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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
---------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
-----------------
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 No. 0-25148
-------
Global Payment Technologies, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2974651
- ------------------------------------ -------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
425B Oser Avenue, Hauppauge, New York 11788
- ------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
(631) 231-1177
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Exchange Act 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 _____
Shares of Common Stock outstanding on February 4, 2004 5,567,266
---------
Global Payment Technologies, Inc.
--------------------------------
Index
-----
PART I. FINANCIAL INFORMATION
- -------- ---------------------
Page Number
Item 1. Financial Statements -----------
Condensed Consolidated Balance Sheets - December 31, 2003 (unaudited)
and September 30, 2003 3
Condensed Consolidated Statements of Operations - Three Months ended
December 31, 2003 and 2002 (unaudited) 4
Condensed Consolidated Statements of Cash Flows - Three Months ended
December 31, 2003 and 2002 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6 - 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11 - 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
- -------- -----------------
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
- ----------
2
GLOBAL PAYMENT TECHNOLOGIES, INC.
---------------------------------
PART I. FINANCIAL INFORMATION
------- ---------------------
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Dollar amounts in thousands, except share data)
December 31, September 30,
2003 2003
--------------- ---------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents (Note D) $ 1,498 $ 1,220
Accounts receivable, less allowance for doubtful accounts
of $247 and $234, respectively 2,078 2,175
Accounts receivable from affiliates 1,722 4,108
Inventory 3,448 3,499
Prepaid expenses and other current assets 148 64
Income taxes receivable 227 211
--- ---
Total current assets 9,121 11,277
Property and equipment, net 2,508 2,617
Investments in unconsolidated affiliates 1,920 1,722
Capitalized software costs, net 2,033 2,159
----- -----
Total assets $15,582 $17,775
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank debt $ 1,400 $ 1,793
Accounts payable 1,954 2,424
Accrued expenses and other current liabilities 1,399 1,881
----- -----
Total current liabilities 4,753 6,098
Shareholders' equity:
Common Stock, par value $0.01; authorized 20,000,000 shares;
issued and outstanding 5,829,500 58 58
Additional paid-in capital 9,843 9,843
Retained earnings 1,985 2,973
Accumulated other comprehensive income 442 302
--------- ----------
12,328 13,176
Less: Treasury stock, at cost, 278,984 shares ( 1,499) ( 1,499)
--------- ----------
Total shareholders' equity 10,829 11,677
-------- --------
Total liabilities and shareholders' equity $ 15,582 $ 17,775
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
GLOBAL PAYMENT TECHNOLOGIES, INC.
---------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
-----------
Three Months ended December 31,
---------------------------------
2003 2002
---------- ---------
(Dollar amounts in thousands,
except share and per share data)
Net sales
Affiliates $ 1,307 $ 3,653
Non-affiliates 3,026 2,307
---------- ---------
4,333 5,960
Cost of sales 3,518 4,570
---------- ---------
Gross profit 815 1,390
Operating expenses 1,852 2,112
---------- ---------
Loss from operations (1,037) (722)
Other income (expense):
Equity in income of unconsolidated affiliates 87 207
Interest expense, net ( 32) ( 66)
---------- -----------
Total other income, net 55 141
-------- ---------
Loss before provision for (benefit from) income taxes (982) (581)
Provision for (benefit from) income taxes 6 (241)
-------- ---------
Net loss ($ 988) ($ 340)
========= =========
Net loss per share:
Basic ($ .18) ($ .06)
========== ==========
Diluted ($ .18) ($ .06)
========== ==========
Common shares used in computing net income per share amounts:
Basic 5,550,516 5,537,629
========= =========
Diluted 5,550,516 5,537,629
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
GLOBAL PAYMENT TECHNOLOGIES, INC.
---------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
-----------
Three months ended December 31,
2003 2002
--------------- ------------
(Dollar amounts in thousands)
OPERATING ACTIVITIES:
Net loss ($ 988) ($ 340)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Equity in income of unconsolidated affiliates ( 87) ( 207)
Depreciation and amortization 314 352
Provision for losses on accounts receivable 14 16
Provision for inventory obsolescence 45 45
Deferred income taxes - (140)
Changes in operating assets and liabilities:
Decrease in accounts receivable 83 17
Decrease (increase) in accounts receivable from affiliates 2,466 (582)
Decrease (increase) in inventory 6 (36)
(Increase) decrease in prepaid expenses and other assets (84) 11
(Increase) decrease in income taxes receivable (16) 99
(Decrease) increase in accounts payable (470) 401
Decrease in accrued expenses and other current liabilities (482) (102)
----- -----
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 801 (466)
----- -----
INVESTING ACTIVITIES:
Purchases of property and equipment ( 79) ( 144)
Distributions from unconsolidated affiliates - 21
Investments in unconsolidated affiliates ( 51) ( 202)
------- -------
NET CASH USED IN INVESTING ACTIVITIES ( 130) ( 325)
------- -------
FINANCING ACTIVITIES:
Net (repayments) borrowings of note payable from bank ( 393) 1,066
Proceeds from the exercise of stock options - 29
------- -------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (393) 1,095
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 278 304
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,220 1,604
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,498 $ 1,908
=========== ==========
CASH PAID DURING THE PERIOD FOR:
Interest $ 32 $ 66
=========== ==========
Income taxes $ 11 $ -
=========== ==========
NON-CASH FINANCING ACTIVITIES
Tax benefit from exercise of stock options $ - $ 11
=========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
December 31, 2003
NOTE A - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited interim condensed consolidated financial statements
of Global Payment Technologies, Inc. (the "Company"), including the September
30, 2003 consolidated balance sheet which has been derived from audited
financial statements, have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The operating results for
the three-month period ended December 31, 2003 are not necessarily indicative of
the results that may be expected for the fiscal year ending September 30, 2004.
We recommend that you refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended September 30, 2003.
NOTE B - FINANCING AND LIQUIDITY
- --------------------------------
The Company has suffered recurring operating losses, and as of September 30,
2003, the Company was not in compliance with certain financial covenants;
however, it had received a waiver and amendment for such non-compliance in both
December 2003 and January 2004, prior to filing its Form 10-K. As of December
31, 2003, the Company is in full compliance with its financial covenants.
Although the Company has amended its current credit facility, the Company is in
discussions with other lenders to put in place an asset-based lending agreement,
which would replace its existing facility and could potentially provide
additional financing availability. The Company anticipates establishing a new
credit facility prior to the expiration of its existing facility, which expires
on December 31, 2004; however, no assurances can be given that the Company will
be successful in establishing a new financing arrangement or renew its existing
agreement. 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, interest payments on
the Company's indebtedness and investments in affiliates. A significant portion
of the Company's cash balance consists of currency used to test the
Company's products, and therefore is not anticipated to be utilized for working
capital purposes in the normal course of business. The Company has initiated
outsourcing some of its manufactured product in an effort to improve gross
margin percentages as well as its cash flow. An inventory reduction plan is also
in place to further improve future cash flows. As a result of the Company's
agreements in December 2003 and January 2004 amending its credit facility, and
the completion of its September 2003 and December 2003 cost reduction
initiatives, 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 operations
throughout fiscal 2004. Further, the Company anticipates its cash
flow will improve by receiving dividends from its Australian affiliate and
continuing its efforts to collect its accounts receivable and reduce its
inventory requirements. The accompanying condensed consolidated financial
statements have been presented on a going-concern basis based on management's
plans described above, and accordingly do not contain any adjustments that could
arise from these uncertainties.
NOTE C - EMPLOYEE STOCK-BASED COMPENSATION
- ------------------------------------------
As of December 31, 2003, the Company had a number of share incentive programs as
discussed in more detail in our annual report on Form 10-K for the year ended
September 30, 2003. The Company applies the intrinsic value method as outlined
in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations in accounting for stock options and
share units granted under these programs. Under the intrinsic value method, no
compensation expense is recognized if the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of the grant. Accordingly, no compensation cost has been recognized.
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", requires that the Company provide pro forma
information regarding net earnings and net earnings per common share as if
compensation cost for the Company's stock option programs
6
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
December 31, 2003
had been determined in accordance with the fair value method prescribed therein.
The Company has adopted the disclosure portion of SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure", requiring quarterly SFAS
No. 123 pro forma disclosure. The following table illustrates the effect on net
income and earnings per share as if the fair value method had been applied to
all outstanding and unvested awards in each period presented.
Three Months Ended
December 31
2003 2002
---- ----
(Unaudited)
(In thousands, except per share data)
Net (loss) attributable to common stock as reported ($988) ($340)
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards,
net of related tax effects (98) (146)
----- -----
Pro forma net earnings (loss), attributable to common stock ($1,086) ($486)
(loss) per common share:
Basic and Diluted - as reported ($.18) ($.06)
Basic and Diluted - pro forma ($.20) ($.09)
NOTE D - SUPPLEMENTAL CASH FLOW INFORMATION
- -------------------------------------------
A significant portion of the Company's cash balance consists of currency used to
test the Company's products, and therefore is not anticipated to be utilized for
working capital purposes in the normal course of business. Translation gains or
losses on foreign currency amounts used for test purposes are included in
operating income.
NOTE E - MANAGEMENT ESTIMATES
- -----------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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. Among the more significant estimates included in
the consolidated financial statements are the allowance for doubtful accounts,
recoverability of inventory, deferred income taxes, capitalized software and
provisions for warranties. Actual results could differ from those estimates.
7
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
December 31, 2003
NOTE F - COMPREHENSIVE INCOME
- -----------------------------
The Company observes the provisions of 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, currency translation adjustments and minimum pension
liability adjustments. For the three months ended December 31, 2003 and 2002,
the Company's comprehensive loss was as follows:
(in thousands)
2003 2002
---- ----
Net (loss) $ (988) $(340)
Other comprehensive
income (a) 140 12
-------- ------
Comprehensive (loss) $(848) $(328)
======== ======
(a) Consisting of cumulative translation adjustments related to the Company's
investments in unconsolidated affiliates.
NOTE G - NET LOSS PER COMMON SHARE
- ----------------------------------
The Company accounts for earnings per share pursuant to SFAS No. 128, "Earnings
Per Share". In accordance with SFAS No. 128, net income per common share amounts
("basic EPS") were computed by dividing net income by the weighted average
number of common shares outstanding for the period. Net income per common share
amounts, assuming dilution ("diluted EPS"), were computed by reflecting the
potential dilution from the exercise of stock options and stock warrants. SFAS
No. 128 requires the presentation of both basic EPS and diluted EPS on the face
of the income statement.
A reconciliation between the numerators and denominators of the basic and
diluted EPS computations for net (loss) income appears below:
Three Months Ended Three Months Ended
December 31, 2003 December 31, 2002
(In thousands, except per share data) (In thousands, except per share data)
-------------------------------------------- -----------------------------------------------
Net (loss) Shares Per Share Net (loss) Shares Per Share
(Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts
Net (loss) income ($988) ( $ 340)
--------- ---------
Basic EPS
- ---------
Net (loss) income attributable to (988) 5,550.5 ($.18) (340) 5,537.6 ($.06)
Common stock
Effect of dilutive securities
Stock options and warrants - - - - - -
--------- --------- --------- --------- --------- ---------
Diluted EPS
Net (loss) income attributable to
Common Stock and assumed option
and warrant exercises ($988) 5,550.5 ($.18) ($ 340) 5,537.6 ($.06)
========= ========= ========= ========== ========= ==========
8
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
December 31, 2003
Options to purchase 747,100 and 150,150 shares of Common Stock in the three
months ended December 31, 2003 and December 31, 2002, respectively, were not
included in the computation of diluted EPS because the exercise prices exceeded
the average market price of the related common shares for these periods. These
options were still outstanding at the end of the related periods. Diluted EPS
for the three months ended December 31, 2003 and 2002, is the same as basic EPS,
as the inclusion of the impact of any of the common stock equivalents then
outstanding would be anti-dilutive.
NOTE H - ACCOUNTS RECEIVABLE AND SALES DATA FOR UNCONSOLIDATED AFFILIATES
-------------------------------------------------------------------------
Net sales to unconsolidated affiliates for the quarters ended December
31, 2003 and 2002, respectively, and accounts receivable from
unconsolidated affiliates as of December 31, 2003 and September 30,
2003, respectively, are as follows:
Net sales - affiliates Accounts receivable from affiliates as of
-------------------------- --------------------------------------------------
-------------------------- ----------------------- -- -----------------------
2003 2002 December 31, 2003 September 30, 2003
----------------------- ----------------------- -----------------------
Australia $ 1,037 3,344 $1,508 3,872
Abacus-UK - - - 148
South Africa 270 309 214 88
--------- ---------- ----------------------- -----------------------
--------- ---------- ----------------------- -----------------------
Total $ 1,307 3,653 $1,722 4,108
========= ========== ======================= =======================
NOTE I - SUMMARY FINANCIAL INFORMATION FOR UNCONSOLIDATED INVESTEES
- -------------------------------------------------------------------
Summarized financial information for GPT Australia and eCash, in which the
Company owns a 50% and 35% non controlling interest, respectively, is as
follows:
All figures are in U.S. dollars (in thousands).
Three Months Ended
September 30, 2003
Net sales $3,467
Operating income 72
Net income 56
As of September 30, 2003
Current assets $10,082
Non-current assets 158
Current liabilities 6,623
Non-current liabilities -
Net assets 3,617
9
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
December 31, 2003
NOTE J - RECENTLY ISSUED ACCOUNTING STANDARDS
- ---------------------------------------------
In August 2003, the Emerging Issues Task Force (EITF) reached a consensus on
Issue No. 03-05 Applicability of AICPA Statement of Position (SOP) 97-2 to
Non-Software Deliverables in an Arrangement Containing More-Than-Incidental
Software, that in an arrangement that includes software that is more than
incidental to the products or services as a whole, software and software-related
elements are included within the scope of SOP 97-2. Software-related elements
include software products and services as well as any non-software
deliverable(s) (including hardware) for which software deliverable is essential
to its functionality. The Company adopted the provisions of this statement
effective October 1, 2003, and the adoption did not have any effect on the
Company's consolidated financial statements.
Financial Accounting Standards Board (FASB) Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities addresses how a
business should evaluate whether it has a controlling financial interest in an
entity. The Company does not believe that it has any involvement with variable
interest entities that require it to consolidate under FASB Interpretation No.
46.
NOTE K - WARRANTY OBLIGATIONS
- -----------------------------
The Company recognizes the estimated cost associated with its standard warranty
on products at the time of sale. The estimate is based on historical failure
rates and current claim cost experience. The following is a summary of the
changes in the Company's accrued warranty obligation (which is included in
accrued expenses) for the reporting period:
Beginning Balance as of October 1, 2003 $ 347,000
Deduct: Payments (65,000)
Add: Provision 37,000
---------
Ending Balance as of December 31, 2003 $ 319,000
=========
NOTE L - SUBSEQUENT EVENTS
- --------------------------
On February 10, 2004, the Company signed an agreement to sell its remaining
4.99% interest in its South African Affiliate for proceeds of approximately
$150,000, which the Company expects will result in a small gain. The Company
anticipates this sale to be approved and payment received in March 2004. This
entity will continue as the Company's non-affiliated distributor in the South
African marketplace.
10
Global Payment Technologies, Inc.
December 31, 2003
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
- ---------------------
Three months ended December 31, 2003 compared with three months ended
December 31, 2002
- ---------------------------------------------------------------------
Sales
Net sales decreased by 27.3%, or $1,627,000, to $4,333,000 in the three months
ended December 31, 2003 as compared with $5,960,000 in the comparative
prior-year period. The decrease was primarily due to lower demand for the
Company's Argus gaming product in Australia, offset in part by increased sales
of its vending product "Aurora" for which sales commenced in January 2003. Sales
of the Company's gaming products for first quarter of fiscal 2003 was
$3,794,000, or 87.6% of sales, as compared to $5,655,000, or 94.9% of sales, in
the prior year period. Sales of the Company's beverage and vending products for
the first quarter of fiscal 2003 were $539,000, or 12.4% of sales, as compared
to $305,000, or 5.1% of sales, in the prior year period.
Gross Profit
Gross profit decreased to $815,000, or 18.8% of net sales, in the three months
ended December 31, 2003 as compared with $1,390,000, or 23.3% of net sales, in
the comparative prior-year period. For the current quarter, indirect costs were
reduced approximately $160,000 due to cost reduction initiatives in fiscal 2003.
However, as a result of the sales decrease of 27.3% noted above and the related
reduction in production, gross profit as a percentage of sales was negatively
effected. Throughout this quarter the Company had continued to achieve
improvements in its purchasing and manufacturing efficiencies, and as a result
has achieved increases in its gross profit, as a percentage of sales, as
compared to the quarters ended March 2003, June 2003, September 2003,
respectively, of 15.9%, 16.2% and 7.5% (which included an increased inventory
writedown based upon management's decisions to discontinue and transition from
earlier generation products). While the Company continues to work towards
further improvements from lower purchasing costs, improved manufacturing
efficiencies and lowering production costs, in large part from its December 2003
cost reduction initiatives, margins in the future will continue to be affected
by the mix of products as well as sales volumes.
Operating Expenses
Operating expenses decreased to $1,852,000, or 42.7% of sales, in the three
months ended December 31, 2003 as compared with $2,112,000, or 35.4% of sales,
in the comparative prior-year period. This decrease of $260,000 is primarily the
result of the Company's cost reduction initiatives during fiscal 2003 as well as
a $45,000 gain on its foreign currency translation. Further, commencing in
September 2003 and ending in December 2003, the Company completed its cost
reduction initiatives, which will reduce total costs by approximately $3 million
on an annualized basis beginning with the quarter ending March 31, 2004. While
operating expenses decreased in absolute dollars, the increase as a percentage
of sales was primarily due to the 27.3% reduction in sales this quarter as
compared to the prior year ago period.
Income Taxes
With respect to the provision for income taxes, the effective rate was .6% as
compared to 41.5% in the prior-year period. This decrease in the effective tax
rate is primarily the result of the Company providing a full valuation allowance
against its deferred income tax assets, in its fiscal year ended September 30,
2003, due to the Company's continued losses and the uncertainty as to the
Company's ability to generate sufficient taxable income to realize the full
value of those assets. The valuation allowance is subject to adjustment based
upon the Company's ongoing assessment of its future taxable income and may be
wholly or partially reversed in the future.
Net Loss
Net loss for the quarter was ($988,000), or ($0.18) per share, as compared to
the ($340,000), or ($0.06) per share, in the comparative prior-year period. In
addition to its operations, the Company owns interests in various unconsolidated
affiliates in key regions of the world, all of which are accounted for using the
equity method,
11
Global Payment Technologies, Inc.
December 31, 2003
except for South Africa which effective April 2003 is accounted for on a cost
basis. Included in the results of operations for the three months ended December
31, 2003 and 2002 are the Company's share of net profits of these affiliates of
$87,000 and $207,000, respectively. In the three months ended December 31, 2003
and 2002, equity in income of unconsolidated affiliates increased by
approximately $80,000 and $125,000, respectively, which represents the
recognition of the Company's share of the gross profit on intercompany sales to
its affiliates that have been recognized by these affiliates. Excluding the
intercompany gross profit adjustment, the Company's share of net income of these
unconsolidated affiliates was $7,000 and $82,000 for the three months ended
December 31, 2003 and 2002, respectively.
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, interest payments on the Company's
indebtedness and investments in affiliates. As a result of the Company's
agreements in December 2003 and January 2004 amending its credit facility, and
the completion of its September 2003 and December 2003 cost reduction
initiatives which will reduce total cost at an annualized rate of $3 million,
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 operations throughout
fiscal 2004.
At December 31, 2003, the Company's cash and cash equivalents were $1,498,000 as
compared with $1,220,000 at September 30, 2003. A significant portion of the
Company's cash balance consists of currency used to test the Company's
products, and therefore is not anticipated to be utilized for working capital
purposes in the normal course of business.
As of September 30, 2003, the Company was not in compliance with certain
financial covenants; however, it had received a waiver and amendment for such
non-compliance in both December 2003 and January 2004, prior to filing its Form
10-K. The amendments include new financial covenants, which the Company
anticipates it will meet due to its cost reduction initiatives and based upon
the expectation of results for fiscal 2004. The amendment also includes a
reduction of the Revolving Line of Credit ("RLC") from $2 million to $1.2
million, an RLC termination date of December 31, 2004 (previously September 10,
2005), as well as increases in its RLC interest rates between 200 - 400 basis
points effective March 1, 2004. As of December 31, 2003, outstanding borrowings
under the Company's term loans and the revolving line of credit were $900,000
and $500,000 respectively.
As of December 31, 2003, the Company was in full compliance with its financial
covenants. The Company has initiated outsourcing some of its manufactured
product in an effort to improve gross margin percentages as well as its cash
flow. An inventory reduction plan is also in place to further improve future
cash flows. Although the Company has amended its current credit facility, the
Company is in discussions with other lenders to put in place an asset-based
lending agreement, which would replace its existing facility and could
potentially provide additional financing availability. The Company anticipates
establishing a new credit facility prior to the expiration of its existing
facility, which expires on December 31, 2004; however, no assurances can be
given that the Company will be successful in establishing a new financing
arrangement or renew its existing agreement. As a result of the Company's
agreements in both December 2003 and January 2004 amending its credit facility,
and the completion of its September 2003 and December 2003 cost reduction
initiatives which will reduce total costs at an annualized rate of $3 million,
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 operations throughout
fiscal 2004. Further, the Company anticipates its cash flow will improve by
receiving dividends from its Australian affiliate and continuing its efforts to
collect its accounts receivable and reduce its inventory requirements. The
accompanying consolidated financial statements have been presented on a
going-concern basis based on management's plans described above, and accordingly
do not contain any adjustments that could arise from these uncertainties.
12
Global Payment Technologies, Inc.
December 31, 2003
Net cash provided by operating activities was $801,000 in the three months ended
December 31, 2003. This amount is due to decreased accounts receivable of
$2,549,000, primarily due to lower sales this quarter and continued steady
collections of prior accounts receivable, and decreased inventory of $6,000,
offset, in part by, a net loss for the period, adjusted for non-cash items, of
($702,000), decreased accrued expenses and other current liabilities of
$482,000, decreased accounts payable of $470,000, an increase in prepaid
expenses and other assets of $84,000 and increased income taxes receivable of
$16,000. Net cash used in operating activities was $466,000 in the three months
ended December 31, 2002. This amount is due to a net loss for the period,
adjusted for non-cash items, of ($274,000), increased accounts receivable of
$565,000, decreased accrued expenses and other current liabilities of $102,000
and increased inventory of $36,000, offset, in part by, increased accounts
payable of $401,000, decreased income taxes receivable of $99,000 and a decrease
in prepaid expenses and other assets of $11,000.
Cash used in investing activities for the three months ended December 31, 2003
amounted to $130,000 as compared with $325,000 in the prior-year period.
Investments in property and equipment in the three months ended December 31,
2003 amounted to $79,000 as compared with $144,000 in 2002. In addition, for the
three months ended December 31, 2003 the Company invested $51,000 in its South
African affiliate for working capital purposes as compared with $202,000 in
2002. The Company also received a dividend distribution of $21,000 from its
South African affiliate in the three months ending December 31, 2002.
Cash (used in) provided by financing activities in the three months ended
December 31, 2003 and 2002 consisted of net bank (repayments) borrowings of
($393,000) and $1,066,000, respectively. In the three months ended December 31,
2002 the Company received $29,000 from the exercise of stock options.
At December 31, 2003, future minimum payments under noncancellable operating
leases and payments to be made for long-term bank debt maturing over the next
five years are as follows in ($000):
Fiscal Year Operating Lease Debt Repayments
----------- --------------- ---------------
2004 334 500
2005 415 900
2006 285 -
Thereafter - -
In addition to the amounts above, and in the normal course of business,
purchase orders are issued which obligate the Company for future inventory
purchases. As of December 31, 2003, purchase order commitments approximated $5.2
million and will be used for production requirements up to, and in excess of,
six months.
Critical Accounting Policies
- ----------------------------
This management discussion and analysis is based on our consolidated financial
statements which are prepared using certain critical accounting policies that
require management to make judgments and estimates that are subject to varying
degrees of uncertainty. While we believe that these accounting policies and
management's judgments and estimates are reasonable, actual future events can
and often do result in outcomes that can be materially different from
management's current judgments and estimates. We believe that the accounting
policies and related matters described in the paragraphs below are those that
depend most heavily on management's judgments and estimates.
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
13
Global Payment Technologies, Inc.
December 31, 2003
the introduction of new technology or products by the Company and its
competitors. These items, as well as the introduction of new technology on
products, could result in future inventory obsolescence.
Software Capitalization Costs:
- ------------------------------
Based upon achieving technological feasibility through a detailed program design
for Argus(TM) and Aurora products, the Company has capitalized the cost of
software coding and development of these products, and reflects the amortization
of these costs in cost of sales. The annual amortization is calculated using the
greater of (a) the ratio that current gross revenues for a product bear to the
total of current and anticipated future gross revenues for that product or (b)
the straight-line method over the remaining estimated economic life of the
product including the period being reported on. The estimation of both future
sales of products as well as the life of the product are critical estimates that
are affected by both internal and external factors that might affect the
Company's estimates. If the useful life is reduced, or sales projections fall
short of the estimation, amortization expense will increase or accelerate.
Revenue Recognition:
- --------------------
The Company recognizes revenue upon shipment of products to its customers and
the passage of title, including shipments to its unconsolidated affiliates, or
at the time services are completed with respect to repairs not covered by
warranty agreements. With respect to sales to its unconsolidated affiliates, the
Company defers its pro rata share of gross profit on those sales until such time
as its affiliates sell to a third party customer. The timing of sales to
affiliates can have an effect on the Company's recognized profitability.
Warranty Policy:
- ----------------
The Company provides for the estimated cost of product warranty at the time
related sales revenue is recognized. Furthermore, the Company warrants that its
products are free from defects in material and workmanship for a period of one
year, or almost two years relating to its Argus and Aurora products, 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 beyond
the warranty period are charged to the Company's customers.
Reserve for Uncollectible Accounts Receivable:
- ----------------------------------------------
At December 31, 2003, the Company's accounts receivable balance was $3.8
million. The Company's accounting policy is to reserve for the accounts
receivable of specific customers based on our assessment of certain customers'
financial condition. We make these assessments using our knowledge of the
industry coupled with current circumstances or known events and our past
experiences. This policy is based on our past collection experience. To the
extent that our experience changes, global economic conditions deteriorate or
our customers experience financial difficulty our reserve may need to increase.
Investments in Unconsolidated Affiliates:
- -----------------------------------------
The Company applies the equity method of accounting to its investments
(including advances) in entities where the Company has non-controlling ownership
interests of 50% or less and exercises a significant influence on that entity.
The Company's share of these affiliates' earnings or losses is included in the
consolidated statements of operations. 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. For investments in which no public market
exists, the Company reviews the operating performance, financing and forecasts
for such entities in assessing the net realizable values of these investments.
Long-Lived Assets:
- ------------------
The Company accounts for long-lived assets pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement requires that long-lived assets
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying
14
Global Payment Technologies, Inc.
December 31, 2003
amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer
depreciated. The Company adopted SFAS No. 144 on October 1, 2002. The adoption
of SFAS 144 did not affect the Company's financial statements. Prior to the
adoption of SFAS No. 144, the Company accounted for long-lived assets in
accordance with SFAS 121, Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. The Company reviews its long-lived assets,
at least annually, for indicators of impairment or upon actual impairment events
or indicators.
Income Taxes:
- -------------
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes". 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. The effective tax rate for the Company is
affected by the income mix derived from the core business and from its share of
income from foreign affiliates that may have different tax rates. Realization of
deferred tax assets is primarily dependent upon the Company's future
profitability, and the Company has, consequently, provided a full valuation
allowance, in fiscal 2003, against its deferred income tax assets due to the
impact of the full fiscal 2003 loss and uncertainty as to the ability to
generate future taxable income to sufficiently realize those assets. To the
extent the Company's profitability improves, the valuation allowance may be
wholly or partially reversed. At such time that the Company believes that it
will realize sufficient taxable income the valuation allowance will be
reassessed.
Special Note Regarding Forward-Looking Statements: A number of statements
- -------------------------------------------------
contained in this discussion and analysis 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 possible
impact of competitive products and pricing; uncertainties with respect to the
Company's business strategy; general economic conditions in the domestic and
international markets in which the Company operates; the relative strength of
the United States currency; and other risks described in the Company's
Securities and Exchange Commission filings.
15
Global Payment Technologies, Inc.
December 31, 2003
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the Company's quantitative and
qualitative disclosures about market risk since the filing of the Company's
Annual Report on Form 10-K for the year ended September 30, 2003.
Item 4. Controls and Procedures
The Company maintains a system of disclosure controls and procedures that is
designed to provide reasonable assurance that information, which is required to
be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934, as amended, is accumulated and communicated to
management in a timely manner. The Company's Chief Executive Officer and Chief
Financial Officer have evaluated this system of disclosure controls and
procedures as of the end of the period covered by this quarterly report and
believe that the system is operating effectively to ensure appropriate
disclosure. There have been no changes in the Company's internal control over
financial reporting during the most recent fiscal year that have materially
affected, or are reasonably likely to materially affect the Company's internal
control over financial reporting.
PART II. OTHER INFORMATION
-------- -----------------
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit - 31.1 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit - 31.2 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit - 32.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K
On January 13, 2004 the Company filed a Current Report on Form 8-K
dated January 13, 2004 under item 12 announcing the Company's financial
results for the year ended September 30, 2003.
On February 12, 2004, the Company furnished a Current Report on Form
8-K dated February 12, 2004 under Item 12 announcing the Company's
financial results for the quarter ended December 31, 2003.
Signatures
In accordance with the requirements 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/ Thomas McNeill
----------------------------------
Vice President,
Chief Financial Officer and
Principal Accounting Officer
Dated: February 13, 2004