SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file Number 000-17288
TIDEL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2193593
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5847 San Felipe, Suite 900
Houston, Texas 77057
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 783-8200
----------------------
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. YES [ ] NO [X]
The number of shares of Common Stock outstanding as of the close of
business on May 15, 2002 was 17,426,210.
TIDEL TECHNOLOGIES, INC.
I N D E X
PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2002 (unaudited) and
September 30, 2001.................................................................. 1
Consolidated Statements of Operations (unaudited) for the three months
and six months ended March 31, 2002 and 2001........................................ 2
Consolidated Statements of Comprehensive Income (Loss) (unaudited)
for the three months and six months ended March 31, 2002 and 2001................... 3
Consolidated Statements of Cash Flows (unaudited) for the six months
ended March 31, 2002 and 2001....................................................... 4
Notes to Consolidated Financial Statements (unaudited)................................. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risks............................ 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 14
Item 2. Changes in Securities.................................................................. 15
Item 3. Defaults Upon Senior Securities........................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders.................................... 16
Item 5. Other Information...................................................................... 16
Item 6. Exhibits and Reports on Form 8-K....................................................... 16
SIGNATURE............................................................................................... 17
TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, SEPTEMBER 30,
2002 2002
------------ -------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 1,886,111 $ 3,266,236
Trade accounts receivable, net of allowance of
$21,410,629 and $21,427,042, respectively 5,099,759 7,036,433
Notes and other receivables, net of allowance
of $4,000,000 1,653,619 1,357,394
Federal income tax receivable 4,833,308 5,596,383
Inventories 9,606,069 11,015,221
Prepaid expenses and other 471,510 525,224
------------ ------------
Total current assets 23,550,376 28,796,891
Property, plant and equipment, at cost 4,719,873 6,006,426
Accumulated depreciation (3,209,373) (4,006,432)
------------ ------------
Net property, plant and equipment 1,510,500 1,999,994
Intangible assets, net of accumulated amortization of
$1,218,531 and $1,199,579, respectively 482,542 501,494
Notes receivable 2,743,554 2,277,675
Other assets 358,141 260,762
------------ ------------
Total assets $ 28,645,113 $ 33,836,816
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities -
Long-term debt $ 4,840,000 $ 5,328,000
Convertible debentures 18,000,000 18,000,000
Accounts payable 993,064 2,795,063
Accrued liabilities 3,613,183 2,423,897
------------ ------------
Total current liabilities 27,446,247 28,546,960
Long-term debt, net of current maturities -- 96,000
------------ ------------
Total liabilities 27,446,247 28,642,960
------------ ------------
Commitments and contingencies
Shareholders' Equity:
Common stock, $.01 par value, authorized 100,000,000
shares; issued and outstanding 17,426,210 shares 174,262 174,262
Additional paid-in capital 19,245,958 19,245,958
Accumulated deficit (17,736,793) (13,623,065)
Stock subscriptions receivable (217,188) (217,188)
Accumulated other comprehensive loss (267,373) (386,111)
------------ ------------
Total shareholders' equity 1,198,866 5,193,856
------------ ------------
Total liabilities and shareholders' equity $ 28,645,113 $ 33,836,816
============ ============
See accompanying notes to consolidated financial statements.
1
TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
------------------------------- -------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues $ 4,738,791 $ 8,155,917 $ 9,375,442 $ 24,852,380
Cost of sales 3,567,163 5,145,773 7,002,439 15,540,890
------------ ------------ ------------ ------------
Gross profit 1,171,628 3,010,144 2,373,003 9,311,490
Selling, general and administrative 2,329,854 2,220,400 4,946,561 4,975,768
Depreciation and amortization 330,976 341,618 587,511 682,472
------------ ------------ ------------ ------------
Operating income (loss) (1,489,202) 448,126 (3,161,069) 3,653,250
Interest expense, net 547,267 347,720 1,276,116 669,825
------------ ------------ ------------ ------------
Income (loss) before taxes (2,036,469) 100,406 (4,437,185) 2,983,425
Income tax expense (benefit) (323,457) 35,000 (323,457) 1,030,000
------------ ------------ ------------ ------------
Net income (loss) $ (1,713,012) $ 65,406 $ (4,113,728) $ 1,953,425
============ ============ ============ ============
Basic earnings (loss) per share:
Net income (loss) $ (0.10) $ 0.00 $ (0.24) $ 0.11
============ ============ ============ ============
Weighted average common shares
outstanding 17,426,210 17,418,988 17,426,210 17,397,364
============ ============ ============ ============
Diluted earnings (loss) per share:
Net income (loss) $ (0.10) $ 0.00 $ (0.24) $ 0.11
============ ============ ============ ============
Weighted average common and
dilutive shares outstanding 17,426,210 18,360,759 17,426,210 18,469,933
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
2
TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
---------------------------- ------------------------------
2002 2001 2002 2001
------------ --------- ------------ -----------
Net income (loss) $ (1,713,012) $ 65,406 $ (4,113,728) $ 1,953,425
Other comprehensive income:
Unrealized gain on investment in 3CI 160,647 109,170 118,738 76,412
------------ --------- ------------ -----------
Comprehensive income (loss) $ (1,552,365) $ 174,576 $ (3,994,990) $ 2,029,837
============ ========= ============ ===========
See accompanying notes to consolidated financial statements.
3
TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED MARCH 31,
-----------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net income (loss) $ (4,113,728) $ 1,953,425
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 587,511 682,472
Amortization of debt discount and financing costs -- 196,460
Changes in assets and liabilities:
Trade accounts receivable, net 1,936,674 (1,729,655)
Notes and other receivables (762,104) (7,323,058)
Federal income tax receivable 763,075 --
Inventories 1,409,152 (3,100,985)
Prepaids and other assets 75,071 (323,692)
Accounts payable and accrued liabilities (612,713) (3,418,014)
------------ ------------
Net cash used in operating activities (717,062) (13,063,047)
------------ ------------
Cash flows from investing activities -
Purchases of property, plant and equipment (79,063) (656,266)
------------ ------------
Cash flows from financing activities:
Repayments of revolving credit note (520,000) --
Repayments of term loan (64,000) (64,000)
Proceeds from exercise of warrants and options -- 75,625
------------ ------------
Net cash used in financing activities (584,000) 11,625
------------ ------------
Net decrease in cash and cash equivalents (1,380,125) (13,707,688)
Cash and cash equivalents at beginning of period 3,266,236 16,223,192
------------ ------------
Cash and cash equivalents at end of period $ 1,886,111 $ 2,515,504
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 207,049 $ 859,614
============ ============
Cash paid for taxes $ -- $ 1,640,000
============ ============
See accompanying notes to consolidated financial statements.
4
TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated balance sheets and related interim
consolidated statements of operations and cash flows of Tidel
Technologies, Inc. (the "Company"), a Delaware corporation, are unaudited.
In the opinion of management, these financial statements include all
adjustments (consisting only of normal recurring items) necessary for
their fair presentation in accordance with generally accepted accounting
principles. Preparing financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results may differ from these
estimates. Interim results are not necessarily indicative of results for a
full year. The information included in this Form 10-Q should be read in
conjunction with the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 2001.
(2) INVENTORIES
Inventories consisted of the following at March 31, 2002 and September 30,
2001:
March 31, September 30,
2002 2001
------------ -------------
Raw materials .................................. $ 7,388,201 $ 7,356,316
Work in process ................................ -- --
Finished goods ................................. 1,564,978 1,926,505
Inventory repurchased from Credit Card Center .. 767,149 1,822,450
Other .......................................... 35,791 --
------------ ------------
9,756,119 11,105,271
Inventory reserve .............................. (150,050) (90,050)
------------ ------------
$ 9,606,069 $ 11,015,221
============ ============
See the Company's Annual Report on Form 10-K for the year ended September
30, 2001 for additional information regarding the repurchase of inventory
from the bankruptcy estate of JRA 222, Inc. d/b/a Credit Card Center
("CCC").
(3) LONG-TERM DEBT AND CONVERTIBLE DEBENTURES
The Company is party to a credit agreement with a bank (the "Lender") (as
amended, the "Revolving Credit Facility"), which provides for a $7,000,000
revolving line of credit with interest equal to the prime rate and a
$544,000 term loan at 8.4% interest per annum. At March 31, 2002,
$4,680,000 was outstanding under the Revolving Credit Facility and
$160,000 was outstanding under the term loan, compared to $5,200,000 and
$224,000, respectively, at September 30, 2001. Subsequent to March 31,
2002, the Company has paid off the term loan in its entirety and reduced
the outstanding balance of the Revolving Credit Facility from $4,680,000
to $2,000,000. The Revolving Credit Facility was amended effective April
30, 2002 to provide for, among other things, an extension of the maturity
date until August 30, 2002; the reduction of the revolving commitment to
$2,000,000; modification of the collateral requirements to include a
pledge of a money market account in an amount equal to 110% of
5
the outstanding principal balance, which pledge is currently $2,200,000;
and the waiver by the bank of certain covenants from April 30, 2002 to
August 30, 2002.
In January 2002, the Company obtained a commitment from another bank for a
line of credit of up to $5,000,000 through December 31, 2002, to replace
the Revolving Credit Facility. The commitment contains certain conditions
and covenants which require, among other things, a collateral pledge of
cash in an amount equal to 100% of the loan amount. The Company has not
utilized the commitment to obtain a loan from this bank, and is presently
in discussions with another lender regarding the replacement of the
Revolving Credit Facility prior to August 30, 2002. There can be no
assurance that such discussions will be successful or that a replacement
for the Revolving Credit Facility will be obtained at all, or on terms
favorable to the Company. A failure to obtain a replacement facility on or
prior to August 30, 2002 could have a material adverse affect upon the
Company.
In September 2000, the Company issued to two investors (the "Holders") an
aggregate of $18,000,000 of the Company's 6% Convertible Debentures, due
September 8, 2004 (the "Convertible Debentures"), convertible into the
Company's Common Stock at a price of $9.50 per share. In addition, the
Company issued warrants to the Holders to purchase 378,947 shares of the
Company's Common Stock exercisable at any time through September 8, 2005
at an exercise price of $9.80 per share. The Convertible Debentures
provide for three methods to convert the debentures into shares of the
Company's Common Stock: (1) conversion at the option of the Holder; (2)
conversion at the option of the Company; and (3) a put option.
In June 2001, the Holders exercised their option to put the Convertible
Debentures back to the Company. The Company had previously notified the
Holders pursuant to the terms of the Convertible Debentures that in the
event such put option was exercised, the Company would pay all amounts due
in cash. Accordingly, the principal amount of $18 million, plus accrued
and unpaid interest, was due on August 27, 2001. The Company did not make
such payment on that date, and currently does not have the funds available
to make such payments. The Company is party to Subordination Agreements
(the "Subordination Agreements") with each Holder and the Lender which
provide, among other things, for prohibitions: (i) on the Company making
this payment to the Holders, and (ii) against the Holders taking legal
action against the Company to collect this amount, other than to increase
the principal balance of the Convertible Debentures for unpaid accounts or
to convert the Convertible Debentures into the Company's Common Stock. The
Holders may, in addition to their other rights and remedies, under certain
circumstances, convert into the Company's Common Stock all or a portion of
the unpaid amount due at a conversion price equal to the current market
price. Any such conversion would result in very substantial dilution to
the Company's existing stockholders. In addition, any issuance of stock
required by a conversion in excess of 19.99% of the Company's issued and
outstanding shares will require stockholder approval under the Nasdaq
Rules, accordingly, it is unlikely that such an issuance would be
permitted, which could subject the Company to additional penalties under
the agreements. In the event that the Company fails to prepay the
Convertible Debentures as required under the terms of the Convertible
Debentures and related agreements, the Holders would also have the right
to declare an event of default under the Convertible Debentures. A
declaration of an event of default would also be a default under the
Revolving Credit Facility. The Company continues to negotiate with the
Holders regarding such non-payment and other terms of the Convertible
Debentures. There can be no assurance, however, that such negotiations
will be successful or that modifications to the Convertible Debentures
will be able to be negotiated on terms acceptable to the Company. It is
unknown what, if any, actions may be taken by the Holders to enforce their
rights under the Convertible Debentures. Depending on the actions taken,
any such action could have a material adverse effect upon the financial
condition or operations of the Company.
6
Even in the event that the ongoing negotiations are successful in waiving
provisions, delaying payments or restructuring the provisions of the
Convertible Debentures, such terms may not be favorable to the Company,
and could limit the Company's operations in the future. A failure to reach
agreements on acceptable terms to the Company with respect to the matters
described above relating to the Convertible Debentures will have a
material adverse effect on the Company.
(4) EARNINGS PER SHARE
Basic earnings per share is computed by dividing the income (loss)
available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is
computed by dividing the income available to common shareholders by the
weighted average number of common shares and dilutive potential common
shares. The following is a reconciliation of the numerators and
denominators of the basic and diluted per-share computations for net
income (loss) for the three months and six months ended March 31, 2002 and
2001. Note that diluted loss per share for the three months and six months
ended March 31, 2002 is the same as basic loss per share due to the loss
reported for the period:
Weighted
Average Shares Per Share
Income (loss) Outstanding Amount
--------------- -------------- ----------
Three Months Ended March 31, 2002:
Basic loss per share ................................. $ (1,713,012) 17,426,210 $ (.10)
Effect of dilutive warrants, options and
convertible debt ................................ -- -- --
--------------- ----------- ----------
Diluted loss per share ............................... $ (1,713,012) 17,426,210 $ (.10)
=============== =========== ==========
Three Months Ended March 31, 2001:
Basic earnings per share ............................. $ 65,406 17,418,988 $ .00
Effect of warrants, options and
convertible debt ................................ -- 941,771 --
--------------- ----------- ----------
Diluted earnings per share ........................... $ 65,406 18,360,759 $ .00
=============== =========== ==========
Six Months Ended March 31, 2002:
Basic loss per share ................................. $ (4,113,728) 17,426,210 $ (.24)
Effect of dilutive warrants, options and
convertible debt ................................ -- -- --
--------------- ----------- ----------
Diluted loss per share ............................... $ (4,113,728) 17,426,210 $ (.24)
=============== =========== ==========
Six Months Ended March 31, 2001:
Basic earnings per share ............................. $ 1,953,425 17,397,364 $ .11
Effect of warrants, options and
convertible debt ................................ -- 1,072,569 --
--------------- ----------- ----------
Diluted earnings per share ........................... $ 1,953,425 18,469,933 $ .11
=============== =========== ==========
Common stock equivalents consisting of warrants, options and convertible debt
that provide for the purchase of or conversion into 4,250,857 shares of common
stock were excluded from the computation of diluted earnings per share due to
their anti-dilutive effect for both the three and six months ended March 31,
2002.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The Company's revenues were $4,739,000 for the three months ended March
31, 2002, representing a decrease of $3,417,000, or 42%, from revenues
of $8,156,000 in the same quarter of the prior year. On a year-to-date
basis, the Company's revenues were $9,375,000 for the six months ended
March 31, 2002, representing a decrease of $15,477,000, or 62%, from
revenues of $24,852,000 in the six months ended March 31, 2001. A
decline in the shipment of ATM units accounted for the majority of the
decrease, as described more fully in "Product Revenues" elsewhere
herein.
The Company incurred a net loss of $(1,713,000) for the three months ended
March 31, 2002, compared to net income of $65,000 in the same quarter of
the prior year. On a year-to-date basis, the Company incurred a net loss
of $(4,114,000) for the six months ended March 31, 2002, compared to net
income of $1,953,000 for the same period a year ago. The losses were due
primarily to i) lower sales volumes, ii) legal and accounting fees related
to the collection of receivables from JRA 222 Inc. d/b/a Credit Card
Center ("CCC") and certain other matters, and iii) higher interest
expenses related to the "put" of the Company's 6% subordinated convertible
debentures in June 2001.
PRODUCT REVENUES
A breakdown of net sales by individual product line is provided in the
following table:
(Dollars in 000's)
----------------------------------------------------------------
Three Months Ended March 31, Six Months Ended March 31,
---------------------------- ----------------------------
2002 2001 2002 2001
----------- --------- --------- --------
ATM................................ $ 2,286 $ 5,459 $ 4,464 $ 18,556
TACC............................... 1,735 1,911 3,410 3,383
Parts, service and other........... 718 786 1,501 2,913
--------- --------- --------- --------
$ 4,739 $ 8,156 $ 9,375 $ 24,852
========= ========= ========= ========
ATM sales were $2,286,000 for the quarter ended March 31, 2002, a decrease
of 58%, compared to sales of $5,459,000 for the same quarter of the prior
year. On a year to date basis, ATM sales decreased 34%, compared to ATM
sales to customers other than CCC of $6,770,000 in the same period of the
prior year. During the six months ended March 31, 2001, the Company had ATM
sales to CCC of $11,787,000.
The Company shipped 657 ATM shipments in the quarter ended March 31, 2002,
a decrease of 52% from the 1,360 units shipped in the same quarter of the
prior year. On a year to date basis, the Company shipped 1,334 ATM units
for the six months ended March 31, 2002, a decrease of 43% from the 2,331
units shipped to customers other than CCC. During the six months ended
March 31, 2001, the Company shipped 2,339 ATM units to CCC. Approximately
50% of the total decline in shipments to customers other than CCC was
attributable to one of the Company's major customers who reduced purchases
during the most recent quarter. Based on recent conversations with that
customer's senior
8
management, the Company believes that the customer will resume purchasing
at an increased level later this year, although there can be no assurance
that this will occur.
The Company's sales of Timed Access Cash Controller ("TACC") products vary
with the timing of large orders and variances from quarter to quarter are
not meaningful. The Company believes that sales of this product for the
year will exceed prior year sales.
Parts and other revenues vary directly with sales of finished goods, and
have decreased accordingly.
GROSS PROFIT, OPERATING EXPENSES AND NON-OPERATING ITEMS
A comparison of certain operating information is provided in the following
table:
(Dollars in 000's)
----------------------------------------------------------
Three Months Ended March 31, Six Months Ended March 31,
---------------------------- --------------------------
2002 2001 2002 2001
---------- -------------- ---------- ------------
Gross profit ........................... $ 1,172 $ 3,010 $ 2,373 $ 9,311
Selling, general and administrative .... 2,330 2,220 4,947 4,976
Depreciation and amortization .......... 331 342 587 682
Operating income (loss) ................ (1,489) 448 (3,161) 3,653
Interest expense, net .................. 547 348 1,276 670
Income (loss) before taxes ............. (2,036) 100 (4,437) 2,983
Income tax expense (benefit) ........... (323) 35 (323) 1,030
Net income (loss) ...................... (1,713) 65 (4,114) 1,953
Gross profit on product sales for the quarter ended March 31, 2002
decreased $1,838,000 from the same quarter a year ago, primarily as a
result of the sharp decline in sales for the period. Gross margin as a
percentage of sales, was 25% in the quarter ended March 31, 2002, compared
to 37% in the same quarter of the previous year. The decrease in gross
margin arose from certain fixed costs associated with a lower number of
units shipped, as well as continued decreases in average sales prices for
ATM products.
Selling, general and administrative expenses for the quarter ended
March 31, 2002 increased 5% from the same quarter of the previous year
despite the significant decline in sales for the period. While the Company
has reduced its staff by more than 10% and reduced certain of its costs
and expenses, these reductions have been more than offset by increases in
legal and accounting fees. Legal and accounting fees increased
approximately $200,000 and $500,000, for the three months and six months
periods ended March 31, 2002, respectively, primarily due to the CCC
bankruptcy matter and related litigation.
Depreciation and amortization for the quarter ended March 31, 2002 was
$331,000, a decrease of $11,000 from the same quarter of the previous
year. This difference is attributable to assets that became fully
depreciated at the beginning of the year, which were related to additions
of property, plant and equipment used in production of new ATM models.
Similarly, depreciation for the six months ended March 31, 2002 was
$95,000 lower than the 2001 provision because of the effect of fully
depreciated assets.
9
Interest expense increased $199,000 in the quarter ended March 31, 2002,
net of interest income of $223,000 arising primarily from interest
applicable to Federal income tax refunds, when compared to the same
quarter of the previous year. The net increase is due to the accrual of
penalty interest of $405,000 per quarter on the Company's Convertible
Debentures, which the Company has incurred since the Debentures were "put"
back to the Company in June 2001. This amount is in addition to the
regular accrual of $270,000 per quarter on the Debentures at the stated
interest rate. Although this interest has been and continues to be
accrued, the Company has made no cash payments of interest to the
debenture holders since June 2001.
Income tax expense (benefit) in the three months and six months ended
March 31, 2002 included a tax benefit of $323,457 relating to refunds of
alternative minimum tax for which the Company had previously established a
valuation allowance. In 2002, the Company has established a valuation
allowance equal to the amount of all other remaining income tax benefits
due to the uncertainty of the Company's ability to utilize such benefits.
The Company has recorded an income tax provision in the three months and
six months ended March 31, 2001 representing an effective tax rate of
34.5%.
LIQUIDITY AND CAPITAL RESOURCES
The financial position of the Company has deteriorated during the second
fiscal quarter of 2002 as a result of CCC's bankruptcy and the Company's
termination of sales to CCC, unprofitable operations and reduced sales of
the Company's products resulting from general difficulties in the ATM
market. This deterioration is reflected in the following key indicators as
of March 31, 2002 and September 30, 2001:
(dollars in 000's)
----------------------------
March 31, September 30,
2002 2001
--------- -------------
Cash $ 1,886 $ 3,266
Working capital (deficit) (3,896) 250
Total assets 28,645 33,837
Shareholders' equity 1,199 5,194
The Company is party to a credit agreement with a bank (the "Lender") (as
amended, the "Revolving Credit Facility"), which provides for a $7,000,000
revolving line of credit with interest equal to the prime rate and a
$544,000 term loan at 8.4% interest per annum. At March 31, 2002,
$4,680,000 was outstanding under the Revolving Credit Facility and
$160,000 was outstanding under the term loan, compared to $5,200,000 and
$224,000, respectively, at September 30, 2001. Subsequent to March 31,
2002, the Company has paid off the term loan in its entirety and reduced
the outstanding balance of the Revolving Credit Facility from $4,680,000
to $2,000,000. The Revolving Credit Facility was amended effective April
30, 2002 to provide for, among other things, an extension of the maturity
date until August 30, 2002; the reduction of the revolving commitment to
$2,000,000; modification of the collateral requirements to include a
pledge of a money market account in an amount equal to 110% of the
outstanding principal balance, which pledge is currently $2,200,000; and
the waiver by the bank of certain covenants from April 30, 2002 to
August 30, 2002.
In April 2002, Tidel received $4,833,000 of the Federal income tax
refunds, which represents all expected tax refunds. These funds were used
to reduce the outstanding principal on the Revolving Credit Facility and
to provide the additional collateral in connection with the extension with
J P Morgan Chase.
In January 2002, the Company obtained a commitment from another bank for a
line of credit loan of up to $5,000,000 through December 31, 2002, to
replace the Revolving Credit Facility. The commitment
10
contains certain conditions and covenants which require, among other
things, a collateral pledge of cash in an amount equal to 100% of the loan
amount. The Company has not utilized the commitment to obtain a loan from
this bank, and is presently in discussions with another lender regarding
the replacement of the Revolving Credit Facility prior to August 30, 2002.
There can be no assurance that such discussions will be successful or that
a replacement for the Revolving Credit Facility will be obtained at all,
or on terms favorable to the Company. A failure to obtain a replacement
facility on or prior to August 30, 2002 could have a material adverse
effect upon the Company.
In September 2000, the Company issued to two investors (the "Holders") an
aggregate of $18,000,000 of the Company's 6% Convertible Debentures, due
September 8, 2004 (the "Convertible Debentures"), convertible into the
Company's Common Stock at a price of $9.50 per share. In addition, the
Company issued warrants to the Holders to purchase 378,947 shares of the
Company's Common Stock exercisable at any time through September 8, 2005
at an exercise price of $9.80 per share. The Convertible Debentures
provide for three methods to convert the debentures into shares of the
Company's Common Stock: (1) conversion at the option of the Holder; (2)
conversion at the option of the Company; and (3) a put option.
In June 2001, the Holders exercised their option to put the Convertible
Debentures back to the Company. The Company had previously notified the
Holders pursuant to the terms of the Convertible Debentures that in the
event such put option was exercised, the Company would pay all amounts due
in cash. Accordingly, the principal amount of $18 million, plus accrued
and unpaid interest, was due on August 27, 2001. The Company did not make
such payment on that date, and currently does not have the funds available
to make such payments. The Company is party to Subordination Agreements
(the "Subordination Agreements") with each Holder and the Lender which
provide, among other things, for prohibitions: (i) on the Company making
this payment to the Holders, and (ii) against the Holders taking legal
action against the Company to collect this amount, other than to increase
the principal balance of the Convertible Debentures for unpaid accounts or
to convert the Convertible Debentures into the Company's Common Stock. The
Holders may, in addition to their other rights and remedies, under certain
circumstances, convert into the Company's Common Stock all or a portion of
the unpaid amount due at a conversion price equal to the current market
price. Any such conversion would result in very substantial dilution to
the Company's existing stockholders. In addition, any issuance of stock
required by a conversion in excess of 19.99% of the Company's issued and
outstanding shares will require stockholder approval under the Nasdaq
Rules, accordingly, it is unlikely that such an issuance would be
permitted, which could subject the Company to additional penalties under
the agreements. In the event that the Company fails to prepay the
Convertible Debentures as required under the terms of the Convertible
Debentures and related agreements, the Holders would also have the right
to declare an event of default under the Convertible Debentures. A
declaration of an event of default would also be a default under the
Revolving Credit Facility. The Company continues to negotiate with the
Holders regarding such non-payment and other terms of the Convertible
Debentures. There can be no assurance, however, that such negotiations
will be successful or that modifications to the Convertible Debentures
will be able to be negotiated on terms acceptable to the Company. It is
unknown what, if any, actions may be taken by the Holders to enforce their
rights under the Convertible Debentures. Depending on the actions taken,
any such action could have a material adverse effect upon the financial
condition or operations of the Company.
Even in the event that the ongoing negotiations are successful in waiving
provisions, delaying payments or restructuring the provisions of the
Convertible Debentures, such terms may not be favorable to the Company,
and could limit the Company's operations in the future. A failure to reach
agreements on acceptable terms to the Company with respect to the matters
described above relating to the Convertible Debentures will have a
material adverse effect on the Company.
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The Company formerly owned 100% of 3CI Complete Compliance Corporation
("3CI"), a company engaged in the transportation and incineration of
medical waste, until its divestiture of a majority interest in February
1994. The Company continues to own 698,464 shares of the common stock of
3CI. The Company has no immediate plan for the disposal of these shares,
and accordingly, all the shares are presently pledged to secure borrowings
under the Revolving Credit Facility.
The Company's research and development budget for fiscal 2002 has been
estimated at $2,900,000. The majority of these expenditures are applicable
to enhancements of the existing product lines, development of new
automated teller machine and cash controller products, and the development
of new technology to facilitate advanced services such as check cashing.
Total research and development expenditures were approximately $685,000
and $1,362,000 for the three months and six months ended March 31, 2002.
The Company used $717,000 for operating activities for the six months
ended March 31, 2002, primarily due to the continuing losses sustained in
the downturn in business. Management believes that operations will
improve, and that the Company will begin to generate cash flow in the
first fiscal quarter of 2003, although there can be no assurance of any
such improvement, or that the Company will generate cash flow in the first
fiscal quarter of 2003 or at any other time. In the interim, management
believes that the Company has adequate resources to cover its requirements
for working capital. Such resources include cash on hand, anticipated
collection of certain notes receivable, and proceeds from a new debt
facility that management is negotiating regarding the replacement of the
Revolving Credit Facility.
There can be no assurance that such discussions will be successful or that
a replacement for the Revolving Credit Facility will be obtained at all,
or on terms favorable to the Company. A failure to obtain a replacement
facility on or prior to August 30, 2002 could have a material adverse
effect upon the Company.
The Company has never paid dividends on shares of its Common Stock, and
does not anticipate paying dividends in the foreseeable future. In
addition, the Company's wholly owned subsidiary is restricted from paying
dividends to the Company pursuant to the subsidiary's revolving credit
agreement with a bank.
MAJOR CUSTOMERS AND CREDIT RISK
The Company generally retains a security interest in the underlying
equipment that is sold to customers until it receives payment in full. The
Company would incur an accounting loss equal to the carrying value of the
accounts receivable, less any amounts recovered from liquidation of
collateral, if a customer failed to perform according to the terms of the
credit arrangements.
Foreign sales accounted for 9% and 13% of the Company's total sales during
the three months ended March 31, 2002 and 2001, respectively. On a year to
date basis, foreign sales accounted for 9% and 6% of sales during the six
months ended March 31, 2002 and 2001, respectively. All sales are
transacted in U.S. dollars.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations," and SFAS No.142, "Goodwill and
Other Intangible Assets." SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001. SFAS 141 also specifies criteria that intangible assets must meet in
order to be recognized and reported separately from goodwill. SFAS 142
requires that goodwill and intangible assets with indefinite useful lives
will no longer be amortized to expense, but instead will be tested for
impairment at least annually. Intangible assets with definite useful lives
will be amortized to expense.
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The Company is required to adopt the provisions of SFAS 141 immediately
and SFAS 142 effective October 1, 2002. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 will
continue to be amortized through September 30, 2002.
As of October 1, 2002, the Company will be required to reassess the useful
lives of all acquired intangible assets and make any necessary
amortization period adjustments by December 31, 2002. The Company will
also be required to perform an assessment of whether there is an
impairment of goodwill as of October 1, 2002, and at least annually
thereafter. Any impairment charge recognized at October 1, 2002 will be
shown as the cumulative effect of a change in accounting principle in the
Company's statement of operations.
As of October 1, 2002, the Company expects to have unamortized goodwill of
approximately $427,400, which will be subject to the transition provisions
of SFAS 142. Amortization expense related to goodwill was $15,444 for each
of the years ended September 30, 2001 and 2000. This amortization of
goodwill will no longer occur under the new standards. The Company is
evaluating the impact of adopting SFAS 142, but because of the extensive
effort required, it is not practicable to reasonably determine, at the
date of this report, whether a goodwill impairment charge will be recorded
upon adoption of the new standards.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes both SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a segment of a business. SFAS 144
provides a single accounting model for long-lived assets to be disposed
of. Although retaining many of the fundamental recognition and measurement
provisions of SFAS 121, the new rules change the criteria to be met to
classify an asset as held-for-sale. The new rules also broaden the
criteria regarding classification of a discontinued operation.
RISK FACTORS
Please see the risk factors contained in the Company's Annual Report on
Form 10-K for the year ended September 30, 2001.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. Investors are
cautioned that all forward-looking statements involve risks and
uncertainty (including without limitation, the exercise of the put on the
Convertible Debentures, the Company's non-compliance with certain
provisions of its Revolving Credit Facility and Convertible Debentures,
the Company's financial position and working capital availability, the
levels of orders which are received and can be shipped in a quarter;
customer order patterns and seasonality; costs of labor, raw materials,
supplies and equipment; technological changes; competition and competitive
pressures on pricing; the economic
13
condition of the ATM industry and the possibility that it is a mature
industry; and economic conditions in the United States and worldwide),
though the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance
that the forward-looking statements included in this Form 10-Q will prove
to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be
achieved.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to changes in interest rates as a result of
financing through its issuance of variable-rate and fixed-rate debt. If
market interest rates were to increase 1% in fiscal 2002, however, there
would be no material impact on the Company's consolidated results of
operations or financial position.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
CCC filed for protection under Chapter 11 of the United States Bankruptcy
Code on June 6, 2001 in the United States Bankruptcy Court for the Eastern
District of Pennsylvania. At that time, CCC owed the Company approximately
$27 million, excluding any amounts for interest, attorney's fees and other
charges. As of September 30, 2001, the Company had recouped inventory from
the estate of CCC recorded at an approximate value of $3 million. At the
time of the bankruptcy filing, the obligation was secured by a collateral
pledge of accounts receivable, inventories and transaction income,
although it is unclear as to what is the value of the Company's
collateral. Based upon analysis by the Company of all available
information regarding the CCC bankruptcy proceedings, the Company
established a reserve in the amount of approximately $24 million in the
fiscal year ended September 30, 2001 against substantially all of the
remaining balance of the note and accounts owed to the Company by CCC.
Depending on the resolution of the bankruptcy proceedings, the Company may
incur additional charges to earnings in future periods. Management of the
Company intends to continue to monitor this matter and to take all actions
that it determines to be necessary based upon its monitoring of the
situation.
In connection with CCC's bankruptcy filing, the Company filed proofs of
claim as to the obligations of CCC due and owing the Company and the
Company's interest in certain assets of CCC. Fleet National Bank
("Fleet"), which provided banking and related services to CCC, also filed
claims asserting security interests in certain of the property in the
bankruptcy estate of CCC. NCR, another secured creditor and vendor of CCC,
and other leasing companies, filed claims based on alleged security
interests in certain property of the bankruptcy estate as well.
In the bankruptcy case, Fleet commenced an adversary proceeding against
the Company and NCR seeking to assert its priority over the claims of the
Company and NCR to some or all of the assets of CCC.
14
The Company responded to Fleet's complaint and asserted claims against
Fleet and NCR seeking a declaration from the court as to the Company's
priority over the security interests held by Fleet and NCR. The Company is
taking other appropriate action in the bankruptcy proceeding to protect
its interest and rights.
Prior to CCC's bankruptcy filing, the Company had commenced actions
against CCC and Andrew J. Kallok ("Kallok"), the principal shareholder and
executive officer of CCC. The actions commended by the Company were stayed
upon CCC's bankruptcy filing. The Company is pursuing the action, however,
which it filed against Kallok on May 14, 2001. Kallok did not answer the
motions filed by the Company in this matter and the Company filed a Motion
for Default Judgment against Kallok on June 14, 2001. Kallok filed an
Answer and Motion to Set Aside Interlocutory Default Judgment, which was
ordered by the court, and a non-jury trial in this matter is currently
scheduled for November 2002. Due to the current stage of the proceeding as
well as the related bankruptcy proceeding of CCC, it is not possible to
estimate the outcome of this action.
On or about April 21, 2002, the bankruptcy case was converted to a Chapter
7 and the appointment of a Trustee by the Court is presently pending.
The Company and several of its officers and directors were named as
defendants (the "Defendants") in a purported class action filed on
October 31, 2001 in the United States District Court for the Southern
District of Texas, George Lehockey v. Tidel Technologies, et al.,
H-01-3741. Subsequent to the filing of this suit, four identical suits
were also filed in the Southern District. On or about March 18, 2002, the
Court consolidated all of the pending class actions and appointed a lead
plaintiff under the Private Securities Litigation Reform Act of 1995
("Reform Act"). On April 10, 2002, the lead plaintiff filed a Consolidated
Amended Complaint ("CAC") that alleges that defendants made material
misrepresentations and omissions concerning the Company's financial
condition and prospects between January 14, 2000 and February 8, 2001 (the
putative class period). The lead plaintiff seeks unspecified amounts of
compensatory damages, interest, and costs, including legal fees. The
Company denies the allegations in the CAC, and on May 10, 2002, filed a
motion to dismiss the CAC. The Company anticipates that the lead plaintiff
will file a response in June 2002, and the Court will issue a ruling on
the motion sometime in the fourth quarter of fiscal 2002 or the first
quarter of fiscal 2003. The consolidated class action lawsuits are still
in the early stages of litigation. Consequently, it is not possible at
this time to predict whether the Company will incur any liability or to
estimate the damages, or the range of damages, if any, that the Company
might incur in connection with these lawsuits. The inability of the
Company to prevail in this action could have a material adverse affect on
the Company's future business, financial condition, and results of
operations.
The Company and its subsidiaries are each subject to certain litigation
and claims arising in the ordinary course of business. In the opinion of
the management of the Company, the amounts ultimately payable, if any, as
a result of such litigation and claims will not have a materially adverse
effect on the Company's financial position.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See "Liquidity and Capital Resources" in Item 2 of this Quarterly Report
on Form 10-Q for a discussion of the Revolving Credit Facility and the
Convertible Debentures.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
In March 2002, the Company was notified by The Nasdaq National Market that
the price of the Company's common stock had closed below the minimum
continued listing requirement of $1.00 per share for thirty consecutive
trading days. Accordingly, on March 22, 2002, the Company voluntarily
transferred its listing to The Nasdaq SmallCap Market where it will have
until August 13, 2002 to regain compliance with the $1.00 minimum bid
price requirement. If it does not, then the Company has been notified that
it will be provided with written notification that its securities will be
subject to delisting procedures. For additional information, see "Risk
Factors - Compliance with NASDAQ National Market Continued Listing
Requirements" contained in the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
None.
b) REPORTS ON FORM 8-K
The Company filed two reports on Form 8-K under Item 5 - Other Events
dated January 17, 2002 and February 5, 2002.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
TIDEL TECHNOLOGIES, INC.
(Registrant)
DATE: May 20, 2002 By:/s/ MARK K. LEVENICK
-------------------------------
Mark K. Levenick
Interim Chief Executive Officer
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