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U.S. 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, 1999
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 0-25148
GLOBAL PAYMENT TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2974651
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
20 East Sunrise Highway, Suite 201, Valley Stream, New York 11581
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 516-256-1000
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 requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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]
The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant, based on the average bid and asked prices on
December 21, 1999, was approximately $40,732,800.
As of December 21, 1999, the registrant had a total of 5,624,675 Common
Shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement of the registrant for the year
ended September 30, 1999 are incorporated by reference into Part III of this
report.
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PART I
Item 1. Business
General
Global Payment Technologies, Inc. (the "Company") was originally incorporated in
New York in 1988 under the name Coin Bill Validator, Inc. In March 1997, the
Company's shareholders approved a change of the Company's name and state of
incorporation from New York to Delaware, effected through the merger of the
Company into the Company's wholly-owned subsidiary, Global Payment Technologies,
Inc., a Delaware corporation.
The Company designs and manufactures currency validation systems including paper
currency validators and related paper currency stackers, and sells its products
in the United States and numerous international markets. Validators receive and
authenticate paper currencies in a variety of automated machines, including
gaming and gaming related equipment, beverage and vending machines and retail
equipment that dispense products, services, coinage and other currencies. Note
stackers are sold with most validators and are designed to store validated paper
currency and, in some cases, record and store information on contents, usually
in secure removable cassettes. Although the Company knows of no commercially
available validator that is counterfeit-currency-proof, the Company's validators
and stackers offer significant protection against tampering and counterfeit
currencies and provide tamper-evident storage of validated currency. The
Company's validators are adaptable to a wide variety of original equipment
manufacturer ("OEM") applications and have been engineered into the design of
most major gaming and numerous beverage and vending machines sold worldwide. The
Company's products offer a highly competitive level of performance and are
designed to provide ease of maintenance and repair.
In August 1996, the Company acquired a 50% non-controlling interest in a South
African affiliate, Global Payment Technologies South Africa Pty. Ltd.
("GPT-SA"), which on July 3, 1998, changed its name to Global Payment Technology
Holdings (Proprietary) Limited ("GPTHL"). On May 29, 1998, Hosken Consolidated
Investments ("HCI"), a South African investment company, purchased a one-third
interest in GPT-SA. Terms of the transaction called for HCI to purchase certain
shares from the Company and the Bevin Trust (GPT-SA's founding shareholders), as
well as additional shares directly from GPT-SA, which reduced the Company's
ownership of GPT-SA from 50% to 33%. On November 1, 1999, GPTHL formed
International Payment Systems Pty. Ltd. ("IPS") and assigned its rights to all
of the non-gaming activities, primarily the distribution of Ingenico, De La Rue
and Scan Coin products. The Company currently has a 30% interest in IPS. GPTHL
holds the exclusive distribution rights to the Company's products in the South
African region. Also on November 1, 1999, On-Line Gaming Systems Inc.
("On-Line"), a Florida-based Nasdaq listed company specializing in Internet
wagering and other casino based products, acquired a 23.5% equity interest in
GPTHL through the purchase of shares from the three partners and management. The
ability to distribute On-Lines' products allows GPTHL to broaden its market and
product line. With the closing of this transaction, the Company now has a 23.5%
interest in GPTHL.
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In January 1997, the Company acquired a 50% non-controlling interest in a
China-based affiliate, Hangzhou CBV Plastics Corp. Ltd. This entity manufactures
plastic and metal components, some of which are used by the Company in its
production.
In August 1997, the Company acquired a 50% non-controlling interest in an
Australian affiliate, Global Payment Technologies Australia Pty. Ltd ("GPTA").
This entity is responsible for sales and service of the Company's products in
Australia and New Zealand on an exclusive basis.
In June 1998, the Company formed Global Payment Technologies (Europe) Limited
("GPT-Europe"), which is based in the United Kingdom and is responsible for
sales and service of the Company's products in Europe. GPT-Europe purchased the
assets and assumed the liabilities of Global Payment Technologies (U.K.) Ltd.
("GPT-UK"), the Company's prior independent European distributor, as of February
28, 1998. The Company owns 70% of GPT-Europe, with the remaining 30% owned by
GPT-Europe's operations manager, a former principal of GPT-UK.
On April 7, 1999, the Company acquired a 25% equity interest in Abacus Financial
Management Systems, Ltd. ("Abacus"), a UK-based software company. Abacus has
developed a cash management system, of which the Company's validators are a key
component, primarily intended to serve the retail market. In addition, the
Company and the principal of Abacus have formed Abacus Financial Management,
Inc. USA, which is 80% owned by the Company and has the exclusive right to
distribute Abacus' product in North America.
Background and History
In the 1980s, a general trend developed with respect to an increase in the
incorporation of paper currency validators in a large number of beverage, food
and novelty vending machines that offered primarily low-priced items. During the
1990s, subsequent technological improvements in the sensory capabilities of
validators created the ability to process high volumes of larger denomination
notes, which led to the extensive use of validators in many new applications
including casino gaming machines, lottery ticket dispensing devices and postage,
transportation, parking and high-value vending machines. This trend accelerated
during the 1990s as a result of the realization that currency validators
positively impacted sales revenues and the overall growth in the worldwide
gaming and beverage and vending industries.
Since incorporation, the Company's net sales have grown from approximately
$35,000 in fiscal 1989 to $16.7 million in fiscal 1996, to $23.9 million in
fiscal 1997, to $39.4 million in fiscal 1998, and to $43.9 million in fiscal
1999. Prior to January 1993, the Company's marketing efforts were directed
primarily toward domestic distribution and end-users that focused on the
replacement and retrofit markets for validators in amusement and gaming
machines. Commencing in January 1993, the Company began to focus its marketing
efforts on OEMs of gaming machines and automated vending machines that dispense
beverages, telephone cards and postage stamps. In addition, since January 1993,
the Company has progressively increased its marketing efforts to the
international market for currency validation systems, particularly targeting the
international gaming industry. The Company's international sales amounted to
80%, 84% and 73% of net sales in fiscal 1999, 1998 and 1997, respectively.
Management
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believes the international market for currency validation systems may grow at a
faster rate than in the United States and, therefore, may represent the
Company's best long-term growth opportunity. However, the Company has been able
to increase its presence in the domestic gaming market as a result of increased
domestic activity by certain of the Company's international customers and
through increased sales and support provided by the Company's branch office
located in Las Vegas, Nevada.
Marketing Strategy
The Company has continued to focus its marketing efforts on those segments of
the marketplace which require a relatively high degree of security and
substantial custom design work that is not adequately served by larger
competitors which focus primarily on the broader, higher-volume market using
standardized product configurations. This focus has been effective in the
worldwide gaming market and is the "niche" strategy that allowed the Company to
develop a strong international customer base that originally started with
manufacturers too small to attract the Company's competition. The focus of this
strategy has, and continues to be, the creation of an increasing presence in the
international gaming industry which continues to gain momentum as markets and
customers grow. In 1997, this strategy led to the Company's products being
designed into most of the major OEMs' gaming machines. In 1998, this strategy
led to new customers that opted to use the Company's products based on its
growing strength internationally and its reputation for working closely to adapt
to customers' needs. In 1999, the Company continued to strengthen and grow its
relationships with the OEMs through increased joint marketing and advertising
efforts and by creating databases to allow the OEMs an opportunity to seek new
potential markets worldwide. As a result, the Company is now in the position to
gain additional business based on its acceptance as the currency validation
standard for a number of growing markets worldwide. The establishment of a
strong international presence continues to provide for growth opportunities in
the domestic gaming sector, as this market is viewed as an important target for
expansion by several of the Company's international customers. In 1999, the
Company also began a seminar program that provided certain key customers and
their personnel with an in-depth orientation of the Company and its operations.
In 1998, the Company expanded its marketing efforts to include the end-users
(i.e., casino operators) who purchase machines from the OEMs to help ensure that
the Company's validator products will be specified as the product of choice in
new orders. The Company also focused on creating business in the retrofit market
for certain important gaming venues such as Nevada, where gaining market
presence would provide improved visibility and credibility in the domestic
market. The expected results of improved recognition were achieved in 1998. In
1999, this strategy of working with the end-users was expanded to include more
direct operator technical training and participation in seminars with the
Company's OEM customers. By marketing directly to the end-users in conjunction
with the OEMs, the Company expects its products will gain acceptance as its
customers' gaming machines gain entry into major casinos or regions previously
dominated by currency validators of the Company's competition. During 1999, the
Company began to develop programs and plans to allow for improved education of
its customers. Such programs and plans will include the development of formally
documented maintenance schedules and similar programs to be proposed to
customers during 2000. These maintenance programs will likely be offered in
coordination with the Company's OEM customers, and are
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intended to broaden awareness of the Company and its products within the gaming
industry. Additionally, the Company will be focusing increased marketing efforts
on explaining the technical features and customer support programs of current
and future products in order to further differentiate itself from the
competition. As a specific example, the Company will have an excellent
opportunity in the domestic market to interface and train its end-users when the
new $5 and $10 notes are released, which is expected in May 2000. The Company
and its OEM customers will work together at the casino technical and management
levels during this upgrade process, which should generate increased goodwill and
understanding of the Company and its commitment to service. This overall
strategy allows the Company's products to continue to demonstrate the high
performance and quality achieved in a number of worldwide markets.
The Company's strategy in the large worldwide beverage and vending industry has
been, and will continue to be, the same "niche" effort that has been successful
in the gaming marketplace. In 1998 and 1999, the Company continued to focus its
efforts on creating relationships with the major OEMs and end-user customers in
certain emerging international markets. By working with both the OEMs and
end-users to adapt its products to meet their needs, the Company is beginning to
create a growing presence in the beverage and vending market with its current
product lines. This flexibility to adapt its products to meet customers' needs
led to a successful product launch in Russia during 1998 and has allowed the
Company to establish new sales in Europe with major vending operators. In 2000,
this strategy will continue to be used to develop particular areas such as the
emerging markets in Eastern Europe and the Pacific Rim. Management believes this
strategy will assist in providing the Company with increased visibility and
credibility in the overall beverage and vending industry. The Company has
recognized the need to develop a product that can more effectively compete in
terms of price and features with other manufacturers' validators in these
industries and has placed a high priority on this product development effort.
The Company expects to begin field trials during the fourth calendar quarter of
2000. Also in 2000, in an effort to gain momentum in the worldwide vending
market for the planned new product release, the Company is modifying its current
Generation II product planned to be more price competitive, primarily in the
international vending marketplace. This effort is expected to provide the
Company with additional market penetration and sales revenues in the
international vending market during fiscal 2000.
The Company's revenue growth is due primarily to its focus on the customer as
well as on the development of products that utilize features that add value to
its customers in the gaming and beverage and vending industries. This strategy
will be further expanded with the anticipated release and trials of three new
products beginning with the second calendar quarter of 2000. The Company will
strive to raise the level of currency acceptance and counterfeit rejection of
its validators to new standards, in addition to expanding the functions of the
validator to handle the processing of payments or transactions through a variety
of media, both paper and electronically based. During 2000, the Company will
also strive to expand its product base through its worldwide joint venture
partners and strategic alliances with other companies that offer technologies
that are synergistic to its currency validation products. Management expects to
build upon the strengths and skills developed by the Company's joint venture
partners in areas such as electronic funds transfer point-of-sale (EFTPOS)
hardware and software development.
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Through the creation of integrated payment solutions for its customers, the
Company will continue to provide value-added products and services.
The Company's overall sales and marketing strategy in both the worldwide gaming
and beverage and vending markets is to deliver a high quality product supported
by a local sales and service organization in order to make the Company's
products the market standard for currency validation products. The Company has
successfully pursued this strategy in Australia and South Africa where the
Company's products are accepted as the industry standard in the gaming market.
Also toward this end, during fiscal 1996 and fiscal 1997, the Company
established joint ventures that provide local sales and service in both
Australia and South Africa and strengthened its distributor relationship in
Italy. In addition, during fiscal 1998 the Company formed GPT-Europe to provide
local sales and service in Europe. During 1999, the Company expanded its local
sales and service network in Southeast Asia, as it signed a three-year
distribution agreement with RGB Ltd., a Malaysian company ("RGB"). RGB has been
a customer of the Company for several years and, through its organization and
many contacts in the region, this alliance should strengthen the Company's
reputation in this region and provide new sales opportunities. The Company
expects to continue to expand its international sales and service capabilities
throughout 2000.
To date, the Company's success has been dependent upon the use of paper or
simulated paper currency in automated payment systems for gaming and beverage
and vending applications. A substantial diminution of the use of paper currency
as a means of payment through a return to extensive use of high-value,
metal-based coinage or the widespread adoption of electronic funds transfer
systems based on credit, debit or "smart-cards" could materially and adversely
affect the Company's future growth until and unless the Company develops other
products that are not solely dependent on the use of paper or simulated paper
currency. The Company believes that aspects of its technology and manufacturing
expertise - for example, the technology applicable to electro-optical scanning
and certain of its patented technologies and proprietary algorithms, may be
applicable to products and systems for conducting transactions using forms of
currency other than paper. The Company is currently investigating, and will
continue to investigate, such opportunities and endeavor to develop new product
applications where markets for such products may exist. However, no assurance
can be given that the Company will be able to successfully develop and market
such new products and systems.
Products
Since inception, the Company has endeavored, through its research and
development and manufacturing efforts, to provide products that meet the
specific performance requirements of its customers. These requirements are
continually evolving as the markets for currency validators continue to grow and
as technological advances are incorporated into the products' design. The
Company spent approximately $300,000, $350,000 and $245,000 during fiscal 1999,
1998 and fiscal 1997, respectively, on research and development. The Company's
research and development consists primarily of efforts to expand its product
lines into new applications and markets. The Company's new product development
efforts are focused on the design of its next generation of validator products,
the first of which will be the Generation III IDS. The Company anticipates
beginning field trials in the second calendar quarter of 2000
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with commercial availability in the third calendar quarter of 2000. Late in
calendar 2000, the Company plans to introduce a new product designed
specifically to address the requirements of the beverage and vending
marketplace. This product is expected to be commercially available in early 2001
and is intended to enable the Company to increase its overall market penetration
and share of validator sales to the international beverage and vending
marketplace. Building from its engineering libraries, the Company anticipates
the introduction of a third new product in early 2001 that will provide the
Company additional flexibility in meeting its customers' needs in both the
domestic and international gaming markets.
The Company's principal products include three basic validator models and a wide
range of comprehensive currency databases and note stacker configurations. In
fiscal 1997, the Company planned for a shift in demand toward its Generation II
product line and such sales amounted to 58% of unit sales. During fiscal 1998
and 1999, this shift continued and Generation II product line sales accounted
for 72% and 79%, respectively of unit sales. The Generation III IDS product has
been designed to be a drop-in replacement for Generation II IDS and is focused
toward bringing new technological features to the marketplace. Once the
Generation III product line is commercially available, the Company expects sales
to shift from its Generation II product line. The Company believes it has
adequately reserved for inventory obsolescence for the shift in demand from its
Generation I products to its Generation II products and will continually assess
the adequacy of inventory reserves for the anticipated shift in demand towards
its Generation III products.
The Model 125 ("M-125") is the Company's first generation multi-country,
multi-denominational validator model specifically designed for the beverage and
vending industries where its space-saving upstack design makes it popular for
use in machines where space is at a premium. The M-125's note stackers are fully
detachable and available with capacities of 150, 300 and 600 notes. During
fiscal 1998 and 1999, M-125 sales were primarily in vending applications in
Italy, helping to grow the Company's presence and credibility in that important
European market. It is expected that this product will begin to be replaced in
fiscal 2001 by a new beverage and vending product currently under development.
The Model 150 ("M-150") is the Company's first generation multi-country,
multi-denominational validator designed to fit machines where space is available
either to the rear or downward. The M-150 is available with locking removable
cassette bill stackers in 500, 1,000 and 2,000 bill capacities and is United
States Postal Service, Department of Gaming Enforcement ("DGE") and Gaming
Laboratories, Inc. ("GLI") approved. Due to the growth and acceptance of the
Generation II product line, the M-150 product has been substantially reduced in
1999 and is expected to be completely phased out by early 2001.
The Company's Generation II product line features several technological advances
designed specifically to meet the exacting requirements of the gaming industry.
The Generation II line includes the Company's "IDS," "IDUS," "IBS," and "IBSi"
validators. The IBSi has been positioned as a replacement for the Company's
first generation M-150 validator. Generation II products have been approved by
DGE and GLI, as well as by a number of U.S. and international test labs.
8
Generation II validators are offered in a wide variety of configurations that
can provide solutions for most worldwide gaming markets, as well as for many
beverage and vending markets. Generation II validators can be configured for
down-stack applications which allow the note stacker, a security removable
cassette, to be reached through a separate front entrance in the gaming machine.
Rear stacker configurations are also available. The front section of all
Generation II validator units can be opened easily to allow for maintenance,
repair or clearance of the currency pathway without violating the integrity of
the associated security stacker. Generation II validators offer currency
acceptance of notes up to 3.34 inches (85 mm) in width and have enhanced
features for gaming and high security applications. These features include a
multi-level high security validation process with side-looking sensors, an
animated bill runway with "smart visuals" for customer attraction and
diagnostics, a user-selectable currency denomination acceptance and an optional
bar-code reader for tickets and coupons. The Generation II line also offers a
"soft drop analyzer" ("SDA") option. This patented SDA feature allows the note
stacker cassette to maintain and track specific information such as currency or
coupons in the cassette by quantity and denomination; the specific machine or
game that the cassette was removed from; the acceptance rate of the validator;
and time-in/time-out of the cassette from the gaming machine. This information
can be easily downloaded, via a docking station provided by the Company, to a
personal computer allowing instant feedback/tracking for the machine operator.
Product Performance and Warranties
The Company's validator and note stacker products are generally covered by a
one-year warranty against defects in materials or workmanship, which the Company
believes is standard for the industry. The Company or its authorized service
agents will repair or replace any units which require warranty service. The
Company does not warrant that its validators will reject all counterfeit
currencies and believes that there is no commercially available validator that
is counterfeit-currency-proof or warranteed as such. To support its increasing
international market presence, the Company has expanded its warranty and
non-warranty support coverage to provide in-country capability in key worldwide
markets (e.g. Australia, South Africa, Europe and Southeast Asia). In these
markets, the local sales and service joint venture partners provide warranty
labor while the Company's primary product support in these markets is in the
form of warranty parts. The Company expects to expand its international service
capabilities during 2000. Over the last three years, the Company has experienced
an increase in its cost of warranting its products. Warranty expense for 1999,
1998 and 1997 was $490,000, $175,000 and $130,000, respectively, which
represents actual costs incurred and an estimate of future costs to be incurred.
The increase in 1999 was the result of increased unit sales of the Company's
products, changes in design to comply with regulatory requirements and
additional costs to maintain its various components.
Marketing and Sales
An "in-house" sales force consisting of sales representatives, sales/product
technicians and customer service support personnel conducts the Company's
primary sales and marketing efforts in both the domestic and international
markets. During the latter part of fiscal 1996 and during fiscal 1997, the
Company established joint ventures providing local sales and service in
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the key markets of South Africa and Australia and a Company-owned sales and
service office was opened in the important Las Vegas, Nevada market. During
fiscal 1998, the Company formed GPT-Europe, a 70%-owned entity, to provide local
sales and service in Europe and acquired the assets and liabilities of its
former independent European distributor. During 1999, the Company expanded its
local sales and service capabilities in Southeast Asia as it signed a three-year
distribution agreement with RGB Ltd., a Malaysian company. The overall sales and
service network provides effective international coverage for the Company's
products and customers and is an indication of the Company's commitment to
providing superior service worldwide.
During fiscal 1998 and 1999, the Company expanded its "Technical Services" and
"Customer Service" groups, which were formed in 1997 and allowed the Company to
become more customer focused. During fiscal 2000, the Company anticipates
further expansion of the sales and marketing structure to support additional
sales opportunities worldwide. This expansion will include adding key personnel
to its corporate and Las Vegas offices to focus on new sales opportunities and
to provide superior technical support and customer service to OEMs and end-users
worldwide. This will allow senior management to focus on developing
opportunities embracing new technologies that will provide products and
partnerships for the future.
Customer Concentration
During fiscal 1999, the Company's largest customer, GPTA, accounted for
approximately 59% of net sales. In addition, a significant portion of GPTA's
sales is to Aristocrat Leisure Industries Pty Ltd. Net sales to the gaming
industry accounted for approximately 87% of the Company's revenues, with the
remaining 13% primarily from product applications in the beverage and vending
industry. The Company anticipates a further reduction of its dependence on its
largest customer and the gaming industry by expanding its customer base and by
the introduction of its next generation of validation products for the beverage
and vending marketplace.
Manufacturing
Since 1995, the Company's operations have been conducted from a leased facility
of 40,000 square feet, which houses the manufacturing and administrative
functions in Hauppauge, New York. During fiscal 1997, due to the need for
increased production space to meet ongoing and anticipated future sales growth,
the Company leased an additional 5,000 square feet of space located adjacent to
the existing Hauppauge facility.
The Company's manufacturing operations consist primarily of mechanical and
electro-optical assembly and the provision of wiring harnesses between
components and between the validator and the OEM machine in which the finished
product is to be used. The Company routinely tests all components and has
extensive "burn-in" procedures for the final assembled product. Direct control
over fabrication and testing permits the Company to shorten its production cycle
and protect patented and proprietary technology. During fiscal 1998 the Company
significantly improved its overall manufacturing productivity, as measured by a
production capacity increase of approximately 48% without adding a production
shift. This was achieved by a combination
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of increased staff as well as improved manufacturing efficiencies. In fiscal
1999 the Company achieved additional manufacturing productivity improvements,
which enabled the Company to achieve a 26% unit sales increase to its
approximately 98,000 validators. During fiscal 1999, the Company began to plan
its transition to demand flow technology ("DFT") in a portion of its
manufacturing. It is anticipated that DFT, when fully implemented in fiscal
2000, will enable the Company to reduce its inventory, reduce total product
cycle time, and most importantly, increase its flexibility in responding to
customer orders.
The Company depends on a limited number of suppliers for various stamped or
formed housings, gears, cogs and wheels and electronic assemblies or components,
including certain microprocessor chips. The Company believes that concentrating
its purchases from its existing suppliers provides, in certain cases, better
prices, better quality and consistency and more reliable deliveries. The Company
maintains on-going communications with its suppliers to prevent interruptions in
supply and, to date, generally has been able to obtain adequate supplies in a
timely manner. The Company has entered into volume blanket purchase agreements
with selected suppliers to guard against shortages of unique components, thereby
limiting the Company's exposure to business interruptions. Furthermore, many of
the electronic components used by the Company, including its microprocessors,
are widely used in many applications and are available from a number of sources.
However, the short wavelength light source that forms a critical part of the
Company's optical scanning device is now commercially available from only a very
limited number of suppliers. The Company believes that if such supply were to
become unavailable, its units could be redesigned to use other light sources and
still remain competitive in the marketplace. However, any interruption in the
supply of key components which cannot be quickly remedied could have a
materially adverse effect on the Company's results of operations.
Competition
The market for the Company's products is very competitive and the number of
competitors and their product offerings have increased due to the growing
worldwide marketplace. A number of competitors have significantly greater
financial, technical, sales and marketing resources than the Company.
Additionally, certain of these companies have acquired competitors with
synergistic product lines in an effort to offer a more complete product line. In
1998, Coin Controls Limited ("Coin Controls") acquired Ardac, Inc. ("Ardac"), a
domestic currency validator manufacturer. Coin Controls had primarily focused on
the validation of coins worldwide for the gaming and amusement industries. With
the acquisition of Ardac, Coin Controls changed its name to Money Controls PLC
("MCP") and the two companies together had the ability to package its coin
mechanism with a currency validator for both the gaming and beverage and vending
industries. In November 1999 MCP announced its agreement to be acquired by Coin
Acceptors, Inc. ("Coinco"), a St. Louis based supplier of primarily vending
products. This now provides the Company with a competitor that has a strong
integrated gaming and beverage and vending product line, as well as strong
relationships in both industries. A similar competitive concept has been in
place with Mars Electronics International ("MEI"), an entity that has products
able to serve both the gaming and the beverage and vending marketplace.
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In the domestic market, certain competitors are divisions or affiliates of
manufacturers of vending machines. For example, Royal Vendors, Inc. is an
affiliate of Coinco. Accordingly, such validator manufacturers enjoy a
competitive advantage in providing for the significant validator requirements of
their affiliates. For validators sold for use in the beverage, food, snack and
lower-priced goods or amusement markets, Coinco dominates the domestic market.
MEI, Ardac, Japan Cash Machines Co., Ltd. ("JCM"), Sanyo, Conlux, Coegis and
Cashcode Company, Inc. are recognized competitors in the growing international
beverage and vending market.
The largest supplier of validators used in the domestic gaming and lottery
markets is JCM. Internationally, the Company competes for gaming machine
business with JCM, MEI and Ardac. In the secondary low-value gaming markets,
Innovative Technology, Ltd. maintains a significant market share due to its
low-cost approach to this market. The Company has focused its marketing efforts
on the higher-priced domestic and international gaming validator business and
competes on the basis of quality, durability and performance while maintaining a
high level of protection against tampering and counterfeit currencies, as well
as a competitive price point.
The Company historically has been more willing to address smaller markets than
its larger competitors and expects to encounter increased competition as the
markets addressed by its products continue to grow. Also, the Company has been
willing to adapt its products to a variety of OEMs, which has allowed it to be
flexible to expand when new markets open up to sales. The Company believes that
performance, quality and protection against tampering and counterfeit currency
are relatively more important, and price relatively less important, as
competitive factors in the worldwide gaming marketplace.
Intellectual Property
The Company relies on certain proprietary know-how and trade secrets to protect
its technology. Important components of this proprietary information are the
Company's library of distinguishing characteristics of the currencies, which its
validators scan and validate, and its proprietary algorithms. The Company has
entered into non-disclosure and secrecy agreements with all of its employees
having access to this technology.
The Company holds nine U.S. patents as follows: design for "Escrow Box for Coin
Operated Machines," U.S. Patent No. 0283518 issued April 22, 1986; "Paper
Currency Acceptor and Method of Handling Paper Currency for Vending Machines and
the Like," U.S. Patent No. 4884671 issued December 5, 1989; "Anti-fraud Currency
Acceptor," U.S. Patent No. 5259490 issued November 9, 1993; "Bill Accumulating
and Stacking Device," U.S. Patent No. 5322275 issued June 21, 1994; "Mechanism
for Insuring Alignment of Currency in Currency Validators," U.S. Patent No.
5527031 issued June 18, 1996 (expiring in April 2000); "Soft Count Tracking
System," U.S. Patent No. 5630755 issued May 20, 1997; "Paper Currency Validator
(Side-Looking Sensors)," U.S. Patent No. 5806649 issued September 15, 1998;
"Electrical Switch Connectors," U.S. Patent No. 5842879 issued December 1, 1998
and "Stacker Mechanism for Stacking Bank Notes" U.S. Patent No. 5899452 issued
May 4, 1999. Certain patents cover technology used in the Company's first and
second generation validator product lines and the remaining patents cover
technology used in certain special models. The
12
Company has also applied for two additional U.S. patents, the most important of
which covers the use of short wave-length light in a validator to discern the
color and other characteristics of bills being scanned. In addition, on
September 30, 1999 the Company filed a reissue application with the U.S. Patent
and Trademark Office to amend and broaden the claims of U.S. Patent No. 5630755.
In addition to its U.S. patents and pending applications, the Company has also
applied for patent protection in a large number of international markets. If
corresponding foreign patents are obtained, the Company believes that these
patents could provide important protection for certain technological advantages
its validators possess in international markets. However, the Company does not
believe that it will be materially and adversely affected if these patents are
not issued. No assurances can be given that any patent applications will result
in the issuance of additional patents. In December 1999, the Company received
its first international patent issued by the Eurasian Patent Convention covering
the use of short wave-length light in a validator to discern the color and other
characteristics of bills being scanned.
The Company licensed certain patented proprietary technology covered by U.S.
Patent No. 5630755 to Ardac, Inc. in 1999. Such license settled a patent
infringement suit initiated by the Company and provides for the payment of
license fees based on unit sales of certain of Ardac's products.
Although the Company has not received any claims asserting infringement of the
proprietary rights of third parties, there can be no assurances that third
parties will not assert such claims against the Company in the future or that
any such assertion may not require the Company to enter into royalty
arrangements or result in protracted or costly litigation.
Government Regulation
As a supplier of paper currency validators to customers subject to gaming
regulations and postal regulations, the Company is indirectly subject to such
regulations that are reflected in customer purchase orders or customer
specifications. The Company believes that it is in full compliance with such
regulations. Any failure to comply with such regulations, however, could have a
materially adverse effect on the results of operations of the Company.
Employees
On December 20, 1999, the Company had 222 employees, including 7 executives; 22
sales, technical support and customer service representatives; 41 engineers and
software developers; 35 materials, quality control and quality assurance
personnel; 25 administrative and clerical personnel; and 92
assembly/manufacturing personnel. The Company believes its relationship with its
employees is good.
13
Special Note Regarding Forward-Looking Statements
A number of statements contained in this report are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 that
involve risks and uncertainties that could cause actual results to differ
materially from those expressed or implied in the applicable statements. These
risks and uncertainties include, but are not limited to: the Company's
dependence on the paper currency validator market and its potential
vulnerability to technological obsolescence; the risks that its current and
future products may contain errors or defects that would be difficult and costly
to detect and correct; potential manufacturing difficulties; possible risks of
product inventory obsolescence; potential shortages of key parts and/or raw
materials; potential difficulties in managing growth; dependence on key
personnel; the Company's dependence on a limited base of customers for a
significant portion of sales; the Company's and its customers' and vendors'
readiness for year 2000 compliance; the possible impact of competitive products
and pricing; uncertainties with respect to the Company's business strategy;
general economic conditions in the domestic and international market in which
the Company operates; and other risks described in the Company's Securities and
Exchange Commission filings.
Item 2. Properties
The Company leases approximately 45,000 square feet which houses the
manufacturing and administrative functions in Hauppauge, New York, for a term
expiring March 31, 2000, at an annual base rental of approximately $299,000 in
fiscal 1999, increasing to approximately $306,000 in the final year of the term.
The Company believes this facility is adequate for its manufacturing needs for
the foreseeable future and is currently in negotiations to extend the lease
term. The Company leases approximately 6,600 square feet in Valley Stream, New
York, for a term expiring February 28, 2002, at an annual base rental of
approximately $154,000 in fiscal 1999, increasing annually to approximately
$170,000 in the final year of the term. This facility houses the executive,
accounting and certain sales functions of the Company. The Company also leases
approximately 3,600 square feet in Las Vegas, Nevada, for a term expiring
January 31, 2004, at an annual base rental of approximately $45,000 increasing
annually to approximately $50,000 in the final year of the term. This facility
houses certain sales and service functions of the Company.
Item 3. Legal Proceedings
There are no material legal proceedings pending against the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
a) Market Information
The Company's Common Stock is listed and trades on the NASDAQ National Market
System under the symbol GPTX. The following table sets forth, on a per share
basis, the high and low sale prices for the Company's Common Stock for each
quarter of fiscal 1998 and 1999.
Common Stock
------------------------
Quarter Ended High Low
------------- ------ ------
December 31, 1997 11 7/8 8
March 31, 1998 15 1/2 8 1/4
June 30, 1998 14 7/8 7 1/4
September 30, 1998 11 5/8 4 1/2
December 31, 1998 8 7/8 5 5/8
March 31, 1999 12 11/16 7 3/8
June 30, 1999 15 3/4 7 1/4
September 30, 1999 9 3/8 7 5/8
b) Holders
The approximate number of beneficial holders and holders of record of the
Company's Common Stock as of December 21, 1999, were 1,548 and 53, respectively.
c) Dividends
The holders of Common Stock are entitled to receive such dividends as may be
declared by the Company's Board of Directors. The Company has not declared or
paid any cash dividends and does not expect to declare or pay any cash dividends
in the foreseeable future.
15
Item 6. Selected Financial Data
FINANCIAL HIGHLIGHTS
(In thousands, except earnings per share)
- --------------------------------------------------------------------------------------
Year Ended September 30 1995(2) 1996 1997 1998 1999
- --------------------------------------------------------------------------------------
Net Sales $14,125 $16,693 $23,868 $39,388 $43,896
Net income 1,166 272 1,475 3,356(3) 3,962
Diluted earnings per share (1) .23 .05 .25 .56 .68
Total assets 10,562 10,903 14,154 22,583 26,204
Long term debt obligations -- -- -- -- 4,994
Stockholders' equity 8,647 8,919 10,417 13,087 17,038
(1) Diluted earnings per share have been adjusted to give a retroactive effect
to a two-for-one stock split, in the form of a stock dividend, distributed
on September 4, 1997.
(2) Gives pro forma effect in 1995 to full-year "C" corporation income taxes.
Prior to the public offering in 1995, the Company was taxed as a subchapter
"S" corporation.
(3) Includes an after-tax gain of $225,000 from the sale of a one-third
interest in the Company's unconsolidated South African affiliate.
QUARTERLY INFORMATION
(In thousands, except earnings per share)
Quarter Ended
- --------------------------------------------------------------------------------
Dec. 31 Mar. 31 June 30 Sept. 30 Year
- --------------------------------------------------------------------------------
Fiscal 1998
Net sales $ 7,686 $10,167 $10,528 $11,007 $39,388
Gross profit 3,301 4,277 4,442 4,355 16,375
Net income 583 794 1,069(1) 910 3,356
Diluted earnings per share 0.10 0.13 0.18 0.15 0.56
- --------------------------------------------------------------------------------
Fiscal 1999
Net sales $12,302 $13,189 $13,251 $ 5,154 $43,896
Gross profit 4,852 5,269 5,273 1,842 17,236
Net income 1,136 1,290 1,249 287 3,962
Diluted earnings per share 0.20 0.22 0.21 0.05 0.68
(1) Includes an after-tax gain of $225,000 from the sale of a one-third
interest in the Company's unconsolidated South African affiliate.
16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Fiscal year ended September 30, 1999 compared with September 30, 1998
Sales
Net sales for fiscal 1999 increased by 11.4% to $43.896 million as compared with
$39.388 million in fiscal 1998. The sales growth in fiscal 1999 is attributable
to increased demand for the Company's bill validator products primarily in the
international gaming industry, and specifically in Australia. Increased sales in
Australia and to the domestic gaming industry amounted to approximately $7.1
million and $1.2 million, respectively. These increases were partially offset by
a decrease of approximately $1.7 million in sales to the Russian beverage and
vending market resulting from a decline in the economic conditions of that
country, as well as a decrease of approximately $1.6 million in sales to Europe.
Accordingly, gaming sales increased 20% to $39.585 million and beverage and
vending sales decreased 33% to $4.311 million. Net sales to international
customers accounted for 80.4% and 83.9% of net sales in fiscal 1999 and 1998,
respectively.
Gross Profit
Gross profit increased to $17.236 million, or 39.3% of net sales, in fiscal 1999
as compared with $16.375 million, or 41.6% of net sales, in the prior-year
period. The decrease in gross profit as a percentage of sales was primarily the
result of a change in the Company's distribution method that began during the
fourth quarter of fiscal 1998. At that time the Company began to sell directly
to its Australian and South African affiliates which subsequently sell the
Company's products into those respective markets. As a result of this change,
1999 results reflect lower sales and gross profit, and a commensurate reduction
in sales commissions within its operating expenses.
Operating Expenses
Operating expenses in fiscal 1999 decreased to $10.306 million, or 23.5% of net
sales, as compared with $10.983 million, or 27.9% of net sales, in fiscal 1998.
Primarily as a result of the shift in distribution method noted above,
commission expense decreased from $2.738 million in 1998 to $556,000 in 1999.
Excluding the effect of these commissions, operating expenses as a percentage of
net sales were 22.2% in 1999 as compared with 20.9% in 1998. This increase, as a
percentage of net sales, in 1999 is principally the result of increased staffing
and related payroll costs, primarily added during 1998, to support the
anticipated sales growth in 1999 and beyond, as well as higher warranty costs to
support the Company's product. Such increase in warranty costs is primarily
attributable to increased unit sales of the Company's products, changes in
design to comply with regulatory requirements and additional costs to maintain
its various components. Additionally, the Company's decline in fourth quarter
sales caused operating expenses, as a percentage of net sales, to increase for
both the fourth quarter and full year.
17
Net Income
For fiscal 1999, the Company's net income was $3.962 million, or $0.68 per
share, as compared with $3.356 million, or $0.56 per share, for fiscal 1998.
During fiscal 1998, the Company recognized an after-tax gain of $225,000, or
$.04 per share, which was the result of the sale of a portion of the Company's
equity interest in its South African affiliate ("GPT-SA"). The Company owns a
one-third interest in GPT-SA (as of September 30, 1999), 50% non-controlling
interests in a local sales and service organization in Australia and a
manufacturing firm in China, as well as a 25% non-controlling interest in a
UK-based software company, all of which are accounted for using the equity
method. Included in the results of operations for fiscal 1999 and 1998 are the
Company's share of losses (net of profits) of these affiliates of $678,000 and
$215,000, respectively. Equity in income of unconsolidated affiliates has been
reduced by approximately $1,125,000 and $400,000 in fiscal 1999 and 1998,
respectively, which represents the gross profit on the Company's sales to its
affiliates, where such sales had not then been recognized by the affiliates. In
addition, the Company owns 70% of GPT-Europe Limited, a local sales and service
organization in Europe, whose results are consolidated in the Company's
financial statements. With the establishment of a Foreign Sales Corporation and
the continuation of the Company's international sales strength, the Company has
reduced its effective tax rate to 32.0% in fiscal 1999 as compared with 39.0% in
fiscal 1998.
Fiscal year ended September 30, 1998 compared with September 30, 1997
Sales
Net sales for fiscal 1998 increased by 65.0% to $39.388 million as compared with
$23.868 million in fiscal 1997. The sales growth in fiscal 1998 is attributable
to increased demand for the Company's bill validator products primarily in the
international gaming industry. Although sales to the international beverage and
vending market represent a relatively small percentage of the Company's overall
sales, such sales increased 82.6% to $6.413 million in 1998. The revenue growth
is the result of the Company broadening its customer base, and accordingly,
sales to the Company's largest customer, as a percentage of net sales, decreased
to 45.7% of net sales in 1998 from 54.0% of net sales in 1997. Net sales to
international customers accounted for 83.9% and 72.8% of net sales in fiscal
1998 and 1997, respectively.
Gross Profit
Gross profit increased to $16.375 million, or 41.6% of net sales, in fiscal 1998
as compared with $8.986 million, or 37.6% of net sales, in the prior year
period. The increase in gross profit as a percentage of net sales was primarily
attributable to increased operating efficiencies due to longer production runs
and reduced product costs resulting from volume purchase arrangements. During
the fourth quarter of fiscal 1998, the Company initiated selling directly to its
Australian affiliate which subsequently sells the Company's products into the
Australian and New Zealand markets. This distribution method will be utilized by
the Company's South African affiliate commencing in fiscal 1999. Under the prior
method, the Company sold directly to the customer, recognizing additional
revenues and the related commission expense. As a result of this change, the
Company expects future operating results to reflect lower gross profit from
these sales and a commensurate reduction in sales commissions within its
operating expenses.
18
Operating Expenses
Operating expenses in fiscal 1998 increased by 72.2% to $10.983 million, or
27.9% of net sales, as compared with $6.378 million, or 26.7% of net sales, in
fiscal 1997. The primary reason for the increase in operating expenses was due
to increased sales commissions expense in fiscal 1998 of $2.738 million as
compared with $300,000 in fiscal 1997. These commissions were paid to
distributors of the Company's products, including certain affiliates providing
in-country sales and service in Australia, South Africa and Europe. As noted
above, the Company expects a significant reduction in sales commissions in
fiscal 1999 on sales to Australia and South Africa as a result of the shift in
distribution method. Excluding the effect of these commissions, operating
expenses as a percentage of net sales were 20.9% in 1998 as compared with 25.5%
in 1997. In addition to the increased sales commissions, the Company incurred
increased staffing and related payroll costs necessary to support the sales
growth in fiscal 1998 as well as to support the Company's growth strategy in
fiscal 1999 and beyond.
Net Income
For fiscal 1998, the Company's net income was $3.356 million, or $0.56 per
share, as compared with $1.475 million, or $0.25 per share for fiscal 1997. (Net
income per share figures give retroactive effect in both periods to a
two-for-one stock split, in the form of a stock dividend, distributed on
September 4, 1997.) During fiscal 1998, the Company recognized an after-tax gain
of $225,000, or $0.04 per share, which was the result of the sale of a portion
of the Company's equity interest in its South African affiliate ("GPT-SA"). The
Company now owns a one-third interest in GPT-SA and 50% non-controlling
interests in a local sales and service organization in Australia and a
manufacturing firm in China, all of which are accounted for using the equity
method. Included in the results of operations for fiscal 1998 and 1997 are the
Company's share of losses (net of profits) of these affiliates of $215,000 and
$71,000, respectively. In fiscal 1998, equity in income of unconsolidated
affiliates has been reduced by approximately $400,000, which represents the
gross profit on the Company's sales to its affiliates, where such sales had not
then been recognized by the affiliates. In addition, the Company owns 70% of
GPT-Europe Limited, a local sales and service organization in Europe, whose
results are consolidated in the Company's financial statements.
Liquidity and Capital Resources
The Company's capital requirements consist primarily of those necessary to
continue to expand and improve product development and manufacturing
capabilities, sales and marketing operations, investments in affiliates and, to
a lesser degree, interest payments on the Company's indebtedness. The Company
believes that its available resources, including its credit facilities, should
be sufficient to meet its obligations as they become due and permit continuation
of its planned product development and expansion throughout fiscal 2000 and
beyond.
At September 30, 1998, the Company maintained two borrowing facilities with The
Chase Manhattan Bank. These facilities consisted of a $5,000,000 unsecured line
of credit to be used for short-term working capital needs and a $3,500,000
unsecured line of credit to be used to repurchase up to 500,000 shares of the
Company's common stock. Both of these lines bore interest at a rate equal to the
bank's prime rate or LIBOR plus 175 basis points per annum.
19
Outstanding borrowings and interest rates under these facilities at September
30, 1998 were $3,050,000 and 8.25%, and $1,047,000 and 7.25%, respectively.
These notes had an original maturity date of March 31, 1999, however, the
maturity was extended until July 1999 when the Company entered into the
long-term credit agreement discussed below.
On July 15, 1999, the Company entered into a $10 million long-term credit
agreement with The Chase Manhattan Bank which is comprised of a $4,000,000
five-year term loan, payable in equal monthly installments with a fixed interest
rate of 7.66% per annum and a $6,000,000 unsecured revolving line of credit
("RLC"). The term of the RLC is three years and outstanding borrowings bear
interest at the bank's prime rate, or at the Company's option, for borrowings
greater than $500,000, LIBOR plus a range of 125 to 200 basis points. The
precise borrowing rate is determined by the Company's financial performance
under certain covenants with which it was in compliance at September 30, 1999.
Simultaneous with the signing of the new credit agreement, the Company repaid
all of its then outstanding bank debt and terminated its existing credit
facilities. As of September 30, 1999, outstanding borrowings under five-year
term loan and the RLC were $3,800,000 and $1,994,000, respectively.
Net cash used in operating activities amounted to $1.037 million in fiscal 1999.
Net income, adjusted for noncash items, was $5.561 million in fiscal 1999. This
amount was reduced by an increase in accounts receivable of $4.472 million, a
decrease in accrued expenses and other current liabilities of $1.134 million, a
decrease in accounts payable of $517,000, a decrease in income taxes payable of
$376,000, and an increase in prepaid expenses and other assets of $111,000. Net
cash used in operating activities amounted to $3.857 million in fiscal 1998. Net
income, adjusted for noncash items, was $3.977 million in fiscal 1998. This
amount was augmented by an increase in accrued expenses and other current
liabilities of $1.695 million and an increase in income taxes payable of
$321,000 and was offset by an increase in accounts receivable of $6.034 million,
an increase in inventory of $3.344 million, an increase in prepaid expenses and
other assets of $214,000 and a decrease in accounts payable of $258,000. Net
cash provided by operating activities amounted to $380,000 in fiscal 1997. Net
income, adjusted for noncash items, was $2.105 million in fiscal 1997. This
amount was augmented by an increase in accounts payable of $1.495 million and an
increase in accrued expenses and other current liabilities of $679,000, and was
offset by an increase in accounts receivable of $2.012 million, an increase in
inventory of $1.365 million and a decrease in income taxes payable of $488,000.
Over the last three years, the Company has seen increases in its accounts
receivable primarily due to the offering of extended payment terms to its
Australian and South African affiliates in conjunction with the change in
distribution which commenced in the fourth quarter of 1998. In addition, sales
increases of 11%, 65% and 43% in 1999, 1998 and 1997, respectively have caused
accounts receivable to increase. Additionally, the Company has seen a trend in
its international business to extend longer payment terms, and will continue to
do so to build long term customer relationships, while at the same time closely
examining credit risk.
Net cash used in investing activities amounted to $128,000 in fiscal 1999 as
compared with $633,000 in fiscal 1998 and $1.217 million in fiscal 1997. The
Company provided net fundings to its joint ventures of $166,000 in fiscal 1999
as compared with $42,000 in fiscal 1998 and $426,000 during fiscal 1997, the
latter of which was predominantly in the form of loans. In addition, during
fiscal 1998 the Company recognized a pre-tax gain of $385,000 from the sale
20
of a portion of the equity in its South African affiliate, which reduced its
ownership from 50% to 33%. Further, the Company received $472,000 and $39,000 in
dividend distributions from its Australian and South African affiliates,
respectively, during fiscal 1999. The remaining investing activities of $473,000
in fiscal 1999, $976,000 in fiscal 1998 and $791,000 in fiscal 1997 were for the
purchase of property and equipment.
Net cash provided by financing activities amounted to $1.686 million in fiscal
1999, as compared with $3.411 million in fiscal 1998 and $23,000 in fiscal 1997.
In fiscal 1999 the Company received proceeds from its credit facilities of
$1.697 million as compared with $4.097 million in fiscal 1998. The Company used
a portion of these proceeds to repurchase its common stock amounting to $247,000
(44,200 shares) and $1.047 million (165,000 shares) in 1999 and 1998,
respectively. The remaining cash provided by financing activities of $236,000 in
fiscal 1999, $361,000 in fiscal 1998 and all financing activities in fiscal 1997
were from the issuance of common stock upon the exercise of stock options and
warrants.
Year 2000
The Company has developed and implemented a comprehensive plan to address Year
2000 issues. The plan addresses two main areas: (a) information systems and (b)
supply chain readiness. To oversee the process, the Company established a
Steering Committee comprised of senior executives. The Company identified
minimal potential deficiencies related to Year 2000 in its information systems
and believes it has addressed them through upgrades and other remediation. To
mitigate the risk of Year 2000 non-compliance by third parties, the Company has
identified, contacted and met with critical inventory suppliers and has
communicated with its larger customers about their Year 2000 readiness. The
Company believes it is difficult to specifically identify the cause of the most
reasonable worst case Year 2000 scenario; however, based upon its work to date,
the Company believes it would likely be the result of the failure of third
parties to be Year 2000 compliant. Incremental out-of-pocket costs incurred
through September 30, 1999 have not been significant and, based upon the
Company's current estimates, the costs of its Year 2000 program are expected to
be immaterial. Such costs do not include internal employee costs and costs
related to the deferral of other information technology projects. While the
Company does not have a system to track internal employee costs specifically
related to the Year 2000, those costs are not expected to be material to the
Company's results of operations or financial condition.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Fiscal 1999 saw continued moderation in the level of inflation. In order to
offset the resultant rise in the costs of operations, the Company has and will
continue to assess ways to reduce product manufacturing costs, thereby
increasing profit margins and improve its operations to gain efficiencies and
reduce operating costs.
While the Company operates in many international markets, it does so principally
through the sale of its products with invoices denominated in the United States
currency. Additionally, the Company operates without the use of derivative or
hedging instruments.
21
The Company has a $6.0 million revolving credit facility with borrowings subject
to interest at the bank's prime rate or LIBOR plus a range of 125 to 200 basis
points. As such, the interest rate is variable and the interest expense on
potential borrowings is based upon the types of loans and applicable interest
rates at the time of borrowing. In the event the Company had its entire
revolving credit facility, $6.0 million, outstanding for the entire year, each
100 basis point increase would result in an annual increase in interest expense
of approximately $60,000.
Item 8. Financial Statements and Supplementary Data
The financial statements of the Company required by this item are set forth
beginning on page F-1.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None
22
PART III
Items 10 through 13 inclusive are omitted per General Instruction G(3). The
information required by Part III shall be incorporated by reference from the
Registrant's definitive proxy statement pursuant to Regulation 14A for the
fiscal year ended September 30, 1999.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. All Financial Statements:
Report of Independent Public Accountants (page F-1)
Consolidated Balance Sheets as of September 30, 1999 and 1998 (page
F-2)
Consolidated Statements of Income for the years ended September 30,
1999, 1998 and 1997 (page F-3)
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 1999, 1998 and 1997 (page F-4)
Consolidated Statements of Cash Flows for the years ended September
30, 1999, 1998 and 1997 (page F-5)
Notes to Consolidated Financial Statements (page F-6)
2. Financial statement schedules required to be filed by Item 8 of this
Form:
Report of Independent Accountants on Financial Statement Schedule
(page S-1)
Schedule II of Valuation and Qualifying Accounts (pageS-2)
3. Exhibits:
Exhibit No.
- -----------
3.1 Certificate of Incorporation (3)
3.2 Certificate of Merger (3)
3.3 By-Laws (3)
4.1 Credit Agreement dated July 15, 1999 between the Company and The
Chase Manhattan Bank ("Chase")(6)
4.1(a) Revolving Credit Note dated July 15, 1999 issue by the Company to
Chase(6)
4.1(b) Term Note dated July 15, 1999 issue by the Company to Chase(6)
4.1(c) Limited Corporate Guaranty dated July 15, 1999 issued by Abacus
Financial Management Systems Ltd. USA to Chase(6)
4.1(d) Pledge Agreement dated July 15, 1999 between the Company and
Chase(6)
10.1 Lease dated September 21, 1994 between the Company and Heartland
Associates (1)
23
10.2 Amendment dated July 31, 1997 to lease dated September 21, 1994
between the Company and Heartland Associates (3)
10.3 1994 Stock Option Plan (2)
10.4 1996 Stock Option Plan (2)
10.5 Employment Agreement dated January 1, 1998 between the Company and
Robert W. Nader (5)
10.6 Employment Agreement dated October 1, 1998 between the Company and
Edward Seidenberg (5)
10.7 Employment Agreement dated September 30, 1997 between the Company
and Stephen Katz (3)
10.8 Employment Agreement dated May 1, 1999 between the Company and
Thomas McNeill (6)
10.9 Supplier agreement dated May 14, 1998 between Global Payment
Technologies, Inc. and Aristrocrat Leisure Industries Pty Ltd. (4)
21 List of Subsidiaries (7)
23 Consent of Independent Public Accountants (7)
27 Financial Data Schedule (7)
- ----------
(1) Incorporated by reference to the Company's initial filings of the
Registration Statement on Form SB-2 (File #33-86352-NY).
(2) Incorporated by reference to the Company's Registration Statement on Form
S-8 (File #333-30829).
(3) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended September 30, 1997.
(4) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1998.
(5) In Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended September 30, 1998.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999.
(7) Filed herewith.
(b) Reports on Form 8-K
No Reports on Form 8-K have been filed during the last quarter of the period
covered by this Report.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Global Payment Technologies, Inc.
By: s/Stephen Katz
------------------------------
Stephen Katz
Chairman of the Board and
Chief Executive Officer
Date: December 28, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
s/Stephen Katz Chairman of the Board December 28, 1999
- --------------------------- and Chief Executive Officer
Stephen Katz
s/Edward Seidenberg Director, President and December 28, 1999
- --------------------------- Chief Operating Officer
Edward Seidenberg
s/Henry B. Ellis Director December 28, 1999
- ---------------------------
Henry B. Ellis
s/Richard Gerzof Director December 28, 1999
- ---------------------------
Richard Gerzof
s/Martin H. Kern Director December 28, 1999
- ---------------------------
Martin H. Kern
s/Thomas McNeill Vice President, Chief Financial December 28, 1999
- --------------------------- Officer and Principal Accounting
Thomas McNeill Officer
25
GLOBAL PAYMENT TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of September 30, 1999 and 1998 F-2
Consolidated Statements of Income for the years ended September
30, 1999, 1998 and 1997 F-3
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 1999, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the years ended
September 30, 1999, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Global Payment Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Global Payment
Technologies, Inc. (a Delaware corporation) and subsidiaries (the "Company") as
of September 30, 1999 and 1998, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended September 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Global Payment Technologies,
Inc. and subsidiaries as of September 30, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1999 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Melville, New York
November 22, 1999
F-1
GLOBAL PAYMENT TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND 1998
(Dollar amounts in thousands, except share data)
ASSETS 1999 1998
-------- --------
Current assets:
Cash and cash equivalents $ 1,355 $ 834
Accounts receivable, less allowance for doubtful accounts of
$288 and $248, respectively 2,715 5,854
Accounts receivable from affiliates 10,919 4,497
Inventory, less allowance for obsolescence of $850 and $942, respectively 7,504 8,090
Prepaid expenses and other current assets 330 254
Deferred income tax benefit 981 584
-------- --------
Total current assets 23,804 20,113
Property and equipment, net 1,551 1,758
Investments in unconsolidated affiliates 684 582
Other assets 165 130
-------- --------
Total assets $ 26,204 $ 22,583
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 800 $ --
Note payable to bank -- 4,097
Accounts payable 1,527 2,044
Accrued expenses and other current liabilities 1,791 2,925
Income taxes payable 54 430
-------- --------
Total current liabilities 4,172 9,496
Long-term debt 4,994 --
-------- --------
Total liabilities 9,166 9,496
-------- --------
Commitments and contingencies (Note 12)
Shareholders' equity:
Common stock, 20,000,000 shares authorized; $.01 par value,
5,619,125 shares and 5,570,300 shares issued in 1999 and
1998, respectively 56 56
Additional paid-in capital 8,570 8,334
Retained earnings 9,706 5,744
-------- --------
18,332 14,134
Less: Treasury stock, at cost, 209,200 shares and 165,000 shares in
1999 and 1998, respectively (1,294) (1,047)
-------- --------
Total shareholders' equity 17,038 13,087
-------- --------
Total liabilities and shareholders' equity $ 26,204 $ 22,583
======== ========
The accompanying notes are an integral part of these financial statements.
F-2
GLOBAL PAYMENT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(Dollar amounts in thousands, except share and per share data)
1999 1998 1997
----------- ----------- -----------
Net sales:
Non-affiliates $ 15,890 $ 34,572 $ 23,649
Affiliates 28,006 4,816 219
----------- ----------- -----------
43,896 39,388 23,868
Cost of sales 26,660 23,013 14,882
----------- ----------- -----------
Gross profit 17,236 16,375 8,986
Operating expenses 10,306 10,983 6,378
----------- ----------- -----------
Income from operations 6,930 5,392 2,608
----------- ----------- -----------
Other income (expense):
Equity in loss of unconsolidated affiliates (678) (215) (71)
Gain on sale of investment in unconsolidated
affiliate -- 385 --
Interest income 39 -- 51
Interest expense (465) (62) --
----------- ----------- -----------
Other income (expense), net (1,104) 108 (20)
----------- ----------- -----------
Income before provision for income taxes 5,826 5,500 2,588
Provision for income taxes 1,864 2,144 1,113
----------- ----------- -----------
Net income $ 3,962 $ 3,356 $ 1,475
=========== =========== ===========
Net income per share:
Basic $ .74 $ .61 $ .27
=========== =========== ===========
Diluted $ .68 $ .56 $ .25
=========== =========== ===========
Common shares used in computing net income per share amounts:
Basic 5,381,170 5,513,414 5,500,530
=========== =========== ===========
Diluted 5,822,787 5,995,067 5,794,215
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
GLOBAL PAYMENT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(Dollar amounts in thousands, except share data)
Common Stock Additional Treasury Stock
--------------------- Paid-in Retained ----------------------
Shares Amount Capital Earnings Shares Amount Total
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1996 5,500,000 $ 55 $ 7,951 $ 913 -- $ -- $ 8,919
Exercise of common stock options 6,200 -- 23 -- -- -- 23
Net income -- -- -- 1,475 -- -- 1,475
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1997 5,506,200 55 7,974 2,388 -- -- 10,417
Exercise of common stock options and
warrants 64,100 1 360 -- -- -- 361
Purchase of treasury stock -- -- -- -- (165,000) (1,047) (1,047)
Net income -- -- -- 3,356 -- -- 3,356
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1998 5,570,300 56 8,334 5,744 (165,000) (1,047) 13,087
Exercise of common stock options 48,825 -- 236 -- -- -- 236
Purchase of treasury stock -- -- -- -- (44,200) (247) (247)
Net income -- -- -- 3,962 -- -- 3,962
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1999 5,619,125 $ 56 $ 8,570 $ 9,706 (209,200) $ (1,294) $ 17,038
========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-4
GLOBAL PAYMENT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(Dollar amounts in thousands)
1999 1998 1997
------- ------- -------
OPERATING ACTIVITIES:
Net income $ 3,962 $ 3,356 $ 1,475
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Equity in loss of unconsolidated affiliates 678 215 71
Gain on sale of investment in unconsolidated affiliate -- (385) --
Depreciation and amortization 680 553 343
Provision for (recovery of) losses on accounts receivable 64 123 (39)
Provision for inventory obsolescence 574 374 39
Deferred income taxes (397) (259) 216
Changes in operating assets and liabilities:
Increase in accounts receivable, including affiliates (4,472) (6,034) (2,012)
Decrease (increase) in inventory 12 (3,344) (1,365)
Increase in prepaid expenses and other assets (111) (214) (34)
(Decrease) increase in accounts payable (517) (258) 1,495
(Decrease) increase in accrued expenses and other current liabilities (1,134) 1,695 679
(Decrease) increase in income taxes payable (376) 321 (488)
------- ------- -------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,037) (3,857) 380
------- ------- -------
INVESTING ACTIVITIES:
Purchases of property and equipment, net of proceeds from disposals (473) (976) (791)
Proceeds from sale of investment in unconsolidated affiliate -- 385 --
Investments in unconsolidated affiliates (166) (42) (426)
Distributions from unconsolidated affiliates 511 -- --
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (128) (633) (1,217)
------- ------- -------
FINANCING ACTIVITIES:
Proceeds from notes payable to bank 1,697 4,097 --
Purchase of treasury stock (247) (1,047) --
Issuance of stock upon exercise of stock options and warrants 236 361 23
------- ------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,686 3,411 23
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 521 (1,079) (814)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 834 1,913 2,727
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,355 $ 834 $ 1,913
======= ======= =======
CASH PAID DURING THE YEAR FOR:
Interest $ 446 $ 97 $ --
======= ======= =======
Income taxes $ 2,621 $ 1,879 $ 1,400
======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-5
GLOBAL PAYMENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, 1998 AND 1997
1. ORGANIZATION AND NATURE OF BUSINESS:
Global Payment Technologies, Inc. (the "Company") was established in 1988. The
Company designs, manufactures and markets paper currency validating equipment
used in gaming and vending machines in the United States and other countries.
Substantially all of the Company's revenues are derived from the sale of paper
currency validators and related bill stackers, specifically the Company's IDS,
IBS, IDUS, M-125 and M-150 validator models. Fluctuations in the Company's
results of operations may be caused by various factors, including the timing and
market acceptance of new products introduced by the Company and its competitors,
the size and timing of product orders and shipments, the relative mix of
products sold by the Company, specific economic conditions in the gaming
industry, from which the Company derives a substantial portion of its revenues,
and general economic conditions. Additionally, the Company depends on a single
or limited number of suppliers for certain housings, parts and components,
including certain microprocessor chips and short wave-length light sources. The
Company has entered into volume blanket purchase agreements with suppliers to
guard against unique component shortages, limiting the Company's exposure to
business interruptions.
Significant Customers
The Company's largest customers for 1999, 1998 and 1997 represent the following
percentages of net sales and accounts receivable:
Net Sales 1999 1998 1997
--------- ---- ---- ----
GPT Australia 59% 46% 54%
Customer B N/A 10% N/A
Accounts Receivable
-------------------
GPT Australia 72% 45% 62%
Customer B N/A 8% N/A
There were no other customers that represented 10% or more of net sales in the
fiscal years presented.
F-6
Geographic Areas
The Company's products are sold both domestically and internationally. The
following summarizes the geographic dispersion of the Company's sales:
Year Ended September 30,
-----------------------------
1999 1998 1997
------- ------- -------
(Amounts in 000s)
Domestic sales (United States) $ 8,614 $ 7,394 $ 6,519
------- ------- -------
International sales:
Australia 26,110 18,947 11,190
All others 9,172 13,047 6,159
------- ------- -------
35,282 31,994 $17,349
======= ======= =======
Total sales $43,896 $39,388 $23,868
======= ======= =======
Primarily all of the Company's long-lived assets are domiciled in the United
States.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of Global Payment
Technologies, Inc. and its majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
The Company recognizes revenue upon shipment of products to its customers,
including shipments to its unconsolidated affiliates, or at the time services
are completed with respect to repairs not covered by warranty agreements.
Investments in Unconsolidated Affiliates
The Company applies the equity method of accounting to its investments in
entities where the Company has non-controlling ownership interests of 20% to
50%. The Company's share of these affiliates' earnings or losses is included in
the consolidated statements of income. The Company eliminates its pro rata share
of gross profit on sales to its affiliates for inventory on hand at the
affiliates at the end of the year. See Note 11 for a description of the
Company's unconsolidated affiliates and the related transactions between the
Company and these affiliates.
Cash and Cash Equivalents
Cash equivalents are stated at cost, which approximates market value. Highly
liquid investments with maturities of three months or less at the purchase date
are considered cash equivalents for purposes of the consolidated balance sheets
and consolidated statements of cash flows.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or net
realizable value. The Company analyzes the net realizable value of its inventory
on an ongoing basis. In determining whether the net realizable value of its
inventory is impaired, the Company considers historical sales performance and
expected future product sales, market conditions in which the Company
distributes its products, changes in product strategy and the potential for the
introduction of new technology or products by the Company and its competitors.
F-7
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets (Note 5) or,
in the case of leasehold improvements, the life of the related lease, whichever
is shorter. Maintenance and repair costs are charged to expense as incurred.
Expenditures that significantly increase value or extend useful asset lives are
capitalized.
Long-Lived Assets
The Company accounts for long-lived assets pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of," which requires
that long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held, and used, be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of those assets may
not be recoverable. The Company did not record any impairment adjustments in
fiscal 1999, 1998 and 1997.
Research and Development
Research and development costs incurred by the Company are included in operating
expenses in the year incurred. Such costs amounted to $300,000, $350,000 and
$245,000 in fiscal 1999, 1998 and 1997, respectively.
Warranty Policy
The Company warrants that its products are free from defects in material and
workmanship for a period of one year from the date of initial purchase. The
warranty does not cover any losses or damage that occur as a result of improper
installation, misuse or neglect and repair or modification by anyone other than
the Company and its appointed service centers. Repair costs on out-of-warranty
units are charged to the Company's customers.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes" (Note 10). SFAS No. 109 requires an asset and liability approach for
financial reporting for income taxes. Under SFAS No. 109, deferred taxes are
provided for temporary differences between the carrying values of assets and
liabilities for financial reporting and tax purposes at the enacted rates at
which these differences are expected to reverse.
Net Income Per Share
Net income per common share amounts ("basic EPS") were computed by dividing net
earnings by the weighted average number of common shares outstanding, excluding
any potential dilution. Net income per common share amounts assuming dilution
("diluted EPS") were computed by reflecting potential dilution from the exercise
of stock options and warrants.
F-8
A reconciliation between the numerators and denominators of the basic and
diluted EPS computations is as follows:
Year Ended September 30,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(In 000s, except share and per share data)
Numerator
Net income attributable to common stockholders $ 3,962 $ 3,356 $ 1,475
========== ========== ==========
Denominator
Weighted average common shares outstanding - basic 5,381,170 5,513,414 5,500,530
Effect of dilutive securities: stock options and warrants 441,617 481,653 293,685
---------- ---------- ----------
Weighted average common shares outstanding - diluted 5,822,787 5,995,067 5,794,215
========== ========== ==========
Basic EPS $ .74 $ .61 $ .27
========== ========== ==========
Diluted EPS $ .68 $ .56 $ .25
========== ========== ==========
Stock-Based Compensation
The Company applies the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" in connection with
stock-based compensation granted to employees and directors of the Company. The
Company provides the required pro forma disclosures as if the fair value method
under SFAS No. 123, "Accounting for Stock-Based Compensation" was adopted. Any
stock-based compensation awards to non-employees are accounted for using the
provisions of SFAS No. 123; no such awards were made to non-employees during the
three years ended September 30, 1999.
Comprehensive Income
In the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which requires companies to report all changes in equity
during a period, except those resulting from investments by owners and
distributions to owners, for the period in which they are recognized.
Comprehensive income is the total of net income and all other non-owner changes
in equity (or other comprehensive income) such as unrealized gains/losses on
securities classified as available-for-sale, foreign currency translation
adjustments and minimum pension liability adjustments. Comprehensive and other
comprehensive income must be reported on the face of annual financial statements
or in the case of interim reporting, the footnote approach may be utilized. For
fiscal years 1999, 1998 and 1997, the Company's operations did not give rise to
material items includable in comprehensive income which were not already
included in net income. Accordingly, the Company's comprehensive income is the
same as its net income for all periods presented.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain prior-year financial statement amounts have been reclassified to conform
to the current year's presentation.
F-9
Recently Issued Accounting Standard
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 is effective for all fiscal quarters beginning
after June 15, 2000 (as amended by SFAS No. 137) and will not require
retroactive restatement of prior-period financial statements. The Company
currently does not use derivative instruments or engage in hedging activities
and, accordingly, does not expect that this statement will have an impact on its
consolidated financial statements when adopted.
3. ACQUISITIONS:
In June 1998, the Company formed Global Payment Technologies (Europe) Limited
("GPT-Europe"), which is based in the United Kingdom and is responsible for
sales and service of the Company's products throughout Europe. GPT-Europe
purchased the assets and assumed the liabilities of Global Payment Technologies
(U.K.) Ltd. ("GPT-UK"), the Company's prior independent European distributor, as
of February 28, 1998. The excess of the cost over the fair market value of the
net assets acquired was not material. The Company, through a capital
contribution of $76,000, owns 70% of GPT-Europe, with the remaining 30% owned by
GPT-Europe's operations manager, a former principal of GPT-UK. GPT-Europe's
assets and liabilities are included in the consolidated balance sheets as of
September 30, 1999 and 1998 and the results of its operations from March 1, 1998
to September 30, 1998 and for the year ended September 30, 1999 have been
included in the consolidated statements of income, net of the related minority
interest in subsidiary earnings, which was not material.
In April 1999, the Company acquired a 25% equity interest in Abacus Financial
Management Systems, Ltd. ("Abacus"), a UK-based software company, for a de
minimis amount (Note 11). This investment is being accounted for under the
equity method. Abacus has developed a cash management system, of which the
Company's validators are a key component, that offers the retail market a
mechanism for counting, storing, and transporting its cash receipts. In
addition, the Company and the principal of Abacus have formed Abacus Financial
Management Systems Limited, USA, which is 80% owned by the Company and has the
exclusive right to distribute Abacus' product in North America. Through
September 30, 1999, there has been no significant activity in this entity.
4. INVENTORY:
The following is a summary of the composition of inventory:
September 30,
-----------------------
1999 1998
------ ------
(in 000s)
Raw materials $2,501 $2,775
Work-in-process 3,715 3,706
Finished goods 1,288 1,609
------ ------
$7,504 $8,090
====== ======
F-10
5. PROPERTY AND EQUIPMENT, NET:
Major classifications of property and equipment are as follows:
September 30,
------------------------------
Useful Lives 1999 1998
------------ ----------- -----------
(in 000s)
Leasehold improvements 5 years $ 258 $ 243
Furniture and fixtures 3 - 7 years 452 401
Machinery and equipment 3 - 10 years 1,335 1,140
Computer software 5 years 691 578
Computer hardware 3 years 759 718
----------- -----------
3,495 3,080
Less: Accumulated
depreciation and amortization (1,944) (1,322)
----------- -----------
$ 1,551 $ 1,758
=========== ===========
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities consist of the following:
September 30,
-------------------
1999 1998
------ ------
(in 000s)
Compensation and employee benefits $ 742 $ 967
International commissions 69 949
Warranty costs 244 112
Administrative and other 736 897
------ ------
$1,791 $2,925
====== ======
7. NOTES PAYABLE TO BANK:
At September 30, 1998, the Company maintained two borrowing facilities with The
Chase Manhattan Bank. These facilities consisted of a $5,000,000 unsecured line
of credit to be used for short-term working capital needs and a $3,500,000
unsecured line of credit to be used to repurchase up to 500,000 shares of the
Company's common stock. Both of these lines bore interest at a rate equal to the
bank's prime rate or LIBOR plus 175 basis points per annum. Outstanding
borrowings and interest rates under these facilities at September 30, 1998 were
$3,050,000 and 8.25%, and $1,047,000 and 7.25%, respectively. These notes had an
original maturity date of March 31, 1999; however, the maturity was extended
until July 1999 when the Company entered into the long-term credit agreement
discussed in Note 8. Simultaneously with the signing of the new credit
agreement, the Company repaid all of its then outstanding bank debt and
terminated its existing credit facilities.
F-11
8. LONG-TERM DEBT:
Long-term debt consists of the following at September 30, 1999:
Revolving credit note $1,994,000
Term note 3,800,000
----------
5,794,000
Less: current portion of term note 800,000
----------
$4,994,000
==========
On July 15,1999, the Company entered into a $10 million long-term credit
agreement with The Chase Manhattan Bank which is comprised of a $4,000,000
five-year term loan, payable in equal monthly installments with a fixed interest
rate of 7.66% per annum and a $6,000,000 unsecured revolving line of credit
("RLC"). The term of the RLC is three years and outstanding borrowings bear
interest at the bank's prime rate or at the Company's option, for borrowings
greater than $500,000, LIBOR plus a range of 125 to 200 basis points. The
precise borrowing rate is determined by the Company's financial performance
under certain covenants. Simultaneous with the signing of the new credit
agreement, the Company repaid all of its then outstanding bank debt and
terminated its existing credit facilities. In connection with the long-term
credit agreement, the Company is required to maintain certain financial
covenants with which it was in compliance at September 30, 1999. As of September
30, 1999, annual principal maturities for the amount outstanding under the term
note were as follows:
Fiscal Year Ended September 30, Amount
------------------------------- ----------
2000 $ 800,000
2001 800,000
2002 800,000
2003 800,000
2004 600,000
----------
$3,800,000
==========
9. SHAREHOLDERS' EQUITY:
Stock Split
In July 1997, the Company's Board of Directors approved a two-for-one stock
split, in the form of a stock dividend, to the Company's common shareholders of
record at August 18, 1997. The new shares were issued to such shareholders of
record on September 4, 1997. Par value remained at $.01 per share. All
information contained in the consolidated financial statements and related
footnotes has been retroactively restated to give effect to this stock split.
Stock Repurchase
In June 1998, the Board of Directors approved a common stock repurchase plan,
providing for the purchase of up to 500,000 shares of the Company's common stock
over a one-year period, using a separately established line of credit (Note 7).
In September 1998, the Company purchased 165,000 shares of its common stock at a
cost of $1,047,000. In October 1998 and January 1999, respectively, the Company
purchased 41,000 shares of its common stock at a cost of $223,000 and 3,200
shares of its common stock at a cost of $24,000.
F-12
Stock Option Plans
In October 1994, the Company adopted the 1994 Stock Option Plan (the "1994
Plan") covering up to 300,000 of the Company's common shares pursuant to which
officers, directors, key employees of the Company, and consultants to the
Company are eligible to receive incentive and/or non-qualified stock options. In
March 1996, the Board of Directors adopted the 1996 Stock Option Plan (the "1996
Plan"). The purpose and provisions of the 1996 Plan are essentially the same as
the 1994 Plan. The 1996 Plan originally covered 400,000 of the Company's common
shares. The total shares available for grant under the 1996 Plan were increased
to 900,000 by the Board of Directors in September 1996. The 1996 Plan, as so
amended, was approved by the shareholders of the Company.
Both the 1994 Plan, which expires on October 17, 2004, and the 1996 Plan, which
expires on March 18, 2006, are administered by the Compensation and Stock Option
Committee of the Board of Directors. The selection of participants, grant of
options, determination of price and other conditions relating to the exercise of
options are determined by the Compensation and Stock Option Committee of the
Board of Directors.
Incentive stock options granted under both the 1994 and 1996 Plans are
exercisable for a period of up to 10 years from the date of grant at an exercise
price which is not less than the fair market value of the common shares on the
date of the grant, except that the term of an incentive stock option granted
under each of the plans to a shareholder owning more than 10% of the outstanding
common shares may not exceed five years, and its exercise price may not be less
than 110% of the fair market value of the common shares on the date of the
grant.
During fiscal 1997, a total of 60,000 incentive stock options were granted under
the 1996 Plan. These options will become exercisable over a four-year period in
equal amounts commencing with the first anniversary from the date of grant,
except for 24,000 options, which will vest on the same basis over a five-year
period.
During fiscal 1998, a total of 147,750 incentive stock options and 7,500
non-qualified options were granted under the 1996 Plan. All options granted in
1998 will become exercisable over a four-year period in equal amounts commencing
with the first anniversary of the date of grant.
During fiscal 1999, a total of 148,850 incentive stock options and 23,500
non-qualified options were granted under the 1996 Plan. All options granted in
1999 will become exercisable over a four-year period in equal amounts commencing
with the first anniversary of the date of grant.
The Company accounts for option awards granted to employees and directors under
APB Opinion No. 25, under which compensation cost is recognized for stock
options granted at an exercise price less than the market value of the options
on the grant date. No compensation cost has been recorded by the Company
pursuant to APB Opinion No. 25. Had compensation cost for all stock option
grants in fiscal years 1999, 1998 and 1997 been determined consistent with SFAS
No. 123, the Company's net income and earnings per share would have been:
1999 1998 1997
---------- ---------- ----------
(in 000s, except per share data)
Net income: As reported $ 3,962 $ 3,356 $ 1,475
Pro forma 3,721 3,227 958
Net income per common share - basic:
As reported $ .74 $ .61 $ .27
Pro forma .69 .59 .17
Net income per common share - diluted:
As reported $ .68 $ .56 $ .25
Pro forma .64 .54 .17
F-13
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to option awards
granted prior to fiscal-year 1997, and additional awards in future years are
anticipated.
A summary of the Company's stock option plans as of September 30, 1999, 1998 and
1997, and changes during the years then ended, is presented below.
1999 1998 1997
-------------------------- -------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------------------------------------------------- ------------- ------------ ------------ ----------- ------------
Outstanding at the beginning of the year 813,150 $4.94 726,400 $4.08 693,500 $3.64
Granted at fair value 172,350 $8.98 155,250 $8.97 60,000 $8.93
Forfeited (26,250) $6.40 (20,900) $4.15 (20,900) $3.78
Exercised (48,825) $4.89 (47,600) $5.24 (6,200) $3.78
------- ------- -------
Outstanding at end of the year 910,425 $5.66 813,150 $4.94 726,400 $4.08
======= ======= =======
Options exercisable at year end 556,300 $3.96 526,510 $3.57 501,400 $3.45
======= ======= =======
Weighted-average fair value of options
granted during the year (a) $5.39 N/A $5.04 N/A $5.08 N/A
(a) The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
Year Ended September 30,
--------------------------------------------------------
1999 1998 1997
----------------- ------------------ ------------------
Risk-free interest rates 5.87% 5.22% 6.19%
Expected lives 5 years 5 years 5 years
Expected volatility 65% 60% 58%
Expected dividend yields -- -- --
Summarized information about the Company's stock options outstanding and
exercisable at September 30, 1999 is as follows:
Outstanding Exercisable
------------------------------------------------ -------------------------------
Average Average Average
Exercise Price Range Options Life Price Options Price
-------------------- ------------------------------------------------ -------------------------------
$3.00 to $4.50 534,100 6.54 years $ 3.34 487,300 $ 3.29
$5.00 to $5.50 25,675 6.36 years $ 5.21 16,675 $ 5.32
$6.50 to $7.00 99,050 5.96 years $ 6.56 24,575 $ 6.56
$7.50 to $8.50 25,450 6.64 years $ 7.75 -- --
$9.00 to $11.00 137,400 6.97 years $ 9.09 -- --
$11.00 to $12.00 44,750 7.30 years $ 11.59 16,750 $11.59
$13.50 to $14.50 44,000 5.56 years $ 14.17 11,000 $14.17
------------ -------------
$3.00 to $14.50 910,425 6.53 years $ 5.66 556,300 $ 3.96
============ =============
F-14
Underwriters' Warrants
In connection with the Company's initial public offering of common stock in
February 1995, the Company granted warrants to purchase 150,000 shares of common
stock at $6.60 per share to the underwriters of that public offering. The
exercise price of $6.60 per share represented in excess of 110% of the initial
public offering price. During fiscal 1998, 16,500 of these warrants were
exercised and no warrants were exercised during fiscal 1999. As of September 30,
1999, all of the remaining 133,500 warrants were exercisable and expire on
February 6, 2000.
10. INCOME TAXES:
The provision for income taxes is comprised of the following:
For the Fiscal Years Ended September 30,
----------------------------------------
1999 1998 1997
------- ------- -------
(in 000s)
Current:
Federal $ 1,945 $ 1,965 $ 670
State and local 316 438 223
------- ------- -------
2,261 2,403 893
------- ------- -------
Deferred:
Federal (343) (179) 153
State and local (54) (80) 67
------- ------- -------
(397) (259) 220
------- ------- -------
Total $ 1,864 $ 2,144 $ 1,113
======= ======= =======
Significant components of deferred tax assets and liabilities are as follows:
As of September 30,
---------------------
1999 1998 1997
----- ----- -----
(in 000s)
Current deferred tax assets:
Accounts receivable $ 91 $ 80 $ 101
Inventory 270 306 320
Accrued expenses and other, net 136 68 --
Elimination of gross profit on sales to affiliates 484 130 --
----- ----- -----
Total 981 584 421
Non-current deferred tax liability:
Depreciation -- -- (96)
----- ----- -----
Net deferred tax asset $ 981 $ 584 $ 325
===== ===== =====
The Company believes that, based upon its consistent history of profitable
operations, it is probable that the net deferred tax assets will be realized,
primarily from the generation of future taxable income.
Reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate is as follows:
For the Fiscal Years
Ended September 30,
---------------------------
1999 1998 1997
------ ------ ------
U.S. Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of Federal benefit 3.0 4.3 7.5
Foreign sales corporation (3.5) -- --
All other, net (1.5) 0.7 1.5
------ ------ ------
Effective income tax rate 32.0% 39.0% 43.0%
====== ====== ======
F-15
11. TRANSACTIONS WITH UNCONSOLIDATED AFFILIATES:
In August 1996, the Company acquired a 50% non-controlling interest in a South
African affiliate ("GPT-SA"), which on July 3, 1998, changed its name to Global
Payment Technology Holdings (Proprietary) Limited ("GPTHL"), for which funding
commenced in June 1997. This entity is responsible for sales and service of the
Company's products in the South African region on an exclusive basis. During
fiscal 1998 and 1997, the Company loaned $104,000 and $178,000, respectively, to
this affiliate. Partial repayments totaling $166,000 were received in fiscal
1998. In addition, the Company received a dividend distribution in the amount of
$39,000 in fiscal 1999. These amounts are included as part of the Company's
investment in unconsolidated affiliates in the accompanying consolidated balance
sheets as of September 30, 1999 and 1998. On May 29, 1998, Hosken Consolidated
Investments ("HCI"), a South African investment company, purchased a one-third
interest in GPT-SA. Terms of the transaction called for HCI to purchase certain
shares from the Company and the Bevin Trust (GPT-SA's founding shareholders) as
well as additional shares directly from GPT-SA. The Company recognized a pre-tax
gain of $385,000 on the transaction and its ownership of GPT-SA was reduced from
50% to 33%. The Company's consolidated results of operations include the
Company's equity in the results of operations of this affiliate in the amounts
of $1,000, $1,400 and ($78,000) in fiscal 1999, 1998 and 1997, respectively. For
fiscal 1999, the Company reduced its equity in income of unconsolidated
affiliates by $122,000, which represents the gross profit on sales to this
affiliate which have not yet been recognized by the affiliate.
In January 1997, the Company acquired a 50% non-controlling interest in a
China-based affiliate. This entity manufactures plastic and metal components,
some of which are used by the Company in its production. In addition, the
Company is obligated to loan up to an aggregate of $299,000 to this entity,
which will bear interest at the rate of 1.5% above the prime rate prevailing
from time to time at the Company's bank, per annum. During fiscal 1998 and 1997,
the Company loaned $25,000 and $219,000, respectively, to this affiliate. These
amounts are included as part of the Company's investment in unconsolidated
affiliates in the accompanying consolidated balance sheets as of September 30,
1999 and 1998. The Company's consolidated results of operations include the
Company's equity in the results of operations of this affiliate in the amounts
of $38,000, ($169,000) and ($42,000) in fiscal 1999, 1998 and 1997,
respectively.
In August 1997, the Company acquired a 50% non-controlling interest in an
Australian affiliate. This entity is responsible for sales and service of the
Company's products in Australia and New Zealand on an exclusive basis. The
Company's consolidated results of operations include the Company's equity in the
results of operations of this affiliate in the amounts of ($638,000), ($47,000)
and $49,000 in fiscal 1999, 1998 and 1997, respectively. For fiscal 1999 and
1998, the Company reduced its equity in income of unconsolidated affiliates by
$1,003,000 and $400,000, respectively, which represents the gross profit on
sales to this affiliate that have not then been recognized by the affiliate. In
1999, the Company received a dividend distribution in the amount of $472,000.
In April 1999, the Company acquired a 25% interest in Abacus Financial
Management Systems, Ltd. ("Abacus") for $162,000. Abacus is a software company
based in the United Kingdom that has developed a cash management system, of
which the Company's validators are a key component, that offers the retail
market a mechanism for counting, storing, and transporting its cash receipts.
The Company's consolidated results of operations for the year ended September
30, 1999 include the Company's equity in the loss of this affiliate of $79,000.
F-16
12. COMMITMENTS AND CONTINGENCIES:
Minimum Lease Commitments
The operations of the Company are conducted in leased premises, one of which is
leased from an affiliate owned partially by the Company's Chairman. The Company
also leases various office equipment. At September 30, 1999, the approximate
minimum annual rentals under these leases, which expire through fiscal year
2002, were as follows:
Total (including
For the Fiscal Year Related Party Related Party
Ending September 30, Commitments) Commitments
-------------------- ------------ -----------
(in 000s) (in 000s)
2000 $354 $157
2001 208 161
2002 116 68
2003 50 --
2004 17 --
Total rent expense for all operating leases was $494,000, $430,000 and $388,000
in fiscal 1999, 1998 and 1997, respectively, including $133,000, $121,000 and
$65,000, respectively, paid to the affiliate. The Company's management believes
this lease with the affiliate is on terms that approximate fair market value.
Employment Agreements
The Company has entered into various employment agreements with four officers
and one other employee of the Company expiring through the end of fiscal 2000,
with minimum compensation requirements as follows:
For the Fiscal Year
Ending September 30, (in 000s)
-------------------- ---------
2000 $688,000
2001 264,000
Litigation
There are no material legal proceedings pending against the Company.
13. SUBSEQUENT EVENT:
On November 1, 1999, GPTHL formed International Payment Systems Pty. Ltd.
("IPS") and assigned its rights to all of the non-gaming activities, primarily
the distribution of Ingenico, De La Rue and Scan Coin products. The Company
currently has a 30% interest in IPS. GPTHL holds the exclusive distribution
rights to the Company's products in the South African region. Also on November
1, 1999, On-Line Gaming Systems Inc. ("On-Line"), a Florida-based Nasdaq listed
company specializing in Internet wagering and other casino based products,
acquired a 23.5% equity interest in GPTHL through the purchase of shares from
the three partners and management. The ability to distribute On-Lines' products
allows GPTHL to broaden its market and product line. With the closing of this
transaction, the Company now has a 23.5% interest in GPTHL.
F-17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Global Payment Technologies, Inc.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of Global Payment Technologies, Inc. and
subsidiaries (the "Company") included in this Form 10-K and have issued our
report thereon dated November 22, 1999. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
accompanying schedule is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Melville, New York
November 22, 1999
S-1
SCHEDULE II
GLOBAL PAYMENT TECHNOLOGIES, INC.
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
Charged to
Balance at costs and Deductions - Balance
Beginning expenses, net of write off at end
Description of period recoveries of accounts of period
----------- --------- ---------- ------------ ---------
Allowance for doubtful accounts:
September 30, 1997 $ 268 $ (39) $ 4 $ 225
====== ========= ======= =======
September 30, 1998 $ 225 $ 123 $ 100 $ 248
====== ======= ======= =======
September 30, 1999 $ 248 $ 64 $ 24 $ 288
====== ======= ======= =======
S-2