SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
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.)
5847 San Felipe, Suite 900
Houston, Texas 77057
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 783-8200
----------------------
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirement for the past 90 days. YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of Common Stock outstanding as of the close of
business on February 14, 2001 was 17,426,210.
TIDEL TECHNOLOGIES, INC.
I N D E X
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2001
(unaudited) and September 30, 2001 ........................ 1
Consolidated Statements of Operations (unaudited) for the
three months ended December 31, 2001 and 2000 ............. 2
Consolidated Statements of Comprehensive Income (Loss)
(unaudited) for the three months ended
December 31, 2001 and 2000 ................................ 3
Consolidated Statements of Cash Flows (unaudited) for
the three months ended December 31, 2001 and 2000 ......... 4
Notes to Consolidated Financial Statements (unaudited) ...... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................... 14
Item 2. Changes in Securities ....................................... 15
Item 3. Defaults Upon Senior Securities ............................. 15
Item 4. Submission of Matters to a Vote of Security Holders ......... 15
Item 5. Other Information ........................................... 15
Item 6. Exhibits and Reports on Form 8-K ............................ 16
SIGNATURE ............................................................... 17
TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
ASSETS 2001 2001
------------ ------------
(UNAUDITED)
Current Assets:
Cash and cash equivalents $ 3,170,164 $ 3,266,236
Trade accounts receivable, net of allowance of
$21,410,565 and $21,427,042, respectively 5,597,148 7,036,433
Notes and other receivables, net of allowance
of $4,000,000 1,356,493 1,357,394
Federal income tax receivable 4,356,383 5,596,383
Inventories 10,670,897 11,330,626
Prepaid expenses and other 572,034 525,224
------------ ------------
Total current assets 25,723,119 29,112,296
Property, plant and equipment, at cost 5,710,624 5,691,021
Accumulated depreciation (4,253,489) (4,006,432)
------------ ------------
Net property, plant and equipment 1,457,135 1,684,589
Intangible assets, net of accumulated amortization of
$1,209,055 and $1,199,579, respectively 492,018 501,494
Notes receivable 2,507,125 2,277,675
Other assets 181,038 260,762
------------ ------------
Total assets $ 30,360,435 $ 33,836,816
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities -
Long-term debt $ 4,872,000 $ 5,328,000
Convertible debentures 18,000,000 18,000,000
Accounts payable 1,824,676 2,795,063
Accrued liabilities 2,912,528 2,423,897
------------ ------------
Total current liabilities 27,609,204 28,546,960
Long-term debt, net of current maturities -- 96,000
------------ ------------
Total liabilities 27,609,204 28,642,960
------------ ------------
Commitments and contingencies
Shareholders' Equity:
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 19,245,958 19,245,958
Accumulated deficit (16,023,781) (13,623,065)
Stock subscriptions receivable (217,188) (217,188)
Accumulated other comprehensive loss (428,020) (386,111)
------------ ------------
Total shareholders' equity 2,751,231 5,193,856
------------ ------------
Total liabilities and shareholders' equity $ 30,360,435 $ 33,836,816
============ ============
See accompanying notes to consolidated financial statements.
1
TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED DECEMBER 31,
--------------------------------
2001 2000
------------ -----------
Revenues $ 4,636,651 $16,696,463
Cost of sales 3,435,276 10,395,117
------------ -----------
Gross profit 1,201,375 6,301,346
Selling, general and administrative 2,616,707 2,755,368
Depreciation and amortization 256,535 340,854
------------ -----------
Operating income (loss) (1,671,867) 3,205,124
Interest expense, net 728,849 322,105
------------ -----------
Income (loss) before taxes (2,400,716) 2,883,019
Income tax expense -- 995,000
------------ -----------
Net income (loss) $ (2,400,716) $ 1,888,019
============ ===========
Basic earnings (loss) per share:
Net income (loss) $ (0.14) $ 0.11
============ ===========
Weighted average common shares
outstanding 17,426,210 17,376,210
============ ===========
Diluted earnings (loss) per share:
Net income (loss) $ (0.14) $ 0.10
============ ===========
Weighted average common and
dilutive shares outstanding 17,426,210 20,396,115
============ ===========
See accompanying notes to consolidated financial statements.
2
TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Three Months Ended December 31,
-------------------------------
2001 2000
----------- -----------
Net income (loss) $(2,400,716) $ 1,888,019
Other comprehensive income (loss):
Unrealized loss on investment in 3CI (41,909) (32,758)
----------- -----------
Comprehensive income (loss) $(2,442,625) $ 1,855,261
=========== ===========
See accompanying notes to consolidated financial statements.
3
TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended December 31,
------------------------------------
2001 2000
----------- ------------
Cash flows from operating activities:
Net income (loss) $(2,400,716) $ 1,888,019
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 256,535 340,854
Amortization of debt discount and financing costs -- 98,230
Changes in assets and liabilities:
Trade accounts receivable, net 1,439,285 (592,653)
Notes and other receivables (228,549) (5,340,427)
Federal income tax receivable 1,240,000 --
Inventories 659,729 (628,109)
Prepaids and other assets (8,997) (32,162)
Accounts payable and accrued liabilities (481,756) (510,706)
----------- ------------
Net cash provided by (used in) operating activities 475,531 (4,776,954)
----------- ------------
Cash flows from investing activities -
Purchases of property, plant and equipment (19,603) (219,440)
----------- ------------
Cash flows from financing activities:
Repayments of revolving credit note (520,000) --
Repayments of term loan (32,000) (32,000)
----------- ------------
Net cash used in financing activities (552,000) (32,000)
----------- ------------
Net decrease in cash and cash equivalents (96,072) (5,028,394)
Cash and cash equivalents at beginning of period 3,266,236 16,223,192
----------- ------------
Cash and cash equivalents at end of period $ 3,170,164 $ 11,194,798
=========== ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 72,816 $ 467,590
=========== ============
Cash paid for taxes, net of refunds receivable $ -- $ 400,000
=========== ============
See accompanying notes to consolidated financial statements.
4
TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated balance sheets and related interim
consolidated statements of operations and cash flows of Tidel Technologies,
Inc. (the "Company"), a Delaware corporation, are unaudited. In the opinion
of management, these financial statements include all adjustments
(consisting only of normal recurring items) necessary for their fair
presentation in accordance with generally accepted accounting principles.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Actual results may differ from these estimates.
Interim results are not necessarily indicative of results for a full year.
The information included in this Form 10-Q should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended September
30, 2001.
(2) INVENTORIES
Inventories consisted of the following at December 31, 2001 and September
30, 2001:
December 31, September 30,
2001 2001
------------ ------------
Raw materials............................ $ 7,535,145 $ 7,361,295
Work in process.......................... 61,947 --
Finished goods........................... 1,502,171 1,926,505
Inventory repurchased from Credit
Card Center............................ 1,370,097 1,822,450
Other.................................... 321,587 310,426
------------ ------------
10,790,947 11,420,676
Inventory reserve........................ (120,050) (90,050)
------------ ------------
$ 10,670,897 $ 11,330,626
============ ============
See the Company's Annual Report on Form 10-K for the year ended September
30, 2001 for additional information regarding the repurchase of inventory
from the estate of Credit Card Center ("CCC").
(3) LONG-TERM DEBT AND CONVERTIBLE DEBENTURES
The Company is party to a credit agreement with a bank (the "Lender") (as
amended, the "Revolving Credit Facility"), which provides for a $7,000,000
revolving line of credit with interest equal to the prime rate and a
$544,000 term loan at 8.4% interest per annum. At December 31, 2001,
$4,680,000 was outstanding under the Revolving Credit Facility and $192,000
was outstanding under the term loan, compared to $5,200,000 and $224,000,
respectively, at September 30, 2001. The Revolving Credit Facility was
amended on December 18, 2001 to provide for, among other things, certain
modifications to the financial covenants set forth in the Revolving Credit
Agreement, modifications to the borrowing base, the reduction of the
revolving line of credit from $10,000,000 to $7,000,000, and the waiver of
compliance with certain covenants by the Company for the quarters ended June
30, 2001 and September 30, 2001. Under the terms of the Revolving Credit
Facility, we currently lack the necessary borrowing base to enable us to
borrow any significant amount of the unused portion of the
5
revolving line of credit, and accordingly have only minimal availability
under the Revolving Credit Facility. In addition, the Company was not in
compliance with certain financial covenants under the Revolving Credit
Facility as of December 31, 2001, and continues to be in non-compliance as
of the filing date. As a result, the Lender could declare an event of
default and exercise its remedies under the Revolving Credit Facility. Such
remedies include the acceleration of all outstanding loans and the
termination of the commitments. The Company does not have the funds
available to repay all of its outstanding borrowings under the Revolving
Credit Facility at the present time. Additionally, the Revolving Credit
Facility expires, in accordance with its terms, on April 30, 2002. There can
be no assurance that the Revolving Credit Facility will be renewed, and if
it is not renewed, there can be no assurance that the Company will be able
to obtain similar financing. The Company has been negotiating with other
lenders to obtain financing to replace the Revolving Credit Facility at its
expiration. In January 2002, the Company obtained a commitment from another
lender, that would provide for up to $5 million of such financing. This
commitment requires the Company to meet certain conditions and covenants and
to restrict certain assets as collateral for the financing, as well as the
execution of additional loan documents. The Company expects to comply with
such conditions and covenants, although there can be no assurance that the
Company will be able to comply with such conditions and covenants.
In September 2000, the Company issued to two investors (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. The Convertible Debentures provide for
three methods to convert the debentures into shares of the Company's Common
Stock: (1) conversion at the option of the Holder; (2) conversion at the
option of the Company; and (3) a put option.
In June 2001, the Holders exercised their option to put the Convertible
Debentures back to the Company. The Company had previously notified the
Holders pursuant to the terms of the Convertible Debentures that in the
event such put option was exercised, the Company would pay all amounts due
in cash. Accordingly, the principal amount of $18 million, plus accrued and
unpaid interest, was due on August 27, 2001. The Company did not make such
payment on that date, and currently does not have the funds available to
make such payments. The Company is party to Subordination Agreements (the
"Subordination Agreements") with each Holder and the Lender which provide,
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. The Holders may, in
addition to their other rights and remedies, under certain circumstances,
convert into our Common Stock all or a portion of the unpaid amount due at a
conversion price equal to the current market price. Any such conversion
would result in very substantial dilution to the Company's existing
stockholders. In addition, any issuance of stock required by a conversion in
excess of 19.99% of the Company's issued and outstanding shares will require
stockholder approval under Nasdaq Rules, accordingly, it is unlikely that
such an issuance would be permitted, which could subject the Company to
additional penalties under the agreements. In the event we fail to prepay
the Convertible Debentures as required under the terms of the Convertible
Debentures and related agreements, the Holders would also have the right to
declare an event of default under the Convertible Debentures. A declaration
of an event of default would also be a default under the Revolving Credit
Facility. The Company is currently in negotiations with the Holders
regarding such non-payment and other terms of the Convertible Debentures.
There can be no assurance, however, that
6
such negotiations will be successful or that modifications to the
Convertible Debentures will be able to be negotiated on terms acceptable to
the Company.
Even in the event the ongoing negotiations are successful in waiving
provisions, delaying payments or restructuring the provisions of the
Revolving Credit Facility and/or the Convertible Debentures, such terms may
not be favorable to the Company, and could limit the Company's operations in
the future. A failure to reach agreements on acceptable terms to the Company
with respect to the matters described above relating to the Revolving Credit
Facility and/or the Convertible Debentures will have a material adverse
effect on the Company.
(4) EARNINGS PER SHARE
Basic earnings per share is computed by dividing the income (loss) available
to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing the income available to common shareholders by the weighted average
number of common shares and dilutive potential common shares. The following
is a reconciliation of the numerators and denominators of the basic and
diluted per-share computations for net income (loss) for the three months
ended December 31, 2001 and 2000. Note that diluted loss per share for the
three months ended December 31, 2001 is the same as basic loss per share due
to the loss reported for the period:
Weighted
Average Shares Per Share
Income (loss) Outstanding Amount
------------- -------------- ---------
Three Months Ended December 31, 2001:
-------------------------------------
Basic loss per share....................................... $(2,400,716) 17,426,210 $(.14)
Effect of dilutive warrants, options and
convertible debt...................................... -- -- --
----------- ---------- -----
Diluted loss per share..................................... $(2,400,716) 17,426,210 $(.14)
=========== ========== =====
Three Months Ended December 31, 2000:
-------------------------------------
Basic earnings per share................................... $ 1,888,019 17,376,210 $ .11
Effect of warrants, options and
convertible debt...................................... 179,665 3,019,905 (.01)
----------- ---------- -----
Diluted earnings per share................................. $ 2,067,684 20,396,115 $ .10
=========== ========== =====
Common stock equivalents consisting of warrants, options and convertible
debt that provide for the purchase of or conversion into 4,250,857 and
3,068,689 shares of common stock were excluded from the computation of
diluted earnings per share due to their anti-dilutive effect for the
quarters ended December 31, 2001 and 2000, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
Sales to one customer, JRA 222, Inc. d/b/a Credit Card Center ("CCC"), were
$11,748,018, or 70% of the Company's net sales, for the quarter ended
December 31, 2000. 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-
7
premise ATMs in the U.S. There have been no shipments to CCC since January
1, 2001, and the Company does not expect to make any shipments to CCC in the
future. As a result, the termination of sales to CCC had a material adverse
effect on the Company's sales and earnings for the quarter ended December
31, 2001.
The Company's revenues were $4,637,000 for the three months ended December
31, 2001, representing a decrease of $12,059,000, or 72%, from revenues of
$16,696,000 in the same quarter of the prior year. The decrease in sales was
primarily due to the loss of business from CCC.
The Company incurred a net loss of $(2,401,000) for the three months ended
December 31, 2001, compared to net income of $1,888,000 in the same quarter
of the prior year. The net loss for the three months ended December 31, 2001
was caused primarily by i) lower sales volumes after the loss of CCC's
business, ii) legal and accounting fees related to the collection of
receivables from CCC, and iii) higher interest expenses related to the "put"
of the Company's 6% subordinated convertible debentures in June 2001.
See the Company's Annual Report on Form 10-K for the year ended September
30, 2001 for additional information about the Company's relationship with
CCC.
PRODUCT REVENUES
A breakdown of net sales by individual product line is provided in the
following table:
(Dollars in 000's)
-------------------------------
Three Months Ended December 31,
-------------------------------
2001 2000
------- -------
ATM................................. $ 2,179 $13,098
TACC................................ 1,675 1,472
Parts, service and other............ 783 2,126
------- -------
$ 4,637 $16,696
======= =======
ATM sales decreased 83% in the past year due primarily to the loss of CCC as
a customer as described elsewhere herein. For the quarter ended December 31,
2001, the Company shipped a total of 677 ATM units, an 80% decrease from the
3,310 units shipped in the same quarter of the prior year. For the quarter
ended December 31, 2001, shipments to non-CCC customers decreased 30% from
the 971 units shipped to non-CCC customers in the same quarter of the prior
year. In the opinion of management, the decline in non-CCC business in the
quarter ended December 31, 2001 was due primarily to i) the economic
downturn as a result of the events of September 11, 2001 and ii) the
deferral of ATM purchases by certain retailers until 2002.
Timed Access Cash Controller ("TACC") sales increased 14% in the quarter
ended December 31, 2001, due primarily to the timing of the receipt of
orders from customers.
Parts and other revenues vary directly with sales of finished goods, and
have decreased accordingly.
8
GROSS PROFIT, OPERATING EXPENSES AND NON-OPERATING ITEMS
A comparison of certain operating information is provided in the following
table:
(Dollars in 000's)
-------------------------------
Three Months Ended December 31,
-------------------------------
2001 2000
------- ------
Gross profit.............................. $ 1,201 $6,301
Selling, general and administrative....... 2,617 2,755
Depreciation and amortization............. 256 341
------- ------
Operating income (loss)................... (1,672) 3,205
Interest expense.......................... 729 322
------- ------
Income (loss) before taxes................ (2,401) 2,883
Income taxes.............................. -- 995
------- ------
Net income (loss)......................... $(2,401) $1,888
======= ======
Gross profit on product sales decreased $5,100,000 from the quarter ended
December 31, 2000, primarily as a result of the sharp decline in sales for
the period. Gross margin as a percentage of sales, was 26% in the quarter
ended December 31, 2001, compared to 38% in the same quarter of the previous
year. The decrease in gross margin arose from certain fixed costs associated
with a lower number of units shipped.
Selling, general and administrative expenses for the quarter ended December
31, 2001 decreased slightly from the same quarter of the previous year
despite the significant decline in sales for the period. Reduction in
variable costs was offset by an increase of approximately $300,000 in legal
and accounting fees associated with the CCC bankruptcy and other matters.
Depreciation and amortization for the quarter ended December 31, 2001 was
$256,000, a decrease of $85,000 from the same quarter of the previous year.
This difference is attributable to assets that became fully depreciated at
the beginning of the year, which were related to additions of property,
plant and equipment used in production of new ATM models.
Interest expense increased $407,000 in the quarter ended December 31, 2001
when compared to the same quarter of the previous year, due to accelerated
interest on the Company's 6% subordinated convertible debentures from June
27, 2001, as a result of the missed "put payment" on August 27, 2001.
Income tax expense included a provision in the quarter ended December 31,
2000 representing an effective tax rate of 34.5%. In the quarter ended
December 31 2001, the Company established a valuation allowance equal to the
amount of income tax benefit due to the uncertainty of the Company's ability
to utilize such benefit.
LIQUIDITY AND CAPITAL RESOURCES
The financial position of the Company deteriorated during fiscal 2001 as a
result of CCC's bankruptcy and the Company's termination of sales to CCC,
unprofitable operations and reduced sales of the Company's products
resulting from general difficulties in the ATM market. This deterioration is
reflected in the following key indicators as of December 31, 2001 and
September 30, 2001:
9
(dollars in 000's)
-------------------------------
December 31, September 30,
2001 2001
------------ -------------
Cash................................. $ 3,170 $ 3,266
Working capital (deficit)............ (1,886) 565
Total assets......................... 30,360 33,837
Shareholders' equity................. 2,751 5,194
The Company is party to a credit agreement with a bank (the "Lender") (as
amended, the "Revolving Credit Facility"), which provides for a $7,000,000
revolving line of credit with interest equal to the prime rate and a
$544,000 term loan at 8.4% interest per annum. At December 31, 2001,
$4,680,000 was outstanding under the Revolving Credit Facility and $192,000
was outstanding under the term loan, compared to $5,200,000 and $224,000,
respectively, at September 30, 2001. The Revolving Credit Facility was
amended on December 18, 2001 to provide for, among other things, certain
modifications to the financial covenants set forth in the Revolving Credit
Agreement, modifications to the borrowing base, the reduction of the
revolving line of credit from $10,000,000 to $7,000,000, and the waiver of
compliance with certain covenants by the Company for the quarters ended June
30, 2001 and September 30, 2001. Under the terms of the Revolving Credit
Facility, we currently lack the necessary borrowing base to enable us to
borrow any significant amount of the unused portion of the revolving line of
credit, and accordingly have only minimal availability under the Revolving
Credit Facility. In addition, the Company was not in compliance with certain
financial covenants under the Revolving Credit Facility as of December 31,
2001, and continues to be in non-compliance as of the filing date. As a
result, the Lender could declare an event of default and exercise its
remedies under the Revolving Credit Facility. Such remedies include the
acceleration of all outstanding loans and the termination of the
commitments. The Company does not have the funds available to repay all of
its outstanding borrowings under the Revolving Credit Facility at the
present time. Additionally, the Revolving Credit Facility expires, in
accordance with its terms, on April 30, 2002. There can be no assurance that
the Revolving Credit Facility will be renewed, and if it is not renewed,
there can be no assurance that the Company will be able to obtain similar
financing. The Company has been negotiating with other lenders to obtain
financing to replace the Revolving Credit Facility at its expiration. In
January 2002, the Company obtained a commitment from another lender, that
would provide for up to $5 million of such financing. This commitment
requires the Company to meet certain conditions and covenants and to
restrict certain assets as collateral for the financing, as well as the
execution of additional loan documents. The Company expects to comply with
such conditions and covenants, although there can be no assurance that the
Company will be able to comply with such conditions and covenants.
In September 2000, the Company issued to two investors (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. The Convertible Debentures provide for
three methods to convert the debentures into shares of the Company's Common
Stock: (1) conversion at the option of the Holder; (2) conversion at the
option of the Company; and (3) a put option.
In June 2001, the Holders exercised their option to put the Convertible
Debentures back to the Company. The Company had previously notified the
Holders pursuant to the terms of the Convertible
10
Debentures that in the event such put option was exercised, the Company
would pay all amounts due in cash. Accordingly, the principal amount of $18
million, plus accrued and unpaid interest, was due on August 27, 2001. The
Company did not make such payment on that date, and currently does not have
the funds available to make such payments. The Company is party to
Subordination Agreements (the "Subordination Agreements") with each Holder
and the Lender which provide, 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. The Holders may, in addition to their other rights and remedies,
under certain circumstances, convert into our Common Stock all or a portion
of the unpaid amount due at a conversion price equal to the current market
price. Any such conversion would result in very substantial dilution to the
Company's existing stockholders. In addition, any issuance of stock required
by a conversion in excess of 19.99% of the Company's issued and outstanding
shares will require stockholder approval under Nasdaq Rules, accordingly, it
is unlikely that such an issuance would be permitted, which could subject
the Company to additional penalties under the agreements. In the event we
fail to prepay the Convertible Debentures as required under the terms of the
Convertible Debentures and related agreements, the Holders would also have
the right to declare an event of default under the Convertible Debentures. A
declaration of an event of default would also be a default under the
Revolving Credit Facility. The Company is currently in negotiations with the
Holders regarding such non-payment and other terms of the Convertible
Debentures. There can be no assurance, however, that such negotiations will
be successful or that modifications to the Convertible Debentures will be
able to be negotiated on terms acceptable to the Company.
Even in the event the ongoing negotiations are successful in waiving
provisions, delaying payments or restructuring the provisions of the
Revolving Credit Facility and/or the Convertible Debentures, such terms may
not be favorable to the Company, and could limit the Company's operations in
the future. A failure to reach agreements on acceptable terms to the Company
with respect to the matters described above relating to the Revolving Credit
Facility and/or the Convertible Debentures will have a material adverse
effect on the Company.
The Company formerly owned 100% of 3CI Complete Compliance Corporation
("3CI"), a company engaged in the transportation and incineration of medical
waste, until its divestiture of a majority interest in February 1994. 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, and
accordingly, all the shares are presently pledged to secure borrowings under
the revolving credit agreement with a bank.
The Company's research and development budget for fiscal 2002 has been
estimated at $2,900,000. The majority of these expenditures are applicable
to enhancements of the existing product lines, development of new automated
teller machine and cash controller products, and the development of new
technology to facilitate such advanced services as check cashing and money
order issuance. Total research and development expenditures were
approximately $677,000 for the quarter ended December 31, 2001.
In addition to the matters described in the foregoing paragraphs relating to
indebtedness, the Company's financial position has also been adversely
impacted by the downturn in operations as more fully described above.
Reduced sales, together with the recoupment of inventory from the estate of
CCC, have resulted in a buildup of finished goods and inventories in excess
of the level normally maintained by the Company.
11
The Company has never paid dividends on shares of its Common Stock, and does
not anticipate paying dividends in the foreseeable future. In addition, the
Company's wholly owned subsidiary is restricted from paying dividends to the
Company pursuant to the subsidiary's revolving credit agreement with a bank.
MAJOR CUSTOMERS AND CREDIT RISK
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.
Sales to CCC and the Company's other two major customers were as follows for
the three months ended December 31, 2001 and 2000:
(Dollars in 000's)
---------------------------------
Three Months Ended December 31,
---------------------------------
2001 2000
---------- -----------
Credit Card Center.............. $ -- $11,786,718
Customer B...................... 1,067,385 1,838,020
Customer C...................... 490,815 --
Sales to customers outside the United States were approximately 9% and 3% of
total revenues in the three months ended December 31, 2001 and 2000,
respectively. All sales were transacted in U.S. dollars.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations," and SFAS No.142, "Goodwill and
Other Intangible Assets." SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001. SFAS 141 also specifies criteria that intangible assets must meet in
order to be recognized and reported separately from goodwill. SFAS 142
requires that goodwill and intangible assets with indefinite useful lives
will no longer be amortized to expense, but instead will be tested for
impairment at least annually. Intangible assets with definite useful lives
will be amortized to expense.
The Company is required to adopt the provisions of SFAS 141 immediately and
SFAS 142 effective October 1, 2002. Goodwill and intangible assets acquired
in business combinations completed before July 1, 2001 will continue to be
amortized through September 30, 2002.
As of October 1, 2002, the Company will be required to reassess the useful
lives of all acquired intangible assets and make any necessary amortization
period adjustments by December 31, 2002. The Company will also be required
to perform an assessment of whether there is an impairment of goodwill as of
October 1, 2002, and at least annually thereafter. Any impairment charge
recognized at October 1, 2002 will be shown as the cumulative effect of a
change in accounting principle in the Company's statement of operations.
12
As of October 1, 2002, the Company expects to have unamortized goodwill of
approximately $427,400, which will be subject to the transition provisions
of SFAS 142. Amortization expense related to goodwill was $15,444 for each
of the years ended September 30, 2001 and 2000. This amortization of
goodwill will no longer occur under the new standards. The Company is
evaluating the impact of adopting SFAS 142, but because of the extensive
effort required, it is not practicable to reasonably determine, at the date
of this report, whether a goodwill impairment charge will be recorded upon
adoption of the new standards.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which supersedes both SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", for the disposal of a
segment of a business. SFAS 144 provides a single accounting model for
long-lived assets to be disposed of. Although retaining many of the
fundamental recognition and measurement provisions of SFAS 121, the new
rules change the criteria to be met to classify an asset as held-for-sale.
The new rules also broaden the criteria regarding classification of a
discontinued operation.
RISK FACTORS
Please see the risk factors contained in the Company's Annual Report on Form
10-K for the year ended September 30, 2001.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. Investors are
cautioned that all forward-looking statements involve risks and uncertainty
(including without limitation, the exercise of the put on the Convertible
Debentures, the Company's non-compliance with certain provisions of its
Revolving Credit Facility, the Company's financial position and working
capital availability, the Company's future product sales, gross profit,
selling, general and administrative expense, 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-Q 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to changes in interest rates as a result of financing
through its issuance of variable-rate and fixed-rate debt. If market
interest rates were to increase 1% in fiscal 2002, however,
13
there would be no material impact on the Company's consolidated results of
operations or financial position.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
CCC 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. At that time, 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
it is unclear as to what is the value of the Company's collateral. Based
upon analysis by the Company of all available information regarding the CCC
bankruptcy proceedings, the Company established a reserve in the amount of
approximately $24 million in the fiscal year ended September 30, 2001
against substantially all of the remaining balance of the note and accounts
owed to the Company by CCC. Depending on the resolution of the bankruptcy
proceedings, the Company may incur additional charges to earnings in future
periods. 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 monitoring of the situation.
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, also filed claims
asserting security interests in certain of the property in the bankruptcy
estate of CCC. NCR, another secured creditor and vendor of CCC, and other
leasing companies, filed claims based on alleged security interests in
certain property of the bankruptcy estate as well.
In the bankruptcy case, Fleet commenced an adversary proceeding against the
Company and NCR seeking to assert its priority over the claims of the
Company and NCR to some or all of the assets of CCC.
The Company responded to Fleet's complaint and asserted claims against Fleet
and NCR seeking a declaration from the court as to the Company's priority
over the security interests held by Fleet and NCR. The Company is taking
other appropriate action in the bankruptcy proceeding to protect its
interest and rights.
Prior to CCC's bankruptcy filing, the Company had commenced actions against
CCC and Andrew J. Kallok ("Kallok"), the principal shareholder and executive
officer of CCC. The actions commenced against CCC were stayed upon CCC's
bankruptcy filing. The Company is pursuing the action, however, which it
filed against Kallok on May 14, 2001. Kallok did not answer the motions
filed by the Company in this matter and the Company filed a Motion for
Default Judgment against Kallok on June 14, 2001. Kallok filed an Answer and
Motion to Set Aside Interlocutory Default Judgment, which was ordered by the
court, and a non-jury trial in this matter is currently scheduled for
November 2002. Due to the current stage of the proceeding as well as the
related bankruptcy proceeding of CCC, it is not possible to estimate the
outcome of this action.
14
The Company and several of its officers and directors were named as
defendants in a purported class action filed on October 31, 2001 in the
United States District Court for the Southern District of Texas, 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.
The plaintiffs in these actions purport to represent purchasers of our
Common Stock from April 6, 2000 to February 8, 2001. These cases have not
yet been consolidated, nor has the court appointed a lead plaintiff. The
plaintiffs in the various cases are seeking unspecified amounts of
compensatory damages, interest, and costs, including legal fees. The Company
denies the allegations in the complaints and intends to defend itself
vigorously. The class action lawsuits are still in the early stages of
litigation. Consequently, it is not possible at this time to predict whether
the Company will incur any liability or to estimate the damages, or the
range of damages, if any, that the Company might incur in connection with
these lawsuits. The inability of the Company to prevail in this action could
have a material adverse affect on the Company's future business, financial
condition, and results of operations.
The Company and its subsidiaries are each subject to certain 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.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company was not in compliance with certain financial covenants under the
Revolving Credit Facility as of December 31, 2001, and continues to be in
non-compliance as of the filing date. See "Liquidity and Capital Resources".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
The Company has been notified by The Nasdaq National Market that the price
of the Company's common stock has closed below the minimum continued listing
requirement of $1.00 per share for thirty consecutive trading days, and that
the Company will have until May 15, 2002 to regain compliance with the
minimum bid price requirement. The Company has been notified that if it
cannot regain compliance with the minimum bid requirements, then it will be
provided with written notification that its securities will be subject to
delisting procedures. The Company intends to apply to transfer its
securities to The Nasdaq SmallCap Market, which transfer would take effect
in the event the Company were unable to remain listed on The Nasdaq National
Market. See "Risk Factors - Compliance with NASDAQ National Market Continued
Listing Requirements" contained in the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 2001.
On February 5, 2002, the Company announced that James T. Rash, its Chairman,
CEO and CFO, had taken a leave of absence for personal health reasons. The
Board of Directors appointed Mark K.
15
Levenick, COO of Tidel, to the position of Interim CEO. The Company's Audit
Committee, chaired by Raymond P. Landry, has provided additional oversight
for various financial responsibilities during Mr. Rash's absence.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
None.
b) REPORTS ON FORM 8-K
The Company filed two reports on Form 8-K under Item 5 - Other Events
dated October 19, 2001 and December 21, 2001.
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
TIDEL TECHNOLOGIES, INC.
(Registrant)
DATE: February 19, 2002 By: /s/ MARK K. LEVENICK
------------------------------
Mark K. Levenick
Interim Chief Executive Officer
17