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 June 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.)
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 [ ] NO [X]
The number of shares of Common Stock outstanding as of the close of
business on August 19, 2002 was 17,426,210.
TIDEL TECHNOLOGIES, INC.
I N D E X
PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2002 (unaudited) and
September 30, 2001.................................................................. 1
Consolidated Statements of Operations (unaudited) for the three months
and nine months ended June 30, 2002 and 2001........................................ 2
Consolidated Statements of Comprehensive Income (Loss) (unaudited)
for the three months and nine months ended June 30, 2002 and 2001................... 3
Consolidated Statements of Cash Flows (unaudited) for the nine months
ended June 30, 2002 and 2001........................................................ 4
Notes to Consolidated Financial Statements (unaudited)................................. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risks............................ 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 15
Item 2. Changes in Securities.................................................................. 16
Item 3. Defaults Upon Senior Securities........................................................ 17
Item 4. Submission of Matters to a Vote of Security Holders.................................... 17
Item 5. Other Information...................................................................... 17
Item 6. Exhibits and Reports on Form 8-K....................................................... 17
SIGNATURE............................................................................................... 18
TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, September 30,
ASSETS 2002 2001
---------- -------------
(unaudited)
Current Assets:
Cash and cash equivalents $ 1,407,647 $ 3,266,236
Restricted cash 2,204,899 --
Trade accounts receivable, net of allowance of
$21,408,269 and $21,427,042, respectively 6,268,963 7,036,433
Notes and other receivables, net of allowance
of $4,000,000 2,313,188 1,357,394
Federal income tax receivable -- 5,596,383
Inventories, net 8,398,579 11,015,221
Prepaid expenses and other 489,064 525,224
------------ ------------
Total current assets 21,082,340 28,796,891
Property, plant and equipment, at cost 4,744,231 6,006,426
Accumulated depreciation (3,502,426) (4,006,432)
------------ ------------
Net property, plant and equipment 1,241,805 1,999,994
Intangible assets, net of accumulated amortization of
$1,228,007 and $1,199,579, respectively 473,066 501,494
Notes receivable 2,518,554 2,277,675
Other assets 233,849 260,762
------------ ------------
Total assets $ 25,549,614 $ 33,836,816
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities -
Long-term debt $ 2,000,000 $ 5,328,000
Convertible debentures 18,000,000 18,000,000
Accounts payable 1,218,193 2,795,063
Accrued interest payable 2,942,136 936,833
Other accrued liabilities 1,335,564 1,487,064
------------ ------------
Total current liabilities 25,495,893 28,546,960
Long-term debt, net of current maturities -- 96,000
------------ ------------
Total liabilities 25,495,893 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 (18,756,215) (13,623,065)
Stock subscriptions receivable (217,188) (217,188)
Accumulated other comprehensive loss (393,096) (386,111)
------------ ------------
Total shareholders' equity 53,721 5,193,856
------------ ------------
Total liabilities and shareholders' equity $25,549,614 $33,836,816
============ ============
See accompanying notes to consolidated financial statements.
1
TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30, Nine Months Ended June 30,
----------------------------- --------------------------------
2002 2001 2002 2001
------------ ----------- ------------ -------------
Revenues $ 6,178,805 $ 4,972,191 $ 15,554,247 $ 29,824,571
Cost of sales 4,020,036 4,167,344 11,022,475 19,708,234
----------- ------------ ------------ ------------
Gross profit 2,158,769 804,847 4,531,772 10,116,337
Selling, general and administrative 2,405,391 2,723,211 7,351,952 7,673,979
Provision for doubtful accounts -- 18,000,000 -- 18,025,000
Depreciation and amortization 286,783 296,384 874,294 978,856
----------- ------------ ------------ ------------
Operating loss (533,405) (20,214,748) (3,694,474) (16,561,498)
Interest expense, net 486,017 2,850,935 1,762,133 3,520,760
----------- ------------ ------------ ------------
Loss before taxes (1,019,422) (23,065,683) (5,456,607) (20,082,258)
Income tax benefit -- (6,619,870) (323,457) (5,589,870)
----------- ------------ ------------ ------------
Net loss $(1,019,422) $(16,445,813) $ (5,133,150) $(14,492,388)
=========== ============ ============ ============
Basic loss per share:
Net loss $ (0.06) $ (0.94) $ (0.29) $ (0.83)
=========== ============ ============ ============
Weighted average common shares
outstanding 17,426,210 17,426,210 17,426,210 17,406,979
=========== ============ ============ ============
Diluted loss per share:
Net loss $ (0.06) $ (0.94) $ (0.29) $ (0.83)
=========== ============ ============ ============
Weighted average common and
dilutive shares outstanding 17,426,210 17,426,210 17,426,210 17,406,979
=========== ============ ============ ============
See accompanying notes to consolidated financial statements.
2
TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Three Months Ended June 30, Nine Months Ended June 30,
----------------------------- --------------------------------
2002 2001 2002 2001
------------ ----------- ------------ -------------
Net loss $(1,019,422) $(16,445,813) $(5,133,150) $(14,492,388)
Other comprehensive gain (loss):
Unrealized gain (loss) on
investment in 3CI (125,723) 2,165 (6,985) 78,577
----------- ------------ ----------- ------------
Comprehensive loss $(1,145,145) $(16,443,648) $(5,140,135) $(14,413,811)
=========== ============ =========== ============
See accompanying notes to consolidated financial statements.
3
TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended June 30,
-----------------------------------
2002 2001
--------------- -------------
Cash flows from operating activities:
Net loss $ (5,133,150) $(14,492,388)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 874,294 805,443
Amortization of debt discount and financing costs -- 2,899,095
Deferred income taxes -- (198,142)
Provision for doubtful accounts -- 18,025,000
Changes in assets and liabilities:
Trade accounts receivable, net 767,470 (1,083,922)
Notes and other receivables (1,196,673) (5,838,254)
Federal income tax receivable 5,596,383 (6,051,642)
Inventories 2,616,642 (1,784,354)
Prepaids and other assets 56,085 (124,740)
Accounts payable and accrued liabilities 276,933 (6,208,703)
-------------- ------------
Net cash provided by (used in) operating activities 3,857,984 (14,052,607)
-------------- ------------
Cash flows from investing activities -
Purchases of property, plant and equipment (87,674) (673,729)
-------------- ------------
Cash flows from financing activities:
Repayments of revolving credit note (3,200,000) --
Repayments of term loan (224,000) (96,000)
Restricted cash (2,204,899) --
Proceeds from exercise of warrants and options -- 75,625
-------------- ------------
Net cash used in financing activities (5,628,899) (20,375)
-------------- ------------
Net decrease in cash and cash equivalents (1,858,589) (14,746,711)
Cash and cash equivalents at beginning of period 3,266,236 16,223,192
-------------- ------------
Cash and cash equivalents at end of period $ 1,407,647 $ 1,476,481
=============== ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 280,512 $ 1,299,322
=============== ============
Cash paid for taxes $ -- $ 1,640,000
=============== ============
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, comprehensive income (loss) 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 fiscal year ended September 30, 2001.
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current period presentation.
(2) INVENTORIES
Inventories consisted of the following at June 30, 2002 and September 30,
2001:
June 30, September 30,
2002 2001
------------ -------------
Raw materials........................................ $ 6,603,978 $ 7,356,316
Finished goods....................................... 1,450,604 1,926,505
Inventory repurchased from Credit Card Center........ 502,707 1,822,450
Other................................................ 21,340 --
------------ ------------
8,578,629 11,105,271
Inventory reserve.................................... (180,050) (90,050)
------------ ------------
$ 8,398,579 $ 11,015,221
============ ============
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 bankruptcy estate of JRA 222, Inc. d/b/a 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 was amended effective
April 30, 2002 to provide for, among other things, an extension of the
maturity date until August 30, 2002; the reduction of the revolving
commitment from the initial amount of $7,000,000 to $2,000,000;
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 is currently $2,200,000 and is recorded as
restricted cash in the June 30, 2002 consolidated balance sheet; and the
waiver by the Lender of certain covenants from April 30, 2002 to August
30, 2002. At June 30, 2002, $2,000,000 was outstanding under the Revolving
Credit Facility compared to $5,200,000 at September 30, 2001.
5
In January 2002, the Company obtained a commitment from another bank for a
line of credit of up to $5,000,000 through December 31, 2002, to replace
the Revolving Credit Facility. The commitment contains certain conditions
and covenants which require, among other things, a collateral pledge of
cash in an amount equal to 100% of the loan amount. The Company has not
utilized the commitment to obtain a loan from this bank, and is presently
in discussions with other lenders regarding the replacement of the
Revolving Credit Facility prior to August 30, 2002. There can be no
assurance that such discussions will be successful or that a replacement
for the Revolving Credit Facility will be obtained at all, or on terms
favorable to the Company. The Company is also currently negotiating to
extend the maturity date of the Revolving Credit Facility, although there
can be no assurance that such negotiations will be successful. A failure
to obtain a replacement facility on or prior to August 30, 2002, or extend
the maturity of the Revolving Credit Facility, could have a material
adverse effect on the Company.
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 the Company's 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 the 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 that the Company fails 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 continues to negotiate 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. It is
unknown what, if any, actions may be taken by the Holders to enforce their
rights under the Convertible Debentures. Depending on the actions taken,
any such action could have a material adverse effect upon the financial
condition or operations of the Company.
6
Even in the event that the ongoing negotiations are successful in waiving
provisions, delaying payments or restructuring the provisions of 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 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 loss
for the three months and nine months ended June 30, 2002 and 2001. Note
that diluted loss per share is the same as basic loss per share due to the
losses reported for the periods:
Weighted
Average Shares Per Share
Income (loss) Outstanding Amount
-------------- -------------- ---------------
Three Months Ended June 30, 2002:
Basic loss per share................................. $ (1,019,422) 17,426,210 $ (.06)
Effect of dilutive warrants, options and
convertible debt................................ -- -- --
------------ ------------ -----------
Diluted loss per share............................... $ (1,019,422) 17,426,210 $ (.06)
============ ============ ===========
Three Months Ended June 30, 2001:
Basic loss per share................................. $(16,445,813) 17,426,210 $ (.94)
Effect of dilutive warrants, options and
convertible debt................................ -- -- --
------------ ------------ -----------
Diluted loss per share............................... $(16,445,813) 17,426,210 $ (.94)
============ ============ ===========
Nine Months Ended June 30, 2002:
Basic loss per share................................. $ (5,133,150) 17,426,210 $ (.29)
Effect of dilutive warrants, options and
convertible debt................................ -- -- --
------------ ------------ -----------
Diluted loss per share............................... $ (5,113,150) 17,426,210 $ (.29)
============ ============ ===========
Nine Months Ended June 30, 2001
Basic loss per share................................. $(14,492,388) 17,406,979 $ (.83)
Effect of dilutive warrants, options and
convertible debt................................ -- -- --
------------ ------------ -----------
Diluted loss per share............................... $(14,492,388) 17,406,979 $ (.83)
============ ============ ===========
Common stock equivalents consisting of warrants, options and convertible debt
that provide for the purchase of or conversion into shares of common stock were
excluded from the computation of diluted earnings per share due to their
anti-dilutive effect in the amount of 3,970,857 shares for both the three and
nine months ended June 30, 2002, and 4,250,857 for both the three and nine
months ended June 30, 2001.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The Company's revenues were $6,179,000 for the three months ended June 30,
2002, representing an increase of $1,207,000, or 24%, from revenues of
$4,972,000 in the same quarter of the prior year, and an increase of
$1,440,000, or 30%, over revenues for the quarter ended March 31, 2002. On
a year-to-date basis, the Company's revenues were $15,554,000 for the nine
months ended June 30, 2002, representing a decrease of $14,271,000, or
48%, from revenues of $29,825,000 in the nine months ended June 30, 2001.
These variations are primarily related to fluctuations in the shipments of
ATM units, as described more fully in "Product Revenues" elsewhere herein.
The Company incurred a net loss of $(1,019,000) for the three months ended
June 30, 2002, compared to a net loss of $(16,446,000) in the same quarter
of the prior year. On a year-to-date basis, the Company incurred a net
loss of $(5,133,000) for the nine months ended June 30, 2002, compared to
a net loss of $(14,492,000) for the same period a year ago. The results
for the three months ended June 30, 2001 included a provision for bad
debts of $18,000,000 related to the collection of accounts receivable from
JRA 222 Inc. d/b/a Credit Card Center ("CCC"), and a charge of $2,530,000
applicable to the write-off of certain deferred financing costs as a
result of the "put" of the Company's Convertible Debentures. Consequently,
comparisons of the net loss for the three months and nine months ended
June 30, 2002 with the net loss for the respective periods in the
preceding year are not meaningful. For a detailed discussion of variations
in costs and expenses, see "Gross Profit, Operating Expenses and
Non-Operating Items" elsewhere herein.
PRODUCT REVENUES
A breakdown of net sales by individual product line is provided in the
following table:
(Dollars in 000's)
-----------------------------------------------------------------
Three Months Ended June 30, Nine Months Ended June 30,
------------------------------ -------------------------------
2002 2001 2002 2001
------------ ------------- ------------- -----------
ATM................................ $ 3,492 $ 2,590 $ 7,957 $ 21,147
TACC............................... 1,579 1,568 4,989 4,952
Parts, service and other........... 1,108 814 2,608 3,726
--------- --------- --------- --------
$ 6,179 $ 4,972 $ 15,554 $ 29,825
========= ========= ========= ========
ATM sales were $3,492,000 for the quarter ended June 30, 2002, an increase
of 35%, compared to sales of $2,590,000 for the same quarter of the prior
year. On a year to date basis, ATM sales decreased 15%, compared to ATM
sales to customers other than CCC of $9,360,000 in the same period of the
prior year. During the nine months ended June 30, 2001, the Company had
ATM sales to CCC of $11,787,000.
The Company shipped 1,004 ATM units in the quarter ended June 30, 2002, an
increase of 51% from the 666 units shipped in the same quarter of the
prior year. On a year to date basis, the Company shipped 2,338 ATM units
for the nine months ended June 30, 2002, a decrease of 22% from the 2,997
units shipped to customers other than CCC in the previous year. During the
nine months ended June
8
30, 2001, the Company shipped 2,339 ATM units to CCC. The decline in
shipments to customers other than CCC was attributable to decreased orders
from two of the Company's major customers. The Company believes that it
has good relationships with these customers and that their current level
of purchases will increase, although there can be no assurance that this
will occur. The loss of these revenues was partially offset by business
with new customers, including some customers outside of the United States.
International sales were $1,128,000 representing approximately 18% of
total revenues for the quarter ended June 30, 2002, compared with
$726,000, or 15% of revenues for the same period in the preceding year.
The Company's sales of Timed Access Cash Controller ("TACC") products vary
with the timing of large orders and variances from quarter to quarter are
not meaningful. The Company believes that sales of this product for the
year will exceed prior year sales.
Parts and other revenues vary directly with sales of finished goods.
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 June 30, Nine Months Ended June 30,
----------------------------- ------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ----------
Gross profit....................... $ 2,159 $ 804 $ 4,532 $ 10,116
Selling, general and administrative 2,405 2,723 7,352 7,674
Provision for doubtful accounts.... -- 18,000 -- 18,025
Depreciation and amortization...... 287 296 874 978
---------- ----------- ---------- ---------
Operating loss..................... (533) (20,215) (3,694) (16,561)
Interest expense, net.............. 486 2,851 1,762 3,521
---------- ----------- ---------- ---------
Loss before taxes.................. (1,019) (23,066) (5,456) (20,082)
Income tax benefit................. -- (6,620) (323) (5,590)
---------- ----------- ---------- ---------
Net loss........................... $ (1,019) $ (16,446) $ (5,133) $ (14,492)
========== =========== ========== =========
Gross profit on product sales for the quarter ended June 30, 2002
increased $1,355,000 from the same quarter a year ago. Gross profit as a
percentage of sales was 35% in the quarter ended June 30, 2002, compared
to only 16% in the same quarter of the previous year. The improvement is
directly related to the increase in the volume of ATM units produced
during the quarter ended June 30, 2002.
Selling, general and administrative expenses for the quarter ended June
30, 2002 decreased 12% from the same quarter of the previous year despite
increased sales for the period. The Company has reduced its staff by more
than 10% and reduced certain of its costs in the service and engineering
departments. Selling, general and administrative expenses for the nine
months ended June 30, 2002 only decreased 4% from the same period a year
ago due to increased legal fees incurred in connection with litigation
related to the CCC bankruptcy and other matters.
Depreciation and amortization for the quarter ended June 30, 2002 was
$287,000, a decrease of $9,000 from the same quarter of the previous year.
This difference is attributable to assets used in production of new ATM
models that became fully depreciated at the beginning of the year.
Similarly, depreciation for the nine months ended June 30, 2002 was
$104,000 lower than the 2001 provision because of the effect of fully
depreciated assets.
9
Interest expense, net of interest income, was $486,000 for the quarter
ended June 30, 2002, compared to $321,000 for the same quarter of the
previous year after excluding $2,530,000 applicable to the write-off of
certain deferred financing costs. The net increase is due to the accrual
of penalty interest of $405,000 per quarter on the Company's Convertible
Debentures, which the Company has incurred since the Convertible
Debentures were "put" back to the Company in June 2001. This amount is in
addition to the regular accrual of $270,000 per quarter on the Convertible
Debentures at the stated interest rate. Although this interest has been
and continues to be accrued, the Company has made no cash payments of
interest to the Convertible Debenture holders since June 2001.
Income tax expense (benefit) in the nine months ended June 30, 2002
included a tax benefit of $323,000 relating to refunds of alternative
minimum tax for which the Company had previously established a valuation
allowance. In 2002, the Company has established a valuation allowance
equal to the amount of all other remaining income tax benefits due to the
uncertainty of the Company's ability to utilize such benefits.
LIQUIDITY AND CAPITAL RESOURCES
The financial position of the Company has deteriorated during 2002 as a
result of losses related to CCC's bankruptcy 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 June
30, 2002 and September 30, 2001:
(dollars in 000's)
---------------------------------
June 30, September 30,
2002 2001
------------- --------------
Cash................................................. $ 1,408 $ 3,266
Working capital (deficit)............................ (4,414) 250
Total assets......................................... 25,550 33,837
Shareholders' equity................................. 54 5,194
The Company is party to a credit agreement with a bank (the "Lender") (as
amended, the "Revolving Credit Facility"), which was amended effective
April 30, 2002 to provide for, among other things, an extension of the
maturity date until August 30, 2002; the reduction of the revolving
commitment from the initial amount of $7,000,000 to $2,000,000;
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 is currently $2,200,000; and the waiver by the
Lender of certain covenants from April 30, 2002 to August 30, 2002. At
June 30, 2002, $2,000,000 was outstanding under the Revolving Credit
Facility compared to $5,200,000 at September 30, 2001.
During the nine months ended June 30, 2002, Tidel received $6,073,000 of
Federal income tax refunds, which represents all expected tax refunds.
These funds were used to reduce the outstanding principal on the Revolving
Credit Facility and to provide the additional collateral in connection
with the extension with the Lender.
In January 2002, the Company obtained a commitment from another bank for a
line of credit of up to $5,000,000 through December 31, 2002, to replace
the Revolving Credit Facility. The commitment contains certain conditions
and covenants which require, among other things, a collateral pledge of
cash in an amount equal to 100% of the loan amount. The Company has not
utilized the commitment to obtain a loan from this bank, and is presently
in discussions with other lenders regarding the
10
replacement of the Revolving Credit Facility prior to August 30, 2002.
There can be no assurance that such discussions will be successful or that
a replacement for the Revolving Credit Facility will be obtained at all,
or on terms favorable to the Company. The Company is also currently
negotiating to extend the maturity date of the Revolving Credit Facility,
although there can be no assurance that such negotiations will be
successful. A failure to obtain a replacement facility on or prior to
August 30, 2002, or extend the maturity of the Revolving Credit Facility,
could have a material adverse effect on the Company.
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 the Company's 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 the 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 that the Company fails 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 continues to negotiate 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. It is
unknown what, if any, actions may be taken by the Holders to enforce their
rights under the Convertible Debentures. Depending on the actions taken,
any such action could have a material adverse effect upon the financial
condition or operations of the Company.
Even in the event that the ongoing negotiations are successful in waiving
provisions, delaying payments or restructuring the provisions of 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
11
agreements on acceptable terms to the Company with respect to the matters
described above relating to 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 Facility.
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 advanced services such as check cashing.
Total research and development expenditures were approximately $756,000
and $2,118,000 for the three months and nine months ended June 30, 2002,
and are included in selling, general and administrative expense. Pursuant
to a contract, a customer has paid the Company for certain engineering
costs incurred in the development of a new product line for which it will
be a customer. Such payments totaled $282,000 and $379,500 for the three
months and nine months ended June 30, 2002, and are included in revenues
for periods ended June 30, 2002.
Net cash generated from operating activities for the nine months ended
June 30, 2002 was $3,858,000, including Federal income tax refunds of
$6,073,000, which more than offset the continuing losses sustained in the
downturn in business. Management believes that operations will improve and
that the Company will begin to generate cash flow in the first fiscal
quarter of 2003, although there can be no assurance of any such
improvement, or that the Company will generate cash flow in the first
fiscal quarter of 2003 or at any other time. In the interim, management
believes that the Company has adequate resources to cover its requirements
for working capital. Such resources include cash on hand, anticipated
collection of certain notes receivable, and proceeds from a new debt
facility that management is negotiating to replace the Revolving Credit
Facility. There can be no assurance that such discussions will be
successful or that a replacement for the Revolving Credit Facility will be
obtained at all, or on terms favorable to the Company. A failure to obtain
a replacement facility on or prior to August 30, 2002, or extend the
maturity of the Revolving Credit Facility, could have a material adverse
effect on the Company.
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 Revolving Credit Facility.
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.
Foreign sales accounted for 18% and 15% of the Company's total sales
during the three months ended June 30, 2002 and 2001, respectively. On a
year to date basis, foreign sales accounted for 13% and 8% of sales during
the nine months ended June 30, 2002 and 2001, respectively. All sales are
transacted in U.S. dollars.
12
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 is 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.
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.
In April 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections ("SFAS No. 145"). SFAS No. 145 requires that gains and losses
from extinguishment of debt be classified as extraordinary items only if
they meet the criteria in Accounting Principles Board Opinion No. 30
("Opinion No. 30"). Applying the provisions of Opinion No. 30 will
distinguish transactions that are part of an entity's recurring operations
from those that are unusual and infrequent and meet the criteria for
classification as an extraordinary item. SFAS No. 145 is effective for the
Company beginning October 1, 2002. Under SFAS No. 145, the Company would
report gains and losses on the extinguishment of debt in pre-tax earnings
rather than in extraordinary
13
items. Upon the adoption of SFAS No. 145, the Company may be required to
reclassify certain items in its prior period statements of operations to
conform to the presentation required by SFAS No. 145. Under SFAS No. 145,
the Company will report gains and losses on the extinguishments of debt
that do meet the requirements of Opinion No. 30 in pre-tax earnings rather
than in extraordinary items.
In July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("SFAS No. 146"). SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities, such as restructuring, involuntarily terminating
employees, and consolidating facilities, initiated after September 30,
2003.
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. In addition, the
following risk factor should be considered:
Compliance with Nasdaq SmallCap Market Continued Listing Requirements
On March 22, 2002, the Company voluntarily transferred its listing to the
Nasdaq SmallCap Market. Pursuant to the Nasdaq SmallCap rules, the Company
had until August 13, 2002 to regain compliance with the $1.00 minimum bid
price requirement. On August 14, 2002, Nasdaq notified the Company that it
had been granted an additional 180-day grace period, until February 10,
2003, to demonstrate compliance with the minimum bid price requirement. If
the Company's common stock fails to trade at or above $1.00 per share for
10 consecutive trading days prior to the expiration of the grace period,
then the Company will be provided with written notification that its
securities will be subject to delisting procedures.
In addition to the $1.00 minimum bid price requirement, the Nasdaq
SmallCap Market has changed its continued listing and currently requires
the Company to have stockholders' equity of at least $2,500,000 for all
filings after November 1, 2002. As of June 30, 2002, the Company had
stockholders' equity of $54,000. Accordingly, even if the Company's Common
Stock had a minimum bid price of at least $1.00, the failure to maintain
stockholders' equity of $2,500,000 could result in the Company's
securities being delisted from the Nasdaq SmallCap Market. If the
Company's Common Stock was delisted from the Nasdaq SmallCap Market, it
would then be traded on the OTC Electronic Bulletin Board. At such point
the Company's Common Stock would also be deemed a penny stock and trading
of the Company's Common Stock would be subject to various additional
Securities and Exchange Commission regulations relating to penny stocks.
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 Company's non-compliance
with certain provisions of its Revolving Credit Facility and Convertible
Debentures, the Company's financial position and working capital
availability, the levels of orders which are received and can be shipped
in a quarter; customer order patterns and seasonality; costs of labor, raw
materials, supplies and equipment; technological changes; competition and
competitive pressures on pricing; the economic condition of the ATM
industry and the possibility that
14
it is a mature industry; possible delisting from the Nasdaq SmallCap
Market; and economic conditions in the United States and worldwide),
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, 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.
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 National Bank
("Fleet"), which provided banking and related services to CCC; NCR,
another secured creditor and vendor of CCC; and several 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.
The resolution of these matters is subject to future rulings by the Court.
15
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 by the Company 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.
On or about April 21, 2002, the bankruptcy case was converted to a Chapter
7 and the Court subsequently appointed a Trustee.
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, 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). The lead plaintiff seeks unspecified amounts of
compensatory damages, interest, and costs, including legal fees. The
Company denies the allegations in the CAC, and on May 10, 2002, filed a
motion to dismiss the CAC. The lead plaintiff filed a response in June
2002, and the Court will issue a ruling on the motion sometime in the
fourth quarter of fiscal 2002 or the first quarter of fiscal 2003. The
consolidated 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.
See Part I, Item 3, "Legal Proceedings" in the Company's Annual Report on
Form 10-K for the year ended September 30, 2001, as well as Part I, Item
1, "Legal Proceedings" in the Company's Quarterly Reports on Form 10-Q for
the quarters ended December 31, 2001 and March 31, 2002 for further
information regarding legal proceedings.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See "Liquidity and Capital Resources" in Part II, Item 2 of this Quarterly
Report on Form 10-Q for a discussion of the Revolving Credit Facility and
the Convertible Debentures.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
On March 22, 2002, the Company voluntarily transferred its listing to the
Nasdaq SmallCap Market. Pursuant to the Nasdaq SmallCap rules, the Company
had until August 13, 2002 to regain compliance with the $1.00 minimum bid
price requirement. On August 14, 2002, Nasdaq notified the Company that it
had been granted an additional 180-day grace period, until February 10,
2003, to demonstrate compliance with the minimum bid price requirement. If
the Company's common stock fails to trade at or above $1.00 per share for
10 consecutive trading days prior to the expiration of the grace period,
then the Company will be provided with written notification that its
securities will be subject to delisting procedures.
In addition to the $1.00 minimum bid price requirement, the Nasdaq
SmallCap Market has changed its continued listing and currently requires
the Company to have stockholders' equity of at least $2,500,000 for all
filings after November 1, 2002. As of June 30, 2002, the Company had
stockholders' equity of $54,000. Accordingly, even if the Company's Common
Stock had a minimum bid price of at least $1.00, the failure to maintain
stockholders' equity of $2,500,000 could result in the Company's
securities being delisted from the Nasdaq SmallCap Market. If the
Company's Common Stock was delisted from the Nasdaq SmallCap Market, it
would then be traded on the OTC Electronic Bulletin Board. At such point
the Company's Common Stock would also be deemed a penny stock and trading
of the Company's Common Stock would be subject to various additional
Securities and Exchange Commission regulations relating to penny stocks.
James T. Rash ended his medical leave of absence and has resumed the
duties of Chief Executive Officer of the Company. Mark K. Levenick remains
Chief Operating Officer of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
4.1 Seventh Amendment to Credit Agreement and Waiver Agreement
dated April 30, 2002 by and among the Company, Tidel
Engineering, L.P. and JP Morgan Chase.
4.2 Amended and Restated Revolving Credit Note dated April 30,
2002 by Tidel Engineering, L.P. payable to JP Morgan Chase.
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
b) REPORTS ON FORM 8-K
The Company filed one report on Form 8-K under Item 5 - Other Events
dated May 16, 2002.
17
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: August 19, 2002 By: /s/ JAMES T. RASH
------------------
James T. Rash
Principal Executive and
Financial Officer
18
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.1 Seventh Amendment to Credit Agreement and Waiver Agreement
dated April 30, 2002 by and among the Company, Tidel
Engineering, L.P. and JP Morgan Chase.
4.2 Amended and Restated Revolving Credit Note dated April 30,
2002 by Tidel Engineering, L.P. payable to JP Morgan Chase.
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer