1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file Number 000-17288
TIDEL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2193593
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5847 San Felipe, Suite 900
Houston, Texas 77057
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 783-8200
----------------------
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of Common Stock outstanding as of the close of
business on August 20, 2001 was 17,426,210.
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TIDEL TECHNOLOGIES, INC.
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2001
(unaudited) and September 30, 2000...................................... 1
Consolidated Statements of Operations (unaudited) for the
three months and nine months ended
June 30, 2001 and 2000.................................................. 2
Consolidated Statements of Comprehensive Income (Loss)
(unaudited) for the three months and
nine months ended June 30, 2001 and 2000................................ 3
Consolidated Statements of Cash Flows (unaudited) for
the nine months ended June 30, 2001 and 2000............................ 4
Notes to Consolidated Financial Statements (unaudited)..................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risks.................. 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 15
Item 2. Changes in Securities........................................................ 15
Item 3. Defaults Upon Senior Securities.............................................. 15
Item 4. Submission of Matters to a Vote of Security Holders.......................... 15
Item 5. Other Information............................................................ 15
Item 6. Exhibits and Reports on Form 8-K............................................. 16
SIGNATURE..................................................................................... 16
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TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, SEPTEMBER 30,
ASSETS 2001 2000
------------ ------------
(UNAUDITED)
Current Assets:
Cash and cash equivalents $ 1,476,481 $ 16,223,192
Trade accounts receivable, net of allowance of
$15,960,962 and $448,037, respectively 14,727,056 29,168,134
Notes and other receivables, net of allowance of
$2,500,000 at June 30, 2001 4,489,934 1,151,680
Federal income tax receivable 7,741,457 --
Inventories 12,199,846 10,415,492
Deferred tax assets and other 1,491,645 1,502,723
------------ ------------
Total current assets 42,126,419 58,461,221
Property, plant and equipment, at cost 5,592,915 4,919,186
Accumulated depreciation (3,731,888) (2,954,873)
------------ ------------
Net property, plant and equipment 1,861,027 1,964,313
Intangible assets, net of accumulated amortization of
$1,190,103 and $1,161,675, respectively 510,970 539,398
Deferred tax assets 717,487 519,345
Deferred financing costs and other assets 463,062 1,576,080
------------ ------------
Total assets $ 45,678,965 $ 63,060,357
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities -
Long-term debt $ 5,456,000 $ 128,000
Convertible debentures 18,000,000 --
Accounts payable 3,930,942 8,176,905
Accrued liabilities 1,677,524 3,640,264
------------ ------------
Total current liabilities 29,064,466 11,945,169
Long-term debt, net of current maturities -- 5,424,000
Convertible debentures, net of discount of
$1,155,157 at September 30, 2000 -- 16,844,843
------------ ------------
Total liabilities 29,064,466 34,214,012
------------ ------------
Commitments and contingencies
Shareholders' Equity:
Common stock, $.01 par value, authorized 100,000,000
shares; issued and outstanding 17,426,210 shares
and 17,376,210 shares, respectively 174,262 173,762
Additional paid-in capital 18,972,077 17,207,137
Retained earnings (deficit) (2,173,667) 12,318,721
Deferred financing costs -- (416,525)
Accumulated other comprehensive loss (358,173) (436,750)
------------ ------------
Total shareholders' equity 16,614,499 28,846,345
------------ ------------
Total liabilities and shareholders' equity $ 45,678,965 $ 63,060,357
============ ============
See accompanying notes to consolidated financial statements.
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TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
--------------------------------- ---------------------------------
2001 2000 2001 2000
------------ ----------- ------------ -----------
Revenues $ 4,972,191 $20,264,113 $ 29,824,571 $52,708,956
Cost of sales 4,167,344 12,456,986 19,708,234 32,781,695
------------ ----------- ------------ -----------
Gross profit 804,847 7,807,127 10,116,337 19,927,261
Selling, general and administrative 2,723,211 2,969,171 7,673,979 8,145,501
Provision for doubtful accounts 18,000,000 100,000 18,025,000 150,000
Depreciation and amortization 296,384 345,444 978,856 974,334
------------ ----------- ------------ -----------
Operating income (loss) (20,214,748) 4,392,512 (16,561,498) 10,657,426
Interest expense, net 2,850,935 126,550 3,520,760 318,222
------------ ----------- ------------ -----------
Income (loss) before taxes (23,065,683) 4,265,962 (20,082,258) 10,339,204
Income tax expense (benefit) (6,619,870) 1,470,000 (5,589,870) 3,543,000
------------ ----------- ------------ -----------
Net income (loss) $(16,445,813) $ 2,795,962 $(14,492,388) $ 6,796,204
============ =========== ============ ===========
Basic earnings (loss) per share:
Net income $ (0.94) $ 0.17 $ (0.83) $ 0.41
============ =========== ============ ===========
Weighted average common shares
outstanding 17,426,210 16,823,276 17,406,979 16,402,625
============ =========== ============ ===========
Diluted earnings (loss) per share:
Net income $ (0.94) $ 0.15 $ (0.83) $ 0.37
============ =========== ============ ===========
Weighted average common and
dilutive shares outstanding 17,426,210 18,767,060 17,406,979 18,380,196
============ =========== ============ ===========
See accompanying notes to consolidated financial statements.
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TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
--------------------------------- ---------------------------------
2001 2000 2001 2000
------------ ----------- ------------ -----------
Net income (loss) $ 16,445,813 $ 2,795,962 $(14,492,388) $ 6,796,204
Other comprehensive income (loss):
Unrealized gain (loss) on
investment in 3CI 2,165 (174,616) 78,577 (43,654)
------------ ----------- ------------ -----------
Comprehensive income (loss) $(16,443,648) $ 2,621,346 $(14,413,811) $ 6,752,550
============ =========== ============ ===========
See accompanying notes to consolidated financial statements.
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TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED JUNE 30,
------------ -----------
2001 2000
------------ -----------
Cash flows from operating activities:
Net income (loss) $(14,492,388) $ 6,796,204
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 805,443 974,334
Amortization of debt discount and financing costs 2,899,095 --
Deferred income taxes (198,142) --
Provision for doubtful accounts 18,025,000 150,000
Changes in assets and liabilities:
Trade accounts receivable, net (1,083,922) (8,070,982)
Notes and other receivables (5,838,254) (272,260)
Federal income tax receivable (6,051,642) --
Inventories (1,784,354) (4,351,713)
Prepaids and other assets (124,740) (12,669)
Accounts payable and accrued liabilities (6,208,703) 2,637,884
------------ ------------
Net cash used in operating activities (14,052,607) (2,149,202)
------------ ------------
Cash flows from investing activities -
Purchases of property, plant and equipment (673,729) (905,200)
------------ ------------
Cash flows from financing activities:
Repayments of long-term debt -- 1,305,366
Repayments of notes payable (96,000) (96,000)
Proceeds from exercise of warrants and options 75,625 1,072,727
Payments of stock subscriptions receivable -- 382,063
------------ ------------
Net cash provided by (used in) financing activities (20,375) 2,664,156
------------ ------------
Net decrease in cash and cash equivalents (14,746,711) (390,246)
Cash and cash equivalents at beginning of period 16,223,192 2,423,844
------------ ------------
Cash and cash equivalents at end of period $ 1,476,481 $ 2,033,598
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,299,322 $ 358,548
============ ============
Cash paid for taxes $ 1,640,000 $ 3,010,100
============ ============
See accompanying notes to consolidated financial statements.
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TIDEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated balance sheets and related interim
consolidated statements of operations and cash flows of Tidel
Technologies, Inc. (the "Company"), a Delaware corporation, are unaudited.
In the opinion of management, these financial statements include all
adjustments (consisting only of normal recurring items) necessary for
their fair presentation in accordance with generally accepted accounting
principles. Preparing financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results may differ from these
estimates. Interim results are not necessarily indicative of results for a
full year. The information included in this Form 10-Q should be read in
conjunction with the Company's Annual Report on Form 10-K for the year
ended September 30, 2000.
(2) INVENTORIES
Inventories consisted of the following at June 30, 2001 and September 30,
2000:
June 30, September 30,
2001 2000
------------ -------------
Raw materials........................................ $ 7,895,769 $ 9,047,215
Work in process...................................... -- 12,191
Finished goods....................................... 4,169,877 1,244,944
Other................................................ 464,499 398,560
------------ ------------
12,530,145 10,702,910
Inventory reserve.................................... (330,299) (287,418)
------------ ------------
$ 12,199,846 $ 10,415,492
============ ============
(3) EARNINGS PER SHARE
Basic earnings per share is computed by dividing the income (loss)
available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is
computed by dividing the income available to common shareholders by the
weighted average number of common shares and dilutive potential common
shares. The following is a reconciliation of the numerators and
denominators of the basic and diluted per-share computations for net
income (loss) for the three months and nine months ended June 30, 2001 and
2000. Note that diluted loss per share for the three months and nine
months ended June 30, 2001 is the same as basic loss per share due to the
losses reported for each period:
Weighted
Average Shares Per Share
Income (loss) Outstanding Amount
------------- -------------- ----------
Three Months Ended June 30, 2001:
---------------------------------
Basic loss per share................................. $(16,445,813) 17,426,210 $ (.94)
Effect of dilutive warrants and options.............. -- -- --
------------ ----------- ---------
Diluted loss per share............................... $(16,445,813) 17,426,210 $ (.94)
============= =========== =========
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Weighted
Average Shares Per Share
Income (loss) Outstanding Amount
------------- -------------- ----------
Three Months Ended June 30, 2000:
---------------------------------
Basic earnings per share............................. $ 2,795,962 16,823,276 $ .17
Effect of dilutive warrants and options.............. -- 1,943,784 (.02)
------------ ----------- ---------
Diluted earnings per share........................... $ 2,795,962 18,767,060 $ .15
============ =========== =========
Nine Months Ended June 30, 2001
-------------------------------
Basic loss per share................................. $(14,492,388) 17,406,979 $ (.83)
Effect of dilutive warrants and options.............. -- -- --
------------ ----------- ---------
Diluted loss per share............................... $(14,492,388) 17,406,979 $ (.83)
============ =========== =========
Nine Months Ended June 30, 2000:
--------------------------------
Basic earnings per share............................. $ 6,796,204 16,402,625 $ .41
Effect of dilutive warrants and options.............. -- 1,977,571 (.04)
------------ ----------- ---------
Diluted earnings per share........................... $ 6,796,204 18,380,196 $ .37
============ =========== =========
(4) MAJOR CUSTOMERS
During the nine months ended June 30, 2001, the Company made loans to
three customers pursuant to a distributor financing program. The aggregate
principal amount of the loans was $8,073,000, of which $5,300,000 was
outstanding as of June 30, 2001. The loans are secured, bear interest at
12% per annum and are due at varying dates.
One of these customers, Credit Card Center ("CCC"), filed for protection
under Chapter 11 of the United States Bankruptcy Code on June 6, 2001. The
Company has recorded accounts and a note receivable due from CCC totaling
approximately $27 million. These receivables are secured by a collateral
pledge of CCC's accounts receivable, inventories and transaction income.
At June 30, 2001, based upon an analysis of all available information
regarding the CCC bankruptcy proceedings, the Company established a
reserve of $15.5 million against the trade accounts receivable due from
CCC and a reserve of $2.5 million against the note receivable due from
CCC.
CCC accounted for $11,748,018 and $31,574,551 of sales during the nine
months ended June 30, 2001 and 2000, respectively. See "Major Customers
and Credit Risks", "Risk Factors" and "Part II, Item 1, Legal Proceedings"
for additional information about the Company's relationship with CCC and
other major customers.
(5) CONVERTIBLE DEBENTURES AND LONG-TERM DEBT
In September 2000, the Company issued to two investors (the "Holders") an
aggregate of $18,000,000 of the Company's 6% Convertible Debentures, due
September 8, 2004 (the "Convertible Debentures"), convertible into the
Company's common stock at a price of $9.50 per share. In June 2001, the
Holders exercised their option to put the Convertible Debentures back to
the Company. The Company had previously notified the Holders pursuant to
the terms of the Convertible Debentures that in the event such put option
was exercised, the Company would pay all amounts due in cash. Accordingly,
the principal amount of $18 million, plus accrued and unpaid interest, is
due on August 27, 2001, and has been classified as a current liability.
6
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The Company is party to a credit agreement ("Revolving Credit Facility")
with a bank (the "Lender") which provides for a $10,000,000 revolving line
of credit with interest equal to the prime rate and a $640,000 term loan
at 8.4% interest per annum. At June 30, 2001, $5,200,000 was outstanding
under the Revolving Credit Facility and $256,000 was outstanding under the
term loan. Pursuant to the terms of the credit agreement, the Company
currently lacks the necessary borrowing base to borrow any significant
amount of the unused portion of the revolving line of credit, and
accordingly has only minimal availability under the Revolving Credit
Facility. As of June 30, 2001, due to the establishment of reserves for
losses related to CCC, the Company was not in compliance with certain
restrictive covenants under the Revolving Credit Facility, and accordingly
has classified this obligation as a current liability. The Company is
engaged in negotiations with the Lender regarding a waiver of such
covenants and an amendment of the Revolving Credit Facility, although
there can be no assurance such negotiations will be successful.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations, Liquidity and Capital Resources" and "Risk Factors"
for additional information about financing matters.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company develops, manufactures, sells and supports automated teller
machines (the "ATM" products) and electronic cash controller safes (the
"Timed Access Cash Controller" or "TACC" products).
During January 2001, the Company became aware that its largest customer,
JRA 222, Inc. d/b/a Credit Card Center ("CCC"), was experiencing severe
cash flow problems. Accordingly, sales to CCC were discontinued and there
have been no shipments to CCC since December 31, 2000. After several
months of unsuccessful efforts to remedy its financial difficulties, CCC
declared bankruptcy on June 6, 2001. These matters have adversely impacted
the results of operations for the three months and nine months ended June
30, 2001.
The loss of CCC's business had a direct adverse effect of the Company's
sales. In addition, the negative reaction to CCC's problems by the
industry taken as a whole indirectly affected sales to our other customers
who had difficulty obtaining sufficient levels of lease financing.
The reduction in sales caused a significant decline in gross profit, as
margins were hurt by continuation of fixed production costs despite lower
volumes of units manufactured and sold. The Company has subsequently taken
steps to curtail its fixed costs through staff reductions of production
and warehouse personnel.
The Company has established a reserve for losses related to its
receivables from CCC and is presently incurring significant legal fees in
connection with its ongoing collection efforts. Further, as an indirect
result of the CCC matter, the holders of the debt have accelerated payment
of the Company's convertible debentures. In that connection, the Company
has charged off the unamortized portion of related financing costs.
The decline in sales, the reduced gross profit margins, the provision for
collection losses, and the charge for financing costs, resulted in the
first operating loss for the Company since the quarter ended September 30,
1995. Although there can be no assurance, the Company believes that it
will replace a portion of the sales lost with new business, and that the
difficulties encountered by our customers obtaining lease financing will
improve.
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PRODUCT REVENUES
The Company's revenues were $4,972,000 for the quarter ended June 30,
2001, representing a decrease of $15,292,000, or 75%, from $20,264,000 for
the same quarter in 2000. The decrease in sales was due to the curtailment
of ATM shipments to CCC. See "Major Customers and Credit Risks", "Risk
Factors" and "Part II, Item 1, Legal Proceedings" for additional
information about the Company's relationship with CCC. A breakdown of
sales by product is presented in the following table:
(Dollars in 000's)
---------------------------------------------------------------
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------- -----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
ATM................................ $ 2,590 $ 16,799 $ 21,147 $ 42,814
TACC............................... 1,568 1,805 4,952 5,465
Parts, service and other........... 814 1,660 3,726 4,430
-------- -------- -------- --------
$ 4,972 $ 20,264 $ 29,825 $ 52,709
======== ======== ======== ========
The three month and nine month periods ended June 30, 2000 included sales
to CCC of $12,787,000 and $31,575,000, respectively, or 63% of total
revenues for the three month period and 60% for the nine month period. The
Company has had no sales to CCC since December 31, 2000.
TACC sales decreased for the three months and nine months ended June 30,
2001 compared to the same periods in 2000, due to a lower number of unit
shipments during the period. Due to the timing of large TACC orders,
results vary from quarter to quarter. TACC sales for fiscal 2001 are
expected to be comparable to sales of this product for the preceding year.
The decrease in parts, service and other revenues was attributable to the
discontinuance of sales to CCC.
GROSS PROFIT, OPERATING EXPENSES AND NON-OPERATING ITEMS
A comparison of certain operating information is provided in the following
table:
(Dollars in 000's)
---------------------------------------------------------------
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------- -----------------------------
2001 2000 2001 2000
---------- ----------- ----------- -----------
Gross profit....................... $ 804 $ 7,807 $ 10,116 $ 19,927
Selling, general and administrative 2,723 2,969 7,674 8,146
Provision for doubtful accounts.... 18,000 100 18,025 150
Depreciation and amortization...... 296 345 979 974
Operating income (loss)............ (21,369) 4,393 (17,715) 10,657
Interest expense................... 2,851 127 3,521 318
Income (loss) before taxes......... (23,065) 4,266 (20,082) 10,339
Income taxes (benefit)............. (6,620) 1,470 (5,590) 3,543
Net income (loss).................. (16,446) 2,796 (14,492) 6,796
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Gross profit for the quarter ended June 30, 2001 was only 16.2% of sales,
compared to 38.5% for the same quarter a year ago. The significant
decrease arose from the sharp decline in sales and a provision of $300,000
to establish a reserve for certain raw material components deemed to be
slow moving or obsolete.
Selling, general and administrative expenses were lower for the quarter
and nine months ended June 30, 2001 due to reduced marketing and warranty
costs related to the decline in revenues. The decrease in these expenses
was offset somewhat by significantly increased legal expenses in
connection with the CCC bankruptcy proceedings.
Provision for doubtful accounts represents the establishment of a reserve
for losses on receivables due from CCC. Although information provided by
CCC indicates that there are sufficient assets to cover its obligation to
the Company, there is significant uncertainty as to the value of the
collateral and the ultimate recoverability of the amounts due.
Interest expense was significantly higher for the three months and nine
months ended June 30, 2001 compared to the same periods in 2000. Interest
applicable to the Company's $18 million of convertible debentures, which
were not issued until September 2000, was approximately $270,000 per
quarter. In addition, in June 2001, the Company charged off $2,529,000 of
unamortized debt discount and financing costs related to the issuance of
warrants in connection with the sales of the convertible debentures. These
costs were previously being amortized over the four-year term of the
debentures prior to the exercise of the "put rights" by the holders.
Income tax benefits of $6,620,000 and $5,590,000 were provided for the
three months and nine months ended June 30, 2001. These benefits represent
amounts recoverable from the anticipated carryback of net operating
losses.
LIQUIDITY AND CAPITAL RESOURCES
In September 2000, the Company issued to two investors (the "Holders") an
aggregate of $18,000,000 of the Company's 6% Convertible Debentures, due
September 8, 2004 (the "Convertible Debentures"), convertible into the
Company's common stock at a price of $9.50 per share. In June 2001, the
Holders exercised their option to put the Convertible Debentures back to
the Company. The Company had previously notified the Holders pursuant to
the terms of the Convertible Debentures that in the event such put option
was exercised, the Company would pay all amounts due in cash. Accordingly,
the principal amount of $18 million, plus accrued and unpaid interest, is
due on August 27, 2001. The Company is currently in negotiations with the
Holders regarding such payment, and has retained Bank of America
Securities to assist it in such negotiations. There can be no assurance,
however, that such negotiations will be successful or that modifications
to the Convertible Debentures will be able to be negotiated on terms
acceptable to the Company.
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In the event such negotiations are unsuccessful, we would be required
pursuant to the terms of the Convertible Debentures to make a payment to
the Holders in the outstanding principal amount of the Convertible
Debentures, which is $18 million, together with accrued and unpaid
interest. We currently do not have the funds available to make such
payment. In addition, any such payment would require an amendment of the
Revolving Credit Facility (as defined below), and absent such amendment,
would be a violation thereof. In the event we fail to prepay any portion
due, the Holders may, in addition to their other rights and remedies,
either rescind their put notice or convert into our common stock all or a
portion of the unpaid amount due at a conversion price equal to the
current market price. Any such conversion would result in very substantial
dilution to the Company's existing stockholders. In addition, any issuance
of stock required by a conversion in excess of 19.99% of our issued and
outstanding shares will require stockholder approval under Nasdaq Rules,
accordingly, it is unlikely that such an issuance would be permitted,
which could subject the Company to additional penalties under the
Convertible Debentures. In the event we fail to prepay the Convertible
Debentures as required, the Holders would also have the right to declare
an event of default under the Convertible Debentures. A declaration of an
event of default would also be a default under the Revolving Credit
Facility. See "Risk Factors" for additional information about the
Convertible Debentures and other financing matters.
The Company is party to a credit agreement ("Revolving Credit Facility")
with a bank (the "Lender") which provides for a $10,000,000 revolving line
of credit with interest equal to the prime rate and a $640,000 term loan
at 8.4% interest per annum. At June 30, 2001 and September 30, 2000,
$5,200,000 was outstanding under the Revolving Credit Facility and
$256,000 was outstanding under the term loan. Pursuant to the terms of the
Revolving Credit Facility, we currently lack the necessary borrowing base
to enable us to borrow any significant amount of the unused portion of the
revolving line of credit, and accordingly have only minimal availability
under the Revolving Credit Facility. As of June 30, 2001, due to the
establishment of a reserve for losses related to the CCC matter, the
Company was not in compliance with certain restrictive covenants under the
Revolving Credit Facility. The Company is engaged is currently negotiating
with the Lender regarding a waiver of such covenants and an amendment of
the Revolving Credit Facility, although there can be no assurance such
negotiations will be successful. In the event the negotiations are not
successful, the Lender could declare an event of default and exercise its
remedies under the Revolving Credit Facility. Such remedies include the
acceleration of all outstanding loans and the termination of the
commitments. The Company does not have the funds available to repay all of
its outstanding borrowings under the Revolving Credit Facility at the
present time. See "Risk Factors" for additional information about
financing matters.
Even in the event the ongoing negotiations are successful in waiving
provisions, delaying payments or restructuring the provisions of the
Convertible Debentures and/or the Revolving Credit Facility, such terms
may not be favorable to the Company, and could limit the Company's
operations in the future. A failure to reach agreements with acceptable
terms to the Company with respect to the matters described above relating
to the Convertible Debentures and the Revolving Credit Facility will have
a material adverse effect on the Company.
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 have resulted in a
buildup of finished goods and inventories in excess of the level normally
maintained by the Company. Also, raw materials are much higher due to
purchase commitments for cash dispensers which the Company was obligated
to fulfill pursuant to a contract.
The Company has used a significant portion of its cash reserves at the
beginning of the fiscal year to reduce its trade payables and maintain
good relationships with its vendors. The Company expects its cash position
to improve materially as a result of the anticipated Federal income tax
refunds arising from the carryback of net operating losses and cash flow
from improved operations.
The Company's research and development budget for fiscal 2001 has been
estimated at $3,200,000. 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 applications such as check cashing, electronic bill payment,
money order issuance and full-
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motion video advertising. Total research and development expenditures were
approximately $739,000 and $1,813,000 for the three months and nine months
ended June 30, 2001, respectively.
The Company has never paid dividends on shares of its common stock, and
does not anticipate paying dividends in the foreseeable future. In
addition, the Company's wholly owned subsidiary is restricted from paying
dividends to the Company pursuant to the subsidiary's revolving credit
agreement with a bank.
SEASONALITY
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 the future quarter or for the
year.
MAJOR CUSTOMERS AND CREDIT RISKS
The Company generally retains a security interest in the underlying
equipment that is sold to customers until it receives payment in full. In
addition, CCC and two other major customers have pledged additional
collateral to the Company pursuant to financing agreements. The Company
would incur an accounting loss equal to the carrying value of the notes
and accounts receivable, less any amounts recovered from liquidation of
collateral, if a customer failed to perform according to the terms of the
credit arrangements. See also "Risk Factors" and "Part II, Item 1, Legal
Proceedings" for additional information about the Company's relationship
with CCC.
The Company generally has good relationships with its customers, but there
can be no assurance that these relationships will continue. The Company
discontinued its sales to CCC on December 31, 2000. In fiscal 2000, CCC
had been the Company's largest customer representing 61% of sales. The
Company has increased its sales to other customers, but the decline in
sales is largely attributable to the loss of CCC as a customer. The loss
of any of the Company's current major customers, or a substantial portion
of these accounts, could have a further material adverse effect on the
Company. Sales to major customers were as follows for the three months and
nine months ended June 30, 2001 and 2000:
(Dollars in 000's)
----------------------------------------------------------------
Three Months Ended June 30, Nine Months Ended June 30,
----------------------------- ----------------------------
2001 2000 2001 2000
----------- ----------- ----------- ------------
Credit Card Center................. $ -- $12,786,718 $11,748,018 $31,574,551
Customer B......................... 1,186,003 864,533 4,914,319 2,909,139
Customer C......................... 731,266 748,893 2,296,050 1,539,298
Foreign sales accounted for 15% and 8% of the Company's total sales during
the three months ended June 30, 2001 and 2000, respectively. On a year to
date basis, foreign sales accounted for 8% and 6% for the nine months
ended June 30, 2001 and 2000.
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RISK FACTORS
Please see the risk factors contained in the Company's Annual Report on
Form 10-K for the year ended September 30, 2000 as filed with the
Securities and Exchange Commission. Subsequent to the filing, the risk
factors should be amended as follows:
We are required to repay the Convertible Debenture on August 27, 2001, and
we do not have the funds available to make such repayment.
The Holders of our Convertible Debentures in the aggregate principal
amount of $18 million have put the full amount of the debentures back to
us and such amount is due on August 27, 2001. At the present time we do
not have the funds available to make such payments. The Company is
currently in negotiations with the Holders regarding such payment, and has
retained Bank of America Securities to assist it in such negotiations.
There can be no assurance, however, that such negotiations will be
successful or that modifications to the Convertible Debentures will be
able to be negotiated on terms acceptable to the Company.
In the event such negotiations are unsuccessful, we would be required
pursuant to the terms of the Convertible Debentures to make a payment to
the Holders in the outstanding principal amount of the Convertible
Debentures, which is $18 million, together with accrued and unpaid
interest. We currently do not have the funds available to make such
payment. In addition, any such repayment would require an amendment of the
Revolving Credit Facility, and absent such amendment, would be a violation
thereof. In the event we fail to prepay any portion due, the Holders may,
in addition to their other rights and remedies, either rescind their put
notice or convert into our common stock all or a portion of the unpaid
amount due at a conversion price equal to the current market price. Any
such conversion would result in very substantial dilution to the Company's
existing stockholders. In addition, any issuance of stock required by a
conversion in excess of 19.99% of our issued and outstanding shares will
require stockholder approval under Nasdaq Rules, accordingly, it is
unlikely that such an issuance would be permitted, which could subject the
Company to additional penalties under the Convertible Debentures. In the
event we fail to prepay the Convertible Debentures as required, the
Holders would also have the right to declare an event of default under the
Convertible Debentures. A declaration of an event of default would also be
a default under the Revolving Credit Facility. See "Liquidity and Capital
Resources."
As of June 30, 2001, we were not in compliance with certain covenants of
our Revolving Credit Facility.
As of June 30, 2001, the Company was not in compliance with certain
restrictive covenants under the Revolving Credit Facility. The Company is
currently negotiating with the Lender regarding a waiver of such covenants
and an amendment of the Revolving Credit Facility, although there can be
no assurance such negotiations will be successful. In the event the
negotiations are not successful, the Lender could declare an event of
default and exercise its remedies as provided under the Revolving Credit
Facility. Such remedies include the acceleration of all outstanding loans
and the termination of the commitments. The Company does not have the
funds available to repay its outstanding borrowings under the Revolving
Credit Facility at the present time. An acceleration or other exercise of
its remedies by the Lender would cause a material adverse effect upon our
financial condition and operations. See "Liquidity and Capital Resources."
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We currently have no significant borrowing availability under our
Revolving Credit Facility.
We currently have borrowings of $5.2 million outstanding under our
Revolving Credit Facility. Pursuant to the terms of the Revolving Credit
Facility, we lack the necessary borrowing base to enable us to borrow any
significant amount of the unused portion of the revolving line of credit,
and accordingly have only minimal availability under the Revolving Credit
Facility. The inability to make additional borrowings to provide working
capital could cause a material adverse effect upon our financial condition
and operations.
CCC has filed for bankruptcy and it is unclear to what extent we will
recover the amounts due to us from CCC.
CCC filed for protection under Chapter 11 of the United States Bankruptcy
Code on June 6, 2001 in the United States Bankruptcy Court for the Eastern
District of Pennsylvania. CCC owes us approximately $27 million, excluding
any amounts for interest, attorney's fees and other charges. The
obligation is secured by a collateral pledge of accounts receivable,
inventories and transaction income, although it is unclear as to the value
of our collateral. Based upon our analysis of all available information
regarding the CCC bankruptcy proceedings, we have established a reserve in
the aggregate amount of $18 million against the note and accounts owed to
us by CCC. Depending on the resolution of the bankruptcy proceedings, we
may record additional reserves and we may incur additional significant
charges to earnings in future periods. We intend to continue to monitor
this matter closely and to take all actions that we determine to be
necessary based upon our monitoring of the situation. See "Part II, Item
1, Legal Proceedings."
We are not presently doing business with CCC, which previously accounted
for a significant portion of revenues and earnings, and we may not be able
to replace this business.
CCC accounted for 70% of our net sales for the quarter ended December 31,
2000, and 61% and 40% of our net sales for the years ended September 30,
2000 and 1999, respectively. We have made no shipments to CCC since
January 1, 2001 and we do not anticipate resuming shipments to CCC. Sales
and earnings for the current period have been adversely impacted by this
loss of business, and future periods will be adversely impacted if we are
unable to replace this business with sales to new customers. In the event
we are unable to replace this business with sales to new customers, it is
likely we will incur operating losses until such sales are replaced.
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. 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.
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IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001. SFAS 141 also specifies criteria that intangible assets must meet in
order to be recognized and reported separately from goodwill, noting that
values allocated to dedicated workforce may not be reported separately
from goodwill. SFAS 142 requires that goodwill and intangible assets with
indefinite useful lives will no longer be amortized to expense, but
instead will be tested for impairment at least annually in accordance with
the provisions of SFAS 142. Intangible assets with definite useful lives
will be amortized to expense and will be reviewed for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of."
The Company is required to adopt the provisions of SFAS 141 immediately,
while adoption of SFAS 142 is not required until October 1, 2002, although
earlier adoption on October 1, 2001 is permitted. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001
will continue to be amortized through the date of adoption.
Upon adoption, the Company will be required to reassess the useful lives
of all acquired intangible assets and make any necessary amortization
period adjustments by the first interim reporting period following
adoption. The Company will also be required to perform an assessment of
whether there is an impairment of goodwill at the date of adoption, and at
least annually thereafter. Any impairment loss recognized at adoption will
be shown as the cumulative effect of a change in accounting principle in
the Company's statement of operations. Because of the extensive effort
needed to comply with adopting SFAS 141 and SFAS 142, it is not
practicable to reasonably estimate the impact of adopting these Statements
on the Company's financial statements at the date of this report.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. Investors are
cautioned that all forward-looking statements involve risks and
uncertainty (including without limitation, the exercise of the put on the
Convertible Debentures, the Company's non-compliance with certain
provisions of its Revolving Credit Facility, the Company's financial
position and working capital availability, the Company's future product
sales, gross profit, selling, general and administrative expense, and
seasonal variances in the Company's operations, as well as general market
conditions), though the Company believes that the assumptions underlying
the forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance
that the forward-looking statements included in this Form 10-Q will prove
to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be
achieved.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to changes in interest rates as a result of
financing through its issuance of variable-rate and fixed-rate debt. If
market interest rates were to increase 1% in fiscal 2001, however, there
would be no material impact on the Company's consolidated results of
operations or financial position.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
CCC filed for protection under Chapter 11 of the United States Bankruptcy
Code on June 6, 2001 in the United States Bankruptcy Court for the Eastern
District of Pennsylvania. CCC owes us approximately $27 million, excluding
any amounts for interest, attorney's fees and other charges. The
obligation is secured by a collateral pledge of accounts receivable,
inventories and transaction income, although it is unclear as to what is
the value of our collateral. Based upon our analysis of all available
information regarding the CCC bankruptcy proceedings, we have established
a reserve in the amount of $18 million against the note and accounts owed
to us by CCC. Depending on the resolution of the bankruptcy proceedings,
we may record additional reserves and we may incur additional significant
charges to earnings in future periods. We intend to continue to monitor
this matter and to take all actions that we determine to be necessary
based upon our monitoring of the situation. The prior actions commenced by
us against CCC were stayed upon CCC's bankruptcy filing. See "Risk
Factors."
The Company and its subsidiaries are each subject to certain litigation
and claims arising in the ordinary course of business. In the opinion of
the management of the Company, the amounts ultimately payable, if any, as
a result of such litigation and claims will not have a material adverse
effect on the Company's consolidated financial position, results of
operations or cash flows.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
4.1 Fifth Amendment to Credit Agreement and Forbearance Agreement
dated June 1, 2001 by and among the Registrant, Tidel
Engineering, L.P. and The Chase Manhattan Bank.
B) REPORTS ON FORM 8-K
The Company filed three reports on Form 8-K under Item 5 - Other Events
dated June 6, 2001, June 14, 2001 and June 28, 2001.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
TIDEL TECHNOLOGIES, INC.
(Registrant)
DATE: August 20, 2001 By: /s/ JAMES T. RASH
--------------------------
James T. Rash
Principal Executive
and Financial Officer
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