UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ____________________
Commission file Number 000-17288
TIDEL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2193593
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2900 Wilcrest Drive, Suite 205
Houston, Texas 77042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (713) 783-8200
----------------------
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. YES [ ] NO [X]
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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [ ] NO [X]
The aggregate market value of the 17,976,743 shares of Common Stock held by
non-affiliates of the Registrant based on the closing sale price on January 21,
2005 of $0.37 was $6,651,395. The number of shares of Common Stock outstanding
as of the close of business on January 21, 2005 was 20,677,210.
TIDEL TECHNOLOGIES, INC.
TABLE OF CONTENTS *
ANNUAL REPORT ON FORM 10-K
PAGE
----
PART I
Item 1. Business.......................................................................... 1
Item 2. Properties........................................................................ 4
Item 3. Legal Proceedings................................................................. 4
Item 4. Submission of Matters to a Vote of Security Holders............................... 6
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.................................................... 6
Item 6. Selected Financial Data........................................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 9
Item 7A. Quantitative and Qualitative Disclosure and Market Risk........................... 20
Item 8. Financial Statements and Supplementary Data....................................... 27
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure.................................................................... 27
Item 9A. Controls and Procedures........................................................... 27
PART III
Item 10. Directors and Executive Officers of the Registrant................................ 27
Item 11. Executive Compensation............................................................ 29
Item 12. Security Ownership of Certain Beneficial Owners and Management.................... 32
Item 13. Certain Relationships and Related Transactions.................................... 34
Item 14. Principal Accounting Fees and Services............................................ 35
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K................... 36
Signature Page .............................................................................. 37
* This Table of Contents is inserted for convenience of reference only and shall
not be considered "filed" as a part of this Annual Report on Form 10-K for the
fiscal year ended September 30, 2002.
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Tidel Technologies, Inc. (the "Company") was incorporated under the laws
of the State of Delaware in November 1987 under the name of American
Medical Technologies, Inc., succeeding a corporation established in
British Columbia, Canada in May 1984.
In September 1992, the Company acquired Tidel Engineering, Inc., a
manufacturer of cash handling devices and other products. The Company
changed its name to Tidel Technologies, Inc. in July 1997, and is
primarily engaged in the development, manufacturing, sale and support of
automated teller machines ("ATMs") and electronic cash security systems.
(b) FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS
The Company conducts business within one operating segment, principally in
the United States.
(c) DESCRIPTION OF BUSINESS
The Company develops, manufactures, sells and supports ATM products and
electronic cash security system products, known as the Timed Access Cash
Controller ("TACC") products and the Sentinel products, which are designed
for specialty retail marketers. Sales of ATM products are generally made
on a wholesale basis to more than 200 distributors and manufacturer's
representatives. TACC and Sentinel products are often sold directly to
end-users as well as distributors. The Company's engineering, sales and
service departments work closely with distributors and their customers to
continually analyze and fulfill their needs, enhance existing products and
develop new products. Sales of the Company's ATM and TACC products
accounted for 82%, 88% and 92% of revenue in the fiscal years ended
September 30, 2002, 2001 and 2000, respectively. The initial sales of
Sentinel products occurred subsequent to September 30, 2002.
The principal materials and components used by the Company are
pre-fabricated steel cabinets, custom molded plastic, and various
electronic parts and components, all of which are generally available in
quantity at this time. The Company assembles its products by configuring
parts and components received from a number of major suppliers with the
Company's proprietary hardware and software.
The Company maintains patents and trademarks on processes and brands
associated with its product lines. However, the Company does not believe
that patents and trademarks, in general, serve as barriers to entry into
the ATM industry. The Company's overall success depends upon proprietary
technology and other intellectual property rights. The Company must be
able to obtain patents and register new trademarks in order to develop and
introduce new product lines.
Sales to one customer, JRA 222, Inc. d/b/a Credit Card Center ("CCC"),
were $44,825,049 or 61% of net sales for the fiscal year ended September
30, 2000. In the three months ended December 31, 2000, sales to CCC were
$11,748,018, or 70% of the Company's net sales for the quarter. During
January 2001, the Company became aware that CCC was experiencing financial
difficulties and sales to this customer were discontinued. Prior to CCC's
financial difficulties it was one of the largest distributors of
off-premise ATMs in the U.S. There have been no shipments to CCC since
January 1, 2001. As a result, sales to CCC for fiscal year 2001 amounted
to
1
33% of the Company's net sales for the year. The termination of sales to
CCC had a material adverse effect on the Company's sales and earnings for
the fiscal years ended September 30, 2002 and 2001. In addition, the
negative general reaction to CCC's problems by the ATM industry indirectly
affected the ATM market in that overall demand for ATM machines of the
type manufactured by Tidel was reduced, primarily as a result of the
difficulty by end-user purchasers in obtaining sufficient levels of lease
financing.
After several months of unsuccessful efforts to remedy its financial
difficulties, CCC filed for protection under Chapter 11 of the United
States Bankruptcy Code on June 6, 2001. At that time, the Company had
accounts and a note receivable due from CCC totaling approximately $27
million, which were secured by a security interest in CCC's accounts
receivable, inventories and transaction income. However, NCR Corporation
("NCR") and Fleet National Bank ("Fleet") also had competing secured
interest claims on the same assets and income of CCC resulting in the
Company's security interest not adequately covering the Company's
liability claim. The proceeding was subsequently converted to a Chapter 7
and a Trustee was appointed in April 2002.
In September 2001, Tidel and NCR jointly acquired CCC's ATM inventory
pursuant to and in accordance with the ATM Inventory Purchase Agreement
approved by the Federal Bankruptcy Court. The total purchase price was
$8,000,000, and consisted of a cash deposit by Tidel of $1,000,000 made
into escrow and equal credits against the debt owed by CCC to each of
Tidel and NCR. An escrow of $700,000 was established to cover any payments
to Fleet, which provided banking and related services to CCC, in the event
that their claim is ultimately determined to be secured. An escrow of
$300,000 was established to cover any claims of warehousemen, carriers and
storage facilities secured by valid and perfected security interests in
such purchased ATMs. The exact amount of those claims has not yet been
determined. At such time as it is determined, any excess amount is
required to be paid by Tidel and to the extent such amount is less than
$1,000,000, the difference is required to be refunded to Tidel. In January
2003, the Trustee refunded $250,000 to Tidel from the inventory escrow of
$300,000. The remaining $50,000 shall be held by the Trustee until a final
accounting has been completed.
Pursuant to a separate but related Intercreditor Agreement, as amended,
between NCR and Tidel, NCR paid Tidel $1,177,550 in September 2001 to
purchase approximately 1,700 ATMs manufactured by NCR which were included
in the inventory jointly acquired from CCC. NCR subsequently paid Tidel an
additional $46,200 in January 2002 upon the resale of the ATMs.
In addition to the amounts received from NCR during 2001, the Company
acquired a significant amount of different ATM units manufactured by
Tidel, along with various parts used for these ATM units. The Company was
able to utilize some of these ATM units during fiscal years 2001 and 2002
to fill subsequent sales orders from customers. Subsequent to fiscal 2002,
the Company was able to utilize most of the remaining recovered parts for
production, warranty work and sales to customers.
As a result of the acquisition in 2001 of the inventory owned by CCC,
including the sales of certain equipment to NCR, the recording of ATM
units and parts manufactured and/or utilized by the Company and estimated
recoveries from other equipment manufactured by other companies, the
Company in 2001 reduced its outstanding receivable from CCC by
approximately $3.0 million.
Notwithstanding the Company's commitment to aggressively pursuing its
rights to collect substantial additional funds from CCC, in view of the
uncertainty of the ultimate outcome of the CCC bankruptcy proceedings,
during 2001 the Company increased its reserve to $20.3 million against the
trade accounts receivable due from CCC and increased its notes receivable
reserve to $3.8 million, which represents the total outstanding balances
of the trade accounts note receivable due from CCC. In addition, the
Company provided additional reserves of $500,000 due to uncertainties
regarding the full recovery of its escrow deposits. As of September 30,
2002, the Company's
2
remaining receivable from the escrow deposits was reduced to $500,000. In
early 2003 the Company recovered $250,000 of this amount from the
bankruptcy estate and is continuing its efforts to recover any additional
amounts.
As of January 2005, the Company is still actively pursuing the collection
of monies from CCC, although it is unlikely that the Company will receive
significant additional funds from CCC. See Part I, Item 3., "Legal
Proceedings", Part II, Item 7., "Management's Discussion and Analysis of
Financial Condition and Results of Operations", and Note 3 to Notes to
Consolidated Financial Statements of this Annual Report on Form 10-K for
the fiscal year ended September 30, 2002 (the "Annual Report") for
additional information about the Company's relationship with CCC.
Sales to another major customer, Cardtronics L.P. ("Cardtronics"),
accounted for 19% and 7% of net sales for the fiscal years ended September
30, 2001 and 2000, respectively. No customer accounted for more than 10%
of net sales for the fiscal year ended September 30, 2002.
The Company's operating results and the amount and timing of revenue are
affected by numerous factors including production schedules, customer
priorities, sales volume, and sales mix. The Company normally fills and
ships customer orders within 45 days of receipt, and therefore no
significant backlog generally exists.
The markets for our products are characterized by intense competition. We
expect the intensity of competition to increase. A major cause of the
intense competition is the saturation of the U.S. market, which may limit
the growth opportunities in the future. Additionally, the increased use of
debit cards by consumers, as opposed to cash, may lower the number of
transactions per ATM which could result in lower sales of new ATMs. Large
manufacturers such as Diebold Incorporated, NCR Corporation, Triton
Systems (a division of Dover Corporation) and Tranax (a distributor of
Hyosung) compete directly with us in the low-cost ATM market.
Additionally, demand in fiscal year 2002 decreased, due to (i) the
declaration of bankruptcy by CCC, our former largest customer, (ii) the
deterioration of the third-party lease finance market to the ATM industry,
and (iii) the general downturn in the economy. Our direct competitors for
our TACC products include NKL Industries, McGunn Safe Company, Armor Safe
Company and AT Systems. Many smaller manufacturers of ATMs, electronic
safes and kiosks are also found in the market.
The Company can experience seasonal variances in its operations and
historically has its lowest dollar volume sales months between November
and February. The Company's operating results for any particular quarter
may not be indicative of the results for future quarters or for the year.
The Company's charges to expense for research and development were
approximately $2,700,000 $2,500,000 and $2,600,000 for the years ended
September 30, 2002, 2001 and 2000, respectively.
Compliance by the Company with federal, state and local environmental
protection laws during 2002 had no material effect upon capital
expenditures, earnings or the competitive position of the Company. As of
September 30, 2002, it was not expected that compliance with such laws
would have a material effect upon capital expenditures, earnings or the
competitive position of the Company in fiscal year 2003.
At September 30, of the fiscal years ended in 2002, 2001 and 2000, the
Company employed 128, 120 and 133 people, respectively. At December 31,
2004, the Company had approximately 107 employees.
3
(d) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
The vast majority of the Company's sales in fiscal 2002 were to customers
within the United States. Sales to customers outside the United States, as
a percentage of total revenues, were approximately 13%, 7% and 6% in the
fiscal years ended September 30, 2002, 2001 and 2000, respectively. Most
of the Company's foreign sales were to customers located in Canada and the
Pacific Rim countries.
Substantially all of the Company's assets were located within the United
States during fiscal year 2002, and are still located in the United States
today. Inventory in transit related to sales to customers outside the
United States can be in foreign countries prior to receipt by the
customer.
ITEM 2. PROPERTIES
The Company's corporate office during fiscal year 2002 was located in
approximately 4,100 square feet in Houston, Texas. The lease expired in
December 2002 and the Company executed a short-term lease with the
landlord on month-to-month terms. The manufacturing, engineering and
warehouse operations are located in two nearby facilities occupying
approximately 110,000 square feet in Carrollton, Texas, under leases
expiring in March 2005 and February 2006.
Subsequent to the end of fiscal year 2002, the Company relocated its
corporate office to its present location of approximately 1,000 square
feet in Houston, Texas. The Company executed a short-term lease in
September 2003 with the landlord on month-to-month terms. The Company
believes that the leased space is suitable for the Company's needs.
At September 30, 2002 and 2001, the Company owned tangible property and
equipment with a cost basis of approximately $5,049,000 and $6,006,000,
respectively.
ITEM 3. LEGAL PROCEEDINGS
CCC, the Company's largest customer in 2000 and 2001, filed for protection
under Chapter 11 of the United States Bankruptcy Code on June 6, 2001 in
the United States Bankruptcy Court for the Eastern District of
Pennsylvania. On or about April 21, 2002, the bankruptcy case was
converted to a Chapter 7 case and the Court subsequently appointed a
Trustee. At the time that the original petition was filed, CCC owed the
Company approximately $27 million, excluding any amounts for interest,
attorney's fees and other charges. As of September 30, 2001, the Company
had recouped inventory from the estate of CCC recorded at an approximate
value of $3 million. At the time of the bankruptcy filing, the obligation
was secured by a collateral pledge of accounts receivable, inventories and
transaction income, although the value of the Company's collateral is
unclear. Based upon analysis by the Company of all available information
regarding the CCC bankruptcy proceedings, as of September 30, 2002 the
Company had recorded a reserve in the amount of approximately $24.1
million against substantially all of the remaining balance of the note and
trade accounts receivable owed to the Company by CCC. Management of the
Company intends to continue to monitor this matter and to take all actions
that it determines to be necessary based upon its findings. Accordingly,
the Company may incur additional expenses which would be charged to
earnings in future periods.
In connection with CCC's bankruptcy filing, the Company filed proofs of
claim as to the obligations of CCC due and owing the Company and the
Company's interest in certain assets of CCC. Fleet, which provided banking
and related services to CCC; NCR, another secured creditor and vendor of
CCC; and several leasing companies filed similar claims based on alleged
security interests in the same property of the bankruptcy estate as well.
4
Prior to CCC's bankruptcy filing, the Company filed an action in the 134th
Judicial District Court of the State of Texas in Dallas County, Texas,
against Andrew J. Kallok ("Kallok"), the principal shareholder and
executive officer of CCC for, among other claims, failure to pay amounts
due and owing, breach of contract, and fraud associated with product sales
to CCC. On November 7, 2002, a final judgment was reached on this matter
with the court finding for the Company and ordering Kallok, due to his
fraudulent actions, to pay damages, including prejudgment interest, in the
amount of $26.2 million to the Company. Due to the current financial
condition of Kallok, there is no guarantee that the Company will be able
to collect any or all of the damages awarded to it by the court.
The Company and several of its officers and directors were named as
defendants (the "Defendants") in a purported class action filed on October
31, 2001 in the United States District Court for the Southern District of
Texas (the "Southern District"), George Lehockey v. Tidel Technologies, et
al., H-01-3741. Subsequent to the filing of this suit, four identical
suits were also filed in the Southern District. On or about March 18,
2002, the Court consolidated all of the pending class actions and
appointed a lead plaintiff under the Private Securities Litigation Reform
Act of 1995 ("Reform Act"). On April 10, 2002, the lead plaintiff filed a
Consolidated Amended Complaint ("CAC") that alleged that the Defendants
made material misrepresentations and omissions concerning the Company's
financial condition and prospects between January 14, 2000 and February 8,
2001 (the putative class period). In June 2004, the Company reached an
agreement in principle to settle these class action lawsuits. The
settlement, which was subject to a definitive agreement and court
approval, provided for a cash payment of $3 million to be funded by the
Company's liability insurance carrier and the issuance of two million
shares of common stock by the Company. In October 2004, the court approved
the settlement and the shares were issued in November 2004. In addition,
in August 2004, the Company reached an agreement with the liability
insurance carrier to issue warrants to the carrier to purchase 500,000
shares of the Company's Common Stock at an exercise price of $0.67 per
share in exchange for the carrier's acceptance of the terms of the class
action lawsuit. The Company provided a reserve of $1,564,490 in fiscal
2002 to cover any losses from this litigation.
On August 9, 2002, one of the holders of the Company's 6% Convertible
Debentures, Montrose Investments Ltd. ("Montrose"), commenced an adversary
proceeding against the Company in the Supreme Court of the State of New
York, County of New York, claiming monies due under the Convertible
Debentures (the "Montrose Litigation"). This action was dismissed by the
court on March 3, 2003. Montrose filed a Notice of Appeal with the Supreme
Court of the State of New York, Appellate Division, First Department on
May 20, 2003. This litigation was dismissed in conjunction with the
financing completed in November 2003, as discussed more fully in Part II,
Item 7., - "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Subsequent Events" and Note 15 to the Notes to
the Consolidated Financial Statements in Part IV of this Annual Report.
For a description of the Company's 6% Convertible Debentures see Part II,
Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" in Part II of
this Annual Report. A stipulation of discontinuance, dismissing the
appeal, was entered on or about December 2, 2003.
The Company and its subsidiaries are each subject to certain other
litigation and claims arising in the ordinary course of business. In the
opinion of the management of the Company, the amounts ultimately payable,
if any, as a result of such litigation and claims will not have a material
adverse effect on the Company's financial position.
5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on September 26, 2002 in
Carrollton, Texas, the following proposals were adopted by the margins
indicated:
a) Election of Directors to hold office until the next annual meeting
of stockholders and until their successors are elected and
qualified:
Number of Shares
----------------
For Withheld
--- --------
James T. Rash........................................ 15,194,875 199,389
Mark K. Levenick..................................... 15,207,875 186,389
Michael F. Hudson.................................... 15,203,975 182,289
Jerrell G. Clay...................................... 15,229,875 164,389
Raymond P. Landry.................................... 15,234,275 161,989
Stephen P. Griggs.................................... 15,208,275 185,989
b) Ratification of the selection of KPMG LLP as the Company's
independent auditors for fiscal year 2002:
For.................................................. 15,330,712
Against.............................................. 39,160
Abstentions.......................................... 24,392
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION
The Company's Common Stock is currently traded over the counter on the
National Quotation Bureau's Pink Sheets under the symbol "ATMS.PK". Prior
to March 26, 2003, the Company's Common Stock traded on the Nasdaq
SmallCap Market. From August 16, 2000 through March 25, 2002, the
Company's Common Stock traded on the Nasdaq National Market. The following
table sets forth the quarterly high and low closing sales price for the
Company's Common Stock for the two-year period ended September 30, 2002:
2002 2001
------------------- ------------------
Fiscal Quarter Ended High Low High Low
-------------------- -------- ------- -------- --------
December 31,............... $ .69 $ .40 $ 6.19 $ 3.81
March 31,.................. .85 .37 6.50 1.94
June 30,................... .65 .32 3.35 1.13
September 30,.............. .60 .31 1.60 .61
------- ------- ------- --------
Fiscal Year............ $ .85 $ .31 $ 6.50 $ .61
======= ======= ======= ========
On January 21, 2003, the Company received notice from The Nasdaq Stock
Market, Inc. that, as a result of its 10-K filing deficiency, the Company
had failed to comply with the requirements for continued listing on the
Nasdaq SmallCap Market under Marketplace Rule 4310(c)(14), and that its
securities were subject to delisting. The Company had previously received
notice that it failed to comply with the minimum bid price requirement as
set forth in Marketplace Rule 4310(c)(4). On February 14, 2003, the
Company received a third notice from The Nasdaq Stock Market, Inc. that
the Company had failed to comply with the minimum
6
stockholders' equity requirement for continued listing set forth in
Marketplace Rule 4310(c)(2)(B). On February 20, 2003, the Company had an
oral hearing before the Nasdaq Listing Qualifications Panel to review the
three compliance deficiencies. On March 25, 2003, the Company was notified
by the Nasdaq Listing Qualifications Panel that its common stock would be
delisted from the Nasdaq SmallCap Market effective March 26, 2003. The
Company's common stock began trading over the counter on the National
Quotation Bureau's Pinks Sheets effective with the opening of business on
March 26, 2003, under the ticker symbol "ATMS.PK".
(b) HOLDERS
The Company estimates that there were more than 5,000 shareholders of its
Common Stock as of December 31, 2004, which includes an estimated number
of shareholders who have shares held for their accounts by brokers, banks
and trustees for benefit plans.
(c) DIVIDENDS
The Company has not paid any dividends in the past, and does not
anticipate paying dividends in the foreseeable future. In addition, as of
September 30, 2002, the Company's wholly owned subsidiary was restricted
from paying dividends to the Company pursuant to the subsidiary's
revolving credit agreement with a bank in effect at that time. This
facility was repaid on November 25, 2003 in connection with the Financing
as discussed more fully in Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Subsequent
Events" of this Annual Report. Also, the Financing precludes the Company
from making any dividend payments without the consent of the Purchaser
also discussed more fully in Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Subsequent
Events" of this Annual Report.
(d) STOCK INCENTIVE PLANS
The Company adopted the Tidel Technologies, Inc. 1997 Long-Term Incentive
Plan (the "Plan") effective July 15, 1997. The Plan permits the grant of
non-qualified stock options, incentive stock options, stock appreciation
rights, restricted stock and other stock-based awards to employees or
directors of the Company or our subsidiaries. A maximum of 2,000,000
shares of common stock may be subject to awards under the Plan. The number
of shares issued or reserved pursuant to the 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 Plan.
7
EQUITY COMPENSATION PLAN INFORMATION
Number of securities to Weighted-average Number of securities remaining
be issued upon exercise exercise price of available for future issuance under
of outstanding options, outstanding options, equity compensation plans (excluding
warrants and rights warrants and rights securities reflected in column (a))
(a) (b) (c)
----------------------- -------------------- ------------------------------------
Plan Category
Equity compensation plans approved
by security holders 974,700 $1.68 981,000
Equity compensation plans not
approved by security holders -- -- --
------- ----- -------
Total 974,700 $1.68 981,000
======= ===== =======
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below is derived from the
Consolidated Financial Statements of the Company. This data should be read
in conjunction with the Consolidated Financial Statements and the notes
thereto and Part II, Item 7., "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of this Annual Report.
Year Ended September 30,
------------------------
SELECTED STATEMENT OF INCOME DATA: (1) 2002 2001 2000 1999 1998
-------------------------------------- ---- ---- ---- ---- ----
Operating revenues...................................... $ 19,442 $ 36,086 $ 72,931 $45,873 $33,608
Operating income (loss)................................. (11,552) (24,764) 15,440 5,117 4,325
Net income (loss) (2)................................... (14,078) (25,942) 9,169 2,936 4,240
Net income (loss) per share:
Basic................................................ $ (0.81) $ (1.49) $ 0.55 $ 0.18 $ 0.27
Diluted.............................................. $ (0.81) $ (1.49) $ 0.50 $ 0.17 $ 0.25
As of September 30,
-------------------
SELECTED BALANCE SHEET DATA: (1) 2002 2001 2000 1999 1998
-------------------------------- ---- ---- ---- ---- ----
Current assets.......................................... $ 17,263 $ 28,797 $ 59,933 $ 26,412 $ 21,511
Current liabilities..................................... 28,487 28,547 11,595 7,528 5,528
Working capital (deficit)............................... (11,224) 250 48,338 18,884 15,983
Total assets............................................ 19,907 33,837 64,532 29,557 24,972
Total short-term notes payable and long-term debt....... 20,000 23,424 22,397 5,375 5,363
Shareholders' equity (deficit).......................... (8,580) 5,194 30,668 16,782 14,028
8
Three Months Ended
------------------
SELECTED QUARTERLY Sep. 30 Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30 Mar. 31 Dec. 31
FINANCIAL DATA: (1) 2002 2002 2002 2001 2001 2001 2001 2000
------------------- ---- ---- ---- ---- ---- ---- ---- ----
Operating revenues........ $ 3,887 $ 6,179 $ 4,739 $ 4,637 $ 6,262 $ 4,972 $ 8,156 $16,696
Operating income (loss) from
continuing operations .. (7,858) (533) (1,489) (1,672) (8,203) (20,215) 448 3,205
Net income (loss) ........ (8,945) (1,019) (1,713) (2,401) (11,449) (16,446) 65 1,888
Net income (loss) per share:
Basic.................. $ (0.51) $ (0.06) $ (0.10) $ (0.14) $ (0.66) $ (0.94) $ 0.00 $ 0.11
Diluted (3)............ $ (0.51) $ (0.06) $ (0.10) $ (0.14) $ (0.66) $ (0.94) $ 0.00 $ 0.10
----------------------
(1) All amounts are in thousands, except per share dollar amounts.
(2) Income tax expense (benefit) was $(323,457), $(3,416,030), $4,838,000,
$1,800,000 and $(307,251) for the years ended September 30, 2002, 2001,
2000, 1999 and 1998, respectively.
(3) The sum of the quarterly amounts of basic and diluted earnings per share
does not necessarily equal basic and diluted earnings per share for the
entire fiscal year due to rounding differences and/or variations in the
stock prices utilized in the calculations at the end of each period.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The Company's revenues were $19,442,000 for the year ended September 30,
2002, representing a decrease of $16,644,000, or 46%, from fiscal 2001 and
a decrease of $53,489,000, or 73%, from fiscal 2000. The Company incurred
an operating loss of $(11,552,000) in fiscal 2002 compared to an operating
loss of $(24,764,000) in fiscal 2001 and operating income of $15,440,000
in fiscal 2000. The Company incurred a net loss of $(14,078,000) in fiscal
2002 compared to a net loss of $(25,942,000) in fiscal 2001 and net income
of $9,169,000 in fiscal 2000.
The decrease in sales in 2002 was primarily due to the discontinuance of
business with CCC, formerly the Company's largest customer, that incurred
financial difficulty in January 2001. CCC filed for bankruptcy protection
in June 2001, and had accounted for sales of approximately $45,000,000 in
2000 and $12,000,000 in 2001. The remaining 2002 sales decrease was due to
lower sales to Cardtronics, the Company's second largest customer in 2001
and 2000. The operating and net losses for fiscal 2002 were caused
primarily by lower sales volumes after the loss of CCC's business and
lower gross profit margins associated with the remaining revenues of the
company.
9
PRODUCT REVENUES
A breakdown of net sales by individual product line is provided in the
following table:
(dollars in 000's)
----------------------------------------------
2002 2001 2000
---------- --------- ----------
ATM...................................... $ 9,399 $ 24,646 $ 59,210
TACC..................................... 6,513 6,836 7,569
Parts and other.......................... 3,530 4,604 6,152
---------- --------- ---------
$ 19,442 $ 36,086 $ 72,931
========== ========= =========
ATM sales decreased 62% in fiscal year 2002 due primarily to the loss of
CCC as a customer and the decreased sales to Cardtronics as described
elsewhere herein. For the year ended September 30, 2002, the Company
shipped 2,785 units, a decrease of 55% from the 6,248 units shipped in
fiscal 2001, and a decrease of 78% from the 12,426 units shipped in fiscal
2000.
Inflation played no significant role in the Company's revenues for the
fiscal years 2002, 2001, and 2000. However, continued decreases in selling
prices of ATMs throughout the industry did affect the amount of revenues
generated by the Company. In fiscal year 2001, the Company's average
selling price for ATMs decreased by 18% from the previous year. Similarly,
in fiscal 2002, the Company's average selling price of ATMs decreased an
additional 14% from 2001. Conversely, the TACC market had increasing
average sales prices during the years 2001 and 2002.
TACC sales decreased 5% in 2002 as the Company's marketing efforts were
focused on rebuilding its ATM sales after the loss of CCC's business.
Parts and other revenues vary directly with sales of finished goods, and
have decreased accordingly.
GROSS PROFIT, OPERATING EXPENSES AND NON-OPERATING ITEMS
A comparison of certain operating information is provided in the following
table:
(dollars in 000's)
---------------------------------------------
2002 2001 2000
--------- -------- --------
Gross profit......................................... $ 4,390 $ 11,702 $ 27,916
Selling, general and administrative.................. 9,770 10,352 10,608
Provision for doubtful accounts...................... 2,985 25,025 500
Provision for settlement of class action litigation.. 1,564 -- --
Depreciation and amortization........................ 1,159 1,089 1,368
Impairment of goodwill and other intangible assets... 464 -- --
-------- -------- --------
Operating income (loss).............................. (11,552) (24,764) 15,440
Interest expense..................................... 2,531 4,594 432
Write-down of investment in 3CI...................... 288 -- 1,000
-------- -------- --------
Income (loss) before taxes........................... (14,371) (29,358) 14,007
Income tax expense (benefit)......................... (294) (3,416) 4,838
-------- -------- --------
Net income (loss).................................... $(14,078) $(25,942) $ 9,169
======== ======== ========
Gross profit on product sales decreased $7,312,000 from fiscal 2001 and
$23,526,000 from fiscal 2000 primarily as a result of the sharp decline in
sales to CCC for the period. Gross margin as a percentage of sales was
22.6% in 2002 compared to 32.4% in 2001 and 38.3% in 2000. The decrease in
the gross margin percentage from 2001
10
and 2000 arose from production inefficiencies and the fixed manufacturing
overhead expenses being allocated to fewer units produced during the year
which resulted in higher unit costs assigned to each unit of product sold.
Additionally, increases in the cost of raw materials used in the
manufacture of the Company's products further decreased the gross margin
percentage.
Selling, general and administrative expenses decreased $582,000, or 6%, in
2002 compared to 2001. The reduction related to lower personnel costs and
general office operating expenses. Selling, general and administrative
expenses in 2001 were virtually unchanged from 2000 despite the
significant decrease in sales for the period. Reduction in variable costs
in 2001 were offset by substantial increases in legal and accounting fees
and travel expenses associated with the CCC bankruptcy matter and
investment banking fees incurred in connection with the Company's effort
to restructure its financial position.
Provision for doubtful accounts decreased substantially due to the
provision of $24,100,000 established in 2001 for amounts due from CCC. In
2002, the provision includes an additional $500,000 to cover reserves for
the escrow deposits relating to CCC and $1,507,000 for non-CCC notes
receivable, together with the additional reserves for certain accounts
that have filed for bankruptcy or are otherwise deemed uncollectible.
Provision for settlement of class action litigation was $1,564,000 for
2002, due to the initial establishment of a reserve for the settlement of
class action litigation. See further discussion in Part I, Item 3., "Legal
Proceedings".
Depreciation and amortization, including impairment of goodwill and other
intangible assets was $1,623,000 for 2002, an increase of $533,000 from
the amount provided in 2001. The majority of the increase, $464,000, was
due to the write-down of goodwill and intangibles on the Company's books
that were deemed to be impaired. The remaining increase in 2002 was due to
the addition of new assets that replaced other fully depreciated assets.
Interest expense decreased by $2,063,000 in 2002 to $2,531,000 when
compared to 2001 due to debt issuance costs of approximately $3,000,000
associated with the $18,000,000 in convertible debt being recognized in
2001. Such debt issuance costs were fully amortized in 2001 as a result of
the "put" of the convertible debt in June 2001, described more fully below
under Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" of
this Annual Report. However, the Company did not repay the convertible
debt following the "put" in 2001, and the debt was considered to be in
default, which resulted in higher interest charges under the terms of the
debt agreements.
Income tax expense (benefit) of $(294,000) for 2002 and $(3,416,000) for
2001 was recognized due to the significant losses sustained by the Company
in those years that the Company was able to carry back to prior periods.
For 2000, the Company had a tax provision of 34.5%. The benefit recognized
in 2002 primarily related to certain tax refunds received during the year.
LIQUIDITY AND CAPITAL RESOURCES
The financial position of the Company deteriorated during fiscal 2002 as a
result of CCC's bankruptcy and the Company's termination of sales to CCC,
under-absorbed fixed costs associated with the production facilities, and
reduced sales of the Company's products resulting from general
difficulties in the ATM market. See Part I, Item 1., "Business" of this
Annual Report. This deterioration is reflected in the following key
indicators as of September 30, 2002, 2001 and 2000:
11
(dollars in 000's)
--------------------------------------------
2002 2001 2000
--------- -------- --------
Cash................................................. $ 1,238 $ 3,266 $ 16,223
Restricted cash...................................... 2,213 -- --
Working capital (deficit)............................ (11,224) 250 48,338
Total assets......................................... 19,907 33,837 64,532
Shareholders' equity (deficit)....................... (8,580) 5,194 30,668
As of September 30, 2002, the Company's wholly-owned subsidiary was a
party to a credit agreement with a bank (the "First Lender") (as amended,
the "Revolving Credit Facility"), which was subsequently amended on April
30, 2002, August 30, 2002 and December 30, 2002 to provide for, among
other things, an extension of the maturity date until June 30, 2003; the
reduction of the revolving commitment from the initial amount of
$7,000,000 to $2,000,000; and a modification of the collateral
requirements to include a pledge of a money market account in an amount
equal to 110% of the outstanding principal balance, which pledge was
$2,200,000 and is recorded as restricted cash in the September 30, 2002
consolidated balance sheet. At September 30, 2002, $2,000,000 was
outstanding under the Revolving Credit Facility compared to $5,200,000 at
September 30, 2001. At September 30, 2002, the Company was in compliance
with the terms of the credit agreement or had received waivers for
covenant violations. On June 30, 2003, the Revolving Credit Facility was
assigned to another bank (the "Second Lender"). The Revolving Credit
Facility was repaid on November 25, 2003, in connection with the Financing
as discussed more fully in Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Subsequent
Events" of this Annual Report.
In September 2000, the Company issued to two investors (individually, the
"Holder", or collectively, the "Holders") an aggregate of $18,000,000 of
the Company's 6% Convertible Debentures, due September 8, 2004 (the
"Convertible Debentures"), convertible into the Company's Common Stock at
a price of $9.50 per share. In addition, the Company issued warrants to
the Holders to purchase 378,947 shares of the Company's Common Stock
exercisable at any time through September 8, 2005 at an exercise price of
$9.80 per share.
In June 2001, the Holders exercised their option to "put" the Convertible
Debentures back to the Company. Accordingly, the principal amount of
$18,000,000, plus accrued and unpaid interest, was due on August 27, 2001.
The Company did not make such payment on that date, and at September 30,
2002, did not have the funds available to make such payments. At September
30, 2002, the Company was party to subordination agreements (the
"Subordination Agreements") with each Holder and the First Lender which
provided, among other things, for prohibitions: (i) on the Company making
this payment to the Holders, and (ii) on the Holders taking legal action
against the Company to collect this amount, other than to increase the
principal balance of the Convertible Debentures for unpaid amounts or to
convert the Convertible Debentures into the Company's Common Stock. The
Convertible Debentures were retired on November 25, 2003, in connection
with the Financing as discussed more fully in Part II, Item 7.,
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Subsequent Events" of this Annual Report.
As of January 31, 2005, the Company has a $1,250,000 purchase order
financing facility through November 26, 2005, as part of the Additional
Financing in November 2004, as discussed more fully in Part II, Item 7.,
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Subsequent Events" of this Annual Report. There can be no
assurance that the Company will have sufficient working capital in the
future. As noted above, the Company's Revolving Credit Facility was
required to be repaid in connection with the Financing in November 2003,
and, as described more fully in Part II, Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Subsequent
Events" of this Annual Report, was repaid at such time. The proceeds from
the Financing were predominantly used to retire the Convertible
Debentures. In addition, the proceeds of the Additional Financing in
November 2004, as discussed more fully in Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Subsequent Events" of this Annual Report,
12
were primarily used to pay vendors for past goods or services and to pay
the Purchaser past due principal and interest on the convertible notes.
There can be no assurance that the Company will obtain additional
financing for working capital purposes. The failure to obtain such
additional financing could cause a material adverse effect upon the
financial condition of the Company.
The Company formerly owned 100% of 3CI Complete Compliance Corporation, a
company engaged in the transportation and incineration of medical waste,
until the Company divested its majority interest in February 1994. As of
September 30, 2002, the Company continues to own 698,464 shares of the
common stock of 3CI. The Company has no immediate plan for the disposal of
these shares. At September 30, 2002 all the shares were pledged to secure
borrowings under the Revolving Credit Facility with the First Lender.
Subsequent to September 30, 2002, the Revolving Credit Facility was repaid
and the shares were pledged to secure borrowings in connection with the
Financing as discussed more fully in Part II, Item 7., "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Subsequent Events" of this Annual Report. See Note 6 to Notes to the
Consolidated Financial Statements in Part IV of this Annual Report. The
value of the investment in 698,464 shares of 3CI was written down by
$288,000 in fiscal 2002 to reflect a carrying amount of $0.40 per share,
the highest price at which the stock was trading in fiscal year 2002.
Historically, the Company has expended significant amounts of funds in the
area of research and development. The majority of these expenditures are
applicable to enhancements of the existing product lines, development of
new automated teller machine products and the development of new
technology to facilitate the dispensing of cash and cash value products.
Total research and development expenditures were approximately $2,700,000,
$2,500,000 and $2,600,000 for the years ended September 30, 2002, 2001 and
2000, respectively.
In addition to the matters described in the foregoing paragraphs relative
to indebtedness, the Company's financial position has also been adversely
impacted by the downturn in operations. Reduced sales resulted in a
buildup of finished goods and inventories in excess of the level normally
maintained by the Company in 2001.
The following table summarizes the Company's contractual cash obligations
as of September 30, 2002:
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------------------------------
FISCAL 2004-
TOTAL FISCAL 2003 2005 FISCAL 2006-2007 BEYOND
--------------------------------------------------------------------------------------------
Operating
leases $ 1,402,882 $ 479,973 $ 824,941 $ 97,968 --
Long-term
debt,
including
current
portion (1) 20,000,000 20,000,000
-- -- --
Purchase
Obligations 952,000 952,000 -- -- --
------------ ------------ ------------ ------------ ----
Total $ 22,354,882 $ 21,431,973 $ 824,941 $ 97,968 --
============ ============ ============ ============ ====
(1) Long-term debt of $20,000,000 was repaid on November 25, 2003, in
connection with the Financing obtained by the Company as discussed more
fully in "Subsequent Events" below. The payment obligations on the new
debt as amended pursuant to the terms of the Additional Financing as
described more fully in "Subsequent Events" below consist of $3,145,000
13
in fiscal 2004 - 2005, $6,667,988 in fiscal 2006 - 2007, and $3,500,000
beyond 2007, which includes a $2,000,000 Reorganization Fee which will be
payable in 2009, unless certain events occur prior to that time that would
accelerate the payment date, as more fully described in "Subsequent
Events" below.
Operating Leases - The Company leases office and warehouse space,
transportation equipment and other equipment under terms of operating
leases, which expire in the years up through 2006. Rental expense under
these leases for the years ended September 30, 2002, 2001 and 2000 was
approximately $661,924, $587,562 and $500,388, respectively.
Long-term debt - As of September 30, 2002, the Company's wholly-owned
subsidiary was a party to a credit agreement with a bank (the "First
Lender") (as amended, the "Revolving Credit Facility"), which was amended
on April 30, 2002, August 30, 2002 and December 30, 2002 to provide for,
among other things, an extension of the maturity date until June 30, 2003.
At September 30, 2002, $2,000,000 was outstanding under the Revolving
Credit Facility. At September 30, 2002, the Company was in compliance with
the terms of the credit agreement or had received waivers for covenant
violations. On June 30, 2003, the Revolving Credit Facility was assigned
to another bank (the "Second Lender"). The Revolving Credit Facility was
repaid on November 25, 2003, in connection with financing obtained by the
Company as discussed more fully in Part II, Item 8, "Financial Statements
and Supplementary Data, Note 9 - Long-Term Debt and Convertible
Debentures".
In September 2000, the Company issued to investors (the "Holders") an
aggregate of $18,000,000 of the Company's 6% Convertible Debentures, due
September 8, 2004. In June 2001, the Holders exercised their option to
"put" the Convertible Debentures back to the Company. Accordingly, the
principal amount of $18,000,000, plus accrued and unpaid interest, was due
on August 27, 2001. The Company did not make such payment on that date,
and at September 30, 2002, did not have the funds available to make such
payments. At September 30, 2002, the Company was party to subordination
agreements (the "Subordination Agreements") with each Holder and the
Lender which provided, among other things, for prohibitions: (i) on the
Company making this payment to the Holders, and (ii) against the Holders
taking legal action against the Company to collect this amount, other than
to increase the principal balance of the Convertible Debentures for unpaid
amounts or to convert the Convertible Debentures into the Company's Common
Stock. The warrants and Convertible Debentures were retired on November
25, 2003, in connection with the Financing as discussed more fully in Part
II, Item 8, "Financial Statements and Supplementary Data, Note 9 -
Long-Term Debt and Convertible Debentures".
Purchase Obligations - Pursuant to an agreement with a supplier, the
Company was obligated to purchase certain raw materials with an
approximate cost of $952,000 before December 31, 2002. Subsequent to
September 30, 2002, the terms of the purchase obligation were amended to
extend the purchase date and revise the purchase prices. This agreement
terminated on March 31, 2004.
SUBSEQUENT EVENTS
BRIDGE LOANS
Beginning in September 2003, the Company issued the following unsecured,
short-term promissory notes totaling $720,000 to shareholders or their
affiliates as part of a bridge financing transaction (the "Bridge Loans"):
In September 2003, the Company 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,
14
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, the Company will record additional interest charges
totaling $20,572 over the term of the note related to the discounts.
The note was paid in full on March 5, 2004.
The Company issued to a shareholder and former director an
unsecured, short-term promissory note dated October 2, 2003 in the
principal amount of $120,000 due April 2, 2004; plus accrued
interest at 9% per annum, payable monthly. In consideration for the
loan, the shareholder received three-year warrants to purchase
40,000 shares of common stock at $0.45 per share. The proceeds of
the note were allocated to the note and the related warrants based
on the relative fair value of the note and the warrants, with the
value of the warrants resulting in a discount against the note. As a
result, the Company will record additional interest charges totaling
$7,611 over the term of the note related to the discounts. The note
was paid in full on March 8, 2004.
The Company also issued to the shareholder and former director an
unsecured, short-term promissory note dated October 21, 2003 in the
principal amount of $90,000 due April 21, 2004; plus accrued
interest at 9% per annum, payable monthly. In consideration for the
loan, the shareholder received three-year warrants to purchase
30,000 shares of common stock at $0.45 per share. The proceeds of
the note were allocated to the note and the related warrants based
on the relative fair value of the note and the warrants, with the
value of the warrants resulting in a discount against the note. As a
result, the Company will record additional interest charges totaling
$6,608 over the term of the note related to the discounts. The note
was paid in full on November 26, 2003.
The Company issued to an affiliate of a shareholder an unsecured,
short-term promissory note dated November 20, 2003 in the principal
amount of $210,000 due May 20, 2004; plus accrued interest at 8% per
annum, payable at maturity. In consideration for the loan, the note
holder received three-year warrants to purchase 70,000 shares of
common stock at $0.45 per share. The proceeds of the note were
allocated to the note and the related warrants based on the relative
fair value of the note and the warrants, with the value of the
warrants resulting in a discount against the note. As a result, the
Company will record additional interest charges totaling $30,619
over the term of the note related to the discounts. The note was
paid in full on March 5, 2004.
THE FINANCING
On November 25, 2003, the Company completed a $6,850,000 financing
transaction (the "Financing") with an independent investment group (the
"Purchaser"). The Financing was comprised of a three-year convertible note
issued to the Purchaser on that date in the amount of $6,450,000 and a
one-year convertible note issued to the Purchaser on that date in the
amount of $400,000, both of which bear interest at a rate of prime plus 2%
and were convertible into the Company's Common Stock at a conversion price
of $0.40 per share. In addition, the Purchaser received warrants to
purchase 4,250,000 shares of the Company's 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, the Company will record
additional interest charges totaling $6,850,000 over the terms of the
notes related to these discounts. The Purchaser 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 Holders' $18,000,000 in
Convertible Debentures together with all accrued interest, penalties and
fees associated therewith. The Company recorded a gain from extinguishment
of
15
debt of $18,823,000 (including accrued interest through the date of
extinguishment) in fiscal year 2004 related to the refinancing. In March
2004, the $400,000 note was repaid in full from the proceeds of the
CashWorks transaction described below.
In connection with the closing of the Financing, all of the warrants and
Convertible Debentures held by the Holders were terminated, all
outstanding litigation including, without limitation, the Montrose
Litigation, was dismissed, and the Revolving Credit Facility was repaid
through the release of the restricted cash used as collateral for the
Revolving Credit Facility.
In August 2004, the Purchaser notified the Company that an Event of
Default had occurred and continued beyond any applicable grace period as a
result of the Company's non-payment of interest and principal on the
$6,450,000 convertible note as required under the terms of the Financing.
In exchange for the Purchaser's waiver of the Event of Default until
September 17, 2004, the Company 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 ADDITIONAL FINANCING
On November 26, 2004, the Company completed a $3,350,000 financing
transaction (the "Additional Financing") with the Purchaser. The
Additional Financing is comprised of (i) a three-year convertible note
issued by the Company to the Purchaser on that date in the amount of
$1,500,000, which bears interest at a rate of 14% and is convertible into
the Company's Common Stock at a conversion price of $3.00 per share (the
"$1,500,000 Note"), (ii) a one-year convertible note issued to the
Purchaser on that date by the Company in the amount of $600,000 which
bears interest at a rate of 10% and is convertible into the Company's
Common Stock at a conversion price of $0.30 per share (the "$600,000
Note"), (iii) a one-year convertible note issued to the Purchaser on that
date by the Company's subsidiary, Tidel Engineering, L.P. in the amount of
$1,250,000, which is a revolving working capital facility for the purpose
of financing purchase orders (the "Purchase Order Note"), which bears
interest at a rate of 14% and is convertible into the Company's Common
Stock at a price of $3.00 per share and (iv) the issuance to the Purchaser
by the Company of 1,251,000 shares, or approximately 7% of the total
shares outstanding, of Common Stock (the "2003 Fee Shares") in full
satisfaction of certain fees totaling $375,300 incurred in connection with
the convertible term notes issued in the Financing. In addition, the
Purchaser received warrants to purchase 500,000 shares of the Company's
Common Stock at an exercise price of $0.30 per share. The 2003 Fee Shares
were issued to the Purchaser based on a price of $0.30 per share. As a
result of the sale of the 2003 Fee Shares, the Company will record in
fiscal 2005 an additional charge of $275,000 related to the difference in
the $.30 sale price and the market value of the stock on November 26,
2004. 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 results in a
beneficial conversion feature, further discounting the carrying value of
the notes. As a result, the Company will record additional interest
charges totaling $840,000 over the terms of the notes related to these
discounts. The Purchaser 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 the Company's assets and are guaranteed by
the Company's subsidiaries. Proceeds from the Additional Financing in the
amount of $3,232,750 were primarily used for general working capital
payments made directly to vendors, as well as for past due interest on the
Purchaser's $6,450,000 convertible note due pursuant to the Financing and
escrow for future principal and interest payments due pursuant to the
Additional Financing.
THE NOTES AND WARRANTS ISSUED IN THE FINANCING AND THE ADDITIONAL
FINANCING, COUPLED WITH THE 2003 FEE SHARES, ARE CONVERTIBLE INTO AN
AGGREGATE OF 29,893,293 SHARES OF THE COMPANY'S COMMON STOCK, OR
APPROXIMATELY 62% OF THE COMPANY'S OUTSTANDING COMMON STOCK, SUBJECT TO
ADJUSTMENT AS PROVIDED IN THE TRANSACTION DOCUMENTS. IF THESE NOTES AND
WARRANTS WERE COMPLETELY CONVERTED TO COMMON STOCK BY THE PURCHASER, THEN
THE OTHER EXISTING SHAREHOLDERS' OWNERSHIP IN THE COMPANY WOULD BE
SIGNIFICANTLY DILUTED TO APPROXIMATELY 38% OF THEIR PRESENT OWNERSHIP
POSITION.
16
In connection with the Financing, the Purchaser required the Company to
covenant that it would become current in its filings with the Securities
and Exchange Commission according to a predetermined schedule. Effective
November 26, 2004, in the Additional Financing documents, the Purchaser
and the Company amended the Financing documents to require, among other
things, that the Company provide evidence of filing to the Purchaser of
its 2002 Form 10-K with the Securities and Exchange Commission on or
before January 31, 2005 and its remaining filings with the Securities and
Exchange Commission on or before July 31, 2005.
Fourteen (14) days following such time as the Company becomes current in
its filings with the Securities and Exchange Commission, the Company is to
deliver the Purchaser evidence of the listing of the Company's Common
Stock on the Nasdaq Over The Counter Bulletin Board (the "Listing
Requirement").
Pursuant to the terms of the Financing and the Additional Financing, an
Event of Default occurs if, among other things, the Company does not
complete its filings with the Securities and Exchange Commission on the
timetable set forth in the Additional Financing documents, or does not
comply with the Listing Requirement or any other material covenant or
other term or condition of the purchase agreement between the Purchaser
and the Company or the notes issued by the Company to the Purchaser. If
there is an Event of Default, including any of the items specified above
or in the transaction documents, the Purchaser may declare all unpaid sums
of principal, interest and other fees due and payable within five (5) days
after written notice from the Purchaser to the Company. If the Company
cures the Event of Default within that five (5) day period, the Event of
Default will no longer be considered to be occurring.
If the Company does not cure such Event of Default, the Purchaser shall
have, among other things, the right to have two (2) of its designees
appointed to the Board of the Company, and the interest rate of the notes
shall be increased to the greater of 18% or the rate in effect at that
time.
ON NOVEMBER 26, 2004, IN CONNECTION WITH THE ADDITIONAL FINANCING, THE
COMPANY AND THE PURCHASER ENTERED INTO AN AGREEMENT (THE "ASSET SALES
AGREEMENT") WHEREBY THE COMPANY AGREED TO PAY A FEE IN THE AMOUNT OF AT
LEAST $2,000,000 (THE "REORGANIZATION FEE") TO THE PURCHASER UPON THE
OCCURRENCE OF CERTAIN EVENTS AS SPECIFIED BELOW AND THEREIN, WHICH
REORGANIZATION FEE IS SECURED BY ALL OF THE COMPANY'S ASSETS, AND IS
GUARANTEED BY THE COMPANY'S SUBSIDIARIES. THE ASSET SALES AGREEMENT
PROVIDES THAT (I) ONCE THE OBLIGATIONS OF THE COMPANY TO THE PURCHASER
HAVE BEEN PAID IN FULL (OTHER THAN THE REORGANIZATION FEE) THE COMPANY
SHALL BE ABLE TO SEEK ADDITIONAL FINANCING IN THE FORM OF A NON
CONVERTIBLE BANK LOAN IN AN AGGREGATE PRINCIPAL AMOUNT NOT TO EXCEED
$4,000,000, SUBJECT TO THE PURCHASER'S RIGHT OF FIRST REFUSAL; (II) THE
NET PROCEEDS OF AN ASSET SALE TO THE PARTY NAMED THEREIN SHALL BE APPLIED
TO THE COMPANY'S OBLIGATIONS TO THE PURCHASER 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 SUBSEQUENT SALES OF EQUITY INTERESTS OR ASSETS OF THE COMPANY OR OF
THE COMPANY'S 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 THE PURCHASER 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 ASSETS OR EQUITY INTERESTS OF THE COMPANY, AFTER PAYMENT OF THE
ADDITIONAL FINANCING AND REORGANIZATION FEE AS DEFINED. SEE "AGREEMENT
REGARDING [NAME REDACTED] TRANSACTION AND OTHER ASSET SALES", SECTION
4(B), FILED HEREWITH AS EXHIBIT 10.22, FOR FURTHER INFORMATION ON THIS
CALCULATION. THE REORGANIZATION FEE SHALL BE $2,000,000 AT A MINIMUM, BUT
COULD EQUAL A HIGHER AMOUNT BASED UPON A PERCENTAGE OF THE PROCEEDS OF ANY
COMPANY SALE, AS SUCH TERM IS DEFINED IN THE ASSET SALES AGREEMENT. IN THE
EVENT THAT THE PURCHASER HAS NOT RECEIVED THE FULL AMOUNT OF THE
REORGANIZATION FEE ON OR BEFORE THE FIFTH ANNIVERSARY OF THE DATE OF THE
ASSET SALES AGREEMENT, THEN THE COMPANY SHALL PAY ANY REMAINING BALANCE
DUE ON THE REORGANIZATION FEE TO THE PURCHASER. THE COMPANY
17
WILL RECORD A $2,000,000 CHARGE OVER THE FIVE-YEAR TERM OF THE ASSET SALES
AGREEMENT FOR THE REORGANIZATION FEE.
CASHWORKS
In December 2001, the Company agreed to invest $500,000 in CashWorks, Inc.
("CashWorks"), a development-stage financial technology solutions
provider, in the form of convertible debt of CashWorks, and entered into a
License, Development and Deployment Agreement ("LDDA") with CashWorks,
which provides for certain marketing rights and future income payments to
the Company in exchange for technical expertise and sales support of the
Company. In December 2002, the Company 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, the Company consented to the sale of
its interest in CashWorks to GE Capital Corp. ("GECC") for $2,451,000,
resulting in the recognition of a gain in the quarter ended March 31, 2004
of $1,918,000. The Company retained the marketing rights and future income
payments pursuant to the LDDA, as amended, following the sale to GECC. All
of the shares and warrants related to the CashWorks investment were
pledged to secure borrowings in connection with the Financing (defined
herein above). Accordingly, upon receipt of the consideration for the
CashWorks Series B preferred shares and warrants, the Company was
obligated to repay in full the $400,000 and $100,000 convertible term
notes plus accrued but unpaid interest thereon, and all outstanding
interest due on the $6,450,000 convertible term note, all of which were
paid as part of the Financing.
THE DEVELOPMENT AGREEMENT
In August 2001, the Company 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" Timed Access Cash Controllers ("TACC"),
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, the Company
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. As of September 2002, the product
was in Phase III testing and the Company had received contributions from
the Retailer totaling $361,500. Subsequent to September 2002, 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 December 31, 2004, 1,047 units of the
Sentinel product had been sold and rebates or other credits totaling
$122,100 had been credited to the Retailer, and rebates or other credits
totaling $342,047 had been accrued for the benefit of the Retailer.
THE EQUIPMENT PURCHASE AGREEMENT
In June 2004, a subsidiary of the Company entered into an equipment
purchase agreement with an initial term through December 31, 2005 with a
national convenience store operator (the "Buyer") for the sale of the
Company's Sentinel timed access cash controllers to the Buyer. The Company
agreed to provide "Most Favored Nation" pricing to the Buyer and to not
increase the price during the initial term of the agreement. The Buyer has
no obligation or commitment to purchase any equipment under the terms of
the agreement. As of December 31, 2004 the Buyer had purchased 600 units
under the agreement.
THE SUPPLY, FACILITY AND SHARE WARRANT AGREEMENTS
In September 2004, a subsidiary of the Company entered into separate
supply and credit facility agreements (the "Supply Agreement", the
"Facility Agreement" and the "Share Warrant Agreement" respectively) with
a foreign distributor (the "Distributor") of the Company's products. The
Supply Agreement required the Distributor, during the initial term of the
agreement, to purchase from the subsidiary, 100% of any and all ATM
machines purchased by the Distributor and during each subsequent term, to
purchase from the subsidiary not less than 85%
18
of any and all ATM machines purchased by the Distributor. The initial term
of the agreement was set as of the earlier of: (a) the expiration or
termination of the debenture, (b) a termination for default, (c) the
mutual agreement of the parties, and (d) August 15, 2009.
The Facility Agreement provides a credit facility in an aggregate amount
not to exceed $2,280,000 to the Distributor with respect to outstanding
invoices already issued by the subsidiary to the Distributor and with
respect to invoices which may be issued in the future by the subsidiary to
the Distributor related to the purchase of the Company's 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. As
of January 21, 2005, the balance of the credit facility outstanding was
$1,357,812 and the Distributor was current with all scheduled payments.
The Share Warrant Agreement provided for the issuance to a subsidiary of
the Company 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 exercise of the warrant by the Company,
the Distributor's balance outstanding under the Facility Agreement would
be reduced by $300,000.
DEATH OF CHIEF EXECUTIVE OFFICER
On December 19, 2004, James T. Rash, the Company's Chief Executive and
Financial Officer, died. The Company has named Mark K. Levenick as Interim
Chief Executive Officer, but no permanent Chairman, Chief Executive
Officer or Chief Financial Officer has been hired or appointed as of the
date hereof. The Company does not currently have a Chief Financial Officer
or Chairman of the Board, and is currently seeking to fill these
positions. There can be no assurance that the Company will be able to find
successors to fulfill any of these roles, or that such successors will be
able to perform as well as Mr. Rash has in the past.
RESEARCH AND DEVELOPMENT EXPENDITURES
The Company's research and development expenditures for fiscal 2003 and
for fiscal 2004 were approximately $2,700,000 and $2,600,000 respectively.
The Company's research and development budget for fiscal 2005 is estimated
to be $2,400,000. The majority of these expenditures are applicable to
enhancements of the existing product lines, development of new automated
teller machine products and the development of new technology to
facilitate the dispensing of cash and cash value products.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 142 entitled "Goodwill and Other
Intangible Assets." Under SFAS No. 142, existing goodwill is no longer
amortized, but is tested for impairment using a fair value approach. SFAS
No. 142 requires goodwill to be tested for impairment at a level referred
to as a reporting unit, generally one level lower than reportable
segments. SFAS No. 142 required the Company to perform the first goodwill
impairment test on all reporting units within six months of adoption. The
Company adopted SFAS No. 142 effective October 1, 2002, however, during
the year ended September 30, 2002, the Company recorded an impairment
charge against its remaining goodwill balance.
In June 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations,"
was issued. The standard requires that legal obligations associated with
the retirement of long-lived intangible assets be recorded at fair value
when incurred, and this standard became effective on October 1, 2002. The
adoption of this statement is not expected to have a material impact on
the Company's consolidated financial position, results of operations or
cash flows.
19
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 reported as
extraordinary items. The adoption of this statement is not expected to
have a material impact on the Company's consolidated financial position,
results of operations or cash flows.
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," was issued. This statement provides guidance on the
recognition and measurement of liabilities associated with disposal
activities that are initiated after December 31, 2002. The adoption of
this statement is not expected to have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation Transition and Disclosure, An Amendment of FAS
No. 123." This statement addresses the acceptable transitional methods
when the fair value method of accounting for stock-based compensation
covered in SFAS No. 123 is elected. Additionally, the statement prescribes
tabular disclosure of specific information in the "Summary of Significant
Accounting Policies" regardless of the method used and also required
interim disclosure of similar information. The Company has adopted this
statement effective for the fiscal year ending September 30, 2002. As is
permissible under SFAS No. 148, the Company has not elected the fair value
method, but continues accounting for stock-based compensation by the
intrinsic method prescribed by APB Opinion 25. The disclosures required by
SFAS No. 148 are included in the Summary of Significant Accounting
Policies.
In November 2002, FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". FIN 45 requires
certain guarantees to be measured at fair value upon issuance and recorded
as a liability. In addition, FIN 45 expands current disclosure
requirements regarding guarantees issues by an entity, including tabular
presentation of the changes affecting an entity's aggregate product
warranty liability. The recognition and measurement requirements of the
interpretation are effective prospectively for guarantees issued or
modified after December 31, 2002. The disclosure requirements are
effective immediately and are provided in Part II, Item 8, "Financial
Statements and Supplementary Data, Note 15 - Commitments and
Contingencies." The adoption of this statement is not expected to have a
material impact on the Company's consolidated financial position, results
of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment."
SFAS No. 123R requires companies to recognize the compensation cost
relating to share-based payment transactions in the financial statements.
SFAS No. 123R will be effective for the Company's fourth quarter of fiscal
2005. The Company has not yet determined the impact of adopting this
standard.
ITEM 7A. QUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 2002, the Company was exposed to changes in interest
rates as a result of significant financing through its issuance of
variable-rate and fixed-rate debt. However, with the retirement of the
Convertible Debentures subsequent to September 30, 2002, and the
associated overall reduction in outstanding debt balances, the Company's
exposure to interest rate risks has significantly decreased. If market
interest rates had increased up to 1% in fiscal 2003, there would have
been no material impact on the Company's consolidated results of
operations or financial position; however, market interest rates did not
increase during fiscal 2003, but instead declined slightly.
20
RISK FACTORS
There are several risks inherent in the business of the Company including,
but not limited to, the following:
THE EXISTING SHAREHOLDERS' OWNERSHIP IN THE COMPANY WILL BE SIGNIFICANTLY
DILUTED.
IN NOVEMBER 2003, THE COMPANY COMPLETED THE FINANCING WHICH WAS COMPRISED
OF A THREE-YEAR CONVERTIBLE NOTE IN THE AMOUNT OF $6,450,000 AND A
ONE-YEAR CONVERTIBLE NOTE IN THE AMOUNT OF $400,000, BOTH OF WHICH WERE
CONVERTIBLE INTO THE COMPANY'S COMMON STOCK AT AN EXERCISE PRICE OF $0.40
PER SHARE. IN ADDITION, THE PURCHASER RECEIVED WARRANTS TO PURCHASE
4,250,000 SHARES OF THE COMPANY'S COMMON STOCK AT AN EXERCISE PRICE OF
$0.40 PER SHARE. IN MARCH 2004, THE $400,000 NOTE WAS REPAID IN FULL. IN
AUGUST 2004, THE COMPANY AGREED TO LOWER THE CONVERSION PRICE ON THE
$6,450,000 CONVERTIBLE NOTE AND THE EXERCISE PRICE OF THE WARRANTS FROM
$0.40 PER SHARE TO $0.30 PER SHARE.
IN NOVEMBER 2004, THE COMPANY COMPLETED THE ADDITIONAL FINANCING WHICH WAS
COMPRISED OF A THREE-YEAR CONVERTIBLE NOTE IN THE AMOUNT OF $1,500,000 AND
A ONE-YEAR CONVERTIBLE NOTE ISSUED BY TIDEL ENGINEERING, L.P., A
SUBSIDIARY OF THE COMPANY, IN THE AMOUNT OF $1,250,000, BOTH OF WHICH ARE
CONVERTIBLE INTO THE COMPANY'S COMMON STOCK AT AN EXERCISE PRICE OF $3.00
PER SHARE, AND A ONE-YEAR CONVERTIBLE NOTE IN THE AMOUNT OF $600,000 WHICH
IS CONVERTIBLE INTO THE COMPANY'S COMMON STOCK AT AN EXERCISE PRICE OF
$0.30 PER SHARE. IN ADDITION, THE PURCHASER RECEIVED WARRANTS TO PURCHASE
500,000 SHARES OF THE COMPANY'S COMMON STOCK AT AN EXERCISE PRICE OF $0.30
PER SHARE AND 1,251,000 2003 FEE SHARES IN FULL SATISFACTION OF CERTAIN
FEES INCURRED IN CONNECTION WITH THE FINANCING.
THE NOTES AND WARRANTS ISSUED IN CONNECTION WITH THE FINANCING AND THE
ADDITIONAL FINANCING, COUPLED WITH THE 2003 FEE SHARES, ARE COLLECTIVELY
CONVERTIBLE INTO AN AGGREGATE OF 29,893,293 SHARES OF THE COMPANY'S COMMON
STOCK, OR APPROXIMATELY 62% OF THE COMPANY'S OUTSTANDING COMMON STOCK,
SUBJECT TO ADJUSTMENT AS PROVIDED IN THE TRANSACTION DOCUMENTS. IF THESE
NOTES AND WARRANTS WERE CONVERTED IN THEIR ENTIRETY TO COMMON STOCK BY THE
PURCHASER, THEN THE OTHER EXISTING SHAREHOLDERS' OWNERSHIP IN THE COMPANY
WOULD BE SIGNIFICANTLY DILUTED TO APPROXIMATELY 38% OF THEIR PRESENT
OWNERSHIP POSITION.
AS A CONDITION OF THE ADDITIONAL FINANCING, THE COMPANY AND THE PURCHASER
ENTERED INTO THE ASSET SALE AGREEMENT WHEREBY THE COMPANY AGREED TO PAY A
REORGANIZATION FEE OF AT LEAST $2,000,000. THE ASSET SALES AGREEMENT
PROVIDES THAT THE NET PROCEEDS OF AN ASSET SALE TO THE PARTY NAMED THEREIN
SHALL BE APPLIED TO THE COMPANY'S OBLIGATIONS UNDER THE FINANCING AND THE
ADDITIONAL FINANCING, BUT NOT TO THE REORGANIZATION FEE, AND THAT THE NET
PROCEEDS OF ANY SUBSEQUENT SALES OF ASSETS OR EQUITY CONSUMMATED ON OR
PRIOR TO THE FIFTH ANNIVERSARY OF THE DATE OF THE ASSET SALES AGREEMENT
SHALL BE APPLIED FIRST TO SUCH OBLIGATIONS, THEN PAID TO THE PURCHASER
PURSUANT TO AN INCREASING PERCENTAGE OF AT LEAST 55.5%, AS SET FORTH IN
THE ASSET SALES AGREEMENT. ACCORDINGLY, THE REORGANIZATION FEE COULD BE A
SUBSTANTIALLY HIGHER AMOUNT BASED UPON A PERCENTAGE OF THE PROCEEDS OF ANY
COMPANY SALE, AS SPECIFIED IN THE ASSET SALES AGREEMENT. EVEN IN THE EVENT
THAT THE COMPANY REPAYS ALL OF THE NOTES PAYABLE OUTSTANDING TO THE
PURCHASER IN FULL, THE PROCEEDS FROM ANY COMPANY SALE WOULD FIRST BE
REDUCED BY THE REORGANIZATION FEE, WHICH WOULD HAVE THE SAME EFFECT AS
DILUTING THE EXISTING SHAREHOLDERS' OWNERSHIP.
FOR MORE INFORMATION, SEE ITEM 7., "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - SUBSEQUENT EVENTS" FOR
ADDITIONAL INFORMATION ON THESE TRANSACTIONS.
21
OUR FUTURE SUCCESS IS UNCERTAIN DUE TO OUR LACK OF LIQUIDITY AND FINANCIAL
SITUATION AT PRESENT.
In 2002, the Company experienced a net loss of approximately $14,078,000
and had a working capital deficit of approximately $11,224,000 as of
September 30, 2002. This was primarily due to a decrease in revenues from
both the loss of CCC as a customer in 2001 and a general deterioration of
the ATM market. This decline in financial condition is serious, and if the
operating conditions do not improve there can be no assurance the Company
will continue operations. As of January 31, 2005, the Company has a
$1,250,000 purchase order financing facility through November 26, 2005.
See Part II, Item 7., "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Subsequent Events" of this Annual
Report for information on the purchase order financing facility. There can
be no assurance that this facility will be sufficient to meet the
Company's current working capital needs or that the Company will have
sufficient working capital in the future. If the Company needs to seek
additional financing, there can be no assurances that the Company will
obtain such additional financing for working capital purposes. The failure
to obtain such additional financing could cause a material adverse effect
upon the financial condition of the Company.
Our future results of operations involve a number of significant risks and
uncertainties. Factors that could affect our future operating results and
cause actual results to vary materially from expectations include, but are
not limited to, lack of a credit facility, dependence on key personnel,
product obsolescence, ability to increase our client base, ability to
increase sales to our current clients, ability to generate consistent
sales, technological innovations and acceptance, competition, reliance on
certain vendors and credit risks. If we do not experience sales increases
in future periods, we will have to reduce our expenses and capital
expenditures to maintain cash levels necessary to sustain our operations.
Our future success will depend on increasing our revenues and reducing our
expenses to enable us to regain profitability.
OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS HAVE STATED IN THEIR REPORT
THAT THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING
CONCERN.
We have limited cash resources and have a working capital deficit. Our
independent registered public accountants have stated in their report that
there is substantial doubt about our ability to continue as a going
concern. By being categorized in this manner, we may find it more
difficult in the short term to either locate financing for future projects
or to identify lenders willing to provide loans at attractive rates, which
may require us to use our cash reserves in order to expand. Should this
occur, and unforeseen events also require greater cash expenditures than
expected, we could be forced to cease all or a part of our operations. As
a result, you could lose your total investment.
WE MAY BE UNABLE TO SELL DEBT OR EQUITY SECURITIES IN THE EVENT WE NEED
ADDITIONAL FUNDS FOR OPERATIONS.
We may need to sell equity or debt securities in the future to provide
working capital for our operations or to provide funds in the event of
future operating losses. We cannot predict whether we will be successful
in raising additional funds. We have no commitments, agreements or
understandings regarding additional financings at this time, and we may be
unable to obtain additional financing on satisfactory terms or at all. The
terms of the Financing and of the Additional Financing restrict our
ability to raise additional funds, and there can be no assurance that we
will be able to obtain a waiver of such restrictions. If we were to raise
additional funds through the issuance of equity or convertible debt
securities, the current stockholders could be substantially diluted and
those additional securities could have preferences and privileges that
current security holders do not have.
22
WE COULD LOSE THE SERVICES OF ONE OR MORE OF OUR EXECUTIVE OFFICERS OR KEY
EMPLOYEES AND WE ARE CURRENTLY OPERATING WITHOUT A CHIEF FINANCIAL
OFFICER.
Our executive officers and key employees are critical to our business
because of their experience and acumen. In particular, the loss of the
services of Mark K. Levenick, Interim Chief Executive Officer of the
Company and President of our operating subsidiaries, could have a material
adverse effect on our operations. In December 2004, James T. Rash, the
former Chairman of the Board, Chief Executive and Financial Officer, died.
The Company has named Mark K. Levenick as Interim Chief Executive Officer
but no permanent Chairman, Chief Executive Officer or Chief Financial
Officer has been hired or appointed as of the date hereof. There can be
no assurance that the Company will be able to find successors to fulfill
his roles, or that such successors will be able to perform as well as Mr.
Rash has in the past. 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 outstanding
promissory notes due from Mr. Rash. This amount, which has not yet been
received by the Company, will be applied to the repayment of the notes. In
addition, one of our subsidiaries has key-man life insurance on the life
of Mr. Levenick in the amount of $1,000,000 and on the life of Michael F.
Hudson, Executive Vice President, in the amount of $750,000, which was
subsequently increased to $1,000,000, with that subsidiary named as the
sole beneficiary. The Company has not yet named a successor for either the
Chairman of the Board or the Chief Financial Officer position.
Our future success and growth also depends on our ability to continue to
attract, motivate and retain highly qualified employees, including those
with the expertise necessary to operate our business. These officers and
key personnel may not remain with us, and their loss may harm our
development of technology, our revenues and cash flows. Concurrently, the
addition of these personnel by our competitors would allow our competitors
to compete more effectively by diverting customers from us and
facilitating more rapid development of their technology.
OUR OPERATING RESULTS MAY FLUCTUATE FOR A VARIETY OF REASONS, MANY OF
WHICH ARE BEYOND OUR CONTROL.
Our business strategies may fail and our quarterly and annual operating
results may vary significantly from period to period depending on:
- the volume and timing of orders received during the period,
- the timing of new product introductions by us and our competitors,
- the impact of price competition on our selling prices,
- the availability and pricing of components for our products,
- seasonal fluctuations in operations and sales,
- changes in product or distribution channel mix,
- changes in operating expenses,
- changes in our strategy, and
- personnel changes and general economic factors.
Many of these factors are beyond our control. We are unable to forecast
the volume and timing of orders received during a particular period.
Customers generally order our products on an as-needed basis, and
accordingly we have historically operated with a relatively small backlog.
We experience seasonal variances in our operations. Accordingly, operating
results for any particular quarter may not be indicative of the results
for the future quarter or for the year.
Even though it is difficult to forecast future sales and we maintain a
relatively small level of backlog at any given time, we generally must
plan production, order components and undertake our development, sales and
marketing activities and other commitments months in advance. Accordingly,
any shortfall in sales in a given period may adversely impact our results
of operations if we are unable to adjust expenses or inventory during the
period to match the level of sales for the period.
WE HAVE LIMITED MANAGEMENT AND OTHER RESOURCES TO ADDRESS THE ISSUES
CONFRONTING THE COMPANY.
The problems and issues facing our business could significantly strain our
limited personnel, management,
23
financial controls and other resources. Our ability to manage any future
complications effectively will require us to hire new employees, to
integrate new management and employees into our overall operations and to
continue to improve our operational, financial and management systems,
controls and facilities. Our failure to handle the issues facing the
Company effectively, including any failure to integrate new management
controls, systems and procedures, could materially adversely affect our
business, results of operations and financial condition.
THE MARKETS FOR OUR PRODUCTS ARE VERY COMPETITIVE AND, IF WE FAIL TO ADAPT
OUR PRODUCTS AND SERVICES, WE WILL LOSE CUSTOMERS AND FAIL TO COMPETE
EFFECTIVELY.
The markets for our products are characterized by intense competition. We
expect the intensity of competition to increase. Large manufacturers such
as Diebold Incorporated, NCR Corporation, Triton Systems (a division of
Dover Corporation) and Tranax (a distributor of Hyosung) compete directly
with us in the quickly growing, low-cost ATM market. Additionally, demand
in fiscal year 2002 has decreased, due to (i) the declaration of
bankruptcy by CCC, our former largest customer, (ii) the deterioration of
the third-party lease finance market to the ATM industry and (iii) the
general downturn in the economy. Our direct competitors for our TACC
products include NKL Industries, McGunn Safe Company, Armor Safe Company
and AT Systems. Many smaller manufacturers of ATMs, electronic safes and
kiosks are also found in the market.
Sales of Sentinel cash security systems are currently to a small number of
customers. The loss of a single customer could have an adverse effect on
TACC sales.
Competition is likely to result in price reductions, reduced margins and
loss of market share, any one of which may harm our business. Competitors
vary in size, scope and breadth of the products and services offered. We
may encounter competition from competitors who offer more functionality
and features. In addition, we expect competition from other established
and emerging companies, as the market continues to develop, resulting in
increased price sensitivity for our products.
To compete successfully, we must adapt to a rapidly changing market by
continually improving the performance, features and reliability of our
products and services, or else our products and services may become
obsolete. We may also incur substantial costs in modifying our products,
services or infrastructure in order to adapt to these changes.
Many of our competitors have greater financial, technical, marketing and
other resources and greater name recognition than we do. In addition, many
of our competitors have established relationships with our current and
potential customers and have extensive knowledge of our industry. In the
past, we have lost potential customers to competitors. In addition,
current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to
increase the ability of their products to address customer needs.
Accordingly, it is possible that new competitors or alliances among
competitors may develop and rapidly acquire significant market share.
OUR FUTURE GROWTH WILL DEPEND UPON OUR ABILITY TO CONTINUE TO MANUFACTURE,
MARKET AND SELL PRODUCTS WITH COST-EFFECTIVE CHARACTERISTICS, DEVELOP AND
PENETRATE NEW MARKET SEGMENTS AND ENTER AND DEVELOP NEW MARKETS.
We must design and introduce new products with enhanced features, develop
close relationships with the leading market participants and establish new
distribution channels in each new market or market segment in order to
grow. We are unable to predict whether any of our new products will gain
acceptance in the market. Additionally, some of the transactions currently
initiated through ATMs could be accomplished in the future using emerging
technologies, such as wireless devices, cellular telephones, debit cards
and smart cards. We may be unable to develop or gain market acceptance of
products supporting these technologies. Our failure to successfully offer
products supporting these emerging technologies could harm our business.
24
Because the protection of our proprietary technology is limited, our
proprietary technology may be used by others without our consent, which
may reduce our ability to compete and may divert resources.
Our success depends upon proprietary technology and other intellectual
property rights. We must be able to obtain patents, maintain trade-secret
protection and operate without infringing on the intellectual property
rights of others. We have relied on a combination of copyright, trade
secret and trademark laws and nondisclosure and other contractual
restrictions to protect proprietary technology. Our means of protecting
intellectual property rights may be inadequate. It is possible that
patents issued to or licensed by us will be successfully challenged. We
may unintentionally infringe patents of third parties or we may have to
alter our products or processes or pay licensing fees or cease certain
activities to take into account patent rights of third parties, thereby
causing additional unexpected costs and delays that may adversely affect
our business.
In addition, competitors may obtain additional patents and proprietary
rights relating to products or processes used in, necessary to,
competitive with or otherwise related to those we use. The scope and
validity of these patents and proprietary rights, the extent to which we
may be required to obtain licenses under these patents or under other
proprietary rights and the cost and availability of licenses are unknown,
but these factors may limit our ability to market our existing or future
products.
We also rely upon unpatented trade secrets. Other entities may
independently develop substantially the same proprietary information and
techniques or otherwise gain access to our trade secrets or disclose such
technology. In addition, we may be unable to meaningfully protect our
rights to our unpatented trade secrets. In addition, certain previously
filed patents relating to our ATM products and TACC products have expired.
Litigation may be necessary to enforce our intellectual property rights,
protect trade secrets, determine the validity and scope of the proprietary
rights of others, or defend against claims of infringement or invalidity.
Litigation may result in substantial costs and diversion of resources,
which may limit our ability to develop new services and compete for
customers.
IF THE ABILITY TO CHARGE ATM FEES IS LIMITED OR PROHIBITED, ATMS MAY
BECOME LESS PROFITABLE AND DEMAND FOR OUR ATM PRODUCTS COULD DECREASE.
The growth in the market and in our sales of ATMs has been due, in part,
to the ability of ATM owners to charge consumers a surcharge fee for the
use of the ATM. The market trend to charge fees resulted from the
elimination in April 1996 by the Cirrus and Plus national ATM networks of
their policies against the imposition of surcharges on ATM transactions.
ATM owners are subject to federal and state regulations governing
consumers' rights with respect to ATM transactions. Some states and
municipalities have enacted legislation in an attempt to limit or
eliminate surcharging, and similar legislation has been introduced in
Congress. In addition, it is possible that one or more of the national ATM
networks will reinstate their former policies prohibiting surcharging. The
adoption of any additional regulations or legislation or industry policies
limiting or prohibiting ATM surcharges could decrease demand for our
products.
25
ANY INTERRUPTION OF OUR MANUFACTURING, WHETHER AS A RESULT OF DAMAGED
EQUIPMENT, NATURAL DISASTERS OR OTHERWISE, COULD INJURE OUR BUSINESS.
All of our manufacturing occurs at our facility in Carrollton, Texas. Our
manufacturing operations utilize equipment that, if damaged or otherwise
rendered inoperable, would result in the disruption of our manufacturing
operations. Although we maintain business interruption insurance, our
business would be injured by any extended interruption of the operations
at our manufacturing facility. This insurance may not continue to be
available on reasonable terms or at all. Our facilities are also exposed
to risks associated with the occurrence of natural disasters, such as
hurricanes and tornadoes.
IF WE RELEASE PRODUCTS CONTAINING DEFECTS, WE MAY NEED TO HALT FURTHER
SALES AND/OR SERVICES UNTIL WE FIX THE DEFECTS, AND OUR REPUTATION WOULD
BE HARMED.
We provide a limited warranty on each of our products covering
manufacturing defects and premature failure. While we believe that our
reserves for warranty claims are adequate, we may experience increased
warranty claims. Our products may contain undetected defects which could
result in the improper dispensing of cash or other items. Although we have
experienced only a limited number of claims of this nature to date, these
types of defects may occur in the future. In addition, we may be held
liable for losses incurred by end users as a result of criminal activity
which our products were intended, but unable, to prevent, or for any
damages suffered by end users as a result of malfunctioning or damaged
components.
WE REMAIN LIABLE FOR ANY PROBLEMS OR CONTAMINATION RELATED TO OUR FUEL
MONITORING UNITS.
Although we discontinued the production and distribution of our fuel
monitoring units more than five years ago, those units which are still in
use are subject to a variety of federal, state and local laws, rules and
regulations governing storage, manufacture, use, discharge, release and
disposal of product and contaminants into the environment or otherwise
relating to the protecting of the environment. These regulations include,
among others (i) the Comprehensive Environmental Response, (ii)
Compensation and Liability Act of 1980, (iii) The Resource Conservation
and Recovery Act of 1976, (iv) the Oil Pollution Act of 1990, (v) the
Clean Air Act of 1970, (vi) the Clean Water Act of 1972, (vii) the Toxic
Substances Control Act of 1976, (viii) the Emergency Planning and
Community Right-to-Know Act, and (ix) the Occupational Safety and Health
Administration Act.
Our fuel monitoring products, by their very nature, give rise to the
potential for substantial environmental risks. If our monitoring systems
fail to operate properly, releases or discharges of petroleum and related
products and associated wastes could contaminate the environment. If there
are releases or discharges we may be found liable under the environmental
laws, rules and regulations of the United States, states and local
jurisdictions relating to contamination or threat of contamination of air,
soil, groundwater and surface waters. This indirect liability could expose
us to monetary liability incident to the failure of the monitoring systems
to detect potential leaks in underground storage tanks. Although we have
tried to protect our business from environmental claims by limiting the
types of services we provide, operating pursuant to contracts designed to
protect us, instituting quality control operating procedures and, where
appropriate, insuring against environmental claims, we are unable to
predict whether these measures will eliminate the risk of potential
environmental liability entirely.
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
26
statements involve risks and uncertainty (including without limitation,
the Company's future gross profit, selling, general and administrative
expense, the Company's financial position, working capital and seasonal
variances in the Company's operations, as well as general market
conditions). Though the Company believes that the assumptions underlying
the forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance
that the forward-looking statements included in this Form 10-K will prove
to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be
achieved.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 15. below for an index of the financial statements and schedules
included as a part of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements on any matters of accounting
principles or financial statement disclosure between us and our
independent auditors.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company,
under the supervision and with the participation of the Company's
management, including Mark K. Levenick, the Company's Interim Chief
Executive Officer, has evaluated the effectiveness of the design and
operation of the Company's "disclosure controls and procedures", as
such term is defined in Rules 13a-14 and 15d-14 promulgated under
the Securities Exchange Act of 1934, as amended (the "Act"), as of
this Annual Report. Based on his evaluation of our disclosure
controls and procedures as of a date within 90 days of the filing of
this report, Mark K. Levenick, the Interim Chief Executive Officer
of Tidel Technologies, Inc. has concluded that the disclosure
controls and procedures were effective as of the end of the period
covered by this report to provide reasonable assurance that
information required to be disclosed by the Company in reports that
it files or submits under the Act is recorded, summarized and
reported within the time periods specified in SEC rules and forms.
James T. Rash was Chief Financial Officer during the fiscal year
ended 2002 and through December 19, 2004. Mr. Rash died on December
19, 2004 and the Company currently does not have a Chief Financial
Officer.
(b) Changes in Internal Controls. In the ordinary course of business,
the Company routinely enhances its information systems by either
upgrading its current systems or implementing new systems. There
were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to
the date of Mr. Levenick's evaluation
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names and ages of the directors and executive
officers of the Company and their principal occupations at present and for
the past five years. James T. Rash was the Chairman of the Board, Chief
Executive Officer and Chief Financial Officer during the year ended
September 30, 2002. Mr. Rash died in December 2004. There are, to the
knowledge of the Company, no agreements or understandings by which these
individuals were so selected. No family relationships exist between any
directors or executive officers (as such term is defined in Item 401 of
Regulation S-K).
27
Director
Name Age All Offices with the Company Since
----------------- --- ------------------------------------------------- -------
Mark K. Levenick 45 Interim Chief Executive Officer of the 1995
Company, President and Chief Executive
Officer of the Company's principal
operating subsidiary, and Director
Michael F. Hudson 53 Executive Vice President of the Company, Chief 2001
Operating Officer of the Company's operating
subsidiaries, and Director
Jerrell G. Clay 63 Director 1990
Raymond P. Landry 65 Director 2001
Stephen P. Griggs 47 Director 2002
BUSINESS BACKGROUND
The following is a summary of the business background and experience
of each of the persons named above:
MARK K. LEVENICK is Interim Chief Executive Officer of the Company
and has served as Chief Executive Officer of the Company's principal
operating subsidiary for in excess of five years. Mr. Levenick has
been a Director of the Company since May 1995. He holds a Bachelor
of Science degree from the University of Wisconsin at Whitewater.
Mr. Levenick also had previously acted as Interim Chief Executive
Officer of the Company during the medical leave of absence of James
T. Rash from February 2002 to August 2002.
MICHAEL F. HUDSON is Executive Vice President of the Company and
Chief Operating Officer of the Company's principal operating
subsidiary. Mr. Hudson has served as a Director of the Company since
February 2001. Prior to joining the Company in September 1993, he
held various positions with the Southland Corporation and its
affiliates for more than 18 years, concluding as President and Chief
Executive Officer of MoneyQuick, a large non-bank ATM network. Mr.
Hudson currently serves on the Board of Directors and Executive
Committee of the Electronic Funds Transfer Association and the
International Board of Directors and National Advisory Board of the
Automated Teller Machine Industry Association. Mr. Hudson is a
recognized authority in the ATM industry.
JERRELL G. CLAY has served as a Director of the Company since
December 1990 and is Chief Executive Officer of 3 Mark Financial,
Inc., an independent life insurance marketing organization, and has
served as President of one of its predecessors for in excess of five
years. Mr. Clay also serves as a member of the Independent Marketing
Organizations Advisory Committee of Protective Life Insurance
Company of Birmingham, Alabama.
RAYMOND P. LANDRY has served as a Director of the Company since
February 2001 and has been engaged in private business consulting to
various companies, including some other entities in the ATM
industry, for in excess of five years. He has served as a senior
executive or financial officer with three publicly traded
28
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 of the Company since June
2002 and has been primarily engaged in managing his personal
investments since 2000. From 1988 to 2000, Mr. Griggs held various
positions, including President and Chief Operating Officer, with
RoTech Medical Corporation, a Nasdaq-traded company. He holds a
Bachelor of Science degree in Business Management from East
Tennessee State University and a Bachelor of Science degree in
Accounting from the University of Central Florida. Mr. Griggs was
appointed to the Board of Directors during 2002 to fill the vacancy
created by the mid-term resignation of a director.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and officers, and persons who own more than 10%
of a registered class of its 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 the Company 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 the Company, and any amendments thereto, and any written
representations with respect to the foregoing, the Company believes
that its 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 paid by the Company for services rendered during the
fiscal years ended September 30, 2002, 2001 and 2000 to James T.
Rash, the former Chairman of the Board and Chief Executive and
Financial Officer, and the Company's four most highly compensated
Executive Officers (as such term is defined in Item 402 of
Regulation S-K) other than the CEO.
29
SUMMARY COMPENSATION TABLE
Long-term
Annual Compensation Compensation
-------------------------------- ------------
Awards
------------
Other Securities
Name and Principal Annual Underlying All Other
Position Year Salary ($) Bonus ($) Compensation ($) Options Compensation ($)(2)
-------------------------- ---- ---------- ------------- ---------------- ------------ -------------------
James T. Rash 2002 $ 225,000 $ -- * -- $ 9,875
Former Chief Executive 2001 225,000 -- * -- 8,880
and Financial 2000 225,000 (1) 225,000 * 75,000 8,475
Officer
Mark K. Levenick 2002 $ 262,500 $ -- * -- $ 4,480
Interim Chief Executive 2001 262,500 -- * -- 4,480
Officer 2000 262,500 278,000 * 75,000 4,480
Michael F. Hudson 2002 $ 204,750 $ -- * -- $ --
Executive Vice President 2001 204,750 -- * -- --
2000 204,750 219,000 * 50,000 --
M. Flynt Moreland 2002 $ 150,000 $ -- * -- $ --
Senior Vice President - 2001 150,000 -- * -- --
Research & Development 2000 150,000 134,000 * 20,000 --
Of Tidel Engineering, L.P.
Troy D. Richard (3) 2002 $ 130,000 $ -- * 50,000 $ --
Senior Vice President - 2001 -- -- -- -- --
Operations of Tidel 2000 -- -- -- -- --
Engineering, L.P.
---------
* - Certain of the officers of the Company routinely receive other benefits
from the Company, the amounts of which are customary in the industry. The
aggregate dollar value of such benefits paid to any named executive office
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, 2002, 2001 and
2000.
(1) - Includes $50,000 of salary earned in the fiscal year ended September 30,
2000, which was deferred and paid in the year ended September 30, 2001.
(2) - The amounts relate to the dollar value of insurance premiums paid by the
Company during the covered fiscal year with respect to life insurance for
the benefit of a named executive officer.
(3) - Hired effective June 26, 2002 to replace Gene Moore, who died May 28,
2002.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The Company did not grant any stock options or stock appreciation rights
to any of the Company's executive officers during the fiscal year ended
September 30, 2002 or in subsequent periods.
30
OPTION EXERCISES IN LAST FISCAL YEAR AND OPTION VALUES AT FISCAL YEAR END
The following table provides (i) the number of options exercisable by the
respective optionees and (ii) the respective valuations at September 30,
2002.
Number of
Securities Underlying Value of Unexercised
Unexercised Options at in-the-Money Options at
Shares September 30, 2002 September 30, 2002
acquired Value (Shares) ($)(3)
on exercise realized ----------------------------- -------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
------------------- ----------- -------- ----------- ------------- ----------- -------------
James T. Rash (1) -- -- 50,000 125,000 $ -- $ --
Mark K. Levenick -- -- 220,000 125,000 -- --
Michael F. Hudson -- -- 67,000 83,500 -- --
M. Flynt Moreland -- -- 21,600 30,800 -- --
Troy D. Richard -- -- -- 50,000 -- --
Eugene W. Moore (2) -- -- 60,700 -- -- --
------------
(1) Mr. Rash died December 19, 2004.
(2) Mr. Moore died May 28, 2002.
(3) Based on the closing price of the Company's Common Stock of $0.70 per
share on September 30, 2002.
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
The Company did not grant any awards to any of the Company's executive
officers under any long-term incentive plans during the fiscal year ended
September 30, 2002.
DIRECTOR COMPENSATION
During the year ended September 30, 2002, each Director received $1,000
per meeting as compensation for his service as a member of the Board of
Directors. Directors who serve on board committees receive $500 per
committee meeting.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
Messrs. Levenick, Hudson, Moreland and Richard have employment agreements
with the Company, which provide for minimum annual salaries of $262,500,
$204,750, $150,000 and $130,000, respectively, over a three-year term
ending December 2007, with certain change of control provisions. In the
event of a change of control, the executive officers are entitled to
immediate vesting of all restricted stock, performance units, stock
options, stock appreciation rights, warrants and employee benefit plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Jerrell G. Clay, Stephen P. Griggs
and Raymond P. Landry. Jerrell G. Clay, Chairman of the Compensation
Committee, has an ownership interest that is greater than 10% in, and is
an executive officer of, a privately held corporation that was provided
with certain office space and administrative services by the Company from
1997 to 1999. This corporation was indebted to the Company in the
aggregate amount of $22,341 at September 30, 2001, which was the largest
aggregate amount of indebtedness outstanding at any time during the fiscal
year. This indebtedness was paid in full
31
during the fiscal year ended September 30, 2002. The Estate of James T.
Rash, the Company's former Chairman, Chief Executive and Financial
Officer, has a 10% ownership interest in a privately held corporation
controlled by Jerrell G. Clay.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth as of December 31, 2004, the number of
shares of Common Stock beneficially owned by (i) the only persons known to
the Company to be the beneficial owners of more than 5% of its voting
securities, (ii) each director and executive officer, as such terms are
defined in Item 402 of Regulation S-K, of the Company individually and
(iii) by all current directors and the executive officers of the Company
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 the
Company's records.
Name and Address of Beneficial Amount and Nature of Percent of
Title of Class Owner Beneficial Ownership Class (1)
-------------- ------------------------------ -------------------- ----------
Common Stock Laurus Master Fund, Ltd. 1,251,000(2) 6.1%
825 Third Avenue, 14th Floor
New York, New York 10022
Common Stock Alliance Developments 1,151,362(3) 5.5%
One Yorkdale Rd., Suite 510
North York, Ontario
M6A 3A1 Canada
Common Stock James T. Rash (8) 415,300(4) 2.0%
2900 Wilcrest, Suite 205
Houston, Texas 77042
Common Stock Mark K. Levenick 415,000(5) 2.0%
2310 McDaniel Dr.
Carrollton, Texas 75006
Common Stock Jerrell G. Clay 181,405 *
2900 Wilcrest, Suite 245
Houston, Texas 77042
Common Stock Michael F. Hudson 263,700(6) 1.3%
2310 McDaniel Dr.
Carrollton, Texas 75006
Common Stock Raymond P. Landry 38,500 *
2900 Wilcrest, Suite 205
Houston, Texas 77042
32
Common Stock Stephen P. Griggs -- *
2900 Wilcrest, Suite 205
Houston, Texas 77042
Common Stock Directors and Executive 1,313,905(7) 6.2%
Officers as a group (6 persons)
------------------------
* Less than one percent.
(1) Based upon 20,677,210 shares outstanding as of December 31, 2004.
(2) The number of shares currently beneficially owned by Laurus is reflected
above. In addition, Laurus could acquire the following additional shares,
none of which could be acquired within 60 days of December 31, 2004: (i)
4,250,000 shares issuable upon exercise of outstanding warrants at an
exercise price of $0.30 per share, (ii) 500,000 shares issuable upon
exercise of outstanding warrants at an exercise price of $0.30 per share,
and (iii) 24,226,627 shares issuable upon conversion of $7,267,988 in debt
at $0.30 per share and 916,667 shares issuable upon conversion of
$2,750,000 in debt at $3.00 per share. Assuming all such shares were
acquired, together with the shares reflected above, Laurus would hold
29,893,293 shares, representing 61.6% of the Company's outstanding Common
Stock. For more information, see Part II, Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Subsequent
Events" of this Annual Report.
(3) Includes 150,000 shares which could be acquired within 60 days upon
exercise of outstanding warrants at an exercise price of $0.45 per share.
(4) Includes 175 shares which could be acquired within 60 days upon exercise
of outstanding options and warrants at exercise prices of (i) $1.25 per
share as to 100,000 shares and (ii) $1.875 per share as to 75,000 shares.
(5) Includes 300,000 shares which could be acquired within 60 days upon
exercise of outstanding warrants and options at exercise prices of (i)
$1.25 per share as to 100,000 shares, (ii) $1.4375 per share as to 25,000
shares, (iii) $1.875 per share as to 75,000 shares and (iv) $2.50 per
share as to 100,000 shares.
(6) Includes 150,500 shares which could be acquired within 60 days upon
exercise of outstanding options and warrants at exercise prices of (i)
$1.25 per share as to 67,000 shares, (ii) $1.875 per share as to 50,000
shares and (iii) $2.50 per share as to 33,500 shares. Included in the
total amount beneficially owned by Mr. Hudson are 83,500 shares which are
pledged to secure a loan from the Company.
(7) Includes the 175,000 shares referred to in Note (4) above, the 300,000
shares referred to in Note (5) above, and the 150,500 shares referred to
in Note (6) above, which could be acquired within 60 days upon exercise of
outstanding options and warrants.
(8) Mr. Rash died on December 19, 2004. These shares are held in the name of
the Estate of James T. Rash.
CHANGE IN CONTROL
THE COMPANY COMPLETED FINANCING TRANSACTIONS WITH THE PURCHASER THAT
RESULTED IN THE ISSUANCE OF $6,850,000 IN CONVERTIBLE NOTES AND 4,250,000
WARRANTS AND $3,350,000 IN CONVERTIBLE NOTES AND 500,000 WARRANTS IN 2003
AND 2004, RESPECTIVELY, AS DESCRIBED MORE FULLY IN ITEM 7., "MANAGEMENT'S
DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS - SUBSEQUENT EVENTS" OF
THIS ANNUAL REPORT. THESE NOTES AND WARRANTS, TOGETHER WITH THE 2003 FEE
SHARES, ARE CONVERTIBLE INTO AN AGGREGATE OF 29,893,293 SHARES OF THE
COMPANY'S COMMON STOCK. IN ADDITION, ON NOVEMBER 26, 2004 THE COMPANY ALSO
ISSUED 1,251,000 SHARES OF COMMON STOCK TO THE PURCHASER IN FULL
SATISFACTION OF CERTAIN FEES INCURRED IN CONNECTION WITH THE CONVERTIBLE
TERM NOTES ISSUED IN THE FINANCING. IF THESE NOTES AND WARRANTS WERE
COMPLETELY CONVERTED TO COMMON STOCK, THE PURCHASER'S OWNERSHIP WOULD
REPRESENT APPROXIMATELY 62% OF THE OUTSTANDING SHARES OF THE COMPANY,
WHICH WOULD RESULT IN A CHANGE IN CONTROL OF THE COMPANY.
33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 2000, the Company loaned $141,563 to Michael F. Hudson,
Executive Vice President of the Company and Chief Operating Officer of the
Company's 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, the Company 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 the Company's 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. The
Company is negotiating with Mr. Hudson regarding satisfaction of these
notes including, among other things, recoveries through certain salary and
bonuses due to Mr. Hudson.
During the year ended September 30, 2001, the Company loaned $75,625 to
Eugene Moore, Senior Vice President of the Company, in a promissory note
maturing October 1, 2002, and bearing interest at 10% per annum. The note
from Mr. Moore was secured by a pledge of 50,000 shares of the Company's
common stock. The note related to the exercise of certain stock option
agreements. Mr. Moore died May 28, 2002. The Company subsequently forgave
the remaining unpaid balance of $75,625 in exchange for the return of the
50,000 shares of the Company's common stock.
At September 30, 2002, James T. Rash, Chairman and CEO of the Company, had
outstanding promissory notes due to the Company 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. These notes were not repaid by
Mr. Rash upon maturity. The Company 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 up to 250,000 shares of the Company's Common
Stock, was paid in full in March 2004. Mr. Rash died December 19, 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 the outstanding promissory notes due from
Mr. Rash. This amount, which has not yet been received by the Company,
will be applied to the repayment of the notes. The remaining receivable
amounts will be collected from anticipated bonuses due to Mr. Rash.
From 1994 to 1997, the Company had provided certain office space and
administrative services to two privately held entities with which Mr. Rash
previously had an affiliation. The entities are indebted to the Company in
the aggregate amount of $215,866, such amount being the largest aggregate
amount of indebtedness outstanding at any time during the fiscal year
ended September 30, 2002. During the fiscal year ended September 30, 2002,
the Company wrote off $182,492 deemed to be uncollectible. The Company is
uncertain about the collectibility of the remaining balance of $33,374,
and established a reserve for losses from these accounts in such amount.
From 1997 to 1999, the Company had provided certain office space and
administrative services to a privately held corporation in which Mr. Rash
and Jerrell G. Clay, a Director of the Company, each have a greater than
10% ownership interest and Mr. Clay is an executive officer. This
corporation was indebted to the Company in the aggregate amount of $22,341
at September 30, 2001, such amount being the largest aggregate amount of
indebtedness outstanding at any time during the fiscal year. This amount
was paid in full during fiscal year 2002.
34
Leonard L. Carr, a vice president of the Company, is the son-in-law of Mr.
Rash, the Company's former CEO, CFO and Chairman of the Board.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
A. AUDIT FEES
The aggregate fees billed to date by KPMG LLP for professional services
rendered for (i) the audit of our annual financial statements set forth in
the 2002 Annual Report and (ii) the reviews of interim financial
statements included in the Quarterly Reports on Form 10-Q for the fiscal
year 2002 were $141,600. The aggregate fees billed by KPMG 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, 2001, and (ii) the reviews of interim financial
statements included in the Quarterly Reports on Form 10-Q for that fiscal
year were $132,400.
B. AUDIT-RELATED FEES
There were no audit-related services billed by KPMG for the fiscal year
ended September 30, 2002. The aggregate fees billed by KPMG LLP for
audit-related services for the fiscal year ended September 30, 2001 were
$23,600. These fees related to a review of option and warrant calculations
and a review of responses to comment letters from the SEC.
C. TAX FEES
The aggregate fees billed by KPMG LLP for tax services for the fiscal year
ended September 30, 2002 were $42,900. The aggregate fees billed by KPMG
LLP for tax services for the fiscal year ended September 30, 2001 were
$41,000.
D. ALL OTHER FEES
There were no fees for other professional services rendered during the
fiscal years ended September 30, 2002 and 2001.
The Audit Committee has advised the Company that it has determined that
the non-audit services rendered by KPMG LLP during the most recent fiscal
year are compatible with maintaining the independence of such auditors.
The Audit Committee's policy has previously been to approve all
professional fees associated with audit, tax and audit-related work
proposed to the Company by KPMG LLP upon completion of the work. However,
the Company changed the policy effective July 1, 2004 to require the Audit
Committee to pre-approve all professional fees associated with audit, tax
and audit-related services as they are proposed to the Company by KPMG 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).
35
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The audited consolidated financial statements and related financial
statement schedules of the Company and the report of its independent
certified public accountants 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 management of the Company, all required disclosures in the
notes thereto.
EXHIBITS
The Exhibits required by Item 601 of Regulation S-K and Regulation S-X are
filed as a part of this Report, are listed in the accompanying Index to
Exhibits.
(B) REPORTS ON FORM 8-K
The Company filed three (3) reports on Form 8-K during the fourth quarter
of the fiscal year ended September 30, 2002 on the following dates:
1. Form 8-K, filed on August 19, 2002;
2. Form 8-K, filed on August 21, 2002; and
3. Form 8-K, filed on September 3, 2002.
All three (3) of the Forms 8-K filed in the fourth quarter of the fiscal
year ended September 30, 2002 were filed under Item 5. - Other Events.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TIDEL TECHNOLOGIES, INC.
(Company)
January 31, 2005 /s/ MARK K. LEVENICK
---------------------------------------------
Mark K. Levenick
Interim Chief Executive Officer and Principal
Executive Officer
January 31, 2005 _____________________________________________
Principal Financial Officer (1)
(1) James T. Rash, the Company's former Chairman, Chief Executive Officer and
Chief Financial Officer, died on December 19, 2004. The Company appointed
Mark K. Levenick to the position of Interim Chief Executive Officer but no
permanent Chairman, Chief Executive Officer or Chief Financial Officer has been
hired or appointed as of the date hereof.
37
POWER OF ATTORNEY
Tidel Technologies, Inc. and each of the undersigned do hereby appoint Mark K.
Levenick its or his true and lawful attorney to execute on behalf of Tidel
Technologies, Inc. and the undersigned any and all amendments to this Annual
Report on Form 10-K and to file the same with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission;
each of such attorneys shall have the power to act hereunder with or without the
other.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JERRELL G. CLAY Director January 31, 2005
-----------------------------------
Jerrell G. Clay
/s/ MARK K. LEVENICK Interim Chief January 31, 2005
----------------------------------- Executive Officer,
Mark K. Levenick President and Director
/s/ MICHAEL F. HUDSON Executive Vice January 31, 2005
----------------------------------- President and
Michael F. Hudson Director
/s/ RAYMOND P. LANDRY Director January 31, 2005
-----------------------------------
Raymond P. Landry
/s/ STEPHEN P. GRIGGS Director January 31, 2005
-----------------------------------
Stephen P. Griggs
38
INDEX TO FINANCIAL STATEMENTS
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS OF TIDEL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets - September 30, 2002 and 2001 F-3
Consolidated Statements of Operations for the years ended
September 30, 2002, 2001 and 2000 F-4
Consolidated Statements of Comprehensive Income (Loss) for
the years ended September 30, 2002, 2001 and 2000 F-5
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended September 30, 2002, 2001 and 2000 F-6
Consolidated Statements of Cash Flows for the years ended
September 30, 2002, 2001 and 2000 F-7
Notes to Consolidated Financial Statements F-8
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES OF TIDEL TECHNOLOGIES, INC.
AND SUBSIDIARIES
The following schedules are filed as part of this Annual Report on Form 10-K:
Schedule I Condensed Financial Information of Registrant S-1
Schedule II Valuation and Qualifying Accounts S-7
All other schedules are omitted because they are not required, are not
applicable or the required information is presented elsewhere herein.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Tidel Technologies, Inc.:
We have audited the consolidated financial statements of Tidel
Technologies, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules 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. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tidel
Technologies, Inc. and subsidiaries as of September 30, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 2002 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, present fairly,
in all material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a net stockholders' deficit as of September 30, 2002 that raise
substantial doubt about the entity's ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
KPMG LLP
Houston, Texas
January 10, 2003, except as to Note 17, which is as of January 28, 2005
F-2
TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
------------------------------
2002 2001
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,237,844 $ 3,266,236
Restricted cash 2,213,233 --
Trade accounts receivable, net of allowance of
$22,250,000 and $21,427,042, respectively 3,657,710 7,036,433
Notes and other receivables, net of allowance of
$5,463,416 and $4,000,000, respectively 2,166,558 1,357,394
Federal income tax receivable -- 5,596,383
Inventories 7,639,085 11,015,221
Prepaid expenses and other 348,807 525,224
------------ ------------
Total current assets 17,263,237 28,796,891
Property, plant and equipment, at cost 5,049,092 6,006,426
Accumulated depreciation (3,775,624) (4,006,432)
------------ ------------
Net property, plant and equipment 1,273,468 1,999,994
Intangible assets, net of accumulated amortization
of $1,701,073 and $1,199,579, respectively -- 501,494
Notes receivable 1,143,554 2,277,675
Other assets 226,575 260,762
------------ ------------
Total assets $ 19,906,834 $ 33,836,816
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Short-term debt, including current maturities
of long-term debt $ 2,000,000 $ 5,328,000
Convertible debentures 18,000,000 18,000,000
Accounts payable 1,718,314 2,795,063
Accrued interest payable 3,673,000 936,833
Reserve for settlement of class action litigation 1,564,490 --
Other accrued liabilities 1,531,021 1,487,064
------------ ------------
Total current liabilities 28,486,825 28,546,960
Long-term debt, net of current maturities -- 96,000
------------ ------------
Total liabilities 28,486,825 28,642,960
------------ ------------
Commitments and contingencies
Shareholders' Equity (Deficit):
Common stock, $.01 par value, authorized 100,000,000
shares; issued and outstanding 17,426,210 shares 174,262 174,262
Additional paid-in capital 19,275,433 19,245,958
Accumulated deficit (27,700,743) (13,623,065)
Stock subscriptions receivable (217,188) (217,188)
Accumulated other comprehensive loss (111,755) (386,111)
------------ ------------
Total shareholders' equity (deficit) (8,579,991) 5,193,856
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 19,906,834 $ 33,836,816
============ ============
See accompanying notes to consolidated financial statements.
F-3
TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30,
------------------------------------------------
2002 2001 2000
------------ ------------ ------------
Revenues $ 19,442,224 $ 36,086,338 $ 72,931,388
Cost of sales 15,051,784 24,384,224 45,015,368
------------ ------------ ------------
Gross profit 4,390,440 11,702,114 27,916,020
Selling, general and administrative 9,770,237 10,351,803 10,608,302
Provision for doubtful accounts 2,985,744 25,025,000 500,000
Provision for settlement of class action litigation 1,564,490 -- --
Depreciation and amortization 1,158,742 1,089,466 1,367,964
Impairment of goodwill and other intangible assets 463,590 -- --
------------ ------------ ------------
Operating income (loss) (11,552,363) (24,764,155) 15,439,754
Other expense:
Interest expense, net 2,530,971 4,593,661 432,361
Write-down of investment in 3CI 288,326 -- 1,000,000
------------ ------------ ------------
Total other expense 2,819,297 4,593,661 1,432,361
------------ ------------ ------------
Income (loss) before taxes (14,371,660) (29,357,816) 14,007,393
Income tax expense (benefit) (293,982) (3,416,030) 4,838,000
------------ ------------ ------------
Net income (loss) $(14,077,678) $(25,941,786) $ 9,169,393
============ ============ ============
Basic earnings (loss) per share:
Net income (loss) $ (0.81) $ (1.49) $ 0.55
============ ============ ============
Weighted average common shares
outstanding 17,426,210 17,411,826 16,630,482
============ ============ ============
Diluted earnings (loss) per share:
Net income (loss) $ (0.81) $ (1.49) $ 0.50
============ ============ ============
Weighted average common and
dilutive shares outstanding 17,426,210 17,411,826 18,594,557
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED SEPTEMBER 30,
------------------------------------------------
2002 2001 2000
------------ ------------ ------------
Net income (loss) $(14,077,678) $(25,941,786) $ 9,169,393
Other comprehensive income:
Unrealized gain (loss) on investment in 3CI (13,970) 50,639 (130,962)
Less: reclassification adjustment for loss
included in net income (loss) 288,326 -- 1,000,000
------------ ------------ ------------
Other comprehensive income 274,356 50,639 869,038
------------ ------------ ------------
Comprehensive income (loss) $(13,803,322) $(25,891,147) $ 10,038,431
============ ============ ============
See accompanying notes to consolidated financial statements.
F-5
TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
RETAINED
SHARES ADDITIONAL EARNINGS TOTAL
ISSUED AND COMMON PAID-IN (ACCUMULATED SHAREHOLDERS'
OUTSTANDING STOCK CAPITAL DEFICIT) OTHER EQUITY
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 1999 16,067,968 $ 160,680 $ 15,160,307 $ 3,149,328 $ (1,687,851) $ 16,782,464
Exercise of warrants and options 1,308,242 13,082 1,336,082 -- (141,563) 1,207,601
Tax benefit from exercise
of warrants -- -- 1,102,762 -- -- 1,102,762
Issuance of warrants
in connection with
convertible debentures -- -- 1,571,682 -- -- 1,571,682
Deferred financing costs -- -- -- -- (416,525) (416,525)
Payments of stock subscriptions -- -- -- -- 382,063 382,063
Net income -- -- -- 9,169,393 -- 9,169,393
Unrealized loss on
investment in 3CI -- -- -- -- (130,962) (130,962)
Reclassification adjustment for
realized loss on investment
in 3CI included in net income -- -- -- -- 1,000,000 1,000,000
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 2000 17,376,210 173,762 19,170,833 12,318,721 (994,838) 30,668,478
Exercise of options 50,000 500 75,125 -- (75,625) --
Deferred financing costs -- -- -- -- 416,525 416,525
Net loss -- -- -- (25,941,786) -- (25,941,786)
Unrealized gain on
investment in 3CI -- -- -- -- 50,639 50,639
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 2001 17,426,210 174,262 19,245,958 (13,623,065) (603,299) 5,193,856
Net loss -- -- -- (14,077,678) -- (14,077,678)
Tax benefit from disqualifying
disposition of ISO's -- -- 29,475 -- -- 29,475
Unrealized loss on
investment in 3CI -- -- -- -- (13,970) (13,970)
Reclassification adjustment for
realized loss on investment
in 3CI included in net loss -- -- -- -- 288,326 288,326
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 2002 17,426,210 $ 174,262 $ 19,275,433 $(27,700,743) $ (328,943) $ (8,579,991)
============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-6
TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30,
------------------------------------------------
2002 2001 2000
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $(14,077,678) $(25,941,786) $ 9,169,393
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,158,742 1,089,466 1,367,964
Provision for doubtful accounts 2,985,744 25,025,000 500,000
Provision for settlement of class action litigation 1,564,490 -- --
Impairment of goodwill and other intangible assets 463,590 -- --
Amortization of debt discount and financing costs -- 2,973,464 --
Deferred income taxes -- 1,672,817 (738,736)
Tax benefits from exercise of warrants and
disqualifying disposition of ISO's 29,475 -- 1,102,762
Write-down of investment in 3CI 288,326 -- 1,000,000
Changes in assets and liabilities:
Trade accounts receivable, net 2,038,887 (715,749) (14,531,078)
Notes and other receivables (1,320,951) (6,624,952) (112,749)
Federal income tax receivable 5,596,383 (3,982,854) (752,595)
Inventories 3,376,136 907,316 (4,286,751)
Prepaid expenses and other assets 196,634 (211,801) (1,522,811)
Accounts payable and accrued liabilities 1,703,375 (6,248,042) 4,067,097
------------ ------------ ------------
Net cash provided by (used in) operating activities 4,003,153 (12,057,121) (4,737,504)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment (394,312) (771,835) (1,230,178)
------------ ------------ ------------
Net cash used in investing activities (394,312) (771,835) (1,230,178)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of convertible debentures -- -- 18,000,000
Proceeds from borrowings under revolving credit note -- -- 305,366
Repayments of notes payable (3,424,000) (128,000) (128,000)
Proceeds from exercise of warrants and options -- -- 1,207,601
Increase in restricted cash (2,213,233) -- --
Payments of stock subscriptions receivable -- -- 382,063
------------ ------------ ------------
Net cash provided by (used in) financing activities (5,637,233) (128,000) 19,767,030
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (2,028,392) (12,956,956) 13,799,348
Cash and cash equivalents at beginning of period 3,266,236 16,223,192 2,423,844
------------ ------------ ------------
Cash and cash equivalents at end of period $ 1,237,844 $ 3,266,236 $ 16,223,192
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 326,313 $ 1,570,886 $ 529,242
============ ============ ============
Cash paid for taxes, net of refunds receivable $ (5,919,840) $ -- $ 4,770,100
============ ============ ============
Supplemental disclosure of non-cash financing activities:
Notes received for exercise of stock options $ -- $ 75,625 $ 141,563
============ ============ ============
Discount on long-term debt for detachable warrants $ -- $ -- $ 1,155,157
============ ============ ============
Warrants issued for deferred financing costs $ -- $ -- $ 416,525
============ ============ ============
Inventory acquired for reduction in accounts receivable $ -- $ 1,822,450 $ --
============ ============ ============
See accompanying notes to consolidated financial statements.
F-7
TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002, 2001 AND 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Tidel Technologies, Inc. (the "Company") is a Delaware corporation which,
through its wholly owned subsidiaries, develops, manufactures, sells and
supports automated teller machines ("ATMs") and electronic cash security systems
("TACC" and "Sentinel"), primarily in the United States.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany items have been
eliminated in consolidation.
RECLASSIFICATIONS
Certain amounts in the prior years' consolidated financial statements have been
reclassified to conform to the current year presentation format. In addition,
the Company reclassified certain prior year balances that resulted in
shareholders' equity increasing by $1,800,000 at September 30, 2000. These
reclassifications related primarily to the tax effect of exercises of options
and warrants and had no impact on retained earnings or net income in any period.
CASH AND CASH EQUIVALENTS
For purposes of consolidated financial statement presentation and reporting cash
flows, all liquid investments with original maturities at the date of purchase
of three months or less are considered cash equivalents. Restricted cash is
primarily collateral for a revolving credit facility.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the standard cost method and includes materials, labor and production overhead
which approximates an average cost method. Reserves are provided to adjust any
slow moving materials or goods to net realizable values.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is calculated on
the straight-line method over the estimated useful lives of the assets.
Expenditures for major renewals and betterments are capitalized; expenditures
for repairs and maintenance are charged to expense as incurred.
INTANGIBLE ASSETS
All intangible assets are amortized using the straight-line method over a period
ranging from 5 to 10 years, with the exception of goodwill. For fiscal years
2000 and 2001 goodwill was amortized over 40 years, but during fiscal year 2002
the goodwill was deemed impaired and was written off in its entirety.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company's 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, the Company estimates the future cash
flows
F-8
expected to result from the use of the asset and its eventual disposition. If
the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, an impairment loss is
recognized.
WARRANTIES
Certain products are sold under warranty against defects in materials and
workmanship for a period of one to two years. A provision for estimated warranty
costs is included in accrued liabilities and is charged to operations at the
time of sale.
REVENUE RECOGNITION
Revenues are recognized at the time products are shipped to customers, as this
is the culmination of substantially all of the earnings process. The Company has
no continuing obligation to provide services or upgrades to its products, other
than a warranty against defects in materials and workmanship. The Company only
recognizes 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.
The Company's products contain imbedded software that is developed for inclusion
within the equipment. The Company has not licensed, sold, leased or otherwise
marketed such software separately. The Company has no continuing obligations
after the delivery of products and does not enter into post-contract customer
support arrangements related to any software embedded into its equipment.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Research and
development costs charged to expense were approximately $2,700,000, $2,500,000
and $2,600,000 for the years ended September 30, 2002, 2001 and 2000,
respectively.
FEDERAL INCOME TAXES
Income taxes are accounted for under the asset and liability method, whereby
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in determining
income or loss in the period that includes the enactment date.
INVESTMENT SECURITIES
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.
115"), the Company classifies its investment in 3CI Complete Compliance
Corporation ("3CI") as available for sale, with unrealized gains and losses
excluded from earnings and recorded as a component of other comprehensive
income. The investment in 3CI is classified as other assets in the accompanying
consolidated balance sheets. Declines in fair value below the amortized cost
basis of the investments that are determined to be other than a temporary
decline are charged to earnings.
ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss includes all non-equity holder changes in
stockholders' equity. As of September 30, 2002 and 2001, the Company's only
component of accumulated other comprehensive loss relates to unrealized losses
on its investment in 3CI.
F-9
NET INCOME (LOSS) PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128"), the Company computes and presents both
basic and diluted earnings per share ("EPS") amounts. Basic EPS is computed by
dividing income (loss) available to common stockholders by the weighted-average
number of common shares outstanding for the period, and excludes the effect of
potentially dilutive securities (such as options, warrants and convertible
securities), which are convertible into common stock. Dilutive EPS reflects the
potential dilution from options, warrants and convertible securities.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), requires companies to recognize stock-based
expense based on the estimated fair value of employee stock options.
Alternatively, SFAS No. 123 allows companies to retain the current approach set
forth in APB Opinion 25, "Accounting for Stock Issued to Employees", provided
that expanded footnote disclosure is presented. The Company applies APB Opinion
No. 25 in accounting for its Plans and, accordingly, no compensation cost has
been recognized for its stock options in the consolidated financial statements.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options and warrants under SFAS No. 123, the Company's
net income (loss) would have been reduced to the pro forma amounts indicated as
follows:
2002 2001 2000
-------------- -------------- --------------
Net income (loss) as reported.................. $ (14,077,678) $ (25,941,786) $ 9,169,393
Deduct: Total stock-based employee.............
compensation expense determined under FAS 123,
net of taxes................................... (50,633) (407,390) (197,137)
-------------- -------------- --------------
Net income (loss), pro forma................... $ (14,128,311) $ (26,349,176) $ 8,972,256
============== ============== ==============
Basic earnings (loss) per share:
As reported.................................... (0.81) (1.49) 0.55
Pro forma...................................... (0.81) (1.51) 0.54
Diluted earnings (loss) per share:
As reported.................................... (0.81) (1.49) 0.50
Pro forma...................................... (0.81) (1.51) 0.48
USE OF ESTIMATES
The preparation of the accompanying consolidated financial statements requires
the use of estimates by management in determining the Company's 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. The Company
believes that the carrying amounts of its financial instruments included in
current assets and current liabilities approximate the fair value of such items
due to their short-term nature.
F-10
The carrying amount of long-term debt approximates its fair value because the
interest rates approximate market.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 142 entitled "Goodwill and Other
Intangible Assets." Under SFAS No. 142, existing goodwill is no longer
amortized, but is tested for impairment using a fair value approach. SFAS No.
142 requires goodwill to be tested for impairment at a level referred to as a
reporting unit, generally one level lower than reportable segments. SFAS No. 142
required the Company to perform the first goodwill impairment test on all
reporting units within six months of adoption. The Company adopted SFAS No. 142
effective October 1, 2002. However, during the year ended September 30, 2002,
the Company recorded a impairment charge against its remaining goodwill balance.
Therefore, the adoption of SFAS No. 142 is not expected to have a significant
impact on the Company's financial statements.
In June 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations," was
issued. The standard requires that legal obligations associated with the
retirement of long-lived intangible assets be recorded at fair value when
incurred and became effective on October 1, 2002. The adoption of this statement
is not expected to have a material impact on the Company's consolidated
financial position, results of operations or cash flows.
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 reported as extraordinary items. The
adoption of this statement is not expected to have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," was issued. This statement provides guidance on the
recognition and measurement of liabilities associated with disposal activities
that are initiated after December 31, 2002. The adoption of this statement is
not expected to have a material impact on the Company's consolidated financial
position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation Transition and Disclosure, An Amendment of FAS No. 123." This
statement addresses the acceptable transitional methods when the fair value
method of accounting for stock-based compensation covered in SFAS No. 123 is
elected. Additionally, the statement prescribes tabular disclosure of specific
information in the "Summary of Significant Accounting Policies" regardless of
the method used and also required interim disclosure of similar information. The
Company has adopted this statement effective with the fiscal year ending
September 30, 2002. The Company has not elected the fair value method, but
continues accounting for stock-based compensation by the intrinsic method
prescribed by APB Opinion 25. The disclosures required by SFAS No. 148 are
included in the Summary of Significant Accounting Policies.
In November 2002, FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including indirect
Guarantees of Indebtedness of Others. " FIN 45 requires certain guarantees to be
measured at fair value upon issuance and recorded as a liability. In addition,
FIN 45 expands current disclosure requirements regarding guarantees issues by an
entity, including tabular presentation of the changes affecting an entity's
aggregate product warranty liability.
F-11
The recognition and measurement requirements of the interpretation are effective
prospectively for guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for interim and annual periods ending
after December 15, 2002. The Company does not expect FIN 45 to have a material
impact on its consolidated financial position, results of operations or cash
flows.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." SFAS No.
123R requires companies to recognize the compensation cost relating to
share-based payment transactions in the financial statements. SFAS No. 123R will
be effective for the Company's fourth quarter of fiscal 2005. The Company has
not yet determined the impact of adopting this standard.
(2) LIQUIDITY
In 2002, the Company experienced a net loss of approximately $14,078,000 and had
a working capital deficit of approximately $11,224,000 and a stockholders'
deficit of $8,580,000 as of September 30, 2002. This was primarily due to a
decrease in revenues from both the loss of CCC as a customer in 2001 and a
general deterioration of the ATM market. This decline in financial condition is
serious, and if the operating conditions do not improve there can be no
assurance the Company will continue operations. As discussed in Note 17, the
Company has a $1,250,000 purchase order financing facility through November 26,
2005. There can be no assurance that this facility will be sufficient to meet
the Company's current working capital needs or that the Company will have
sufficient working capital in the future. If the Company needs to seek
additional financing, there can be no assurances that the Company will obtain
such additional financing for working capital purposes. The failure to obtain
such additional financing could cause a material adverse effect upon the
financial condition of the Company.
(3) MAJOR CUSTOMERS AND CREDIT RISKS
The Company generally retains a security interest in the underlying equipment
that is sold to customers until it receives payment in full. The Company 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.
The Company had no customer that accounted for more than 10% of net sales for
the fiscal year ended September 30, 2002. The Company had sales to its former
largest customer, Credit Card Center ("CCC"), that accounted for 33% and 61% of
the Company's net sales for the fiscal years ending September 30, 2001 and 2000,
respectively. During January 2001, the Company became aware that CCC was
experiencing financial difficulties and sales to this customer were
discontinued. See further discussion of CCC and related charges in Note 14.
During the year ended September 30, 2001, the Company recorded reserves of
approximately $24.1 million. As of September 30, 2002, the Company's remaining
receivable from CCC has been reduced to $500,000. See Note 17 for additional
information on this receivable.
In addition, the Company had sales to one major customer other than CCC that
accounted for 19% and 7% of net sales for the fiscal years ending September 30,
2001 and 2000, respectively.
Sales to customers outside the United States, as a percentage of total revenues,
were approximately 13%, 7% and 6% in the fiscal years ended September 30, 2002,
2001 and 2000, respectively. All of the Company's sales are transacted in U.S.
dollars.
F-12
(4) NOTES AND OTHER RECEIVABLES
The current and long-term portion of notes and other receivables consisted of
the following at September 30, 2002 and 2001:
2002 2001
----------- -----------
Notes receivable:
CCC............................ $ 3,800,000 $ 3,800,000
Other trade notes.............. 3,158,738 2,061,158
Officers....................... 1,368,554 1,068,554
Other accounts receivable......... 446,236 705,357
----------- -----------
8,773,528 7,635,069
Allowance for doubtful accounts... (5,463,416) (4,000,000)
----------- -----------
$ 3,310,112 $ 3,635,069
=========== ===========
The notes due from CCC and other trade accounts were secured, bear interest at
12%, and are due at varying dates. See further discussion of CCC and related
charges in Note 15. All of the notes receivable from CCC have been fully
reserved as of September 30, 2002. The notes due from officers bear interest at
10% and were due at varying dates. Non-trade accounts also include amounts due
from entities with affiliations with related parties as described in Note 16.
The "Other trade notes" amounts include a $500,000 note due from CashWorks, Inc.
- see Note 17 for events relating to this note receivable subsequent to year
end.
(5) INVENTORIES
Inventories consisted of the following at September 30, 2002 and 2001:
2002 2001
------------ ------------
Raw materials.............................. $ 5,268,378 $ 7,356,316
Work in process............................ -- --
Finished goods............................. 3,309,622 1,926,505
Inventory repurchased from estate of CCC... 392,278 1,822,450
Other...................................... 68,807 --
------------ ------------
9,039,085 11,105,271
Inventory reserve.......................... (1,400,000) (90,050)
------------ ------------
$ 7,639,085 $ 11,015,221
============ ============
(6) INVESTMENT IN 3CI
The Company owned 698,464 shares of 3CI common stock at September 30, 2002 and
2001 with a market value of $167,631 ($.24 per share) and $181,601 ($.26 per
share), respectively. The Company recorded unrealized gain (loss) of ($13,970),
$50,639 and ($130,962) as components of other comprehensive income for the years
ended September 30, 2002, 2001 and 2000, respectively. Such investment is
included in Other Assets in the accompanying consolidated balance sheets. The
value of the investment in the 698,464 shares of 3CI was written down by
$288,000 in fiscal 2002 to reflect a carrying amount of $0.40 per share, the
high price at which the stock was traded in fiscal year 2002. In addition, the
Company recorded a write down of $1,000,000 in fiscal 2000 related to their
investment. The change in the carrying value of the 3CI shares is reflected in
the Accumulated Other Comprehensive Loss account in the Shareholders' Equity
(Deficit) section of the Consolidated Balance Sheet.
F-13
(7) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at September 30, 2002
and 2001:
2002 2001 Useful Life
---------- ---------- ------------
Machinery and equipment .................... $3,085,186 $3,957,255 2 - 10 years
Computer equipment and systems.............. 934,502 990,074 2 - 7 years
Furniture, fixtures and other improvements.. 1,029,404 1,059,097 3 - 5 years
---------- ----------
$5,049,092 $6,006,426
========== ==========
Depreciation expense was $1,120,838, $1,051,559 and $1,245,653 for the years
ended September 30, 2002, 2001 and 2000, respectively. Repairs and maintenance
expense was $145,437, $99,638 and $111,711 for the years ended September 30,
2002, 2001 and 2000, respectively.
(8) INTANGIBLE ASSETS
Intangible assets consisted of the following at September 30, 2002 and 2001:
2002 2001
-------------- -----------
Electronic cash security systems:
Software..................................... $ 350,000 $ 350,000
Proprietary technology ...................... 417,000 417,000
Other .......................................... 350,849 350,849
Goodwill ....................................... 583,224 583,224
Accumulated amortization ....................... (1,701,073) (1,199,579)
-------------- -----------
$ -- $ 501,494
============== ===========
Due to the Company's recurring operating losses, the intangible assets were
deemed impaired during fiscal year 2002 and were written off in their entirety.
As a result, the Company recognized a charge of $463,590, primarily related to
the remaining book value of the goodwill prior to the impairment charge.
(9) LONG-TERM DEBT AND CONVERTIBLE DEBENTURES
LONG-TERM DEBT
Long-term debt consisted of the following at September 30, 2002 and 2001:
2002 2001
----------- -----------
Revolving credit note payable to bank, due
June 30, 2003, interest payable monthly
at prime (4.75% and 6.0% at September 30,
2002 and 2001, respectively) ................... $ 2,000,000 $ 5,200,000
Term note payable to bank, payable in quarterly
installments of $32,000 plus accrued interest
at 8.4% through May 30, 2003 (Paid April 30,
2002) .......................................... -- 224,000
----------- -----------
Total short-term and long-term debt ............... 2,000,000 5,424,000
Less: current maturities ....................... (2,000,000) (5,328,000)
----------- -----------
Long-term debt, less current maturities ........... $ -- $ 96,000
=========== ===========
As of September 30, 2002, the Company's wholly-owned subsidiary was a party to a
credit agreement with a bank (the "First Lender") (as amended, the "Revolving
Credit Facility"), which was amended on
F-14
April 30, 2002, August 30, 2002 and December 30, 2002 to provide for, among
other things, an extension of the maturity date until June 30, 2003; the
reduction of the revolving commitment from the initial amount of $7,000,000 to
$2,000,000; and a modification of the collateral requirements to include a
pledge of a money market account in an amount equal to 110% of the outstanding
principal balance, which pledge was $2,200,000 and is recorded as restricted
cash in the September 30, 2002 consolidated balance sheet. At September 30,
2002, $2,000,000 was outstanding under the Revolving Credit Facility compared to
$5,200,000 at September 30, 2001. At September 30, 2002, the Company was in
compliance with the terms of the credit agreement or had received waivers for
covenant violations. See Note 17 for resolution of the Revolving Credit Facility
subsequent to year end.
CONVERTIBLE DEBENTURES
In September 2000, the Company issued to two investors (individually, the
"Holder", or collectively, the "Holders") an aggregate of $18,000,000 of the
Company's 6% Convertible Debentures, due September 8, 2004 (the "Convertible
Debentures"), convertible into the Company's Common Stock at a price of $9.50
per share. In addition, the Company issued warrants to the Holders to purchase
378,947 shares of the Company's Common Stock exercisable at any time through
September 8, 2005 at an exercise price of $9.80 per share.
In June 2001, the Holders exercised their option to put the Convertible
Debentures back to the Company. Accordingly, the principal amount of
$18,000,000, plus accrued and unpaid interest, was due on August 27, 2001. The
Company did not make such payment on that date, and at September 30, 2002, did
not have the funds available to make such payments. At September 30, 2002, the
Company was party to Subordination Agreements (the "Subordination Agreements")
with each Holder and the First Lender which provided, among other things, for
prohibitions: (i) on the Company making this payment to the Holders, and (ii)
against the Holders taking legal action against the Company to collect this
amount, other than to increase the principal balance of the Convertible
Debentures for unpaid accounts or to convert the Convertible Debentures into the
Company's Common Stock. Subsequent to year end, the warrants and Convertible
Debentures were retired in connection with the Financing as discussed in Note
17.
(10) ACCRUED LIABILITIES
Other accrued liabilities consisted of the following at September 30, 2002 and
2001:
2002 2001
---------- ----------
Reserve for warranty charges.. $ 513,345 $ 628,847
Taxes:
Sales and use........... 71,036 139,578
Ad valorem.............. 273,494 258,598
Wages and related benefits.... 326,080 290,096
Other......................... 347,066 169,945
---------- ----------
$1,531,021 $1,487,064
========== ==========
(11) WARRANTS
The Company's registration statement covering the offering and sale by selling
shareholders of the Common Stock underlying all of the Company's then
outstanding warrants was effective January 1997 through December 2002. The
warrants related to grants made in connection with debt and equity issues,
acquisitions, directors' remuneration (see Note 12) and various services
rendered. During the year ended September 30,
F-15
2000 warrants to purchase 1,055,692 shares of Common Stock were exercised
generating proceeds of $995,587. No warrants were exercised during the years
ended September 30, 2001 and 2002.
During the year ended September 30, 2001, the Company issued warrants to
purchase 300,000 shares of Common Stock at an exercise price of $2.91 (such
price being equal to the fair market value of the Common Stock at the date of
the grant) in connection with directors' remuneration. No warrants were issued
during the year ended September 30, 2002. At September 30, 2002, the Company had
outstanding warrants to purchase 993,420 shares of Common Stock that expire at
various dates through September 2005. The warrants have exercise prices ranging
from $2.91 to $11.27 per share and, if exercised, would generate proceeds to the
Company of approximately $7,300,000. See Note 17 for a discussion of warrants
issued subsequent to September 30, 2002.
(12) EMPLOYEE STOCK OPTION PLANS
The Company adopted a Long-Term Incentive Plan in 1997 (the "1997 Plan")
pursuant to which the Company's 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 the Company's 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. At
September 30, 2002, there were 974,700 options outstanding and 981,000 shares
available for grant under the 1997 Plan.
The Company's predecessor employee stock option plan, the 1989 Incentive Stock
Option Plan (the "1989 Plan"), was terminated in June 1999. At the date of
termination of the 1989 Plan, there were outstanding options to purchase 438,250
shares of Common Stock, of which 70,000 were outstanding at September 30, 2002.
In addition to stock options granted under the 1997 Plan and 1989 Plan noted
above, the Company has issued warrants to the Company's directors for
remuneration (see Note 11).
The weighted-average fair value per share of stock options and warrants issued
to employees and directors granted during 2002, 2001 and 2000 was $0.26, $1.59
and $1.17, respectively, on the date of grant, using the Black Scholes model
with the following assumptions: a risk-free interest rate of 3.42%, expected
life of 4 years, expected volatility of 80%, and an expected dividend yield of
0% for the 2002 granted options/warrants; a risk-free interest rate of 5.00%,
expected life of 3 years, expected volatility of 80%, and an expected dividend
yield of 0% for the 2001 granted options/warrants; and a risk-free interest rate
of 5.16%, expected life of 4 years, expected volatility of 80%, and an expected
dividend yield of 0% for the 2000 granted options/warrants.
At September 30, 2002, the range of exercise prices was $0.88 to $1.44 per share
under the 1989 Plan, $0.42 to $2.50 per share under the 1997 Plan, and $2.91 per
share for warrants issued to directors. At September 30, 2002 and 2001, the
weighted-average remaining contractual life of the outstanding options was 5.7
years and 6.1 years, respectively. Combined stock option and directors' warrant
activity during the periods indicated was as follows:
F-16
Number of Weighted average
shares exercise price
------ --------------
Balance at October 1, 1999 ......... 1,860,750 $1.39
Granted ......................... 277,500 1.88
Exercised ....................... (552,550) (1.08)
---------
Balance at September 30, 2000 ... 1,585,700 1.58
Granted ......................... 300,000 2.91
Exercised ....................... (50,000) (1.51)
Canceled ........................ (173,000) (1.02)
---------
Balance at September 30, 2001 ... 1,662,700 1.88
Granted ......................... 55,000 0.42
Canceled ........................ (373,000) (1.51)
---------
Balance at September 30, 2002 ...... 1,344,700 1.93
=========
The above table includes warrants issued for directors' remuneration that are
also included in outstanding warrants in Note 11 (300,000 such warrants
outstanding as of September 30, 2002). At September 30, 2002 and 2001, the
number of options exercisable was 533,800 and 408,800, respectively, at weighted
average prices of $1.80 per share and $2.06 per share, respectively.
(13) INCOME TAXES
Income tax expense (benefit) attributable to income from operations consisted of
the following for the years ended September 30, 2002, 2001 and 2000:
2002 2001 2000
----------- ----------- -----------
Federal current tax expense (benefit) ... $ (293,982) $(5,088,846) $ 5,576,736
Federal deferred tax expense (benefit) .. -- 1,672,817 (738,736)
State tax expense ....................... -- -- --
----------- ----------- -----------
$ (293,982) $(3,416,029) $ 4,838,000
=========== =========== ===========
Income tax expense (benefit) differed from the amounts computed by applying the
U.S. statutory federal income tax rate of 34% to income (loss) before taxes as a
result of the following:
2002 2001 2000
----------- ----------- -----------
Computed "expected" tax expense (benefit) ...... $(4,886,364) $(9,981,657) $ 4,762,514
Change in valuation allowances ................. 3,606,770 5,808,678 --
State taxes, net of benefit .................... -- -- --
Nondeductible items and permanent differences .. 985,612 977,034 46,687
Other .......................................... -- (220,084) 28,799
----------- ----------- -----------
$ (293,982) $(3,416,029) $ 4,838,000
=========== =========== ===========
F-17
The tax effects of temporary differences that were the sources of the deferred
tax assets consisted of the following at September 30, 2002 and 2001:
2002 2001
------------ ------------
Deferred tax assets:
Fixed assets ........................................ $ 300,078 $ 250,260
Intangible assets ................................... 628,944 456,534
Accounts receivable ................................. 1,565,298 485,194
Inventories ......................................... 793,506 301,681
Investment in 3CI ................................... 703,032 605,001
Accrued expenses .................................... 816,431 324,467
Other ............................................... 39,332 --
Minimum tax credit .................................. 144,575 481,067
Net operating losses ................................ 5,990,579 3,169,475
------------ ------------
Total gross deferred tax assets .................. 10,981,775 6,073,679
Less: valuation allowance ........................... (10,981,775) (6,073,679)
------------ ------------
Net deferred tax assets .......................... -- --
Other deferred tax liabilities ...................... -- --
------------ ------------
Net deferred tax assets ................................ $ -- $ --
============ ============
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. 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. Of the total
valuation allowance for the year ended September 30, 2002, approximately $1.3
million relates to stock option compensation deductions. The tax benefits
associated with stock option deductions will be credited to equity when
realized.
As of September 30, 2002, the Company has remaining net operating losses of
approximately $17,619,000 that will be available to offset U.S. Federal taxable
income generated in future years. Net operating losses of $11,253,000 and
$6,366,000 will expire in 2021 and 2022 respectively.
Due to certain terms of the Company's subordinated debentures, the interest
expense related to such debentures is not deductible for tax purposes.
The tax benefits associated with the exercise of compensatory stock options and
warrants increased the federal income tax receivable by $1,103,000 during the
year ended September 30, 2000. The benefit was recorded as an increase to
additional paid-in capital.
F-18
(14) EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted computations for the years ended September 30, 2002, 2001 and
2000:
Weighted
Net Income Average Shares Per Share
(Loss) Outstanding Amount
------------ ------------ -----
Year Ended September 30, 2002:
Basic earnings (loss) per share.......... $(14,077,678) 17,426,210 $(0.81)
Effect of dilutive warrants and options.. -- -- --
------------ ------------ ------
Diluted earnings (loss) per share........ $(14,077,678) 17,426,210 $(0.81)
============ ============ ======
Year Ended September 30, 2001:
Basic earnings (loss) per share.......... $(25,941,786) 17,411,826 $(1.49)
Effect of dilutive warrants and options.. -- -- --
------------ ------------ ------
Diluted earnings (loss) per share........ $(25,941,786) 17,411,826 $(1.49)
============ ============ ======
Year Ended September 30, 2000:
Basic earnings per share................. $ 9,169,393 16,630,482 $ 0.55
Effect of dilutive warrants and options.. 38,081 1,964,075 (0.05)
------------ ------------ ------
Diluted earnings per share............... $ 9,207,474 18,594,557 $ 0.50
============ ============ ======
Common stock equivalents consisting of warrants, options and convertible debt of
3,932,857, 4,250,857, and 2,229,782 were excluded from the computation of
diluted earnings per share due to their anti-dilutive effect for the years ended
September 30, 2002, 2001 and 2000, respectively.
(15) COMMITMENTS AND CONTINGENCIES
CREDIT CARD CENTER
CCC, the Company's largest customer in 2000 and 2001, filed for protection under
Chapter 11 of the United States Bankruptcy Code on June 6, 2001 in the United
States Bankruptcy Court for the Eastern District of Pennsylvania. On or about
April 22, 2002, the bankruptcy case was converted to a Chapter 7 case and the
Court subsequently appointed a Trustee. At the time the original petition was
filed, CCC owed the Company approximately $27 million, excluding any amounts for
interest, attorney's fees and other charges. As of September 30, 2001, the
Company had recouped inventory from the estate of CCC recorded at an approximate
value of $3 million. At the time of the bankruptcy filing, the obligation was
secured by a collateral pledge of accounts receivable, inventories and
transaction income, although the value of the Company's collateral is unclear.
Based upon analysis by the Company of all available information regarding the
CCC bankruptcy proceedings, as of September 30, 2002 the Company has recorded a
reserve in the amount of approximately $24.1 million against substantially all
of the remaining balance of the note and accounts owed to the Company by CCC.
Management of the Company intends to continue to monitor this matter and to take
all actions that it determines to be necessary based upon its findings.
Accordingly, the Company may incur additional expenses that would be charged to
earnings in future periods.
In connection with CCC's bankruptcy filing, the Company filed proofs of claim as
to the obligations of CCC due and owing the Company and the Company's interest
in certain assets of CCC. Fleet National Bank ("Fleet"), which provided banking
and related services to CCC; NCR, another secured creditor and vendor of CCC;
and several leasing companies filed similar claims based on alleged security
interests in the same property of the bankruptcy estate as well.
F-19
Prior to CCC's bankruptcy filing, the Company filed an action in the 134th
Judicial District Court of the State of Texas in Dallas County, Texas, against
Andrew J. Kallok ("Kallok"), the principal shareholder and an executive officer
of CCC for, among other claims, failure to pay amounts due and owing, breach of
contract, and fraud associated with product sales to CCC. On November 7, 2002, a
final judgment was reached on this matter with the court finding for the Company
and ordering Kallok, due to his fraudulent actions, to pay damages, including
prejudgment interest, in the amount of $26.2 million to the Company. Due to the
current financial condition of Kallok there is no guarantee that the Company
will be able to collect any or all of the damages awarded to it by the court.
CLASS ACTION LITIGATION
The Company and several of its officers and directors were named as defendants
(the "Defendants") in a purported class action filed on October 31, 2001 in the
United States District Court for the Southern District of Texas (the "Southern
District"), George Lehockey v. Tidel Technologies, et al., H-01-3741. Subsequent
to the filing of this suit, four identical suits were also filed in the Southern
District. On or about March 18, 2002, the Court consolidated all of the pending
class actions and appointed a lead plaintiff under the Private Securities
Litigation Reform Act of 1995 ("Reform Act"). On April 10, 2002, the lead
plaintiff filed a Consolidated Amended Complaint ("CAC") that alleges that
defendants made material misrepresentations and omissions concerning the
Company's financial condition and prospects between January 14, 2000 and
February 8, 2001 (the putative class period). Subsequent to year end, the
Company entered into an agreement to settle this litigation. See Note 17 for
further discussion.
MONTROSE LITIGATION
On August 9, 2002, one of the Holders, Montrose Investments Ltd., commenced an
adversary proceeding against the Company in the Supreme Court of the State of
New York, County of New York claiming monies due under the Convertible
Debentures (the "Montrose Litigation"). See Note 17 for further discussion of
proceedings and dismissal of this litigation.
OTHER MATTERS
The Company and its subsidiaries are each subject to certain other litigation
and claims arising in the ordinary course of business. In the opinion of the
management of the Company, the amounts ultimately payable, if any, as a result
of such litigation and claims will not have a materially adverse effect on the
Company's financial position.
The Company leases 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, 2002, 2001
and 2000 was approximately $661,924, $587,562 and $500,388, respectively. The
Company has approximate future lease commitments as follows:
Amount
-----------
Year Ending September 30:
2003.............................................. $ 479,973
2004.............................................. 453,241
2005.............................................. 371,700
Thereafter .......................................... 97,968
-----------
$ 1,402,882
===========
Pursuant to an agreement with a supplier, the Company was obligated to purchase
certain raw materials with an approximate cost of $952,000 before December 31,
2002. Subsequent to September 30, 2002, the
F-20
terms of the purchase obligation were amended to extend the purchase date and
revise the purchase prices. The Company has subsequently fulfilled all
commitments under this agreement and has fully utilized all products acquired.
(16) RELATED PARTY TRANSACTIONS
In September 2000, the Company loaned $141,563 to Michael F. Hudson, Executive
Vice President of the Company and Chief Operating Officer of the Company's
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,
the Company 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 the Company's 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. The Company is negotiating with Mr. Hudson regarding satisfaction
of these notes, including, among other things, recoveries through certain salary
and bonuses due to Mr. Hudson.
During the year ended September 30, 2001, the Company loaned $75,625 to Eugene
Moore, Senior Vice President of the Company, in a promissory note maturing
October 1, 2002, and bearing interest at 10% per annum. The note from Mr. Moore
was secured by a pledge of 50,000 shares of the Company's common stock. The note
related to the exercise of certain stock option agreements. Mr. Moore died May
28, 2002. The Company subsequently forgave the remaining unpaid balance of
$75,625 in exchange for the return of the 50,000 shares of the Company's common
stock.
At September 30, 2002, James T. Rash, Chairman and CEO of the Company, had
outstanding promissory notes due to the Company 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. See Note 17 for further discussion of events
occurring subsequent to September 30, 2002.
From 1994 to 1997, the Company had provided certain office space and
administrative services to two privately held entities with which Mr. Rash
previously had an affiliation. The entities are indebted to the Company in the
aggregate amount of $215,866, such amount being the largest aggregate amount of
indebtedness outstanding at any time during the fiscal year ended September 30,
2002. During the fiscal year ended September 30, 2002, the Company wrote off
$182,492 deemed to be uncollectible. The Company is uncertain about the
collectibility of the remaining balance of $33,374 and established a reserve for
losses from these accounts in such amount.
From 1997 to 1999, the Company had provided certain office space and
administrative services to a privately held corporation in which Mr. Rash and
Jerrell G. Clay, Director of the Company, each have a greater than 10% ownership
interest and Mr. Clay is an executive officer. This corporation was indebted to
the Company in the aggregate amount of $22,341 at September 30, 2001, such
amount being the largest aggregate amount of indebtedness outstanding at any
time during the fiscal year. This amount was paid in full during fiscal year
2002.
Leonard L. Carr, a vice president of the Company, is the son-in-law of Mr. Rash,
the Company's CEO, CFO and Chairman of the Board.
F-21
(17) SUBSEQUENT EVENTS
BRIDGE LOANS
Beginning in September 2003, the Company issued the following unsecured,
short-term promissory notes totaling $720,000 to shareholders or their
affiliates as part of a bridge financing transaction (the "Bridge Loans"):
In September 2003, the Company 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, the Company will record additional interest charges totaling
$35,580 over the terms of the note related to these discounts. The note
was paid in full on March 5, 2004.
The Company issued to a shareholder and former director an unsecured,
short-term promissory note dated October 2, 2003 in the principal amount
of $120,000 due April 2, 2004; plus accrued interest at 9% per annum,
payable monthly. In consideration for the loan, the shareholder received
three-year warrants to purchase 40,000 shares of common stock at $0.45 per
share. The proceeds of the note were allocated to the note and the related
warrants based on the relative fair value of the note and the warrants,
with the value of the warrants resulting in a discount against the note.
As a result, the Company will record additional interest charges totaling
$8,186 over the terms of the note related to these discounts. The note was
paid in full on March 8, 2004.
The Company also issued to the shareholder an unsecured, short-term
promissory note dated October 21, 2003 in the principal amount of $90,000
due April 21, 2004; plus accrued interest at 9% per annum, payable
monthly. In consideration for the loan, the shareholder received
three-year warrants to purchase 30,000 shares of common stock at $0.45 per
share. The proceeds of the note were allocated to the note and the related
warrants based on the relative fair value of the note and the warrants,
with the value of the warrants resulting in a discount against the note.
As a result, the Company will record additional interest charges totaling
$7,132 over the terms of the note related to these discounts. The note was
paid in full on November 26, 2003.
The Company issued to an affiliate of a shareholder an unsecured,
short-term promissory note dated November 20, 2003 in the principal amount
of $210,000 due May 20, 2004; plus accrued interest at 8% per annum,
payable at maturity. In consideration for the loan, the note holder
received three-year warrants to purchase 70,000 shares of common stock at
$0.45 per share. The proceeds of the note were allocated to the note and
the related warrants based on the relative fair value of the note and the
warrants, with the value of the warrants resulting in a discount against
the note. As a result, the Company will record additional interest charges
totaling $35,845 over the terms of the note related to these discounts.
The note was paid in full on March 5, 2004.
F-22
THE FINANCING
On November 25, 2003, the Company completed a $6,850,000 financing transaction
(the "Financing") with an independent investment group (the "Purchaser"). 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 the prime rate plus 2% and were convertible into the
Company's common stock at a conversion price of $0.40 per share. In addition,
the Purchaser received warrants to purchase 4,250,000 shares of the Company's
Common Stock at an exercise price of $0.40 per share. The proceeds of the
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 notes resulted in a
beneficial conversion feature, further discounting the carrying value of the
notes. As a result, the Company will record additional interest charges totaling
$6,850,000 over the terms of the notes related to these discounts. The Purchaser
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 Holders' $18,000,000 in
Convertible Debentures discussed in Note 9 together with all accrued interest
($3,673,000 at September 30, 2002), penalties, and fees associated therewith.
The Company recorded a gain from extinguishment of debt related to the
Convertible Debentures of $18,823,000 (including accrued interest through the
date of extinguishment) in fiscal year 2004 related to the refinancing. In March
2004, the $400,000 note was repaid in full from the proceeds of the CashWorks
transaction discussed below.
In connection with the closing of the Financing, all of the warrants and
Convertible Debentures held by the Holders were terminated, all outstanding
litigation including, without limitation, the Montrose Litigation (see Note 15),
was dismissed, and the Revolving Credit Facility discussed in Note 9, which had
been assigned to another bank on June 30, 2003, was repaid through the release
of the restricted cash used as collateral for the Revolving Credit Facility.
In August 2004, the Purchaser notified the Company that an Event of Default had
occurred and continued beyond any applicable grace period as a result of the
Company's non-payment of interest and principal on the $6,450,000 convertible
note as required under the terms of the Financing. In exchange for the
Purchaser's waiver of the Event of Default until September 17, 2004, the Company
agreed, among other things, to lower the conversion price on the $6,450,000
convertible note and the exercise price on the warrants from $0.40 per share to
$0.30 per share.
THE ADDITIONAL FINANCING
On November 26, 2004, the Company completed a $3,350,000 financing transaction
(the "Additional Financing") with the same investment group involved in the
November 2003 financing (the "Purchaser"). The Additional Financing is comprised
of (i) a three-year convertible note issued by the Company to the Purchaser on
that date in the amount of $1,500,000, which bears interest at a rate of 14% and
is convertible into the Company's Common Stock at an exercise price of $3.00 per
share (the "$1,500,000 Note") (ii) a one-year convertible note issued to the
Purchaser on that date by the Company in the amount of $600,000 which bears
interest at a rate of 10% and is convertible into the Company's Common Stock at
an exercise price of $0.30 per share (the "$600,000 Note"), (iii) a one-year
convertible note issued to the Purchaser on that date by the Company's
subsidiary, Tidel Engineering, L.P. in the amount of $1,250,000, which is a
revolving working capital facility for the purpose of financing purchase orders
(the "Purchase Order Note"), which bears interest at a rate of 14% and is
convertible into the Company's Common Stock at a price of $3.00 per share, and
(iv) the issuance to the Purchaser by the Company of 1,251,000 shares of Common
Stock (the "2003 Fee Shares") in full satisfaction of certain fees incurred in
connection with the convertible term notes issued in the Financing. In addition,
the Purchaser received warrants to purchase 500,000 shares of the Company's
Common Stock at an exercise price of $0.30 per share. The 2003 Fee Shares were
issued to the Purchaser based on a price of $0.30 per share. As a result of the
sale of the 2003 Fee Shares, the Company will record in fiscal 2005 an
additional charge of $275,000 related to the difference in the $.30 sale price
and the market value of the stock
F-23
on November 26, 2004. 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 result in a beneficial
conversion feature, further discounting the carrying value of the notes. As a
result, the Company will record additional interest charges totaling $840,000
over the terms of the notes related to these discounts. The Purchaser 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 the Company's assets and are
generated by the Company's subsidiaries. Proceeds from the Additional Financing
in the amount of $3,232,750 were primarily used for general working capital
payments made directly to vendors, as well as for past due interest payments due
on the Purchaser's $6,450,000 convertible note and due pursuant to the Financing
and escrow for future principal and interest payments due pursuant to the
Additional Financing.
In connection with the Financing, the Purchaser had required the Company
to covenant that it would become current in its filings with the Securities
and Exchange Commission according to a predetermined schedule. Effective
November 26, 2004, in the Additional Financing documents, the Purchaser and
the Company amended the Financing documents to require that the Company provide
evidence of filing to the Purchaser of its 2002 Form 10-K filing with the
Securities and Exchange Commission on or before January 31, 2005 and its
remaining filings with the Securities and Exchange Commission on or before
July 31, 2005.
Fourteen (14) days following such time as the Company becomes current in its
filings with the Securities and Exchange Commission, the Company is to deliver
the Purchaser evidence of the listing of the Company's Common Stock on the
Nasdaq Over The Counter Bulletin Board (the "Listing Requirement").
Pursuant to the terms of the Financing and the Additional Financing, an Event of
Default occurs if, among other things, the Company does not complete its filings
with the Securities and Exchange Commission on the timetable set forth in the
Additional Financing documents, does not comply with the Listing Requirement or
any other material covenant or other term or condition of the purchase agreement
between the Purchaser and the Company or the notes issued by the Company to the
Purchaser. If there is an Event of Default, including any of the items specified
above or in the transaction documents, the Purchaser may declare all unpaid sums
of principal, interest and other fees due and payable within five (5) days after
written notice from the Purchaser to the Company. If the Company cures the Event
of Default within that five (5) day period, the Event of Default will no longer
be considered to be occurring.
If the Company does not cure such Event of Default, the Purchaser shall have,
among other things, the right to have two (2) of its designees appointed to the
Board of the Company, and the interest rate of the notes shall be increased to
the greater of 18% or the rate in effect at that time.
On November 26, 2004, in connection with the Additional Financing, the Company
and the Purchaser entered into an agreement (the "Asset Sales Agreement")
whereby the Company agreed to pay a fee in the amount of at least $2,000,000
(the "Reorganization Fee") to the Purchaser upon the occurrence of certain
events as specified below and therein, which Reorganization Fee is secured by
all of the Company's assets, and is guaranteed by the Company's subsidiaries.
The Asset Sales Agreement provides that (i) once the obligations of the Company
to the Purchaser have been paid in full (other than the Reorganization Fee) the
Company shall be able to seek additional financing in the
F-24
form of a non convertible bank loan in an aggregate principal amount not to
exceed $4,000,000, subject to the Purchaser's right of first refusal; (ii) the
net proceeds of an asset sale to the party named therein shall be applied to the
Company's obligations to the Purchaser under the Financing and Additional
Financing (collectively, the "Obligations"), but not to the Reorganization Fee;
and (iii) the proceeds of any subsequent sales of equity interests or assets of
the Company or of the Company's 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 the Purchaser pursuant
to an increasing percentage of at least 55.5% set forth therein, which amount
shall be applied to the Reorganization Fee. See "Agreement Regarding [Name
Redacted] Transaction And Other Asset Sales", Section 4(b), filed herewith as
Exhibit 10.22, for further information on this calculation. The Reorganization
Fee shall be $2,000,000 at a minimum, but could equal a higher amount based upon
a percentage of the proceeds of any Company Sale, as such term is defined in the
Asset Sales Agreement. In the event that the Purchaser has not received the full
amount of the Reorganization Fee on or before the fifth anniversary of the date
of the Asset Sales Agreement, then the Company shall pay any remaining balance
due on the Reorganization Fee to the Purchaser. The Company will record a
$2,000,000 charge over the five-year term of the Asset Sales Agreement for the
Reorganization Fee.
UNAUDITED SELECTED PRO FORMA FINANCIAL INFORMATION
As noted above, as of September 30, 2002 the Company had $2,000,000 of long-term
debt and $18,000,000 of convertible debentures outstanding, as well as accrued
interest on these obligations. The Financing and the subsequent retirement of
the existing long-term debt and convertible debentures, result in significant
changes in the Company's long-term debt positions subsequent to year end.
Accordingly, the following unaudited pro forma information reflects certain
balance sheet information as if the refinancing/retirement of the long-term debt
and convertible debentures resulting from the Financing had occurred on
September 30, 2002.
The unaudited pro forma information presented below excludes the following
items: 1) the Bridge Loans, 2) the Additional Financing, including the
convertible notes totaling $3,350,000, the issuance of the 2003 Fee Shares in
satisfaction of fees resulting from the Financing, and the $2,000,000
Reorganization Fee, all of which are discussed under "The Additional Financing"
above, and 3) the impact of any other transactions that may have occurred
subsequent to September 30, 2002, including any fees associated with the
Financing or the Additional Financing. These items have been excluded as the
proceeds of the borrowings were used for working capital purposes subsequent to
September 30, 2002 and did not represent the refinancing of any long-term debt
existing as of September 30, 2002 or the items relate to operations occurring
subsequent to September 30, 2002.
September 30, 2002
---------------------------
As Reported Pro Forma
----------- -----------
Revolving credit facility .................. $ 2,000,000 $ --
Convertible debentures ..................... 18,000,000 --
Accrued interest payable ................... 3,673,000 --
Convertible notes issued in the Financing .. -- 6,850,000
Debt discount - convertible notes issued
in the Financing ...................... -- (6,850,000)
F-25
Additional paid-in capital:
Historical .................................................... 19,275,433 19,275,433
Debt discount attributed to warrants and beneficial
conversion features associated with the Financing ........... -- 6,850,000
Accumulated deficit ........................................... (27,671,268) (11,998,268)
As noted under "The Financing" above, in connection with the closing of the
Financing the Revolving Credit Facility was repaid through the release of the
restricted cash used as collateral for the Revolving Credit Facility. In
addition, proceeds from the Financing in the amount of $6,000,000 were used to
fully retire the convertible debentures.
CASHWORKS
In December 2001, the Company agreed to invest $500,000 in CashWorks, Inc.
("CashWorks") in the form of convertible debt of CashWorks. In December 2002,
the Company 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, the Company
consented to the sale of its interest in CashWorks to GE Capital Corp. ("GECC")
for $2,451,000. All of the shares and warrants related to the CashWorks
investment were pledged to secure borrowings in connection with the Financing
(defined above). Accordingly, upon receipt of the consideration for the
CashWorks Series B preferred shares and warrants, the Company was obligated to
repay in full the $400,000 and $100,000 convertible term notes plus accrued but
unpaid interest thereon, and all outstanding interest due on the $6,450,000
convertible term note, all of which were paid as part of the Financing.
THE DEVELOPMENT AGREEMENT
In August 2001, the Company 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" Timed Access Cash Controllers ("TACC"), 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, the Company 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. As of September
2002, the product was in Phase III testing and the Company had received
contributions from the Retailer totaling $361,500.
F-26
CLASS ACTION LITIGATION
As discussed in Note 15, the Company and several of its officers and directors
were named as defendants in purported class action lawsuits. In June 2004, the
Company reached an agreement in principle to settle these class action lawsuits.
The settlement, which was subject to a definitive agreement and court approval,
provided for a cash payment of $3 million to be funded by the Company's
liability insurance carrier and the issuance of 2 million shares of common stock
by the Company. In October 2004, the court approved the settlement and the
shares were issued in November 2004. In addition, in August 2004, the Company
reached an agreement with the liability insurance carrier to issue 500,000
warrants to the carrier in exchange for the carrier's acceptance of the terms of
the class action lawsuit. The Company provided a reserve of $1,564,490 in fiscal
2002 to cover any losses from this litigation for the full amount of this
settlement.
MONTROSE LITIGATION
As discussed in Note 15, Montrose Investments Ltd., on of the holders of the
Company's convertible debentures commenced a proceeding against the Company
claiming monies due under the convertible debentures. This action was dismissed
by the court on March 3, 2003. Montrose filed a notice of Appeal with the
Supreme Court of the State of New York, Appellate Division, First Department on
May 20, 2003. This litigation was dismissed in conjunction with the Financing
discussed in Note 17. A stipulation of discontinuance dismissing the appeal was
entered on or about December 2, 2003.
CREDIT CARD CENTER
As discussed in Note 3, as of September 30, 2002, the Company's net receivable
was $500,000. In early 2003, the Company recovered $250,000 of this amount from
the bankruptcy estate and is continuing its efforts to recover any additional
amounts.
F-27
RELATED PARTY TRANSACTIONS
As discussed in Note 16, at September 30, 2002 James T. Rash, Chairman and CEO
of the Company, had outstanding promissory notes due to the Company 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. The remaining
receivable amounts will be collected from certain bonus payments due to Mr.
Rash. The Company 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
up to 250,000 shares of the Company's Common Stock, was paid in full in March
2004. Mr. Rash died December 19, 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 the outstanding
promissory notes due from Mr. Rash. This amount, which has not yet been received
by the Company, will be applied to the repayment of the notes. The remaining
receivable amount will be collected from anticipated bonuses due to Mr. Rash.
F-28
SCHEDULE I
TIDEL TECHNOLOGIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
SEPTEMBER 30,
----------------------------
2002 2001
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 95,357 $ 2,051,578
Restricted cash 2,213,233 --
Accounts, notes and other receivables, net of allowance
of $5,463,416 and $4,000,000, respectively 2,747,509 2,314,232
Income tax receivable -- 5,596,383
Prepaid expenses and other assets 45,054 70,636
------------ ------------
Total current assets 5,101,153 10,032,829
Property, plant and equipment, at cost 150,072 136,901
Accumulated depreciation (124,098) (113,308)
------------ ------------
Net property, plant and equipment 25,974 23,593
Investment in subsidiaries, at equity 3,366,353 9,254,396
Receivables from subsidiaries 5,320,952 3,200,403
Notes receivable 1,143,554 2,277,675
Other assets 173,647 237,906
------------ ------------
Total assets $ 15,131,633 $ 25,026,802
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current maturities -
Long-term debt $ -- $ 128,000
Convertible debentures 18,000,000 18,000,000
Accounts payable 201,354 561,806
Accrued interest payable 3,673,000 936,833
Reserve for settlement of class action litigation 1,564,490 --
Other accrued liabilities 272,780 110,307
------------ ------------
Total current liabilities 23,711,624 19,736,946
Long-term debt, net of current maturities -- 96,000
------------ ------------
Total liabilities 23,711,624 19,832,946
------------ ------------
Commitments and contingencies
Shareholders' Equity (Deficit):
Common stock, $.01 par value, authorized 100,000,000
shares; issued and outstanding 17,426,210 shares 174,262 174,262
Additional paid-in capital 19,275,433 19,245,958
Accumulated deficit (27,700,743) (13,623,065)
Stock subscriptions receivable (217,188) (217,188)
Accumulated other comprehensive loss (111,755) (386,111)
------------ ------------
Total shareholders' equity (deficit) (8,579,991) 5,193,856
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 15,131,633 $ 25,026,802
============ ============
See accompanying notes to condensed financial information of registrant.
S-1
TIDEL TECHNOLOGIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED SEPTEMBER 30,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Revenues $ -- $ -- $ --
Costs and expenses:
Selling, general and administrative 2,180,377 2,165,269 1,202,709
Provision for doubtful accounts 2,145,908 4,000,000 --
Provision for settlement of class action litigation 1,564,490 -- --
Depreciation and amortization 10,790 13,089 14,808
------------ ------------ ------------
Operating loss (5,901,565) (6,178,358) (1,217,517)
Interest income (expense), net (2,217,509) (4,039,196) 56,112
------------ ------------ ------------
Loss before equity in income (loss) of
subsidiaries and taxes (8,119,074) (10,217,554) (1,161,405)
Equity in income (loss) of subsidiaries (5,964,260) (15,292,605) 10,545,570
Write-down of investment in 3CI (288,326) -- (1,000,000)
------------ ------------ ------------
Income (loss) before taxes (14,371,660) (25,510,159) 8,384,165
Income tax (expense) benefit 293,982 (431,627) 785,228
------------ ------------ ------------
Net income (loss) (14,077,678) (25,941,786) 9,169,393
Other comprehensive income, net of tax:
Unrealized (loss) gain on investment in 3CI (13,970) 50,639 (130,962)
Less: reclassification adjustment for realized loss
included in net income (loss) 288,326 -- 1,000,000
------------ ------------ ------------
Other comprehensive income 274,356 50,639 869,038
------------ ------------ ------------
Comprehensive income (loss) $(13,803,322) $(25,891,147) $ 10,038,431
============ ============ ============
See accompanying notes to condensed financial information of registrant.
S-2
TIDEL TECHNOLOGIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $(14,077,678) $(25,941,786) $ 9,169,393
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 10,790 13,089 14,808
Amortization of debt discount and financing costs -- 2,973,464 --
Provision for doubtful accounts 2,145,908 4,000,000 --
Provision for settlement of class action litigation 1,564,490 -- --
Deferred income taxes -- 431,627 (431,627)
Tax benefits from exercise of warrants and disqualifying
dispositions of ISO's 29,475 -- 1,102,762
Write-down of investment in 3CI 288,326 -- 1,000,000
Equity in (income) loss of subsidiaries 5,964,260 15,292,605 (10,545,570)
Changes in assets and liabilities:
Accounts, notes and other receivables (1,445,064) (5,214,413) (116,084)
Income tax receivable 5,596,383 (3,982,854) (752,595)
Prepaid expenses and other assets 75,871 (136,272) (1,337,466)
Receivables from subsidiaries (2,120,549) 1,150,551 (5,574,375)
Accounts payable and accrued liabilities 2,538,188 634,091 689,548
------------ ------------ ------------
Net cash provided by (used in) operating activities 570,400 (10,779,898) (6,781,206)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment (13,171) (8,221) (3,286)
Investment in subsidiaries (76,217) -- --
------------ ------------ ------------
Net cash used in investing activities (89,388) (8,221) (3,286)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of convertible debentures -- -- 18,000,000
Repayments of notes payable (224,000) (128,000) (128,000)
Increase in restricted cash (2,213,233) -- --
Proceeds from exercise of warrants -- -- 1,349,164
Payments of stock subscriptions -- -- 382,063
------------ ------------ ------------
Net cash provided by (used in) financing activities (2,437,233) (128,000) 19,603,227
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,956,221) (10,916,119) 12,818,735
Cash and cash equivalents at beginning of year 2,051,578 12,967,697 148,962
------------ ------------ ------------
Cash and cash equivalents at end of year $ 95,357 $ 2,051,578 $ 12,967,697
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 12,821 $ 1,140,307 $ 40,769
============ ============ ============
Cash paid for taxes, net of refunds receivable $ (5,919,840) $ -- $ 3,156,571
============ ============ ============
Supplemental disclosure of non-cash financing activities:
Notes received for exercise of stock options $ -- $ 75,625 $ 141,563
============ ============ ============
Discount on long-term debt for detachable warrants $ -- $ -- $ 1,155,157
============ ============ ============
Warrants issued for deferred financing costs $ -- $ -- $ 416,525
============ ============ ============
See accompanying notes to condensed financial information of registrant.
S-3
TIDEL TECHNOLOGIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(A) LONG-TERM DEBT AND CONVERTIBLE DEBENTURES
Long-term debt and convertible debentures consisted of the following at
September 30, 2002 and 2001:
2002 2001
------------ ------------
Term note payable to bank, payable in quarterly
installments of $32,000 plus accrued interest
at 8.4% through May 31, 2003 (Paid April 30, 2002) .............. $ - $ 224,000
Convertible debentures, due September 2004, less unamortized discount
of $ 0 and $ 0, at September 30, 2002 and 2001, respectively,
interest payable quarterly at 6% ................................. 18,000,000 18,000,000
------------ ------------
Total ............................................................... 18,000,000 18,224,000
Less: current maturities ......................................... (18,000,000) (18,128,000)
------------ ------------
Total, less current maturities ...................................... $ - $ 96,000
============ ============
As of September 30, 2002, the Company's wholly-owned subsidiary was a party to a
credit agreement with a bank (the "First Lender") (as amended, the "Revolving
Credit Facility"), which was amended on April 30, 2002, August 30, 2002 and
December 30, 2002 to provide for, among other things, an extension of the
maturity date until June 30, 2003; the reduction of the revolving commitment
from the initial amount of $7,000,000 to $2,000,000; and a modification of the
collateral requirements to include a pledge of a money market account in an
amount equal to 110% of the outstanding principal balance, which pledge was
$2,200,000 and is recorded as restricted cash in the September 30, 2002
consolidated balance sheet. At September 30, 2002, $2,000,000 was outstanding
under the Revolving Credit Facility compared to $5,200,000 at September 30,
2001. At September 30, 2002, the Company was in compliance with the terms of the
credit agreement or had received waivers for covenant violations.
CONVERTIBLE DEBENTURES
In September 2000, the Company issued to two investors (individually, the
"Holder", or collectively, the "Holders") an aggregate of $18,000,000 of the
Company's 6% Convertible Debentures, due September 8, 2004 (the "Convertible
Debentures"), convertible into the Company's Common Stock at a price of $9.50
per share. In addition, the Company issued warrants to the Holders to purchase
378,947 shares of the Company's Common Stock exercisable at any time through
September 8, 2005 at an exercise price of $9.80 per share.
In June 2001, the Holders exercised their option to put the Convertible
Debentures back to the Company. Accordingly, the principal amount of
$18,000,000, plus accrued and unpaid interest, was due on August 27, 2001. The
Company did not make such payment on that date, and at September 30, 2002, did
not have the funds available to make such payments. At September 30, 2002, the
Company was party to Subordination Agreements (the "Subordination Agreements")
with each Holder and the First Lender which provided, among other things, for
prohibitions: (i) on the Company making this payment to the Holders, and (ii)
S-4
TIDEL TECHNOLOGIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
against the Holders taking legal action against the Company to collect this
amount, other than to increase the principal balance of the Convertible
Debentures for unpaid accounts or to convert the Convertible Debentures into the
Company's Common Stock. Subsequent to year end, the warrants and Convertible
Debentures were retired in connection with the Financing as discussed in Note
17.
(B) GUARANTEES
The parent company (the "Company") and its subsidiaries (the "Subsidiaries") had
guaranteed the revolving credit note issued by the Company's wholly owned
operating company, Tidel Engineering, L.P., to a bank in the maximum principal
amount of $10,000,000 for fiscal year 2001 and $2,000,000 (reduced from
$7,000,000) for fiscal year 2002 (the "Revolving Credit Note"). The Revolving
Credit Note's maturity date was extended to June 30, 2003. At September 30,
2002, $2,000,000 was outstanding pursuant to the Revolving Credit Note. The
Revolving Credit Note was paid in connection with the Financing on November 25,
2003. See Note 9 to Notes to Consolidated Financial Statements.
(C) DIVIDENDS FROM SUBSIDIARIES
No dividends have been paid to the Company by its subsidiaries as of September
30, 2002. Up to and including that date, the Company's wholly owned operating
company, Tidel Engineering, L.P., had been restricted from paying dividends to
the parent company and its subsidiaries pursuant to the Revolving Credit Note.
(D) INCOME TAXES
The Company and the Subsidiaries have entered into a tax sharing agreement
providing that each of the Subsidiaries will be responsible for its tax
liability for the years that the Subsidiaries were included in the Company's
consolidated income tax returns. Income taxes have been allocated to each of the
Subsidiaries based on its pretax income and calculated on a separate company
basis. Further, the agreement provides for reimbursements to the Company for
payment of the consolidated tax liability based on the allocations, and
compensates each of the Subsidiaries for use of its losses or tax credits. As a
result of the agreement, the parent company recognized tax benefits of $323,457
and $785,228 for the years ended September 30, 2002 and 2000, respectively and
tax expense of $431,627 for the year ended September 30, 2001.
(E) AFFILIATED TRANSACTIONS
In September 2000, the Company loaned $141,563 to Michael F. Hudson, Executive
Vice President of the Company and Chief Operating Officer of the Company's
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,
the Company 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 the Company's common
stock. The note to Mr. Hudson in the
S-5
TIDEL TECHNOLOGIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
amount of $141,563 relates to the exercise of certain stock option agreements.
These notes were not repaid by Mr. Hudson upon maturity. The Company is
negotiating with Mr. Hudson regarding satisfaction of these notes, including,
among other things, recoveries through certain salary and bonuses due to Mr.
Hudson.
During the year ended September 30, 2001, the Company loaned $75,625 to Eugene
Moore, Senior Vice President of the Company, in a promissory note maturing
October 1, 2002, and bearing interest at 10% per annum. The note from Mr. Moore
was secured by a pledge of 50,000 shares of the Company's common stock. The note
related to the exercise of certain stock option agreements. Mr. Moore died May
28, 2002. The Company subsequently forgave the remaining unpaid balance of
$75,625 in exchange for the return of the 50,000 shares of the Company's common
stock.
At September 30, 2002, James T. Rash, Chairman and CEO of the Company, had
outstanding promissory notes due to the Company 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. See Note 17 for further discussion of events
occurring subsequent to September 30, 2002.
From 1994 to 1997, the Company had provided certain office space and
administrative services to two privately held entities with which Mr. Rash
previously had an affiliation. The entities are indebted to the Company in the
aggregate amount of $215,866, such amount being the largest aggregate amount of
indebtedness outstanding at any time during the fiscal year ended September 30,
2002. During the fiscal year ended September 30, 2002, the Company wrote off
$182,492 deemed to be uncollectible. The Company is uncertain about the
collectbility of the remaining balance of $33,374 and established a reserve for
losses from these accounts in such amount.
From 1997 to 1999, the Company had provided certain office space and
administrative services to a privately held corporation in which Mr. Rash and
Jerrell G. Clay, Director of the Company, each have a greater than 10% ownership
interest and Mr. Clay is an executive officer. This corporation was indebted to
the Company in the aggregate amount of $22,341 at September 30, 2001, such
amount being the largest aggregate amount of indebtedness outstanding at any
time during the fiscal year. This amount was paid in full during fiscal year
2002.
The subsidiaries paid annual management fees to the parent company in the
aggregate amount of $180,000, $180,000, and $250,000, during the fiscal years
ended September 30, 2002, 2001 and 2000, respectively. In addition, the parent
company bills the subsidiaries for direct expenses paid on their behalf and from
time to time makes interest-bearing advances for working capital purposes.
S-6
TIDEL TECHNOLOGIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(F) SUBSEQUENT EVENTS
BRIDGE LOANS
Beginning in September 2003, the Company issued the following unsecured,
short-term promissory notes totaling $720,000 to shareholders or their
affiliates as part of a bridge financing transaction (the "Bridge Loans"):
In September 2003, the Company 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, the Company will record additional interest charges totaling
$20,572 over the terms of the note related to these discounts. The note
was paid in full on March 5, 2004.
The Company issued to a shareholder and former director an unsecured,
short-term promissory note dated October 2, 2003 in the principal amount
of $120,000 due April 2, 2004; plus accrued interest at 9% per annum,
payable monthly. In consideration for the loan, the shareholder received
three-year warrants to purchase 40,000 shares of common stock at $0.45 per
share. The proceeds of the note were allocated to the note and the related
warrants based on the relative fair value of the note and the warrants,
with the value of the warrants resulting in a discount against the note.
As a result, the Company will record additional interest charges totaling
$7,611 over the terms of the note related to these discounts. The note was
paid in full on March 8, 2004.
The Company also issued to the shareholder an unsecured, short-term
promissory note dated October 21, 2003 in the principal amount of $90,000
due December 4, 2003; plus accrued interest at 9% per annum, payable
monthly. In consideration for the loan, the shareholder received
three-year warrants to purchase 30,000 shares of common stock at $0.45 per
share. The proceeds of the note were allocated to the note and the related
warrants based on the relative fair value of the note and the warrants,
with the value of the warrants resulting in a discount against the note.
As a result, the Company will record additional interest charges totaling
$6,608 over the terms of the note related to these discounts. The note was
paid in full on November 26, 2003.
The Company issued to an affiliate of a shareholder an unsecured,
short-term promissory note dated November 20, 2003 in the principal amount
of $210,000 due May 20, 2004; plus accrued interest at 8% per annum,
payable at maturity. In consideration for the loan, the note holder
received three-year warrants to purchase 70,000 shares of common stock at
$0.45 per share. The proceeds of the
S-7
TIDEL TECHNOLOGIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
note were allocated to the note and the related warrants based on the
relative fair value of the note and the warrants, with the value of the
warrants resulting in a discount against the note. As a result, the
Company will record additional interest charges totaling $30,610 over the
terms of the note related to these discounts. The note was paid in full on
March 5, 2004.
THE FINANCING
On November 25, 2003, the Company completed a $6,850,000 financing transaction
(the "Financing") with an independent investment group (the "Purchaser"). 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 the prime rate plus 2% and were convertible into the
Company's common stock at a conversion price of $0.40 per share. In addition,
the Purchaser received warrants to purchase 4,250,000 shares of the Company's
Common Stock at an exercise price of $0.40 per share. The proceeds of the
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 notes resulted in a
beneficial conversion feature, further discounting the carrying value of the
notes. As a result, the Company will record additional interest charges totaling
$6,850,000 over the terms of the notes related to these discounts. The Purchaser
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 Holders' $18,000,000 in
Convertible Debentures discussed in Note 9 together with all accrued interest
($3,673,000 at September 30, 2002), penalties, and fees associated therewith.
The Company recorded a gain from extinguishment of debt related to the
Convertible Debentures of $18,823,000 (including accrued interest through the
date of extinguishment) in fiscal year 2004 related to the refinancing. In March
2004, the $400,000 note was repaid in full from the proceeds of the CashWorks
transaction discussed below.
In connection with the closing of the Financing, all of the warrants and
Convertible Debentures held by the Holders were terminated, all outstanding
litigation including, without limitation, the Montrose Litigation (see Note 15),
was dismissed, and the Revolving Credit Facility discussed in Note 9, which had
been assigned to another bank on June 30, 2003, was repaid through the release
of the restricted cash used as collateral for the Revolving Credit Facility.
In August 2004, the Purchaser notified the Company that an Event of Default had
occurred and continued beyond any applicable grace period as a result of the
Company's non-payment of interest and principal on the $6,450,000 convertible
note as required under the terms of the Financing. In exchange for the
Purchaser's waiver of the Event of Default until September 17, 2004, the Company
agreed, among other things, to lower the conversion price on the $6,450,000
convertible note and the exercise price on the warrants from $0.40 per share to
$0.30 per share.
THE ADDITIONAL FINANCING
On November 26, 2004, the Company completed a $3,350,000 financing transaction
(the "Additional Financing") with the same investment group involved in the
November 2003 financing (the "Purchaser").
S-8
TIDEL TECHNOLOGIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
The Additional Financing is comprised of (i) a three-year convertible note
issued by the Company to the Purchaser on that date in the amount of $1,500,000,
which bears interest at a rate of 14% and is convertible into the Company's
Common Stock at an exercise price of $3.00 per share (the "$1,500,000 Note")
(ii) a one-year convertible note issued to the Purchaser on that date by the
Company in the amount of $600,000 which bears interest at a rate of 10% and is
convertible into the Company's Common Stock at an exercise price of $0.30 per
share (the "$600,000 Note"), (iii) a one-year convertible note issued to the
Purchaser by the Company's subsidiary, Tidel Engineering, L.P. in the amount of
$1,250,000, which is a revolving working capital facility for the purpose of
financing purchase orders (the "Purchase Order Note"), which bears interest at a
rate of 14% and is convertible into the Company's Common Stock at a price of
$3.00 per share, and (iv) the issuance to the Purchaser by the Company of
1,251,000 shares of Common Stock (the "2003 Fee Shares") in full satisfaction of
certain fees incurred in connection with the convertible term notes issued in
the Financing. In addition, the Purchaser received warrants to purchase 500,000
shares of the Company's Common Stock at an exercise price of $0.30 per share.
The 2003 Fee Shares were issued to the Purchaser based on a price of $0.30 per
share. As a result of the sale of the 2003 Fee Shares, the Company will record
in fiscal 2005 an additional charge of $275,000 related to the difference in the
$.30 sale price and the market value of the stock on November 26, 2004. 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 result in a beneficial conversion feature, further
discounting the carrying value of the notes. As a result, the Company will
record additional interest charges totaling $840,000 over the terms of the notes
related to these discounts. The Purchaser 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 the Company's assets and are generated by the Company's
subsidiaries. Proceeds from the Additional Financing in the amount of $3,232,750
were primarily used for general working capital payments made directly to
vendors, as well as for past due interest payments due on the Purchaser's
$6,450,000 convertible note and due pursuant to the Financing and escrow for
future principal and interest payments due pursuant to the Additional Financing.
In connection with the Financing, the Purchaser had required the Company
to covenant that it would become current in its filings with the Securities
and Exchange Commission according to a predetermined schedule. Effective
November 26, 2004, in the Additional Financing documents, the Purchaser and
the Company amended the Financing documents to require, among other things,
that the Company provide evidence of filing to the Purchaser of its 2002
Form 10-K filing with the Securities and Exchange Commission on or before
January 31, 2005 and its remaining filings with the Securities and Exchange
Commission on or before July 31, 2005.
Fourteen (14) days following such time as the Company becomes current in its
filings with the Securities and Exchange Commission, the Company is to deliver
the Purchaser evidence of the listing of the Company's Common Stock on the
Nasdaq Over The Counter Bulletin Board (the "Listing Requirement").
S-9
TIDEL TECHNOLOGIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Pursuant to the terms of the Financing and the Additional Financing, an Event of
Default occurs if, among other things, the Company does not complete its filings
with the Securities and Exchange Commission on the timetable set forth in the
Additional Financing documents, does not comply with the Listing Requirement or
any other material covenant or other term or condition of the purchase agreement
between the Purchaser and the Company or the notes issued by the Company to the
Purchaser. If there is an Event of Default, including any of the items specified
above or in the transaction documents, the Purchaser may declare all unpaid sums
of principal, interest and other fees due and payable within five (5) days after
written notice from the Purchaser to the Company. If the Company cures the Event
of Default within that five (5) day period, the Event of Default will no longer
be considered to be occurring.
If the Company does not cure such Event of Default, the Purchaser shall have,
among other things, the right to have two (2) of its designees appointed to the
Board of the Company, and the interest rate of the notes shall be increased to
the greater of 18% or the rate in effect at that time.
On November 26, 2004, in connection with the Additional Financing the Company
and the Purchaser entered into an agreement (the "Asset Sales Agreement")
whereby the Company agreed to pay a fee in the amount of at least $2,000,000
(the "Reorganization Fee") to the Purchaser upon the occurrence of certain
events as specified below and therein, which Reorganization Fee is secured by
all of the Company's assets, and is guaranteed by the Company's subsidiaries.
The Asset Sales Agreement provides that (i) once the obligations of the Company
to the Purchaser have been paid in full (other than the Reorganization Fee) the
Company shall be able to seek additional financing in the form of a non
convertible bank loan in an aggregate principal amount not to exceed $4,000,000,
subject to the Purchaser's right of first refusal; (ii) the net proceeds of an
asset sale to the party named therein shall be applied to the Company's
obligations to the Purchaser under the Financing and Additional Financing
(collectively, the "Obligations"), but not to the Reorganization Fee; and (iii)
the proceeds of any subsequent sales of equity interests or assets of the
Company or of the Company's 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 the Purchaser pursuant
to an increasing percentage of at least 55.5% set forth therein, which amount
shall be applied to the Reorganization Fee. See "Agreement Regarding [Name
Redacted] Transaction And Other Asset Sales", Section 4(b), filed herewith as
Exhibit 10.22, for further information on this calculation. The Reorganization
Fee shall be $2,000,000 at a minimum, but could equal a higher amount based upon
a percentage of the proceeds of any Company Sale, as such term is defined in the
Asset Sales Agreement. In the event that the Purchaser has not received the full
amount of the Reorganization Fee on or before the fifth anniversary of the date
of the Asset Sales Agreement, then the Company shall pay any remaining balance
due on the Reorganization Fee to the Purchaser. The Company will record a
$2,000,000 charge over the five-year term of the Asset Sales Agreement for the
Reorganization Fee.
S-10
TIDEL TECHNOLOGIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SELECTED PRO FORMA FINANCIAL INFORMATION
As noted above, as of September 30, 2002 the Company had $2,000,000 of long-term
debt and $18,000,000 of convertible debentures outstanding, as well as accrued
interest on these obligations. The Financing and the subsequent retirement of
the existing long-term debt and convertible debentures, result in significant
changes in the Company's long-term debt positions subsequent to year end.
Accordingly, the following unaudited pro forma information reflects certain
balance sheet information as if the refinancing/retirement of the long-term debt
and convertible debentures resulting from the Financing had occurred on
September 30, 2002.
The unaudited pro forma information presented below excludes the following
items: 1) the Bridge Loans, 2) the Additional Financing, including the
convertible notes totaling $3,350,000, the issuance of the 2003 Fee Shares in
satisfaction of fees resulting from the Financing, and the $2,000,000
Reorganization Fee, all of which are discussed under "The Additional Financing"
above, and 3) the impact of any other transactions that may have occurred
subsequent to September 30, 2002, including any fees associated with the
Financing or the Additional Financing. These items have been excluded as the
proceeds of the borrowings were used for working capital purposes subsequent to
September 30, 2002 and did not represent the refinancing of any long-term debt
existing as of September 30, 2002 or the items relate to operations occurring
subsequent to September 30, 2002.
September 30, 2002
----------------------------
As Reported Pro Forma
------------- -----------
Revolving credit facility .............. $ 2,000,000 $ --
Convertible debentures ................. 18,000,000 --
Accrued interest payable ............... 3,673,000 --
Convertible notes issued in the
Financing ......................... -- 6,850,000
Debt discount - convertible notes
issued in the Financing ........... -- (6,850,000)
Additional paid-in capital:
Historical ........................ 19,275,433 19,275,433
Debt discount attributed to
warrants and beneficial
conversion features
associated with the Financing.. -- 6,850,000
Accumulated deficit ............... (27,671,268) (11,998,268)
As noted under "The Financing" above, in connection with the closing of the
Financing the Revolving Credit Facility was repaid through the release of the
restricted cash used as collateral for the Revolving
S-11
TIDEL TECHNOLOGIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Credit Facility. In addition, proceeds from the Financing in the amount of
$6,000,000 were used to fully retire the convertible debentures.
CASHWORKS
In December 2001, the Company agreed to invest $500,000 in CashWorks, Inc.
("CashWorks") in the form of convertible debt of CashWorks. In December 2002,
the Company 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, the Company
consented to the sale of its interest in CashWorks to GE Capital Corp. ("GECC")
for $2,451,000. All of the shares and warrants related to the CashWorks
investment were pledged to secure borrowings in connection with the Financing
(defined above). Accordingly, upon receipt of the consideration for the
CashWorks Series B preferred shares and warrants, the Company was obligated to
repay in full the $400,000 and $100,000 convertible term notes plus accrued but
unpaid interest thereon, and all outstanding interest due on the $6,450,000
convertible term note, all of which were paid as part of the Financing.
CLASS ACTION LITIGATION
As discussed in Note 15, the Company and several of its officers and directors
were named as defendants in purported class action lawsuits. In June 2004, the
Company reached an agreement in principle to settle these class action lawsuits.
The settlement, which was subject to a definitive agreement and court approval,
provided for a cash payment of $3 million to be funded by the Company's
liability insurance carrier and the issuance of 2 million shares of common stock
by the Company. In October 2004, the court approved the settlement and the
shares were issued in November 2004. In addition, in August 2004, the Company
reached an agreement with the liability insurance carrier to issue 500,000
warrants to the carrier in exchange for the carrier's acceptance of the terms of
the class action lawsuit. The Company provided a reserve of $1,564,490 in fiscal
2002 to cover any losses from this litigation for the full amount of this
settlement.
MONTROSE LITIGATION
As discussed in Note 15, Montrose Investments Ltd., on of the holders of the
Company's convertible debentures commenced a proceeding against the Company
claiming monies due under the convertible debentures. This action was dismissed
by the court on March 3, 2003. Montrose filed a notice of Appeal with the
Supreme Court of the State of New York, Appellate Division, First Department on
May 20, 2003. This litigation was dismissed in conjunction with the Financing
discussed in Note 17. A stipulation of discontinuance dismissing the appeal was
entered on or about December 2, 2003.
CREDIT CARD CENTER
As discussed in Note 3, as of September 30, 2002, the Company's net receivable
was $500,000. In early 2003, the Company recovered $250,000 of this amount from
the bankruptcy estate and is continuing its efforts to recover any additional
amounts.
S-12
TIDEL TECHNOLOGIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
RELATED PARTY TRANSACTIONS
As discussed in Note 16, at September 30, 2002 James T. Rash, Chairman and CEO
of the Company, had outstanding promissory notes due to the Company 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. The Company 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 up to 250,000 shares of the
Company's Common Stock, was paid in full in March 2004. Mr. Rash died December
19, 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 the outstanding promissory notes due from Mr.
Rash. This amount, which has not yet been received by the Company, will be
applied to the repayment of the notes. The remaining receivable amount will be
collected from anticipated bonuses due to Mr. Rash.
S-13
SCHEDULE II
TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
CLASSIFICATION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
--------------------------------------- ----------- ------------ ---------- ------------ ------------
For the year ended September 30, 2002:
Allowance for doubtful accounts
and notes receivable $25,427,042 $ 2,985,744 $ -- $ 699,370 $ 27,713,416
Reserve for settlement of class
action litigation - 1,564,490 -- - 1,564,490
Inventory reserve 90,050 1,370,671 -- 60,721 1,400,000
----------- ------------ ---------- ------------ ------------
$25,517,092 $ 5,920,905 $ -- $ 760,091 $ 30,677,906
=========== ============ ========== ============ ============
For the year ended September 30, 2001:
Allowance for doubtful accounts
and notes receivable $ 448,037 $ 25,025,000 $ -- $ 45,995 $ 25,427,042
Inventory reserve 287,418 500,000 -- 697,368 90,050
----------- ------------ ---------- ------------ ------------
$ 735,455 $ 25,525,000 $ -- $ 743,363 $ 25,517,092
=========== ============ ========== ============ ============
For the year ended September 30, 2000:
Allowance for doubtful accounts $ 566,917 $ 500,000 $ -- $ 618,880 $ 448,037
Inventory reserve 84,710 370,000 -- 167,292 287,418
----------- ------------ ---------- ------------ ------------
$ 651,627 $ 870,000 $ -- $ 786,172 $ 735,455
=========== ============ ========== ============ ============
S-14
INDEX TO EXHIBITS
Except as otherwise indicated, the following documents are incorporated by
reference as Exhibits to this Report:
Exhibit
Number Description
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 the Company's 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 the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1997).
3.03. By-Laws of the Company (incorporated by reference to Exhibit 3 of
the Company's Form 10 dated November 7, 1988 as amended by Form 8
dated February 2, 1989).
4.01. Credit Agreement dated April 1, 1999 by and among Tidel Engineering,
L.P., the Company and Chase Bank of Texas, N.A. (incorporated by
reference to Exhibit 4.02 of the Company's 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., the Company and Chase Bank of
Texas, N.A. (incorporated by reference to Exhibit 4.19 of the
Company's 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 the Company, Tidel Engineering, L.P. and The Chase Manhattan
Bank (incorporated by reference to Exhibit 10.4 of the Company's
Current Report on Form 8-K dated September 8, 2000).
4.04 Third Amendment to Credit Agreement dated September 29, 2000 by and
among the Company, Tidel Engineering, L.P. and The Chase Manhattan
Bank (incorporated by reference to Exhibit 10.4 of the Company's
Current Report on Form 8-K dated September 29, 2000).
4.05 Fourth Amendment to Credit Agreement dated November 30, 2000 by and
among the Company, Tidel Engineering, L.P. and The Chase Manhattan
Bank (incorporated by reference to Exhibit 10.5 of the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 2000).
E-1
4.06. Fifth Amendment to Credit Agreement and Forbearance Agreement dated
June 1, 2001 by and among the Company, Tidel Engineering, L.P. and
The Chase Manhattan Bank (incorporated by reference to Exhibit 4.01
of the Company's 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 the Company, Tidel Engineering, L.P. and JP Morgan
Chase (incorporated by reference to Exhibit 4.07 of the Company's
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 the Company (incorporated by reference to Exhibit 4.01 of
the Company's 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 the Company's 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 the Company payable to the order of Chase Bank of Texas, N.A.
(incorporated by reference to Exhibit 4.04 of the Company's 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 the Company's 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 the Company's
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 the Company's
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 the Company's 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 the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1999).
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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 the Company's 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 the Company's
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 the Company's 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 the Company's
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 the Company's
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 the Company's 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 the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1999).
4.23 Form of Agreement under 1997 Long-Term Incentive Plan of the Company
(incorporated by reference to Exhibit 4.3 of the Company's Form S-8
dated February 14, 2000).
4.24 Form of Agreement under 1989 Incentive Stock Option Plan of the
Company (incorporated by reference to Exhibit 4.4 of the Company's
Form S-8 dated February 14, 2000).
4.25 Common Stock Purchase Warrant of the Company issued to Montrose
Investments Ltd. dated September 8, 2000 (incorporated by reference
to Exhibit 4.2 of the Company's Current Report on Form 8-K dated
September 8, 2000).
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4.26 Common Stock Purchase Warrant of the Company issued to Montrose
Investments Ltd. dated September 8, 2000 (incorporated by reference
to Exhibit 4.2 of the Company's Current Report on Form 8-K dated
September 8, 2000).
4.27 Registration Rights Agreement dated September 8, 2000 by and between
the Company and Montrose Investments Ltd. (incorporated by reference
to Exhibit 4.2 of the Company's 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 the Company and Acorn Investment
Trust (incorporated by reference to Exhibit 10.2 of the Company's
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 the Company, Tidel Engineering, L.P. and NCR
Corporation (incorporated by reference to Exhibit 10.26 of the
Company's 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 the Company, Tidel Engineering, L.P. and NCR
Corporation (incorporated by reference to Exhibit 10.25 of the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 2001).
4.31 Convertible Debenture of the Company issued to Montrose Investments,
Ltd. Dated September 8, 2000 (incorporated by reference to Exhibit
4.1 of the Company's Current Report on Form 8-K dated September 8,
2000).
4.32 Subordination Agreement dated September 8, 2000 by and among the
Company, Tidel Engineering, L.P., Montrose Investments, Ltd. and The
Chase Manhattan Bank (incorporated by reference to Exhibit 10.3 of
the Company's Current Report on Form 8-K dated September 8, 2000).
4.33 Convertible Debenture of the Company issued to Acorn Investment
Trust dated September 29, 2000 (incorporated by reference to Exhibit
4.1 of the Company's Current Report on Form 8-K dated September 29,
2000).
4.34 Subordination Agreement dated September 29, 2000 by and among the
Company, Tidel Engineering, L.P., Acorn Investment Trust and The
Chase Manhattan Bank (incorporated by reference to Exhibit 10.3 of
the Company's Current Report on Form 8-K dated September 29, 2000).
*4.35 Convertible Term Note of the Company in favor of Laurus Master Fund,
Ltd. in the principal amount of $6,450,000 dated November 25, 2003.
*4.36 Convertible Term Note of the Company in favor of Laurus Master Fund,
Ltd. in the principal amount of $400,000 dated November 25, 2003.
*4.37 Convertible Term Note of the Company in favor of Laidlaw Southwest,
LLC in the principal amount of $100,000 dated November 25, 2003.
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*4.38 Security Agreement by and among the Company, Tidel Engineering,
L.P., Tidel Cash Systems, Inc., AnyCard International, Inc. and
Tidel Services, Inc., dated November 25, 2003.
*4.39 Equity Pledge Agreement by and between the Company and Laurus Master
Fund, Ltd. dated November 25, 2003.
*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.
*4.41 Registration Rights Agreement by and Between the Company and Laurus
Master Fund, Ltd. dated November 25, 2003.
*4.42 Common Stock Purchase Warrant of the Company issued to Laurus Master
Fund, Ltd. dated November 25, 2003
*4.43 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.
*4.44 Guaranty by and among the Company, Tidel Engineering, L.P., Tidel
Cash Systems, Inc., Tidel Services, Inc. and Laurus Master Fund,
Ltd. dated as of November 25, 2003.
*4.45 Payoff Letter of Wallis State Bank dated November 24, 2003.
4.46 Convertible Term Note of the Company 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 the Company's Current
Report on Form 8-K dated November 26, 2004).
4.47 Convertible Term Note of the Company 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 the Company's Current
Report on Form 8-K dated November 26, 2004).
4.48 Common Stock Purchase Warrant of the Company issued to Laurus Master
Fund, Ltd. dated November 26, 2004 (incorporated by reference to
Exhibit 10.4 of the Company's Current report on Form 8-K dated
November 26, 2004).
4.49 Agreement of Amendment and Reaffirmation by and among the Company,
Tidel Engineering, L.P., Tidel Cash Systems, Inc., Anycard
International, Inc., Tidel Services, Inc. and Laurus Master Fund,
Ltd. 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).
4.50 Convertible Promissory Note of the Company 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 the Company's
Current Report on Form 8-K dated November 26, 2004).
E-5
4.51 Guaranty by the Company in favor of Laurus Master Fund, Ltd. dated
as of November 26, 2004 (incorporated by reference to Exhibit 10.8
to the Company's Current Report on Form 8-K dated November 26,
2004).
10.01 1997 Long-Term Incentive Plan of the Company (incorporated by
reference to Exhibit 4.1 of the Company's Form S-8 dated February
14, 2000).
10.02 1989 Incentive Stock Option Plan of the Company (incorporated by
reference to Exhibit 4.2 of the Company's Form S-8 dated February
14, 2000).
10.03 Lease Agreement dated February 21, 1992 between the Company and San
Felipe Plaza, Ltd., related to the occupancy of the Company's
executive offices (incorporated by reference to Exhibit 10.10 of the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1992).
10.04 Amendment to Lease Agreement dated September 15, 1997 between the
Company and San Felipe Plaza, Ltd., related to the occupancy of the
Company's executive offices (incorporated by reference to Exhibit
10.14 of the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1997)
10.05 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 the Company's principal operating
facility in Carrollton, Texas (incorporated by reference to Exhibit
10.7 of the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1994).
10.06 Agreement dated October 30, 1991 between Affiliated Computer
Services, Inc. ("ACS") and Tidel Engineering, Inc. (incorporated by
reference to Exhibit 10.14 of the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1992).
10.07 EFT Processing Services Agreement dated February 3, 1995 by, between
and among ACS, AnyCard International, Inc. and the Company
(incorporated by reference to Exhibit 10.9 of the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1995).
10.08 Amendment to EFT Processing Services Agreement dated as of September
14, 1995 by, between and among ACS, AnyCard International, Inc. and
the Company (incorporated by reference to Exhibit 10.10 of the
Company's Annual Report on Form 10-K for the year fiscal ended
September 30, 1995).
10.09 Purchase Agreement dated February 3, 1995 between ACS and AnyCard
International, Inc. related to the purchase by ACS of ATMs
(incorporated by reference to Exhibit 10.11 of the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1995).
E-6
10.10 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 the Company's
Annual Report on Form 10-K for the fiscal year ended September 30,
1995).
10.11 Employment Agreement dated January 1, 2000 between the Company and
James T. Rash (incorporated by reference to Exhibit 99.1 of the
Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2000).
10.12 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 the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 2001).
10.13 Convertible Debenture Purchase Agreement dated September 8, 2000 by
and between the Company and Montrose Investments Ltd. (incorporated
by reference to Exhibit 10.1 of the Company's Current Report on Form
8-K dated September 8, 2000).
10.14 Convertible Debenture Purchase Agreement dated September 29, 2000 by
and between the Company and Acorn Investment Trust (incorporated by
reference to Exhibit 10.1 of the Company's Current Report on Form
8-K dated September 29, 2000).
10.15 ATM Inventory Purchase Agreement dated September 7, 2001 by and
among the Company, Tidel Engineering, L.P., and NCR Corporation
(incorporated by reference to Exhibit 10.27 of the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 2001).
*10.16 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.
*10.17 Securities Purchase Agreement by and between the Company and Laurus
Master Fund, Ltd. dated November 25, 2003.
*10.18 Termination Agreement by and between the Company and Montrose
Investments Ltd. dated November 24, 2003.
*10.19 Termination Agreement by and between the Company and Columbia Acorn
Trust dated November 25, 2003.
10.20 Securities Purchase Agreement by and between the Company and Laurus
Master Fund, Ltd. dated November 26, 2004 (incorporated by reference
to Exhibit 10.1 of the Company's Current Report on Form 8-K dated
November 26, 2004).
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10.21 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 the Company's
Current Report on Form 8-K dated November 26, 2004).
*10.22 Agreement Regarding [Name Redacted] Transaction and Other Asset
Sales by and between the Company and Laurus Master Fund, Ltd., dated
November 26, 2004.
21.01 Subsidiaries of the Company.
*31.1 Certification of Interim Chief Executive Officer, Mark K. Levenick,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2 Certification of Chief Financial Officer, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
*32.1 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.
---------------
* - filed herewith