires our directors and
officers, and persons who own more than 10% of a registered class of our equity
securities, to file reports of ownership and changes in ownership of such equity
securities with the Securities and Exchange Commission (“SEC”). Such entities
are also required by SEC regulations to furnish us with copies of all Section
16(a) forms filed.
Based
solely on a review of the copies of Forms 3, 4 and 5 furnished to us, and any
amendments thereto, and any written representations with respect to the
foregoing, we believe that our directors and officers, and greater than 10%
beneficial owners, have complied with all Section 16(a) filing
requirements.
ITEM
11. |
EXECUTIVE
COMPENSATION
|
The
following table sets forth the amount of all cash and other compensation we
have
paid for services rendered during the fiscal years ended September 30, 2006,
2005 and 2004 to James T. Rash, the former Chairman of the Board and Chief
Executive and Financial Officer, and to Mark K. Levenick, our former Interim
Chief Executive Officer, and our four most highly compensated Executive Officers
(as such term is defined in Item 402 of Regulation S-K) other than the CEO.
Summary
Compensation Table
|
|
|
|
|
|
|
|
Long-term
Compensation
Awards
|
|
|
|
|
|
|
|
|
|
Annual
Compensation
|
|
Securities
|
|
|
|
Name
and Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Other
Annual
Compensation
(*)
|
|
Underlying
Options
|
|
All
Other
Compensation
($)
|
|
James
T. Rash (1)
|
|
|
2006
|
|
$
|
—
|
|
$
|
—
|
|
|
*
|
|
$
|
—
|
|
$
|
—
|
|
Former
Chief Executive
|
|
|
2005
|
|
|
74,328
|
|
|
—
|
|
|
*
|
|
|
—
|
|
|
19,688
|
|
and
Financial Officer
|
|
|
2004
|
|
|
236,250
|
|
|
—
|
|
|
*
|
|
|
—
|
|
|
12,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark
K. Levenick (1)
|
|
|
2006
|
|
$
|
281,683
|
|
$
|
288,750
|
|
|
*
|
|
|
—
|
|
$
|
6,172
|
|
Interim
Chief Executive Officer
|
|
|
2005
|
|
|
262,500
|
|
|
315,000
|
|
|
*
|
|
|
—
|
|
|
6,172
|
|
|
|
|
2004
|
|
|
262,500
|
|
|
—
|
|
|
*
|
|
|
—
|
|
|
6,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael
F. Hudson (2)
|
|
|
2006
|
|
$
|
55,125
|
|
$
|
235,750
|
|
|
*
|
|
|
—
|
|
$
|
1,248
|
|
Executive
Vice President
|
|
|
2005
|
|
|
205,000
|
|
|
20,500
|
|
|
*
|
|
|
—
|
|
|
1,248
|
|
|
|
|
2004
|
|
|
204,750
|
|
|
10,250
|
|
|
*
|
|
|
—
|
|
|
1,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
M.
Flynt Moreland (3)
|
|
|
2006
|
|
$
|
187,789
|
|
$
|
147,000
|
|
|
*
|
|
|
—
|
|
$
|
—
|
|
Senior
Vice President —
|
|
|
2005
|
|
|
175,000
|
|
|
156,700
|
|
|
*
|
|
|
—
|
|
|
—
|
|
Research
& Development
|
|
|
2004
|
|
|
168,269
|
|
|
—
|
|
|
*
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troy
D. Richard (3)
|
|
|
2006
|
|
$
|
139,500
|
|
$
|
94,380
|
|
|
*
|
|
|
—
|
|
$
|
—
|
|
Senior
Vice President —
|
|
|
2005
|
|
|
130,000
|
|
|
107,380
|
|
|
*
|
|
|
—
|
|
|
—
|
|
Operations
of Secure Alliance, L.P.
|
|
|
2004
|
|
|
130,000
|
|
|
—
|
|
|
17,342
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthew
C. Johnson (4)
|
|
|
2006
|
|
$
|
—
|
|
$
|
—
|
|
|
*
|
|
|
—
|
|
$
|
—
|
|
Vice
President —
|
|
|
2005
|
|
|
133,600
|
|
|
66,000
|
|
|
*
|
|
|
—
|
|
|
—
|
|
Marketing
of Secure Alliance, L.P.
|
|
|
2004
|
|
|
127,392
|
|
|
—
|
|
|
*
|
|
|
—
|
|
|
—
|
|
— |
We
routinely give certain of our officers benefits, the amounts of which
are
customary in the industry. The aggregate dollar value of such benefits
paid to any named executive officer did not exceed the lesser of
$50,000,
or 10%, of the total annual salary and bonus during each of the fiscal
years ended September 30, 2005, 2004 and
2003.
|
|
(1) |
Mr.
Rash died December 19, 2004. Mr. Levenick was appointed Interim Chief
Executive Officer on December 22, 2004. Mr. Levenick resigned as
our
Interim Chief Executive Officer effective September 30,
2006.
|
|
(2) |
Mr.
Hudson’s employment was terminated effective December 31, 2005 in
connection with the ATM Business
Sale.
|
|
(3) |
Messrs.
Moreland’s and Richard’s respective employment was terminated effective
September 30, 2006 in connection with the Cash Security Business
Sale.
|
|
(4) |
Mr.
Johnson’s employment was terminated effective August 11,
2006.
|
Option/SAR
Grants in Last Fiscal Year
We
granted 225,380 stock options to our executive officers during the fiscal year
ended September 30, 2005. No stock options were granted during the fiscal year
ended September 30, 2006.
Option
Grants in Last Fiscal Year
No
stock
options were granted to our executives during the last fiscal year
Aggregated
Option Exercises in Last Fiscal Year and Option Values at Fiscal Year
End
The
following tables provide (i) the number of options exercisable by the respective
optionees, and (ii) the respective valuations at September 30, 2006 and
September 30, 2005.
|
|
Shares
acquired
on
exercise
|
|
Value
realized
|
|
Number
of
Securities
Underlying
Unexercised
Options at
September
30, 2006
(Shares)
|
|
Value
of Unexercised
In-the-Money
Options at
September
30, 2006
($)(2)
|
|
Name
|
|
(#)
|
|
($)
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
|
Mark
K. Levenick
|
|
|
—
|
|
|
—
|
|
|
275,000
|
|
|
100,000
|
|
$
|
—
|
|
$
|
10,000
|
|
Michael
F. Hudson (1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
M.
Flynt Moreland
|
|
|
—
|
|
|
—
|
|
|
77,400
|
|
|
25,000
|
|
|
—
|
|
|
2,500
|
|
Troy
D. Richard
|
|
|
—
|
|
|
—
|
|
|
25,000
|
|
|
7,500
|
|
|
—
|
|
|
750
|
|
Matthew
C. Johnson
|
|
|
—
|
|
|
—
|
|
|
7,880
|
|
|
5,380
|
|
|
—
|
|
|
538
|
|
(1) |
Mr.
Hudson’s employment agreement was terminated related to a settlement
agreement due to the ATM Business
Sale.
|
(2) |
Based
on the closing price of our common stock of $0.35 per share on September
30, 2006.
|
|
|
Shares
acquired
on
exercise
|
|
Value
realized
|
|
Number
of
Securities
Underlying
Unexercised
Options at
September
30, 2005
(Shares)
|
|
Value
of Unexercised
In-the-Money
Options at
September
30, 2005
($)(2)
|
|
Name
|
|
(#)
|
|
($)
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
|
James
T. Rash(1)
|
|
|
—
|
|
|
—
|
|
|
175,000
|
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Mark
K. Levenick
|
|
|
—
|
|
|
—
|
|
|
275,000
|
|
|
100,000
|
|
|
—
|
|
|
6,000
|
|
Michael
F. Hudson
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
75,000
|
|
|
—
|
|
|
4,500
|
|
M.
Flynt Moreland
|
|
|
—
|
|
|
—
|
|
|
52,400
|
|
|
25,000
|
|
|
—
|
|
|
1,500
|
|
Troy
D. Richard
|
|
|
—
|
|
|
—
|
|
|
25,000
|
|
|
7,500
|
|
|
—
|
|
|
1,350
|
|
Matthew
C. Johnson
|
|
|
—
|
|
|
—
|
|
|
2,500
|
|
|
5,380
|
|
|
—
|
|
|
173
|
|
(1) |
Mr.
Rash died December 19, 2004. The 175,000 options exercisable as of
September 30, 2004 expired on December 19,
2005.
|
(2) |
Based
on the closing price of our common stock of $0.31 per share on September
30, 2005.
|
Long-Term
Incentive Plans — Awards in Last Fiscal Year
We
did
not grant any awards to any of our executive officers under any long-term
incentive plans during the fiscal years ended September 30, 2006 and
2005.
Director
Compensation
During
fiscal year ended September 30, 2006, each outside Director earned compensation
in the amount of $3,000 per quarter, with no additional compensation for
committee representation. During fiscal year ended September 30, 2004, each
outside Director earned compensation in the amount of $3,000 per quarter, which
was subsequently paid in fiscal year 2005, with no additional compensation
for
committee representation.
Following
board approval in July 2006, we made a payment of $100,000 to each of our three
non-employee directors, Raymond P. Landry, Stephen P. Griggs, and Jerrell G.
Clay, in recognition of the extraordinary efforts of, and time spent by, such
directors over the past two years in connection with Tidel business matters,
including without limitation, the sale of our ATM business division to NCR
Corporation and exploring strategic alternatives regarding our Cash Security
business, and helping guide the Company following the serious illness and
subsequent death of our former Chief Executive Officer.
Employment
Contracts, Termination of Employment and Change of Control
Arrangements
On
June
9, 2006, we agreed to make the following payments to four executives who will
remain with the Cash Security business following the Cash Security Business
Sale: $350,000 to Mark K. Levenick, $50,000 to M. Flynt Moreland, $50,000 to
Troy D. Richard and $20,000 to Robert M. Gutierrez, in connection with the
termination of each such person's employment with the Company and upon the
closing of the Cash Security Business Sale. Under the agreement with each
executive, we agreed to make the termination payment upon the closing of the
Cash Security Business Sale in consideration for terminating such executive's
employment agreement and all rights thereunder (including any rights to vacation
pay or other benefits) other than for accrued pay. Each payment had previously
been approved by the Company's compensation committee, prior to the Cash
Security Business Sale being proposed, as a stay bonus in respect of such
executive continuing his employment with the Company until the ATM Business
Sale
and the Cash Security Business Sale. Under the terms of each agreement, each
executive agreed that all stock options held by him to purchase the Company's
common stock, to the extent exercisable and not previously terminated, may
be
exercised by him at any time prior to 90 days following the closing of the
Cash
Security Business Sale. Each
such
person’s respective employment with the Company was terminated effective
September 30, 2006 in connection with the Cash Security Business
Sale.
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 NCR Asset Purchase Agreement. Mr. Hudson and the
Company also entered into a 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’s employment with the Company was terminated effective December 31, 2005
in connection with the ATM Business Sale.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
following table sets forth as of December 15, 2006, the number of shares of
common stock beneficially owned by (i) the beneficial owners of more than 5%
of
our voting securities, (ii) each of our directors and executive officers of
the
Company individually and (iii) all of our directors and the executive officers
as a group. Except as otherwise indicated, and subject to applicable community
property laws, each person has sole investment and voting power with respect
to
the shares shown. Ownership information is based upon information furnished
by
the respective holders and contained in our records or upon public filings
made
by such persons with the SEC.
Title
of Class
|
|
Name
and Address of Beneficial Owner
|
|
Amount
and Nature of
Beneficial
Ownership
|
|
Percent
of
Class(1)
|
Common
stock
|
|
Kellogg
Capital Group LLC
55
Broadway, 4th Floor
New
York, New York 10006
|
|
2,261,623
|
|
|
11.6%
|
|
|
|
|
|
|
|
|
Common
stock
|
|
Alliance
Developments
One
Yorkdale Rd., Suite 510
North
York, Ontario M6A 3A1 Canada
|
|
1,030,362
|
(2)
|
|
5.5%
|
|
|
|
|
|
|
|
|
Common
stock
|
|
Mark
K. Levenick
2025
Beltline Rd., Ste. 114
Carrollton,
Texas 75006
|
|
390,000
|
(3)
|
|
2.0%
|
|
|
|
|
|
|
|
|
Common
stock
|
|
Jerrell
G. Clay
1600
Highway 6, Suite 400
Sugarland,
Texas 77478
|
|
181,405
|
|
|
*
|
|
|
|
|
|
|
|
|
Common
stock
|
|
Raymond
P. Landry
2900
Wilcrest, Suite 105
Houston,
Texas 77042
|
|
38,500
|
(4)
|
|
*
|
|
|
|
|
|
|
|
|
Common
stock
|
|
Michael
F. Hudson
2900
Wilcrest, Suite 105
Houston,
Texas 77042
|
|
22,700
|
(5)
|
|
*
|
|
|
|
|
|
|
|
|
Common
stock
|
|
Stephen
P. Griggs
2900
Wilcrest, Suite 105
Houston,
Texas 77042
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
Common
stock
|
|
Directors
and Executive
Officers
as a group (6 persons)
|
|
632,605
|
(6)
|
|
3.2%
|
(1) |
Based
upon 19,426,210 shares outstanding as of December 15, 2006.
|
(2) |
Includes
50,000 shares which could be acquired within 60 days upon exercise
of
outstanding warrants at an exercise price of $0.45 per
share.
|
(3) |
Includes
275,000 shares which could be acquired within 60 days upon exercise
of
outstanding options at exercise prices of (i) $1.25 per share as
to
100,000 shares, (ii) $1.875 per share as to 75,000 shares and (iii)
$2.50
per share as to 100,000 shares. Mr. Levenick resigned from our Board
and
from all positions with the Company and its subsidiaries effective
September 30, 2006 in connection with the Cash Security Business
Sale.
|
(4) |
Mr.
Landry resigned from our Board effective September 30, 2006 in connection
with the Cash Security Business
Sale.
|
(5) |
Mr.
Hudson’s employment was terminated effective December 31, 2005 in
connection with the ATM Business
Sale.
|
(6) |
Includes
the 275,000 shares referred to in Note (3) above which could be acquired
within 60 days upon exercise of outstanding
options.
|
ITEM
13. |
CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS
|
Raymond
P. Landry, a former member of our Board, provided certain financial consulting
services to the Company totaling $72,440 during the fiscal year
2006.
Robert
D.
Peltier, our Acting Chief Financial Officer, is the nephew of Raymond P. Landry,
one of our former directors. We have used the services of a consulting and
printing company in which Mr. Peltier has an interest. We believe that the
fees
paid to the consulting and printing company are comparable to fees that would
be
paid similar companies for comparable services rendered in arms-length
transactions. Amounts paid to this Company totaled approximately $ 357,000
for
consulting services and $62,000 for financial printing services for fiscal
2006.
On
January 12, 2006, we entered into the Cash Security Asset Purchase Agreement
with Sentinel Operating, L.P., a purchaser led by a management buyout group
that
included our former director and Interim Chief Executive Officer, Mark K.
Levenick, and our former director, Raymond P. Landry, pursuant to which we
agreed to sell the Cash Security Business for a cash purchase price of
$15,500,000, less $100,000 as consideration for Sentinel Operating, L.P.
assuming certain potential liability in connection with ongoing litigation,
and
less a working capital deficit adjustment of $1,629,968, resulting in a net
purchase price of $13,770,032. In addition, Sentinel Operating, L.P. paid a
cash
adjustment of $2,458,718 to the Company at closing. The Cash Security Business
Sale was completed on October 2, 2006.
On
June
9, 2006, we agreed to make the following payments to four executives who will
remain with the Cash Security business following the Cash Security Business
Sale: $350,000 to Mark K. Levenick, $50,000 to M. Flynt Moreland, $50,000 to
Troy D. Richard and $20,000 to Robert M. Gutierrez, in connection with the
termination of each such person's employment with the Company and upon the
closing of the Cash Security Business Sale. Under the agreement with each
executive, we agreed to make the termination payment upon the closing of the
Cash Security Business Sale in consideration for terminating such executive's
employment agreement and all rights thereunder (including any rights to vacation
pay or other benefits) other than for accrued pay. Each payment had previously
been approved by the Company's compensation committee, prior to the Cash
Security Business Sale being proposed, as a stay bonus in respect of such
executive continuing his employment with the Company until the ATM Business
Sale
and the Cash Security Business Sale.
On
October 3, 2006, the Company approved the payment to each of Messrs. Clay and
Griggs of a $100,000 per annum consulting fee on account of each such persons
duties and responsibilities as officers and directors of the Company, with
the
first scheduled payment commencing as of October 1, 2006. The Company has not
entered into any written agreement with Messrs. Clay and Griggs in respect
of
the foregoing consulting services.
ITEM
14. |
PRINCIPAL
ACCOUNTING FEES AND
SERVICES
|
The
aggregate fees billed by Hein & Associates LLP for professional services
rendered for (i) the audit of our annual financial statements set forth in
the
Annual Report on Form 10-K for the fiscal year ended September 30, 2006 and
fiscal year ended September 30, 2005, and (ii) the reviews of interim financial
statements included in the Quarterly Reports on Form 10-Q for the quarter ended
December 31, 2005 and quarters ended March 31, 2006 and June 30, 2006, were
approximately $243,000 for the fiscal year ended September 30, 2006 and $225,000
for the fiscal year ended September 30, 2005.
(b) |
Other
Audit-Related Fees
|
There
were no other audit-related fees incurred during the fiscal year ended September
30, 2006 and 2005.
The
aggregate fees billed by Hein & Associates LLP for tax services for the
fiscal year ended September 30, 2006 were $107,000 consisting of $12,000 related
to an IRS Audit for the year 2005, $65,000 related to other tax services, and
approximately $30,000 related to tax consulting. Aggregate fees were $75,000
for
the fiscal year ended September 30, 2005 for tax services.
There
were no fees for other professional services rendered during the fiscal years
ended September 30, 2006 and 2005.
Our
Audit
Committee has advised us that it has determined that the non-audit services
rendered by Hein & Associates LLP during the most recent fiscal year are
compatible with maintaining the independence of such auditors.
Our
policy is to pre-approve all professional fees associated with audit, tax and
audit-related services as they are proposed to us by Hein & Associates LLP
and other professional service firms. The Audit Committee approved of 100%
of
the services described in each of sections A—D above pursuant to 17 CFR
210.2-01(C)(7)(i)(C).
PART
IV
ITEM
15. |
FINANCIAL
STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM
8-K
|
Documents
Filed
Financial
Statements and Financial Statement Schedules
Our
audited consolidated financial statements and related financial statement
schedules and the report of an independent registered public accounting firm
as
required by Item 8 of Form 10-K and Regulation S-X are filed as a part of this
Annual Report, as set forth in the accompanying Index to Financial Statements.
Such audited financial statements and related financial statement schedules
include, in the opinion of our management, all required disclosures in the
accompanying notes.
Consolidated
Financial Statements of Secure Alliance Holdings Corporation and
Subsidiaries
Report
of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets — September 30, 2006 and 2005
Consolidated
Statements of Operations for the years ended September 30, 2006, 2005 and
2004
Consolidated
Statements of Comprehensive Income (Loss) for the years ended September 30,
2006, 2005 and 2004
Consolidated
Statements of Shareholders’ Equity (Deficit) for the years ended September 30,
2006, 2005 and 2004
Consolidated
Statements of Cash Flows for the years ended September 30, 2006, 2005 and
2004
Notes
to
Consolidated Financial Statements
Schedule
II Valuation and Qualifying Accounts — as filed as part of this Annual Report on
Form 10-K
Exhibits
The
Exhibits required by Item 601 of Regulation S-K and Regulation S-X are filed
as
a part of this Report, and are listed in the accompanying Index to
Exhibits.
Index
to Financial Statements
|
Page
|
CONSOLIDATED
FINANCIAL STATEMENTS OF SECURE ALLIANCE HOLDINGS CORPORATION AND
SUBSIDIARIES
|
|
Report
of Independent Registered Public Accounting Firm
|
40
|
Consolidated
Balance Sheets — September 30, 2006 and 2005
|
41
|
Consolidated
Statements of Operations for the years ended September 30, 2006,
2005 and
2004
|
42
|
Consolidated
Statements of Comprehensive Income (Loss) for the years ended September
30, 2006, 2005 and 2004
|
43
|
Consolidated
Statements of Shareholders’ Equity (Deficit) for the years ended September
30, 2006, 2005 and 2004
|
44
|
Consolidated
Statements of Cash Flows for the years ended September 30, 2006,
2005 and
2004
|
45
|
Notes
to Consolidated Financial Statements
|
46
|
Schedule
II Valuation and Qualifying Accounts — as filed as part of this Annual
Report on Form 10-K
|
66
|
All
other
schedules are omitted because they are not required, are not applicable or
the
required information is presented elsewhere herein.
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors
Secure
Alliance Holdings Corporation:
We
have
audited the consolidated 2006, 2005 and 2004 financial statements of Secure
Alliance Holdings Corporation and subsidiaries as listed in the accompanying
index. In connection with our audits of the consolidated financial statements,
we also have audited the financial statement schedule as listed in the
accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company has determined that
it
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well
as evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Secure Alliance Holdings
Corporation and subsidiaries as of September 30, 2006 and 2005, and the results
of their operations and their cash flows for each of the years in the three-year
period ended September 30, 2006 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As
further discussed in note #22 to the consolidated financial statements, the
Company disposed of its remaining operating assets and liabilities in October
2006, liquidated its liabilities and currently has no
operations.
/s/
HEIN & ASSOCIATES LLP
|
|
|
|
Houston,
Texas
|
December 8,
2006
|
SECURE
ALLIANCE HOLDINGS CORPORATION AND
SUBSIDIARIES
(FORMERLY
TIDEL TECHNOLOGIES, INC.)
CONSOLIDATED
BALANCE SHEETS
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,264,463
|
|
$
|
1,003,663
|
|
Restricted
cash
|
|
|
5,400,000
|
|
|
—
|
|
Marketable
securities held-to-maturity
|
|
|
4,899,249
|
|
|
—
|
|
Marketable
securities available-for-sale
|
|
|
851,939
|
|
|
—
|
|
Trade
account receivable
|
|
|
—
|
|
|
250,000
|
|
Other
receivables
|
|
|
220,689
|
|
|
12,965
|
|
Prepaid
expenses and other
|
|
|
132,036
|
|
|
170,231
|
|
Assets
held for sale, net of accumulated depreciation of $1,352,463 and
$5,236,167, respectively (See Note 2)
|
|
|
6,312,663
|
|
|
15,471,113
|
|
Total
current assets
|
|
|
19,081,039
|
|
|
16,907,972
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, at cost
|
|
|
—
|
|
|
55,641
|
|
Accumulated
depreciation
|
|
|
—
|
|
|
(42,848
|
)
|
Net
property, plant and equipment
|
|
|
—
|
|
|
12,793
|
|
Other
assets
|
|
|
4,000
|
|
|
615,763
|
|
Total
assets
|
|
$
|
19,085,039
|
|
$
|
17,536,528
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Current
maturities
|
|
$
|
—
|
|
$
|
2,325,000
|
|
Accounts
payable
|
|
|
221,295
|
|
|
431,876
|
|
Accrued
interest payable
|
|
|
2,000,000
|
|
|
2,135,852
|
|
Shares
subject to redemption
|
|
|
5,400,000
|
|
|
—
|
|
Other
accrued liabilities
|
|
|
150,194
|
|
|
290,871
|
|
Liabilities
held for sale (See Note 2)
|
|
|
3,636,369
|
|
|
7,993,154
|
|
Total
current liabilities
|
|
|
11,407,858
|
|
|
13,176,753
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current maturities and debt discount of $3,746,531 at
September 30, 2005
|
|
|
—
|
|
|
2,096,457
|
|
Total
liabilities
|
|
|
11,407,858
|
|
|
15,273,210
|
|
|
|
|
|
|
|
|
|
Commentments
and contingencies
|
|
|
|
|
|
|
|
Shareholders’
Equity:
|
|
|
|
|
|
|
|
Common
stock, $.01 par value, authorized 100,000,000 shares; issued and
outstanding 38,677,210 shares and 20,677,210 shares,
respectively
|
|
|
386,772
|
|
|
206,772
|
|
Additional
paid-in capital
|
|
|
30,782,187
|
|
|
30,962,187
|
|
Accumulated
deficit
|
|
|
(24,043,717
|
)
|
|
(28,905,810
|
)
|
Accumulated
other comprehensive income
|
|
|
551,939
|
|
|
169
|
|
Total
shareholders’ equity
|
|
|
7,677,181
|
|
|
2,263,318
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
19,085,039
|
|
$
|
17,536,528
|
|
See
accompanying Notes to Consolidated Financial Statements
SECURE
ALLIANCE HOLDINGS CORPORATION AND SUBSIDIARIES
(FORMERLY
TIDEL TECHNOLOGIES, INC.)
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Years
Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Revenues
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
3,065,064
|
|
|
1,805,484
|
|
|
2,011,257
|
|
Depreciation
and amortization
|
|
|
2,678
|
|
|
4,977
|
|
|
4,146
|
|
Operating
loss
|
|
|
(3,067,742
|
)
|
|
(1,810,461
|
)
|
|
(2,015,403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
Gain
on disposal of investment in 3CI
|
|
|
|
|
|
|
|
|
|
|
Pursuant
to class-action settlement
|
|
|
5,380,121
|
|
|
—
|
|
|
—
|
|
Amortization
of debt discount and deferred financing costs
|
|
|
(4,078,738
|
)
|
|
(3,816,178
|
)
|
|
(2,529,864
|
)
|
Interest
Income
|
|
|
392,564
|
|
|
(2,732,891
|
)
|
|
(1,670,804
|
)
|
Interest
Expense
|
|
|
(235,765
|
)
|
|
|
|
|
|
|
Gain
on extinguishment of debt
|
|
|
—
|
|
|
—
|
|
|
18,823,000
|
|
Gain
on sale of securities
|
|
|
—
|
|
|
—
|
|
|
1,918,012
|
|
Gain
on collection of receivable
|
|
|
598,496
|
|
|
—
|
|
|
—
|
|
Gain
on CCC bankruptcy settlement
|
|
|
105,000
|
|
|
—
|
|
|
—
|
|
Other
expense
|
|
|
(7,455
|
)
|
|
—
|
|
|
—
|
|
Total
other income (expense)
|
|
|
2,154,223
|
|
|
(6,549,069
|
)
|
|
16,540,344
|
|
Income
(loss) before taxes
|
|
|
(913,519
|
)
|
|
(8,359,530
|
)
|
|
14,524,941
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit) from continuing operations
|
|
|
159,546
|
|
|
—
|
|
|
(81,229
|
)
|
Income
(loss) from continuing operations
|
|
|
(1,073,065
|
)
|
|
(8,359,530
|
)
|
|
14,606,170
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations
|
|
|
2,399,053
|
|
|
5,073,608
|
|
|
(3,288,598
|
)
|
Gain
on sale of ATM business
|
|
|
3,536,105
|
|
|
—
|
|
|
—
|
|
Total
discontinued operations
|
|
|
5,935,158
|
|
|
5,073,608
|
|
|
(3,288,598
|
)
|
Net
income (loss)
|
|
$
|
4,862,093
|
|
$
|
(3,285,922
|
)
|
$
|
11,317,572
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
(0.03
|
)
|
$
|
(0.41
|
)
|
$
|
0.84
|
|
Income
(loss) from discontinued operations
|
|
|
0.18
|
|
|
0.25
|
|
|
(0.19
|
)
|
Net
income (loss)
|
|
$
|
0.15
|
|
$
|
(0.16
|
)
|
$
|
0.65
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
33,499,128
|
|
|
20,292,796
|
|
|
17,426,210
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
(0.03
|
)
|
$
|
(0.41
|
)
|
$
|
0.42
|
|
Income
(loss) from discontinuing operations
|
|
|
0.18
|
|
|
0.25
|
|
|
(0.09
|
)
|
Net
income (loss)
|
|
$
|
0.15
|
|
$
|
(0.16
|
)
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average common and
|
|
|
|
|
|
|
|
|
|
|
Dilutive
shares outstanding
|
|
|
33,499,128
|
|
|
20,292,796
|
|
|
38,576,763
|
|
See
accompanying Notes to Consolidated Financial Statements
SECURE
ALLIANCE HOLDINGS CORPORATION AND SUBSIDIARIES
(FORMERLY
TIDEL TECHNOLOGIES, INC.)
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
|
Years
Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Net
income (loss)
|
|
$
|
4,862,093
|
|
$
|
(3,285,922
|
)
|
$
|
11,317,572
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on marketable securities available-for-sale
|
|
|
551,939
|
|
|
—
|
|
|
—
|
|
Unrealized
gain on investment in 3CI
|
|
|
—
|
|
|
35,093
|
|
|
34,923
|
|
Comprehensive
income (loss)
|
|
$
|
5,414,032
|
|
$
|
(3,250,829
|
)
|
$
|
11,352,495
|
|
See
accompanying Notes to Consolidated Financial Statements
SECURE
ALLIANCE HOLDINGS CORPORATION AND SUBSIDIARIES
(FORMERLY
TIDEL TECHNOLOGIES, INC.)
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
|
|
Shares
Issued
and
Outstanding
|
|
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
(Accumulated
Deficit)
|
|
Other
|
|
Total
Shareholders
Equity
(Deficit)
|
|
Balances,
September 30, 2003
|
|
$
|
17,426,210
|
|
$
|
174,262
|
|
$
|
19,296,005
|
|
$
|
(36,937,460
|
)
|
$
|
(211,410
|
)
|
$
|
(17,678,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,317,572
|
|
|
—
|
|
|
11,317,572
|
|
Receivable
from officer
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(31,675
|
)
|
|
(31,675
|
)
|
Settlement
of Hudson stock subscription receivable
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
141,563
|
|
|
141,563
|
|
Unrealized
gain on investment in 3CI
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
34,923
|
|
|
34,923
|
|
Issuance
of warrants in connection with debt with beneficial conversion
premium on
convertible debt
|
|
|
—
|
|
|
—
|
|
|
8,804,669
|
|
|
—
|
|
|
—
|
|
|
8,804,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
September 30, 2004
|
|
|
17,426,210
|
|
|
174,262
|
|
|
28,100,674
|
|
|
(25,619,888
|
)
|
|
(66,599
|
)
|
|
2,588,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,285,922
|
)
|
|
—
|
|
|
(3,285,922
|
)
|
Issuance
of shares to Laurus in payment of fees
|
|
|
1,251,000
|
|
|
12,510
|
|
|
625,500
|
|
|
—
|
|
|
—
|
|
|
638,010
|
|
Issuance
of shares in connection with settlement of class-action
litigation
|
|
|
2,000,000
|
|
|
20,000
|
|
|
1,544,490
|
|
|
—
|
|
|
—
|
|
|
1,564,490
|
|
Shares
received from officer in connection with settlement
|
|
|
—
|
|
|
—
|
|
|
(31,675
|
)
|
|
—
|
|
|
31,675
|
|
|
—
|
|
Unrealized
gain on investment in 3CI
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
35,093
|
|
|
35,093
|
|
Issuance
of warrants in connection with debt with beneficial conversion
premium on
convertible debt
|
|
|
—
|
|
|
—
|
|
|
723,198
|
|
|
—
|
|
|
—
|
|
|
723,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
September 30, 2005
|
|
|
20,677,210
|
|
|
206,772
|
|
|
30,962,187
|
|
|
(28,905,810
|
)
|
|
169
|
|
|
2,263,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,862,093
|
|
|
—
|
|
|
4,862,093
|
|
Issuance
of shares subject to redemption
|
|
|
18,000,000
|
|
|
180,000
|
|
|
(180,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Unrealized
gain on marketable securities available-for-sale
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
551,939
|
|
|
551,939
|
|
Disposal
of investment in 3CI pursuant to class-action settlement
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(169
|
)
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
September 30, 2006
|
|
|
38,677,210
|
|
$
|
386,772
|
|
$
|
30,782,187
|
|
$
|
(24,043,717
|
)
|
$
|
551,939
|
|
$
|
7,677,181
|
|
See
accompanying Notes to Consolidated Financial Statements.
SECURE
ALLIANCE HOLDINGS CORPORATION AND SUBSIDIARIES
(FORMERLY
TIDEL TECHNOLOGIES, INC.)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Years
Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
4,862,093
|
|
$
|
(3,285,922
|
)
|
$
|
11,317,572
|
|
Adjustments
to reconcile net income (loss) to net cash used in continuing operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,678
|
|
|
4,977
|
|
|
4,146
|
|
Amortization
of debt discount and financing costs
|
|
|
4,078,738
|
|
|
3,816,178
|
|
|
2,529,864
|
|
Gain
on disposal of investment in 3CI pursuant to class-action
settlement
|
|
|
(5,380.121
|
)
|
|
—
|
|
|
—
|
|
Gain
on extinguishment of convertible debentures
|
|
|
—
|
|
|
—
|
|
|
(18,823,000
|
)
|
Gain
on sale of securities
|
|
|
—
|
|
|
—
|
|
|
(1,918,012
|
)
|
Loss
from disposal of fixed assets
|
|
|
7,455
|
|
|
—
|
|
|
—
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Trade
accounts receivable, net
|
|
|
250,000
|
|
|
—
|
|
|
—
|
|
Notes
and other receivables
|
|
|
(207,724
|
)
|
|
1,022,433
|
|
|
490,620
|
|
Prepaid
expenses and other assets
|
|
|
38,196
|
|
|
(131,140
|
)
|
|
(12,633
|
)
|
Accounts
payable and accrued liabilities
|
|
|
(487,110
|
)
|
|
2,013,106
|
|
|
1,739,582
|
|
Net
cash flows used in discontinued operations
|
|
|
(5,935,675
|
)
|
|
(3,901,956
|
)
|
|
1,846,545
|
|
Net
cash used in operating activities
|
|
|
(2,771,470
|
)
|
|
(462,324
|
)
|
|
(2,825,316
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from continuing investing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from class-action settlement on investment in 3CI
|
|
|
5,659,507
|
|
|
—
|
|
|
—
|
|
Increase
in marketable securities held-to-maturity
|
|
|
(4,899,249
|
)
|
|
—
|
|
|
—
|
|
Proceeds
from sale of securities
|
|
|
—
|
|
|
—
|
|
|
2,451,444
|
|
Purchases
of property, plant and equipment, net
|
|
|
—
|
|
|
(11,566
|
)
|
|
—
|
|
Net
cash provided by discontinued investing activities
|
|
|
10,440,000
|
|
|
—
|
|
|
—
|
|
Net
cash provided by (used in) investing activities
|
|
|
11,200,258
|
|
|
(11,566
|
)
|
|
2,451,444
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from borrowings
|
|
|
—
|
|
|
2,100,000
|
|
|
7,409,921
|
|
Repayments
of notes payable
|
|
|
(2,767,988
|
)
|
|
(600,000
|
)
|
|
(3,297,261
|
)
|
Borrowing
on revolver
|
|
|
1,204,391
|
|
|
2,251,203
|
|
|
—
|
|
Payments
of revolver
|
|
|
(1,204,391
|
)
|
|
(2,251,203
|
)
|
|
—
|
|
Repayments
of convertible debentures
|
|
|
—
|
|
|
—
|
|
|
(6,000,000
|
)
|
(Increase)
decrease in restricted cash
|
|
|
(5,400,00
|
)
|
|
—
|
|
|
2,200,000
|
|
Increase
in deferred financing costs
|
|
|
—
|
|
|
(280,567
|
)
|
|
(595,765
|
)
|
Net
cash provided by discontinued financing activities
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
cash provided by (used in) financing activities
|
|
|
(8,167,988
|
)
|
|
1,219,433
|
|
|
(283,105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
260,800
|
|
|
745,543
|
|
|
(656,977
|
)
|
Cash
and cash equivalents at beginning of year
|
|
|
1,003,663
|
|
|
258,120
|
|
|
915,097
|
|
Cash
and cash equivalents at end of year
|
|
$
|
1,264,463
|
|
$
|
1,003,663
|
|
$
|
258,120
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
314,314
|
|
$
|
755,808
|
|
$
|
209,957
|
|
Cash
paid (refunded) for taxes
|
|
$
|
70,962
|
|
$
|
—
|
|
$
|
(81,229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
Conversion
of debt into common stock subject to redemption
|
|
$
|
5,400,000
|
|
$
|
—
|
|
$
|
—
|
|
Discount
on issuance of debt with beneficial conversion premium and detachable
warrants
|
|
$
|
—
|
|
$
|
723,198
|
|
$
|
8,804,669
|
|
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
|
|
$
|
—
|
|
Warrants
issued for deferred financing cost
|
|
$
|
—
|
|
$
|
—
|
|
$
|
229,180
|
|
Conversion
of interest payable to loan principal
|
|
$
|
—
|
|
$
|
—
|
|
$
|
229,988
|
|
Unrealized
gain on 3CI investment
|
|
$
|
—
|
|
$
|
35,093
|
|
$
|
—
|
|
Unrealized
gain on marketable securities available-for-sale
|
|
$
|
551,939
|
|
$
|
—
|
|
$
|
—
|
|
See
accompanying Notes to Consolidated Financial Statements.
SECURE
ALLIANCE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2006, 2005 AND 2004
(1) |
Summary
of Significant Accounting Policies for Continued
Operations
|
Description
of Business
Secure
Alliance Holdings Corporation (the “Company,” “we,” “us,” or “our”) is a
Delaware corporation which, through its wholly-owned subsidiaries, developed,
manufactured, sold and supported 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 were designed for the management of cash within various
specialty retail markets, primarily in the United States.
Principles
of Consolidation
The
consolidated financial statements include our accounts and our wholly-owned
subsidiaries. All significant intercompany items have been eliminated in
consolidation.
Cash
and Cash Equivalents
For
purposes of consolidated financial statement presentation and reporting cash
flows, all liquid investments with original maturities at the date of purchase
of three months or less are considered cash equivalents.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost. Depreciation is calculated on the
straight-line method over the estimated useful lives of the assets. Expenditures
for major renewals and betterments are capitalized; expenditures for repairs
and
maintenance are charged to expense as incurred.
Intangible
Assets
All
intangible assets are amortized using the straight-line method over a period
ranging from 5 to 10 years.
Impairment
of Long-Lived Assets
Our
long-lived assets and certain identifiable intangibles and goodwill are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of any assets may not be recoverable. In performing the review
for recoverability, we estimate the future cash flows expected to result from
the use of our assets and our eventual disposition. If the sum of the expected
future cash flows (undiscounted and without interest charges) is less than
the
carrying amount of the asset, an impairment loss is recognized.
Federal
Income Taxes
Income
taxes are accounted for under the asset and liability method, whereby deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to
taxable income in the years in which those temporary differences are expected
to
be recovered or settled. The effect on deferred tax assets and liabilities
of a
change in tax rates is recognized in determining income or loss in the period
that includes the enactment date.
Investment
Securities
In
accordance with Statement of Financial Accounting Standards No. 115, “Accounting
for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”), we
classify our investment in 3CI Complete Compliance Corporation (“3CI”) as
available-for-sale, with unrealized gains and losses excluded from earnings
and
recorded as a component of other comprehensive income. The investment in 3CI
was
$279,556 and was classified as other assets totaling $615,763 in 2005 in the
accompanying consolidated balance sheets. Declines in fair value below the
amortized cost basis of the investments that are determined to be other than
a
temporary decline are charged to earnings.
Accumulated
Other Comprehensive Income (Loss)
Accumulated
other comprehensive income (loss) includes all non-equity holder changes in
shareholders’ equity. As of
September
30, 2006 and 2005, our only component of accumulated other comprehensive loss
relates to unrealized gains and losses on our investment in 3CI.
Net
Income (Loss) Per Share
In
accordance with Statement of Financial Accounting Standards No. 128, “Earnings
Per Share” (“SFAS No. 128”), we compute and present both basic and diluted
earnings per share (“EPS”) amounts. Basic EPS is computed by dividing income
(loss) available to common shareholders by the weighted-average number of common
shares outstanding for the period, and excludes the effect of potentially
dilutive securities (such as options, warrants and convertible securities),
which are convertible into common stock. Dilutive EPS reflects the potential
dilution from options, warrants and convertible securities.
Stock-Based
Compensation
In
December 2004, the FASB issued SFAS No. 123(R), which amends SFAS No. 123 and
supersedes APB Opinion No. 25. SFAS No. 123(R) requires compensation expense
to
be recognized for all share-based payments made to employees based on the fair
value of the award at the date of grant, eliminating the intrinsic value
alternative allowed by SFAS No. 123. Generally, the approach to determining
fair
value under the original pronouncement has not changed. However, there are
revisions to the accounting guidelines established, such as accounting for
forfeitures, that will change our accounting for stock-based awards in the
future.
The
statement allows companies to adopt its provisions using either of the following
transition alternatives:
• |
The
modified prospective method, which results in the recognition of
compensation expense using SFAS 123(R) for all share-based awards
granted
after the effective date and the recognition of compensation expense
using
SFAS 123 for all previously granted share-based awards that remain
unvested at the effective date; or
|
• |
The
modified retrospective method, which results in applying the modified
prospective method and restating prior periods by recognizing the
financial statement impact of share-based payments in a manner consistent
with the pro forma disclosure requirements of SFAS No. 123. The modified
retrospective method may be applied to all prior periods presented
or
previously reported interim periods of the year of
adoption.
|
We
adopted SFAS No. 123(R) on October 1, 2005, using the modified prospective
method. This change in accounting has not materially impacted our financial
position. We applied the fair-value criteria established by SFAS No. 123(R)
to
previous stock option grants, the impact to our results of operations would
have
approximated the impact of applying SFAS No. 123, which was a decrease to net
income of approximately $9,801 in 2006, $19,433 in 2005, a decrease to net
income of approximately $1,392 in 2004, and an increase to our net loss of
$15,363. The impact of applying SFAS No. 123 to previous stock option grants
is
further summarized in Note 1 of the Notes to Consolidated Financial
Statements.
We
recognize expense related to stock options and other types of equity-based
compensation beginning in fiscal year 2006 and such cost must be recognized
over
the period during which an employee is required to provide service in exchange
for the award. The requisite service period is usually the vesting period.
The
standard also requires us to estimate the number of instruments that will
ultimately be issued, rather than accounting for forfeitures as they occur.
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Net
income (loss) as reported
|
|
$
|
4,862,093
|
|
$
|
(3,285,922
|
)
|
$
|
11,317,572
|
|
Deduct:
|
|
|
|
|
|
|
|
|
|
|
Total
stock-based employee compensation expense determined under SFAS 123,
net
of taxes
|
|
|
(9,801
|
)
|
|
(19,433
|
)
|
|
(1,392
|
)
|
Net
income (loss), pro forma
|
|
$
|
4,852,292
|
|
$
|
(3,305,355
|
)
|
$
|
11,316,180
|
|
Basic
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
|
0.15
|
|
|
(0.16
|
)
|
|
0.65
|
|
Pro
forma
|
|
|
0.15
|
|
|
(0.16
|
)
|
|
0.65
|
|
Diluted
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
|
0.15
|
|
|
(0.16
|
)
|
|
0.33
|
|
Pro
forma
|
|
|
0.15
|
|
|
(0.16
|
)
|
|
0.37
|
|
Use
of Estimates
The
preparation of the accompanying consolidated financial statements requires
the
use of estimates by management in determining our assets and liabilities at
the
date of the Consolidated Financial Statements and the reported amount of
revenues and expenses during the period. Actual results could differ from these
estimates.
Fair
Value of Financial Instruments
Statement
of Financial Accounting Standards No. 107, “Disclosures About Fair Value of
Financial Instruments,” requires the disclosure of estimated fair values for
financial instruments. Fair value estimates are made at discrete points in
time
based on relevant market information. These estimates may be subjective in
nature and involve uncertainties and matters of significant judgment and
therefore, cannot be determined with precision. We believe that the carrying
amounts of our financial instruments included in current assets and current
liabilities approximate the fair value of such items due to their short-term
nature.
The
carrying amount of long-term debt, excluding the discounts related to the
warrants issued with the debt, approximates its fair value because the interest
rates approximate market.
New
Accounting Pronouncements
In
July 2006, the FASB issued Interpretation No. 48 (“FIN 48”),
Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting
for
uncertainty in income taxes recognized in an enterprise’s financial statements
in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48
prescribes a recognition threshold and measurement attributable for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures and transitions. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
impact on its financial statements of FIN 48 upon adoption effective in fiscal
year 2007.
In
December 2004, the FASB issued SFAS No. 123(R), which amends SFAS No. 123 and
supersedes APB Opinion No. 25. SFAS No. 123(R) requires compensation expense
to
be recognized for all share-based payments made to employees based on the fair
value of the award at the date of grant, eliminating the intrinsic value
alternative allowed by SFAS No. 123. Generally, the approach to determining
fair
value under the original pronouncement has not changed. However, there are
revisions to the accounting guidelines established, such as accounting for
forfeitures, that will change our accounting for stock-based awards in the
future.
SFAS
No.
123(R) must be adopted in the first interim or annual period for fiscal year
periods beginning after June 15, 2005. The statement allows companies to adopt
its provisions using either of the following transition
alternatives:
• |
The
modified prospective method, which results in the recognition of
compensation expense using SFAS 123(R) for all share-based awards
granted
after the effective date and the recognition of compensation expense
using
SFAS 123 for all previously granted share-based awards that remain
unvested at the effective date; or
|
• |
The
modified retrospective method, which results in applying the modified
prospective method and restating prior periods by recognizing the
financial statement impact of share-based payments in a manner consistent
with the pro forma disclosure requirements of SFAS No. 123. The modified
retrospective method may be applied to all prior periods presented
or
previously reported interim periods of the year of
adoption.
|
We
adopted SFAS No. 123(R) on October 1, 2005, using the modified prospective
method. This change in accounting did not materially impact our financial
position. However, because we accounted for share-based payments to our
employees using the intrinsic value method, our results of operations did not
include the recognition of compensation expense for the issuance of stock option
awards. Had we applied the fair-value criteria established by SFAS No. 123(R)
to
previous stock option grants, the impact to our results of operations would
have
approximated the impact of applying SFAS No. 123, which was a decrease to net
income of approximately $19,433 in 2005 and $1,392 in 2004. The impact of
applying SFAS No. 123 to previous stock option grants is further summarized
above in Note 1 of the Notes to consolidated financial statements.
We
will
be required to recognize expense related to stock options and other types of
equity-based compensation beginning in our fiscal year ending in 2006 and such
cost must be recognized over the period during which an employee is required
to
provide service in exchange for the award. The requisite service period is
usually the vesting period. The standard also requires us to estimate the number
of instruments that will ultimately be issued, rather than accounting for
forfeitures as they occur. Additionally, we may be required to change our method
for determining the fair value of stock options.
In
April
2002, SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB No. 13, and Technical Corrections,” was issued. This statement provides
guidance on the classification of gains and losses from the extinguishment
of
debt and on the accounting for certain specified lease transactions, as well
as
other items. As a result, gains or losses arising from the extinguishment of
debt are no longer required to be reported as extraordinary items. We reported
a
gain on extinguishment of debt in the fiscal year 2004 in the amount of
$18,823,000.
Effective
for financial statements issued for fiscal years beginning after December 15,
2001, and interim periods within those fiscal years, SFAS No. 144 “Accounting
for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), changed
the criteria for determining when the disposal or sale of certain assets meets
the definition of “discontinued operations.” At the November 2004 EITF meeting,
the final consensus was reached on EITF Issue No. 03-13, “Applying the
Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether
to
Report Discontinued Operations” (“EITF Issue No. 03-13”). This Issue is
effective prospectively for disposal transactions entered into after January
1,
2005, and provides a model to assist in evaluating (i) which cash flows should
be considered in the determination of whether cash flows of the disposal
component have been, or will be, eliminated from the ongoing operations of
the
entity and (ii) the types of continuing involvement that constitute significant
continuing involvement in the operations of the disposal component. The Company
considered the model outlined in EITF Issue No. 03-13 in its evaluation of
the
February 19, 2005 asset purchase agreement of the ATM business with NCR (see
Note 2 below for more information). We have concluded that we are required
to
report the ATM assets of this sale as discontinued operations net of any
applicable income taxes for all periods presented.
(2) |
Discontinued
Operations
|
ATM
Business
On
February 19, 2005, the Company and its wholly-owned subsidiary, Secure Alliance,
L.P., entered into NCR Asset Purchase Agreement with NCR EasyPoint, a wholly
owned subsidiary of NCR Corporation, for the sale of our ATM
Business.
On
December 28, 2005, the holders of 62.2% of our shares of outstanding common
stock approved the NCR Asset Purchase Agreement.
On
January 3, 2006, we completed the ATM Business Sale. The total purchase price
was approximately $10.4 million of which $8.2 million was paid to Laurus into
a
collateral account to be held by Laurus as collateral for the satisfaction
of
all monetary obligations payable to Laurus, $0.5 million was paid into an escrow
account pending a post closing net asset value adjustment, and the remaining
$1.7 million was paid to the Company to be used for necessary working capital.
This transaction resulted in a book gain of approximately $3.5
million.
We
classified the ATM business as Assets Held for Sale as of 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)
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
—
|
|
$
|
—
|
|
Trade
accounts receivable, net of allowance of approximately $0 and $1,125,000,
respectively
|
|
|
—
|
|
|
2,310,262
|
|
Inventories
|
|
|
—
|
|
|
7,323,439
|
|
Prepaid
expenses and other
|
|
|
—
|
|
|
392,972
|
|
Total
current assets
|
|
|
—
|
|
|
10,026,673
|
|
Property,
plant and equipment, at cost
|
|
|
—
|
|
|
4,337,677
|
|
Accumulated
depreciation
|
|
|
—
|
|
|
(4,216,152
|
)
|
Net
property, plant and equipment
|
|
|
—
|
|
|
121,525
|
|
Other
assets
|
|
|
—
|
|
|
27,297
|
|
Total
assets
|
|
$
|
—
|
|
$
|
10,175,495
|
|
LIABILITIES
|
|
|
—
|
|
|
|
|
Current
Liabilities:
|
|
|
—
|
|
|
|
|
Accounts
payable
|
|
$
|
—
|
|
$
|
1,681,288
|
|
Other
accrued expenses
|
|
|
—
|
|
|
1,814,634
|
|
Total
liabilities
|
|
$
|
—
|
|
$
|
3,495,922
|
|
DISCONTINUED
OPERATIONS — ATM BUSINESS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Years
Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Net
sales
|
|
$
|
3,847,874
|
|
$
|
15,497,834
|
|
$
|
15,047,292
|
|
Cost
of sales
|
|
|
2,592,268
|
|
|
9,508,120
|
|
|
11,762,082
|
|
Gross
profit
|
|
|
1,255,606
|
|
|
5,989,714
|
|
|
3,285,210
|
|
Selling,
general and administrative
|
|
|
880,941
|
|
|
4,768,880
|
|
|
4,709,478
|
|
Depreciation
and amortization
|
|
|
46,048
|
|
|
255,967
|
|
|
292,543
|
|
Operating
loss
|
|
|
328,617
|
|
|
964,867
|
|
|
(1,716,811
|
)
|
Non-operating
(income) expense
|
|
|
—
|
|
|
—
|
|
|
16,456
|
|
Net
income (loss)
|
|
$
|
328,617
|
|
$
|
964,867
|
|
$
|
(1,733,267
|
)
|
Cash
Security Business
On
January 12, 2006, we entered into an asset purchase agreement with Sentinel
Operating, L.P., a purchaser led by a management buyout team that included
our
former director and Interim Chief Executive Officer, Mark K. Levenick, and
our
former director, Raymond P. Landry, pursuant to which we agreed to sell (the
"Cash Security Business Sale") our electronic cash security business ,
consisting of (a) timed access cash controllers, (b) the Sentinel products,
(c)
the servicing, maintenance and repair of the timed access cash controllers
or
Sentinel products and (d) all other assets and business operations associated
with the foregoing. We and Sentinel Operating, L.P. amended and restated the
asset purchase agreement as of June 9, 2006 (as amended, the “Cash Security
Asset Purchase Agreement”). The two members of our Board who were unaffiliated
with the management buyout of the Cash Security business negotiated the terms
of
the Cash Security Asset Purchase Agreement with the management buyout
group.
The
independent members of our Board received an opinion from an investment advisory
firm, Capitalink, L.C., as to the fairness of the Cash Security Business Sale
from a financial point of view to the unaffiliated shareholders. On June 9,
2006, our Board, with Messrs. Levenick and Landry abstaining, voted to approve
the Cash Security Asset Purchase Agreement and the Cash Security Business
Sale.
On
September 25, 2006, the holders of a majority of shares of our outstanding
common stock approved the Cash Security Business Sale. The Cash Security Asset
Purchase Agreement provided for a cash purchase price of $15,500,000, less
$100,000 as consideration for the Buyer assuming certain potential liability
in
connection with ongoing litigation, and less a working capital deficit
adjustment of $1,629,968, resulting in a net purchase price of $13,770,032.
In
addition, Sentinel Operating, L.P. paid a cash adjustment of $2,458,718 to
the
Company at closing. The Cash Security Business Sale was completed on October
2,
2006.
We
classified the Cash Security business as a discontinued operation for the years
ended September 30, 2006 and 2005. We classified the Cash Security business
as
Assets Held for Sale as of September 30, 2005 and 2006.
An
analysis of the discontinued operations of the Cash Security business is as
follows:
DISCONTINUED
OPERATIONS — CASH SECURITY BUSINESS
SELECTED
BALANCE SHEET DATA
(UNAUDITED)
|
|
September
30,
2006
|
|
September
30,
2005
|
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,048,275
|
|
$
|
—
|
|
Trade
accounts receivable, net of allowance of approximately $45,000 and
$7,500,
respectively
|
|
|
1,591,522
|
|
|
1,856,523
|
|
Inventories
|
|
|
2,051,764
|
|
|
3,137,818
|
|
Prepaid
expenses and other
|
|
|
73,089
|
|
|
198,057
|
|
Total
current assets
|
|
|
5,764,650
|
|
|
5,192,398
|
|
Property,
plant and equipment, at cost
|
|
|
316,608
|
|
|
1,097,604
|
|
Accumulated
depreciation
|
|
|
(18,595
|
)
|
|
(1,020,015
|
)
|
Net
property, plant and equipment
|
|
|
298,013
|
|
|
77,589
|
|
Other
assets
|
|
|
250,000
|
|
|
25,631
|
|
Total
assets
|
|
$
|
6,312,663
|
|
$
|
5,295,618
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Current
maturities
|
|
$
|
1,981
|
|
$
|
1,852
|
|
Accounts
payable
|
|
|
1,514,731
|
|
|
1,397,394
|
|
Other
accrued expenses
|
|
|
2,098,675
|
|
|
3,069,278
|
|
Total
current liabilities
|
|
|
3,615,387
|
|
|
4,468,524
|
|
Long-term
debt, net of current maturities
|
|
|
20,982
|
|
|
28,708
|
|
Total
liabilities
|
|
$
|
3,636,369
|
|
$
|
4,497,232
|
|
DISCONTINUED
OPERATIONS — CASH SECURITY BUSINESS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Years
Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Net
sales
|
|
$
|
16,080,069
|
|
$
|
19,435,222
|
|
$
|
7,467,194
|
|
Cost
of sales
|
|
|
9,476,386
|
|
|
10,870,947
|
|
|
5,350,108
|
|
Gross
profit
|
|
|
6,603,683
|
|
|
8,564,275
|
|
|
2,117,086
|
|
Selling,
general and administrative
|
|
|
4,541,774
|
|
|
4,449,550
|
|
|
3,550,491
|
|
Depreciation
and amortization
|
|
|
—
|
|
|
29,868
|
|
|
84,008
|
|
Operating
income (loss)
|
|
|
2,061,907
|
|
|
4,084,857
|
|
|
(1,517,413
|
)
|
Non-operating
expense
|
|
|
(8,529
|
)
|
|
(23,884
|
)
|
|
(37,918
|
)
|
Net
income (loss)
|
|
$
|
2,070,436
|
|
$
|
4,108,741
|
|
$
|
(1,555,331
|
)
|
(3) |
Notes
to Discontinued Operations which are Classified as Assets Held For
Sale
|
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined using the standard
cost method and includes materials, labor and production overhead which
approximates an average cost method. Reserves are provided to adjust any slow
moving materials or goods to net realizable values.
Warranties
Certain
products are sold under warranty against defects in materials and workmanship
for a period of one to three years. A provision for estimated warranty costs
is
included in accrued liabilities and is charged to operations at the time of
sale.
Accounts
Receivable
We
have
significant investments in billed receivables as of September 30, 2006 and
2005.
Billed receivables represent amounts billed upon the shipments of our products
under our standard contract terms and conditions. Allowances for doubtful
accounts and estimated non-recoverable costs primarily provide for losses that
may be sustained on uncollectible receivables and claims. In estimating the
allowance for doubtful accounts, we evaluate our contract receivables and
thoroughly review historical collection experience, the financial condition
of
our customers, billing disputes and other factors. When we ultimately conclude
that a receivable is uncollectible, the balance is charged against the allowance
for doubtful accounts. As of September 30, 2006 and 2005, the allowance for
doubtful contract receivables was $45,000 and $1,132,000, respectively.
Revenue
Recognition
Revenues
are recognized at the time products are shipped to customers. We have no
continuing obligation to provide services or upgrades to our products, other
than a warranty against defects in materials and workmanship. We only recognize
such revenues if there is persuasive evidence of an arrangement, the products
have been delivered; there is a fixed or determinable sales price and a
reasonable assurance of our ability to collect from the customer.
Our
products contain imbedded software that is developed for inclusion within the
equipment. We have not licensed, sold, leased or otherwise marketed such
software separately. We have no continuing obligations after the delivery of
our
products and we do not enter into post-contract customer support arrangements
related to any software embedded into our equipment.
Research
and Development Cost
Research
and development costs are expensed as incurred. Research and development costs
charged to expense were approximately $1,229,617, $2,060,071, and 2,613,000
for
the years ended September 30, 2006, 2005 and 2004, respectively.
Shipping
and Handling Cost
Shipping
and handling costs billed to customers totaled $429,881, $781,442 and $647,459,
for the years ended September 30, 2006, 2005, and 2004, respectively. We
incurred shipping and handling costs of $458,633, $978,957 and $738,340 for
the
years ended September 30, 2006, 2005 and 2004 respectively. The net expense
of
$28,752 and $197,515 and $90,881 is included in selling expenses in the
accompanying statement of operations for the years ended September 30, 2006,
2005, and 2004, respectively.
(4) |
Major
Customers and Credit Risks
|
We
generally retain a security interest in the underlying equipment that is sold
to
customers until it receives payment in full. We would incur an accounting loss
equal to the carrying value of the accounts receivable, less any amounts
recovered from liquidation of collateral, if a customer failed to perform
according to the terms of the credit arrangements.
Only
one
customer accounted for more than 10% of net sales for the fiscal years 2006,
2005 and 2004. Two customers accounted for more than 10% of our total
outstanding trade receivable as of September 30, 2006 and 2005.
The
vast
majority of our sales in fiscal 2006, 2005 and 2004 were to customers within
the
United States. Sales to customers outside the United States, as a percentage
of
total revenues, were approximately 6.8 %, 14% and 16%, in the fiscal years
ended
September 30, 2006, 2005 and 2004, respectively. Most of our foreign sales
were
to one customer.
(5) |
Notes
Receivable — Officers
|
The
current and long-term portion of notes and other receivables related to
continuing operations consisted of the following at September 30, 2006 and
2005:
|
|
2006
|
|
2005
|
|
Notes
receivable — Officers
|
|
$
|
—
|
|
$
|
—
|
|
Other
accounts receivable
|
|
|
220,689
|
|
|
12,965
|
|
|
|
|
220,689
|
|
|
12,965
|
|
Allowance
for notes receivable
|
|
|
—
|
|
|
—
|
|
Less:
Current portion
|
|
|
(220,689
|
) |
|
(12,965
|
)
|
Long-term
portion
|
|
$
|
—
|
|
$
|
—
|
|
In
September 2000, we loaned $141,563 to Michael F. Hudson, our Executive Vice
President and Chief Operating Officer of our principal operating subsidiary,
in
a promissory note maturing October 1, 2002, and bearing interest at 10% per
annum. During the year ended September 30, 2001, we loaned an additional
$225,000 to Mr. Hudson in a promissory note maturing October 1, 2002, and
bearing interest at 10% per annum. The notes from Mr. Hudson are secured by
a
pledge of 83,500 shares of our common stock. The note to Mr. Hudson in the
amount of $141,563 relates to the exercise of certain stock option agreements.
These notes were not repaid by Mr. Hudson upon maturity. Subsequent to September
30, 2004, we entered into a settlement agreement with Mr. Hudson regarding
satisfaction of these notes, including, among other things, recoveries through
the pledged shares and certain salary and bonuses due to Mr. Hudson. As a result
of the settlement with Mr. Hudson, we recorded a provision for bad debts
totaling $104,055 in fiscal 2003 related to accrued interest on the notes and
a
provision for settlement of the claims totaling $279,918 in fiscal 2004. In
addition, we reduced the notes receivable balances by $60,750 as an offset
against accrued bonuses due to Mr. Hudson. Effective with the sale of the ATM
business, Mr. Hudson is no longer employed by the Company.
In
September 2001, we loaned $843,554 to James T. Rash, our former Chairman and
CEO, in a promissory note maturing September 30, 2004, and bearing interest
at
10% per annum. In January 2002, we loaned an additional $300,000 to Mr. Rash
in
a promissory note maturing January 14, 2005, and bearing interest at 10% per
annum. In December 2004, Mr. Rash died. The Board of Directors approved the
transfer of a key-man life insurance policy on the life of Mr. Rash in the
amount of $1,000,000 to Mr. Rash in 2002, in connection with Mr. Rash’s then
pending retirement. The proceeds were assigned as collateral for the notes
due
from Mr. Rash in the aggregate principal amount of $1,143,554. Proceeds of
$1,009,227 were received from the insurance policy in February 2005, which
were
applied to the principal amount of the notes. Mr. Rash also received bonuses
totaling $350,000 of which $134,327 was applied to the remaining principal
balance of the notes. We recorded a provision for bad debt totaling $220,625
in
fiscal 2003 related to accrued interest on the notes.
Inventories
related to discontinued operations consisted of the following at September
30,
2006 and 2005:
|
|
2006
|
|
2005
|
|
Raw
materials
|
|
$
|
1,953,305
|
|
$
|
7,594,510
|
|
Work
in process
|
|
|
—
|
|
|
114,365
|
|
Finished
goods
|
|
|
143,459
|
|
|
2,714,331
|
|
Other
|
|
|
—
|
|
|
138,609
|
|
|
|
|
2,096,764
|
|
|
10,561,815
|
|
Inventory
reserve
|
|
|
(45,000
|
)
|
|
(100,558
|
)
|
Total,
classified as assets held for sale
|
|
$
|
2,051,764
|
|
$
|
10,461,257
|
|
(7) |
Investment
in CashWorks
|
In
December 2001, we invested $500,000 in CashWorks, Inc. (“CashWorks”), a
development-stage financial technology solutions provider, in the form of
convertible debt of CashWorks. In December 2002, we converted the notes, plus
accrued but unpaid interest, into 2,133,728 shares of CashWorks’ Series B
preferred shares plus warrants to purchase 125,000 shares of CashWorks’ common
stock at $2.00 per share. In March 2004, we consented to the sale of our
interest in CashWorks to GE Capital Corp. for approximately $2,451,000,
resulting in the recognition of a gain of $1,918,012.
We
formerly owned 100% of 3CI Complete Compliance Corporation, a company engaged
in
the transportation and incineration of medical waste, until we divested our
majority interest in February 1994. At September 30, 2005, we continued to
own
698,889 shares of the common stock of 3CI and the value of our investment was
marked to the market value of $279,556, or $.40 per share.
On
May
30, 2006, we received a settlement payment of $4,489,963 and on September
6, 2006, the Company received an additional settlement payment in the amount
of
$1,169,544 arising
out
of our ownership of the 3CI shares under a class action settlement paid out
to
minority shareholders of 3CI. Under the terms of the settlement and in order
to
participate in the settlement, we tendered all 698,889 shares that we owned
to
Stericycle, Inc., the current majority shareholder of 3CI and the defendant
under the class action, and accordingly we no longer hold any ownership interest
in 3CI. As a result, we recognized a gain of $5,659,507 on the disposal of
these
shares during the year ended September 30, 2006, which represented the
difference between the settlement payment amount and our carrying
amount.
The
Company estimates additional federal income tax of approximately $400,000 due
to
this additional settlement payment resulting in an estimated federal income
tax
expense of approximately $250,000 for the fiscal year ended September 30, 2006.
The Company does not expect to receive any further significant payments in
this
matter.
(9) |
Property,
Plant and Equipment
|
Property,
plant and equipment consisted of the following at September 30, 2006 and
2005:
|
|
2006
|
|
2005
|
|
Useful
Life
|
|
Machinery
and equipment
|
|
$
|
544,498
|
|
$
|
3,452,061
|
|
|
2
- 10 years
|
|
Computer
equipment and systems
|
|
|
605,712
|
|
|
950,349
|
|
|
2
- 7 years
|
|
Furniture,
fixtures and other improvements
|
|
|
500,267
|
|
|
1,032,871
|
|
|
3
- 5 years
|
|
|
|
|
1,650,476
|
|
|
5,435,281
|
|
|
|
|
Less
classified as discontinued
|
|
|
(1,650,476
|
)
|
|
(5,422,488
|
)
|
|
|
|
Total
property, plant and equipment for continued operations
|
|
$
|
—
|
|
$
|
12,793
|
|
|
|
|
Depreciation
expense was $99,789, $285,835 and $509,693, for the years ended September 30,
2006, 2005 and 2004, respectively. Repairs and maintenance expense was $64,420
,
$86,043 and $83,532 for the years ended September 30, 2006, 2005 and 2004
respectively. All such amounts are classified in discontinued
operations.
Other
assets consisted of the following at September 30, 2006 and 2005:
|
|
2006
|
|
2005
|
|
Deferred
financing costs
|
|
$
|
—
|
|
$
|
714,261
|
|
Investment
in 3CI
|
|
|
—
|
|
|
279,556
|
|
Other
|
|
|
4,000
|
|
|
4,000
|
|
Accumulated
amortization
|
|
|
—
|
|
|
(382,054
|
)
|
|
|
|
4,000
|
|
|
615,763
|
|
Less:
Discontinued Operations
|
|
|
—
|
|
|
—
|
|
Total
Other Assets for Continued Operations
|
|
$
|
4,000
|
|
$
|
615,763
|
|
(11) |
Long-Term
Debt and Convertible
Debentures
|
Long-Term
Debt
Long-term
debt related to continued operations consisted of the following at September
30,
2006 and 2005:
|
|
2006
|
|
2005
|
|
Laurus
financing, net of debt of $0 and $3,746,531, respectively
|
|
$ |
—
|
|
$ |
4,392,749
|
|
Other-
five-year note
|
|
|
—
|
|
|
28,708
|
|
Total
short-term and long-term debt
|
|
|
—
|
|
|
4,421,457
|
|
Less:
current maturities
|
|
|
—
|
|
|
(2,325,000
|
)
|
Long-term
debt, less current maturities
|
|
$
|
—
|
|
$
|
2,096,457
|
|
Laurus
Financing
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 recorded additional interest charges totaling $7,437,195 over the
terms of the notes related to these discounts. 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
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. As a result of the reduction of the
conversion price, we recorded additional interest charges totaling $1,905,488
over the terms of the notes related to the discounts.
On
November 26, 2004, we completed the Additional Financing, a $3,350,000 financing
transaction 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 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, Secure Alliance, 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, Secure Alliance, L.P.,
(the “Purchase Order Note”), which bears interest at a rate of 14% and is
convertible into our common stock at a price of $3.00 per share and (iv) our
issuance to Laurus of the 2003 Fee Shares, which consisted of 1,251,000 shares
of common stock, or approximately 7% of the total shares outstanding, in
satisfaction of fees totaling $375,300 incurred in connection with the
convertible term notes issued in the Financing discussed above. As a result
of
the issuance of the 2003 Fee Shares, we recorded an additional charge in fiscal
2004 of $638,010. We also increased the principal balance of the original note
by $292,987, of which $226,312 bears interest at the default rate of 18%. This
amount represents interest accrued but not paid to Laurus as of August 1, 2004.
In addition, Laurus received warrants to purchase 500,000 shares of our common
stock at an exercise price of $0.30 per share. The proceeds of the Additional
Financing were allocated to the notes based on the relative fair value of the
notes and the warrants, with the value of the warrants resulting in a discount
against the notes. In addition, the conversion terms of the $600,000 Note
resulted in a beneficial conversion feature, further discounting the carrying
value of the notes. As a result, we will record additional interest charges
related to these discounts totaling $840,000 over the terms of the notes. Laurus
was also granted registration rights in connection with the 2003 Fee Shares
and
other shares issuable pursuant to the Additional Financing. The obligations
pursuant to the Additional Financing are secured by all of our assets and are
guaranteed by our subsidiaries. Net proceeds from the Additional Financing
in
the amount of $3,232,750 were primarily used for (i) general working capital
payments made directly to vendors, (ii) past due interest on Laurus’s $6,450,000
convertible note due pursuant to the Financing and (iii) the establishment
of an
escrow for future principal and interest payments due pursuant to the Additional
Financing.
Agreements
with Laurus
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. Such
Reorganization Fee was secured by all of our assets, and was guaranteed by
our
subsidiaries. The Asset Sales Agreement provided, among other things, that
(i)
the net proceeds of the ATM Business Sale 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 was to 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 had 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 were obliged
to
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.
We
and
Laurus entered a Stock Redemption Agreement on January 12, 2006 and as
subsequently amended. Pursuant to the terms of the Stock Redemption Agreement:
(i) we agreed, among other things, to repurchase from Laurus, upon the closing
of the Cash Security Business Sale, all shares of our common stock held by
Laurus, and (ii) Laurus agreed to the cancellation as of the closing date of
the
Cash Security Business Sale of warrants it holds to purchase 4,750,000 shares
of
our common stock at an exercise price of $.30 per share, and (ii) not to
exercise such warrants prior to the earlier to occur of September 30, 2006
and
the date on which the Asset Purchase Agreement is terminated.
We
and
Laurus also entered into an Exercise and Conversion Agreement on January 12,
2006 and as subsequently amended. The Exercise and Conversion Agreement
provided, among other things, for Laurus to convert, on or prior to the record
date set with respect to the special meeting of our stockholders to be held
for
the purpose of voting on the Cash Security Business Sale, $5,400,000 of
indebtedness outstanding under our Convertible Note dated November 25, 2003
in
the original principal amount of $6,450,000 together with an additional $292,987
added thereto on November 26, 2004, made by the Company to Laurus into
18,000,000 shares of our common stock.
On
June
9, 2006, we and Laurus entered into an agreement (the “Laurus Termination
Agreement”) which, among other things, provided for the payment of a sale fee of
$8,508,963 to Laurus (the “Sale Fee”) in full satisfaction of all amounts
payable to Laurus under the Asset Sales Agreement, including fees payable in
respect of the sale of our ATM business and the Cash Security Business Sale
Upon
closing of the Cash Security Business Sale, we paid the Sale Fee to Laurus.
The
Termination Agreement further provided that, upon payment of the Sale Fee and
performance by the Company of its obligations owing to Laurus, including the
repurchase
from Laurus, upon the closing of the Cash Security Business Sale, of all shares
of our common stock held by Laurus:
(i) all
warrants to purchase common stock of the Company held by Laurus will terminate
and be of no further force or effect; and (ii) thereafter, neither the Company
nor any of its subsidiaries will have any further obligation to Laurus. Further,
each of the Company and Laurus granted each other and their respective
affiliates and subsidiaries reciprocal releases from and against any claims
and
causes of action that may exist.
Other
accrued expenses consisted of the following at September 30, 2006 and
2005:
|
|
2006
|
|
2005
|
|
Reserve
for warranty charges
|
|
$
|
826,152
|
|
$
|
1,143,643
|
|
Taxes:
|
|
|
—
|
|
|
|
|
Sales
and use
|
|
|
11,049
|
|
|
656,177
|
|
Ad
valorem
|
|
|
44,000
|
|
|
76,389
|
|
Wages
and related benefits
|
|
|
662,348
|
|
|
1,456,818
|
|
Other
|
|
|
555,126
|
|
|
1,550,885
|
|
Other
accrued expenses related to continuing operations
|
|
|
150,194
|
|
|
290,871
|
|
Total
accrued expenses
|
|
$
|
2,248,869
|
|
$
|
5,174,783
|
|
Less:
discontinued liabilities
|
|
|
(2,098,675
|
) |
|
(4,883,912
|
) |
Total
accrued expenses related to continuing operations
|
|
$
|
150,194
|
|
$
|
290,871
|
|
At
September 30, 2006, we had outstanding warrants to purchase 5,790,000 shares
of
common stock that expire at various dates through November 2010. The warrants
have exercise prices ranging from $0.45 to $0.30 per share and, if exercised,
would generate proceeds to us of approximately $1,990,500.
Common
Stock Purchase Warrants:
|
|
Warrants
|
|
Expiration
Date
|
|
Exercise
Price
|
|
Relative
Fair
Value(1)
|
|
Alliance
Developments (1)
|
|
|
50,000
|
|
|
11/24/2010
|
|
|
0.45
|
|
|
13,450
|
|
Laurus
Master Fund (2)
|
|
|
4,250,000
|
|
|
11/24/2010
|
|
|
0.30
|
|
|
1,918,451
|
|
Other
parties in connection with Laurus financing (2)
|
|
|
350,000
|
|
|
11/24/2010
|
|
|
0.40
|
|
|
226,749
|
|
AIG/National
Union Fire Insurance Co. (3)
|
|
|
500,000
|
|
|
11/01/2007
|
|
|
0.67
|
|
|
224,490
|
|
Laurus
Master Fund (4)
|
|
|
500,000
|
|
|
11/26/2010
|
|
|
0.30
|
|
|
226,751
|
|
Bridge
Loan (5)
|
|
|
40,000
|
|
|
10/6/2006
|
|
|
0.45
|
|
|
8,186
|
|
Bridge
Loan (6)
|
|
|
30,000
|
|
|
10/21/2006
|
|
|
0.45
|
|
|
7,132
|
|
Bridge
Loan (7)
|
|
|
70,000
|
|
|
11/20/2006
|
|
|
0.45
|
|
|
35,845
|
|
Outstanding
warrants as of September 30, 2006
|
|
|
5,790,000
|
|
|
|
|
|
|
|
$
|
2,661,054
|
|
Value
calculated using Black-Scholes:
|
|
|
|
Stock
Price
At
Issuance
|
|
Expected
Term
|
|
Volatility
|
|
Risk
Free Rate
|
|
(1)
|
|
|
Variables
|
|
$
|
0.41
|
|
|
3
years
|
|
|
111.00
|
%
|
|
2.06
|
%
|
(2)
|
|
|
Variables
|
|
$
|
0.72
|
|
|
7
years
|
|
|
111.00
|
%
|
|
3.72
|
%
|
(3)
|
|
|
Variables
|
|
$
|
0.67
|
|
|
3
years
|
|
|
108.00
|
%
|
|
3.85
|
%
|
(4)
|
|
|
Variables
|
|
$
|
0.51
|
|
|
7
years
|
|
|
97.000
|
%
|
|
3.98
|
%
|
(5)
|
|
|
Variables
|
|
$
|
0.33
|
|
|
3
years
|
|
|
111.00
|
%
|
|
1.96
|
%
|
(6)
|
|
|
Variables
|
|
$
|
0.37
|
|
|
3
years
|
|
|
111.00
|
%
|
|
2.41
|
%
|
(7)
|
|
|
Variables
|
|
$
|
0.69
|
|
|
3
years
|
|
|
111.00
|
%
|
|
2.35
|
%
|
(14) |
Employee
Stock Option Plans
|
We
adopted a Long-Term Incentive Plan in 1997 (the “1997 Plan”) pursuant to which
our Board of Directors may grant stock options to officers and key employees.
The 1997 Plan, as amended, authorizes grants of options to purchase up to
2,000,000 shares of our common stock. Options are granted with an exercise
price
equal to the fair market value of the common stock at the date of grant. Options
granted under the 1997 Plan vest over four-year periods and expire no later
than
10 years from the date of grant. Under the 1997 Plan, there were 648,150 options
outstanding and 1,310,800 shares available for grant at September 30, 2006.
There were 1,099,810 options outstanding and 855,890 shares available and
736,000 options outstanding and 1,219,700 shares available for grant at
September 30, 2005 and 2004, respectively. There were 363,810 stock options
granted during the fiscal year ended 2005 and no stock options granted during
the fiscal year ended 2006.
At
September 30, 2006, the range of exercise prices was $2.50 to $0.25 per share
under the 1997 Plan with a weighted average remaining contractual life of 4.56
years. At September 30, 2005 and 2004, the weighted-average remaining
contractual life of the outstanding options was 5.32 years and 4.0 years,
respectively.
Combined
stock option and directors’ warrant activity during the periods indicated was as
follows:
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Balance
at September 30, 2003
|
|
|
1,281,000
|
|
|
1.93
|
|
Granted
|
|
|
—
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
Canceled
|
|
|
(495,000
|
)
|
|
2.35
|
|
Balance
at September 30, 2004
|
|
|
786,000
|
|
|
1.67
|
|
Granted
|
|
|
363,810
|
|
|
0.25
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
Canceled
|
|
|
(50,000
|
)
|
|
1.16
|
|
Balance
at September 30, 2005
|
|
|
1,099,810
|
|
|
1.22
|
|
Granted
|
|
|
—
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
Canceled
|
|
|
(451,660
|
)
|
|
1.19
|
|
Balance
at September 30, 2006
|
|
|
648,150
|
|
|
1.24
|
|
The
above
table includes warrants issued for directors’ remuneration that are also
included in outstanding warrants at September 30, 2004. The number of options
exercisable was 683,500 and 731,000, respectively, at weighted average prices
of
$1.80 per share and $1.76 per share, respectively. Included in the 495,000
shares canceled during 2004 were 300,000 warrants issued to
directors.
Income
tax expense (benefit) attributable to income from operations consisted of the
following for the years ended September
30, 2006, 2005 and 2004:
|
|
2006
|
|
2005
|
|
2004
|
|
Federal
current tax Expense (Benefit)
|
|
$
|
88,584
|
|
$
|
—
|
|
$
|
(81,229
|
)
|
Federal
deferred tax benefit
|
|
|
—
|
|
|
—
|
|
|
—
|
|
State
tax
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
88,584
|
|
$
|
—
|
|
$
|
(81,229
|
)
|
In
addition to the Income tax expense of $88,854 above, we paid $70,962 in 2006
for
a Federal Tax liability incurred in 2005. The total of $159,546 is recorded
as
our income tax provision in the accompanying consolidated financial statements
for the year ended September 30, 2006. The income tax differed from the amounts
computed by applying the U.S. statutory federal income tax rate of 34% to income
(loss) before taxes as a result of the following:
|
|
2006
|
|
2005
|
|
2004
|
|
Computed
“expected” tax expense (benefit)
|
|
$
|
1,707,357
|
|
$
|
(1,117,213
|
)
|
$
|
3,847,974
|
|
Change
in valuation allowances
|
|
|
(4,156,100
|
)
|
|
1,638,969
|
|
|
(5,278,972
|
)
|
State
taxes, net of benefit
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Nondeductible
items and permanent differences
|
|
|
1,499,031
|
|
|
(521,756
|
)
|
|
1,376,064
|
|
Other
|
|
|
1,038,296
|
|
|
—
|
|
|
(26,295
|
)
|
|
|
$
|
88,584
|
|
$
|
(0
|
)
|
$
|
(81,229
|
)
|
The
tax
effects of temporary differences that were the sources of the deferred tax
assets consisted of the following at September 30, 2006 and 2005:
|
|
2006
|
|
2005
|
|
Deferred
tax assets:
|
|
|
|
|
|
Fixed
assets
|
|
$
|
286,643
|
|
$
|
379,000
|
|
Intangible
assets
|
|
|
—
|
|
|
—
|
|
Accounts
receivable
|
|
|
15,151
|
|
|
383,000
|
|
Inventories
|
|
|
268,704
|
|
|
808,000
|
|
Investment
in 3CI
|
|
|
—
|
|
|
438,000
|
|
Accrued
expenses
|
|
|
511,398
|
|
|
490,000
|
|
Other
|
|
|
39,332
|
|
|
39,000
|
|
Minimum
tax credit
|
|
|
—
|
|
|
—
|
|
Net
operating losses
|
|
|
931,673
|
|
|
3,672,000
|
|
Total
gross deferred tax assets
|
|
|
2,052,900
|
|
|
6,209,000
|
|
Less:
valuation allowance
|
|
|
(2,052,900
|
)
|
|
(6,209,000
|
)
|
Net
deferred tax assets
|
|
|
—
|
|
|
—
|
|
Other
deferred tax liabilities
|
|
|
—
|
|
|
—
|
|
Net
deferred tax assets
|
|
$
|
—
|
|
$
|
—
|
|
In
assessing the realizability of deferred assets, management considers whether
it
is more likely than not some portion or all of the deferred tax assets will
be
realized. The Company has established a valuation allowance for such deferred
tax assets to the extent such amounts are not utilized to offset existing
deferred tax liabilities reversing in the same periods.
As
of
September 30, 2006,
the
Company had remaining net operating losses of approximately
$2,740,214 which will begin to expire in 2024.
The
following is a reconciliation of the numerators and denominators of the basic
and diluted computations for the years ended September 30, 2006, 2005 and
2004:
|
|
2006
|
|
2005
|
|
2004
|
|
Net
Income (loss) (numerator for basic earnings per share)
|
|
$
|
4,862,093
|
|
$
|
(3,285,922
|
)
|
$
|
11,317,572
|
|
Interest
expense attributable to convertible note (including
non-cash)
|
|
|
|
|
|
|
|
|
2,898,225
|
|
Adjusted
net income (loss) (numerator for diluted earnings per
share)
|
|
$
|
4,862,093
|
|
$
|
(3,285,922
|
)
|
$
|
14,215,797
|
|
Weighted
average common shares outstanding (denominator for basic earnings
per
share)
|
|
|
33,499,128
|
|
|
20,292,796
|
|
|
17,426,210
|
|
Dilutive
shares outstanding
|
|
|
—
|
|
|
—
|
|
|
21,150,553
|
|
Weighted
average common and dilutive shares outstanding
|
|
|
33,499,128
|
|
|
20,292,796
|
|
|
38,576,763
|
|
Basic
earnings per share
|
|
$
|
0.15
|
|
$
|
(0.16
|
)
|
$
|
0.65
|
|
Diluted
earnings per share
|
|
$
|
0.15
|
|
$
|
(0.16
|
)
|
$
|
0.33
|
|
Common
stock equivalents consisting of warrants, options and convertible debt of
$5,874,687 and $29,717,185 were excluded from the computation of diluted
earnings per share due to their anti-dilutive effect for the years ended
September 30, 2006 and 2005, respectively.
(17) |
Commitments
and Contingencies
|
The
Supply, Facility and Share Warrant Agreements
In
September 2004, our subsidiary entered into separate supply and credit facility
agreements (the “Supply Agreement”, the “Facility Agreement” and the “Share
Warrant Agreement” respectively) with a foreign distributor related to our ATM
products. The Supply Agreement required the distributor, during the initial
term
of the agreement, to purchase ATMs only from us, effectively making us its
sole
supplier of ATMs. During each of the subsequent terms, the distributor is
required to purchase from us not less than 85% of all ATMs purchased by the
distributor. The initial term of the agreement was set as of the earlier of:
(i)
the expiration or termination of the debenture, (ii) a termination for default,
(iii) the mutual agreement of the parties, and (iv) August 15,
2009.
The
Facility Agreement provides a credit facility in an aggregate amount not to
exceed $2,280,000 to the distributor with respect to outstanding invoices
already issued to the distributor and with respect to invoices which may be
issued in the future related to the purchase of our ATM products. Repayment
of
the credit facility is set by schedule for the last day of each month beginning
November 2004 and continuing through August 2005. The distributor fell into
default due to non-payment during February 2005. As of September 30, 2004,
we
had an outstanding balance of approximately $720,000 related to this facility.
Notwithstanding our current commitment to aggressively pursue our rights to
collect the outstanding balance of the facility and in view of the uncertainty
of the ultimate outcome, we recorded a reserve in the amount of approximately
$185,000 during the quarter ended September 30, 2004 due to the payment
delinquency of the invoices related to 2004 billings. During 2005, we increased
the reserve to approximately $830,000 due to the payment delinquency of the
majority of the invoices issued in the fiscal year 2005. In July of 2005, we
collected a partial payment of approximately $350,000 related to the 2004
billings. This collection reduced the outstanding balance on this facility
to
approximately $1,700,000, of which we have reserved a total of $830,000 as
of
July 31, 2005. We have also received a commitment commencing August 5, 2005
from
the distributor to submit at least approximately $35,000 per week until the
balance is paid in full. We have received approximately $560,000 consisting
of
16 weekly payments reducing the accounts receivable balance.
The
Share
Warrant Agreement provides for the issuance to our subsidiary of a warrant
to
purchase up to 5% of the issued and outstanding Share Capital of the
distributor. The warrant restricts the distributor from (i) creating or issuing
a new class of stock or allotting additional shares, (ii) consolidating or
altering the shares, (iii) issuing a dividend, (iv) issuing additional warrants
and (v) amending articles of incorporation. Upon our exercise of the warrant,
the distributors balance outstanding under the Facility Agreement would be
reduced by $300,000. We exercised this option during December of 2005,
therefore, reducing the receivable by an additional $300,000 resulting in a
balance of $833,000 at January 5, 2006, of which $598,496 was reserved at
December 31, 2005.
On
March
31, 2006, we received $950,000 from the distributor resulting in full payment
of
the outstanding receivable of $833,000 and interest of $117,000. We recognized
income of approximately $598,000 from the reversal of the bad debt reserve
and
$117,000 of interest income during the year ended September 30, 2006 from the
proceeds.
(18)
|
Marketable
Securities Available- for-
Sale
|
We
own
2,022,000 of the common stock of Cashbox plc pursuant to our exercise of the
Share Warrant Agreement in September 2005. On or about March 27, 2006, shares
of
Cashbox plc began trading on the AIM Market of the London Stock Exchange (the
“Exchange”). Prior to Cashbox plc going public, we considered their shares not
marketable, thus the shares were carried at cost. Since the shares are now
public and market value is readily available, we determined the market value
of
the shares as of June 30, 2006 and pursuant to SFAS No. 115 “Accounting for
Investments in Equity and Debt Securities” we classified these shares as
available for sale. Pursuant to the SFAS No. 115 the unrealized change in fair
value during the three months ended June 30, 2006 was excluded from earnings
and
recorded net of tax as other comprehensive income.
As
of
September 30, 2006, our common stock in Cashbox plc was recorded at a fair
value
of $851,939. Unrealized gains on these shares of common stock, which were added
to stockholders' equity as of September 30, 2006, were $551,939.
As
of
September 30, 2006 we were restricted from selling any shares until the second
anniversary of its admission to the Exchange unless we (i) consult with
Cashbox’s primary broker prior to the disposal of any shares and (ii) effect the
disposal of the shares through Cashbox’s primary broker from time to time and in
such manner as such broker may require with a view to the maintenance of an
orderly market in the shares of Cashbox.
The
Development Agreement
In
August
2001, we entered into a Development Agreement (the “Development Agreement”) with
a national petroleum retailer and convenience store operator (the “Retailer”)
for the joint development of a new generation of “intelligent” TACCs, now known
as the Sentinel product. The Development Agreement provided for four phases
of
development with the first three phases to be funded by the Retailer at an
estimated cost of $800,000. In February 2002, we agreed to provide the Retailer
a rebate on each unit of the Sentinel product for the first 1,500 units sold,
provided the product successfully entered production, until the Retailer had
earned amounts equal to the development costs paid by the Retailer. The
development of the product was completed and production commenced. The aggregate
development costs for the Sentinel product paid for by the Retailer totaled
$651,500. As of September 30, 2004, we had credited back approximately $87,629
to the retailer resulting in an accrued liability of $564,231 for the benefit
of
the Retailer. As of September 30, 2005 and 2006, the accrued balance was
$529,400.
Other
Matters
We
and
our subsidiaries are each subject to certain other litigation and claims arising
in the ordinary course of business. In our management’s opinion, the amounts
ultimately payable, if any, resulting from such litigation and claims will
not
have a materially adverse effect on our financial position.
We
lease
office and warehouse space, transportation equipment and other equipment under
terms of operating leases which expire through 2006. Rental expense under these
leases for the years ended September 30, 2006, 2005 and 2004, was approximately
$210,820, $453,000 and $479,000, respectively.
Completion
of Cash Security Business Sale and Related Agreements with
Laurus
On
October 2, 2006, we completed the Cash Security Business Sale and became a
shell
public company with approximately $12.9 million in cash, cash equivalents and
marketable securities held-to-maturity; or approximately $0.66 per share based
upon 19,426,210 shares outstanding.
On
October 2, 2006, we paid a sale fee of $8,508,963 to Laurus pursuant to the
Laurus Termination Agreement, and we paid $6,545,340 to Laurus for the purchase
of 19,251,000 shares of our common stock from Laurus at a price of $.34 per
share pursuant to the Stock Redemption Agreement,
On
October 2, 2006, following the foregoing payments to Laurus pursuant to the
terms of the Laurus Termination Agreement and the Stock Redemption Agreement,
no
further fees remain payable by the Company to Laurus and, to our knowledge,
Laurus does not own any shares of the Company.
(20) |
Related
Party Transactions
|
Raymond
P. Landry, a member of our Board, provided certain financial consulting services
to the Company totaling $72,440 during the fiscal year 2006.
Robert
D.
Peltier, our Acting Chief Financial Officer, is the nephew of Raymond P. Landry,
one of our former directors. We have used the services of a consulting and
printing company in which Mr. Peltier has an interest. We believe that the
fees
paid to the consulting and printing company are comparable to fees that would
be
paid similar companies for comparable services rendered in arms-length
transactions. Amounts paid to this company totaled approximately $421,549 for
fiscal 2006.
On
January 12, 2006, we entered into an asset purchase agreement with Sentinel
Operating, L.P., a purchaser led by a management buyout group that included
our
former director and Interim Chief Executive Officer, Mark K. Levenick, and
our
former director, Raymond P. Landry, pursuant to which we agreed to sell the
Cash
Security business for a cash purchase price of $15,500,000, less $100,000 as
consideration for the Buyer assuming certain potential liability in connection
with ongoing litigation, and less a working capital deficit adjustment of
$1,629,968, resulting in a net purchase price of $13,770,032. In addition,
Sentinel Operating, L.P. paid a cash adjustment of $2,458,718 to the Company
at
closing. The Cash Security Business Sale was completed on October 2,
2006.
In
September 2000, we loaned $141,563 to Michael F. Hudson, our Executive Vice
President and Chief Operating Officer of our principal operating subsidiary,
in
a promissory note maturing October 1, 2002, and bearing interest at 10% per
annum. During the year ended September 30, 2001, we loaned an additional
$225,000 to Mr. Hudson in a promissory note maturing October 1, 2002, and
bearing interest at 10% per annum. The notes from Mr. Hudson are secured by
a
pledge of 83,500 shares of our common stock. The note to Mr. Hudson in the
amount of $141,563 relates to the exercise of certain stock option agreements.
These notes were not repaid by Mr. Hudson upon maturity. We negotiated with
Mr.
Hudson regarding satisfaction of these notes, including, among other things,
recoveries through certain salary and bonuses due to Mr. Hudson.
On
June
22, 2005, we entered into two agreements with Mr. Hudson. The first was a
settlement agreement with Mr. Hudson, which provided for the settlement of
outstanding amounts owed by Mr. Hudson to the Company. In satisfaction of Mr.
Hudson’s obligations to the Company, he agreed to (a) the delivery of certain
shares of the Company’s common stock held by him for cancellation by the
Company; (b) cancellation by the Company of the majority of the options to
purchase common stock held by him; (c) application of certain bonuses (otherwise
payable to him) to the payment of his outstanding obligations to the Company;
and (d) release by Mr. Hudson of any and all claims against the Company. Mr.
Hudson also resigned from the Board of Directors of the Company.
We
also
entered into a new employment agreement with Mr., Hudson 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 ATM
Business Sale. Under the new employment agreement, Mr. Hudson’s duties and
compensation continued as under his prior employment agreement. Mr. Hudson’s
employment terminated effective December 31, 2005 in connection with the closing
of the ATM Business Sale.
At
September 30, 2002, James T. Rash, our Chairman and CEO, had outstanding
promissory notes due to us in the aggregate amount of $1,143,554, bearing
interest at 10% per annum. The notes matured on September 30, 2004 and January
14, 2005. Mr. Rash died December 19, 2004. These notes were not repaid by Mr.
Rash upon maturity. We also issued a convertible note in the amount of $100,000
payable to a private company controlled by Mr. Rash in connection with the
Financing. The note payable to Mr. Rash, which was convertible at any time
into
a maximum of 250,000 shares of our common stock, was paid in full in March
2004.
The Board of Directors approved the transfer of a key-man life insurance policy
on the life of Mr. Rash in the amount of $1,000,000 to Mr. Rash in 2002, in
connection with Mr. Rash’s then pending retirement. The proceeds were assigned
as collateral for outstanding promissory notes due from Mr. Rash. Proceeds
of
$1,009,227 were received from the insurance policy in February 2005, which
were
applied to the principal amount of the notes. Mr. Rash also received bonuses
totaling $350,000 of which $134,327 was applied to the remaining principal
balance of the notes.
On
June
9, 2005, Corporate Safe Specialists, Inc. (“CSS”) filed a lawsuit against Secure
Alliance Holdings Corporation and Secure Alliance, 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 Secure Alliance, 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. Secure Alliance Holdings Corporation was released
from this lawsuit, but Secure Alliance, L.P. remains a defendant. Secure
Alliance, L.P. is vigorously defending this litigation.
The
Company has filed a motion to dismiss the case CSS filed in Illinois, and Secure
Alliance, L.P. has filed a motion to transfer the Illinois case to the Eastern
District of Texas. The Company and Secure Alliance, L.P. has also filed a
declaratory judgment action pending in the Eastern District of Texas. In that
action, both the Tidel entities are asking the Eastern District of Texas to
find, among other things, that neither the Company nor Tidel Engineering have
infringed on CSS’s ‘281 patent. Both companies have also requested that an
injunction be issued by the Eastern District of Texas against CSS for
intentional interference with the sale or bid process for Tidel Engineering
L.P.’s cash security business. The Company is vigorously pursuing this
declaratory judgment action.
We
answered the suit denying that the Company's Sentinel products in any way
infringe upon the independent claims of CSS’s patent. We also filed a
counterclaim against CSS wherein the Company seeks to recover damages resulting
from CSS’s violation of a confidential agreement signed by CSS and the Company
and from CSS's intentional interference in the sale of the Sentinel product
line
and related assets. Further, we filed a Motion for Partial Summary Judgment
("Summary Judgment Motion") and a Motion for Sanctions Pursuant to Rule 11
("Rule 11 Motion") whereby the Company alleges that CSS and/or its counsel
failed to perform the required investigation of the facts before bringing suit.
We requested damages from both CSS and its counsel for failure to properly
investigate the validity of the claims by CSS.
Prior
to
the date by which CSS was to file its responses to the Company's Summary
Judgment Motion and Rule 11 Motion, CSS instead filed a Motion for Entry of
Judgment ("CSS's Motion") claiming that we have destroyed evidence and/or have
obstructed the discovery process. We are in the process of preparing a response
to CSS’s Motion by which response the Company vigorously disputes CSS's Motion
and, as with all claims asserted by CSS, the Company intends to vigorously
defend all of CSS's claims.
On
May
16, 2006, the court issued an order directing the parties to submit a joint
claims construction chart, after which the court would conduct a Markman
hearing. The purpose of a Markman hearing is to narrow the patent claims issues
to be submitted to the jury; however, CSS failed to do so. Consequently, the
Court ordered a telephone hearing to address the then-pending Judgment Motion
for additional time within which to attend to the claims construction issues.
During the hearing, the Court admonished CSS’s counsel for failing to comply
with the order, clarified for CSS’s counsel what the Court expected and directed
the parties to file the joint claims construction report on or before August
30,
2006. The court also directed CSS’s counsel to have CSS undertake a meaningful
inspection of the Sentinel safe that had been made available by us, which
invitation CSS had not yet acted upon.
As
part
of the Cash Security Business Sale, the buyer of the Cash Security business
agreed to undertake and have the sole right to direct on behalf of itself and
us, the defense of the CSS litigation, with counsel of its choice, provided
that
in the event we incur any adverse consequences in connection with the litigation
subsequent to the Cash Security Business Sale, then the buyer will indemnify
the
Company from and against the entirety of any such adverse consequences to the
extent they are incurred as a result of the breach of the Cash Security Asset
Purchase Agreement or our negligent action or inaction.
On
October 2, 2006, we completed the Cash Security Business Sale and became
a shell
public company with approximately $12.9 million in cash, cash equivalents
and
marketable securities held-to-maturity; or approximately $0.66 per share
based
on 19,426,210 shares outstanding.
It
is the
present intention of the Company to review its financial position and consider
all available alternatives including without limitation the acquisition of
a new
business or alternatively, the possible dissolution of the Company and
liquidation of its assets, the discharge of any remaining liabilities, and
the
eventual distribution of the remaining assets to stockholders. Although
management currently does not expect to liquidate the Company, if it later
determines that liquidation is in the best interest of stockholders, such action
will require the approval of the holders of a majority of the Company’s then
outstanding shares of common stock. If liquidation does occur there can be
no
assurances as to the amount of liquidation proceeds that might eventually be
distributed to stockholders.
SCHEDULE
II
SECURE
ALLIANCE HOLDINGS CORPORATION AND SUBSIDIARIES
(FORMERLY
TIDEL TECHNOLOGIES, INC.)
VALUATION
AND QUALIFYING ACCOUNTS
Classification
|
|
Balance
at
Beginning
of
Period
|
|
Additions
Charged
to
Costs
and
Expenses
|
|
Charged
to
Other
Accounts
|
|
Deductions
|
|
Balance
at
End
of Period
|
|
For
the year ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts and notes receivable
|
|
$
|
1,132,382
|
|
$
|
—
|
|
|
—
|
|
|
1,087,439
|
|
$
|
44,943
|
|
Inventory
reserve
|
|
|
100,558
|
|
|
—
|
|
|
—
|
|
|
55,558
|
|
|
45,000
|
|
|
|
$
|
1,232,940
|
|
$
|
—
|
|
|
—
|
|
$
|
1,142,997
|
|
$
|
89,943
|
|
For
the year ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts and notes receivable
|
|
$
|
1,076,055
|
|
$
|
56,327
|
|
|
—
|
|
|
—
|
|
$
|
1,132,382
|
|
Reserve
for settlement of class action litigation
|
|
|
1,564,490
|
|
|
—
|
|
|
—
|
|
|
1,564,490
|
|
|
—
|
|
Inventory
reserve
|
|
|
1,900,000
|
|
|
—
|
|
|
—
|
|
|
1,799,442
|
|
|
100,558
|
|
|
|
$
|
4,540,545
|
|
$
|
56,327
|
|
|
—
|
|
$
|
3,363,932
|
|
$
|
1,232,940
|
|
For
the year ended September 30, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts and notes receivable
|
|
$
|
847,815
|
|
$
|
228,240
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,076,055
|
|
Reserve
for settlement of class action litigation
|
|
|
1,564,490
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,564,490
|
|
Inventory
reserve
|
|
|
1,285,389
|
|
|
614,611
|
|
|
—
|
|
|
—
|
|
|
1,900,000
|
|
|
|
$
|
3,697,694
|
|
$
|
842,851
|
|
$
|
—
|
|
$
|
—
|
|
$
|
4,540,545
|
|
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.
|
SECURE
ALLIANCE HOLDINGS CORPORATION
|
|
(Company) |
|
|
|
|
January
16, 2007
|
/s/
Jerrell G. Clay
|
|
|
Jerrell
G. Clay
|
|
|
Chief
Executive Officer
|
|
|
|
|
January
16, 2007
|
/s/
Robert D. Peltier
|
|
|
Robert
D. Peltier
|
|
|
Acting
Chief Financial Officer
|
|
POWER
OF ATTORNEY
Secure
Alliance Holdings Corporation and each of the undersigned do hereby appoint
Jerrell G. Clay its or his true and lawful attorney to execute on behalf of
Secure Alliance Holdings Corporation and the undersigned any and all amendments
to this Annual Report on Form 10-K and to file the same with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission; each of such attorneys shall have the power to act
hereunder with or without the other.
Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report
has
been signed below by the following persons on behalf of the Registrant and
in
the capacities and on the dates indicated:
SIGNATURE
|
|
TITLE
|
|
Date
|
|
|
|
|
|
/s/
Jerrell G. Clay
|
|
Director
and Chief Executive Officer
|
|
January
16, 2007
|
Jerrell
G. Clay
|
|
|
|
|
|
|
|
|
|
/s/
Stephen P. Griggs
|
|
Director,
President and Chief Operating Officer
|
|
January
16, 2007
|
Stephen
P. Griggs
|
|
|
|
|
|
|
|
|
|
/s/
Robert D. Peltier
|
|
Acting
Chief Financial Officer
|
|
January
16, 2007
|
Robert
D. Peltier
|
|
|
|
|
Except
as
otherwise indicated, the following documents are incorporated by reference
as
Exhibits to this Report:
Exhibit
Number
|
|
Description
|
2.01.
|
|
Asset
Purchase Agreement dated February 19, 2005 by and among Tidel Engineering,
L.P., NCR Texas LLC and us (incorporated by reference to Exhibit
2.01 of
our Annual Report on Form 10-K for the fiscal years ended September
30,
2004 and 2003).
|
|
|
|
2.02.
|
|
Asset
Purchase Agreement, dated as of January 12, 2006, by and among Sentinel
Operating, L.P., Tidel Technologies, Inc., and Tidel Engineering,
L.P.
(incorporated by reference to Exhibit 10.1 of Form 8-K filed on January
19, 2006).
|
|
|
|
2.03.
|
|
Amended
and Restated Asset Purchase Agreement, dated as of June 9, 2006,
by and
among Sentinel Operating, L.P., Tidel Technologies, Inc. and Tidel
Engineering, L.P. (incorporated by reference to Exhibit 10.1 of Form
8-K
filed on June 14, 2006).
|
|
|
|
3.01.
|
|
Certificate
of Incorporation of American Medical Technologies, Inc. (filed as
Articles
of Domestication with the Secretary of State, State of Delaware on
November 6, 1987 and incorporated by reference to Exhibit 2 of our
Form 10
dated November 7, 1988 as amended by Form 8 dated February 2,
1989).
|
|
|
|
3.02.
|
|
Amendment
to Certificate of Incorporation dated July 16, 1997 (incorporated
by
reference to Exhibit 3 of our Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997).
|
|
|
|
3.03
|
|
Our
By-Laws (incorporated by reference to Exhibit 3 of our Form 10 dated
November 7, 1988 as amended by Form 8 dated February 2, 1989).
|
|
|
|
|
|
Certificate
of Amendment of Certificate of Incorporation, filed with the State
of
Delaware Secretary of State on October 3, 2006.
|
|
|
|
4.01.
|
|
Credit
Agreement dated April 1, 1999 by and among Tidel Engineering, L.P.,
Chase
Bank of Texas, N.A. and us (incorporated by reference to Exhibit
4.02 of
our Annual Report on Form 10-K for the fiscal year ended September
30,
1999).
|
|
|
|
4.02.
|
|
First
Amendment to Credit Agreement dated April 1, 1999 by and between
Tidel
Engineering, L.P., Chase Bank of Texas, N.A. and us (incorporated
by
reference to Exhibit 4.19 of our Annual Report on Form 10-K for the
fiscal
year ended September 30, 1999).
|
|
|
|
4.03.
|
|
Second
Amendment to Credit Agreement dated September 8, 2000 by and among
Tidel
Engineering, L.P., The Chase Manhattan Bank and us (incorporated
by
reference to Exhibit 10.4 of our Current Report on Form 8-K dated
September 8, 2000).
|
|
|
|
4.04.
|
|
Third
Amendment to Credit Agreement dated September 29, 2000 by and among
Tidel
Engineering, L.P., The Chase Manhattan Bank, and us (incorporated
by
reference to Exhibit 10.4 of our Current Report on Form 8-K dated
September 29, 2000).
|
|
|
|
4.05.
|
|
Fourth
Amendment to Credit Agreement dated November 30, 2000 by and among
Tidel
Engineering, L.P., The Chase Manhattan Bank, and us (incorporated
by
reference to Exhibit 10.5 of our Quarterly Report on Form 10-Q for
the
quarterly period ended December 31, 2000).
|
|
|
|
4.06.
|
|
Fifth
Amendment to Credit Agreement and Forbearance Agreement dated June
1, 2001
by and among Tidel Engineering, L.P., The Chase Manhattan Bank, and
us
(incorporated by reference to Exhibit 4.01 of our Quarterly Report
on Form
10-Q for the quarterly period ended June 30,
2001).
|
4.07.
|
|
Sixth
Amendment to Credit Agreement and Waiver dated December 18, 2001
by and
among Tidel Engineering, L.P., JP Morgan Chase, and us (incorporated
by
reference to Exhibit 4.07 of our Annual Report on Form 10-K for the
fiscal
year ended September 30, 2001).
|
|
|
|
4.08.
|
|
Seventh
Amendment to Credit Agreement and Waiver Agreement dated April 30,
2002 by
and among JP Morgan Chase Bank, Tidel Engineering, L.P. and us
(incorporated by reference to Exhibit 4.01 of our Quarterly Report
on Form
10-Q for the quarterly period ended June 30, 2002).
|
|
|
|
4.09.
|
|
Promissory
Note dated April 1, 1999 executed by Tidel Engineering, L.P. payable
to
the order of Chase Bank of Texas Commerce, N.A. (incorporated by
reference
to Exhibit 4.03 of our Annual Report on Form 10-K for the fiscal
year
ended September 30, 1999).
|
|
|
|
4.10.
|
|
Term
Note dated April 1, 1999, executed by Tidel Engineering, L.P. and
us,
payable to the order of Chase Bank of Texas, N.A. (incorporated by
reference to Exhibit 4.04 of our Annual Report on Form 10-K for the
fiscal
year ended September 30, 1999).
|
|
|
|
4.11.
|
|
Revolving
Credit Note dated September 30, 1999, executed by Tidel Engineering,
L.P.,
payable to the order of Chase Bank of Texas, Inc. (incorporated by
reference to Exhibit 4.18 of our Annual Report on Form 10-K for the
fiscal
year ended September 30, 1999).
|
|
|
|
4.12.
|
|
Amended
and Restated Revolving Credit Note dated November 30, 2000 by and
between
Tidel Engineering, L.P. and The Chase Manhattan Bank (incorporated
by
reference to Exhibit 10.6 of our Quarterly Report on Form 10-Q for
the
quarterly period ended December 31,
2000).
|
4.13.
|
|
Amended
and Restated Revolving Credit Note dated April 30, 2002 by and between
Tidel Engineering, L.P. and JP Morgan Chase Bank (incorporated by
reference to Exhibit 4.02 of our Quarterly Report on Form 10-Q for
the
quarterly period ended June 30, 2002).
|
|
|
|
4.14.
|
|
Security
Agreement (Personal Property) dated as of April 1, 1999, by and between
Tidel Engineering, L.P. and Chase Bank of Texas, N.A. (incorporated
by
reference to Exhibit 4.05 of our Annual Report on Form 10-K for the
fiscal
year ended September 30, 1999).
|
|
|
|
4.15.
|
|
Security
Agreement (Personal Property) dated as of April 1, 1999, by and between
Tidel Cash Systems, Inc. and Chase Bank of Texas, N.A. (incorporated
by
reference to Exhibit 4.06 of our Annual Report on Form 10-K for the
fiscal
year ended September 30, 1999).
|
|
|
|
4.16.
|
|
Security
Agreement (Personal Property) dated as of April 1, 1999, by and between
Tidel Services, Inc. and Chase Bank of Texas, N.A. (incorporated
by
reference to Exhibit 4.07 of our Annual Report on Form 10-K for the
fiscal
year ended September 30, 1999).
|
|
|
|
4.17.
|
|
Unconditional
Guaranty Agreement dated April 1, 1999, executed by Tidel Technologies,
Inc. for the benefit of Chase Bank of Texas, N.A. (incorporated by
reference to Exhibit 4.08 of our Annual Report on Form 10-K for the
fiscal
year ended September 30, 1999).
|
|
|
|
4.18.
|
|
Unconditional
Guaranty Agreement dated April 1, 1999, executed by Tidel Services,
Inc.
for the benefit of Chase Bank of Texas, N.A. (incorporated by reference
to
Exhibit 4.09 of our Annual Report on Form 10-K for the fiscal year
ended
September 30, 1999).
|
|
|
|
4.19.
|
|
Unconditional
Guaranty Agreement dated April 1, 1999, executed by Tidel Cash Systems,
Inc. for the benefit of Chase Bank of Texas, N.A. (incorporated by
reference to Exhibit 4.10 of our Annual Report on Form 10-K for the
fiscal
year ended September 30, 1999).
|
4.20.
|
|
Pledge
and Security Agreement (Stock) dated April 1, 1999, executed by Tidel
Technologies, Inc. for the benefit of Chase Bank of Texas, N.A.
(incorporated by reference to Exhibit 4.11 of our Annual Report on
Form
10-K for the fiscal year ended September 30, 1999).
|
|
|
|
4.21.
|
|
Pledge
and Security Agreement (Limited Partnership Interest) dated April
1, 1999,
executed by Tidel Services, Inc. for the benefit of Chase Bank of
Texas,
N.A. (incorporated by reference to Exhibit 4.12 of our Annual Report
on
Form 10-K for the fiscal year ended September 30,
1999).
|
|
|
|
4.22.
|
|
Pledge
and Security Agreement (Limited Partnership Interest) dated April
1, 1999,
executed by Tidel Cash Systems, Inc. for the benefit of Chase Bank
of
Texas, N.A. (incorporated by reference to Exhibit 4.13 of our Annual
Report on Form 10-K for the fiscal year ended September 30,
1999).
|
|
|
|
4.23.
|
|
Form
of Agreement under our 1997 Long-Term Incentive Plan (incorporated
by
reference to Exhibit 4.3 of our Form S-8 dated February 14,
2000).
|
|
|
|
(1)4.24.
|
|
Form
of Agreement under our 1989 Incentive Stock Option Plan (incorporated
by
reference to Exhibit 4.4 of our Form S-8 dated February 14,
2000).
|
|
|
|
4.25.
|
|
Common
stock Purchase Warrant issued to Montrose Investments Ltd. dated
September
8, 2000 (incorporated by reference to Exhibit 4.2 of our Current
Report on
Form 8-K dated September 8, 2000).
|
|
|
|
4.26.
|
|
Common
stock Purchase Warrant issued to Montrose Investments Ltd. dated
September
8, 2000 (incorporated by reference to Exhibit 4.2 of our Current
Report on
Form 8-K dated September 8, 2000).
|
4.27.
|
|
Registration
Rights Agreement dated September 8, 2000 by and between Montrose
Investments Ltd. and us (incorporated by reference to Exhibit 4.2
of our
Current Report on Form 8-K dated September 8, 2000).
|
|
|
|
4.28.
|
|
Joinder
and Amendment to Registration Rights Agreement dated September 29,
2000 by
and between Acorn Investment Trust and us (incorporated by reference
to
Exhibit 10.2 of our Current Report on Form 8-K dated September 29,
2000).
|
|
|
|
4.29.
|
|
Amendment
and Supplement to Intercreditor Agreement dated September 6, 2001
by and
among Tidel Engineering, L.P., NCR Corporation, and us (incorporated
by
reference to Exhibit 10.26 of our Annual Report on Form 10-K for
the
fiscal year ended September 30, 2001).
|
|
|
|
4.30.
|
|
Amended
and Restated Intercreditor Agreement dated September 24, 2001 by
and among
Tidel Engineering, L.P., NCR Corporation, and us (incorporated by
reference to Exhibit 10.25 of our Annual Report on Form 10-K for
the
fiscal year ended September 30, 2001).
|
|
|
|
4.31.
|
|
Our
Convertible Debenture issued to Montrose Investments, Ltd. dated
September
8, 2000 (incorporated by reference to Exhibit 4.1 of our Current
Report on
Form 8-K dated September 8, 2000).
|
|
|
|
4.32.
|
|
Subordination
Agreement dated September 8, 2000 by and among Tidel Engineering,
L.P.,
Montrose Investments, Ltd., The Chase Manhattan Bank, and us (incorporated
by reference to Exhibit 10.3 of our Current Report on Form 8-K dated
September 8, 2000).
|
|
|
|
4.33.
|
|
Convertible
Debenture issued to Acorn Investment Trust dated September 29, 2000
(incorporated by reference to Exhibit 4.1 of our Current Report on
Form
8-K dated September 29, 2000).
|
|
|
|
4.34.
|
|
Subordination
Agreement dated September 29, 2000 by and among Tidel Engineering,
L.P.,
Acorn Investment Trust, The Chase Manhattan Bank, and us (incorporated
by
reference to Exhibit 10.3 of our Current Report on Form 8-K dated
September 29, 2000).
|
|
|
|
4.35.
|
|
Convertible
Term Note in favor of Laurus Master Fund, Ltd. in the principal amount
of
$6,450,000 dated November 25, 2003 (incorporated by reference to
Exhibit
4.35 of our Annual Report on Form 10-K for the fiscal year ended
September
30, 2002, filed February 1, 2005).
|
4.36.
|
|
Convertible
Term Note in favor of Laurus Master Fund, Ltd. in the principal amount
of
$400,000 dated November 25, 2003 (incorporated by reference to Exhibit
4.36 of our Annual Report on Form 10-K for the fiscal year ended
September
30, 2002, filed February 1, 2005).
|
|
|
|
4.37.
|
|
Convertible
Term Note in favor of Laidlaw Southwest, LLC in the principal amount
of
$100,000 dated November 25, 2003 (incorporated by reference to Exhibit
4.37 of our Annual Report on Form 10-K for the fiscal year ended
September
30, 2002, filed February 1, 2005).
|
|
|
|
4.38.
|
|
Security
Agreement by and among Tidel Engineering, L.P., Tidel Cash Systems,
Inc.,
AnyCard International, Inc., Tidel Services, Inc., and us, dated
November
25, 2003 (incorporated by reference to Exhibit 4.38 of our Annual
Report
on Form 10-K for the fiscal year ended September 30, 2002, filed
February
1, 2005).
|
|
|
|
4.39.
|
|
Equity
Pledge Agreement by and between Laurus Master Fund, Ltd. and us dated
November 25, 2003 (incorporated by reference to Exhibit 4.39 of our
Annual
Report on Form 10-K for the fiscal year ended September 30, 2002,
filed
February 1, 2005).
|
|
|
|
4.40.
|
|
Partnership
Interest Pledge Agreement by and among Tidel Cash Systems, Inc.,
Tidel
Services, Inc. and Laurus Master Fund, Ltd., dated as of November
25, 2003
(incorporated by reference to Exhibit 4.40 of our Annual Report on
Form
10-K for the fiscal year ended September 30, 2002, filed February
1,
2005).
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4.41.
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Registration
Rights Agreement by and between Laurus Master Fund, Ltd. and us,
dated
November 25, 2003 (incorporated by reference to Exhibit 4.41 of our
Annual
Report on Form 10-K for the fiscal year ended September 30, 2002,
filed
February 1, 2005).
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4.42.
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Our
common stock Purchase Warrant issued to Laurus Master Fund, Ltd.
dated
November 25, 2003 (incorporated by reference to Exhibit 4.42 of our
Annual
Report on Form 10-K for the fiscal year ended September 30, 2002,
filed
February 1, 2005).
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4.43.
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Blocked
Account Control Agreement by and among Tidel Engineering, L.P., Laurus
Master Fund, Ltd. and JP Morgan Chase Bank, dated as of November
25, 2003
(incorporated by reference to Exhibit 4.43 of our Annual Report on
Form
10-K for the fiscal year ended September 30, 2002, filed February
1,
2005).
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4.44.
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Guaranty
by and among Tidel Engineering, L.P., Tidel Cash Systems, Inc., Tidel
Services, Inc., Laurus Master Fund, Ltd. and us, dated as of November
25,
2003 (incorporated by reference to Exhibit 4.44 of our Annual Report
on
Form 10-K for the fiscal year ended September 30, 2002, filed February
1,
2005).
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4.45.
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Payoff
Letter of Wallis State Bank dated November 24, 2003 (incorporated
by
reference to Exhibit 4.45 of our Annual Report on Form 10-K for the
fiscal
year ended September 30, 2002, filed February 1,
2005).
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4.46.
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Convertible
Term Note in favor of Laurus Master Fund, Ltd. in the principal amount
of
$600,000 dated November 26, 2004 (incorporated by reference to Exhibit
10.2 of our Current Report on Form 8-K dated November 26,
2004).
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4.47.
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Convertible
Term Note in favor of Laurus Master Fund, Ltd. in the principal amount
of
$1,500,000 dated November 26, 2004 (incorporated by reference to
Exhibit
10.3 of our Current Report on Form 8-K dated November 26,
2004).
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4.48.
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Common
Stock Purchase Warrant issued to Laurus Master Fund, Ltd. dated November
26, 2004 (incorporated by reference to Exhibit 10.4 of our Current
Report
on Form 8-K dated November 26, 2004).
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4.49.
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Agreement
of Amendment and Reaffirmation by and among Tidel Engineering, L.P.,
Tidel
Cash Systems, Inc., AnyCard International, Inc., Tidel Services,
Inc.,
Laurus Master Fund, Ltd., and us, dated as of November 26, 2004
(incorporated by reference to Exhibit 10.5 of the Current Report
on Form
8-K dated November 26, 2004).
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4.50.
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Convertible
Promissory Note in favor of Laurus Master Fund, Ltd. in the principal
amount of $1,250,000 dated November 26, 2004 (incorporated by reference
to
Exhibit 10.3 of our Current Report on Form 8-K dated November 26,
2004).
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4.51.
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Guaranty
in favor of Laurus Master Fund, Ltd. dated as of November 26, 2004
(incorporated by reference to Exhibit 10.8 to our Current Report
on Form
8-K dated November 26, 2004).
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9.01
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Voting
Agreement, dated as of January 12, 2006, by and between Tidel
Technologies, Inc., Sentinel Technologies, Inc., Sentinel Operating,
L.P.
and the individuals named therein (incorporated by reference to Exhibit
10.6 of Form 8-K/A filed on January 31, 2006).
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9.02
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Voting
Agreement, dated as of January 12, 2006, by and between Tidel
Technologies, Inc., Sentinel Technologies, Inc., Sentinel Operating,
L.P.
and Laurus Master Fund, Ltd. (incorporated by reference to Exhibit
10.7 of
Form 8-K/A filed on January 31, 2006).
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9.03
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Amendment
to Voting Agreement, dated as of February 28, 2006, by and among
Tidel
Technologies, Inc., Sentinel Technologies, Inc., Sentinel Operating,
L.P.
and Laurus Master Fund, Ltd. (incorporated by reference to Exhibit
10.3 of
Form 8-K filed on March 7, 2006).
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9.04
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Second
Amendment to Voting Agreement, dated as of June 9, 2006, by and among
Tidel Technologies, Inc., Sentinel Technologies, Inc., Sentinel Operating,
L.P. and Laurus Master Fund, Ltd. (incorporated by reference to Exhibit
10.5 of Form 8-K filed on June 14, 2006).
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(1)10.01.
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1997
Long-Term Incentive Plan (incorporated by reference to Exhibit 4.1
of our
Form S-8 dated February 14, 2000).
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(1)10.02.
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1989
Incentive Stock Option Plan (incorporated by reference to Exhibit
4.2 of
our Form S-8 dated February 14, 2000).
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10.03.
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Lease
Agreement dated February 21, 1992 between San Felipe Plaza, Ltd.
and us,
related to the occupancy of our executive offices (incorporated by
reference to Exhibit 10.10 of our Annual Report on Form 10-K for
the
fiscal year ended September 30, 1992).
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10.04.
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Amendment
to Lease Agreement dated September 15, 1997 between San Felipe Plaza,
Ltd.
and us, related to the occupancy of our executive offices (incorporated
by
reference to Exhibit 10.14 of our Annual Report on Form 10-K for
the
fiscal year ended September 30, 1997).
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10.05.
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Lease
dated as of December 9, 1994 (together with the Addendum and Exhibits
thereto) between Booth, Inc. and Tidel Engineering, Inc. related
to the
occupancy of our principal operating facility in Carrollton, Texas
(incorporated by reference to Exhibit 10.7 of our Annual Report on
Form
10-K for the fiscal year ended September 30, 1994).
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10.06.
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Agreement
dated October 30, 1991 between Affiliated Computer Services, Inc.
(“ACS”)
and Tidel Engineering, Inc. (incorporated by reference to Exhibit
10.14 of
our Annual Report on Form 10-K for the fiscal year ended September
30,
1992).
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10.07.
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EFT
Processing Services Agreement dated February 3, 1995 by, between
and among
ACS, AnyCard International, Inc. and us (incorporated by reference
to
Exhibit 10.9 of our Annual Report on Form 10-K for the fiscal year
ended
September 30, 1995).
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10.08.
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Amendment
to EFT Processing Services Agreement dated as of September 14, 1995
by,
between and among ACS, AnyCard International, Inc. and us (incorporated
by
reference to Exhibit 10.10 of our Annual Report on Form 10-K for
the year
fiscal ended September 30, 1995).
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10.09.
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Purchase
Agreement dated February 3, 1995 between ACS and AnyCard International,
Inc. related to the purchase by ACS of ATMs (incorporated by reference
to
Exhibit 10.11 of our Annual Report on Form 10-K for the fiscal year
ended
September 30, 1995).
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10.10.
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Amendment
to Purchase Agreement dated September 14, 1995 between ACS and AnyCard
International, Inc. related to the purchase by ACS of ATMs (incorporated
by reference to Exhibit 10.12 of our Annual Report on Form 10-K for
the
fiscal year ended September 30, 1995).
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(1)10.11.
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Employment
Agreement dated January 1, 2000 between James T. Rash and us (incorporated
by reference to Exhibit 99.1 of our Quarterly Report on Form 10-Q
for the
quarterly period ended March 31, 2000).
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(1)10.12.
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Form
of Employment Agreement dated January 1, 2000 between Tidel Engineering,
L.P. and Mark K. Levenick, Michael F. Hudson, M. Flynt Moreland and
Eugene
Moore, individually (incorporated by reference to Exhibit 10.14 of
our
Annual Report on Form 10-K for the fiscal year ended September 30,
2001).
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10.13.
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Convertible
Debenture Purchase Agreement dated September 8, 2000 by and between
Montrose Investments Ltd. and us (incorporated by reference to Exhibit
10.1 of our Current Report on Form 8-K dated September 8,
2000).
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10.14.
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Convertible
Debenture Purchase Agreement dated September 29, 2000 by and between
Acorn
Investment Trust and us (incorporated by reference to Exhibit 10.1
of our
Current Report on Form 8-K dated September 29, 2000).
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10.15.
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ATM
Inventory Purchase Agreement dated September 7, 2001 by and among
Tidel
Engineering, L.P., NCR Corporation, and us (incorporated by reference
to
Exhibit 10.27 of our Annual Report on Form 10-K for the fiscal year
ended
September 30, 2001).
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10.16.
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Note
Purchase Agreement by and between JPMorgan Chase Bank, N.A. and Wallis
State Bank, with the consent and agreement of Tidel Engineering,
L.P.,
Tidel Technologies, Inc., Tidel Services, Inc., and Tidel Cash Systems,
Inc. dated June 30, 2003 (incorporated by reference to Exhibit 10.16
of
our Annual Report on Form 10-K for the fiscal year ended September
30,
2002, filed February 1, 2005).
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10.17.
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Securities
Purchase Agreement by and between Laurus Master Fund, Ltd. and us
dated
November 25, 2003 (incorporated by reference to Exhibit 10.17 of
our
Annual Report on Form 10-K for the fiscal year ended September 30,
2002,
filed February 1, 2005).
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10.18.
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Termination
Agreement by and between Montrose Investments Ltd. and us dated November
24, 2003 (incorporated by reference to Exhibit 10.18 of our Annual
Report
on Form 10-K for the fiscal year ended September 30, 2002, filed
February
1, 2005).
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10.19.
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Termination
Agreement by and between Columbia Acorn Trust and us dated November
25,
2003 (incorporated by reference to Exhibit 10.19 of our Annual Report
on
Form 10-K for the fiscal year ended September 30, 2002, filed February
1,
2005).
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10.20.
|
|
Securities
Purchase Agreement by and between Laurus Master Fund, Ltd. and us
dated
November 26, 2004 (incorporated by reference to Exhibit 10.1 of our
Current Report on Form 8-K dated November 26, 2004).
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10.21.
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|
Purchase
Order Finance and Security Agreement dated as of November 26, 2004
between
Laurus Master Fund, Ltd. and Tidel Engineering, L.P. (incorporated
by
reference to Exhibit 10.6 of our Current Report on Form 8-K dated
November
26, 2004).
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10.22.
|
|
Agreement
Regarding NCR Transaction and Other Asset Sales by and between Laurus
Master Fund, Ltd., and us, dated November 26, 2004 (incorporated
by
reference to Exhibit 10.22 of our Annual Report on Form 10-K for
the
fiscal years ended September 30, 2004 and
2003).
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(1)
10.23.
|
|
Tidel/Peltier
Agreement dated February 23, 2005 (incorporated by reference to Exhibit
99.1 to this Annual Report on Form 8-K dated February 23,
2005).
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(1)
10.24.
|
|
Settlement
Agreement by and between Tidel Engineering, L.P., Michael F. Hudson
and
us, dated June 22, 2005.
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10.25
|
|
Exercise
and Conversion Agreement, dated as of January 12, 2006, by and among
Sentinel Technologies, Inc., Sentinel Operating, L.P., Tidel Technologies,
Inc. and Laurus Master Fund, Ltd. (incorporated by reference to Exhibit
10.2 of Form 8-K filed on January 19, 2006).
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10.26
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Cash
Collateral Deposit Letter, dated as of January 12, 2006, by and between
Laurus Master Fund, Ltd., Tidel Technologies, Inc., Tidel Engineering,
L.P., Tidel Cash Systems, Inc., Tidel Services, Inc. and AnyCard
International, Inc. (incorporated by reference to Exhibit 10.3 of
Form 8-K
filed on January 19, 2006).
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10.27
|
|
Stock
Redemption Agreement, dated as of January 12, 2006, by and among
Tidel
Technologies, Inc. and Laurus Master Fund, Ltd. (incorporated by
reference
to Exhibit 10.4 of Form 8-K filed on January 19, 2006).
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10.28
|
|
Reaffirmation,
Ratification and Confirmation Agreement, dated as of January 12,
2006, by
and between Tidel Technologies, Inc. and Laurus Master Fund, Ltd.
(incorporated by reference to Exhibit 10.5 of Form 8-K filed on January
19, 2006).
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10.29
|
|
Amendment
to Exercise and Conversion Agreement, dated as of February 28, 2006,
by
and among Sentinel Technologies, Inc., Sentinel Operating, L.P.,
Tidel
Technologies, Inc. and Laurus Master Fund, Ltd. (incorporated by
reference
to Exhibit 10.1 of Form 8-K filed on March 7, 2006).
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10.30
|
|
Amendment
to Stock Redemption Agreement, dated as of February 28, 2006, by
and
between Tidel Technologies, Inc. and Laurus Master Fund, Ltd.
(incorporated by reference to Exhibit 10.2 of Form 8-K filed on March
7,
2006).
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10.31
|
|
Agreement,
dated as of June 9, 2006, by and between Tidel Technologies, Inc.
and
Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.2
of
Form 8-K filed on June 14, 2006).
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10.32
|
|
Second
Amendment to Stock Redemption Agreement, dated as of June 9, 2006,
by and
among Tidel Technologies, Inc. and Laurus Master Fund, Ltd. (incorporated
by reference to Exhibit 10.3 of Form 8-K filed on June 14,
2006).
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10.33
|
|
Second
Amendment to Exercise and Conversion Agreement, dated as of June
9, 2006,
by and among Sentinel Technologies, Inc., Sentinel Operating, L.P.,
Tidel
Technologies, Inc. and Laurus Master Fund, Ltd. (incorporated by
reference
to Exhibit 10.4 of Form 8-K filed on June 14, 2006).
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(1)
10.34
|
|
Agreement,
dated as of June 9, 2006, between Tidel Engineering, L.P. and Mark
K.
Levenick. (incorporated by reference to Exhibit 10.6 of Form 8-K
filed on
June 14, 2006).
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14.01.
|
|
Code
of Conduct and Ethics of Tidel Technologies, Inc (incorporated by
reference to Exhibit 2.01 of our Annual Report on Form 10-K for the
fiscal
years ended September 30, 2004 and 2003).
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21.01.
|
|
Subsidiaries.
|
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|
|
Certification
of Interim Chief Executive Officer, Mark K. Levenick, pursuant to
Section
302 of the Sarbanes-Oxley Act of 2002.
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|
|
Certification
of Interim Chief Financial Officer, Robert D. Peltier, pursuant to
Section
302 of the Sarbanes-Oxley Act of 2002.
|
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|
|
Certification
of Interim Chief Executive Officer, Mark K. Levenick, pursuant to
18
U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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|
|
Certification
of Interim Chief Financial Officer, Robert D. Peltier, pursuant to
18
U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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____________
(1) |
Indicates
management contract or compensatory plan or arrangement.
|
75