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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ____________________
Commission file Number 000-17288
TIDEL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2193593
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2900 Wilcrest Drive, Suite 205
Houston, Texas 77042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (713) 783-8200
----------------------
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. YES [ ] NO [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this Chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [ ] NO [X]
The aggregate market value of the 17,976,743 shares of Common Stock held by
non-affiliates of the Registrant based on the closing sale price on January 21,
2005 of $0.37 was $6,651,395. The number of shares of Common Stock outstanding
as of the close of business on January 21, 2005 was 20,677,210.
TIDEL TECHNOLOGIES, INC.
TABLE OF CONTENTS *
ANNUAL REPORT ON FORM 10-K
PAGE
----
PART I
Item 1. Business.......................................................................... 1
Item 2. Properties........................................................................ 4
Item 3. Legal Proceedings................................................................. 4
Item 4. Submission of Matters to a Vote of Security Holders............................... 6
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.................................................... 6
Item 6. Selected Financial Data........................................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 9
Item 7A. Quantitative and Qualitative Disclosure and Market Risk........................... 20
Item 8. Financial Statements and Supplementary Data....................................... 27
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure.................................................................... 27
Item 9A. Controls and Procedures........................................................... 27
PART III
Item 10. Directors and Executive Officers of the Registrant................................ 27
Item 11. Executive Compensation............................................................ 29
Item 12. Security Ownership of Certain Beneficial Owners and Management.................... 32
Item 13. Certain Relationships and Related Transactions.................................... 34
Item 14. Principal Accounting Fees and Services............................................ 35
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K................... 36
Signature Page .............................................................................. 37
* This Table of Contents is inserted for convenience of reference only and shall
not be considered "filed" as a part of this Annual Report on Form 10-K for the
fiscal year ended September 30, 2002.
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Tidel Technologies, Inc. (the "Company") was incorporated under the laws
of the State of Delaware in November 1987 under the name of American
Medical Technologies, Inc., succeeding a corporation established in
British Columbia, Canada in May 1984.
In September 1992, the Company acquired Tidel Engineering, Inc., a
manufacturer of cash handling devices and other products. The Company
changed its name to Tidel Technologies, Inc. in July 1997, and is
primarily engaged in the development, manufacturing, sale and support of
automated teller machines ("ATMs") and electronic cash security systems.
(b) FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS
The Company conducts business within one operating segment, principally in
the United States.
(c) DESCRIPTION OF BUSINESS
The Company develops, manufactures, sells and supports ATM products and
electronic cash security system products, known as the Timed Access Cash
Controller ("TACC") products and the Sentinel products, which are designed
for specialty retail marketers. Sales of ATM products are generally made
on a wholesale basis to more than 200 distributors and manufacturer's
representatives. TACC and Sentinel products are often sold directly to
end-users as well as distributors. The Company's engineering, sales and
service departments work closely with distributors and their customers to
continually analyze and fulfill their needs, enhance existing products and
develop new products. Sales of the Company's ATM and TACC products
accounted for 82%, 88% and 92% of revenue in the fiscal years ended
September 30, 2002, 2001 and 2000, respectively. The initial sales of
Sentinel products occurred subsequent to September 30, 2002.
The principal materials and components used by the Company are
pre-fabricated steel cabinets, custom molded plastic, and various
electronic parts and components, all of which are generally available in
quantity at this time. The Company assembles its products by configuring
parts and components received from a number of major suppliers with the
Company's proprietary hardware and software.
The Company maintains patents and trademarks on processes and brands
associated with its product lines. However, the Company does not believe
that patents and trademarks, in general, serve as barriers to entry into
the ATM industry. The Company's overall success depends upon proprietary
technology and other intellectual property rights. The Company must be
able to obtain patents and register new trademarks in order to develop and
introduce new product lines.
Sales to one customer, JRA 222, Inc. d/b/a Credit Card Center ("CCC"),
were $44,825,049 or 61% of net sales for the fiscal year ended September
30, 2000. In the three months ended December 31, 2000, sales to CCC were
$11,748,018, or 70% of the Company's net sales for the quarter. During
January 2001, the Company became aware that CCC was experiencing financial
difficulties and sales to this customer were discontinued. Prior to CCC's
financial difficulties it was one of the largest distributors of
off-premise ATMs in the U.S. There have been no shipments to CCC since
January 1, 2001. As a result, sales to CCC for fiscal year 2001 amounted
to
1
33% of the Company's net sales for the year. The termination of sales to
CCC had a material adverse effect on the Company's sales and earnings for
the fiscal years ended September 30, 2002 and 2001. In addition, the
negative general reaction to CCC's problems by the ATM industry indirectly
affected the ATM market in that overall demand for ATM machines of the
type manufactured by Tidel was reduced, primarily as a result of the
difficulty by end-user purchasers in obtaining sufficient levels of lease
financing.
After several months of unsuccessful efforts to remedy its financial
difficulties, CCC filed for protection under Chapter 11 of the United
States Bankruptcy Code on June 6, 2001. At that time, the Company had
accounts and a note receivable due from CCC totaling approximately $27
million, which were secured by a security interest in CCC's accounts
receivable, inventories and transaction income. However, NCR Corporation
("NCR") and Fleet National Bank ("Fleet") also had competing secured
interest claims on the same assets and income of CCC resulting in the
Company's security interest not adequately covering the Company's
liability claim. The proceeding was subsequently converted to a Chapter 7
and a Trustee was appointed in April 2002.
In September 2001, Tidel and NCR jointly acquired CCC's ATM inventory
pursuant to and in accordance with the ATM Inventory Purchase Agreement
approved by the Federal Bankruptcy Court. The total purchase price was
$8,000,000, and consisted of a cash deposit by Tidel of $1,000,000 made
into escrow and equal credits against the debt owed by CCC to each of
Tidel and NCR. An escrow of $700,000 was established to cover any payments
to Fleet, which provided banking and related services to CCC, in the event
that their claim is ultimately determined to be secured. An escrow of
$300,000 was established to cover any claims of warehousemen, carriers and
storage facilities secured by valid and perfected security interests in
such purchased ATMs. The exact amount of those claims has not yet been
determined. At such time as it is determined, any excess amount is
required to be paid by Tidel and to the extent such amount is less than
$1,000,000, the difference is required to be refunded to Tidel. In January
2003, the Trustee refunded $250,000 to Tidel from the inventory escrow of
$300,000. The remaining $50,000 shall be held by the Trustee until a final
accounting has been completed.
Pursuant to a separate but related Intercreditor Agreement, as amended,
between NCR and Tidel, NCR paid Tidel $1,177,550 in September 2001 to
purchase approximately 1,700 ATMs manufactured by NCR which were included
in the inventory jointly acquired from CCC. NCR subsequently paid Tidel an
additional $46,200 in January 2002 upon the resale of the ATMs.
In addition to the amounts received from NCR during 2001, the Company
acquired a significant amount of different ATM units manufactured by
Tidel, along with various parts used for these ATM units. The Company was
able to utilize some of these ATM units during fiscal years 2001 and 2002
to fill subsequent sales orders from customers. Subsequent to fiscal 2002,
the Company was able to utilize most of the remaining recovered parts for
production, warranty work and sales to customers.
As a result of the acquisition in 2001 of the inventory owned by CCC,
including the sales of certain equipment to NCR, the recording of ATM
units and parts manufactured and/or utilized by the Company and estimated
recoveries from other equipment manufactured by other companies, the
Company in 2001 reduced its outstanding receivable from CCC by
approximately $3.0 million.
Notwithstanding the Company's commitment to aggressively pursuing its
rights to collect substantial additional funds from CCC, in view of the
uncertainty of the ultimate outcome of the CCC bankruptcy proceedings,
during 2001 the Company increased its reserve to $20.3 million against the
trade accounts receivable due from CCC and increased its notes receivable
reserve to $3.8 million, which represents the total outstanding balances
of the trade accounts note receivable due from CCC. In addition, the
Company provided additional reserves of $500,000 due to uncertainties
regarding the full recovery of its escrow deposits. As of September 30,
2002, the Company's
2
remaining receivable from the escrow deposits was reduced to $500,000. In
early 2003 the Company recovered $250,000 of this amount from the
bankruptcy estate and is continuing its efforts to recover any additional
amounts.
As of January 2005, the Company is still actively pursuing the collection
of monies from CCC, although it is unlikely that the Company will receive
significant additional funds from CCC. See Part I, Item 3., "Legal
Proceedings", Part II, Item 7., "Management's Discussion and Analysis of
Financial Condition and Results of Operations", and Note 3 to Notes to
Consolidated Financial Statements of this Annual Report on Form 10-K for
the fiscal year ended September 30, 2002 (the "Annual Report") for
additional information about the Company's relationship with CCC.
Sales to another major customer, Cardtronics L.P. ("Cardtronics"),
accounted for 19% and 7% of net sales for the fiscal years ended September
30, 2001 and 2000, respectively. No customer accounted for more than 10%
of net sales for the fiscal year ended September 30, 2002.
The Company's operating results and the amount and timing of revenue are
affected by numerous factors including production schedules, customer
priorities, sales volume, and sales mix. The Company normally fills and
ships customer orders within 45 days of receipt, and therefore no
significant backlog generally exists.
The markets for our products are characterized by intense competition. We
expect the intensity of competition to increase. A major cause of the
intense competition is the saturation of the U.S. market, which may limit
the growth opportunities in the future. Additionally, the increased use of
debit cards by consumers, as opposed to cash, may lower the number of
transactions per ATM which could result in lower sales of new ATMs. Large
manufacturers such as Diebold Incorporated, NCR Corporation, Triton
Systems (a division of Dover Corporation) and Tranax (a distributor of
Hyosung) compete directly with us in the low-cost ATM market.
Additionally, demand in fiscal year 2002 decreased, due to (i) the
declaration of bankruptcy by CCC, our former largest customer, (ii) the
deterioration of the third-party lease finance market to the ATM industry,
and (iii) the general downturn in the economy. Our direct competitors for
our TACC products include NKL Industries, McGunn Safe Company, Armor Safe
Company and AT Systems. Many smaller manufacturers of ATMs, electronic
safes and kiosks are also found in the market.
The Company can experience seasonal variances in its operations and
historically has its lowest dollar volume sales months between November
and February. The Company's operating results for any particular quarter
may not be indicative of the results for future quarters or for the year.
The Company's charges to expense for research and development were
approximately $2,700,000 $2,500,000 and $2,600,000 for the years ended
September 30, 2002, 2001 and 2000, respectively.
Compliance by the Company with federal, state and local environmental
protection laws during 2002 had no material effect upon capital
expenditures, earnings or the competitive position of the Company. As of
September 30, 2002, it was not expected that compliance with such laws
would have a material effect upon capital expenditures, earnings or the
competitive position of the Company in fiscal year 2003.
At September 30, of the fiscal years ended in 2002, 2001 and 2000, the
Company employed 128, 120 and 133 people, respectively. At December 31,
2004, the Company had approximately 107 employees.
3
(d) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
The vast majority of the Company's sales in fiscal 2002 were to customers
within the United States. Sales to customers outside the United States, as
a percentage of total revenues, were approximately 13%, 7% and 6% in the
fiscal years ended September 30, 2002, 2001 and 2000, respectively. Most
of the Company's foreign sales were to customers located in Canada and the
Pacific Rim countries.
Substantially all of the Company's assets were located within the United
States during fiscal year 2002, and are still located in the United States
today. Inventory in transit related to sales to customers outside the
United States can be in foreign countries prior to receipt by the
customer.
ITEM 2. PROPERTIES
The Company's corporate office during fiscal year 2002 was located in
approximately 4,100 square feet in Houston, Texas. The lease expired in
December 2002 and the Company executed a short-term lease with the
landlord on month-to-month terms. The manufacturing, engineering and
warehouse operations are located in two nearby facilities occupying
approximately 110,000 square feet in Carrollton, Texas, under leases
expiring in March 2005 and February 2006.
Subsequent to the end of fiscal year 2002, the Company relocated its
corporate office to its present location of approximately 1,000 square
feet in Houston, Texas. The Company executed a short-term lease in
September 2003 with the landlord on month-to-month terms. The Company
believes that the leased space is suitable for the Company's needs.
At September 30, 2002 and 2001, the Company owned tangible property and
equipment with a cost basis of approximately $5,049,000 and $6,006,000,
respectively.
ITEM 3. LEGAL PROCEEDINGS
CCC, the Company's largest customer in 2000 and 2001, filed for protection
under Chapter 11 of the United States Bankruptcy Code on June 6, 2001 in
the United States Bankruptcy Court for the Eastern District of
Pennsylvania. On or about April 21, 2002, the bankruptcy case was
converted to a Chapter 7 case and the Court subsequently appointed a
Trustee. At the time that the original petition was filed, CCC owed the
Company approximately $27 million, excluding any amounts for interest,
attorney's fees and other charges. As of September 30, 2001, the Company
had recouped inventory from the estate of CCC recorded at an approximate
value of $3 million. At the time of the bankruptcy filing, the obligation
was secured by a collateral pledge of accounts receivable, inventories and
transaction income, although the value of the Company's collateral is
unclear. Based upon analysis by the Company of all available information
regarding the CCC bankruptcy proceedings, as of September 30, 2002 the
Company had recorded a reserve in the amount of approximately $24.1
million against substantially all of the remaining balance of the note and
trade accounts receivable owed to the Company by CCC. Management of the
Company intends to continue to monitor this matter and to take all actions
that it determines to be necessary based upon its findings. Accordingly,
the Company may incur additional expenses which would be charged to
earnings in future periods.
In connection with CCC's bankruptcy filing, the Company filed proofs of
claim as to the obligations of CCC due and owing the Company and the
Company's interest in certain assets of CCC. Fleet, which provided banking
and related services to CCC; NCR, another secured creditor and vendor of
CCC; and several leasing companies filed similar claims based on alleged
security interests in the same property of the bankruptcy estate as well.
4
Prior to CCC's bankruptcy filing, the Company filed an action in the 134th
Judicial District Court of the State of Texas in Dallas County, Texas,
against Andrew J. Kallok ("Kallok"), the principal shareholder and
executive officer of CCC for, among other claims, failure to pay amounts
due and owing, breach of contract, and fraud associated with product sales
to CCC. On November 7, 2002, a final judgment was reached on this matter
with the court finding for the Company and ordering Kallok, due to his
fraudulent actions, to pay damages, including prejudgment interest, in the
amount of $26.2 million to the Company. Due to the current financial
condition of Kallok, there is no guarantee that the Company will be able
to collect any or all of the damages awarded to it by the court.
The Company and several of its officers and directors were named as
defendants (the "Defendants") in a purported class action filed on October
31, 2001 in the United States District Court for the Southern District of
Texas (the "Southern District"), George Lehockey v. Tidel Technologies, et
al., H-01-3741. Subsequent to the filing of this suit, four identical
suits were also filed in the Southern District. On or about March 18,
2002, the Court consolidated all of the pending class actions and
appointed a lead plaintiff under the Private Securities Litigation Reform
Act of 1995 ("Reform Act"). On April 10, 2002, the lead plaintiff filed a
Consolidated Amended Complaint ("CAC") that alleged that the Defendants
made material misrepresentations and omissions concerning the Company's
financial condition and prospects between January 14, 2000 and February 8,
2001 (the putative class period). In June 2004, the Company reached an
agreement in principle to settle these class action lawsuits. The
settlement, which was subject to a definitive agreement and court
approval, provided for a cash payment of $3 million to be funded by the
Company's liability insurance carrier and the issuance of two million
shares of common stock by the Company. In October 2004, the court approved
the settlement and the shares were issued in November 2004. In addition,
in August 2004, the Company reached an agreement with the liability
insurance carrier to issue warrants to the carrier to purchase 500,000
shares of the Company's Common Stock at an exercise price of $0.67 per
share in exchange for the carrier's acceptance of the terms of the class
action lawsuit. The Company provided a reserve of $1,564,490 in fiscal
2002 to cover any losses from this litigation.
On August 9, 2002, one of the holders of the Company's 6% Convertible
Debentures, Montrose Investments Ltd. ("Montrose"), commenced an adversary
proceeding against the Company in the Supreme Court of the State of New
York, County of New York, claiming monies due under the Convertible
Debentures (the "Montrose Litigation"). This action was dismissed by the
court on March 3, 2003. Montrose filed a Notice of Appeal with the Supreme
Court of the State of New York, Appellate Division, First Department on
May 20, 2003. This litigation was dismissed in conjunction with the
financing completed in November 2003, as discussed more fully in Part II,
Item 7., - "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Subsequent Events" and Note 15 to the Notes to
the Consolidated Financial Statements in Part IV of this Annual Report.
For a description of the Company's 6% Convertible Debentures see Part II,
Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" in Part II of
this Annual Report. A stipulation of discontinuance, dismissing the
appeal, was entered on or about December 2, 2003.
The Company and its subsidiaries are each subject to certain other
litigation and claims arising in the ordinary course of business. In the
opinion of the management of the Company, the amounts ultimately payable,
if any, as a result of such litigation and claims will not have a material
adverse effect on the Company's financial position.
5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on September 26, 2002 in
Carrollton, Texas, the following proposals were adopted by the margins
indicated:
a) Election of Directors to hold office until the next annual meeting
of stockholders and until their successors are elected and
qualified:
Number of Shares
----------------
For Withheld
--- --------
James T. Rash........................................ 15,194,875 199,389
Mark K. Levenick..................................... 15,207,875 186,389
Michael F. Hudson.................................... 15,203,975 182,289
Jerrell G. Clay...................................... 15,229,875 164,389
Raymond P. Landry.................................... 15,234,275 161,989
Stephen P. Griggs.................................... 15,208,275 185,989
b) Ratification of the selection of KPMG LLP as the Company's
independent auditors for fiscal year 2002:
For.................................................. 15,330,712
Against.............................................. 39,160
Abstentions.......................................... 24,392
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION
The Company's Common Stock is currently traded over the counter on the
National Quotation Bureau's Pink Sheets under the symbol "ATMS.PK". Prior
to March 26, 2003, the Company's Common Stock traded on the Nasdaq
SmallCap Market. From August 16, 2000 through March 25, 2002, the
Company's Common Stock traded on the Nasdaq National Market. The following
table sets forth the quarterly high and low closing sales price for the
Company's Common Stock for the two-year period ended September 30, 2002:
2002 2001
------------------- ------------------
Fiscal Quarter Ended High Low High Low
-------------------- -------- ------- -------- --------
December 31,............... $ .69 $ .40 $ 6.19 $ 3.81
March 31,.................. .85 .37 6.50 1.94
June 30,................... .65 .32 3.35 1.13
September 30,.............. .60 .31 1.60 .61
------- ------- ------- --------
Fiscal Year............ $ .85 $ .31 $ 6.50 $ .61
======= ======= ======= ========
On January 21, 2003, the Company received notice from The Nasdaq Stock
Market, Inc. that, as a result of its 10-K filing deficiency, the Company
had failed to comply with the requirements for continued listing on the
Nasdaq SmallCap Market under Marketplace Rule 4310(c)(14), and that its
securities were subject to delisting. The Company had previously received
notice that it failed to comply with the minimum bid price requirement as
set forth in Marketplace Rule 4310(c)(4). On February 14, 2003, the
Company received a third notice from The Nasdaq Stock Market, Inc. that
the Company had failed to comply with the minimum
6
stockholders' equity requirement for continued listing set forth in
Marketplace Rule 4310(c)(2)(B). On February 20, 2003, the Company had an
oral hearing before the Nasdaq Listing Qualifications Panel to review the
three compliance deficiencies. On March 25, 2003, the Company was notified
by the Nasdaq Listing Qualifications Panel that its common stock would be
delisted from the Nasdaq SmallCap Market effective March 26, 2003. The
Company's common stock began trading over the counter on the National
Quotation Bureau's Pinks Sheets effective with the opening of business on
March 26, 2003, under the ticker symbol "ATMS.PK".
(b) HOLDERS
The Company estimates that there were more than 5,000 shareholders of its
Common Stock as of December 31, 2004, which includes an estimated number
of shareholders who have shares held for their accounts by brokers, banks
and trustees for benefit plans.
(c) DIVIDENDS
The Company has not paid any dividends in the past, and does not
anticipate paying dividends in the foreseeable future. In addition, as of
September 30, 2002, the Company's wholly owned subsidiary was restricted
from paying dividends to the Company pursuant to the subsidiary's
revolving credit agreement with a bank in effect at that time. This
facility was repaid on November 25, 2003 in connection with the Financing
as discussed more fully in Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Subsequent
Events" of this Annual Report. Also, the Financing precludes the Company
from making any dividend payments without the consent of the Purchaser
also discussed more fully in Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Subsequent
Events" of this Annual Report.
(d) STOCK INCENTIVE PLANS
The Company adopted the Tidel Technologies, Inc. 1997 Long-Term Incentive
Plan (the "Plan") effective July 15, 1997. The Plan permits the grant of
non-qualified stock options, incentive stock options, stock appreciation
rights, restricted stock and other stock-based awards to employees or
directors of the Company or our subsidiaries. A maximum of 2,000,000
shares of common stock may be subject to awards under the Plan. The number
of shares issued or reserved pursuant to the Plan (or pursuant to
outstanding awards) are subject to adjustment on account of mergers,
consolidations, reorganization, stock splits, stock dividends and other
dilutive changes in the common stock. Shares of common stock covered by
awards that expire, terminate or lapse will again be available for grant
under the Plan.
7
EQUITY COMPENSATION PLAN INFORMATION
Number of securities to Weighted-average Number of securities remaining
be issued upon exercise exercise price of available for future issuance under
of outstanding options, outstanding options, equity compensation plans (excluding
warrants and rights warrants and rights securities reflected in column (a))
(a) (b) (c)
----------------------- -------------------- ------------------------------------
Plan Category
Equity compensation plans approved
by security holders 974,700 $1.68 981,000
Equity compensation plans not
approved by security holders -- -- --
------- ----- -------
Total 974,700 $1.68 981,000
======= ===== =======
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below is derived from the
Consolidated Financial Statements of the Company. This data should be read
in conjunction with the Consolidated Financial Statements and the notes
thereto and Part II, Item 7., "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of this Annual Report.
Year Ended September 30,
------------------------
SELECTED STATEMENT OF INCOME DATA: (1) 2002 2001 2000 1999 1998
-------------------------------------- ---- ---- ---- ---- ----
Operating revenues...................................... $ 19,442 $ 36,086 $ 72,931 $45,873 $33,608
Operating income (loss)................................. (11,552) (24,764) 15,440 5,117 4,325
Net income (loss) (2)................................... (14,078) (25,942) 9,169 2,936 4,240
Net income (loss) per share:
Basic................................................ $ (0.81) $ (1.49) $ 0.55 $ 0.18 $ 0.27
Diluted.............................................. $ (0.81) $ (1.49) $ 0.50 $ 0.17 $ 0.25
As of September 30,
-------------------
SELECTED BALANCE SHEET DATA: (1) 2002 2001 2000 1999 1998
-------------------------------- ---- ---- ---- ---- ----
Current assets.......................................... $ 17,263 $ 28,797 $ 59,933 $ 26,412 $ 21,511
Current liabilities..................................... 28,487 28,547 11,595 7,528 5,528
Working capital (deficit)............................... (11,224) 250 48,338 18,884 15,983
Total assets............................................ 19,907 33,837 64,532 29,557 24,972
Total short-term notes payable and long-term debt....... 20,000 23,424 22,397 5,375 5,363
Shareholders' equity (deficit).......................... (8,580) 5,194 30,668 16,782 14,028
8
Three Months Ended
------------------
SELECTED QUARTERLY Sep. 30 Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30 Mar. 31 Dec. 31
FINANCIAL DATA: (1) 2002 2002 2002 2001 2001 2001 2001 2000
- ------------------- ---- ---- ---- ---- ---- ---- ---- ----
Operating revenues........ $ 3,887 $ 6,179 $ 4,739 $ 4,637 $ 6,262 $ 4,972 $ 8,156 $16,696
Operating income (loss) from
continuing operations .. (7,858) (533) (1,489) (1,672) (8,203) (20,215) 448 3,205
Net income (loss) ........ (8,945) (1,019) (1,713) (2,401) (11,449) (16,446) 65 1,888
Net income (loss) per share:
Basic.................. $ (0.51) $ (0.06) $ (0.10) $ (0.14) $ (0.66) $ (0.94) $ 0.00 $ 0.11
Diluted (3)............ $ (0.51) $ (0.06) $ (0.10) $ (0.14) $ (0.66) $ (0.94) $ 0.00 $ 0.10
- ----------------------
(1) All amounts are in thousands, except per share dollar amounts.
(2) Income tax expense (benefit) was $(323,457), $(3,416,030), $4,838,000,
$1,800,000 and $(307,251) for the years ended September 30, 2002, 2001,
2000, 1999 and 1998, respectively.
(3) The sum of the quarterly amounts of basic and diluted earnings per share
does not necessarily equal basic and diluted earnings per share for the
entire fiscal year due to rounding differences and/or variations in the
stock prices utilized in the calculations at the end of each period.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The Company's revenues were $19,442,000 for the year ended September 30,
2002, representing a decrease of $16,644,000, or 46%, from fiscal 2001 and
a decrease of $53,489,000, or 73%, from fiscal 2000. The Company incurred
an operating loss of $(11,552,000) in fiscal 2002 compared to an operating
loss of $(24,764,000) in fiscal 2001 and operating income of $15,440,000
in fiscal 2000. The Company incurred a net loss of $(14,078,000) in fiscal
2002 compared to a net loss of $(25,942,000) in fiscal 2001 and net income
of $9,169,000 in fiscal 2000.
The decrease in sales in 2002 was primarily due to the discontinuance of
business with CCC, formerly the Company's largest customer, that incurred
financial difficulty in January 2001. CCC filed for bankruptcy protection
in June 2001, and had accounted for sales of approximately $45,000,000 in
2000 and $12,000,000 in 2001. The remaining 2002 sales decrease was due to
lower sales to Cardtronics, the Company's second largest customer in 2001
and 2000. The operating and net losses for fiscal 2002 were caused
primarily by lower sales volumes after the loss of CCC's business and
lower gross profit margins associated with the remaining revenues of the
company.
9
PRODUCT REVENUES
A breakdown of net sales by individual product line is provided in the
following table:
(dollars in 000's)
----------------------------------------------
2002 2001 2000
---------- --------- ----------
ATM...................................... $ 9,399 $ 24,646 $ 59,210
TACC..................................... 6,513 6,836 7,569
Parts and other.......................... 3,530 4,604 6,152
---------- --------- ---------
$ 19,442 $ 36,086 $ 72,931
========== ========= =========
ATM sales decreased 62% in fiscal year 2002 due primarily to the loss of
CCC as a customer and the decreased sales to Cardtronics as described
elsewhere herein. For the year ended September 30, 2002, the Company
shipped 2,785 units, a decrease of 55% from the 6,248 units shipped in
fiscal 2001, and a decrease of 78% from the 12,426 units shipped in fiscal
2000.
Inflation played no significant role in the Company's revenues for the
fiscal years 2002, 2001, and 2000. However, continued decreases in selling
prices of ATMs throughout the industry did affect the amount of revenues
generated by the Company. In fiscal year 2001, the Company's average
selling price for ATMs decreased by 18% from the previous year. Similarly,
in fiscal 2002, the Company's average selling price of ATMs decreased an
additional 14% from 2001. Conversely, the TACC market had increasing
average sales prices during the years 2001 and 2002.
TACC sales decreased 5% in 2002 as the Company's marketing efforts were
focused on rebuilding its ATM sales after the loss of CCC's business.
Parts and other revenues vary directly with sales of finished goods, and
have decreased accordingly.
GROSS PROFIT, OPERATING EXPENSES AND NON-OPERATING ITEMS
A comparison of certain operating information is provided in the following
table:
(dollars in 000's)
---------------------------------------------
2002 2001 2000
--------- -------- --------
Gross profit......................................... $ 4,390 $ 11,702 $ 27,916
Selling, general and administrative.................. 9,770 10,352 10,608
Provision for doubtful accounts...................... 2,985 25,025 500
Provision for settlement of class action litigation.. 1,564 -- --
Depreciation and amortization........................ 1,159 1,089 1,368
Impairment of goodwill and other intangible assets... 464 -- --
-------- -------- --------
Operating income (loss).............................. (11,552) (24,764) 15,440
Interest expense..................................... 2,531 4,594 432
Write-down of investment in 3CI...................... 288 -- 1,000
-------- -------- --------
Income (loss) before taxes........................... (14,371) (29,358) 14,007
Income tax expense (benefit)......................... (294) (3,416) 4,838
-------- -------- --------
Net income (loss).................................... $(14,078) $(25,942) $ 9,169
======== ======== ========
Gross profit on product sales decreased $7,312,000 from fiscal 2001 and
$23,526,000 from fiscal 2000 primarily as a result of the sharp decline in
sales to CCC for the period. Gross margin as a percentage of sales was
22.6% in 2002 compared to 32.4% in 2001 and 38.3% in 2000. The decrease in
the gross margin percentage from 2001
10
and 2000 arose from production inefficiencies and the fixed manufacturing
overhead expenses being allocated to fewer units produced during the year
which resulted in higher unit costs assigned to each unit of product sold.
Additionally, increases in the cost of raw materials used in the
manufacture of the Company's products further decreased the gross margin
percentage.
Selling, general and administrative expenses decreased $582,000, or 6%, in
2002 compared to 2001. The reduction related to lower personnel costs and
general office operating expenses. Selling, general and administrative
expenses in 2001 were virtually unchanged from 2000 despite the
significant decrease in sales for the period. Reduction in variable costs
in 2001 were offset by substantial increases in legal and accounting fees
and travel expenses associated with the CCC bankruptcy matter and
investment banking fees incurred in connection with the Company's effort
to restructure its financial position.
Provision for doubtful accounts decreased substantially due to the
provision of $24,100,000 established in 2001 for amounts due from CCC. In
2002, the provision includes an additional $500,000 to cover reserves for
the escrow deposits relating to CCC and $1,507,000 for non-CCC notes
receivable, together with the additional reserves for certain accounts
that have filed for bankruptcy or are otherwise deemed uncollectible.
Provision for settlement of class action litigation was $1,564,000 for
2002, due to the initial establishment of a reserve for the settlement of
class action litigation. See further discussion in Part I, Item 3., "Legal
Proceedings".
Depreciation and amortization, including impairment of goodwill and other
intangible assets was $1,623,000 for 2002, an increase of $533,000 from
the amount provided in 2001. The majority of the increase, $464,000, was
due to the write-down of goodwill and intangibles on the Company's books
that were deemed to be impaired. The remaining increase in 2002 was due to
the addition of new assets that replaced other fully depreciated assets.
Interest expense decreased by $2,063,000 in 2002 to $2,531,000 when
compared to 2001 due to debt issuance costs of approximately $3,000,000
associated with the $18,000,000 in convertible debt being recognized in
2001. Such debt issuance costs were fully amortized in 2001 as a result of
the "put" of the convertible debt in June 2001, described more fully below
under Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" of
this Annual Report. However, the Company did not repay the convertible
debt following the "put" in 2001, and the debt was considered to be in
default, which resulted in higher interest charges under the terms of the
debt agreements.
Income tax expense (benefit) of $(294,000) for 2002 and $(3,416,000) for
2001 was recognized due to the significant losses sustained by the Company
in those years that the Company was able to carry back to prior periods.
For 2000, the Company had a tax provision of 34.5%. The benefit recognized
in 2002 primarily related to certain tax refunds received during the year.
LIQUIDITY AND CAPITAL RESOURCES
The financial position of the Company deteriorated during fiscal 2002 as a
result of CCC's bankruptcy and the Company's termination of sales to CCC,
under-absorbed fixed costs associated with the production facilities, and
reduced sales of the Company's products resulting from general
difficulties in the ATM market. See Part I, Item 1., "Business" of this
Annual Report. This deterioration is reflected in the following key
indicators as of September 30, 2002, 2001 and 2000:
11
(dollars in 000's)
--------------------------------------------
2002 2001 2000
--------- -------- --------
Cash................................................. $ 1,238 $ 3,266 $ 16,223
Restricted cash...................................... 2,213 -- --
Working capital (deficit)............................ (11,224) 250 48,338
Total assets......................................... 19,907 33,837 64,532
Shareholders' equity (deficit)....................... (8,580) 5,194 30,668
As of September 30, 2002, the Company's wholly-owned subsidiary was a
party to a credit agreement with a bank (the "First Lender") (as amended,
the "Revolving Credit Facility"), which was subsequently amended on April
30, 2002, August 30, 2002 and December 30, 2002 to provide for, among
other things, an extension of the maturity date until June 30, 2003; the
reduction of the revolving commitment from the initial amount of
$7,000,000 to $2,000,000; and a modification of the collateral
requirements to include a pledge of a money market account in an amount
equal to 110% of the outstanding principal balance, which pledge was
$2,200,000 and is recorded as restricted cash in the September 30, 2002
consolidated balance sheet. At September 30, 2002, $2,000,000 was
outstanding under the Revolving Credit Facility compared to $5,200,000 at
September 30, 2001. At September 30, 2002, the Company was in compliance
with the terms of the credit agreement or had received waivers for
covenant violations. On June 30, 2003, the Revolving Credit Facility was
assigned to another bank (the "Second Lender"). The Revolving Credit
Facility was repaid on November 25, 2003, in connection with the Financing
as discussed more fully in Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Subsequent
Events" of this Annual Report.
In September 2000, the Company issued to two investors (individually, the
"Holder", or collectively, the "Holders") an aggregate of $18,000,000 of
the Company's 6% Convertible Debentures, due September 8, 2004 (the
"Convertible Debentures"), convertible into the Company's Common Stock at
a price of $9.50 per share. In addition, the Company issued warrants to
the Holders to purchase 378,947 shares of the Company's Common Stock
exercisable at any time through September 8, 2005 at an exercise price of
$9.80 per share.
In June 2001, the Holders exercised their option to "put" the Convertible
Debentures back to the Company. Accordingly, the principal amount of
$18,000,000, plus accrued and unpaid interest, was due on August 27, 2001.
The Company did not make such payment on that date, and at September 30,
2002, did not have the funds available to make such payments. At September
30, 2002, the Company was party to subordination agreements (the
"Subordination Agreements") with each Holder and the First Lender which
provided, among other things, for prohibitions: (i) on the Company making
this payment to the Holders, and (ii) on the Holders taking legal action
against the Company to collect this amount, other than to increase the
principal balance of the Convertible Debentures for unpaid amounts or to
convert the Convertible Debentures into the Company's Common Stock. The
Convertible Debentures were retired on November 25, 2003, in connection
with the Financing as discussed more fully in Part II, Item 7.,
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Subsequent Events" of this Annual Report.
As of January 31, 2005, the Company has a $1,250,000 purchase order
financing facility through November 26, 2005, as part of the Additional
Financing in November 2004, as discussed more fully in Part II, Item 7.,
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Subsequent Events" of this Annual Report. There can be no
assurance that the Company will have sufficient working capital in the
future. As noted above, the Company's Revolving Credit Facility was
required to be repaid in connection with the Financing in November 2003,
and, as described more fully in Part II, Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Subsequent
Events" of this Annual Report, was repaid at such time. The proceeds from
the Financing were predominantly used to retire the Convertible
Debentures. In addition, the proceeds of the Additional Financing in
November 2004, as discussed more fully in Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Subsequent Events" of this Annual Report,
12
were primarily used to pay vendors for past goods or services and to pay
the Purchaser past due principal and interest on the convertible notes.
There can be no assurance that the Company will obtain additional
financing for working capital purposes. The failure to obtain such
additional financing could cause a material adverse effect upon the
financial condition of the Company.
The Company formerly owned 100% of 3CI Complete Compliance Corporation, a
company engaged in the transportation and incineration of medical waste,
until the Company divested its majority interest in February 1994. As of
September 30, 2002, the Company continues to own 698,464 shares of the
common stock of 3CI. The Company has no immediate plan for the disposal of
these shares. At September 30, 2002 all the shares were pledged to secure
borrowings under the Revolving Credit Facility with the First Lender.
Subsequent to September 30, 2002, the Revolving Credit Facility was repaid
and the shares were pledged to secure borrowings in connection with the
Financing as discussed more fully in Part II, Item 7., "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Subsequent Events" of this Annual Report. See Note 6 to Notes to the
Consolidated Financial Statements in Part IV of this Annual Report. The
value of the investment in 698,464 shares of 3CI was written down by
$288,000 in fiscal 2002 to reflect a carrying amount of $0.40 per share,
the highest price at which the stock was trading in fiscal year 2002.
Historically, the Company has expended significant amounts of funds in the
area of research and development. The majority of these expenditures are
applicable to enhancements of the existing product lines, development of
new automated teller machine products and the development of new
technology to facilitate the dispensing of cash and cash value products.
Total research and development expenditures were approximately $2,700,000,
$2,500,000 and $2,600,000 for the years ended September 30, 2002, 2001 and
2000, respectively.
In addition to the matters described in the foregoing paragraphs relative
to indebtedness, the Company's financial position has also been adversely
impacted by the downturn in operations. Reduced sales resulted in a
buildup of finished goods and inventories in excess of the level normally
maintained by the Company in 2001.
The following table summarizes the Company's contractual cash obligations
as of September 30, 2002:
PAYMENTS DUE BY PERIOD
- --------------------------------------------------------------------------------------------
FISCAL 2004-
TOTAL FISCAL 2003 2005 FISCAL 2006-2007 BEYOND
- --------------------------------------------------------------------------------------------
Operating
leases $ 1,402,882 $ 479,973 $ 824,941 $ 97,968 --
Long-term
debt,
including
current
portion (1) 20,000,000 20,000,000
-- -- --
Purchase
Obligations 952,000 952,000 -- -- --
------------ ------------ ------------ ------------ ----
Total $ 22,354,882 $ 21,431,973 $ 824,941 $ 97,968 --
============ ============ ============ ============ ====
(1) Long-term debt of $20,000,000 was repaid on November 25, 2003, in
connection with the Financing obtained by the Company as discussed more
fully in "Subsequent Events" below. The payment obligations on the new
debt as amended pursuant to the terms of the Additional Financing as
described more fully in "Subsequent Events" below consist of $3,145,000
13
in fiscal 2004 - 2005, $6,667,988 in fiscal 2006 - 2007, and $3,500,000
beyond 2007, which includes a $2,000,000 Reorganization Fee which will be
payable in 2009, unless certain events occur prior to that time that would
accelerate the payment date, as more fully described in "Subsequent
Events" below.
Operating Leases - The Company leases office and warehouse space,
transportation equipment and other equipment under terms of operating
leases, which expire in the years up through 2006. Rental expense under
these leases for the years ended September 30, 2002, 2001 and 2000 was
approximately $661,924, $587,562 and $500,388, respectively.
Long-term debt - As of September 30, 2002, the Company's wholly-owned
subsidiary was a party to a credit agreement with a bank (the "First
Lender") (as amended, the "Revolving Credit Facility"), which was amended
on April 30, 2002, August 30, 2002 and December 30, 2002 to provide for,
among other things, an extension of the maturity date until June 30, 2003.
At September 30, 2002, $2,000,000 was outstanding under the Revolving
Credit Facility. At September 30, 2002, the Company was in compliance with
the terms of the credit agreement or had received waivers for covenant
violations. On June 30, 2003, the Revolving Credit Facility was assigned
to another bank (the "Second Lender"). The Revolving Credit Facility was
repaid on November 25, 2003, in connection with financing obtained by the
Company as discussed more fully in Part II, Item 8, "Financial Statements
and Supplementary Data, Note 9 - Long-Term Debt and Convertible
Debentures".
In September 2000, the Company issued to investors (the "Holders") an
aggregate of $18,000,000 of the Company's 6% Convertible Debentures, due
September 8, 2004. In June 2001, the Holders exercised their option to
"put" the Convertible Debentures back to the Company. Accordingly, the
principal amount of $18,000,000, plus accrued and unpaid interest, was due
on August 27, 2001. The Company did not make such payment on that date,
and at September 30, 2002, did not have the funds available to make such
payments. At September 30, 2002, the Company was party to subordination
agreements (the "Subordination Agreements") with each Holder and the
Lender which provided, among other things, for prohibitions: (i) on the
Company making this payment to the Holders, and (ii) against the Holders
taking legal action against the Company to collect this amount, other than
to increase the principal balance of the Convertible Debentures for unpaid
amounts or to convert the Convertible Debentures into the Company's Common
Stock. The warrants and Convertible Debentures were retired on November
25, 2003, in connection with the Financing as discussed more fully in Part
II, Item 8, "Financial Statements and Supplementary Data, Note 9 -
Long-Term Debt and Convertible Debentures".
Purchase Obligations - Pursuant to an agreement with a supplier, the
Company was obligated to purchase certain raw materials with an
approximate cost of $952,000 before December 31, 2002. Subsequent to
September 30, 2002, the terms of the purchase obligation were amended to
extend the purchase date and revise the purchase prices. This agreement
terminated on March 31, 2004.
SUBSEQUENT EVENTS
BRIDGE LOANS
Beginning in September 2003, the Company issued the following unsecured,
short-term promissory notes totaling $720,000 to shareholders or their
affiliates as part of a bridge financing transaction (the "Bridge Loans"):
In September 2003, the Company issued a shareholder, Alliance
Developments, Ltd. ("Alliance"), an unsecured, short-term promissory
note dated September 26, 2003 in the principal amount of $300,000
due December 24, 2003; plus accrued interest at 9% per annum,
payable at maturity. In consideration for the original loan,
Alliance received three-year warrants to purchase 100,000 shares of
common stock at $0.45 per share. The note was renewed on December
24, 2003 until March 24, 2004. In consideration for the renewal,
14
Alliance received additional three-year warrants to purchase 50,000
shares of common stock at $0.45 per share. The proceeds of the
Alliance note were allocated to the note and the related warrants
based on the relative fair value of the note and the warrants, with
the value of the warrants resulting in a discount against the note.
As a result, the Company will record additional interest charges
totaling $20,572 over the term of the note related to the discounts.
The note was paid in full on March 5, 2004.
The Company issued to a shareholder and former director an
unsecured, short-term promissory note dated October 2, 2003 in the
principal amount of $120,000 due April 2, 2004; plus accrued
interest at 9% per annum, payable monthly. In consideration for the
loan, the shareholder received three-year warrants to purchase
40,000 shares of common stock at $0.45 per share. The proceeds of
the note were allocated to the note and the related warrants based
on the relative fair value of the note and the warrants, with the
value of the warrants resulting in a discount against the note. As a
result, the Company will record additional interest charges totaling
$7,611 over the term of the note related to the discounts. The note
was paid in full on March 8, 2004.
The Company also issued to the shareholder and former director an
unsecured, short-term promissory note dated October 21, 2003 in the
principal amount of $90,000 due April 21, 2004; plus accrued
interest at 9% per annum, payable monthly. In consideration for the
loan, the shareholder received three-year warrants to purchase
30,000 shares of common stock at $0.45 per share. The proceeds of
the note were allocated to the note and the related warrants based
on the relative fair value of the note and the warrants, with the
value of the warrants resulting in a discount against the note. As a
result, the Company will record additional interest charges totaling
$6,608 over the term of the note related to the discounts. The note
was paid in full on November 26, 2003.
The Company issued to an affiliate of a shareholder an unsecured,
short-term promissory note dated November 20, 2003 in the principal
amount of $210,000 due May 20, 2004; plus accrued interest at 8% per
annum, payable at maturity. In consideration for the loan, the note
holder received three-year warrants to purchase 70,000 shares of
common stock at $0.45 per share. The proceeds of the note were
allocated to the note and the related warrants based on the relative
fair value of the note and the warrants, with the value of the
warrants resulting in a discount against the note. As a result, the
Company will record additional interest charges totaling $30,619
over the term of the note related to the discounts. The note was
paid in full on March 5, 2004.
THE FINANCING
On November 25, 2003, the Company completed a $6,850,000 financing
transaction (the "Financing") with an independent investment group (the
"Purchaser"). The Financing was comprised of a three-year convertible note
issued to the Purchaser on that date in the amount of $6,450,000 and a
one-year convertible note issued to the Purchaser on that date in the
amount of $400,000, both of which bear interest at a rate of prime plus 2%
and were convertible into the Company's Common Stock at a conversion price
of $0.40 per share. In addition, the Purchaser received warrants to
purchase 4,250,000 shares of the Company's Common Stock at an exercise
price of $0.40 per share. The proceeds of the Financing were allocated to
the notes and the related warrants based on the relative fair value of the
notes and the warrants, with the value of the warrants resulting in a
discount against the notes. In addition, the conversion terms of the notes
result in a beneficial conversion feature, further discounting the
carrying value of the notes. As a result, the Company will record
additional interest charges totaling $6,850,000 over the terms of the
notes related to these discounts. The Purchaser was also granted
registration rights in connection with the shares of Common Stock issuable
in connection with the Financing. Proceeds from the Financing in the
amount of $6,000,000 were used to fully retire the Holders' $18,000,000 in
Convertible Debentures together with all accrued interest, penalties and
fees associated therewith. The Company recorded a gain from extinguishment
of
15
debt of $18,823,000 (including accrued interest through the date of
extinguishment) in fiscal year 2004 related to the refinancing. In March
2004, the $400,000 note was repaid in full from the proceeds of the
CashWorks transaction described below.
In connection with the closing of the Financing, all of the warrants and
Convertible Debentures held by the Holders were terminated, all
outstanding litigation including, without limitation, the Montrose
Litigation, was dismissed, and the Revolving Credit Facility was repaid
through the release of the restricted cash used as collateral for the
Revolving Credit Facility.
In August 2004, the Purchaser notified the Company that an Event of
Default had occurred and continued beyond any applicable grace period as a
result of the Company's non-payment of interest and principal on the
$6,450,000 convertible note as required under the terms of the Financing.
In exchange for the Purchaser's waiver of the Event of Default until
September 17, 2004, the Company agreed, among other things, to lower the
conversion price on the $6,450,000 convertible note and the exercise price
of the warrants from $0.40 per share to $0.30 per share.
THE ADDITIONAL FINANCING
On November 26, 2004, the Company completed a $3,350,000 financing
transaction (the "Additional Financing") with the Purchaser. The
Additional Financing is comprised of (i) a three-year convertible note
issued by the Company to the Purchaser on that date in the amount of
$1,500,000, which bears interest at a rate of 14% and is convertible into
the Company's Common Stock at a conversion price of $3.00 per share (the
"$1,500,000 Note"), (ii) a one-year convertible note issued to the
Purchaser on that date by the Company in the amount of $600,000 which
bears interest at a rate of 10% and is convertible into the Company's
Common Stock at a conversion price of $0.30 per share (the "$600,000
Note"), (iii) a one-year convertible note issued to the Purchaser on that
date by the Company's subsidiary, Tidel Engineering, L.P. in the amount of
$1,250,000, which is a revolving working capital facility for the purpose
of financing purchase orders (the "Purchase Order Note"), which bears
interest at a rate of 14% and is convertible into the Company's Common
Stock at a price of $3.00 per share and (iv) the issuance to the Purchaser
by the Company of 1,251,000 shares, or approximately 7% of the total
shares outstanding, of Common Stock (the "2003 Fee Shares") in full
satisfaction of certain fees totaling $375,300 incurred in connection with
the convertible term notes issued in the Financing. In addition, the
Purchaser received warrants to purchase 500,000 shares of the Company's
Common Stock at an exercise price of $0.30 per share. The 2003 Fee Shares
were issued to the Purchaser based on a price of $0.30 per share. As a
result of the sale of the 2003 Fee Shares, the Company will record in
fiscal 2005 an additional charge of $275,000 related to the difference in
the $.30 sale price and the market value of the stock on November 26,
2004. The proceeds of the Additional Financing were allocated to the notes
based on the relative fair value of the notes and the warrants, with the
value of the warrants resulting in a discount against the notes. In
addition, the conversion terms of the $600,000 Note results in a
beneficial conversion feature, further discounting the carrying value of
the notes. As a result, the Company will record additional interest
charges totaling $840,000 over the terms of the notes related to these
discounts. The Purchaser was also granted registration rights in
connection with the 2003 Fee Shares and other shares issuable pursuant to
the Additional Financing. The obligations pursuant to the Additional
Financing are secured by all of the Company's assets and are guaranteed by
the Company's subsidiaries. Proceeds from the Additional Financing in the
amount of $3,232,750 were primarily used for general working capital
payments made directly to vendors, as well as for past due interest on the
Purchaser's $6,450,000 convertible note due pursuant to the Financing and
escrow for future principal and interest payments due pursuant to the
Additional Financing.
THE NOTES AND WARRANTS ISSUED IN THE FINANCING AND THE ADDITIONAL
FINANCING, COUPLED WITH THE 2003 FEE SHARES, ARE CONVERTIBLE INTO AN
AGGREGATE OF 29,893,293 SHARES OF THE COMPANY'S COMMON STOCK, OR
APPROXIMATELY 62% OF THE COMPANY'S OUTSTANDING COMMON STOCK, SUBJECT TO
ADJUSTMENT AS PROVIDED IN THE TRANSACTION DOCUMENTS. IF THESE NOTES AND
WARRANTS WERE COMPLETELY CONVERTED TO COMMON STOCK BY THE PURCHASER, THEN
THE OTHER EXISTING SHAREHOLDERS' OWNERSHIP IN THE COMPANY WOULD BE
SIGNIFICANTLY DILUTED TO APPROXIMATELY 38% OF THEIR PRESENT OWNERSHIP
POSITION.
16
In connection with the Financing, the Purchaser required the Company to
covenant that it would become current in its filings with the Securities
and Exchange Commission according to a predetermined schedule. Effective
November 26, 2004, in the Additional Financing documents, the Purchaser
and the Company amended the Financing documents to require, among other
things, that the Company provide evidence of filing to the Purchaser of
its 2002 Form 10-K with the Securities and Exchange Commission on or
before January 31, 2005 and its remaining filings with the Securities and
Exchange Commission on or before July 31, 2005.
Fourteen (14) days following such time as the Company becomes current in
its filings with the Securities and Exchange Commission, the Company is to
deliver the Purchaser evidence of the listing of the Company's Common
Stock on the Nasdaq Over The Counter Bulletin Board (the "Listing
Requirement").
Pursuant to the terms of the Financing and the Additional Financing, an
Event of Default occurs if, among other things, the Company does not
complete its filings with the Securities and Exchange Commission on the
timetable set forth in the Additional Financing documents, or does not
comply with the Listing Requirement or any other material covenant or
other term or condition of the purchase agreement between the Purchaser
and the Company or the notes issued by the Company to the Purchaser. If
there is an Event of Default, including any of the items specified above
or in the transaction documents, the Purchaser may declare all unpaid sums
of principal, interest and other fees due and payable within five (5) days
after written notice from the Purchaser to the Company. If the Company
cures the Event of Default within that five (5) day period, the Event of
Default will no longer be considered to be occurring.
If the Company does not cure such Event of Default, the Purchaser shall
have, among other things, the right to have two (2) of its designees
appointed to the Board of the Company, and the interest rate of the notes
shall be increased to the greater of 18% or the rate in effect at that
time.
ON NOVEMBER 26, 2004, IN CONNECTION WITH THE ADDITIONAL FINANCING, THE
COMPANY AND THE PURCHASER ENTERED INTO AN AGREEMENT (THE "ASSET SALES
AGREEMENT") WHEREBY THE COMPANY AGREED TO PAY A FEE IN THE AMOUNT OF AT
LEAST $2,000,000 (THE "REORGANIZATION FEE") TO THE PURCHASER UPON THE
OCCURRENCE OF CERTAIN EVENTS AS SPECIFIED BELOW AND THEREIN, WHICH
REORGANIZATION FEE IS SECURED BY ALL OF THE COMPANY'S ASSETS, AND IS
GUARANTEED BY THE COMPANY'S SUBSIDIARIES. THE ASSET SALES AGREEMENT
PROVIDES THAT (I) ONCE THE OBLIGATIONS OF THE COMPANY TO THE PURCHASER
HAVE BEEN PAID IN FULL (OTHER THAN THE REORGANIZATION FEE) THE COMPANY
SHALL BE ABLE TO SEEK ADDITIONAL FINANCING IN THE FORM OF A NON
CONVERTIBLE BANK LOAN IN AN AGGREGATE PRINCIPAL AMOUNT NOT TO EXCEED
$4,000,000, SUBJECT TO THE PURCHASER'S RIGHT OF FIRST REFUSAL; (II) THE
NET PROCEEDS OF AN ASSET SALE TO THE PARTY NAMED THEREIN SHALL BE APPLIED
TO THE COMPANY'S OBLIGATIONS TO THE PURCHASER UNDER THE FINANCING AND THE
ADDITIONAL FINANCING, AS DESCRIBED ABOVE (COLLECTIVELY, THE
"OBLIGATIONS"), BUT NOT TO THE REORGANIZATION FEE; AND (III) THE PROCEEDS
OF ANY SUBSEQUENT SALES OF EQUITY INTERESTS OR ASSETS OF THE COMPANY OR OF
THE COMPANY'S SUBSIDIARIES CONSUMMATED ON OR BEFORE THE FIFTH ANNIVERSARY
OF THE ASSET SALES AGREEMENT (EACH, A "COMPANY SALE") SHALL BE APPLIED
FIRST TO ANY REMAINING OBLIGATIONS, THEN PAID TO THE PURCHASER PURSUANT TO
AN INCREASING PERCENTAGE OF AT LEAST 55.5% SET FORTH THEREIN, WHICH AMOUNT
SHALL BE APPLIED TO THE REORGANIZATION FEE. UNDER THIS FORMULA, THE
EXISTING SHAREHOLDERS COULD RECEIVE LESS THAN 45% OF THE PROCEEDS OF ANY
SALE OF ASSETS OR EQUITY INTERESTS OF THE COMPANY, AFTER PAYMENT OF THE
ADDITIONAL FINANCING AND REORGANIZATION FEE AS DEFINED. SEE "AGREEMENT
REGARDING [NAME REDACTED] TRANSACTION AND OTHER ASSET SALES", SECTION
4(B), FILED HEREWITH AS EXHIBIT 10.22, FOR FURTHER INFORMATION ON THIS
CALCULATION. THE REORGANIZATION FEE SHALL BE $2,000,000 AT A MINIMUM, BUT
COULD EQUAL A HIGHER AMOUNT BASED UPON A PERCENTAGE OF THE PROCEEDS OF ANY
COMPANY SALE, AS SUCH TERM IS DEFINED IN THE ASSET SALES AGREEMENT. IN THE
EVENT THAT THE PURCHASER HAS NOT RECEIVED THE FULL AMOUNT OF THE
REORGANIZATION FEE ON OR BEFORE THE FIFTH ANNIVERSARY OF THE DATE OF THE
ASSET SALES AGREEMENT, THEN THE COMPANY SHALL PAY ANY REMAINING BALANCE
DUE ON THE REORGANIZATION FEE TO THE PURCHASER. THE COMPANY
17
WILL RECORD A $2,000,000 CHARGE OVER THE FIVE-YEAR TERM OF THE ASSET SALES
AGREEMENT FOR THE REORGANIZATION FEE.
CASHWORKS
In December 2001, the Company agreed to invest $500,000 in CashWorks, Inc.
("CashWorks"), a development-stage financial technology solutions
provider, in the form of convertible debt of CashWorks, and entered into a
License, Development and Deployment Agreement ("LDDA") with CashWorks,
which provides for certain marketing rights and future income payments to
the Company in exchange for technical expertise and sales support of the
Company. In December 2002, the Company converted the notes plus accrued
but unpaid interest into 2,133,728 shares of CashWorks' Series B preferred
shares plus warrants to purchase 125,000 shares of CashWorks' common stock
at $2.00 per share. In March 2004, the Company consented to the sale of
its interest in CashWorks to GE Capital Corp. ("GECC") for $2,451,000,
resulting in the recognition of a gain in the quarter ended March 31, 2004
of $1,918,000. The Company retained the marketing rights and future income
payments pursuant to the LDDA, as amended, following the sale to GECC. All
of the shares and warrants related to the CashWorks investment were
pledged to secure borrowings in connection with the Financing (defined
herein above). Accordingly, upon receipt of the consideration for the
CashWorks Series B preferred shares and warrants, the Company was
obligated to repay in full the $400,000 and $100,000 convertible term
notes plus accrued but unpaid interest thereon, and all outstanding
interest due on the $6,450,000 convertible term note, all of which were
paid as part of the Financing.
THE DEVELOPMENT AGREEMENT
In August 2001, the Company entered into a Development Agreement (the
"Development Agreement") with a national petroleum retailer and
convenience store operator (the "Retailer") for the joint development of a
new generation of "intelligent" Timed Access Cash Controllers ("TACC"),
now known as the Sentinel product. The Development Agreement provided for
four phases of development with the first three phases to be funded by the
Retailer at an estimated cost of $800,000. In February 2002, the Company
agreed to provide the Retailer a rebate on each unit of the Sentinel
product for the first 1,500 units sold, provided the product successfully
entered production, until the Retailer had earned amounts equal to the
development costs paid by the Retailer. As of September 2002, the product
was in Phase III testing and the Company had received contributions from
the Retailer totaling $361,500. Subsequent to September 2002, the
development of the product was completed and production commenced. The
aggregate development costs for the Sentinel product paid for by the
Retailer totaled $651,500. As of December 31, 2004, 1,047 units of the
Sentinel product had been sold and rebates or other credits totaling
$122,100 had been credited to the Retailer, and rebates or other credits
totaling $342,047 had been accrued for the benefit of the Retailer.
THE EQUIPMENT PURCHASE AGREEMENT
In June 2004, a subsidiary of the Company entered into an equipment
purchase agreement with an initial term through December 31, 2005 with a
national convenience store operator (the "Buyer") for the sale of the
Company's Sentinel timed access cash controllers to the Buyer. The Company
agreed to provide "Most Favored Nation" pricing to the Buyer and to not
increase the price during the initial term of the agreement. The Buyer has
no obligation or commitment to purchase any equipment under the terms of
the agreement. As of December 31, 2004 the Buyer had purchased 600 units
under the agreement.
THE SUPPLY, FACILITY AND SHARE WARRANT AGREEMENTS
In September 2004, a subsidiary of the Company entered into separate
supply and credit facility agreements (the "Supply Agreement", the
"Facility Agreement" and the "Share Warrant Agreement" respectively) with
a foreign distributor (the "Distributor") of the Company's products. The
Supply Agreement required the Distributor, during the initial term of the
agreement, to purchase from the subsidiary, 100% of any and all ATM
machines purchased by the Distributor and during each subsequent term, to
purchase from the subsidiary not less than 85%
18
of any and all ATM machines purchased by the Distributor. The initial term
of the agreement was set as of the earlier of: (a) the expiration or
termination of the debenture, (b) a termination for default, (c) the
mutual agreement of the parties, and (d) August 15, 2009.
The Facility Agreement provides a credit facility in an aggregate amount
not to exceed $2,280,000 to the Distributor with respect to outstanding
invoices already issued by the subsidiary to the Distributor and with
respect to invoices which may be issued in the future by the subsidiary to
the Distributor related to the purchase of the Company's ATM products.
Repayment of the credit facility is set by schedule for the last day of
each month beginning November 2004 and continuing through August 2005. As
of January 21, 2005, the balance of the credit facility outstanding was
$1,357,812 and the Distributor was current with all scheduled payments.
The Share Warrant Agreement provided for the issuance to a subsidiary of
the Company of a warrant to purchase up to 5% of the issued and
outstanding Share Capital of the Distributor. The warrant restricts the
Distributor from (i) creating or issuing a new class of stock or allotting
additional shares, (ii) consolidating or altering the shares, (iii)
issuing a dividend, (iv) issuing additional warrants and (v) amending
articles of incorporation. Upon exercise of the warrant by the Company,
the Distributor's balance outstanding under the Facility Agreement would
be reduced by $300,000.
DEATH OF CHIEF EXECUTIVE OFFICER
On December 19, 2004, James T. Rash, the Company's Chief Executive and
Financial Officer, died. The Company has named Mark K. Levenick as Interim
Chief Executive Officer, but no permanent Chairman, Chief Executive
Officer or Chief Financial Officer has been hired or appointed as of the
date hereof. The Company does not currently have a Chief Financial Officer
or Chairman of the Board, and is currently seeking to fill these
positions. There can be no assurance that the Company will be able to find
successors to fulfill any of these roles, or that such successors will be
able to perform as well as Mr. Rash has in the past.
RESEARCH AND DEVELOPMENT EXPENDITURES
The Company's research and development expenditures for fiscal 2003 and
for fiscal 2004 were approximately $2,700,000 and $2,600,000 respectively.
The Company's research and development budget for fiscal 2005 is estimated
to be $2,400,000. The majority of these expenditures are applicable to
enhancements of the existing product lines, development of new automated
teller machine products and the development of new technology to
facilitate the dispensing of cash and cash value products.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 142 entitled "Goodwill and Other
Intangible Assets." Under SFAS No. 142, existing goodwill is no longer
amortized, but is tested for impairment using a fair value approach. SFAS
No. 142 requires goodwill to be tested for impairment at a level referred
to as a reporting unit, generally one level lower than reportable
segments. SFAS No. 142 required the Company to perform the first goodwill
impairment test on all reporting units within six months of adoption. The
Company adopted SFAS No. 142 effective October 1, 2002, however, during
the year ended September 30, 2002, the Company recorded an impairment
charge against its remaining goodwill balance.
In June 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations,"
was issued. The standard requires that legal obligations associated with
the retirement of long-lived intangible assets be recorded at fair value
when incurred, and this standard became effective on October 1, 2002. The
adoption of this statement is not expected to have a material impact on
the Company's consolidated financial position, results of operations or
cash flows.
19
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB No. 13, and Technical Corrections," was issued. This
statement provides guidance on the classification of gains and losses from
the extinguishment of debt and on the accounting for certain specified
lease transactions as well as other items. As a result, gains or losses
arising from the extinguishment of debt are no longer reported as
extraordinary items. The adoption of this statement is not expected to
have a material impact on the Company's consolidated financial position,
results of operations or cash flows.
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," was issued. This statement provides guidance on the
recognition and measurement of liabilities associated with disposal
activities that are initiated after December 31, 2002. The adoption of
this statement is not expected to have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation Transition and Disclosure, An Amendment of FAS
No. 123." This statement addresses the acceptable transitional methods
when the fair value method of accounting for stock-based compensation
covered in SFAS No. 123 is elected. Additionally, the statement prescribes
tabular disclosure of specific information in the "Summary of Significant
Accounting Policies" regardless of the method used and also required
interim disclosure of similar information. The Company has adopted this
statement effective for the fiscal year ending September 30, 2002. As is
permissible under SFAS No. 148, the Company has not elected the fair value
method, but continues accounting for stock-based compensation by the
intrinsic method prescribed by APB Opinion 25. The disclosures required by
SFAS No. 148 are included in the Summary of Significant Accounting
Policies.
In November 2002, FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". FIN 45 requires
certain guarantees to be measured at fair value upon issuance and recorded
as a liability. In addition, FIN 45 expands current disclosure
requirements regarding guarantees issues by an entity, including tabular
presentation of the changes affecting an entity's aggregate product
warranty liability. The recognition and measurement requirements of the
interpretation are effective prospectively for guarantees issued or
modified after December 31, 2002. The disclosure requirements are
effective immediately and are provided in Part II, Item 8, "Financial
Statements and Supplementary Data, Note 15 - Commitments and
Contingencies." The adoption of this statement is not expected to have a
material impact on the Company's consolidated financial position, results
of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment."
SFAS No. 123R requires companies to recognize the compensation cost
relating to share-based payment transactions in the financial statements.
SFAS No. 123R will be effective for the Company's fourth quarter of fiscal
2005. The Company has not yet determined the impact of adopting this
standard.
ITEM 7A. QUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 2002, the Company was exposed to changes in interest
rates as a result of significant financing through its issuance of
variable-rate and fixed-rate debt. However, with the retirement of the
Convertible Debentures subsequent to September 30, 2002, and the
associated overall reduction in outstanding debt balances, the Company's
exposure to interest rate risks has significantly decreased. If market
interest rates had increased up to 1% in fiscal 2003, there would have
been no material impact on the Company's consolidated results of
operations or financial position; however, market interest rates did not
increase during fiscal 2003, but instead declined slightly.
20
RISK FACTORS
There are several risks inherent in the business of the Company including,
but not limited to, the following:
THE EXISTING SHAREHOLDERS' OWNERSHIP IN THE COMPANY WILL BE SIGNIFICANTLY
DILUTED.
IN NOVEMBER 2003, THE COMPANY COMPLETED THE FINANCING WHICH WAS COMPRISED
OF A THREE-YEAR CONVERTIBLE NOTE IN THE AMOUNT OF $6,450,000 AND A
ONE-YEAR CONVERTIBLE NOTE IN THE AMOUNT OF $400,000, BOTH OF WHICH WERE
CONVERTIBLE INTO THE COMPANY'S COMMON STOCK AT AN EXERCISE PRICE OF $0.40
PER SHARE. IN ADDITION, THE PURCHASER RECEIVED WARRANTS TO PURCHASE
4,250,000 SHARES OF THE COMPANY'S COMMON STOCK AT AN EXERCISE PRICE OF
$0.40 PER SHARE. IN MARCH 2004, THE $400,000 NOTE WAS REPAID IN FULL. IN
AUGUST 2004, THE COMPANY AGREED TO LOWER THE CONVERSION PRICE ON THE
$6,450,000 CONVERTIBLE NOTE AND THE EXERCISE PRICE OF THE WARRANTS FROM
$0.40 PER SHARE TO $0.30 PER SHARE.
IN NOVEMBER 2004, THE COMPANY COMPLETED THE ADDITIONAL FINANCING WHICH WAS
COMPRISED OF A THREE-YEAR CONVERTIBLE NOTE IN THE AMOUNT OF $1,500,000 AND
A ONE-YEAR CONVERTIBLE NOTE ISSUED BY TIDEL ENGINEERING, L.P., A
SUBSIDIARY OF THE COMPANY, IN THE AMOUNT OF $1,250,000, BOTH OF WHICH ARE
CONVERTIBLE INTO THE COMPANY'S COMMON STOCK AT AN EXERCISE PRICE OF $3.00
PER SHARE, AND A ONE-YEAR CONVERTIBLE NOTE IN THE AMOUNT OF $600,000 WHICH
IS CONVERTIBLE INTO THE COMPANY'S COMMON STOCK AT AN EXERCISE PRICE OF
$0.30 PER SHARE. IN ADDITION, THE PURCHASER RECEIVED WARRANTS TO PURCHASE
500,000 SHARES OF THE COMPANY'S COMMON STOCK AT AN EXERCISE PRICE OF $0.30
PER SHARE AND 1,251,000 2003 FEE SHARES IN FULL SATISFACTION OF CERTAIN
FEES INCURRED IN CONNECTION WITH THE FINANCING.
THE NOTES AND WARRANTS ISSUED IN CONNECTION WITH THE FINANCING AND THE
ADDITIONAL FINANCING, COUPLED WITH THE 2003 FEE SHARES, ARE COLLECTIVELY
CONVERTIBLE INTO AN AGGREGATE OF 29,893,293 SHARES OF THE COMPANY'S COMMON
STOCK, OR APPROXIMATELY 62% OF THE COMPANY'S OUTSTANDING COMMON STOCK,
SUBJECT TO ADJUSTMENT AS PROVIDED IN THE TRANSACTION DOCUMENTS. IF THESE
NOTES AND WARRANTS WERE CONVERTED IN THEIR ENTIRETY TO COMMON STOCK BY THE
PURCHASER, THEN THE OTHER EXISTING SHAREHOLDERS' OWNERSHIP IN THE COMPANY
WOULD BE SIGNIFICANTLY DILUTED TO APPROXIMATELY 38% OF THEIR PRESENT
OWNERSHIP POSITION.
AS A CONDITION OF THE ADDITIONAL FINANCING, THE COMPANY AND THE PURCHASER
ENTERED INTO THE ASSET SALE AGREEMENT WHEREBY THE COMPANY AGREED TO PAY A
REORGANIZATION FEE OF AT LEAST $2,000,000. THE ASSET SALES AGREEMENT
PROVIDES THAT THE NET PROCEEDS OF AN ASSET SALE TO THE PARTY NAMED THEREIN
SHALL BE APPLIED TO THE COMPANY'S OBLIGATIONS UNDER THE FINANCING AND THE
ADDITIONAL FINANCING, BUT NOT TO THE REORGANIZATION FEE, AND THAT THE NET
PROCEEDS OF ANY SUBSEQUENT SALES OF ASSETS OR EQUITY CONSUMMATED ON OR
PRIOR TO THE FIFTH ANNIVERSARY OF THE DATE OF THE ASSET SALES AGREEMENT
SHALL BE APPLIED FIRST TO SUCH OBLIGATIONS, THEN PAID TO THE PURCHASER
PURSUANT TO AN INCREASING PERCENTAGE OF AT LEAST 55.5%, AS SET FORTH IN
THE ASSET SALES AGREEMENT. ACCORDINGLY, THE REORGANIZATION FEE COULD BE A
SUBSTANTIALLY HIGHER AMOUNT BASED UPON A PERCENTAGE OF THE PROCEEDS OF ANY
COMPANY SALE, AS SPECIFIED IN THE ASSET SALES AGREEMENT. EVEN IN THE EVENT
THAT THE COMPANY REPAYS ALL OF THE NOTES PAYABLE OUTSTANDING TO THE
PURCHASER IN FULL, THE PROCEEDS FROM ANY COMPANY SALE WOULD FIRST BE
REDUCED BY THE REORGANIZATION FEE, WHICH WOULD HAVE THE SAME EFFECT AS
DILUTING THE EXISTING SHAREHOLDERS' OWNERSHIP.
FOR MORE INFORMATION, SEE ITEM 7., "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - SUBSEQUENT EVENTS" FOR
ADDITIONAL INFORMATION ON THESE TRANSACTIONS.
21
OUR FUTURE SUCCESS IS UNCERTAIN DUE TO OUR LACK OF LIQUIDITY AND FINANCIAL
SITUATION AT PRESENT.
In 2002, the Company experienced a net loss of approximately $14,078,000
and had a working capital deficit of approximately $11,224,000 as of
September 30, 2002. This was primarily due to a decrease in revenues from
both the loss of CCC as a customer in 2001 and a general deterioration of
the ATM market. This decline in financial condition is serious, and if the
operating conditions do not improve there can be no assurance the Company
will continue operations. As of January 31, 2005, the Company has a
$1,250,000 purchase order financing facility through November 26, 2005.
See Part II, Item 7., "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Subsequent Events" of this Annual
Report for information on the purchase order financing facility. There can
be no assurance that this facility will be sufficient to meet the
Company's current working capital needs or that the Company will have
sufficient working capital in the future. If the Company needs to seek
additional financing, there can be no assurances that the Company will
obtain such additional financing for working capital purposes. The failure
to obtain such additional financing could cause a material adverse effect
upon the financial condition of the Company.
Our future results of operations involve a number of significant risks and
uncertainties. Factors that could affect our future operating results and
cause actual results to vary materially from expectations include, but are
not limited to, lack of a credit facility, dependence on key personnel,
product obsolescence, ability to increase our client base, ability to
increase sales to our current clients, ability to generate consistent
sales, technological innovations and acceptance, competition, reliance on
certain vendors and credit risks. If we do not experience sales increases
in future periods, we will have to reduce our expenses and capital
expenditures to maintain cash levels necessary to sustain our operations.
Our future success will depend on increasing our revenues and reducing our
expenses to enable us to regain profitability.
OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS HAVE STATED IN THEIR REPORT
THAT THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING
CONCERN.
We have limited cash resources and have a working capital deficit. Our
independent registered public accountants have stated in their report that
there is substantial doubt about our ability to continue as a going
concern. By being categorized in this manner, we may find it more
difficult in the short term to either locate financing for future projects
or to identify lenders willing to provide loans at attractive rates, which
may require us to use our cash reserves in order to expand. Should this
occur, and unforeseen events also require greater cash expenditures than
expected, we could be forced to cease all or a part of our operations. As
a result, you could lose your total investment.
WE MAY BE UNABLE TO SELL DEBT OR EQUITY SECURITIES IN THE EVENT WE NEED
ADDITIONAL FUNDS FOR OPERATIONS.
We may need to sell equity or debt securities in the future to provide
working capital for our operations or to provide funds in the event of
future operating losses. We cannot predict whether we will be successful
in raising additional funds. We have no commitments, agreements or
understandings regarding additional financings at this time, and we may be
unable to obtain additional financing on satisfactory terms or at all. The
terms of the Financing and of the Additional Financing restrict our
ability to raise additional funds, and there can be no assurance that we
will be able to obtain a waiver of such restrictions. If we were to raise
additional funds through the issuance of equity or convertible debt
securities, the current stockholders could be substantially diluted and
those additional securities could have preferences and privileges that
current security holders do not have.
22
WE COULD LOSE THE SERVICES OF ONE OR MORE OF OUR EXECUTIVE OFFICERS OR KEY
EMPLOYEES AND WE ARE CURRENTLY OPERATING WITHOUT A CHIEF FINANCIAL
OFFICER.
Our executive officers and key employees are critical to our business
because of their experience and acumen. In particular, the loss of the
services of Mark K. Levenick, Interim Chief Executive Officer of the
Company and President of our operating subsidiaries, could have a material
adverse effect on our operations. In December 2004, James T. Rash, the
former Chairman of the Board, Chief Executive and Financial Officer, died.
The Company has named Mark K. Levenick as Interim Chief Executive Officer
but no permanent Chairman, Chief Executive Officer or Chief Financial
Officer has been hired or appointed as of the date hereof. There can be
no assurance that the Company will be able to find successors to fulfill
his roles, or that such successors will be able to perform as well as Mr.
Rash has in the past. The Board of Directors approved the transfer of a
key-man life insurance policy on the life of Mr. Rash in the amount of
$1,000,000 to Mr. Rash in 2002, in connection with Mr. Rash's then pending
retirement. The proceeds were assigned as collateral for the outstanding
promissory notes due from Mr. Rash. This amount, which has not yet been
received by the Company, will be applied to the repayment of the notes. In
addition, one of our subsidiaries has key-man life insurance on the life
of Mr. Levenick in the amount of $1,000,000 and on the life of Michael F.
Hudson, Executive Vice President, in the amount of $750,000, which was
subsequently increased to $1,000,000, with that subsidiary named as the
sole beneficiary. The Company has not yet named a successor for either the
Chairman of the Board or the Chief Financial Officer position.
Our future success and growth also depends on our ability to continue to
attract, motivate and retain highly qualified employees, including those
with the expertise necessary to operate our business. These officers and
key personnel may not remain with us, and their loss may harm our
development of technology, our revenues and cash flows. Concurrently, the
addition of these personnel by our competitors would allow our competitors
to compete more effectively by diverting customers from us and
facilitating more rapid development of their technology.
OUR OPERATING RESULTS MAY FLUCTUATE FOR A VARIETY OF REASONS, MANY OF
WHICH ARE BEYOND OUR CONTROL.
Our business strategies may fail and our quarterly and annual operating
results may vary significantly from period to period depending on:
- the volume and timing of orders received during the period,
- the timing of new product introductions by us and our competitors,
- the impact of price competition on our selling prices,
- the availability and pricing of components for our products,
- seasonal fluctuations in operations and sales,
- changes in product or distribution channel mix,
- changes in operating expenses,
- changes in our strategy, and
- personnel changes and general economic factors.
Many of these factors are beyond our control. We are unable to forecast
the volume and timing of orders received during a particular period.
Customers generally order our products on an as-needed basis, and
accordingly we have historically operated with a relatively small backlog.
We experience seasonal variances in our operations. Accordingly, operating
results for any particular quarter may not be indicative of the results
for the future quarter or for the year.
Even though it is difficult to forecast future sales and we maintain a
relatively small level of backlog at any given time, we generally must
plan production, order components and undertake our development, sales and
marketing activities and other commitments months in advance. Accordingly,
any shortfall in sales in a given period may adversely impact our results
of operations if we are unable to adjust expenses or inventory during the
period to match the level of sales for the period.
WE HAVE LIMITED MANAGEMENT AND OTHER RESOURCES TO ADDRESS THE ISSUES
CONFRONTING THE COMPANY.
The problems and issues facing our business could significantly strain our
limited personnel, management,
23
financial controls and other resources. Our ability to manage any future
complications effectively will require us to hire new employees, to
integrate new management and employees into our overall operations and to
continue to improve our operational, financial and management systems,
controls and facilities. Our failure to handle the issues facing the
Company effectively, including any failure to integrate new management
controls, systems and procedures, could materially adversely affect our
business, results of operations and financial condition.
THE MARKETS FOR OUR PRODUCTS ARE VERY COMPETITIVE AND, IF WE FAIL TO ADAPT
OUR PRODUCTS AND SERVICES, WE WILL LOSE CUSTOMERS AND FAIL TO COMPETE
EFFECTIVELY.
The markets for our products are characterized by intense competition. We
expect the intensity of competition to increase. Large manufacturers such
as Diebold Incorporated, NCR Corporation, Triton Systems (a division of
Dover Corporation) and Tranax (a distributor of Hyosung) compete directly
with us in the quickly growing, low-cost ATM market. Additionally, demand
in fiscal year 2002 has decreased, due to (i) the declaration of
bankruptcy by CCC, our former largest customer, (ii) the deterioration of
the third-party lease finance market to the ATM industry and (iii) the
general downturn in the economy. Our direct competitors for our TACC
products include NKL Industries, McGunn Safe Company, Armor Safe Company
and AT Systems. Many smaller manufacturers of ATMs, electronic safes and
kiosks are also found in the market.
Sales of Sentinel cash security systems are currently to a small number of
customers. The loss of a single customer could have an adverse effect on
TACC sales.
Competition is likely to result in price reductions, reduced margins and
loss of market share, any one of which may harm our business. Competitors
vary in size, scope and breadth of the products and services offered. We
may encounter competition from competitors who offer more functionality
and features. In addition, we expect competition from other established
and emerging companies, as the market continues to develop, resulting in
increased price sensitivity for our products.
To compete successfully, we must adapt to a rapidly changing market by
continually improving the performance, features and reliability of our
products and services, or else our products and services may become
obsolete. We may also incur substantial costs in modifying our products,
services or infrastructure in order to adapt to these changes.
Many of our competitors have greater financial, technical, marketing and
other resources and greater name recognition than we do. In addition, many
of our competitors have established relationships with our current and
potential customers and have extensive knowledge of our industry. In the
past, we have lost potential customers to competitors. In addition,
current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to
increase the ability of their products to address customer needs.
Accordingly, it is possible that new competitors or alliances among
competitors may develop and rapidly acquire significant market share.
OUR FUTURE GROWTH WILL DEPEND UPON OUR ABILITY TO CONTINUE TO MANUFACTURE,
MARKET AND SELL PRODUCTS WITH COST-EFFECTIVE CHARACTERISTICS, DEVELOP AND
PENETRATE NEW MARKET SEGMENTS AND ENTER AND DEVELOP NEW MARKETS.
We must design and introduce new products with enhanced features, develop
close relationships with the leading market participants and establish new
distribution channels in each new market or market segment in order to
grow. We are unable to predict whether any of our new products will gain
acceptance in the market. Additionally, some of the transactions currently
initiated through ATMs could be accomplished in the future using emerging
technologies, such as wireless devices, cellular telephones, debit cards
and smart cards. We may be unable to develop or gain market acceptance of
products supporting these technologies. Our failure to successfully offer
products supporting these emerging technologies could harm our business.
24
Because the protection of our proprietary technology is limited, our
proprietary technology may be used by others without our consent, which
may reduce our ability to compete and may divert resources.
Our success depends upon proprietary technology and other intellectual
property rights. We must be able to obtain patents, maintain trade-secret
protection and operate without infringing on the intellectual property
rights of others. We have relied on a combination of copyright, trade
secret and trademark laws and nondisclosure and other contractual
restrictions to protect proprietary technology. Our means of protecting
intellectual property rights may be inadequate. It is possible that
patents issued to or licensed by us will be successfully challenged. We
may unintentionally infringe patents of third parties or we may have to
alter our products or processes or pay licensing fees or cease certain
activities to take into account patent rights of third parties, thereby
causing additional unexpected costs and delays that may adversely affect
our business.
In addition, competitors may obtain additional patents and proprietary
rights relating to products or processes used in, necessary to,
competitive with or otherwise related to those we use. The scope and
validity of these patents and proprietary rights, the extent to which we
may be required to obtain licenses under these patents or under other
proprietary rights and the cost and availability of licenses are unknown,
but these factors may limit our ability to market our existing or future
products.
We also rely upon unpatented trade secrets. Other entities may
independently develop substantially the same proprietary information and
techniques or otherwise gain access to our trade secrets or disclose such
technology. In addition, we may be unable to meaningfully protect our
rights to our unpatented trade secrets. In addition, certain previously
filed patents relating to our ATM products and TACC products have expired.
Litigation may be necessary to enforce our intellectual property rights,
protect trade secrets, determine the validity and scope of the proprietary
rights of others, or defend against claims of infringement or invalidity.
Litigation may result in substantial costs and diversion of resources,
which may limit our ability to develop new services and compete for
customers.
IF THE ABILITY TO CHARGE ATM FEES IS LIMITED OR PROHIBITED, ATMS MAY
BECOME LESS PROFITABLE AND DEMAND FOR OUR ATM PRODUCTS COULD DECREASE.
The growth in the market and in our sales of ATMs has been due, in part,
to the ability of ATM owners to charge consumers a surcharge fee for the
use of the ATM. The market trend to charge fees resulted from the
elimination in April 1996 by the Cirrus and Plus national ATM networks of
their policies against the imposition of surcharges on ATM transactions.
ATM owners are subject to federal and state regulations governing
consumers' rights with respect to ATM transactions. Some states and
municipalities have enacted legislation in an attempt to limit or
eliminate surcharging, and similar legislation has been introduced in
Congress. In addition, it is possible that one or more of the national ATM
networks will reinstate their former policies prohibiting surcharging. The
adoption of any additional regulations or legislation or industry policies
limiting or prohibiting ATM surcharges could decrease demand for our
products.
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ANY INTERRUPTION OF OUR MANUFACTURING, WHETHER AS A RESULT OF DAMAGED
EQUIPMENT, NATURAL DISASTERS OR OTHERWISE, COULD INJURE OUR BUSINESS.
All of our manufacturing occurs at our facility in Carrollton, Texas. Our
manufacturing operations utilize equipment that, if damaged or otherwise
rendered inoperable, would result in the disruption of our manufacturing
operations. Although we maintain business interruption insurance, our
business would be injured by any extended interruption of the operations
at our manufacturing facility. This insurance may not continue to be
available on reasonable terms or at all. Our facilities are also exposed
to risks associated with the occurrence of natural disasters, such as
hurricanes and tornadoes.
IF WE RELEASE PRODUCTS CONTAINING DEFECTS, WE MAY NEED TO HALT FURTHER
SALES AND/OR SERVICES UNTIL WE FIX THE DEFECTS, AND OUR REPUTATION WOULD
BE HARMED.
We provide a limited warranty on each of our products covering
manufacturing defects and premature failure. While we believe that our
reserves for warranty claims are adequate, we may experience increased
warranty claims. Our products may contain undetected defects which could
result in the improper dispensing of cash or other items. Although we have
experienced only a limited number of claims of this nature to date, these
types of defects may occur in the future. In addition, we may be held
liable for losses incurred by end users as a result of criminal activity
which our products were intended, but unable, to prevent, or for any
damages suffered by end users as a result of malfunctioning or damaged
components.
WE REMAIN LIABLE FOR ANY PROBLEMS OR CONTAMINATION RELATED TO OUR FUEL
MONITORING UNITS.
Although we discontinued the production and distribution of our fuel
monitoring units more than five years ago, those units which are still in
use are subject to a variety of federal, state and local laws, rules and
regulations governing storage, manufacture, use, discharge, release and
disposal of product and contaminants into the environment or otherwise
relating to the protecting of the environment. These regulations include,
among others (i) the Comprehensive Environmental Response, (ii)
Compensation and Liability Act of 1980, (iii) The Resource Conservation
and Recovery Act of 1976, (iv) the Oil Pollution Act of 1990, (v) the
Clean Air Act of 1970, (vi) the Clean Water Act of 1972, (vii) the Toxic
Substances Control Act of 1976, (viii) the Emergency Planning and
Community Right-to-Know Act, and (ix) the Occupational Safety and Health
Administration Act.
Our fuel monitoring products, by their very nature, give rise to the
potential for substantial environmental risks. If our monitoring systems
fail to operate properly, releases or discharges of petroleum and related
products and associated wastes could contaminate the environment. If there
are releases or discharges we may be found liable under the environmental
laws, rules and regulations of the United States, states and local
jurisdictions relating to contamination or threat of contamination of air,
soil, groundwater and surface waters. This indirect liability could expose
us to monetary liability incident to the failure of the monitoring systems
to detect potential leaks in underground storage tanks. Although we have
tried to protect our business from environmental claims by limiting the
types of services we provide, operating pursuant to contracts designed to
protect us, instituting quality control operating procedures and, where
appropriate, insuring against environmental claims, we are unable to
predict whether these measures will eliminate the risk of potential
environmental liability entirely.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. Investors are
cautioned that all forward-looking
26
statements involve risks and uncertainty (including without limitation,
the Company's future gross profit, selling, general and administrative
expense, the Company's financial position, working capital and seasonal
variances in the Company's operations, as well as general market
conditions). Though the Company believes that the assumptions underlying
the forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance
that the forward-looking statements included in this Form 10-K will prove
to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be
achi