Tidel Technologies 10-K 9-30-2005
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
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T
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended September 30, 2005
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the transition period
from
to
Commission
file Number 000-17288
TIDEL
TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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75-2193593
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(State
or other jurisdiction of incorporation
or organization)
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(I.R.S.
Employer Identification
No.)
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2900
Wilcrest Drive, Suite 205
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77042
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Houston,
Texas
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(Zip
Code)
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(Address
of principal executive offices)
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Registrant’s
telephone number, including area code (713) 783-8200
Securities
Registered Pursuant to Section 12(b) of the Act: None
Securities
Registered Pursuant to Section 12(g) of the Act:
common
stock, par value $.01 per share
(Title
of Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes * No T
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes * No T
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirement
for
the past 90 days. Yes *
No *
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this Chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. *
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule
12b-2 of the Act). Yes *
No *
The
aggregate market value of the 20,039,605 shares of common stock held by
non-affiliates of the registrant based on the closing sale price on March 31,
2005 of $0.17 was $3,406,733. The number of shares of common stock outstanding
as of the close of business on January 6, 2006 was 20,677,210.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
TIDEL
TECHNOLOGIES, INC.
ANNUAL
REPORT ON FORM 10-K
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PAGE
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PART
I
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2
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6
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9
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9
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PART
II
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11
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14
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14
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27
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27
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27
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27
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PART
III
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29
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30
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34
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35
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37
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PART
IV
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37
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39
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63
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65
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PART
I
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(a)
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General
Development of Business
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Tidel
Technologies, Inc. (the “Company,” “we,” “us,” or “our”) is a Delaware
corporation which, through its wholly owned subsidiaries, develops,
manufactures, sells and supports automated teller machines (“ATMs”) and
electronic cash security systems, consisting of the Timed Access Cash Controller
(“TACC”) products and the Sentinel products (together, the “Cash Security”
products), which are designed for the management of cash within various
specialty retail markets, primarily in the United States. Sales of ATM and
Cash
Security products are generally made on a wholesale basis to more than 200
distributors and manufacturers’ representatives. TACC and Sentinel products are
often sold directly to end-users as well as distributors.
In
September 1992, we acquired Tidel Engineering, Inc., a manufacturer of cash
handling devices and other products. We changed our name to Tidel Technologies,
Inc. in July 1997. The Company is primarily engaged in the development,
manufacturing, sale and support of automated teller machines (“ATMs”) and
electronic cash security systems, consisting of the Timed Access Cash Controller
(“TACC”) products and the Sentinel products (together, the “Cash Security”
products), which are designed for the management of cash within various
specialty retail markets.
On
January 3, 2006, we completed the sale of our ATM business to NCR EasyPoint,
LLC, as described below. On January 12, 2006, we entered into an asset purchase
agreement with an entity controlled by certain members of our management
pursuant to which we agreed to sell substantially all of the assets of our
Cash
Security business as described below
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(b)
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Financial
Information about Operating
Segments
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We
conduct business within one operating segment, principally in the United
States.
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(c)
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Description
of Business
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We
develop, manufacture, sell and support ATM products and Cash Security products.
Sales of ATM and Cash Security products are generally made on a wholesale
basis
to more than 200 distributors and manufacturers’ representatives. Sentinel
products are often sold directly to end-users as well as distributors. We
completed the sale of our ATM division on January 3, 2006 and executed an
agreement to sell our Cash Security Business on January 12, 2006. See “Recent
Developments - Sale of ATM Business and Sale of Cash Security Business and
Related Agreements with Laurus”.
The
ATM
products are low-cost, cash-dispensing automated teller machines that are
primarily designed for the off-premise, or non-bank, markets. We offer a wide
variety of options and enhancements to the ATM products, including custom
configurations that dispense cash-value products, such as coupons, tickets
and
stored-value cards; accept currency; and perform other functions, such as
check-cashing.
The
TACC
products are essentially stand-alone safes that dispense cash to an operator
in
preset amounts. As a deterrent to robbers, $50 or less in cash is kept in a
register at any given time. When a customer requires change in denominations
of
$5, $10 and $20 bills, the clerk presses a button on the TACC for the
appropriate denomination and the cash is dispensed in a plastic tube. The time
and frequency it takes to dispense the cash is pre-determined and adjustable
so
that in high-risk times of operations, transaction times can be slowed to act
as
a deterrent against robberies. When excess cash is collected, the clerk simply
places individual bills back into the plastic tubes and loads them into the
TACC
for safe storage. Other available features include envelope drop boxes for
excess cash, dollar scanners, state lottery interfaces, touch pads requiring
user PINs for increased transaction accuracy and an audit trail and reporting
capabilities.
The
Sentinel products were introduced in 2002. The Sentinel product has all the
functionality of the TACC, but has been designed to also reduce the risk
of
internal theft and increase in-store management efficiencies through its
state-of-the-art integration with a store’s point-of-sale (“POS”) and accounting
systems. Our engineering, sales and service departments work closely with
distributors and their customers to continually analyze and fulfill their
needs,
enhance existing products and develop new products.
The
principal materials and components used by us are pre-fabricated steel cabinets,
custom molded plastic and various electronic parts and components, all of
which
are readily available in quantity at this time. We assemble our products
by
configuring parts and components received from a number of major suppliers
with
our proprietary hardware and software.
We
maintain patents and trademarks on processes and brands associated with our
product lines; however, we do not believe that patents and trademarks, in
general, serve as barriers to entry into the ATM or the cash security system
industry. Our overall success depends upon proprietary technology and other
intellectual property rights. We must be able to obtain patents and register
new
trademarks in order to develop and introduce new product lines.
Our
operating results and the amount and timing of revenue are affected by numerous
factors including production schedules, customer priorities, sales volume and
sales mix. We ordinarily fill and ship customer orders within 45 days of
receipt; therefore, we historically have had no significant
backlog.
Bankruptcy
of Credit Card Center (“CCC”), Impact on Liquidity and Additional
Financing
After
several months of unsuccessful efforts to remedy its financial difficulties,
our
former largest customer, JRA 222, Inc., d/b/a Credit Card Center (“CCC”), filed
for protection under Chapter 11 of the United States Bankruptcy Code on June
6,
2001. At that time, we had accounts and a note receivable due from CCC totaling
approximately $27.1 million, which were secured by a security interest in CCC’s
accounts receivable, inventories and transaction income. However, NCR
Corporation (“NCR”) and Fleet National Bank (“Fleet”) also had competing secured
interest claims on the same assets and income of CCC, resulting in our security
interest not adequately covering our liability claim. The proceeding was
subsequently converted to a Chapter 7 proceeding and a Trustee was appointed
in
April 2002.
In
September 2001, we recovered inventory from CCC in the approximate amount of
$3.0 million; however, in view of the uncertainty of the ultimate outcome of
the
CCC bankruptcy proceedings, we increased our reserves to $24.1 million, which
represented the total remaining balances of the trade accounts and note
receivable due from CCC. In addition, we provided additional reserves of
$500,000 due to uncertainties regarding the full recovery of our escrow
deposits. At September 30, 2003, our remaining receivable from the escrow
deposits was reduced to $250,000. In October 2005, an order for summary judgment
was entered by the court, which confirmed that Fleet had a first lien on all
of
the assets of CCC followed by the liens of Tidel and NCR, respectively. In
December 2006, we entered into a settlement agreement in the matter of Fleet
v.
Tidel Engineering L.P., et al, whereby we received a cash payment of $430,000
in
exchange for an assignment of our claims to NCR and a waiver of our rights
to
any future payments from such claims.
Our
liquidity was negatively impacted by our inability to collect the outstanding
receivables and claims from CCC; therefore, we were required to seek additional
financing, resulting in a substantial increase in our debt, as discussed
below.
On
November 25, 2003, we completed a $6,850,000 financing transaction (the
“Financing”) with Laurus Master Fund, Ltd. (“Laurus”) pursuant to that certain
Securities Purchase Agreement by and between the Company and Laurus dated as
of
November 25, 2003 (the “2003 SPA”). The Financing was comprised of a three-year
convertible note in the amount of $6,450,000 and a one-year convertible note
in
the amount of $400,000, both of which bear interest at a rate of prime plus
2%
and were convertible into our common stock at a conversion price of $0.40 per
share. In addition, Laurus received warrants to purchase 4,250,000 shares of
our
common stock at an exercise price of $0.40 per share. The proceeds of the
Financing were allocated to the notes and the related warrants based on the
relative fair value of the notes and the warrants, with the value of the
warrants resulting in a discount against the notes. In addition, the conversion
terms of the notes result in a beneficial conversion feature, further
discounting the carrying value of the notes.
As
a
result, we will record additional interest charges totaling $6,850,000 over
the
terms of the notes related to these discounts. Laurus was also granted
registration rights in connection with the shares of common stock issuable
in
connection with the Financing. Proceeds from the Financing in the amount of
$6,000,000 were used to fully retire the $18,000,000 in Convertible Debentures
issued to two investors (the “Holders”) in September 2000, together with all
accrued interest, penalties and fees associated therewith. All of the warrants
and Convertible Debentures held by the Holders were terminated and we recorded
a
gain from extinguishment of debt of $18,823,000 (including accrued interest
through the date of extinguishment) in fiscal year 2004 related to this
Financing. In March 2004, the $400,000 note was repaid in full.
In
connection with the closing of the Financing, all outstanding litigation
including, without limitation, the Montrose Litigation, was dismissed, and
a
revolving credit facility with a bank (the “Revolving Credit Facility”) was
repaid through the release of the restricted cash used as collateral for the
Revolving Credit Facility. See Part II, Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” of the Form 10-K for
the fiscal years ended September 30, 2003 and 2004.
In
August
2004, Laurus notified us that an Event of Default had occurred and had continued
beyond any applicable grace period as a result of our non-payment of interest
and principal on the $6,450,000 convertible note as required under the terms
of
the Financing, as well as noncompliance with certain other covenants of the
Financing documents. In exchange for Laurus’s waiver of the Event of Default
until September 17, 2004, we agreed, among other things, to lower the conversion
price on the $6,450,000 convertible note and the exercise price of the warrants
from $0.40 per share to $0.30 per share. The reduction in conversion price
resulted in an additional discount against the carrying value of the notes.
As a
result, we will record additional interest charges totaling approximately
$1,900,000 over the remaining terms of the notes related to the
discounts.
On
November 26, 2004, we completed a $3,350,000 financing transaction (the
“Additional Financing”) with Laurus pursuant to that certain Securities Purchase
Agreement by and between the Company and Laurus, dated as of November 26, 2004
(the “2004 SPA”). The Additional Financing was comprised of (i) a three-year
convertible note issued to Laurus in the amount of $1,500,000, which bears
interest at a rate of 14% and is convertible into our common stock at a
conversion price of $3.00 per share (the “$1,500,000 Note”), (ii) a one-year
convertible note in the amount of $600,000 which bears interest at a rate of
10%
and is convertible into our common stock at a conversion price of $0.30 per
share (the “$600,000 Note”), (iii) a one-year convertible note of our
subsidiary, Tidel Engineering, L.P., in the amount of $1,250,000, which is
a
revolving working capital facility for the purpose of financing purchase orders
of our subsidiary, Tidel Engineering, L.P., (the “Purchase Order Note”), which
bears interest at a rate of 14% and is convertible into our common stock at
a
price of $3.00 per share and (iv) our issuance to Laurus of 1,251,000 shares
of
common stock, or approximately 7% of the total shares outstanding, (the “2003
Fee Shares”) in satisfaction of fees totaling $375,300 incurred in connection
with the convertible term notes issued in the Financing discussed above. As
a
result of the issuance of the 2003 Fee Shares, we recorded an additional charge
in fiscal 2004 of $638,010 based on the market value on November 26, 2004.
We
also increased the principal balance of the original note by $292,987 for unpaid
accrued interest as of August 1, 2004 which included $226,312 of interest at
the
default rate of 18%. In addition, Laurus received warrants to purchase 500,000
shares of our common stock at an exercise price of $0.30 per share. The proceeds
of the Additional Financing were allocated to the notes based on the relative
fair value of the notes and the warrants, with the value of the warrants
resulting in a discount against the notes. In addition, the conversion terms
of
the $600,000 Note resulted in a beneficial conversion feature, further
discounting the carrying value of the notes. As a result, we will record
additional interest charges related to these discounts totaling $840,000 over
the terms of the notes. Laurus was also granted registration rights in
connection with the 2003 Fee Shares and other shares issuable pursuant to the
Additional Financing. The obligations pursuant to the Additional Financing
are
secured by all of our assets and are guaranteed by our subsidiaries. Net
proceeds from the Additional Financing in the amount of $3,232,750 were
primarily used for (i) general working capital payments made directly to
vendors, (ii) past due interest on Laurus’s $6,450,000 convertible note due
pursuant to the Financing and (iii) the establishment of an escrow for future
principal and interest payments due pursuant to the Additional
Financing.
In
connection with the Financing, Laurus required that we covenant to become
current in our filings with the Securities and Exchange Commission according
to
a predetermined schedule. Effective November 26, 2004, the Additional Financing
documents require, among other things, that we provide evidence of filing to
Laurus of our fiscal 2003, fiscal 2004 and year-to-date interim 2005 filings
with the Securities and Exchange Commission on or before July 31,
2005.
On
February 4, 2005, we received a letter from the Securities and Exchange
Commission stating that the Division of Corporate Finance of the SEC would
not
object to the Company filing a comprehensive annual report on Form 10-K which
covers all of the periods during which it has been a delinquent filer, together
with its filing all Forms 10-Q which are due for quarters subsequent to the
latest fiscal year included in that comprehensive annual report. However, the
SEC Letter also stated that, upon filing such a comprehensive Form 10-K, the
Company would not be considered “current” for purposes of Regulation S, Rule 144
or filing on Forms S-8, and that the Company would not be eligible to use Forms
S-2 or S-3 until a sufficient history of making timely filings is established.
Laurus consented to the filing of such a comprehensive annual report in
satisfaction of the Filing Requirements mandated on or before July 31, 2005.
Laurus also consented to a modification of the requirement that a Registration
Statement be filed within 20 days of satisfaction of the Filing Requirements
to
instead require that the Registration Statement be required to be filed by
September 20, 2006.
We
filed
the Form 10-K for the fiscal year ended September 30, 2002 on February 1, 2005,
and we filed the Form 10-K for the fiscal years ended September 30, 2003 and
2004, the Form 10-Q for the quarter ending December 31, 2004 and the Form 10-Q
for the quarter ended March 31, 2005 on Monday, August 1, 2005, which was in
accordance with the requirements of the Additional Financing. We also filed
the
Form 10-Q for the quarter ended June 30, 2005 on a timely basis on August 19,
2005.
Laurus
Reorganization Fee
On
November 26, 2004, in connection with the Additional Financing, we entered
into
an agreement with Laurus (the “Asset Sales Agreement”) whereby we agreed to pay
a fee in the amount of at least $2,000,000 (the “Reorganization Fee”) to Laurus
upon the occurrence of certain events as specified below and therein, which
Reorganization Fee is secured by all of our assets, and is guaranteed by our
subsidiaries. The Asset Sales Agreement provides that (i) once our obligations
to Laurus have been paid in full (other than the Reorganization Fee), we shall
be able to seek additional financing in the form of a non-convertible bank
loan
in an aggregate principal amount not to exceed $4,000,000, subject to Laurus’s
right of first refusal; (ii) the net proceeds of an asset sale to the party
named therein shall be applied to our obligations to Laurus under the Financing
and the Additional Financing, as described above (collectively, the
“Obligations”), but not to the Reorganization Fee; and (iii) the proceeds of any
of our subsequent sales of equity interests or assets or of our subsidiaries
consummated on or before the fifth anniversary of the Asset Sales Agreement
(each, a “Company Sale”) shall be applied first to any remaining obligations,
then paid to Laurus pursuant to an increasing percentage of at least 55.5%
set
forth therein, which amount shall be applied to the Reorganization Fee. Under
this formula, the existing shareholders could receive less than 45% of the
proceeds of any sale of our assets or equity interests, after payment of the
Additional Financing and Reorganization Fee as defined. The Reorganization
Fee
shall be $2,000,000 at a minimum, but could equal a higher amount based upon
a
percentage of the proceeds of any company sale, as such term is defined in
the
Asset Sales Agreement. In the event that Laurus has not received the full amount
of the Reorganization Fee on or before the fifth anniversary of the date of
the
Asset Sales Agreement, then we shall pay any remaining balance due on the
Reorganization Fee to Laurus. We recorded a $2,000,000 charge in the first
quarter of fiscal 2005 to interest expense.
Upon
closing of the Cash Security Business Sale (as defined below), we estimate
the
Reorganization Fee payable to Laurus will be in the range of $9 million to
$11
million.
As
of
September 30, 2005, we had approximately $8.2 million face value of outstanding
debt, or $4.4 million after debt discount of approximately $3.7 million. Of
the
$8.2 million total outstanding debt at September 30, 2005, $6.0 million
represented the outstanding balance of the Financing, and $0.6 million and
$1.5
million represented the outstanding respective balances of two term notes in
connection with the Additional Financing together with accrued but unpaid
interest.
At
September 30, 2005, we had $1,250,000 available for borrowing under the Purchase
Order Note through November 26, 2005, as part of the Additional Financing in
November 2004. The Maturity date was extended to the earlier of the ATM Asset
Sale or February 28, 2006.
Recent
Developments
Sale
of ATM Business
On
February 19, 2005, the Company and its wholly-owned subsidiary, Tidel
Engineering, L.P., entered into an asset purchase agreement (the “NCR Asset
Purchase Agreement”) with NCR EasyPoint LLC f/k/a/ NCR Texas LLC (“NCR
EasyPoint”), a wholly owned subsidiary of NCR Corporation, for the sale of our
ATM Business (the “ATM Business Sale”).
On
December 28, 2005, the holders of 62.2% of our shares of outstanding common
stock approved the NCR Asset Purchase Agreement.
On
January 3, 2006, we completed the ATM Business Sale. The total purchase price
was approximately $10.4 million of which $8.2 million was paid to Laurus into
a
collateral account to be held by Laurus as collateral for the satisfaction
of
all monetary obligations payable to Laurus, $0.5 million was paid into an escrow
account pending a post closing net asset value adjustment, and the remaining
$1.7 million was paid to the Company to be used for necessary working capital.
This termination resulted in a book gain of approximately $3.8
million.
We
have
classified our ATM business as Assets Held for Sale as of September 30,
2005.
Sale
of Our Cash Security Business and Related Agreements with
Laurus
We
entered into an asset purchase agreement, dated as of January 12, 2006 (the
“Cash Security Asset Purchase Agreement”), with Sentinel Operating, L.P., a
purchaser controlled by a management buyout team led by Mark K. Levenick,
our
Interim Chief Executive Officer and a member of our Board, and Raymond Landry,
a
member of our Board, for the sale of substantially all of the assets of our
Cash
Security Business (the “Cash Security Business Sale”). The two members of our
Board who are unaffiliated with the management buyout of the Cash Security
business negotiated the terms of the Cash Security Asset Purchase Agreement
with
the management buyout group.
The
independent members of our board received an opinion from an investment advisory
firm, Capitalink, L.C., as to the fairness of the Cash Security Business
Sale
from a financial point of view to the unaffiliated shareholders. On December
31,
2005, our Board, with Messrs. Levenick and Landry abstaining, voted to approve
the Cash Security Asset Purchase Agreement and the Cash Security Business
Sale.
The
Cash
Security Asset Purchase Agreement provides for the sale of the Company’s Cash
Security business to the purchaser thereunder for a cash purchase price of
$17.5
million, less $100,000 as consideration for the purchaser’s potential liability
in connection with certain litigation and subject to a closing balance sheet
purchase price adjustment. In addition, the Cash Security Asset Purchase
Agreement is subject to customary representations and warranties and covenants
and the satisfaction of several customary closing conditions, including our
obtaining shareholder approval. The closing under the Cash Security Asset
Purchase Agreement is expected to occur in the first quarter of
2006. The purchase price payable under the Cash Security Business
Sale is subject to the Reorganization Fee and the other amounts payable to
Laurus under the terms of the Asset Sales Agreement
Upon
closing of the Cash Security Business Sale, we estimate the Reorganization
Fee
payable to Laurus will be in the range of $9 million to $11 million. See Part
I,
Item 1(c), “Laurus Reorganization Fee” for more information.
In
connection with the Cash Security Asset Purchase Agreement and pursuant to
the
terms of the Exercise and Conversion Agreement we entered into with Laurus
on
January 12, 2006, Laurus converted $5,400,000 in aggregate principal amount
of
convertible Company debt it holds into 18,000,000 shares of our common stock.
Following Laurus’ conversion of such debt, Laurus holds shares representing
approximately 49.8% of our common stock.
On
January 12, 2006, we repaid all of our remaining outstanding debt to Laurus
in
the principal amount of $2,617,988 plus accrued but unpaid interest in the
amount of $113,333. In connection therewith, the Company paid a prepayment
penalty to Laurus in the amount of $59,180.
In
addition, in connection with the Cash Security Asset Purchase
Agreement, and pursuant to the terms of a stock redemption agreement we
entered into with Laurus at such time, we have agreed to repurchase from Laurus,
upon the closing of the Cash Security Business Sale, all shares of Company
common stock held by Laurus at a per share price not less than $.20 per share
nor greater than $.34 per share following the determination of the Company’s
assets in accordance with the formula set forth below.
The
stock
redemption agreement with Laurus provides that the purchase price (the “Purchase
Price”) for the shares of our common stock to be repurchased from Laurus (the
“Laurus Shares”) shall consist of the Per Share Price (as defined below)
multiplied by the number of Laurus Shares. The “Per Share Price” shall equal the
quotient obtained by dividing (1) the value on the closing date under the Cash
Security Asset Purchase Agreement of (A) the sum of the value of all assets
of
the Company that would be valued by the Company in connection with a liquidation
of the Company following the closing of the Cash Security Business Sale (after
giving effect to such closing), including, but not limited to: (i) all cash
and
cash equivalents held by the Company, (ii) all marketable securities held by
the
Company, and (iii) all other remaining tangible and intangible assets held
directly or indirectly by the Company valued at fair market value minus (B)
the
sum of (i) all fees and expenses of the Company and its subsidiaries in
connection with the ATM Business Sale and the Cash Security Business Sale
incurred through the closing date of the Cash Security Business Sale, (ii)
all
payments and obligations due to, or on behalf of, present and former employees
of the Company and its subsidiaries incurred through the closing date of the
Cash Security Business Sale, (iii) all amounts paid or payable to Laurus
pursuant to the Agreement Regarding NCR Transaction and Other Assets Sales
dated
as of November 26, 2004 by and between the Company and Laurus, (iv) all other
liabilities of the Company and its subsidiaries, (v) payments due to independent
directors of the Company in an aggregate amount not to exceed $400,000, and
(vi)
a good faith estimate of the costs and expenses which would be incurred in
connection with the liquidation of the Company including, without limitation,
legal fees, directors and officers insurance, all fees and expenses relating
to
SEC and governmental filings and related expenses, by (2) the total number
of
shares of Common Stock outstanding on the closing date of the Cash Security
Business Sale. Notwithstanding the foregoing, the Per Share Price shall not
be
less than $.20 per share nor greater than $.34 per share.
Following
such share repurchase, Laurus will cease to hold any equity interest in the
Company. If the Cash Security Business Sale does not occur by March 31, 2006,
then pursuant to the terms of the Exercise and Conversion Agreement we entered
into with Laurus at the same time as the Cash Security Asset Purchase Agreement,
we have agreed to immediately redeem from Laurus the 18,000,000 shares of our
common stock issued to Laurus in connection with the Cash Security Asset
Purchase Agreement and Laurus’ conversion of our debt at a redemption price of
$5,400,000.
Customers
Only
one
customer accounted for more than 10% of net sales for the fiscal years ended
2005, 2004 and, 2003. No one customer accounted for more than 10% of net
sales
for the fiscal year ended 2004.
Our
compliance with federal, state and local environmental protection laws during
2005, 2004, and 2003 had no material effect upon our capital
expenditures, earnings or competitive position. As of September 30, 2005,
it was
not expected that compliance with such laws would have a material effect
upon
our capital expenditures, earnings or the competitive position in future
years.
Employees
At
September 30, 2005 and 2004, we employed approximately 107 people. On January
1,
2006, 56 employees associated with our ATM Business personnel became employees
of NCR EasyPoint following the closing of the ATM Business Sale.
Company
Information and Website
Our
principal executive offices are located at 2900 Wilcrest Drive, Suite 205,
Houston, Texas 77042. Our telephone number is (713) 783-8200. The Internet
address of our principal operating subsidiary’s website is www.tidel.com. Copies
of the annual, quarterly and current reports that we file with the SEC, and
any
amendments to those reports, are available on our subsidiary’s web site free of
charge. The information posted on our web site is not incorporated into this
Annual Report.
|
(e)
|
Financial
Information about Geographic
Areas
|
The
vast
majority of our sales in fiscal 2005 were to customers within the United States.
Sales to customers outside the United States, as a percentage of total revenues,
were approximately 14%, 16% and 25%, in the fiscal years ended September 30,
2005, 2004 and 2003, respectively.
Substantially
all of our assets were located within the United States during fiscal year
2005
and 2004, and are still located in the United States today. Inventory in transit
related to sales to customers outside the United States can be in foreign
countries prior to receipt by the customer.
There
are
several risks inherent in our business including, but not limited to, the
following:
Existing
shareholders’ ownership in the Company will be significantly
diluted.
Following
Laurus’s conversion as of January 12, 2006 of $5,400,000 of Company debt into
18,000,000 new shares, Laurus holds an aggregate 19,251,000, or 49.8%, of our
outstanding shares.
For
more
information, see Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” for additional information about these
transactions.
Upon
closing of the Cash Security Business Sale, we will owe a substantial
Reorganization Fee to Laurus
As
a
condition of the Additional Financing, we entered into an agreement with Laurus
whereby we agreed to pay a Reorganization Fee of at least $2,000,000. The
agreement provides that the net proceeds of an asset sale to the party named
therein shall be applied to our obligations under the Financing and the
Additional Financing, but not to the Reorganization Fee, and that the net
proceeds of any subsequent sales of assets or equity consummated on or prior
to
the fifth anniversary of the date of the agreement shall be applied first to
such obligations, then paid to Laurus pursuant to an increasing percentage
of at
least 55.5%, as set forth in the agreement. Accordingly, the Reorganization
Fee
could be a substantially higher amount based upon a percentage of the proceeds
of any company sale, as specified in the asset sales agreement. Even in the
event that we repay all of the notes payable outstanding to Laurus in full,
the
proceeds from any Company sale would first be reduced by the Reorganization
Fee,
which would have the same effect as diluting the existing shareholders’
ownership. The purchase price of the Cash Security Business Sale will be
subject to the Reorganization Fee.
Upon
closing of the Cash Security Business Sale, we estimate the Reorganization
Fee
payable to Laurus will be in the range of $9 million to $11
million.
For
more
information, see Part I, Item 1(c), “Laurus Reorganization Fee” and item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” for additional information about the Reorganization Fee and other
transactions with Laurus.
Upon
closing of the Cash Security Business Sale, we will cease to have
operations.
Following
the consummation of the ATM Business Sale on January 3, 2006 and the expected
closing of the Cash Security Business Sale in the first quarter of 2006, we
will
have no remaining operations and no employees.
Our
future success is uncertain due to our lack of liquidity and financial situation
at present.
Our
liquidity has been negatively impacted by our inability to collect outstanding
receivables and claims as a result of CCC’s bankruptcy, the inability to collect
outstanding receivables from certain customers, under-absorbed fixed costs
associated with the production facilities, and reduced sales of our products
resulting from general difficulties in the ATM market. In order to meet our
liquidity needs during the past four years, we have incurred a substantial
amount of debt. See “Liquidity and Capital Resources” under Item 7 for detailed
discussion of these financing transactions. See Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” of
this Annual Report for information on the purchase order financing facility.
There can be no assurance that this facility will be sufficient to meet our
current working capital needs or that we will have sufficient working capital
in
the future. If we need to seek additional financing, there can be no assurances
that we will obtain such additional financing for working capital purposes.
The
failure to obtain such additional financing could cause a material adverse
effect upon our financial condition.
Our
future results of operations involve a number of significant risks and
uncertainties. Factors that could affect our future operating results and cause
actual results to vary materially from expectations include, but are not limited
to, lack of a credit facility, dependence on key personnel, product
obsolescence, ability to increase our client base, ability to increase sales
to
our current clients, ability to generate consistent sales, technological
innovations and acceptance, competition, reliance on certain vendors and credit
risks. If we do not experience sales increases in future periods, we will have
to reduce our expenses and capital expenditures to maintain cash levels
necessary to sustain our operations. Our future success will depend on
increasing our revenues and reducing our expenses to enable us to regain
profitability.
We
may be unable to sell debt or equity securities in the event we need additional
funds for operations.
We
may
need to sell equity or debt securities in the future to provide working capital
for our operations or to provide funds in the event of future operating losses.
We cannot predict whether we will be successful in raising additional funds.
We
have no commitments, agreements or understandings regarding additional
financings at this time, and we may be unable to obtain additional financing
on
satisfactory terms or at all. The terms of the Financing and of the Additional
Financing restrict our ability to raise additional funds, and there can be
no
assurance that we will be able to obtain a waiver of such restrictions. If
we
were to raise additional funds through the issuance of equity or convertible
debt securities, the current shareholders could be substantially diluted and
those additional securities could have preferences and privileges that current
security holders do not have.
We
could lose the services of one or more of our executive officers or key
employees and we are currently operating without a permanent Chairman or Chief
Executive Officer or permanent Chief Financial Officer.
Our
executive officers and key employees are critical to our business because of
their experience and acumen. In particular, the loss of the services of Mark
K.
Levenick, our Interim Chief Executive Officer and President of our operating
subsidiaries, could have a material adverse effect on our operations. In
December 2004, James T. Rash, the former Chairman of the Board, Chief Executive
and Financial Officer, died. We have named Mark K. Levenick as Interim Chief
Executive Officer but no permanent Chairman or Chief Executive Officer has
been
hired or appointed as of the date hereof. We engaged Robert D. Peltier as
Interim Chief Financial Officer on a consulting basis in February 2005. Our
future success and growth also depends on our ability to continue to attract,
motivate and retain highly qualified employees, including those with the
expertise necessary to operate our business. These officers and key personnel
may not remain with us, and their loss may harm our development of technology,
our revenues and cash flows. Concurrently, the addition of these personnel
by
our competitors would enable our competitors to compete more effectively by
diverting customers from us and facilitating more rapid development of their
technology.
Our
operating results may fluctuate for a variety of reasons, many of which are
beyond our control.
We
have
sold our ATM Business and signed an agreement to sell our Cash Security
Business. Until the closing of that transaction, or if that transaction should
fail to close, our business strategies may fail and our quarterly and annual
operating results may vary significantly from period to period depending
on:
|
•
|
the
collection of outstanding receivables,
|
|
•
|
the
volume and timing of orders received during the period,
|
|
•
|
the
timing of new product introductions by us and our
competitors,
|
|
•
|
the
impact of price competition on our selling prices,
|
|
•
|
the
availability and pricing of components for our products,
|
|
•
|
seasonal
fluctuations in operations and sales,
|
|
•
|
changes
in product or distribution channel mix,
|
|
•
|
changes
in operating expenses,
|
|
•
|
changes
in our strategy,
|
|
•
|
personnel
changes and general economic factors,
|
|
•
|
the
dependence of our strong working relationships with our significant
customers, and
|
|
•
|
the
possibility of a terrorist attack or armed conflict could harm our
business.
|
Many
of
these factors are beyond our control. We are unable to forecast the volume
and
timing of orders received during a particular period. Customers generally order
our products on an as-needed basis, and accordingly we have historically
operated with a relatively small backlog. We experience seasonal variances
in
our operations. Accordingly, operating results for any particular quarter may
not be indicative of the results for the future quarter or for the
year.
Even
though it is difficult to forecast future sales and we maintain a relatively
small level of backlog at any given time, we generally must plan production,
order components and undertake our development, sales and marketing activities
and other commitments months in advance. Accordingly, any shortfall in sales
in
a given period may adversely impact our results of operations if we are unable
to adjust expenses or inventory during the period to match the level of sales
for the period.
We
have limited management and other resources to address the issues confronting
us.
The
problems and issues facing our future business ventures could significantly
strain our limited personnel, management, financial controls and other
resources. Our ability to manage any future complications effectively will
require us to hire new employees, to integrate new management and employees
into
our overall operations and to continue to improve our operational, financial
and
management systems, controls and facilities. Our failure to handle the issues
we
face effectively, including any failure to integrate new management controls,
systems and procedures, could materially adversely affect our business, results
of operations and financial condition.
The
markets for our products are every competitive and, if we fail to adapt our
products and services, we will lose customers and fail to compete
effectively.
Our
direct competitors for our TACC products include FireKing Industries, Armor
Safe
Company and AT Systems. Sales of Sentinel cash security systems are currently
confined to a small number of customers. The loss of a single customer could
have an adverse affect on TACC sales.
Competition
is likely to result in price reductions, reduced margins and loss of market
share, any one of which may harm our business. Competitors vary in size, scope
and breadth of the products and services offered. We may encounter competition
from competitors who offer more functionality and features. In addition, we
expect competition from other established and emerging companies, as the market
continues to develop, resulting in increased price sensitivity for our
products.
To
compete successfully, we must adapt to a rapidly changing market by continually
improving the performance, features and reliability of our products and
services, or else our products and services may become obsolete. We may also
incur substantial costs in modifying our products, services or infrastructure
in
order to adapt to these changes.
Many
of
our competitors have greater financial, technical, marketing and other resources
and greater name recognition than we do. In addition, many of our competitors
have established relationships with our current and potential customers and
have
extensive knowledge of our industry. In the past, we have lost potential
customers to competitors. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or
with
third parties to increase the ability of their products to address customer
needs. Accordingly, it is possible that new competitors or alliances among
competitors may develop and rapidly acquire significant market
share.
If
we release products containing defects, we may need to halt further sales and/or
services until we fix the defects, and our reputation would be
harmed.
We
provide a limited warranty on each of our products covering manufacturing
defects and premature failure. While we believe that our reserves for warranty
claims are adequate, we may experience increased warranty claims. Our products
may contain undetected defects which could result in the improper dispensing
of
cash or other items. Although we have experienced only a limited number of
claims of this nature to date, these types of defects may occur in the future.
In addition, we may be held liable for losses incurred by end users as a result
of criminal activity which our products were intended to prevent, or for any
damages suffered by end users as a result of malfunctioning or damaged
components.
We
remain liable for any problems or contamination related to our fuel monitoring
units.
Although
we discontinued the production and distribution of our fuel monitoring units
more than five years ago, those units which are still in use are subject to
a
variety of federal, state and local laws, rules and regulations governing
storage, manufacture, use, discharge, release and disposal of product and
contaminants into the environment or otherwise relating to the protecting of
the
environment. These regulations include, among others (i) the Comprehensive
Environmental Response, (ii) Compensation and Liability Act of 1980, (iii)
the
Resource Conservation and Recovery Act of 1976, (iv) the Oil Pollution Act
of
1990, (v) the Clean Air Act of 1970, (vi) the Clean Water Act of 1972, (vii)
the
Toxic Substances Control Act of 1976, (viii) the Emergency Planning and
Community Right-to-Know Act and (ix) the Occupational Safety and Health
Administration Act.
Our
fuel
monitoring products, by their very nature, give rise to the potential for
substantial environmental risks. If our monitoring systems fail to operate
properly, releases or discharges of petroleum and related products and
associated wastes could contaminate the environment. If there are releases
or
discharges we may be found liable under the environmental laws, rules and
regulations of the United States, state and local jurisdictions relating to
contamination or threat of contamination of air, soil, groundwater and surface
waters. This indirect liability could expose us to a monetary liability related
to the failure of the monitoring systems to detect potential leaks in
underground storage tanks. Although we have tried to protect our business from
environmental claims by limiting the types of services we provide, operating
pursuant to contracts designed to protect us, instituting quality control
operating procedures and, where appropriate, insuring against environmental
claims, we are unable to predict whether these measures will eliminate the
risk
of potential environmental liability entirely.
We
relocated our corporate offices on October 1, 2003 into an approximately 2,100
square foot space. On June 1, 2005, we renewed the lease for these offices
for a
term of seven months which expires December 31, 2005, with an option to lease
on
a month-to-month basis thereafter. We believe that our present leased space
is
suitable for our needs.
The
manufacturing, engineering and warehouse operations of Tidel Engineering, L.P.
are located in two nearby facilities occupying approximately 110,000 square
feet
in Carrollton, Texas, under leases expiring in February 2006 with an option
to
extend for three years. This lease was assumed by NCR EasyPoint pursuant to
the
NCR Asset Purchase Agreement, discussed further in Part I, Item 1 of this Annual
Report.
At
September 30, 2005 and 2004, we owned tangible property and equipment with
a
cost basis of approximately $5.5 million and $5.4 million, respectively which
included assets held for sale from discontinued operations.
Bankruptcy
of Credit Card Center (“CCC”), Impact on Liquidity and Additional
Financing
After
several months of unsuccessful efforts to remedy its financial difficulties,
our
former largest customer, CCC, filed for protection under Chapter 11 of the
United States Bankruptcy Code on June 6, 2001. At that time, we had accounts
and
a note receivable due from CCC totaling approximately $27.1 million, which
were
secured by a security interest in CCC’s accounts receivable, inventories and
transaction income. However, NCR Corporation (“NCR”) and Fleet National Bank
(“Fleet”) also had competing secured interest claims on the same assets and
income of CCC, resulting in our security interest not adequately covering our
liability claim. The proceeding was subsequently converted to a Chapter 7
proceeding and a Trustee was appointed in April 2002.
In
September 2001, we recovered inventory from CCC in the approximate amount of
$3.0 million; however, in view of the uncertainty of the ultimate outcome of
the
CCC bankruptcy proceedings, we increased our reserves to $24.1 million, which
represented the total remaining balances of the trade accounts and note
receivable due from CCC. In addition, we provided additional reserves of
$500,000 due to uncertainties regarding the full recovery of our escrow
deposits. At September 30, 2003, our remaining receivable from the escrow
deposits was reduced to $250,000. In October 2005, an order for summary judgment
was entered by the court, which confirmed that Fleet had a first lien on all
of
the assets of CCC followed by the liens of Tidel and NCR, respectively. In
December 2006, we entered into a settlement agreement in the matter of Fleet
v.
Tidel Engineering L.P., et al, whereby we received a cash payment of $430,000
in
exchange for an assignment of our claims to NCR and a waiver of our rights
to
any future payments from such claims.
We
and
several of our officers and directors were named as defendants (the
“Defendants”) in a purported class action filed on October 31, 2001 in the
United States District Court for the Southern District of Texas (the “Southern
District”), George Lehockey v. Tidel Technologies, et al., H-01-3741. Prior to
the suit’s filing, four identical suits were also filed in the Southern
District. On or about March 18, 2002, the Court consolidated all of the pending
class actions and appointed a lead plaintiff under the Private Securities
Litigation Reform Act of 1995 (“Reform Act”). On April 10, 2002, the lead
plaintiff filed a Consolidated Amended Complaint (“CAC”) that alleged that the
Defendants made material misrepresentations and omissions concerning our
financial condition and prospects between January 14, 2000 and February 8,
2001
(the putative class period). In June 2004, we reached an agreement in principle
to settle these class action lawsuits. The settlement, which was subject to
a
definitive agreement and court approval, provided for a cash payment of $3
million to be funded by our liability insurance carrier and our issuance of
two
million shares of common stock. In October 2004, the Court approved the
settlement and the shares were issued in November 2004. In addition, in August
2004, we reached an agreement with the liability insurance carrier to issue
warrants to the carrier to purchase 500,000 shares of our common stock at an
exercise price of $0.67 per share in exchange for the carrier’s acceptance of
the terms of the class action lawsuit.
On
June
9, 2005, Corporate Safe Specialists, Inc. (“CSS”) filed a lawsuit against Tidel
Technologies, Inc. and Tidel Engineering, L.P. The lawsuit, Civil Action No.
02-C-3421, was filed in the United States District Court of the Northern
District of Illinois, Eastern Division. CSS alleges that the Sentinel product
sold by Tidel Engineering, L.P. infringes on one or more patent claims found
in
CSS patent U.S. Patent No. 6,885,281 (the ‘281 patent). CSS seeks injunctive
relief against future infringement, unspecified damages for past infringement
and attorney’s fees and costs. Tidel Technologies, Inc. was released from this
lawsuit, but Tidel Engineering, L.P. remains a defendant. Tidel Engineering,
L.P. is vigorously defending this litigation.
Subsequently
we filed a motion to dismiss the case CSS filed in Illinois, and Tidel
Engineering, L.P. filed a motion to transfer the Illinois case to the Eastern
District of Texas. On August 15, 2005, The Court ordered the transfer of this
case to the Northern District of Texas. We also filed a declaratory judgment
action pending in the Eastern District of Texas. In that action, we are asking
the Eastern District of Texas to find, among other things that we have not
infringed on CSS's `281 patent. Both companies have also requested that an
injunction be issued by the Eastern District of Texas against CSS for
intentional interference with the sale or bid process for our cash security
business. We are vigorously pursuing this declaratory judgment
action.
PART
II
|
|
MARKET
FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
Our
common stock is currently traded over-the-counter on the Pink Sheets under
the
symbol “ATMS.PK.” From March 26, 2002 through March 26, 2003, our common stock
traded on the Nasdaq SmallCap Market. From August 16, 2000 through March 25,
2002, our common stock traded on the Nasdaq National Market. The following
table
sets forth the quarterly high and low bid information for our common stock
for
the three-year period ended September 30, 2005. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may
not
necessarily represent actual transactions.
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
Fiscal
Quarter Ended
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
|
December
31,
|
|
$
|
.72
|
|
$
|
.45
|
|
$
|
.78
|
|
$
|
.33
|
|
$
|
.61
|
|
$
|
.35
|
|
|
March
31,
|
|
|
.47
|
|
|
.14
|
|
|
.75
|
|
|
.47
|
|
|
.43
|
|
|
.17
|
|
|
June
30,
|
|
|
.36
|
|
|
.12
|
|
|
.96
|
|
|
.65
|
|
|
.21
|
|
|
.16
|
|
|
September
30,
|
|
|
.50
|
|
|
.27
|
|
|
.80
|
|
|
.59
|
|
|
.42
|
|
|
.17
|
|
|
Fiscal
Year
|
|
|
.72
|
|
|
.12
|
|
|
.96
|
|
|
.33
|
|
|
.61
|
|
|
.16
|
|
On
January 21, 2003, we received notice from The Nasdaq Stock Market, Inc. that,
as
a result of our 10-K filing deficiency, we had failed to comply with the
requirements for continued listing on the Nasdaq SmallCap Market under
Marketplace Rule 4310(c)(14), and that our securities were subject to delisting.
We had previously received notice that we failed to comply with the minimum
bid
price requirement as set forth in Marketplace Rule 4310(c)(4). On February
14,
2003, we received a third notice from The Nasdaq Stock Market, Inc., which
stated we had failed to comply with the minimum shareholders’ equity requirement
for continued listing set forth in Marketplace Rule 4310(c)(2)(B). On February
20, 2003, we had an oral hearing before the Nasdaq Listing Qualifications Panel
to review these three compliance deficiencies. On March 25, 2003, we were
notified by the Nasdaq Listing Qualifications Panel that our common stock would
be delisted from the Nasdaq SmallCap Market effective March 26, 2003. Effective
at the opening of business on March 26, 2003, our common stock began trading
over-the-counter on the Pink Sheets under the ticker symbol
“ATMS.PK”.
As
of
November 30 2005, there were approximately 1,077 holders on record of our common
stock.
We
have
not paid any dividends in the past, and do not anticipate paying dividends
in
the foreseeable future. From September 30, 2002 until November 25, 2003, our
wholly-owned subsidiary, Tidel Engineering, L.P., was restricted from paying
dividends to us pursuant to the subsidiary’s revolving credit agreement with a
bank in effect at that time. Since November 25, 2003, we have been restricted
from paying dividends pursuant to our financing arrangements with Laurus. For
additional information about our arrangements with Laurus, see Part II, Item
7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of this Annual Report.
|
(d)
|
Securities
Authorized for Issuance under Equity Compensation
Plans
|
We
adopted the Tidel Technologies, Inc. 1997 Long-Term Incentive Plan (the “1997
Plan”) effective July 15, 1997. The 1997 Plan permits the grant of non-qualified
stock options, incentive stock options, stock appreciation rights, restricted
stock and other stock-based awards to our employees or directors or our
subsidiaries. Under the 1997 Plan, up to 2,000,000 shares of common stock may
be
awarded. The number of shares issued or reserved pursuant to the 1997 Plan
(or
pursuant to outstanding awards) are subject to adjustment on account of mergers,
consolidations, reorganization, stock splits, stock dividends and other dilutive
changes in the common stock. Shares of common stock covered by awards that
expire, terminate, or lapse, will again be available for grant under the 1997
Plan. Our predecessor employee stock option plan, the 1989 Incentive Stock
Option Plan (the “1989 Plan”), was terminated in June 1999. At the date of
termination of the 1989 Plan, there were outstanding options to purchase 438,250
shares of common stock, of which none were outstanding at September 30, 2005
and
50,000 were outstanding at September 30, 2004.
The
following table provides information regarding common stock authorized for
issuance under our compensation plans as of September 30 of 2005.
Equity
Compensation Plan Information
As
of September 30, 2005
|
Plan
Category
|
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
(a)
|
|
Weighted-average
exercise price of outstanding options, warrants and
rights
(b)
|
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a)
(c)
|
|
|
Equity
compensation plans approved by security holders
|
|
|
1,099,810
|
|
$
|
1.22
|
|
|
855,890
|
|
|
Equity
compensation plans not approved by security holders
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
|
1,099,810
|
|
$
|
1.22
|
|
|
855,890
|
|
|
(e)
|
Recent
Sales of Unregistered
Securities
|
At
September 30, 2005, we had outstanding warrants to purchase 5,890,000 shares
of
common stock that expire at various dates through November 2010. The warrants
have exercise prices ranging from $0.30 to $0.67 per share and, if exercised,
would generate proceeds to us of approximately $2,035,500.
The
following sales of unregistered securities were sold by the Company during
the
2003 and 2004 fiscal years in reliance on the exemptions from registration
contained in Section 4(2) and Regulation D promulgated under the Securities
Act
of 1933.
In
September 2003, we issued a shareholder, Alliance Developments, Ltd.
(“Alliance”), an unsecured, short-term promissory note dated September 26, 2003
in the principal amount of $300,000 due December 24, 2003; plus accrued interest
at 9% per annum, payable at maturity. In consideration for the original loan,
Alliance received three-year warrants to purchase 100,000 shares of common
stock
at $0.45 per share. The note was renewed on December 24, 2003 until March 24,
2004. In consideration for the renewal, Alliance received additional three-year
warrants to purchase 50,000 shares of common stock at $0.45 per share. The
proceeds of the Alliance note were allocated to the note and the related
warrants based on the relative fair value of the note and the warrants, with
the
value of the warrants resulting in a discount against the note. As a result,
we
recorded additional interest charges totaling $20,572 in fiscal 2003 related
to
the discounts. The note was paid in full on March 5, 2004.
In
November 2003, we issued warrants in connection with the Laurus Financing
discussed further in Part II, Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operation” of this Annual Report. The
financing comprised of a three-year convertible note in the amount of $6,450,000
and a one-year convertible note in the amount of $400,000, both of which bear
interest at a rate of prime plus 2% and were convertible into our common stock
at a conversion price of $0.40 per share. In addition, Laurus received warrants
to purchase 4,250,000 shares of our common stock at an exercise price of $0.40
per share. The proceeds of the Financing were allocated to the notes and the
related warrants based on the relative fair value of the notes and the warrants,
with the value of the warrants resulting in a discount against the notes. As
a
result, we will record additional interest charges totaling $6,850,000 over
the
terms of the notes related to these discounts. Laurus was also granted
registration rights in connection with the shares of common stock issuable
in
connection with the Financing. Proceeds from the Financing in the amount of
$6,000,000 were used to fully retire the $18,000,000 in Convertible Debentures.
See further discussion in Note 10, “Laurus Financing” in Part IV, “Notes to
Consolidated Financial Statements” of this Annual Report.
In
August
2004, Laurus notified us that an Event of Default had occurred and had continued
beyond any applicable grace period as a result of our non-payment of interest
and principal on the $6,450,000 convertible note as required under the terms
of
the Financing, as well as noncompliance with certain other covenants of the
Financing documents. In exchange for Laurus’s waiver of the event of default
until September 17, 2004, we agreed, among other things, to lower the conversion
price on the $6,450,000 convertible note and the exercise price of the warrants
from $0.40 per share to $0.30 per share.
In
November of 2004, we issued additional securities in connection with the
Additional Financing with Laurus, discussed further in Part II, Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operation” of this Annual Report, which is comprised of (i) a three-year
convertible note issued to Laurus in the amount of $1,500,000, which bears
interest at a rate of 14% and is convertible into our common stock at a
conversion price of $3.00 per share (the “$1,500,000 Note”), (ii) a one-year
convertible in the amount of $600,000 which bears interest at a rate of 10%
and
is convertible into our common stock at a conversion price of $0.30 per share
(the “$600,000 Note”), (iii) a one-year convertible note of our subsidiary,
Tidel Engineering, L.P., in the amount of $1,250,000, which is a revolving
working capital facility for the purpose of financing purchase orders of our
subsidiary, Tidel Engineering, L.P., (the “Purchase Order Note”), which bears
interest at a rate of 14% and is convertible into our common stock at a price
of
$3.00 per share and (iv) our issuance to Laurus of 1,251,000 shares of common
stock, or approximately 7% of the total shares outstanding, (the “2003 Fee
Shares”) in satisfaction of fees totaling $375,300 incurred in connection with
the convertible term notes issued in the Financing discussed above. We recorded
additional interest expense totaling $638,010 related to the 2003 Fee Shares
based on the fair value of the stock price on the date issued.
In
addition, Laurus received warrants to purchase 500,000 shares of our common
stock at an exercise price of $0.30 per share. The proceeds of the Additional
Financing were allocated to the notes based on the relative fair value of the
notes and the warrants, with the value of the warrants resulting in a discount
against the notes. In addition, the conversion terms of the $600,000 Note
resulted in a beneficial conversion feature, further discounting the carrying
value of the notes. As a result, we will record additional interest charges
related to these discounts totaling $840,000 over the terms of the notes. Laurus
was also granted registration rights in connection with the 2003 Fee Shares
and
other shares issuable pursuant to the Additional Financing. The obligations
pursuant to the Additional Financing are secured by all of our assets and are
guaranteed by our subsidiaries. Net proceeds from the Additional Financing
in
the amount of $3,232,750 were primarily used for (i) general working capital
payments made directly to vendors, (ii) past due interest on Laurus’s $6,450,000
convertible note due pursuant to the Financing and (iii) the establishment
of an
escrow for future principal and interest payments due pursuant to the Additional
Financing.
We
issued
to a shareholder and former director an unsecured, short-term promissory note
dated October 2, 2003 in the principal amount of $120,000 due April 2, 2004;
plus accrued interest at 9% per annum, payable monthly. In consideration for
the
loan, the shareholder received three-year warrants to purchase 40,000 shares
of
common stock at $0.45 per share. The proceeds of the note were allocated to
the
note and the related warrants based on the relative fair value of the note
and
the warrants, with the value of the warrants resulting in a discount against
the
note. As a result, we recorded additional interest charges totaling $7,611
in
fiscal 2004 related to the discounts. The note was paid in full on March 8,
2004.
The
Company issued to an affiliate of a shareholder an unsecured, short-term
promissory note dated November 20, 2003 in the principal amount of $210,000
due
May 20, 2004; plus accrued interest at 8% per annum, payable at maturity. In
consideration for the loan, the note holder received three-year warrants to
purchase 70,000 shares of common stock at $0.45 per share. The proceeds of
the
note were allocated to the note and the related warrants based on the relative
fair value of the note and the warrants, with the value of the warrants
resulting in a discount against the note. As a result, the Company will record
additional interest charges totaling $30,619 over the term of the note related
to the discounts. The note was paid in full on March 5, 2004 from proceeds
obtained in the Financing.
The
selected financial data presented below is derived from our Consolidated
Financial Statements. This data should be read in conjunction with the
Consolidated Financial Statements and its notes and with Part II, Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of this Annual Report.
The
Consolidated Financial Statements for 2001 through 2002 were audited by KPMG
LLP. The Consolidated Financial Statements for 2003 through 2005 were audited
by
Hein & Associates LLP.
|
|
|
Years
Ended September 30,
|
|
|
SELECTED
STATEMENT OF OPERATIONS DATA:(1)
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
Net
income (loss)(2)
|
|
$
|
(3,286
|
)
|
$
|
11,318
|
|
$
|
(9,237
|
)
|
$
|
(14,078
|
)
|
$
|
(25,942
|
)
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(.16
|
)
|
|
.65
|
|
|
(0.53
|
)
|
|
(0.81
|
)
|
|
(1.49
|
)
|
|
Diluted
|
|
|
(.16
|
)
|
|
.37
|
|
|
(0.53
|
)
|
|
(0.81
|
)
|
|
(1.49
|
)
|
|
|
|
As
of September 30,
|
|
|
SELECTED
BALANCE SHEET DATA:(1)
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
Current
assets
|
|
$
|
16,908
|
|
$
|
10,129
|
|
$
|
11,773
|
|
$
|
17,263
|
|
$
|
28,797
|
|
|
Current
liabilities
|
|
|
13,177
|
|
|
8,190
|
|
|
32,109
|
|
|
28,487
|
|
|
28,547
|
|
|
Working
capital (deficit)
|
|
|
3,731
|
|
|
1,939
|
|
|
(20,336
|
)
|
|
(11,224
|
)
|
|
250
|
|
|
Total
assets
|
|
|
17,537
|
|
|
10,778
|
|
|
14,430
|
|
|
19,907
|
|
|
33,837
|
|
|
Total
short-term notes payable and long-term debt (net of
discount)
|
|
|
4,421
|
|
|
175
|
|
|
2,279
|
|
|
20,000
|
|
|
23,424
|
|
|
Shareholders’
equity (deficit)
|
|
|
2,263
|
|
|
2,588
|
|
|
(17,679
|
)
|
|
(8,580
|
)
|
|
5,194
|
|
|
(1)
|
All
amounts are in thousands, except per share dollar amounts.
|
|
(2)
|
Income
tax expense (benefit) was $0, $(81,229), $0, $(293,982), and $(3,416,030)
, for the years ended September 30, 2005, 2004, 2003, 2002, and 2001,
respectively.
|
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Our
liquidity has been negatively impacted by our inability to collect outstanding
receivables and claims as a result of CCC’s bankruptcy, the inability to collect
outstanding receivables from certain customers, and under-absorbed fixed costs
associated with the low utilization of our production facilities and reduced
sales of our products resulting from general difficulties in the ATM market.
In
order to meet our liquidity needs during the past four years, we have incurred
a
substantial amount of debt. On January 1, 2006, the Company completed the sale
of substantially all of the assets of its ATM business division to NCR EasyPoint
pursuant to the NCR Asset Purchase Agreement (the “ATM Sale”). The total
purchase price was $10.4 million of which $8.2 million was funded into a
collateral account for the benefit of Laurus to be applied towards the repayment
of our outstanding loans from Laurus Master Fund, Ltd. (“Laurus”). See
“Liquidity and Capital Resources” under this item for a detailed discussion of
these financing transactions.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations
are
based upon our consolidated financial statements. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. We
must apply significant, subjective and complex estimates and judgments in this
process. Among the factors, but not fully inclusive of all factors, that may
be
considered by management in these processes are: the range of accounting
policies permitted by accounting principles generally accepted in the United
States; management’s understanding of our business; expected rates of business
and operational change; sensitivity and volatility associated with the
assumptions used in developing estimates; and whether historical trends are
expected to be representative of future trends. Among the most subjective
judgments employed in the preparation of these financial statements are the
collectibility of contract receivables and claims, the fair value of our
inventory, the depreciable lives of and future cash flows to be provided by
our
equipment and long-lived assets, the expected timing of the sale of products,
estimates for the number and related costs of insurance claims for medical
care
obligations, judgments regarding the outcomes of pending and potential
litigation and certain judgments regarding the nature of income and expenditures
for tax purposes. We review all significant estimates on a recurring basis
and
record the effect of any necessary adjustments prior to publication of our
financial statements. Adjustments made with respect to the use of estimates
often relate to improved information not previously available. Because of the
inherent uncertainties in this process, actual future results could differ
from
those expected at the reporting date.
The
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States, assuming
the
Company continues as a going concern, which contemplates the realization of
the
assets and the satisfaction of liabilities in the normal course of business.
Our
significant accounting policies are described in Note 1 of the Notes to
Consolidated Financial Statements included in Part IV of this Annual Report.
We
consider certain accounting policies to be critical policies due to the
significant judgments, subjective and complex estimation processes and
uncertainties involved for each in the preparation of our Consolidated Financial
Statements. We believe the following represents our critical accounting
policies. We have discussed our critical accounting policies and estimates,
together with any changes therein, with the audit committee of our Board of
Directors.
Revenue
Recognition
Revenues
are recognized at the time products are shipped to customers. We have no
continuing obligation to provide services or upgrades to our products, other
than a warranty against defects in materials and workmanship. We only recognize
such revenues if there is persuasive evidence of an arrangement, the products
have been delivered, there is a fixed or determinable sales price and a
reasonable assurance of collectibility from the customer.
Our
products contain imbedded software that is developed for inclusion within the
equipment. We have not licensed, sold, leased or otherwise marketed such
software separately. We have no continuing obligations after the delivery of
our
products and we do not enter into post-contract customer support arrangements
related to any software embedded into our equipment.
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined using the standard
cost method and includes materials, labor and production overhead which
approximates an average cost method. Reserves are provided to adjust any slow
moving materials or goods to net realizable values. During the fiscal year
ended
2003, we increased our reserve by $615,000 and we increased our reserve by
$614,611 in 2004. At September 30, 2005, our reserve was reduced by $1,799,442
as a result of the ATM Asset sale to NCR. NCR paid full value for all slow
moving inventory items pursuant to the Asset Purchase Agreement. Our reserve
generally fluctuates based on the level of production and the introduction
of
new models.
Warranties
Certain
products are sold under warranty against defects in materials and workmanship
for a period of one to two years. A provision for estimated warranty costs
is
included in accrued liabilities and is charged to operations at the time of
sale.
Federal
Income Taxes
Income
taxes are accounted for under the asset and liability method, whereby deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to
taxable income in the years in which those temporary differences are expected
to
be recovered or settled. The effect on deferred tax assets and liabilities
of a
change in tax rates is recognized in determining income or loss in the period
that includes the enactment date.
Net
Income (Loss) Per Share
In
accordance with Statement of Financial Accounting Standards No. 128, “Earnings
Per Share” (“SFAS No. 128”), we compute and present both basic and diluted
earnings per share (“EPS”) amounts. Basic EPS is computed by dividing income
(loss) available to common shareholders by the weighted-average number of common
shares outstanding for the period, and excludes the effect of potentially
dilutive securities (such as options, warrants and convertible securities),
which are convertible into common stock. Dilutive EPS reflects the potential
dilution from options, warrants and convertible securities.
Accounts
Receivable
We
have
significant investments in billed receivables as of September 30, 2005 and
2004.
Billed receivables represent amounts billed upon the shipments of our products
under our standard contract terms and conditions. Allowances for doubtful
accounts and estimated nonrecoverable costs primarily provide for losses
that
may be sustained on uncollectible receivables and claims. In estimating the
allowance for doubtful accounts, we evaluate our contract receivables and
thoroughly review historical collection experience, the financial condition
of
our customers, billing disputes and other factors. When we ultimately conclude
that a receivable is uncollectible, the balance is charged against the allowance
for doubtful accounts. As of September 30, 2005 and 2004, the allowance for
doubtful contract receivables was $1,132,000 and $1,076,000, respectively,
all
includes the Assets Held for Sale .
|
(b)
|
Impact
of Recently Issued Accounting
Standards
|
In
December 2004, the FASB issued SFAS No. 123(R), which amends SFAS No. 123 and
supersedes APB Opinion No. 25. SFAS No. 123(R) requires compensation expense
to
be recognized for all share-based payments made to employees based on the fair
value of the award at the date of grant, eliminating the intrinsic value
alternative allowed by SFAS No. 123. Generally, the approach to determining
fair
value under the original pronouncement has not changed. However, there are
revisions to the accounting guidelines established, such as accounting for
forfeitures, that will change our accounting for stock-based awards in the
future.
The
statement allows companies to adopt its provisions using either of the following
transition alternatives:
|
•
|
The
modified prospective method, which results in the recognition of
compensation expense using SFAS 123(R) for all share-based awards
granted
after the effective date and the recognition of compensation expense
using
SFAS 123 for all previously granted share-based awards that remain
unvested at the effective date; or
|
|
•
|
The
modified retrospective method, which results in applying the modified
prospective method and restating prior periods by recognizing the
financial statement impact of share-based payments in a manner consistent
with the pro forma disclosure requirements of SFAS No. 123. The modified
retrospective method may be applied to all prior periods presented
or
previously reported interim periods of the year of
adoption.
|
We
will
adopt SFAS No. 123(R) on October 1, 2005, using the modified prospective
method.
This change in accounting is not expected to materially impact our financial
position. However, because we currently account for share-based payments
to our
employees using the intrinsic value method, our results of operations have
not
included the recognition of compensation expense for the issuance of stock
option awards. Had we applied the fair-value criteria established by SFAS
No.
123(R) to previous stock option grants, the impact to our results of operations
would have approximated the impact of applying SFAS No. 123, which was a
decrease to net income of approximately $19,433 in 2005, a decrease to net
income of approximately $1,392 in 2004, and an increase to our net loss of
$15,363. The impact of applying SFAS No. 123 to previous stock option grants
is
further summarized in Note 1 of the Notes to Consolidated Financial
Statements.
We
will
be required to recognize expense related to stock options and other types of
equity-based compensation beginning in fiscal year 2006 and such cost must
be
recognized over the period during which an employee is required to provide
service in exchange for the award. The requisite service period is usually
the
vesting period. The standard also requires us to estimate the number of
instruments that will ultimately be issued, rather than accounting for
forfeitures as they occur. Additionally, we may be required to change our method
for determining the fair value of stock options.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,”
an amendment of APB No. 29. This amendment eliminates the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. This statement specifies that a nonmonetary exchange
has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This statement is effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after
June
15, 2005. Earlier application is permitted for nonmonetary exchanges occurring
in fiscal periods beginning after the date of this statement is issued.
Retroactive application is not permitted. We are analyzing the requirements
of
this new statement and believe that its adoption will not have a significant
impact on our financial position, results of operations or cash
flows.
Effective
for financial statements issued for fiscal years beginning after December 15,
2001, and interim periods within those fiscal years, SFAS No. 144 “Accounting
for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), changed
the criteria for determining when the disposal or sale of certain assets meets
the definition of “discontinued operations.” At the November 2004 EITF meeting,
the final consensus was reached on EITF Issue No. 03-13, “Applying the
Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether
to
Report Discontinued Operations” (“EITF Issue No. 03-13”). This Issue is
effective prospectively for disposal transactions entered into after January
1,
2005, and provides a model to assist in evaluating (a) which cash flows should
be considered in the determination of whether cash flows of the disposal
component have been or will be eliminated from the ongoing operations of the
entity and (b) the types of continuing involvement that constitute significant
continuing involvement in the operations of the disposal component. The Company
considered the model outlined in EITF Issue No. 03-13 in its evaluation of
the
February 19, 2005 Asset Purchase Agreement of the ATM division with NCR. For
additional discussion, see Note 2, “Liquidity” in Part IV, “Notes to
Consolidated Financial Statements” for more information. We have concluded that
we will be required to report the ATM assets of this sale as discontinued
operations net of any applicable income taxes for the fiscal year
2005.
|
(c)
|
Results
of Operations
|
Operating
Segments
We
conduct business within one operating segment, principally in the United
States.
Product
Net Sales for ATM Business and Cash Security Business
A
breakdown of net sales by individual product line is provided in the following
table:
|
|
|
(dollars
in 000’s)
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
ATM
Business
|
|
$
|
15,498
|
|
$
|
15,047
|
|
$
|
10,435
|
|
|
Cash
Security Business:
|
|
|
|
|
|
|
|
|
|
|
|
TACC
|
|
|
5,269
|
|
|
5,631
|
|
|
4,433
|
|
|
Sentinel
|
|
|
12,468
|
|
|
972
|
|
|
1,827
|
|
|
Parts
& Other
|
|
|
1,698
|
|
|
864
|
|
|
1,099
|
|
|
Total
Cash Security Business
|
|
$ |
19,435
|
|
$ |
7,467
|
|
$ |
7,359
|
|
Gross
Profit, Operating Expenses and Non-Operating Items
Continuing
Operations
Due
to
the requirement to classify our only two product lines as discontinued
operations, the results of continuing operations consist primarily of the
corporate overhead and debt-related costs.
An
analysis of continuing operations and assets and liabilities is provided in
the
following tables:
CONTINUING
OPERATIONS
SELECTED
BALANCE SHEET DATA
(UNAUDITED)
|
|
|
September
30,
2005
|
|
September
30,
2004
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,003,663
|
|
$
|
258,120
|
|
|
Trade
account receivable
|
|
|
250,000
|
|
|
250,000
|
|
|
Other
receivables
|
|
|
12,965
|
|
|
1,003,723
|
|
|
Prepaid
expenses and other
|
|
|
170,231
|
|
|
42,153
|
|
|
Total
current assets
|
|
|
1,436,859
|
|
|
1,553,996
|
|
|
Property,
plant and equipment, at cost
|
|
|
55,641
|
|
|
44,075
|
|
|
Accumulated
depreciation
|
|
|
(42,848
|
)
|
|
(37,871
|
)
|
|
Net
property, plant and equipment
|
|
|
12,793
|
|
|
6,204
|
|
|
Other
assets
|
|
|
615,763
|
|
|
643,305
|
|
|
Total
assets
|
|
$
|
2,065,415
|
|
$
|
2,203,505
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt, net of discount of $0 and $725,259,
respectively
|
|
$
|
2,325,000
|
|
$
|
174,741
|
|
|
Accounts
payable
|
|
|
431,876
|
|
|
331,576
|
|
|
Accrued
interest payable
|
|
|
2,135,852
|
|
|
793,577
|
|
|
Reserve
for settlement of class action litigation
|
|
|
—
|
|
|
1,564,490
|
|
|
Other
accrued liabilities
|
|
|
290,871
|
|
|
326,675
|
|
|
Total
current liabilities
|
|
|
5,183,599
|
|
|
3,191,059
|
|
|
Long-term
debt, net of current maturities and debt discount of $3,746,531 and
$5,767,988, respectively
|
|
|
2,096,457
|
|
|
—
|
|
|
Total
liabilities
|
|
$
|
7,280,056
|
|
$
|
3,191,059
|
|
CONTINUING
OPERATIONS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
|
Years
Ended September 30,
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
Revenues
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Selling,
general and administrative
|
|
|
1,805,484
|
|
|
2,011,257
|
|
|
1,889,907
|
|
|
Depreciation
and amortization
|
|
|
4,977
|
|
|
4,146
|
|
|
10,742
|
|
|
Operating
loss
|
|
|
(1,810,461
|
)
|
|
(2,015,403
|
)
|
|
(1,900,649
|
)
|
|
Gain
on extinguishment of debt
|
|
|
—
|
|
|
18,823,000
|
|
|
—
|
|
|
Gain
on sale of securities
|
|
|
—
|
|
|
1,918,012
|
|
|
—
|
|
|
Interest
expense
|
|
|
(6,549,069
|
)
|
|
(4,200,668
|
)
|
|
(2,466,536
|
)
|
|
Continuing
income (loss) before taxes
|
|
|
(8,359,530
|
)
|
|
14,524,941
|
|
|
(4,367,185
|
)
|
|
Income
tax benefit
|
|
|
—
|
|
|
(81,229
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (loss) from continuing operations
|
|
$
|
(8,359,530
|
)
|
$
|
14,606,170
|
|
$
|
(4,367,185
|
)
|
Year
Ended September 30, 2005 Compared with the Year Ended September 30,
2004
Selling,
general and administrative expenses
for the year ended September 30, 2005 were $1,805,484, which is a decrease
of
approximately 10% from the year ended September 30, 2004. The decrease is
primarily related todue to changes related to the resolution of officer notes
in
2004 partially offset by increased accounting fees in 2005.
Depreciation
and amortization for
the
year ended September 30, 2005 and 2004 was $4,977 and $4,146,
respectively.
Interest
expense
was
$6,549,069 for the year ended September 30, 2005 compared with $4,200,668 for
the year ended September 30, 2004. The increase is a result of additional
charges related to the Additional Financing and the amortization of the debt
discount related to the Laurus debt.
Income
tax expense (benefit).
In
assessing the realizability of deferred tax asset, management considers whether
it is more likely than not, that some portion or all of the deferred tax assets
will be realized. We have established a valuation allowance for such deferred
tax assets to the extent such amounts are not utilized to offset existing
deferred tax liabilities reversing in the same periods.
We
recorded a net income (loss) from continuing operations of $(8,359,530) and
$14,606,170 for the years ended September 30, 2005 and 2004, respectively.
The
significant decrease in operating profit was due to a gain on early
extinguishment of debt of approximately $18.8 million recorded during the fiscal
year ended September 30, 2004.
Year
Ended September 30, 2004 Compared with the Year Ended September 30,
2003
Selling,
general and administrative expenses
for the year ended September 30, 2004 were $2,011,257, which is a decrease
of
approximately 11% from the year ended September 30, 2003. The decrease is
primarily related to reduced legal, accounting, and audit-related
costs.
Depreciation
and amortization for
the
year ended September 30, 2004 and 2003 was $4,146 and $10,742,
respectively.
Interest
expense
was
$4,200,668 for the year ended September 30, 2004 compared with $2,466,536 for
the year ended September 30, 2003. The increase is a result of Additional
Financing and the amortization of the debt discount related to the Laurus
debt.
Income
tax expense (benefit).
In
assessing the reliability of deferred tax asset, management considers whether
it
is more likely than not, that some portion or all of the deferred tax assets
will be realized. We have established a valuation allowance for such deferred
tax assets to the extent such amounts are not utilized to offset existing
deferred tax liabilities reversing in the same periods.
We
recorded a net income (loss) from continuing operations of $14,606,170 and
$(4,367,185) for the years ended September 30, 2004 and 2003, respectively.
The
significant increase in operating profit was due to a gain on early
extinguishment of debt of $18.8 million recorded during the fiscal year ended
September 30, 2004.
Discontinued
Operations (ATM Business)
We
committed to a plan to sell the ATM Business during the first quarter ended
December 31, 2004.
On
February 19, 2005, the Company and its wholly-owned subsidiary, Tidel
Engineering, L.P., entered into an asset purchase agreement (the “NCR Asset
Purchase Agreement”) with NCR EasyPoint LLC f/k/a/ NCR Texas LLC (“NCR
EasyPoint”), a wholly owned subsidiary of NCR Corporation, for the sale of our
ATM Business (the “ATM Business Sale”).
On
December 28, 2005, the holders of 62.2% of our shares of outstanding common
stock approved the NCR Asset Purchase Agreement.
On
January 3, 2006, we completed the ATM Business Sale. The total purchase price
was approximately $10.4 million of which $8.2 million was paid to Laurus into
a
collateral account to be held by Laurus as collateral for the satisfaction
of
all monetary obligations payable to Laurus, $0.5 million was paid into an escrow
account pending a post closing net asset value adjustment, and the remaining
$1.7 million was paid to the Company to be used for necessary working capital.
This termination resulted in a book gain of approximately $3.8
million.
We
have
classified our ATM business as Assets Held for Sale as of September 30,
2005.
The
ATM
products are low-cost, cash-dispensing automated teller machines that are
primarily designed for the off-premise, or non-bank, markets. We offer a wide
variety of options and enhancements to the ATM products, including custom
configurations that dispense cash-value products, such as coupons, tickets
and
stored-value cards; accept currency; and perform other functions, such as
check-cashing
An
analysis of the discontinued operations of the ATM business is as follows:
DISCONTINUED
OPERATIONS — ATM BUSINESS
SELECTED
BALANCE SHEET DATA
(UNAUDITED)
|
|
|
September
30,
2005
|
|
September
30,
2004
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
—
|
|
$
|
—
|
|
|
Trade
accounts receivable, net of allowance of approximately $1,125,000
and
$1,070,000, respectively
|
|
|
2,310,262
|
|
|
1,983,931
|
|
|
Inventories
|
|
|
7,323,439
|
|
|
3,432,828
|
|
|
Prepaid
expenses and other
|
|
|
392,972
|
|
|
157,490
|
|
|
Total
current assets
|
|
|
10,026,673
|
|
|
5,574,249
|
|
|
Property,
plant and equipment, at cost
|
|
|
4,337,677
|
|
|
4,286,617
|
|
|
Accumulated
depreciation
|
|
|
(4,216,152
|
)
|
|
(3,977,412
|
)
|
|
Net
property, plant and equipment
|
|
|
121,525
|
|
|
309,205
|
|
|
Other
assets
|
|
|
27,297
|
|
|
27,297
|
|
|
Total
assets
|
|
$
|
10,175,495
|
|
$
|
5,910,751
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,681,288
|
|
$
|
1,686,732
|
|
|
Other
accrued expenses
|
|
|
1,814,634
|
|
|
836,289
|
|
|
Total
liabilities
|
|
$
|
3,495,922
|
|
$
|
2,523,021
|
|
DISCONTINUED
OPERATIONS — ATM BUSINESS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
|
Years
Ended September 30,
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
Net
sales
|
|
$
|
15,497,834
|
|
$
|
15,047,292
|
|
$
|
10,435,118
|
|
|
Cost
of sales
|
|
|
9,508,120
|
|
|
11,762,082
|
|
|
9,675,580
|
|
|
Gross
profit
|
|
|
5,989,714
|
|
|
3,285,210
|
|
|
759,538
|
|
|
Selling,
general and administrative
|
|
|
4,768,880
|
|
|
4,709,478
|
|
|
3,944,795
|
|
|
Depreciation
and amortization
|
|
|
255,967
|
|
|
292,543
|
|
|
647,640
|
|
|
Operating
loss
|
|
|
964,867
|
|
|
(1,716,811
|
)
|
|
(3,832,897
|
)
|
|
Non-operating
(income) expense
|
|
|
—
|
|
|
16,456
|
|
|
66,581
|
|
|
Net
income (loss)
|
|
$
|
964,867
|
|
$
|
(1,733,267
|
)
|
$
|
(3,899,478
|
) |
Year
ended September 30, 2005 Compared with Year Ended September 30,
2004
Net
Sales from
the
ATM business were $15,497,834 for the year ended September 30, 2005,
representing an increase of 3% from net sales of $15,047,292 for the year ended
September 30, 2004. The increase was a result of the slight increase in sales
of
ATM machines. We sold 3,646 ATM units during Fiscal 2005 compared with 3,488
units sold during Fiscal 2004.
Gross
profit on
net
sales for the year ended September 30, 2005 increased $2,704,504 from a year
ago. Gross profit as a percentage of sales was 39% and 22% for the year ended
September 30, 2005 and 2004, respectively. The increase in gross profit is
primarily related to the reversal of $1.8 million in obsolete inventory reserve
in 2005 and the opposite result of $615,000 recognized in 2004.
Selling,
general and administrative expenses
for the year ended September 30, 2005 increased 1% compared with the year ended
September 30, 2004. The increase is primarily related to costs associated with
our marketing efforts.
Depreciation
and amortization for
the
year ended September 30, 2005 and 2004 was $255,967 and $292,543,
respectively.
The
ATM
business recorded a net income (loss) of $964,867 and $(1,733,267) for the
year
ended September 30, 2005 and 2004, respectively.
Year
ended September 30, 2004 Compared with Year Ended September 30,
2003
Net
Sales from
the
ATM business were $15,047,292 for the year ended September 30, 2004,
representing an increase of 30% from net sales of $10,435,118 for the year
ended
September 30, 2003. This was primarily a result of the increase in sales of
ATM
machines. We sold 3,450 ATM units during Fiscal 2004 compared with 2,307 units
sold during Fiscal 2003.
Gross
profit on
net
sales for the year ended September 30, 2004 increased $2,525,672 from a year
ago. Gross profit as a percentage of sales was 22% and 7% for the year ended
September 30, 2004 and 2003, respectively. Such increases primarily arose from
production efficiencies and the fixed manufacturing overhead expenses being
allocated to more units produced during the year, both of which resulted in
lower unit costs assigned to each unit of product sold and the reduction of
indirect labor due to a reduction of personnel.
Selling,
general and administrative expenses for the year ended September 30, 2004
increased 19% compared with the year ended September 30, 2003. The increase
is
primarily related to costs associated with our marketing efforts attributed
to
the sales of the Sentinel Units.
Depreciation
and amortization for
the
year ended September 30, 2004 and 2003 was $292,543 and $647,640, respectively.
The decrease is primarily a result of assets being fully depreciated during
the
year.
The
ATM
business recorded a net income (loss) of $(1,733,267) and $3,899,478 for the
year ended September 30, 2004 and 2003, respectively.
Discontinued
Operations (Cash Security Business)
We
entered into an asset purchase agreement dated as of January 12, 2006 (the
“Cash
Security Asset Purchase Agreement”) with Sentinel Operating, L.P., a purchaser
controlled by a management buyout team led by Mark K. Levenick, our Interim
Chief Executive Officer and a member of our Board, and Raymond Landry, a member
of our Board, for the sale of substantially all of the assets of our Cash
Security business (the “Cash Security Business Sale”). The two members of our
Board who are unaffiliated with the management buyout of the Cash Security
business negotiated the terms of the Cash Security Asset Purchase Agreement
with
the management buyout group.
The
independent members of our Board received an opinion from an investment advisory
firm, Capitalink, L.C., as to the fairness of the Cash Security Business Sale
from a financial point of view to the unaffiliated shareholders. On December
31,
2005, our Board, with Messrs. Levenick and Landry abstaining, voted to approve
the Cash Security Asset Purchase Agreement and the Cash Security Business
Sale.
The
Cash
Security Asset Purchase Agreement provides for the sale of the Company’s Cash
Security business to the purchaser thereunder for a cash purchase price of
$17.5
million, less $100,000 as consideration for the purchaser’s potential liability
in connection with certain litigation and subject to a closing balance sheet
purchase price adjustment. In addition, the Cash Security Asset Purchase
Agreement is subject to customary representations and warranties and covenants
and the satisfaction of several customary closing conditions, including our
obtaining shareholder approval. The closing under the Cash Security Asset
Purchase Agreement is expected to occur in the first quarter of 2006. The
purchase price payable under the Cash Security Business Sale is subject to
the
Reorganization Fee and the other amounts payable to Laurus under the terms
of
the Asset Sales Agreement.
Upon
closing of the Cash Security Business Sale we estimate the Reorganization Fee
payable to Laurus will be in the range of $9 million to $11 million. See Part
I,
item 1(c), “Laurus Reorganization Fee” for more information.
We
have
classified the Cash Security Business as Assets Held for Sale as of September
30, 2005 and 2004.
An
analysis of the discontinued operations of the Cash Security Business is as
follows:
DISCONTINUED
OPERATIONS — CASH SECURITY BUSINESS
SELECTED
BALANCE SHEET DATA
(UNAUDITED)
|
|
|
September
30,
2005
|
|
September
30,
2004
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
—
|
|
$
|
—
|
|
|
Trade
accounts receivable, net of allowance of approximately $7,500 and
$6,200,
respectively
|
|
|
1,856,523
|
|
|
1,076,362
|
|
|
Inventories
|
|
|
3,137,818
|
|
|
1,350,631
|
|
|
Prepaid
expenses and other
|
|
|
198,057
|
|
|
93,087
|
|
|
Total
current assets
|
|
|
5,192,398
|
|
|
2,520,080
|
|
|
Property,
plant and equipment, at cost
|
|
|
1,097,604
|
|
|
1,091,197
|
|
|
Accumulated
depreciation
|
|
|
(1,020,015
|
)
|
|
(972,920
|
)
|
|
Net
property, plant and equipment
|
|
|
77,589
|
|
|
118,277
|
|
|
Other
assets
|
|
|
25,631
|
|
|
25,631
|
|
|
Total
assets
|
|
$
|
5,295,618
|
|
$
|
2,663,988
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Current
maturities
|
|
$
|
1,852
|
|
$
|
8,951
|
|
|
Accounts
payable
|
|
|
1,397,394
|
|
|
1,380,054
|
|
|
Other
accrued expenses
|
|
|
3,069,278
|
|
|
1,058,001
|
|
|
Total
current liabilities
|
|
|
4,468,524
|
|
|
2,447,006
|
|
|
Long-term
debt, net of current maturities
|
|
|
28,708
|
|
|
28,709
|
|
|
Total
liabilities
|
|
$
|
4,497,232
|
|
$
|
2,475,715
|
|
DISCONTINUED
OPERATIONS — CASH SECURITY BUSINESS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
|
|
|
Year
Ended September 30,
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
Net
sales
|
|
$
|
19,435,222
|
|
$
|
7,467,194
|
|
$
|
7,359,181
|
|
|
Cost
of sales
|
|
|
10,870,947
|
|
|
5,350,108
|
|
|
4,936,867
|
|
|
Gross
profit
|
|
|
8,564,275
|
|
|
2,117,086
|
|
|
2,422,314
|
|
|
Selling,
general and administrative
|
|
|
4,449,550
|
|
|
3,550,491
|
|
|
3,184,314
|
|
|
Depreciation
and amortization
|
|
|
29,868
|
|
|
84,008
|
|
|
141,473
|
|
|
Operating
income (loss)
|
|
|
4,084,857
|
|
|
(1,517,413
|
)
|
|
(903,473
|
)
|
|
Non-operating
expense
|
|
|
(23,884
|
) |
|
37,918
|
|
|
66,581
|
|
|
Net
income (loss)
|
|
$
|
4,108,741
|
|
$
|
(1,555,331
|
)
|
$
|
(970,054
|
)
|
Year
ended September 30, 2005 Compared with year ended September 30,
2004
Net
Sales from
the
Cash Security Business were $19,435,222 for the year ended September 30,
2005,
representing an increase of $11,968,028 from net sales of $7,467,194 for
the
year ended September 30, 2004. The improvement is directly related to an
increase in sales of the Sentinel units to a national convenience store
operator.
Gross
profit on
product sales for the year ended September 30, 2005 increased $6,447,189 from
the year ended September 30, 2004. Gross profit as a percentage of sales was
44%
for the year ended September 30, 2005, compared to only 28% for the year ended
September 30, 2004. The improvement is directly related to an increase in the
volume of Sentinel units produced during the fiscal year ended September 30,
2005.
Selling,
general and administrative expenses
for the year ended September 30, 2005 increased $899,059 or 25% from the year
ended September 30, 2004. This is primarily related to costs associated with
our
marketing efforts related to the Sentinel Product.
Depreciation
and amortization for the year ended September 30, 2005 and 2004 was $29,868
and $84,008, respectively.
Year
ended September 30, 2004 Compared with year ended September 30,
2003
Net
Sales from
the
Cash Security Business were $7,467,194 for the year ended September 30, 2004,
representing an increase of $108,013 from net sales of $7,359,181 for the
year
ended September 30, 2003. The slight improvement is directly related to an
increase in sales of the Sentinel units to a national convenience store
operator.
Gross
profit on
product sales for the year ended September 30, 2004 decreased $305,228 from
the
year ended September 30, 2003. Gross profit as a percentage of sales was 28%
for
the year ended September 30, 2004, compared to 33% for the year ended September
30, 2003. The decrease was related to increased manufacturing costs during
the
fiscal year ended September 30, 2004.
Selling,
general and administrative expenses for the year ended September 30, 2004
increased $366,177 or approximately 11% from the year ended September 30, 2003.
This is primarily related to costs associated with our marketing efforts related
to the Sentinel Product.
Depreciation
and amortization for the year ended September 30, 2004 and 2003 was $84,008
and $141,473, respectively.
|
(d)
|
Liquidity
and Capital Resources
|
Our
liquidity has been negatively impacted by our inability to collect outstanding
receivables and claims as a result of CCC’s bankruptcy, the inability to collect
outstanding receivables from certain customers, and under-absorbed fixed costs
associated with the low utilization of our production facilities and reduced
sales of our products resulting from general difficulties in the ATM market.
In
order to meet our liquidity needs during the past four years, we have incurred
a
substantial amount of debt. On January 1, 2006, the Company completed the sale
of substantially all of the assets of its ATM business division to NCR EasyPoint
pursuant to that Asset Purchase Agreement (the “ATM Sale”). The total purchase
price was $10.4 million of which $8.2 million was funded into a collateral
account for the benefit of Laurus to be applied towards the repayment of our
outstanding loans from Laurus Master Fund, Ltd. (“Laurus”).
|
|
|
(dollars
in 000’s)
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
Cash
|
|
$
|
1,004
|
|
$
|
258
|
|
$
|
915
|
|
|
Restricted
cash
|
|
|
—
|
|
|
—
|
|
|
2,200
|
|
|
Working
capital (deficit)
|
|
|
3,731
|
|
|
1,939
|
|
|
(19,802
|
)
|
|
Total
assets
|
|
|
17,537
|
|
|
10,778
|
|
|
14,430
|
|
|
Shareholders’
equity (deficit)
|
|
|
2,263
|
|
|
2,588
|
|
|
(17,679
|
)
|
Cash
Flows
Cash
used
in operations was $(462,324) for 2005 compared with cash used in operations
of
$(2,825,316) for 2004, and cash used operations of $(635,980) for 2003. The
cash
used in operations during fiscal 2005 and fiscal 2004 was primarily attributable
to the Operating Losses, the increase in trade accounts receivable and the
delays in collection of these receivables.
Working
Capital
As
of
September 30, 2005, we had a working capital of $3,731,219, compared with a
working capital of $1,938,940 at September 30, 2004. The increase in working
capital was primarily a result of the increase in sales of the Sentinel product
line.
Indebtedness
The
Laurus Financings
On
November 25, 2003, we completed the Financing, a $6,850,000 financing
transaction with Laurus pursuant to the 2003 SPA. The Financing was comprised
of
a three-year convertible note in the amount of $6,450,000 and a one-year
convertible note in the amount of $400,000, both of which bear interest at
a
rate of prime plus 2% and were convertible into our common stock at a conversion
price of $0.40 per share. In addition, Laurus received warrants to purchase
4,250,000 shares of our common stock at an exercise price of $0.40 per share.
The proceeds of the Financing were allocated to the notes and the related
warrants based on the relative fair value of the notes and the warrants, with
the value of the warrants resulting in a discount against the notes. In
addition, the conversion terms of the notes result in a beneficial conversion
feature, further discounting the carrying value of the notes. As a result,
we
will record additional interest charges totaling $6,850,000 over the terms
of
the notes related to these discounts. Laurus was also granted registration
rights in connection with the shares of common stock issuable in connection
with
the Financing. Proceeds from the Financing in the amount of $6,000,000 were
used
to fully retire the $18,000,000 in Convertible Debentures issued to the two
Holders thereof in September 2000, together with all accrued interest, penalties
and fees associated therewith. All of the warrants and Convertible Debentures
held by the Holders were terminated and we recorded a gain from extinguishment
of debt of $18,823,000 (including accrued interest through the date of
extinguishment) in fiscal year 2004 related to this Financing. See further
discussion in Part IV, Item 12, “Notes to the Consolidated Financials”. In March
2004, the $400,000 note was repaid in full.
In
connection with the closing of the Financing, all outstanding litigation
including, without limitation, the Montrose Litigation, was dismissed, and
the
Revolving Credit Facility was repaid through the release of the restricted
cash
used as collateral for the Revolving Credit Facility.
In
August
2004, Laurus notified us that an Event of Default had occurred and had continued
beyond any applicable grace period as a result of our non-payment of interest
and principal on the $6,450,000 convertible note as required under the terms
of
the Financing, as well as noncompliance with certain other covenants of the
Financing documents. In exchange for Laurus’s waiver of the Event of Default
until September 17, 2004, we agreed, among other things, to lower the conversion
price on the $6,450,000 convertible note and the exercise price of the warrants
from $0.40 per share to $0.30 per share.
On
November 26, 2004, we completed the Additional Financing, a $3,350,000 financing
transaction with Laurus pursuant to the 2004 SPA. The Additional Financing
was
comprised of (i) a three-year convertible note issued to Laurus in the amount
of
$1,500,000, which bears interest at a rate of 14% and is convertible into our
common stock at a conversion price of $3.00 per share (the “$1,500,000 Note”),
(ii) a one-year convertible in the amount of $600,000 which bears interest
at a
rate of 10% and is convertible into our common stock at a conversion price
of
$0.30 per share (the “$600,000 Note”), (iii) a one-year convertible note of our
subsidiary, Tidel Engineering, L.P., in the amount of $1,250,000, which is
a
revolving working capital facility for the purpose of financing purchase orders
of our subsidiary, Tidel Engineering, L.P., (the “Purchase Order Note”), which
bears interest at a rate of 14% and is convertible into our common stock at
a
price of $3.00 per share and (iv) our issuance to Laurus of the 2003 Fee Shares,
which consisted of 1,251,000 shares of common stock, or approximately 7% of
the
total shares outstanding, in satisfaction of fees totaling $375,300 incurred
in
connection with the convertible term notes issued in the Financing discussed
above. As a result of the issuance of the 2003 Fee Shares, we recorded an
additional charge in fiscal 2004 of $638,010. We also increased the principal
balance of the original note by $292,987, of which $226,312 bears interest
at
the default rate of 18%. This amount represents interest accrued but not paid
to
Laurus as of August 1, 2004. In addition, Laurus received warrants to purchase
500,000 shares of our common stock at an exercise price of $0.30 per share.
The
proceeds of the Additional Financing were allocated to the notes based on the
relative fair value of the notes and the warrants, with the value of the
warrants resulting in a discount against the notes. In addition, the conversion
terms of the $600,000 Note resulted in a beneficial conversion feature, further
discounting the carrying value of the notes. As a result, we will record
additional interest charges related to these discounts totaling $840,000 over
the terms of the notes. Laurus was also granted registration rights in
connection with the 2003 Fee Shares and other shares issuable pursuant to the
Additional Financing. The obligations pursuant to the Additional Financing
are
secured by all of our assets and are guaranteed by our subsidiaries. Net
proceeds from the Additional Financing in the amount of $3,232,750 were
primarily used for (i) general working capital payments made directly to
vendors, (ii) past due interest on Laurus’s $6,450,000 convertible note due
pursuant to the Financing and (iii) the establishment of an escrow for future
principal and interest payments due pursuant to the Additional
Financing.
Pursuant
to the terms of the Financing and the Additional Financing, an Event of Default
occurs if, among other things, we do not complete our filings with the
Securities and Exchange Commission on the timetable set forth in the Additional
Financing documents, or we do not comply with the Listing Requirement or any
other material covenant or other term or condition of the 2003 SPA, the 2004
SPA, the notes we issued to Laurus or any of the other documents related to
the
Financing or the Additional Financing. If there is an Event of Default,
including any of the items specified above or in the transaction documents,
Laurus may declare all unpaid sums of principal, interest and other fees due
and
payable within five (5) days after we receive a written notice from Laurus.
If
we cure the Event of Default within that five (5) day period, the Event of
Default will no longer be considered to be occurring.
If
we do
not cure such event of default, Laurus shall have, among other things, the
right
to have two (2) of its designees appointed to our Board, and the interest rate
of the notes shall be increased to the greater of 18% or the rate in effect
at
that time.
On
January 12, 2006, the proceeds from the ATM Sale to NCR were applied to the
repayment of approximately $2,455,000 of indebtedness to Laurus and Laurus’
remaining indebtedness of $5,745,000 was converted into 18,250,000 shares of
our
common stock.
For
more
information about the Financing and the Additional Financing, see Part I, Item
1, “Business — Recent Developments” of this Annual Report.
The
Cash Security Asset Purchase Agreement:
We
entered into an asset purchase agreement, dated as of January 12, 2006 (the
“Cash Security Asset Purchase Agreement”), with Sentinel Operating, L.P., a
purchaser controlled by a management buyout team led by Mark K. Levenick, our
Interim Chief Executive Officer and a member of our Board, and Raymond Landry,
a
member of our Board, for the sale of substantially all of the assets of our
Cash
Security business (the “Cash Security Business Sale”). The two members of
our Board who are unaffiliated with the management buyout of the Cash Security
business negotiated the terms of the Cash Security Asset Purchase Agreement
with
the management buyout group.
The
independent members of our Board received an opinion from an investment advisory
firm, Capitalink, L.C., as to the fairness of the Cash Security Business Sale
from a financial point of view to the unaffiliated shareholders. On December
31,
2005, our Board, with Messrs. Levenick and Landry abstaining, voted to approve
the Cash Security Asset Purchase Agreement and the Cash Security Business
Sale.
The
Cash
Security Asset Purchase Agreement provides for the sale of the Company’s Cash
Security business to the purchaser thereunder for a cash purchase price of
$17.5
million, less $100,000 as consideration for the purchaser’s potential liability
in connection with certain litigation and subject to a closing balance sheet
purchase price adjustment. In addition, the Cash Security Asset Purchase
Agreement is subject to customary representations and warranties and covenants
and the satisfaction of several customary closing conditions, including our
obtaining shareholder approval. The closing under the Cash Security Asset
Purchase Agreement is expected to occur in the first quarter of 2006. The
purchase price payable under the Cash Security Business Sale is subject to
the
Reorganization Fee and the other amounts payable to Laurus under the terms
of
the Asset Sales Agreement.
Upon
closing of the Cash Security Business Sale we estimate the Reorganization Fee
payable to Laurus will be in the range of $9 million to $11 million. See Part
I,
Item 1(c), “Laurus Reorganization Fee” for more information.
The
Equipment Purchase Agreement
In
June
2004, our subsidiary entered into an equipment purchase agreement with an
initial term through December 31, 2005 with a national convenience store
operator (the “Buyer”) for the sale of our Sentinel units. We agreed to provide
“Most Favored Nation” pricing to the Buyer and to not increase the price during
the initial term of the agreement. As of June 30, 2005, the Buyer had purchased
approximately 1,531 units under the agreement.
The
Supply, Facility and Share Warrant Agreements
In
September 2004, our subsidiary entered into separate supply and credit facility
agreements (the “Supply Agreement”, the “Facility Agreement” and the “Share
Warrant Agreement” respectively) with a foreign distributor related to our ATM
products. The Supply Agreement required the distributor, during the initial
term
of the agreement, to purchase ATMs only from us, effectively making us its
sole
supplier of ATMs. During each of the subsequent terms, the distributor is
required to purchase from us not less than 85% of all ATMs purchased by the
distributor. The initial term of the agreement was set as of the earlier of:
(i)
the expiration or termination of the debenture, (ii) a termination for default,
(iii) the mutual agreement of the parties, and (iv) August 15,
2009.
The
Facility Agreement provides a credit facility in an aggregate amount not to
exceed $2,280,000 to the distributor with respect to outstanding invoices
already issued to the distributor and with respect to invoices which may be
issued in the future related to the purchase of our ATM products. Repayment
of
the credit facility is set by schedule for the last day of each month beginning
November 2004 and continuing through August 2005. The distributor fell into
default due to non-payment during February 2005. As of September 30, 2004,
we
had an outstanding balance of approximately $720,000 related to this facility.
Notwithstanding our current commitment to aggressively pursue our rights to
collect the outstanding balance of the facility and in view of the uncertainty
of the ultimate outcome, we recorded a reserve in the amount of approximately
$185,000 during the quarter ended September 30, 2004 due to the payment
delinquency of the invoices related to 2004 billings. During 2005, we increased
the reserve to approximately $830,000 due to the payment delinquency of the
majority of the invoices issued in the fiscal year 2005. In July of 2005, we
collected a partial payment of approximately $350,000 related to the 2004
billings. This collection reduced the outstanding balance on this facility
to
approximately $1,700,000, of which we have reserved a total of $830,000 as
of
July 31, 2005. We have also received a commitment commencing August 5, 2005
from
the distributor to submit at least approximately $35,000 per week until the
balance is paid in full. We have received approximately $560,000 consisting
of
16 weekly payments reducing the accounts receivable balance.
The
Share
Warrant Agreement provides for the issuance to our subsidiary of a warrant
to
purchase up to 5% of the issued and outstanding Share Capital of the
distributor. The warrant restricts the distributor from (i) creating or issuing
a new class of stock or allotting additional shares, (ii) consolidating or
altering the shares, (iii) issuing a dividend, (iv) issuing additional warrants
and (v) amending articles of incorporation. Upon our exercise of the warrant,
the distributors balance outstanding under the Facility Agreement would be
reduced by $300,000. We exercised this option during December of 2005,
therefore, reducing the receivable by an additional $300,000 resulting in a
balance of $833,000 at January 05, 2006.
Bridge
Loans
Beginning
in September 2003, we issued the following unsecured, short-term promissory
notes totaling $720,000 to shareholders or their affiliates as part of a bridge
financing transaction (the “Bridge Loans”):
In
September 2003, we issued Alliance an unsecured, short-term promissory note
dated September 26, 2003 in the principal amount of $300,000 due December 24,
2003; plus accrued interest at 9% per annum, payable at maturity. In
consideration for the original loan, Alliance received three-year warrants
to
purchase 100,000 shares of common stock at $0.45 per share. The note was renewed
on December 24, 2003 until March 24, 2004. In consideration for the renewal,
Alliance received additional three-year warrants to purchase 50,000 shares
of
common stock at $0.45 per share. The proceeds of the Alliance note were
allocated to the note and the related warrants based on the relative fair value
of the note and the warrants, with the value of the warrants resulting in a
discount against the note. As a result, we recorded additional interest charges
totaling $20,572 in fiscal 2003 related to the discounts. The note was paid
in
full on March 5, 2004.
We
issued
to a shareholder and former director an unsecured, short-term promissory note
dated October 2, 2003 in the principal amount of $120,000 due April 2, 2004;
plus accrued interest at 9% per annum, payable monthly. In consideration for
the
loan, the shareholder received three-year warrants to purchase 40,000 shares
of
common stock at $0.45 per share. The proceeds of the note were allocated to
the
note and the related warrants based on the relative fair value of the note
and
the warrants, with the value of the warrants resulting in a discount against
the
note. As a result, we recorded additional interest charges totaling $7,611
in
fiscal 2004 related to the discounts. The note was paid in full on March 8,
2004.
The
Company issued to an affiliate of a shareholder an unsecured, short-term
promissory note dated November 20, 2003 in the principal amount of $210,000
due
May 20, 2004; plus accrued interest at 8% per annum, payable at maturity. In
consideration for the loan, the note holder received three-year warrants to
purchase 70,000 shares of common stock at $0.45 per share. The proceeds of
the
note were allocated to the note and the related warrants based on the relative
fair value of the note and the warrants, with the value of the warrants
resulting in a discount against the note. As a result, the Company will record
additional interest charges totaling $30,619 over the term of the note related
to the discounts. The note was paid in full on March 5, 2004 from proceeds
obtained in the Financing.
The
Development Agreement
In
August
2001, we entered into a Development Agreement (the “Development Agreement”) with
a national petroleum retailer and convenience store operator (the “Retailer”)
for the joint development of a new generation of “intelligent” TACCs, now known
as the Sentinel product. The Development Agreement provided for four phases
of
development with the first three phases to be funded by the Retailer at an
estimated cost of $800,000. In February 2002, we agreed to provide the Retailer
a rebate on each unit of the Sentinel product for the first 1,500 units sold,
provided the product successfully entered production, until the Retailer had
earned amounts equal to the development costs paid by the Retailer. The
development of the product was completed and production commenced. The aggregate
development costs for the Sentinel product paid for by the Retailer totaled
$651,500. As of September 30, 2004, we had credited back approximately $122,100
to the retailer resulting in an accrued liability of $529,400 for the benefit
of
the Retailer. As of September 30, 2005, the accrued balance was
$529,400.
CashWorks
In
December 2001, we invested $500,000 in CashWorks, Inc. (“CashWorks”), a
development-stage financial technology solutions provider, in the form of
convertible debt of CashWorks, and entered into a License, Development and
Deployment Agreement (“LDDA”) with CashWorks, which provided for certain
marketing rights and future income payments to us in exchange for technical
expertise and our sales support. In December 2002, we converted the notes,
plus
accrued but unpaid interest into 2,133,728 shares of CashWorks’ Series B
preferred shares plus warrants to purchase 125,000 shares of CashWorks’ common
stock at $2.00 per share. In March 2004, we consented to the sale of our
interest in CashWorks to GE Capital Corp. (“GECC”) for approximately $2,451,000,
resulting in the recognition of a gain in the quarter ended March 31, 2004
of
$1,918,012. We retained the marketing rights and future income payments pursuant
to the LDDA, as amended, following the sale to GECC. All of the shares and
warrants related to the CashWorks investment were pledged to secure borrowings
in connection with the Financing (defined herein above). Accordingly, upon
receipt of the consideration for the CashWorks Series B preferred shares and
warrants, we were obligated to repay in full the $400,000 and $100,000
convertible term notes plus accrued but unpaid interest thereon, and all
outstanding interest due on the $6,450,000 convertible term note, all of which
were paid as part of the Financing.
Convertible
Debentures
In
September 2000, we issued to two investors (individually, the “Holder”, or
collectively, the “Holders”) an aggregate of $18,000,000 of our 6% Convertible
Debentures, due September 8, 2004 (the “Convertible Debentures”), convertible
into our common stock at a price of $9.50 per share. In addition, we issued
warrants to the Holders to purchase 378,947 shares of our common stock
exercisable at any time through September 8, 2005 at an exercise price of $9.80
per share.
In
June
2001, the Holders exercised their option to “put” the Convertible Debentures
back to the Company. Accordingly, the principal amount of $18,000,000, plus
accrued and unpaid interest, became due on August 27, 2001. We did not make
such
payment on that date, and at September 30, 2002, did not have the funds
available to make such payments. At September 30, 2002, we were party to
subordination agreements (the “Subordination Agreements”) with each Holder and
the First Lender which provided, among other things, for prohibitions: (i)
on
our making this payment to the Holders, and (ii) on the Holders taking legal
action against us to collect this amount, other than to increase the principal
balance of the Convertible Debentures for unpaid amounts or to convert the
Convertible Debentures into our common stock. The Convertible Debentures were
retired on November 25, 2003, which resulted in a gain on early extinguishment
of debt of $18,823,000, and in connection with the Financing discussed
above.
Investment
in 3CI Complete Compliance Corporation
We
formerly owned 100% of 3CI Complete Compliance Corporation (“3CI”) a company
engaged in the transportation and incineration of medical waste, until we
divested our majority interest in February 1994. As of September 30, 2004,
we
continue to own 698,889 shares of the common stock of 3CI. We have no immediate
plan for the disposal of these shares. At September 30, 2004, all the shares
were pledged to secure borrowings in connection with the Financing. See Note
7,
“Investment in 3CI” to “Notes to the Consolidated Financial Statements” in Part
IV of this Annual Report. The value of the investment in 698,889 shares of
3CI
was written down and was marked to the market values of $209,539 ($0.30 per
share), $244,462 ($0.35 per share), and $279,556 ($0.40 per share) at September
30, 2003, 2004, and 2005 respectively.
Off-Balance
Sheet Transactions
We
do not
have any significant off-balance sheet arrangements that have, or are reasonably
likely to have, a current or future material effect on our financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures
or
capital resources.
Indebtedness
We
have
fixed debt service and lease payment obligations under notes payable and
operating leases for which we have material contractual cash obligations.
Interest rates on our debt vary from prime rate plus 2% to 14%.
The
following table summarizes our contractual cash obligations:
PAYMENTS
DUE BY PERIOD
|
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Thereafter
|
|
|
Long-term
debt, including current portion(1)
|
|
|
3,000,000
|
|
|
3,667,988
|
|
|
1,500,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
3,000,000
|
|
$
|
3,667,988
|
|
$
|
1,500,000
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
(1)
|
Long-term
debt including current maturities and debt discount was $8,167,988
as of
September 30, 2005 and $5,942,729 as of September 30, 2004.
|
Operating
Leases — We lease office and warehouse space, transportation equipment and other
equipment under terms of operating leases, which expire in the years up through
2006. Rental expense under these leases for the years ended September 30, 2005,
2004 and 2003 was approximately $531,992, $519,292 and $512,519,
respectively.
Purchase
Obligations — Pursuant to an agreement with a supplier, we were obligated to
purchase certain raw materials with an approximate cost of $952,000 before
December 31, 2002. Subsequent to September 30, 2002, the terms of the purchase
obligation were amended to extend the purchase date and revise the purchase
prices. This agreement terminated on March 31, 2004.
Planned
capital expenditures for 2006 are estimated to be approximately $200,000. These
expenditures will depend upon available funds, levels of orders received and
future operating activity.
Research
and Development Expenditures
Our
research and development expenditures for fiscal 2005, 2004, and 2003 were
approximately $2,060,000, $2,613,000 and $2,668,000, respectively. Our research
and development budget for fiscal 2006 is estimated to be $1,200,000. The
majority of these expenditures are applicable to enhancements of existing
product lines and the development of new technology to facilitate the dispensing
of cash and cash-value products.
Death
of Chief Executive Officer
In
December 2004, James T. Rash, our former Chairman of the Board, Chief Executive
and Financial Officer, died. We have named Mark K. Levenick as Interim Chief
Executive Officer but no permanent Chairman or Chief Executive Officer has
been
hired or appointed as of the date hereof. The Board of Directors approved the
transfer of a key-man life insurance policy on the life of Mr. Rash in the
amount of $1,000,000 to Mr. Rash in 2002, in connection with Mr. Rash’s then
pending retirement. The proceeds were assigned as collateral for outstanding
promissory notes due from Mr. Rash in the aggregate principal amount of
$1,143,554 plus accrued interest in the amount of $334,980. Proceeds of
$1,009,227 were received from the insurance policy in February 2005, which
were
applied to the principal amount of the notes. Mr. Rash also received bonuses
totaling $350,000 of which $134,327 was applied to the remaining principal
balance of the notes. The accrued interest was charged to bad debt expense
during fiscal 2003.
|
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
At
September 30, 2005 and September 30, 2004, we were exposed to changes in
interest rates as a result of significant financing through our issuance of
variable-rate and fixed-rate debt. However, with the retirement of the
Convertible Debentures subsequent to September 30, 2002, and the associated
overall reduction in outstanding debt balances, our exposure to interest rate
risks has significantly decreased. If market interest rates had increased up
to
1% in fiscal 2004 or 2005, there would have been no material impact on our
consolidated results of operations or financial position.
Forward-Looking
Statements
This
Form
10-K contains certain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which are intended to be covered by the safe
harbors created thereby. Investors are cautioned that all forward-looking
statements involve risks and uncertainty (including without limitation, our
future gross profit, selling, general and administrative expense, our financial
position, working capital and seasonal variances in our operations, as well
as
general market conditions). Though we believe that the assumptions underlying
the forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this Form 10-K will prove to be
accurate. In light of the significant uncertainties inherent in the forward-
looking statements included herein, the inclusion of such information should
not
be regarded as a representation by us or any other person that our objectives
and plans will be achieved.
|
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY
DATA
|
Our
consolidated financial statements, notes thereto and supplementary data appear
on pages 42 through 49 in this report and are incorporated herein by
reference.
|
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
On
March
24, 2005, we engaged Hein & Associates LLP (“Hein”) to serve as our
independent registered public accounting firm and dismissed KPMG LLP (“KPMG”).
The change in independent registered public accounting firms was approved by
the
Audit Committee of our Board of Directors and reported on a Current Report
on
Form 8-K, dated March 24, 2005. KPMG audited our financial statements for the
fiscal year ended September 30, 2002 and for all the prior years, and Hein
audited our financial statements as of and for the fiscal years ended September
30, 2005, 2004 and 2003.
The
audit
report of KPMG on our consolidated financial statements for fiscal year ended
September 30, 2002 did not contain an adverse opinion or disclaimer of opinion,
and such audit report was not qualified or modified as to any uncertainty,
audit
scope or accounting practice.
During
fiscal 2002 and subsequent interim periods through the date we changed
independent registered public accounting firms, there were no disagreements
between us and KPMG on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedures, which
disagreements, if not resolved to the satisfaction of KPMG, would have caused
KPMG to make reference to the subject matter of the disagreement in connection
with its report. In addition, during those same periods, no reportable events,
as defined in Item 304(a)(1)(v) of Regulation S-K, occurred, and we did not
consult with Hein regarding the application of accounting principles to a
specific transaction, either completed or proposed, or the type of audit opinion
that might be rendered on our consolidated financial statements, or any other
matters or reportable events as set forth in Item 304(a)(2) of Regulation
S-K.
|
(a)
|
Evaluation
of Disclosure Controls and
Procedures
|
Mark
K.
Levenick, our Interim Chief Executive Officer, and Robert D. Peltier, our
Interim Chief Financial Officer, have evaluated the effectiveness of the design
and operation of our “disclosure controls and procedures”, as such term is
defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). James T. Rash was Chief
Executive and Chief Financial Officer during the fiscal years ended 2002, 2003
and 2004. Mr. Rash died on December 19, 2004. Mr. Levenick was appointed Interim
Chief Executive Officer on December 22, 2004. During fiscal years 2002, 2003
and
2004, Mr. Levenick served as Chief Operating Officer and Director of the
Company, and President and Chief Executive Officer of Tidel Engineering, L.P.,
the Company's principal operating subsidiary. In February 2005, Mr. Robert
D.
Peltier joined the Company as Interim Chief Financial Officer. Mr. Peltier
began
his assessment of disclosure controls and internal controls without having
ever
been in a position of active management or knowledge over transactions during
fiscal years 2002, 2003 or 2004.
In
conducting the evaluation of disclosure controls and procedures and the
accounting controls and procedures, it was concluded that the Company had a
material weakness in its internal controls and procedures related to the
company’s communication from its principal operating subsidiary, Tidel
Engineering, L.P to the corporate office regarding the recognition of revenues.
The company revised its revenue recognition policy in the fiscal year ended
September 30, 2000 to recognize revenue at the time products are shipped to
customers. Approximately $2.0 million of revenues were recognized from the
sales
of the Sentinel product in the fourth quarter of the fiscal year ended September
30, 2005 and the majority of the units that related to the revenue had not
been
shipped as of September 30, 2005. These sales were not communicated to the
corporate office, and accordingly our Chief Executive Officer and Chief
Financial Officer concluded that the Company’s internal controls and procedures
were not effective as of the end of the year ended September 30, 2005. We
properly adjusted our 2005 consolidated financial statements included in this
Form 10-K for the fiscal year ended September 30, 2005 to be in compliance
with
our revenue recognition policy.
In
order
to remedy this material weakness, the Company implemented a new internal control
procedure, which requires the principal operating subsidiary to send a monthly
billing schedule to the corporate office for review by the Chief Financial
Officer. The Chief Financial Officer is then required to review the monthly
billings with the Chief Executive Officer in Dallas to ensure that the monthly
revenues recorded are consistent with our revenue recognition
policy.
In
a
report to the Audit Committee of the Board of Directors of the Company dated
July 28, 2005, the Company’s independent registered public accountants noted
that the following significant deficiencies in our internal controls and
procedures were discovered during the course of their audit: (1) established
credit policies were overridden on occasion by executive management based on
their business judgment at that time, (2) bookkeeping at the corporate level
was
not administrated on a timely basis during 2003 and 2004 and (3) the Company’s
accounts payable supervisor had access to the check signature and the ability
to
prepare check runs without proper review prior to distribution. In examining
the
significant deficiencies, both the Company and our independent registered public
accountants performed expanded reviews of our procedures and mitigating controls
to determine whether such deficiencies constituted a material weakness. In
the
expanded reviews, both the Company and our independent registered public
accountants noted the following controls were in place prior to the audit of
our
financial statements for the fiscal years ended September 30, 2003 and 2004:
(1)
Management of the Company consistently performed weekly and monthly reviews
of
actual and budgeted results during the periods, (2) the Audit Committee of
the
Board of Directors of the Company provided additional oversight with respect
to
financial reporting beginning immediately after the death of our former Chief
Executive and Chief Financial Officer in December 2004, and (3) the Company
hired a new Chief Financial Officer in February 2005 to oversee the Company’s
financial reporting process. We collectively concluded that since such
additional controls were in place the Company was able to conclude that none
of
the deficiencies constituted a material weakness that resulted in more than
a
remote likelihood that a material misstatement of the annual or interim
financial statements would not be prevented or detected. Further, the report
of
the independent registered public accountants indicated no inappropriate or
unauthorized activity during the periods reviewed. To the Audit Committee of
Board of Directors of the Company.
In
August
2005, the Company began implementing revised internal controls and procedures
to
correct the significant deficiencies in our internal controls and procedures
noted by our independent registered public accountants in their July 28, 2005
report, which consisted of: (1) the establishment of new credit approval
policies, including Board-level approval for certain amounts, (2) the
establishment new guidelines for timely administration of bookkeeping tasks
at
the corporate level, including the implementation of monthly, quarterly and
annual closing schedules and (3) removal of check signature access from the
Company’s accounts payable supervisor. Such implementation was completed by
August 30, 2005, and as of that date our Chief Executive Officer and our Chief
Financial Officer believe that these significant internal controls and
procedures deficiencies no longer exist.
A
significant deficiency is a control deficiency, or a combination of control
deficiencies, that adversely affect the entity’s ability to authorize, initiate,
record, process or report external financial data reliably in accordance with
generally accepted accounting principles in the United States such that there
is
more than a remote likelihood that a misstatement of the entity’s annual or
interim financial statements that is more than inconsequential will not be
prevented or detected.
A
material weakness is a significant deficiency, or a combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.
A
control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there
are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations on all control systems,
no
evaluation of controls can provide absolute assurance that all errors, control
issues and instances of fraud, if any, with a company have been detected.
The
design of any system of controls is also based in part on certain assumptions
regarding the likelihood of future events, and there can be no assurance
that
any design will succeed in achieving its stated goals under all potential
future
conditions. Therefore, even those systems determined to be effective can
provide
only reasonable assurance with respect to financial statement preparation
and
presentation. Our Chief Executive Officer and our Chief Financial Officer
have
concluded that the Company’s disclosure controls and procedures are effective at
this reasonable assurance level as of January 17, 2006.
|
(b)
|
Changes
in Internal Controls
|
In
the
ordinary course of business, we routinely enhance our information systems by
either upgrading our current systems or implementing new systems. Following
the
evaluations discussed above, the Company took the actions and implemented the
procedures described above. There were no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation by Messrs. Levenick and
Peltier.
PART
III
|
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE
REGISTRANT
|
Set
forth
below are the names and ages of our directors and executive officers and their
principal occupations at present and for the past five years. James T. Rash
was
the Chairman of the Board, Chief Executive Officer and Chief Financial Officer
during the years ended September 30, 2003 and 2004. Mr. Rash died in December
2004. There are, to our knowledge, no agreements or understandings by which
these individuals were selected. No family relationships exist between any
directors or executive officers (as such term is defined in Item 401 of
Regulation S-K), except as otherwise stated below.
|
Name
|
|
Age
|
|
The
Company’s Officers
|
|
Director
Since
|
|
|
|
|
|
|
|
|
|
Mark
K. Levenick
|
|
45
|
|
Interim
Chief Executive Officer, President and Chief Executive Officer of
Tidel
Engineering, L.P., and Director
|
|
1995
|
|
Michael
F. Hudson
|
|
53
|
|
Executive
Vice President, Chief Operating Officer of Tidel Engineering,
L.P.
|
|
2001
|
|
Jerrell
G. Clay
|
|
64
|
|
Director
|
|
1990
|
|
Raymond
P. Landry
|
|
66
|
|
Director
|
|
2001
|
|
Stephen
P. Griggs
|
|
47
|
|
Director
|
|
2002
|
|
Robert
D. Peltier
|
|
41
|
|
Interim
Chief Financial Officer
|
|
2005
|
The
following is a summary of the business background and experience of each of
the
persons named above:
MARK
K.
LEVENICK has been our Interim Chief Executive Officer since December 2004 and
has served as Chief Executive Officer of our principal operating subsidiary,
Tidel Engineering, L.P., for in excess of five years. Mr. Levenick has been
a
Director since May 1995. He holds a Bachelor of Science degree from the
University of Wisconsin at Whitewater. Mr. Levenick also had previously acted
as
our Interim Chief Executive Officer from February 2002 to August 2002, during
James T. Rash’s medical leave of absence.
MICHAEL
F. HUDSON is our Executive Vice President and Chief Operating Officer of our
principal operating subsidiary. Mr. Hudson served as a Director from February
2001 through June 2005, when he resigned on June 22, 2005 in accordance with
the
terms of the Settlement Agreement (see further discussion in Part III, Item
11,
“Employment Contracts, Termination of Employment and Change of Control
Arrangements” of this Annual Report). Prior to joining us in September 1993, he
held various positions with the Southland Corporation and its affiliates for
more than 18 years, concluding as President and Chief Executive Officer of
MoneyQuick, a large non-bank ATM network. Mr. Hudson currently serves on the
Board of Directors and Executive Committee of the Electronic Funds Transfer
Association and the International Board of Directors and National Advisory
Board
of the Automated Teller Machine Industry Association.
JERRELL
G. CLAY has served as a Director since December 1990 and is Chief Executive
Officer of 3 Mark Financial, Inc., an independent life insurance marketing
organization, and has served as president of one of its predecessors for in
excess of five years. Mr. Clay also serves as a member of the Independent
Marketing Organization’s Advisory Committee of Protective Life Insurance Company
of Birmingham, Alabama.
RAYMOND
P. LANDRY has served as a Director since February 2001 and has been engaged
in
private business consulting to various companies, including some other entities
in the ATM industry, for in excess of five years. He has served as a senior
executive or financial officer with three publicly traded companies and several
private concerns over the last 30 years. Prior to that time, he was employed
by
the consulting group of Arthur Andersen & Co. (now known as Accenture) for
10 years. Mr. Landry holds a Bachelor of Science degree in Business
Administration from Louisiana State University.
STEPHEN
P. GRIGGS has served as a Director since June 2002 and has been primarily
engaged in managing his personal investments since 2000. From 1988 to 2000,
Mr.
Griggs held various positions, including President and Chief Operating Officer,
with RoTech Medical Corporation, a Nasdaq-traded company. He holds a Bachelor
of
Science degree in Business Management from East Tennessee State University
and a
Bachelor of Science degree in Accounting from the University of Central Florida.
Mr. Griggs was appointed to the Board of Directors during 2002 to fill the
vacancy created by the mid-term resignation of a former director.
ROBERT
D.
PELTIER has served as Interim Chief Financial Officer since February 2005,
and
has over fourteen years of various accounting and financial experience. Since
1997, he served in several financial capacities with Horizon Offshore
Contractors, Inc., including Vice President of Finance. He has over seven years
experience with drafting and filing financial reports. Mr. Peltier earned his
Bachelor of Science Degree in Accounting at the University of North
Texas.
Mr.
Peltier, our Interim Chief Financial Officer, is the nephew of Mr. Landry,
one
of our directors.
The
Company has a separately designated standing Audit Committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act, which is responsible
for reviewing the financial information which will be provided to shareholders
and others, the systems of internal controls, which management and the Board
of
Directors have established, and the financial reporting processes. On September
30, 2005 the Audit Committee consisted of Messrs, Griggs, and Clay. The Audit
Committee held no meetings during the last fiscal years 2004 and 2003,
respectively. During the fiscal year 2005, the Audit committee held six
meetings. Except as identified in the following paragraph, each member of the
Audit Committee was an “independent director” as defined in Rule 4200 of the
Marketplace Rules of the National Association of Securities Dealers, Inc.
(“NASD”) as of September 30, 2005. Effective August 26, 2005, Mr. Landry
resigned from the Audit Committee and Mr. Griggs was appointed as Chairman
of
the Audit Committee, and the Board of Directors determined that Mr. Griggs
is an
“audit committee financial expert” as defined in Item 401(h) of Regulation
S-K.
Subsequent
to the death of Jim Rash, former Chairman, CEO and CFO of the Company, a meeting
of the Board of Directors was held to address the immediate needs of corporate
governance. At this meeting, Ray Landry was requested by the Board to provide
the Company with guidance in the areas of Financial Management and oversight
in
the negotiations with NCR and the sale of the Cash Security division. On
December 28, 2004, Mr. Landry entered into a consulting arrangement with the
Company to provide those services enumerated above. Since December 28, 2004,
Mr.
Landry has performed financial oversight and financial and transactional
consultation for the Company, and has been paid on an hourly basis.
The
Compensation Committee is responsible for reviewing the performance and
development of management in achieving corporate goals and objectives and
ensuring that the Company’s senior executives are compensated effectively in a
manner consistent with the Company’s strategy, competitive practice, and the
requirements of the appropriate regulatory bodies. Toward that end, the
Compensation Committee oversees all of the Company’s compensation, equity and
employee benefit plans and payments. The Compensation Committee held one meeting
each year during the last fiscal years 2004 and 2003, respectively. Each of
the
members of the Compensation Committee is an “independent director” as defined in
Rule 4200 of the Marketplace Rules of the NASD, and an “outside director” as
defined in Section 162(m) of the Internal Revenue Code of 1986.
In
April
2002, we formed a special committee of the Board of Directors to evaluate any
potential sale of the Company and/or its divisions, any re-financing, or
investment banking relationships and to oversee all mergers and acquisitions
activity. This committee currently consists of all outside
directors.
The
Company has adopted a code of conduct and ethics that applies to the Company’s
Chief Executive Officer, Chief Financial Officer and other persons performing
similar functions. This Code of Conduct and Ethics is filed as an exhibit to
this Annual Report. Our Code addresses conflicts of interest, usurpation of
corporate opportunities, the protection and proper use of company assets,
confidentiality, compliance with laws, rules, and regulations, prompt reporting
of any illegal or improper activity to an officer, supervisor, manager, or
other
appropriate personnel of the Company.
|
(b)
|
Section
16(a) Beneficial Ownership Reporting
Compliance
|
Section
16(a) of the Securities Exchange Act of 1934 requires our directors and
officers, and persons who own more than 10% of a registered class of our equity
securities, to file reports of ownership and changes in ownership of such equity
securities with the Securities and Exchange Commission (“SEC”). Such entities
are also required by SEC regulations to furnish us with copies of all Section
16(a) forms filed.
Based
solely on a review of the copies of Forms 3, 4 and 5 furnished to us, and any
amendments thereto, and any written representations with respect to the
foregoing, we believe that our directors and officers, and greater than 10%
beneficial owners, have complied with all Section 16(a) filing
requirements.
The
following table sets forth the amount of all cash and other compensation we
have
paid for services rendered during the fiscal years ended September 30, 2005,
2004 and 2003 to James T. Rash, the former Chairman of the Board and Chief
Executive and Financial Officer, Mark K. Levenick, the current Interim Chief
Executive Officer, and our four most highly compensated Executive Officers
(as
such term is defined in Item 402 of Regulation S-K) other than the
CEO.
Summary
Compensation Table
|
|
|
|
|
|
|
|
|
Long-term
Compensation
Awards
|
|
|
|
|
|
|
|
|
|
|
Annual
Compensation
|
|
Securities
|
|
|
|
|
Name
and Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Other
Annual
Compensation(*)
|
|
Underlying
Options
|
|
All
Other
Compensation($)
|
|
|
James
T. Rash(1)
|
|
|
2005
|
|
$
|
74,328
|
|
$
|
—
|
|
|
*
|
|
$
|
—
|
|
$
|
19,688
|
|
|
Former
Chief Executive
|
|
|
2004
|
|
|
236,250
|
|
|
—
|
|
|
*
|
|
|
—
|
|
|
12,430
|
|
|
and
Financial Officer
|
|
|
2003
|
|
|
225,000
|
|
|
18,700
|
|
|
*
|
|
|
—
|
|
|
11,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark
K. Levenick(1)
|
|
|
2005
|
|
$
|
262,500
|
|
$
|
315,000
|
|
|
*
|
|
|
—
|
|
$
|
6,172
|
|
|
Interim
Chief Executive Officer
|
|
|
2004
|
|
|
262,500
|
|
|
—
|
|
|
*
|
|
|
—
|
|
|
6,172
|
|
|
|
|
|
2003
|
|
|
262,500
|
|
|
—
|
|
|
*
|
|
|
—
|
|
|
4,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael
F. Hudson
|
|
|
2005
|
|
$
|
205,000
|
|
$
|
20,500
|
|
|
*
|
|
|
—
|
|
$
|
1,248
|
|
|
Executive
Vice President Officer
|
|
|
2004
|
|
|
204,750
|
|
|
10,250
|
|
|
*
|
|
|
—
|
|
|
1,248
|
|
|
|
|
|
2003
|
|
|
204,750
|
|
|
—
|
|
|
*
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
M.
Flynt Moreland
|
|
|
2005
|
|
$
|
175,000
|
|
$
|
156,700
|
|
|
*
|
|
|
—
|
|
$
|
—
|
|
|
Senior
Vice President —
|
|
|
2004
|
|
|
168,269
|
|
|
—
|
|
|
*
|
|
|
—
|
|
|
—
|
|
|
Research
& Development
|
|
|
2003
|
|
|
150,000
|
|
|
—
|
|
|
*
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troy
D. Richard
|
|
|
2005
|
|
$
|
130,000
|
|
$
|
107,380
|
|
|
*
|
|
|
—
|
|
$
|
—
|
|
|
Senior
Vice President —
|
|
|
2004
|
|
|
130,000
|
|
|
—
|
|
|
17,342
|
|
|
—
|
|
|
—
|
|
|
Operations
of Tidel
|
|
|
2003
|
|
|
130,000
|
|
|
—
|
|
|
15,492
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthew
C. Johnson
|
|
|
2005
|
|
$
|
133,600
|
|
$
|
66,000
|
|
|
*
|
|
|
—
|
|
$
|
—
|
|
|
Vice
President —
|
|
|
2004
|
|
|
127,392
|
|
|
—
|
|
|
*
|
|
|
—
|
|
|
—
|
|
|
Marketing
of Tidel Engineering, L.P.
|
|
|
2003
|
|
|
126,561
|
|
|
—
|
|
|
*
|
|
|
—
|
|
|
—
|
|
|
—
|
We
routinely give certain of our officers benefits, the amounts of which
are
customary in the industry. The aggregate dollar value of such benefits
paid to any named executive officer did not exceed the lesser of
$50,000,
or 10%, of the total annual salary and bonus during each of the fiscal
years ended September 30, 2005, 2004 and
2003.
|
|
—
|
Mr.
Rash died December 19, 2004. Mr. Levenick was appointed Interim Chief
Executive Officer on December 22,
2004.
|
Option/SAR
Grants in Last Fiscal Year
We
granted 225,380 stock options to our executive officers during the fiscal year
ended September 30, 2005.
Option
Grants in Last Fiscal Year
The
following table sets forth information concerning the grant of stock options
to
the named executive officers during the calendar year ended September 31,
2001.
|
Individual
Grants
|
|
Potential
Realizable Value at Assumed
|
|
|
Name
|
|
Number
of Securities Underlying Options Granted (1)
|
|
Percent
of Total Options Granted to Employees in Fiscal
Year
|
|
Exercise
Price
($/
sh)
|
|
Expiration
Date
|
|
Annual
Rates of Stock Price Appreciation for Option Term
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
5%
($)
|
|
10%
($)
|
|
|
Hudson,
Michael F
|
|
|
75,000
|
|
|
21
|
%
|
|
0.25
|
|
|
3/6/2025
|
|
|
30,542
|
|
|
31,996
|
|
|
Levenick,
Mark K
|
|
|
100,000
|
|
|
27
|
%
|
|
0.25
|
|
|
3/6/2025
|
|
|
40,722
|
|
|
42,662
|
|
|
Johnson,
Matthew C.
|
|
|
2,880
|
|
|
1
|
%
|
|
0.25
|
|
|
3/6/2025
|
|
|
1,173
|
|
|
1,229
|
|
|
Moreland,
M Flynt
|
|
|
25,000
|
|
|
7
|
%
|
|
0.25
|
|
|
3/6/2025
|
|
|
10,181
|
|
|
10,665
|
|
|
Richard,
Troy D.
|
|
|
22,500
|
|
|
6
|
%
|
|
0.25
|
|
|
3/6/2025
|
|
|
9,163
|
|
|
9,599
|
|
(1) Grants
vest and become exercisable 50% at the end of three and 100% at the end of
year
four.
(2) The
dollar gains under these columns result from calculations required by the
Securities and Exchange Commission’s (“SEC”) rules and are not intended to
forecast future price appreciation of the common Stock of the Company It is
important to note that options have value to the listed executives only if
the
stock price increases above the exercises price shown in the table during the
effective option
Aggregated
Option Exercises in Last Fiscal Year and Option Values at Fiscal Year
End
The
following tables provide (i) the number of options exercisable by the respective
optionees, and (ii) the respective valuations at September 30, 2005 and
September 30, 2004.
|
|
|
Shares
acquired
on
exercise
|
|
Value
realized
|
|
Number
of
Securities
Underlying
Unexercised
Options at
September
30, 2005
(Shares)
|
|
Value
of Unexercised
In-the-Money
Options at
September
30, 2005
($)(2)
|
|
|
Name
|
|
(#)
|
|
($)
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
|
|
James
T. Rash(1)
|
|
|
—
|
|
|
—
|
|
|
175,000
|
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Mark
K. Levenick
|
|
|
—
|
|
|
—
|
|
|
275,000
|
|
|
100,000
|
|
|
—
|
|
|
6,000
|
|
|
Michael
F. Hudson
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
75,000
|
|
|
—
|
|
|
4,500
|
|
|
M.
Flynt Moreland
|
|
|
—
|
|
|
—
|
|
|
52,400
|
|
|
25,000
|
|
|
—
|
|
|
1,500
|
|
|
Troy
D. Richard
|
|
|
—
|
|
|
—
|
|
|
25,000
|
|
|
7,500
|
|
|
—
|
|
|
1,350
|
|
|
Matthew
C. Johnson
|
|
|
—
|
|
|
—
|
|
|
2,500
|
|
|
5,380
|
|
|
—
|
|
|
173
|
|
|
|
|
Shares
acquired
on
exercise
|
|
Value
realized
|
|
Number
of
Securities
Underlying
Unexercised
Options at
September
30, 2004
(Shares)
|
|
Value
of Unexercised
In-the-Money
Options at
September
30, 2004
($)(2)
|
|
|
Name
|
|
(#)
|
|
($)
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
|
|
James
T. Rash(1)
|
|
|
—
|
|
|
—
|
|
|
175,000
|
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Mark
K. Levenick
|
|
|
—
|
|
|
—
|
|
|
325,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Michael
F. Hudson
|
|
|
—
|
|
|
—
|
|
|
150,500
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
M.
Flynt Moreland
|
|
|
—
|
|
|
—
|
|
|
42,400
|
|
|
10,000
|
|
|
—
|
|
|
—
|
|
|
Troy
D. Richard
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
50,000
|
|
|
—
|
|
|
—
|
|
|
Matthew
C. Johnson
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,000
|
|
|
—
|
|
|
—
|
|
|
(1)
|
Mr.
Rash died December 19, 2004. The 175,000 options exercisable as of
September 30, 2004 expired on December 30,
2005.
|
|
(2)
|
Based
on the closing price of our common stock of $0.31 and $0.59 per share
on
September 30, 2005 and 2004,
respectively.
|
Long-Term
Incentive Plans — Awards in Last Fiscal Year
We
did
not grant any awards to any of our executive officers under any long-term
incentive plans during the fiscal years ended September 30, 2005 and
2004.
Director
Compensation
During
fiscal year ended September 30, 2005, each outside Director earned compensation
in the amount of $3,000 per quarter, with no additional compensation for
committee representation. During fiscal year ended September 30, 2004, each
outside Director earned compensation in the amount of $3,000 per quarter, which
was subsequently paid in fiscal year 2005, with no additional compensation
for
committee representation.
Employment
Contracts, Termination of Employment and Change of Control
Arrangements
We
have
entered into employment agreements with Messrs. Levenick, Moreland and Richard,
which provide for minimum annual salaries of $262,500, $175,000 and $130,000,
respectively, over a three-year term ending December 2007, with certain change
of control provisions. In the event of a change of control, the executive
officers are entitled to immediate vesting of all restricted stock, performance
units, stock options, stock appreciation rights, warrants and employee benefit
plans.
On
June
22, 2005, we entered into two agreements with Mr. Hudson. The first was a new
employment agreement that terminated his prior employment agreement and provided
for his continued employment with the Company until the earlier of December
31,
2005 or the closing of the transactions contemplated by the Asset Purchase
Agreement. Under this new employment agreement, Mr. Hudson’s duties and
compensation will continue as under his prior employment agreement.
Mr.
Hudson and the Company also entered into the Settlement Agreement, which
provided for the settlement of outstanding amounts owed by Mr. Hudson to the
Company. In satisfaction of Mr. Hudson’s obligations to the Company, he agreed
to (i) the delivery of certain shares of the Company’s common stock held by him
for cancellation by the Company; (ii) cancellation by the Company of the
majority of the options to purchase common stock held by him; (iii) application
of certain bonuses (otherwise payable to him) to the payment of his outstanding
obligations to the Company; and (iv) release by Mr. Hudson of any and all claims
against the Company. Mr. Hudson also resigned from the Board of Directors of
the
Company.
Compensation
Committee Interlocks and Insider Participation
The
Compensation Committee consists of Jerrell G. Clay, Stephen P. Griggs. The
Estate of James T. Rash, our former Chairman, Chief Executive and Financial
Officer, has a 10% ownership interest in a privately held corporation controlled
by Jerrell G. Clay.
|
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER
MATTERS
|
The
following table sets forth as of December 31, 2005, the number of shares of
common stock beneficially owned by (i) the beneficial owners of more than 5%
of
our voting securities, (ii) each of our directors and executive officers, as
such terms are defined in Item 402 of Regulation S-K, of the Company
individually and (iii) by all of our current directors and the executive
officers as a group. Except as otherwise indicated, and subject to applicable
community property laws, each person has sole investment and voting power with
respect to the shares shown. Ownership information is based upon information
furnished by the respective holders and contained in our records.
|
Title
of Class
|
|
Name
and Address of Beneficial Owner
|
|
Amount
and Nature of
Beneficial
Ownership
|
|
Percent
of
Class(1)
|
|
Common
stock
|
|
Laurus
Master Fund, Ltd
825
Third Avenue, 14th Floor
New
York, New York 10022
|
|
1,251,000
|
(2)
|
|
6.1%
|
|
Common
stock
|
|
Alliance
Developments
One
Yorkdale Rd., Suite 510
North
York, Ontario M6A 3A1 Canada
|
|
1,180,362
|
(3)
|
|
5.7%
|
|
Common
stock
|
|
Estate
of James T. Rash(9)
2900
Wilcrest, Suite 205
Houston,
Texas 77042
|
|
240,000
|
|
|
1.2%
|
|
Common
stock
|
|
Mark
K. Levenick
2310
McDaniel Dr.
Carrollton,
Texas 75006
|
|
390,000
|
(4)
|
|
1.9%
|
|
Common
stock
|
|
Jerrell
G. Clay
1600
Highway 6, Suite 400
Sugarland,
Texas 77478
|
|
181,405
|
|
|
*
|
|
Common
stock
|
|
M.
Flynt Moreland
2310
McDaniel Dr.
Carrollton,
Texas 75006
|
|
82,400
|
(5)
|
|
*
|
|
Common
stock
|
|
Raymond
P. Landry
2900
Wilcrest, Suite 205
Houston,
Texas 77042
|
|
38,500
|
|
|
*
|
|
Common
stock
|
|
Troy
D. Richard
2310
McDaniel Dr.
Carrollton,
Texas 75006
|
|
25,000
|
(6)
|
|
*
|
|
Common
stock
|
|
Michael
F. Hudson
2310
McDaniel Dr.
Carrollton,
Texas 75006
|
|
22,700
|
|
|
*
|
|
Common
stock
|
|
Matthew
C. Johnson
2310
McDaniel Dr.
Carrollton,
Texas 75006
|
|
42,500
|
(7)
|
|
*
|
|
Common
stock
|
|
Stephen
P. Griggs
2900
Wilcrest, Suite 205
Houston,
Texas 77042
|
|
—
|
|
|
*
|
|
Common
stock
|
|
Directors
and Executive
Officers
as a group (6 persons)
|
|
632,605
|
(8)
|
|
3.0%
|
|
(1)
|
Based
upon 20,677,210 shares outstanding as of December 31, 2005.
|
|
(2)
|
The
number of shares currently beneficially owned by Laurus as of December
31,
2005 is reflected above. As previously discussed, simultaneous with
our
execution of the Cash Security Asset Purchase Agreement on January
12,
2006, Laurus converted $5,400,000 in aggregate principal amount of
convertible Company debt it holds into 18,000,000 shares of our common
stock,. Accordingly, as of January 13, 2006, Laurus holds an aggregate
19,251,000 of our outstanding shares representing approximately 49.8%
of
our common stock. For more information, see Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations
—
Subsequent Events” of this Annual
Report.
|
|
(3)
|
Includes
150,000 shares which could be acquired within 60 days upon exercise
of
outstanding warrants at an exercise price of $0.45 per
share.
|
|
(4)
|
Includes
275,000 shares which could be acquired within 60 days upon exercise
of
outstanding options at exercise prices of (i) $1.25 per share as
to
100,000 shares, (ii) $1.875 per share as to 75,000 shares and (iii)
$2.50
per share as to 100,000 shares.
|
|
(5)
|
Includes
52,400 shares which could be acquired within 60 days upon exercise
of
outstanding options at exercise prices of (i) $1.25 per share as
to 21,600
shares, (ii) $1.875 per share as to 20,000 shares and (iii) $2.50
per
share as to 10,800 shares.
|
|
(6)
|
Includes
25,000 shares which could be acquired within 60 days upon exercise
of
outstanding options at exercise prices of $0.42 per
share.
|
|
(7)
|
Includes
2,500 shares which could be acquired within 60 days upon exercise
of
outstanding options at prices of $0.45 per share.
|
|
(8)
|
Includes
the 275,000 shares referred to in Note (4) above which could be acquired
within 60 days upon exercise of outstanding
options.
|
|
(9)
|
Mr.
Rash died on December 19, 2004. These shares are held in the name
of the
Estate of James T. Rash.
|
|
|
CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS
|
In
September 2000, we loaned $141,563 to Michael F. Hudson, our Executive Vice
President and Chief Operating Officer of our principal operating subsidiary,
pursuant to a promissory note maturing October 1, 2002, and bearing interest
at
10% per annum. During the year ended September 30, 2001, we loaned an additional
$225,000 to Mr. Hudson pursuant to a promissory note maturing October 1, 2002,
and bearing interest at 10% per annum. In June of 2005, pursuant to the terms
of
the Settlement Agreement, these loans were satisfied. See Part III, Item 11,
“Employment Contracts, Termination of Employment and Change of Control
Arrangements” of this Annual Report.
During
the year ended September 30, 2001, we loaned $75,625 to Eugene Moore, our Senior
Vice President, in a promissory note maturing October 1, 2002, and bearing
interest at 10% per annum. The note from Mr. Moore was secured by a pledge
of
50,000 shares of our common stock. The note related to the exercise of certain
stock option agreements. Mr. Moore died May 28, 2002. We subsequently forgave
the remaining unpaid balance of $75,625 in exchange for the return of the 50,000
shares of our common stock.
James
T.
Rash, our Chairman and CEO, had outstanding promissory notes due to us in the
aggregate amount of $1,143,554, bearing interest at 10% per annum. The notes
matured on September 30, 2004 and January 14, 2005. Mr. Rash died December
19,
2004. These notes were not repaid by Mr. Rash upon maturity. We also issued
a
convertible note in the amount of $100,000 payable to a private company
controlled by Mr. Rash, in connection with the Financing, which was paid in
full
in March 2004. The Board of Directors approved the transfer of a key-man life
insurance policy on the life of Mr. Rash in the amount of $1,000,000 to Mr.
Rash
in 2002, in connection with Mr. Rash’s then pending retirement. The proceeds
were assigned as collateral for outstanding promissory notes totaling a
principal balance of $1,143,554 plus accrued interest from Mr. Rash in the
amount of $334,980. Proceeds of $1,009,227 were received from the insurance
policy in February of 2005 and were applied to the principal amount of the
notes. Mr. Rash also received bonuses totaling $350,000, of which $134,327
was
applied to the remaining principal balance of the notes. The accrued interest
was charged to bad debt expense during fiscal 2004.
From
1994
to 1997, we had provided certain office space and administrative services to
two
privately held entities with which Mr. Rash previously had an affiliation.
The
entities are indebted to us in the aggregate amount of $215,866, such amount
being the largest aggregate amount of indebtedness outstanding at any time
during the fiscal year ended September 30, 2002. During the fiscal year ended
September 30, 2002, we wrote off $182,492 deemed to be uncollectible. We wrote
off the remaining balance of $33,374 during the fiscal year 2003.
From
1997
to 1999, we had provided certain office space and administrative services to
a
privately held corporation in which Mr. Rash and Jerrell G. Clay, one of our
Directors, each have a greater than 10% ownership interest and in which Mr.
Clay
is an executive officer.
Raymond
P. Landry, a member of our Board, has provided certain financial consulting
services to the Company totaling $106,422 during the fiscal year
2005
Robert
D.
Peltier was appointed Interim Chief Financial Officer in February 2005; and
he
is the nephew of Raymond P. Landry, one of our current directors. We have
used the services of a printing company in which Mr. Peltier has an interest.
We
believe that the fees paid to the printing company are comparable to fees that
would be paid to another printing company for comparable services rendered
in an
arms-length transaction at approximately $86,000
Leonard
L. Carr, one of our vice presidents, is the son-in-law of Mr. Rash, our former
CEO, CFO and Chairman of the Board. Mr. Carr has a three-year contract, expiring
on December 31, 2007, with certain change of control provisions. Mr. Carr’s
salary was $123,200, $116,200, and $112,000 for the years 2005, 2004 and 2003,
respectively.
We
entered into an asset purchase agreement, dated as of January 12, 2006 (the
“Cash Security Asset Purchase Agreement”), with Sentinel Operating, L.P., a
purchaser controlled by a management buyout team led by Mark K. Levenick, our
Interim Chief Executive Officer and a member of our Board, and Raymond Landry,
a
member of our Board, for the sale of substantially all of the assets of our
Cash
Security business (the “Cash Security Business Sale”). The two members of our
Board who are unaffiliated with the management buyout of the Cash Security
business negotiated the terms of the Cash Security Asset Purchase Agreement
with
the management buyout group.
The
independent members of our Board received an opinion from an investment advisory
firm, CapitaLink, L.C., as to the fairness of the Cash Security Business Sale
from a financial point of view to the unaffiliated shareholders. On December
31,
2005, our Board, with Messrs. Levenick and Landry abstaining, voted to approve
the Cash Security Asset Purchase Agreement and the Cash Security Business
Sale.
The
Cash
Security Asset Purchase Agreement provides for the sale of the Company’s Cash
Security business to the purchaser thereunder for a cash purchase price of
$17.5
million, less $100,000 as consideration for the purchaser’s potential liability
in connection with certain litigation and subject to a closing balance sheet
purchase price adjustment. In addition, the Cash Security Asset Purchase
Agreement is subject to customary representations and warranties and covenants
and the satisfaction of several customary closing conditions, including our
obtaining shareholder approval. The closing under the Cash Security Asset
Purchase Agreement is expected to occur in the first quarter of 2006. The
purchase price payable under the Cash Security Business Sale is subject to
the
Reorganization Fee and the other amounts payable to Laurus under the terms
of
the Asset Sales Agreement
Upon
closing of the Cash Security Business Sale, we estimate the Reorganization
Fee
payable to Laurus will be in the range of $9 million to $11 million. See Part
I,
Item 1(c), “Laurus Reorganization Fee” for more information.
In
connection with the Cash Security Asset Purchase Agreement and pursuant to
the
terms of the Exercise and Conversion Agreement we entered into with Laurus
on
January 12, 2006, Laurus converted $5,400,000 in aggregate principal amount
of
convertible Company debt it holds into 18,000,000 shares of our common stock.
Following Laurus’ conversion of such debt, Laurus holds shares representing
approximately 49.8% of our common stock.
On
January 12, 2006, we repaid all of our remaining outstanding debt to Laurus
in
the principal amount of $2,617,988 plus accrued but unpaid interest in the
amount of $113,333. In connection therewith, the Company paid a prepayment
penalty to Laurus in the amount of $59,180.
In
addition, in connection with the Cash Security Asset Purchase Agreement and
pursuant to the terms of a stock redemption agreement we entered into with
Laurus at such time, we have agreed to repurchase from Laurus, upon the closing
of the Cash Security Business Sale, all shares of Company common stock held
by
Laurus at a per share price not less than $.20 per share nor greater than $0.34
per share following the determination of the Company’s assets in accordance with
the formula set forth below.
The
stock
redemption agreement with Laurus provides that the purchase price (the “Purchase
Price”) for the shares of our common stock to be repurchased from Laurus (the
“Laurus Shares”) shall consist of the Per Share Price (as defined below)
multiplied by the number of Laurus Shares. The “Per Share Price” shall equal the
quotient obtained by dividing (1) the value on the closing date under the Cash
Security Asset Purchase Agreement of (A) the sum of the value of all assets
of
the Company that would be valued by the Company in connection with a liquidation
of the Company following the closing of the Cash Security Business Sale (after
giving effect to such closing), including, but not limited to: (i) all cash
and
cash equivalents held by the Company, (ii) all marketable securities held by
the
Company, and (iii) all other remaining tangible and intangible assets held
directly or indirectly by the Company valued at fair market value minus (B)
the
sum of (i) all fees and expenses of the Company and its subsidiaries in
connection with the ATM Business Sale and the Cash Security Business Sale
incurred through the closing date of the Cash Security Business Sale, (ii)
all
payments and obligations due to, or on behalf of, present and former employees
of the Company and its subsidiaries incurred through the closing date of the
Cash Security Business Sale, (iii) all amounts paid or payable to Laurus
pursuant to the Agreement Regarding NCR Transaction and Other Assets Sales
dated
as of November 26, 2004 by and between the Company and Laurus, (iv) all other
liabilities of the Company and its subsidiaries, (v) payments due to independent
directors of the Company in an aggregate amount not to exceed $400,000, and
(vi)
a good faith estimate of the costs and expenses which would be incurred in
connection with the liquidation of the Company including, without limitation,
legal fees, directors and officers insurance, all fees and expenses relating
to
SEC and governmental filings and related expenses, by (2) the total number
of
shares of Common Stock outstanding on the closing date of the Cash Security
Business Sale. Notwithstanding the foregoing, the Per Share Price shall not
be
less than $.20 per share nor greater than $0.34 per share.
Following
such share repurchase, Laurus will cease to hold any equity interest in the
Company. If the Cash Security Business Sale does not occur by March 31, 2006,
then pursuant to the terms of the Exercise and Conversion Agreement we entered
into with Laurus at the same time as the Cash Security Asset Purchase Agreement,
we have agreed to immediately redeem from Laurus the 18,000,000 shares of our
common stock issued to Laurus in connection with the Cash Security Asset
Purchase Agreement and Laurus’ conversion of our debt at a redemption price of
$5,400,000.
|
|
PRINCIPAL
ACCOUNTING FEES AND
SERVICES
|
The
aggregate fees billed by Hein & Associates LLP for professional services
rendered for (i) the audit of our annual financial statements set forth in
the
Annual Report on Form 10-K for the fiscal year ended September 30, 2005 and
fiscal year ended September 30, 2004, and (ii) the reviews of interim financial
statements included in the Quarterly Reports on Form 10-Q for the quarter ended
December 31, 2004 and quarters ended March 31, 2005 and June 30, 2005, were
approximately $225,000 for the fiscal year ended September 30, 2005 and $400,000
for the fiscal year ended September 30, 2004.
|
(b)
|
Other
Audit-Related Fees
|
There
were no other audit-related fees incurred during the fiscal year ended September
30, 2005 and 2004.
The
aggregate fees billed by Hein & Associates LLP for tax services for the
fiscal year ended September 30, 2005 were $75,000 and $16,000 for the fiscal
year ended September 30, 2004.
There
were no fees for other professional services rendered during the fiscal years
ended September 30, 2005 and 2004.
Our
Audit
Committee has advised us that it has determined that the non-audit services
rendered by Hein & Associates LLP during the most recent fiscal year are
compatible with maintaining the independence of such auditors.
The
Audit
Committee’s policy has previously been to approve all professional fees
associated with audit, tax and audit-related work proposed to us by Hein &
Associates LLP and KPMG LLP upon completion of the work. However, we changed
the
policy effective July 1, 2004, to require the Audit Committee to pre-approve
all
professional fees associated with audit, tax and audit-related services as
they
are proposed to us by Hein & Associates LLP and other professional service
firms. The Audit Committee approved of 100% of the services described in each
of
sections A—D above pursuant to 17 CFR 210.2-01(C)(7)(i)(C).
PART
IV
|
|
FINANCIAL
STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM
8-K
|
Documents
Filed
Financial
Statements and Financial Statement Schedules
Our
audited consolidated financial statements and related financial statement
schedules and the report of an independent registered public accounting firm
as
required by Item 8 of Form 10-K and Regulation S-X are filed as a part of this
Annual Report, as set forth in the accompanying Index to Financial Statements.
Such audited financial statements and related financial statement schedules
include, in the opinion of our management, all required disclosures in the
accompanying notes.
Consolidated
Financial Statements of Tidel Technologies, Inc. and
Subsidiaries
Report
of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets — September 30, 2005 and 2004
Consolidated
Statements of Operations for the years ended September 30, 2005, 2004 and
2003
Consolidated
Statements of Comprehensive Income (Loss) for the years ended September 30,
2005, 2004 and 2003
Consolidated
Statements of Shareholders’ Equity (Deficit) for the years ended September 30,
2005, 2004 and 2003
Consolidated
Statements of Cash Flows for the years ended September 30, 2005, 2004 and
2003
Notes
to
Consolidated Financial Statements
Schedule
II Valuation and Qualifying Accounts — as filed as part of this Annual Report on
Form 10-K
Exhibits
The
Exhibits required by Item 601 of Regulation S-K and Regulation S-X are filed
as
a part of this Report, and are listed in the accompanying Index to
Exhibits.
Index
to Financial Statements
|
|
Page
|
|
CONSOLIDATED
FINANCIAL STATEMENTS OF TIDEL TECHNOLOGIES, INC. AND
SUBSIDIARIES
|
|
|
Report
of Independent Registered Public Accounting Firm
|
40
|
|
Consolidated
Balance Sheets — September 30, 2005 and 2004
|
41
|
|
Consolidated
Statements of Operations for the years ended September 30, 2005,
2004 and
2003
|
42
|
|
Consolidated
Statements of Comprehensive Income (Loss) for the years ended September
30, 2005, 2004 and 2003
|
43
|
|
Consolidated
Statements of Shareholders’ Equity (Deficit) for the years ended September
30, 2005, 2004 and 2003
|
44
|
|
Consolidated
Statements of Cash Flows for the years ended September 30, 2005,
2004 and
2003
|
45
|
|
Notes
to Consolidated Financial Statements
|
46
|
|
Schedule
II Valuation and Qualifying Accounts — as filed as part of this Annual
Report on Form 10-K
|
62
|
All
other
schedules are omitted because they are not required, are not applicable or
the
required information is presented elsewhere herein.
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors
Tidel
Technologies, Inc.:
We
have
audited the consolidated 2005 and 2004 financial statements of Tidel
Technologies, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company has determined that
it
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well
as evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Tidel Technologies, Inc.
and
subsidiaries as of September 30, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 2005 in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 4 to the financial
statements, the Company has suffered recurring losses from operations and has
an
accumulated deficit as of September 30, 2005, items that raise substantial
doubt
about the entity’s ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty.
|
/s/
HEIN & ASSOCIATES LLP
|
|
|
|
|
|
Houston,
Texas
|
|
January
6, 2006, except as to note 19, which is dated as of January 17,
2006
|
TIDEL
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
SEPTEMBER
30,
|
|
|
|
|
2005
|
|
2004
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,003,663
|
|
$
|
258,120
|
|
|
Trade
accounts receivable
|
|
|