STRATEGIC PARTNERS
They say what doesn't kill you makes you stronger. Tidel Technologies will find out if this is true, as they face down today's deadline to make an $18 million payment to two creditors in the wake of a dramatic decline in business linked to the bankruptcy of Credit Card Center.
August 26, 2001
With its revenue and share price plummeting, the collapse of former customer Credit Card Center (CCC) hanging over the company, and with $18 million in debt notes scheduled to be called in today, Tidel Technologies Inc. (NASDAQ:ATMS) is seemingly facing an uphill climb to survive.
The outlook was much brighter one year ago.
Tidel was the fifth-leading manufacturer of ATMs in the world in 2000, according to the Nilson Report, shipping 13,523 units. It ended fiscal year 2000 with net income of $9.2 million, a 212.3 percent increase over the previous year. Its stock value peaked at $12.50 during the year.
Senior Vice President Leonard Carr said the company's management team is confident the company can come back, despite the fact that it may have to write off much of the $27 million it is owed by Credit Card Center, the now-bankrupt ISO that once accounted for more than half its business.
"It's uncertain what we'll recover from the $27 million, but we're working around the clock to repair the company," Carr said. "Our mission now is to put these financial difficulties behind us so we can get to a lot of things we've been working on."
Carr said Tidel managers have been working with Banc of America Securities and other potential creditors to keep the company going in the face of the Aug. 27 deadline set by Montrose Investments Ltd. and Liberty Acorn Trust, who have indicated their intention to exercise their right to collect on $18 million in notes, plus interest.
The recent fallout over CCC's bankruptcy has exposed Tidel's reliance on the ISO, once its biggest customer. Without CCC, Tidel's revenue sagged 75.4 percent during the third quarter of 2001, and the company reported a net loss of $16.4 million after recording net income of $2.8 million in the third quarter of 2000. Tidel wrote off $18 million for losses on receivables in its third quarter report, accounting for the net loss.
At the end of trading on Aug. 23, Tidel stock was at 77 cents, having lost nearly 40 percent of its value since the beginning of trading on Aug. 20.
Ties that bind
The collapse of CCC into bankruptcy proceedings-a sale of its assets was slated to take place Aug. 24 in a bankruptcy court in Philadelphia-was the worst possible news Tidel could receive. Company officials knew Tidel's future was tied to CCC's, judging from Tidel's 2000 annual report, which contained a blunt assessment of the company's future.
"We depend on one major customer and, if we lose that customer, we may be unable to replace it," the report stated.
"One customer, Credit Card Center ("CCC") accounted for 61 percent and 40 percent of our net sales for the years ended September 30, 2000 and 1999, respectively," the report continued. "We expect to depend upon CCC for a significant portion of our net sales in future periods. If CCC fails to place anticipated orders or defers or cancels its orders, we will experience an immediate and severe drop in our sales. We are unable to predict whether sales from CCC will reach or exceed historical levels in any future period. In addition, we may be unable to retain CCC or expand our distribution channels by entering into arrangements with new customers."
Concerned that CCC's bankruptcy and dispersal of assets could foil its attempts to gain restitution, Tidel in May filed suit in courts in Dallas and Philadelphia on charges of fraud and breach of contract.
According to the suit, Tidel offered CCC a $7.5 million line of credit in September of 1999. CCC was supposed to create a lock box - a bank depository used by creditors to funnel customer payments directly into the bank rather than through a central accounting office - at a bank of Tidel's choice for CCC to make direct payments.
But CCC delayed creating the lock box, Tidel claims in the suit, and instead negotiated an interim credit agreement with Tidel in February of 2000, extending its credit line to $10 million. Again CCC delayed in setting up the lock box, according to the suit, and maxxed out its credit line. Tidel further alleges that in order to resolve the debt, it began asking CCC to pay an increased price for its ATMs.
"However, when the price became due (CCC) failed to make complete payments and instead of regularly discharging its debt became erratic in its repayment," the suit contends. "As a consequence, defendants' total debt owed to Tidel increased beyond the agreed credit limit."
Uncommon terms
ATM industry figures say Tidel's relationship with CCC was unusual from the beginning, in May of 1997 when the two first joined forces. In a way, the combination of the two company's goals - Tidel's to become one of the world's leading ATM manufacturers, and CCC's to become the biggest ISO - proved an immolating mix.
Ken Paull, Triton's former vice president of sales and marketing and now executive vice president of sales and marketing for Lynk Systems, said Tidel's willingness to offer such generous credit terms to CCC was unusual.
"The whole relationship between Tidel and CCC is very uncommon, including any lock box activities," Paull said. "(Triton) never had an agreement like that as far as I know.
"If a customer is new you'd wean them in with terms that established payment with delivery and work them up. Eventually, the customer would establish a 30-day credit term. That's fairly standard in this type of industry; you establish a relationship, then you establish credit terms."
At least one other manufacturer took a pass on extending generous credit lines to CCC.
Hansup Kwon, president of Cross Technologies, said his company shipped about 200 units to CCC in late 1998 and early 1999. CCC wanted to expand the relationship and began ordering "enormous amounts," Kwon said. But after making several visits to CCC headquarters in Philadelphia, he decided not to offer the company any more credit.
"Purchase orders are like a drug; they can kill you. I was not willing to get killed," Kwon said.
Making things work
With CCC no longer in the mix, Tidel is trying to solidify its relationships with other distributors in order to grow its business. Since late 2000, the company has become the exclusive or preferred supplier for several ISOs, including Momentum Cash Systems and Cardtronics, both based in Houston, Billings, Mont.-based Western States ATM Systems and Mine Hill, N.J.-based ATM Center.
Carr said the expected boost from these new agreements hasn't been realized as quickly as Tidel would have liked.
"Unfortunately a lot of our expected business from these new agreements hasn't come to pass," he said. "We expect to see improvement in the rest of this year. We have higher expectations for this year."
Tidel alluded to some of the problems in a news release issued with its third-quarter financials. According to the release: "The majority of our customers encountered difficulty in obtaining sufficient levels of lease financing due to the negative reaction to the Credit Card Center matter by principal financiers throughout the industry."
The release continued: "Many customers shifted their focus from sales of ATM equipment to the conversion of lucrative processing contracts with merchants formerly committed to Credit Card Center."
Also, according to the release: "Apprehension as to the ultimate outcome of the highly-publicized matters relating to Credit Card Center and the convertible debentures have caused prospective customers, as well as existing customers, to delay decisions with respect to pending orders."
Tidel may have had to offer steep discounts or other special incentives to win the business of distributors, some in the industry believe.
"The problem's pretty clear - they had too much of their business in one pot with CCC and that spiraled into some other problems," Paull said. "In order to diversify, they had to go out and rebuild distribution channels, which meant making offers to customers that were very price-oriented."
However, Carr said the new relationships provide great value to Tidel. The new distributors who committed to Tidel last fall and in early 2001 agreed to exclusive or near-exclusive arrangements, he said, and those deals are subject to stringent payment policies.
Executive compensation
The boon that Tidel experienced before CCC's financial problems began to intensify allowed Tidel executives to personally capitalize on the company's best year. Tidel's executives and directors received record levels of compensation through salary increases, bonuses and the exercising of stock options in 2000, according to Tidel annual reports and Yahoo! Finance's Web site.
Three of the company's executives - Chairman and Chief Executive Officer James Rash, Chief Operating Officer Mark Levenick, and Executive Vice President of Sales and Marketing Michael Hudson - all received substantially higher compensation packages in 2000 than in previous years.
In the company's 1999 annual report, Rash received $272,292 in salary and bonus, compared to $182,292 each of the previous two years. According to the Yahoo! Finance's Web site, Rash made $421,000 in salary and bonuses in 2000, a 54.6 percent increase over the previous year.
Levenick and Hudson experienced similar increases. Levenick earned $547,000 last year after receiving $335,500 in 1999 and $292,500 and $291,462 in the previous two years, respectively. Hudson, who made $187,038 in 1997, $187,500 in `98, and $261,690 in `99, took home $429,000 in compensation in 2000.
But Carr said the figures were based on the company's sales figures in 2000 and tied to company performance formulas.
Company executives and board members also took advantage of the company's attractive stock price last summer. In an eight-day stretch starting June 13, 2000, Rash sold 250,000 shares in company stock for proceeds of $2,917,839, according to Yahoo! Finance. From June 14-16, 2000, Levenick sold 105,000 shares for $1,246,070.
Another beneficiary of the stock's then-strong price was Director James L. Britton III. On July 12, 2000, he acquired 100,000 shares in the company for $81,500 through the exercise of warrants. Over the next 12 days he sold 133,800 shares for proceeds of $1,556,494.
Had the three sold their shares on Aug. 23, 2001, based on the stock's closing price of 77 cents, they would have earned $192,500 (Rash), $80,850 (Levenick), and $103,026 (Britton III).
According to Carr, none of the executives sold more than 30 percent of their personal holdings. The sale of stock is typical for executives at public companies, he added. Much like outside investors, executives hope to make a profit by selling when stock price rises and buying when it's low.
"In six months, the stock went from $2.80 to $12.50. That's why you own stock," Carr said. "(The executives) had not sold a share in 13 years and had never realized a gain. The stock had not gone above $4 in more than a decade, then it escalated above $12 in six months.
"We thought it was headed to $30."
At the time executives received their compensation packages for 2000 and when lucrative stock sales were made, no one in the company foresaw the problems that were immediately ahead, Carr said.
The end game
Tidel's efforts to devise a successful strategy for near-term survival come to a head Aug. 27, when the Montrose Investments and Liberty Acorn Trust expect their $18 million to be repaid.
Kitt Turner, the attorney representing the Unsecured Creditors in the CCC case, said several scenarios could unfold: Tidel could come up with the funds to make the payment; fail to pay the notes, handing control of the company over to the creditors; or declare bankruptcy itself.
"The question is what does this all mean and what is Tidel going to do. That's a tough question," Turner said. "The one thing we could see is Tidel in Chapter 11. That would be a real mess."
Carr doesn't expect that to happen.
"We're committed to rebuilding this business," he said. "Many of our employees own stock and have seen their net worth drop. We want to see the company recover and go forward for another 20 years.
"We still feel we make the best products in the ATM industry. That's what keeps us getting up in the morning."
Note: Editor Ann All and General Editor Rick Redding contributed to this story.
