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, 2004
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
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
425B OSER AVENUE, HAUPPAUGE, NEW YORK 11788
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 631-231-1177
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Securities registered pursuant to Section 12(b) of the Act:
NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(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 ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in the Securities and Exchange act rule 12b-2). Yes___ or NO_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 November 26, 2004, was approximately $27,600,000.
As of November 26, 2004, the registrant had a total of 5,627,240 Common
Shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement of the registrant for the
annual meeting of stockholders to be held in 2005 are incorporated by reference
into Part III of this report.
2
PART I
ITEM 1. BUSINESS
GENERAL
Global Payment Technologies, Inc. (the "Company") is a Delaware corporation
established in 1988. 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.
On November 1, 1999, Global Payment Technology Holdings (Proprietary) Limited
("GPTHL"), the Company's South African affiliate, formed International Payment
Systems Pty Ltd. ("IPS") and assigned to IPS its rights to all of GPTHL's
non-gaming activities, primarily the distribution of Ingenico, De La Rue and
Scan Coin products. The Company had a 30% interest in IPS. GPTHL holds the
exclusive distribution rights to the Company's products in the South African
region. On January 18, 2001, GPTHL merged its operations with Vukani Gaming
Corporation ("Vukani") (formerly South African Video Gaming Corporation (Pty)
Ltd.), a wholly owned subsidiary of Hosken Consolidated Investments Ltd.
("HCI"). By virtue of the agreement, the Company's ownership of GPTHL was
reduced from 23.5% to approximately 5%. In March 2002, the Company exercised its
right to acquire shares from an existing shareholder, HCI, for $979,000, which
increased the Company's ownership to 24.2%. In April 2003, the Company sold a
significant portion of its investments in its South African affiliates. The
Company received approximately $1.9 million in cash for the sale of its entire
interest in IPS and a major portion of its interest in GPTHL. As a result of
this transaction, which did not result in a gain or loss, the Company's
ownership interest in GPTHL has been reduced from 24.2% to 5%. GPTHL's Vukani
division is one of the two licensed operators in the South African route market
province of Mpumalanga. The cash received was a return of all of the Company's
advances and investments resulting in the Company recovering the carrying value
of such advances and investments. On January 15, 2004, the Company sold its
remaining 5% ownership interest in GPTHL for a gain of $78,000.
3
The Company has 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 2002, the Company and two other shareholders formed eCash Management
Pty. Ltd., an Australian based company. This entity was formed to market,
distribute, service and support Automated Teller Machines across Australia and
New Zealand. The Company owns a 35% interest in this entity.
Since 1998, the Company owned 70% of Global Payment Technologies (Europe)
Limited ("GPT-Europe"). This entity is based in the United Kingdom and is
responsible for sales and service of the Company's products in Europe. Effective
October 1, 2001, the Company acquired the remaining 30% of the stock of
GPT-Europe, for a de minimis amount, from the then operations manager and
promoted him to European sales manager.
In April 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. To date, Abacus Financial
Management, Inc. USA has not had material operations.
In fiscal 2004, the Company established a wholly owned subsidiary in Moscow,
Russia (GPT-Russia) to provide local service of the Company's products.
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 its high of $43.9 million in fiscal 1999. In fiscal
2000, sales declined to $22.5 million as a result of a slowdown in the worldwide
gaming market and delays in key projects, which resulted in increased inventory
at the Company's affiliates. During fiscal 2000 the Company significantly
reduced inventory at its affiliates, matching demand in those regions, which
resulted in the resumption of production and shipments in August 2000. In fiscal
2001, sales increased 43% to $32.2 million primarily as a result of increased
demand for our products in both Australia and Russia, as well as the addition of
several new customers during the year. In fiscal 2002, sales decreased 14% to
$27.7 million as a result of customers lowering their inventory and taking
advantage of the Company's shorter lead-times on its Argus gaming validator,
certain product issues which have since been resolved, as well as softer
worldwide economic conditions. In fiscal 2003, sales decreased 5.9% to $26.1
million as a result of reduced sales in Eastern Europe which were hindered by
initial product issues, which have since been resolved, offset in part by sales
of the Company's new vending product which commenced in January 2003. With the
launching of its new beverage and vending product in fiscal 2003 the Company
achieved an increase in its beverage and vending sales with $5.7 million as
compared to $2.2 million in fiscal 2002. As a percentage of sales, beverage and
vending products represented 21.7% in fiscal 2003 as compared with 8% in fiscal
2002. In fiscal 2004, sales decreased 6.5% to $24.4 million primarily due to
$4.3 million in lower sales of the Company's gaming products to its Australian
affiliate offset, in part, by a $1.7 million increase in sales of the Company's
Aurora product to both the vending and gaming markets and a $637,000 increase in
sales to the South African gaming market. Gaming sales for fiscal 2004 were
$19.304 million, or 79.2% of sales, as compare with $20.417 million, or 78.3% of
sales, in fiscal 2003. Beverage and vending sales for fiscal 2004 were $5.077
million, or 20.8% of sales, as compared with $5.659 million, or 21.7% of sales
in fiscal 2003.
4
The Company's international sales amounted to 86%, 90% and 92% of net sales in
fiscal 2004 2003 and 2002, respectively. Management believes the international
markets for currency validation systems in both gaming and beverage and vending
may grow at a faster rate than in the United States and, therefore, may
represent the Company's best long-term growth opportunity.
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 have tended to focus primarily on the broader, higher-volume
market using standardized product configurations. Our approach in the worldwide
gaming market was initially a "niche" strategy that allowed the Company to
develop a strong international customer base that originally started with
manufacturers too small to attract the larger competitors. With development
completed and the commencement of sales of our Argus(TM) and Aurora products in
January 2001 and January 2003, respectively, and the launch of our new
"Advantage" and "SA-4" products in fiscal 2005, this strategy will continue, and
be broadened paying particular attention to markets which have the largest
opportunity for growth. The Company has both gained new customers and retained
existing customers based on its strength internationally and its reputation for
working closely to adapt to customers' needs. The Company will continue to
market directly to the OEMs and Operators in Eastern Europe to continue its
pursuit to regain lost market share due to initial product issues on its Argus
product, which have since been resolved. During the second half of fiscal 2004,
the Company has achieved significant increases in gaming sales with Aurora in
this part of the world. The Company has in the past and will continue to attempt
to strengthen and grow its relationships with the OEMs through joint marketing
and advertising efforts and by creating country-specific currency databases and
customization, which will allow OEMs an opportunity to seek new potential
markets worldwide. Today the Company has in excess of 70 country-specific
databases and 17 multi-country databases, which is one of the largest database
libraries in the industry. Further, it plans to continue to build a large
library of databases for its newest products, as well as adding to its existing
Argus and Aurora databases.
5
As a result of the Company's launch of its Aurora product in fiscal 2003, it has
increased its Aurora revenue from $5.3 million in fiscal 2003, to $7.0 million
in fiscal 2004. In fiscal 2003 the Company signed a four year supply contract,
valued in excess of $10,000,000, with tobaccoland Automaten GmbH & Co, a German
based cigarette-vending operator with over 200,000 machines or approximately 25%
of the German market share, however, in the last quarter of fiscal 2004 the
overall German tobacco vending industry has faced significant volume shortfalls
due to significant government increases in cigarette taxes. During this
timeframe, however, the Company more than offset the loss in revenue from this
industry segment by successfully and substantially penetrating sales into the
Russian gaming market with its Aurora, originally dubbed the "beverage and
vending" product. As a result of this progress GPT has increased its Aurora
sales year over year by penetrating into both the beverage and vending industry
as well as the gaming industry, thus increasing its customer base as well as
venues and markets Aurora serves. The Company will continue to search for new
growth opportunities both domestically and internationally for all its products.
The Company believes it is in position to gain additional business with its
Aurora product based on its acceptance as a currency validator for a number of
growing markets worldwide. By leveraging the Company's international
relationships, the Company will seek growth opportunities in the domestic gaming
sector, as the United States is viewed as an important target for expansion by
several of our major OEM customers. Further, the Company has launched its new
Advantage product in early fiscal 2005 and believes it will allow the Company to
penetrate the domestic gaming market as well as other international markets.
In the gaming venue, the Company markets its products principally to the OEMs as
well as the end-users (i.e., casino operators) who purchase slot 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 has also provided 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. In 1999, the Company developed
programs and plans designed to elevate the level of our customers' product
knowledge. Such programs and plans included the development of formally
documented maintenance schedules and similar programs, which are proposed to
customers. These maintenance programs are being offered in coordination with the
Company's OEM customers, and are intended to broaden awareness of the Company
and its products within the gaming industry and as a result increase sales.
Additionally, the Company will be focusing its 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. This
overall strategy allows the Company's products to continue to demonstrate the
high level of performance and quality achieved in many markets throughout the
world.
6
The Company's marketing strategy for the significantly larger worldwide beverage
and vending industry will be very similar to that of the Company's gaming
strategy. During fiscal 2002, the Company completed its field trials of the
Aurora product and initiated its sales campaign. During fiscal 2003, with sales
of its new Aurora product commencing in January 2003, the Company achieved a
significant $3.5 million increase in beverage and vending sales to $5.7 million.
Throughout fiscal 2004 and into fiscal 2005, the Company will continue to market
and sell its Aurora product through its already existing distribution channels,
as well as through the creation of additional alliances and sales channels to
further penetrate this market. The beverage and vending industry's requirement
for currency validation equipment is more than $375 million per annum, or three
times that of the gaming market. In addition, further penetration into the
beverage and vending market, as well as the gaming market, will allow the
Company to achieve a major portion of its diversification strategy and if
successful could reduce the reliance on any one market as well as expand its
customer base.
The Company's overall sales and marketing strategy in the worldwide gaming and
beverage and vending industries is to deliver a high quality product supported
by local sales and service in order to make the Company's products the market
standard for currency validation products. The Company has successfully pursued
this strategy in Australia, South Africa, Latin America and Russia where the
Company's products are accepted as the industry standard in the gaming market.
Also toward this end, the Company has sales and service offices in London,
England and Moscow, Russia as well as a joint venture that provides local sales
and service in Australia. It also has distributors in Russia, Italy, Southeast
Asia, Latin America, the Middle East and South Africa.
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 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 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 continues to grow
and as technological advances are incorporated into the products' design. The
Company spent approximately $75,000, $150,000, and $225,000 during fiscal 2004,
2003 and 2002, respectively, on research and development. The Company's research
and development consists primarily of efforts to expand its product lines into
new applications, as well as to achieve improvements in technology.
7
The Company's product development efforts have been focused on the design of its
latest generation of validator products, the first of which was Argus(TM).
Argus(TM), the Company's gaming validator, began selling in January 2001. Sales
of this product represented 19%, 63%, 54% and 51% of unit validator sales in
fiscal 2001, 2002, 2003 and 2004, respectively. In the summer of 2002, the
Company completed the development of its new product designed specifically to
address the requirements of the vending industry. Following successful field
trials during the summer and fall of 2002, the Company commenced its sales and
marketing campaign which led to sales commencing in January 2003 on its new
product called "Aurora". Sales of this product represented 29% and 43% of unit
validator sales in fiscal 2003 and 2004, respectively. Building from its
engineering libraries, the Company has launched several new products, including
"Advantage" and "SA-4", during the beginning of fiscal 2005 that the Company
anticipates will provide the Company additional flexibility in meeting its
customers' needs in both the domestic and international gaming markets. For
Argus(TM) and Aurora products, the Company has, since achieving technological
feasibility through a detailed program design, capitalized the cost of software
coding and development, and reflects the amortization of these costs in cost of
sales.
The Company's principal products in fiscal 2004 include three basic validator
models (GII, Argus(TM) and Aurora) 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 2000, 2001 and 2002, this shift
continued and Generation II and Argus(TM) product line sales accounted for 76%,
89% and 92%, respectively of unit sales. The Argus product has been designed to
be a drop-in replacement for Generation II products and is focused toward
bringing new technological features to the marketplace. During fiscal 2002 and
fiscal 2003, sales substantially shifted from the Company's Generation II
product line to its Argus(TM) product line, which represented 63% and 80% of
gaming validator sales. This shift increased further in the fourth quarter of
fiscal 2003 and represented 96% of gaming sales. This shift, coupled with the
Company's increased marketing efforts on Argus, rather than its Generation II
product line resulted in an increased inventory reserve in the fourth quarter of
2003. The Company believes it has adequately reserved for inventory obsolescence
for the shift in demand from its Generation I products and its Generation II
products.
The Company's Generation II product line features several technological advances
designed specifically to meet the requirements of the gaming industry. The
Generation II line includes the Company's "IDS," "IDUS," "IBS," and "IBSi"
validators.
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. 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. During fiscal 2004, the
Company has commenced a phase out program on this product, however; we will
maintain field service and support for warranty repairs for several more years.
Argus(TM) is a worldwide gaming note validator, which can process multi-country
databases, with a substantially greater number of notes (between 2.44 inches to
3.35 inches in width), in all 4 directions. Argus is designed to be a one size
fits all validator that uses essentially the same hardware for every currency
throughout the world. Argus is equipped with a standard bar code reader, which
has the added capability of reading coupons and currency at the same time. In
the future, GPT plans to explore the option of integrating smart-card and
mag-card technologies with its existing products. The Argus sensor system has
the Company's patented Red, Green, Blue and Infrared (RGBI) optical array, which
generates 56 channels of high-resolution data. It is arranged in a unique layout
that allows for the analysis of a note's signature (fingerprint) without any
gaps between optical sensors. The optical information provided by Argus is
reflective (off the note), transmissive (through the note) and a combined RGBI
pattern of reflective data to create a color signature of the note being
evaluated. The Argus validator also has a high-sensitivity magnetic sensor and
high-resolution Side-Looking Sensors(TM). Both the Generation II and III product
lines offer 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.
Aurora is the Company's first validator specifically designed for the worldwide
beverage and vending industries. Aurora is an injection-molded modular design
that can be used in the up-stack or down-stack orientation and uses state of the
art optics in its internal sensor system with the Company's patented RGBI
optical array. With field trials completed in the fall of 2002 and sales
commencing in January 2003, this product has quickly replaced most sales of the
Company's M-125 and M-150. This product originally targeted for the beverage and
vending industry has also been aggressively marketed in the un-regulated gaming
market in 2004 with substantial penetration. The Company will continue marketing
efforts in both venues during fiscal 2005. As with Argus, Aurora is designed to
be a one size fits all validator that essentially uses the same hardware for
every currency in the world.
9
The Company's newest products launched in early fiscal 2005 are Advantage and
SA-4. Advantage is a worldwide note validator that can handle bills up to 3.35
inches in width. Advantage uses the latest DSP chip set for a 20X increase in
speed, which decreases the time it takes to validate to less than half a second.
The DSP chip enables the use of advanced algorithms, which significantly improve
security and performance. The Advantage sensor system has the Company's patented
Red, Green, Blue and Infrared (RGBI) optical array and an industry standard
bar-code reader that is compatible with the various Ticket-In Ticket-Out (TITO)
systems currently found on many casino floors worldwide. The newly designed
precision mechanism and side-looking optical system increases the sensitivity of
the Advantage currency validator to detect fraud attempts. The number of
different notes retained in a single database memory is expandable from 40 to
128 in all four directions, which enables Advantage to securely validate
multiple currencies without the need to re-program.
SA-4 is a worldwide note validator that can handle bills up to 3.35 inches in
width while holding a database of up to 128 different bank notes in four
directions, which enables SA-4 to securely validate multiple currencies without
the need to re-program. The DSP chip enables the use of advanced algorithms,
which significantly improve security and performance. The SA-4 Advantage sensor
system has the Company's patented Red, Green, Blue and Infrared (RGBI) optical
array and an industry standard bar-code reader that is compatible with the
various Ticket-In Ticket-Out (TITO) systems currently found on many Casino
floors worldwide. Many countries use magnetic ink to increase the security of
their currency. The SA-4 currency validator contains a new high-sensitivity
magnetic circuit that doubles the sensitivity to detect these inks. SA-4
contains front and rear sensors, which guarantee the detection of critical bill
position information. SA-4 supports the various industry-standard communication
protocols commonly used for vending, gaming, and video lottery machines.
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. This warranty has
essentially doubled with its generation III validators (Argus, Aurora, Advantage
and SA-4). The Company or its authorized service agents will repair or replace
any units that 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 warranted
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, Russia, Latin
America, South Africa, Europe and Southeast Asia). In these markets, the local
sales and service joint venture partners and distributors 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 2005 as opportunities arise. Over the last three years, the
Company's cost of warranting its products has varied primarily as a direct
result of the increase or decrease in the unit sales, as well as product
performance. Warranty expense for 2004, 2003 and 2002 was 198,000, $327,000, and
$280,000, respectively, which represents actual costs incurred and an estimate
of future costs to be incurred.
10
MARKETING AND SALES
An "in-house" sales force consisting of sales representatives, sales/product
technicians and customer service support personnel, as well as strategic joint
ventures and distributors, conducts the Company's primary sales and marketing
efforts in both the domestic and international markets. The Company has a joint
venture providing local sales and service in the key market of Australia and
Company-owned sales and service offices in London, England and Moscow, Russia.
In addition, the Company has distributors in Southeast Asia, Italy, Latin
America and South Africa. The overall sales and service network provides
effective international coverage for the Company's products and customers and
reflects the Company's commitment to providing superior service worldwide.
CUSTOMER CONCENTRATION
During fiscal 2004, the Company's largest customer, GPTA, accounted for
approximately 34% of net sales. A significant portion of GPTA's sales is to
Aristocrat Technologies Australia Pty Ltd. Net sales to the gaming industry
accounted for approximately 79.2% of the Company's revenues, with the remaining
20.8% primarily from product applications in the beverage and vending industry.
While the Company has diversified its sales mix with sales to the beverage and
vending industry, increased sales to Russia, and added new accounts during the
year, it continues to sell to a small group of OEMs in the gaming and beverage
and vending industries. The Company must achieve significantly less dependence
on several important customers by expanding into new countries, expanding its
customer base and developing new products to increase the market size it can
market to, such as domestic gaming and the mass market vending applications.
Until such initiatives are achieved, the Company is at risk that lower demand
for any one product or market, or a loss of a significant customer, can
substantially impact its revenues and net income.
MANUFACTURING
Since 1995, the Company's operations have been conducted from a leased facility,
currently 44,000 square feet, which houses the manufacturing and administrative
functions in Hauppauge, New York.
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, via its key suppliers, and testing permits the Company to
shorten its production cycle and protect patented and proprietary technology.
During fiscal 2000, the Company transitioned a portion of its manufacturing to
demand flow technology. In addition, the Company has evaluated and will continue
to evaluate its suppliers in an effort to reduce its total cost of
manufacturing, a process that may include vendor consolidation and selected
outsourcing. Despite these efforts, the Company's manufacturing efficiencies
significantly declined in fiscal 2000 as a direct result of the 49% sales
decline resulting in higher manufacturing costs per unit, as well as less
efficient operations as a result of lower and more frequent production runs. In
fiscal 2001, the Company incurred higher startup costs on its new products;
however, this was offset by increased production volumes and commensurate
efficiencies resulting from a 43% increase in sales and production.
11
As the Company began its transition to the Argus product line in fiscal 2001, it
incurred increased costs related to lower volumes on the two product lines. As
this transition was substantially completed during fiscal 2002, Argus was
expected to be produced in a more efficient manner at a lower cost, and at the
same time allowing the Company increased flexibility to meet customers' demand.
In the fourth quarter of 2002 these improvements were more than offset by the
significant reduction in sales and production. During fiscal 2003, the Company's
introduction of its new Aurora product with higher initial purchase costs and
increased initial manufacturing costs, coupled with overall lower sales volume
than fiscal 2002 resulted in lower net margins for the year. The Company did,
however, take action to significantly reduce its purchased component costs on
Aurora and Argus by the end of fiscal 2003 by manufacturing and selling off, on
a first-in first-out basis, its higher priced purchased components. In fiscal
2004, the Company continued its efforts to further reduce costs and to improve
the margin on its Aurora product, and while improvements in purchasing costs and
manufacturing efficiencies have been achieved by the end of fiscal 2004, until
such time as these benefits are substantially realized over the first two
quarters of fiscal 2005, the margins in the future will continue to be affected
by the mix of products as well as sales volumes.
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 that 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, and subsequently completed, its
agreement to be acquired by Coin Acceptors, Inc. ("Coinco"), a St. Louis-based
supplier of primarily vending products. This resulted in Coinco being a
competitor that has an integrated gaming and beverage and vending product line,
as well as relationships in both industries. A similar competitor is Mars
Electronics International ("MEI"), an entity that has products able to serve
both the gaming and the beverage and vending marketplace.
12
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. 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"), International Currency Technologies, Sanyo, Conlux,
Coegis and Cashcode Company, Inc. ("Cashcode") compete with the Company in the
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, Ardac and Cashcode. In the secondary low-value gaming
markets, Innovative Technology, Ltd. maintains a significant market share due to
this market's price sensitivity and 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 service,
quality, durability and performance while maintaining a high level of protection
against tampering and counterfeit currencies.
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.
13
The Company holds ten 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; "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; "STACKER MECHANISM FOR STACKING BANK NOTES" U.S. Patent No. 5899452 issued
May 4, 1999; "APPARATUS AND METHOD FOR DETECTING A SECURITY FEATURE IN A
CURRENCY NOTE," U.S. Patent No. 6,104,036 issued August 15, 2000; and "BANK NOTE
VALIDATOR (RGBI)" U.S. Patent No. 6,223,876 issued May 1, 2001. Certain patents
cover technology used in the Company's first, second and third generation
validator product lines and the remaining patents cover technology used in
certain special models. 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 application, 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 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. The Company has obtained patents in
Australia, New Zealand and South Africa under the Eurasian Patent Convention
corresponding to U.S. Patent No. 6,223,876 covering the use of short wave-length
light in a validator to discern the color and other characteristics of bills
being scanned. In addition the Company has obtained a patent in New Zealand
corresponding to U.S. Patent No. 5,630,755 covering a system for monitoring and
tracking money collected from a gaming machine and the like.
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.
In March 2004, the Company entered into a Cross-License Agreement with JCM
whereby the Company grants JCM a non-exclusive, royalty-free license for U.S.
Patent No. 5,630,755 and JCM grants the Company a non-exclusive, royalty-free
license to use and install the ID-003 software in bill validators manufactured
by or on behalf of the Company and sold by the Company.
14
Although the Company has not received any bona fide 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 November 16, 2004, the Company had 114 employees, consisting of 2 executives;
10 sales and customer service representatives; 23 engineers and software
developers, and technical support representatives; 18 materials, quality control
and quality assurance personnel; 9 administrative and clerical personnel; and 52
assembly/manufacturing personnel. The Company believes its relationship with its
employees is good.
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 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 market in which the Company operates; 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 relative strength of the United States currency; and other risks
described in the Company's Securities and Exchange Commission filings.
ITEM 2. PROPERTIES
The Company leases approximately 44,000 square feet which houses the
manufacturing and administrative functions in Hauppauge, New York, for a term
expiring June 30, 2006, at an annual base rental of approximately $349,000 in
fiscal 2004, increasing to approximately $372,000 in the final year of the term.
The Company believes this facility is adequate for its manufacturing needs for
the foreseeable future.
15
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.
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 2003 and 2004.
COMMON STOCK
------------
QUARTER ENDED HIGH LOW
- ------------------- ----- -----
December 31, 2002 6.79 5.30
March 31, 2003 6.09 4.10
June 30, 2003 5.00 3.50
September 30, 2003 4.288 2.95
December 31, 2003 3.65 3.05
March 31, 2004 4.25 3.16
June 30, 2004 4.06 3.15
September 30, 2004 4.08 3.25
b) HOLDERS
The approximate number of beneficial holders and holders of record of the
Company's Common Stock as of November 26, 2004 were 1,350 and 35, 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.
16
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Year Ended September 30 2000 2001 2002 2003 2004
- --------------------------------- ------------ --------- -------- -------- -----------
Net sales $ 22,507 $32,161 $ 27,713 $ 26,076 $ 24,381
Net income (loss) (1,229)(2) 806 (633)(1) (5,677)(5) (1,690)(6)
Diluted earnings (loss) per share (0.22)(3) 0.14 (0.11)(3) (1.02)(3) (0.30)(3)
Total assets (4) 24,460 26,466 24,030 17,775 16,267
Long-term debt obligations 3,617 2,800 0 0 1,354
Stockholders' equity 16,795 17,550 17,026 11,677 11,107
(1) Includes an after-tax gain of $82,000 from the sale of the Company's
unconsolidated China affiliate.
(2) Includes an after-tax gain of $221,000 from the sale of a portion of the
Company's unconsolidated South African affiliate.
(3) The weighted average shares outstanding used in the calculation of net loss
per common share did not include potential shares outstanding because they
were anti-dilutive.
(4) As described in Note 2 to the consolidated financial statements, the
Company, in connection with its fiscal 2002 annual audit, reclassified
certain costs previously included in inventory, in the amount of $2,756,000
and $1,528,000 as capitalized software costs, and molds and tooling,
respectively, as of September 30, 2001. This reclassification did not
affect reported earnings, total assets, or stockholders' equity for any
period.
(5) Based on the Company's continued losses, and related uncertainty as to the
Company's ability to generate sufficient taxable income to realize the full
value of its deferred income tax asset, the Company recorded a full
valuation allowance and related income tax expense in the fourth quarter of
fiscal 2003.
(6) Includes a gain of $78,000 from the sale of the remaining portion of the
Company's unconsolidated South African affiliate.
17
QUARTERLY INFORMATION
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Quarter Ended
Dec. 31 Mar. 31 June 30 Sept. 30 Year
------- ------- ------- -------- --------
Fiscal 2003
- -------
Net sales 5,960 7,072 7,348 5,696 26,076
Gross profit 1,390 1,123 1,189 425 4,127
Net loss (340) (858) (627) (3,852) (5,677)
Basic loss per share (0.06) (0.15) (0.11) (0.70) (1.02)
Diluted loss per share (1) (0.06) (0.15) (0.11) (0.70) (1.02)
Fiscal 2004
- -------
Net sales 4,333 5,712 7,076 7,260 24,381
Gross profit 815 1,025 1,670 1,832 5,342
Net income (loss) (988) (711) (108) 117 (1,690)
Basic income (loss) per share (0.18) (0.13) (0.02) 0.02 (0.30)
Diluted income (loss) per share (1) (0.18) (0.13) (0.02) 0.02 (0.30)
(1) The weighted average shares outstanding used in the calculation of net loss
per common share did not include potential shares outstanding because they
were anti-dilutive.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 2004 COMPARED WITH SEPTEMBER 30, 2003
SALES
Net sales for fiscal 2004 decreased by 6.5% to $24.381 million as compared with
$26.076 million in fiscal 2003. This decrease was primarily due to $4.3 million
in lower sales of the Company's gaming products to its Australian affiliate,
offset in part, by a $1.7 million increase in sales of the Company's Aurora
product to both the vending and gaming markets and a $637,000 increase in sales
to the South African gaming market. Gaming sales for fiscal 2004 were $19.304
million, or 79.2% of sales, as compared with $20.417 million, or 78.3% of sales,
in fiscal 2003. Beverage and vending sales for fiscal 2004 were $5.077 million,
or 20.8% of sales, as compared with $5.659 million, or 21.7% of sales in fiscal
2003. Net sales to international customers accounted for 86.3% and 90.0% of net
sales in fiscal 2004 and 2003, respectively.
18
GROSS PROFIT
Gross profit increased to $5.342 million, or 21.9% of net sales, in fiscal 2004
as compared with $4.127 million, or 15.8% of net sales, in the prior-year
period. In fiscal 2004, the inventory provision charged to operations decreased
by $610,000 to $237,000 in fiscal 2004 as compared to $847,000 in fiscal 2003.
This decreased provision is the result of the Company's provision required in
fiscal 2003 for the discontinuance of its generation I and II products. Further
in fiscal 2004, indirect costs were reduced by approximately $485,000 due to
cost reduction initiatives completed in December 2003. In addition, the increase
in gross profit, as a percentage of sales, was positively impacted by
improvements in margins on the Company's Aurora product, which in fiscal 2003
had significant startup costs, including higher purchase costs as well as less
efficient manufacturing. The Company is continuing its efforts to further reduce
costs and to improve the margin on its Aurora product, and while improvements in
purchasing costs and manufacturing efficiencies have been achieved by the end of
fiscal 2004, until such time as these benefits are substantially realized over
the first two quarters of fiscal 2005, the margins in the future will continue
to be affected by the mix of products as well as sales volumes. During fiscal
2004 the Company's gross profit as a percentage of sales for the quarters ended
December 2003, March 2004, June 2004 and September 2004 were 18.8%, 17.9%, 23.6%
and 25.2%, respectively.
OPERATING EXPENSES
Operating expenses in fiscal 2004 decreased to $6.857 million, or 28.1% of net
sales, as compared with $9.758 million, or 37.4% of net sales, in fiscal 2003.
This decrease of $2.901 million is primarily the results of the Company's
completion of its cost reduction initiatives in December 2003, which consisted
primarily of employee and employee related expenses, as well as operating
expenses in fiscal 2003 including $405,000, as compared to none in fiscal 2004,
for the amortization and write-down of the Company's smart card intangible asset
resulting from the Company's decision to focus on its core operations and that
it will not seek or be able to realize the benefits of this asset in future
periods.
INCOME TAXES
With respect to the provision for income taxes, the effective rate was a benefit
of 0.4% in fiscal 2004 as compared to a provision of 9.1% in fiscal 2003. This
change in the effective tax rate is primarily the result of fiscal 2004
operating losses for which no benefit has been recognized. The Company has
provided a full valuation allowance against its deferred tax assets in the
fourth quarter of fiscal 2003, and continues to provide a full valuation
allowance at September 30, 2004, due to the Company's continued annual losses
and the uncertainty as to the Company's ability to generate sufficient taxable
income to realize the full value of those assets. This 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.
19
NET LOSS
The net loss for fiscal 2004 was ($1,690,000), or ($.30) per share, as compared
with ($5,677,000), or ($1.02) per share, for fiscal 2003. In addition to its
operations, the Company owns interests in unconsolidated affiliates in Australia
and the United Kingdom which are accounted for using the equity method. Its
South African affiliate, however, was accounted for on a cost basis effective
April 2003 until the final sale of that entity in January 2004, in which the
Company recognized a gain on the sale in the amount of $78,000. Included in the
results of operations for fiscal 2004 and 2003 are the Company's share of net
profits of these affiliates of $108,000 and $676,000, respectively. In fiscal
2004 and 2003, equity in income of unconsolidated affiliates includes a
(decrease) increase of ($165,000) and $225,000, respectively, which represents
the (deferral) recognition of the Company's share of the gross profits on
intercompany sales to its affiliates that (have not) have been recognized by
these affiliates. Excluding the intercompany gross profit adjustment, the
Company's share of net income of these unconsolidated affiliates was $273,000
and $451,000 for fiscal 2004 and 2003, respectively. This decrease of $178,000
is primarily the result of lower sales and profits at the Company's Australian
affiliates, a result of the softer gaming market in Australia due principally to
tighter gaming regulations and a slowing market. Until such time as the
Australian market improves, or other export markets develop, the Company
anticipates a continued reduction in the profitability at this affiliate. In
addition, the Company owns 100% of Global Payment Technologies (Europe) Limited
and GPT-Russia, and owns 80% of Abacus Financial Management Systems, Ltd., USA,
the results of which are consolidated in the Company's financial statements.
FISCAL YEAR ENDED SEPTEMBER 30, 2003 COMPARED WITH SEPTEMBER 30, 2002
SALES
Net sales for fiscal 2003 decreased by 5.9% to $26.076 million as compared with
$27.713 million in fiscal 2002. This decrease was primarily due to lower demand
for the Company's Argus gaming product in Eastern Europe, and to product issues
which have since been resolved, offset in part by increased sales of the
Company's beverage and vending products. Sales of the Company's beverage and
vending products for the year were $5.659 million, or 21.7% of net sales, as
compared with $2.218 million, or 8.0% of net sales in the prior year. This
increase was the result of the Company's new Aurora beverage and vending
product, for which sales commenced in January 2003. Sales of the Company's
gaming products for the year were $20.417 million, or 78.3% of net sales, as
compared with $25.495 million, or 92.0% of net sales in the prior year. Net
sales to international customers accounted for 90.0% and 91.7% of net sales in
fiscal 2003 and 2002, respectively. This year the Company has substantially
transitioned its sales to its Argus gaming validator, which represented
approximately 80% of its gaming validator sales in fiscal 2003 as compared with
63% in the prior year period. Further, Argus represented 96% of gaming validator
sales in the fourth quarter of 2003.
20
GROSS PROFIT
Gross profit decreased to $4.127 million, or 15.8% of net sales, in fiscal 2003
as compared with $6.828 million, or 24.6% of net sales, in the prior-year
period. This decrease in gross profit, as a percentage of net sales, was
primarily the result of substantial startup costs relating to new products,
principally higher initial purchasing costs and less efficient manufacturing
operations on the Company's new beverage and vending product for which sales
commenced in January 2003. During fiscal 2003 Aurora sales accounted for
substantially all of beverage and vending sales as compared with none in the
prior year. While improvements in purchasing costs and manufacturing
efficiencies have been achieved by the end of fiscal 2003, the Company will not
realize these benefits until it utilizes its higher priced component material on
a first-in first-out basis, which was substantially completed in the fourth
quarter of 2003. With the ability to realize the benefit of lower purchase
prices and more efficient operations expected in fiscal 2004, direct cost of
sales are expected to decrease per unit. Gross profit, however, will be affected
by the mix of products as well as sales volumes in future periods. Finally, the
inventory provision increased by $659,000 to $847,000 in fiscal 2003 as compared
to $188,000 in the prior year. This increased provision is the result of the
current sales plan, including the Company's decision to terminate its Generation
I products, a plan to phase out its Generation II product line in fiscal 2004
and the inability to use certain Generation III components, as well as marketing
efforts being focused on Argus and Aurora products instead of earlier generation
products.
OPERATING EXPENSES
Operating expenses in fiscal 2003 increased to $9.758 million, or 37.4% of net
sales, as compared with $8.783 million, or 31.7% of net sales, in fiscal 2002.
This increase of $975,000 includes $405,000 for the amortization and write-down
of the Company's smart card intangible asset resulting from the Company's
decision to focus on its core operations and that it will not seek or be able to
realize the benefits of this asset in future periods. In addition the Company
incurred increased executive costs of $210,000 as a result of the transition to
a new CEO and the contractual obligations of the previous CEO, increased
recruiting and relocation expenses for three executives of $172,000, increased
bank related fees of $150,000 and increased legal and audit fees of $140,000,
offset in part by lower staffing costs. In September 2003, the Company initiated
a cost reduction effort, which reduced total staffing by approximately 15%. The
benefits from this initiative will be fully recognized in the first quarter of
fiscal year 2004 and will reduce total costs at an approximate annualized rate
of $1.2 million. In December 2003, the Company completed its cost reduction
initiatives, primarily a reduction of staffing and benefits, which will be fully
recognized in the second quarter of fiscal 2004 and will reduce total costs at
an approximate annualized rate of $2 million.
INCOME TAXES
With respect to the provision for income taxes, the effective rate was (9.1%) as
compared with 59.4% in the prior-year period. This change in the effective tax
rate is the result of the Company's change in mix of earnings from its own
operations and earnings derived from its foreign affiliates and, furthermore, as
a result of the provision in the fourth quarter of fiscal 2003, of a full
valuation allowance against the Company's deferred income tax asset 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.
This 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.
21
NET INCOME (LOSS)
The net loss for fiscal 2003 was ($5,677,000), or ($1.02) per share, as compared
with ($633,000), or ($.11) per share, for fiscal 2002. 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, except for South Africa, which effective April 2003 is accounted for on
a cost basis. Included in the results of operations for fiscal 2003 and 2002 are
the Company's share of net profits of these affiliates of $676,000 and $565,000,
respectively. In fiscal 2003 and 2002, equity in income of unconsolidated
affiliates includes an increase of $225,000 and $250,000, respectively, which
represents the recognition of the Company's share of the gross profits 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 $451,000 and $315,000
for fiscal 2003 and 2002, respectively. This increase of $136,000 includes the
affect of lower sales and profits at the Company's Australian affiliates, a
result of the softer gaming market in Australia due principally to tighter
gaming regulations and lower profits at its eCash affiliate. Income from the
Company's Australian affiliate was $678,000 in fiscal 2002 as compared with
$470,000 in fiscal 2003. Until such time as the Australian market improves, the
Company anticipates a continued reduction in profitability at this affiliate.
Positively affecting the Company in fiscal 2003 were lower losses at its South
African operations, totaling $60,000, which were substantially sold in April
2003, and a write down of the Company's net investment in Abacus Financial
Management Systems, Ltd. totaling $215,000 in fiscal 2002 due to the
deterioration in the financial condition of that entity, as compared to none in
fiscal 2003. In addition, the Company has a majority ownership in Global Payment
Technologies (Europe) Limited and Abacus Financial Management Systems, Ltd.,
USA, whose results are consolidated in the Company's financial statements.
During fiscal 2002, the Company recognized an after-tax gain of $82,000, or $.01
per share, which resulted from the sale of the Company's China investment.
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 and service principal and interest
payments on the Company's indebtedness. At September 30, 2004, the Company's
cash and cash equivalents were $3,453,000 as compared with $1,220,000 at
September 30, 2003. A significant portion of the Company's cash balance in the
amount of $770,000 and $774,000, as of September 30, 2004 and 2003,
respectively, consists of currency used to test the Company's products and,
although it could be available, it 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. In addition the Company has
realized significant savings from its cost reduction initiatives completed in
December 2003. As a result of these savings and the funds available under the
credit facility with Laurus discussed below, the Company believes that its
available resources should be sufficient to meet its obligations as they become
due and permit continuation of its planned product development and operations
for the next 12 months.
22
On March 16, 2004, the Company received aggregate proceeds of $1,500,000 from
the sale to Laurus Master Fund Ltd. ("Laurus") of a $1,500,000 principal amount
secured convertible term note due in March 2007 (the "CTN"), pursuant to a
Securities Purchase Agreement. The CTN is convertible into common stock of the
Company at any time at the rate of $4.26 of principal for one share of common
stock and is collateralized by substantially all assets of the Company. The note
provides for monthly principal payments of $25,000 from July 2004 to March 2005,
$45,000 from April 2005 to September 2005 and $55,833 from October 2005 to March
2007. Interest is payable monthly at the prime rate plus 1.5%, with a minimum
rate of 6%. In addition, Laurus received 7 year warrants to purchase an
aggregate of 200,000 shares of the Company's common stock at prices of $4.87,
$5.28 and $5.68 for 100,000, 60,000 and 40,000 warrants, respectively. The
Company utilized approximately $1,200,000 of the proceeds to repay amounts
outstanding under a previous credit agreement.
The value allocated to the warrants resulted in a debt discount of $506,000 that
is being recognized as interest expense over the term of the note. Additionally,
by allocating value to the warrants, Laurus received a beneficial conversion
feature in the amount of $304,000 that resulted in additional debt discount that
is being recognized as interest expense over the term of the note. Interest
expense is computed utilizing the interest method, which results in an effective
yield over the term of the note. For the year ended September 30, 2004
amortization expense was $242,000. As of September 30, 2004, the unamortized
debt discount amounted to approximately $568,000. Amortization of debt discount
will approximate $370,000 and $198,000 for fiscal 2005 and 2006, respectively,
which will be charged to operations. In the event that the CTN, or any portion
of the CTN, is converted prior to maturity, the unamortized discount related to
the amount converted will be immediately recognized as interest expense and
charged to operations.
On March 16, 2004, the Company also entered into a Security Agreement with
Laurus which provides for a credit facility of $2,500,000 consisting of a
secured revolving note of $1,750,000 (the "RN") and a secured convertible
minimum borrowing note of $750,000 (the "MBN"), both due in March 2007 (both
notes collectively referred to as the "LOC"). At closing, the Company borrowed
$750,000 under the MBN. Funds available under the LOC are determined by a
borrowing base equal to 85% and 70% of eligible domestic and foreign accounts
receivable, respectively, and 50% of eligible inventory. Outstanding amounts
under the RN and MBN are convertible into common stock of the Company at any
time at the rate of $4.26 of principal for one share of common stock and are
collateralized by substantially all assets of the Company. Interest is payable
monthly at the prime rate plus 1.5%, with a minimum rate of 6%. At September 30,
2004, the Company has $1,750,000 available under the RN.
23
The agreements provide that Laurus will not convert debt or exercise warrants to
the extent that such conversion or exercise would result in Laurus, together
with its affiliates, beneficially owning more than 4.99% of the number of
outstanding shares, including warrants, of the Company's common stock at the
time of conversion or exercise.
Net cash provided by operating activities was $1,741,000 in fiscal 2004. This
amount is due to decreased inventory of $746,000 as a result of outsourcing and
the autonomous nature of the Generation III components, decreased income taxes
receivable of $96,000 due to collections in 2004, decreased accounts receivable
of $1,907,000, and net loss for the year, adjusted for non-cash items, of
$126,000, offset, in part, by increased prepaid expenses and other current
assets of $383,000, decreased accrued expenses and other liabilities of
$600,000, and decreased accounts payable of 151,000. Net cash provided by
operating activities amounted to $106,000 in fiscal 2003. This amount is due to
decreased inventory of $955,000 as a result of outsourcing and the autonomous
nature of the Generation III components, decrease income taxes receivable of
$652,000 due to collections in 2003, increased accrued expenses and other
liabilities of $450,000, increased accounts payable of $363,000, decreased
accounts receivable of $179,000, decreased prepaid expenses and other current
assets of $113,000, and decreased other assets and capitalized software costs of
$86,000, offset, in part, by a net loss for the year, adjusted for non-cash
items of ($2,692,000). Net cash provided by operating activities amounted to
$2,261,000 in fiscal 2002. This amount is due to decrease accounts receivable of
$5,242,000, decreased prepaid expenses and other current assets of $291,000,
decreased inventory of $10,000 and a net loss for the year, adjusted for
non-cash items, of $2,000, offset, in part, by increased accounts payable of
$2,127,000 and decreased income taxes receivable of $674,000, offset, in part,
by decreased accounts payable of $1,411,000, decreased accrued expenses and
other liabilities of $336,000 and increased other assets and capitalized
software costs of $269,000. The Company sells its products primarily to
international markets on terms generally greater than 30 days. Further the
Company has agreements with its affiliates, which could extend payment terms in
excess of 90 days. Based upon history, and the Company's current review of its
accounts receivable, it believes it is adequately reserved for potentially
uncollectible accounts. However, given the Company's sales and accounts
receivable are concentrated to a small group of customers and in certain
markets, any changes in conditions could cause a material impact to its net
income (loss) and cash flow.
Net cash (used in) provided by investing activities amounted to ($38,000) in
fiscal 2004 as compared with $1,169,000 in fiscal 2003 and ($1,608,000) in
fiscal 2002. In fiscal 2004 the Company received $154,000 from the sale of the
remaining portion of its South African affiliate investment, in fiscal 2003 the
Company received $1,877,000 from the sale of a significant portion of its South
African affiliate investment and in fiscal 2002 received $118,000 from the sale
of its investment in its China affiliate (See Note 3 in the financial
statements). The Company provided net fundings and investments in its joint
ventures of $51,000 in fiscal 2004, $323,000 in fiscal 2003 and $1,380,000 in
fiscal 2002. Further, the Company received $206,000, $21,000 and $550,000 in
dividend distributions, primarily from its Australian affiliate, during fiscal
2004, 2003 and fiscal 2002, respectively. The remaining investing activities of
$347,000 in fiscal 2004, $406,000 in fiscal 2003 and $896,000 in fiscal 2002
were for the purchase of property and equipment primarily for its manufacturing
operations.
Net cash provided by (used in) financing activities consisted of net proceeds
from issuance of convertible debt of $2,250,000 in fiscal 2004 and net
repayments of bank borrowings of $1,868,000 in fiscal 2004, as compared with
$1,719,000 in fiscal 2003 and $155,000 in fiscal 2002. The remaining cash
provided by financing activities of $148,000 in fiscal 2004, $60,000 in fiscal
2003 and $37,000 in fiscal 2002 were from the issuance of stock upon the
exercise of common stock options and warrants.
24
COMMITMENTS:
At September 30, 2004, future minimum payments under non-cancelable leases and
payments to be made for long-term debt maturing over the next five years are as
follows in ($000):
OPERATING LEASE DEBT REPAYMENTS
---------------- ---------------
Fiscal year ending September 30:
2005 $ 415 $ 420
2006 319 670
Thereafter -- 1,085
------ -------
Total $ 734 $ 2,175
------ -------
In addition to the chart above, and in the normal course of business, purchase
orders are generated which obligate the Company for future inventory
requirements. As of September 30, 2004, purchase order commitments approximated
$8.1 million and will be used for production requirements during fiscal 2005 and
beyond.
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 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.
25
CAPITALIZED SOFTWARE 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.
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 September 30, 2004, our accounts receivable balance was $4.2 million. Our
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 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.
Accordingly, the Company recognized an impairment loss in fiscal 2002 totaling
$215,000 for its net investment in the United Kingdom-based Abacus Financial
Management Systems Limited affiliate based upon the deterioration in that
entity's financial condition. Since April 2003, when the Company sold a
significant portion of its investment in its South African affiliates which
reduced its ownership in GPTHL from 24.2% to 5%, the Company accounted for its
remaining investment on a cost basis. Effective January 15, 2004, the Company
sold its remaining interest in this affiliate.
26
LONG-LIVED ASSETS:
The Company accounts for long-lived assets in accordance with the provisions of
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 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.
As a result of its review, the Company does not believe that any impairment
exists in the recoverability of its long-lived assets as of September 30, 2004.
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 against its deferred income tax assets due to the impact of the fiscal
2004 and 2003 losses 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.
27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Fiscal 2004 saw continued moderation in the level of inflation. In order to
offset the resultant rise in the costs of operations, the Company has assessed,
and will continue to assess, ways to gain efficiencies and reduce operating and
manufacturing costs, thereby increasing profit margins and improving its
operations.
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. The Company is subject to the effects caused by the
strengthening or weakening of the United States currency, and as such may
consider the use of currency instruments in the future.
The Company has a $1.425 million convertible term note as of September 30, 2004
with borrowings subject to interest at the bank's prime rate plus 150 basis
points. The Company also has a $2.5 million credit facility consisting of a
secured revolving note of $1.75 million and a secured convertible minimum
borrowing note of $750,000 with borrowings subject to interest at the bank's
prime rate plus 150 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, $3.925 million at September 30, 2004,
outstanding for the entire year, each 100 basis point increase would result in
an annual increase in interest expense of approximately $40,000.
The Company has investments in privately held unconsolidated foreign companies
for the purposes of conducting its business overseas and attaining its strategic
objectives. These investments have a net carrying value of $1.8 million and $1.7
million at September 30, 2004 and 2003, respectively. These investments are
included in Investments in Unconsolidated Affiliates and are accounted for using
the equity method. For investments in which no public market exists, our policy
is to regularly review the operating performance, recent financing transactions
and forecasts for such companies in assessing the net realizable values of the
investments in these companies. Impairment losses on equity investments are
recorded when events and circumstances indicate that such assets are impaired
and the decline in value is other than temporary. Accordingly, we recorded
$215,000 in impairment losses during the fourth quarter of fiscal 2002.
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.
28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 10, 2004 the Board of Directors of Global Payment Technologies, Inc.
(the "Company") dismissed KPMG, LLP ("KPMG") as its independent certified public
accountants and appointed Eisner, LLP ("Eisner") to serve in their place. These
actions were taken at the recommendation of the Company's Audit Committee.
KPMG had served as the Company's independent public accountants since July 26,
2002. KPMG's report on the Company's consolidated financial statements for the
fiscal years ended September 30, 2003 and 2002 did not contain an adverse
opinion or disclaimer of opinion, nor was such report qualified or modified as
to uncertainty, audit scope or accounting principles.
During the two fiscal years ended September 30, 2004, through March 10, 2004,
there were no disagreements between the Company and KPMG on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure which, if not resolved to KPMG's satisfaction, would have
caused it to make reference to the subject matter in connection with its report
on the Company's consolidated financial statements for such year; and there were
no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
During the two fiscal years ended September 30, 2004, through March 10, 2004,
the Company did not consult Eisner with respect to either (i) the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Company's
consolidated financial statements, or (ii) any matter that was either the
subject of a disagreement, within the meaning of Item 304(a)(1)(iv) of
Regulation S-K, or any "reportable event," as that term is defined in Item
304(a)(1)(v) of Regulation S-K.
ITEM 9A. 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 annual 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.
29
PART III
Items 10 through 14 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
annual meeting of stockholders to be held in calendar 2005.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. GLOBAL PAYMENT TECHNOLOGIES, INC. CONSOLIDATED FINANCIAL STATEMENTS:
Reports of Independent Registered Public Accounting Firms (pages F-1 -
F-2)
Consolidated Balance Sheets as of September 30, 2004 and 2003 (page
F-3)
Consolidated Statements of Income for the years ended September 30,
2004, 2003 and 2002 (page F-4)
Consolidated Statements of Shareholders' Equity and Comprehensive Loss
for the years ended September 30, 2004, 2003 and 2002 (page F-5)
Consolidated Statements of Cash Flows for the years ended September
30, 2004, 2003 and 2002 (page F-6)
Notes to Consolidated Financial Statements (pages F-7 - F23)
2. GLOBAL PAYMENT TECHNOLOGIES AUSTRALIA PTY LIMITED FINANCIAL STATEMENTS:
Reports of Independent Registered Public Accounting Firms (pages F-24
to F-25)
Balance Sheets as of June 30, 2004 and 2003 (page F-26)
Statements of Income for each of the years in the three-year period
ended June 30, 2004 (page F-27)
Statements of Stockholders' Equity for each of the years in the
three-year period ended June 30, 2004 (page F-28)
Statements of Cash Flows for each of the years in the three-year
period ended June 30, 2004 (page F-29)
Notes to Financial Statements (pages F-30 to F34)
30
3. FINANCIAL STATEMENT SCHEDULES REQUIRED TO BE FILED BY ITEM 8 OF THIS
FORM:
Schedule II - Valuation and Qualifying Accounts (page S-1)
4. EXHIBITS:
EXHIBIT NO.
3.1 Certificate of Incorporation (2)
3.2 Certificate of Merger (2)
3.3 By-Laws (2)
4.1 Securities Purchase Agreement dated March 16, 2004 by and between the
registrant and Laurus (5)
4.2 Secured Convertible Term Note dated March 16, 2004 issued to Laurus (5)
4.3 Common Stock Purchase Warrant dated March 16, 2004 issued to Laurus (5)
4.4 Registration Rights Agreement dated March 16, 2004 by and between the
registrant and Laurus (5)
4.5 Security Agreement dated March 16, 2004 by and between the registrant and
Laurus (5)
4.6 Security Agreement dated March 16, 2004 by and between the registrant and
Laurus (5)
4.7 Secured Convertible Minimum Borrowing Note dated March 16, 2004 issued to
Laurus (5)
4.8 Secured Revolving Note dated March 16, 2004 issued to Laurus (5)
4.9 Registration Rights Agreement dated March 16, 2004 by and between the
registrant and Laurus (5)
4.10 Amendment No. 1, dated April 29, 2004, to Securities Purchase Agreement
(6)
4.11 Amendment No. 1, dated April 29, 2004, to Common Stock Purchase Warrant
(6)
4.12 Amendment No. 1, dated April 29, 2004, to Secured Convertible Minimum
Borrowing Note (6)
4.13 Amendment No. 1, dated April 29, 2004, to Secured Revolving Note (6)
4.14 Amendment No. 1, dated April 29, 2004, to Secured Convertible Term Note
(6)
4.15 Amendment No.2, dated August 9, 2004 to Secured Convertible Term Note (7)
4.16 Amendment No.2, dated August 9, 2004 to Secured Convertible Minimum
Borrowing Note (7)
4.17 Amendment No.2, dated August 9, 2004 to Secured Revolving Note (7)
10.1 Lease dated October 1, 2000 between the Company and Heartland Associates
(4)
10.2 1994 Stock Option Plan (1)*
10.3 1996 Stock Option Plan (1)*
10.4 2000 Stock Option Plan (3)*
10.5 Employment Agreement dated May 1, 2004 between the Company and
Thomas McNeill (6)*
10.6 Employment Agreement dated April 5, 2004 between the Company and
Thomas Oliveri (6)*
14 Code of Ethics (8)
21 List of Subsidiaries (8)
31
23.1 Consent of Eisner LLP, Independent Registered Public Accounting Firm(8)
23.2 Consent of Pitcher Partners, Independent Registered Public Accounting Firm
(8)
23.2 Consent of KPMG LLP, Independent Registered Public Accounting Firm (8)
23.3 Consent of KPMG, Independent Registered Public Accounting Firm (8)
31.1 Rule13a-14a Certification (Chief Executive Officer) (8)
31.2 Rule13a-14a Certification (Chief Financial Officer) (8)
32 Section 1350 Certification (8)
(1) Filed as an exhibit to the Company's Registration Statement on Form S-8
(File #333-30829).
(2) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
fiscal year ended September 30, 1997.
(3) Incorporated by reference to the Company's Proxy Statement for the fiscal
year ended September 30, 1999.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 2000
(5) Filed as an exhibit to the Company's Current Report on Form 8-K dated
March 16, 2004, filed with the SEC on March 18, 2004
(6) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2004
(7) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 2004
(8) Filed herewith.
* Management contract or compensatory plan or arrangement
32
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/THOMAS OLIVERI
------------------------------
Thomas Oliveri
Chief Executive Officer
and Director
Date: December 2, 2004
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/ Thomas Oliveri President, Chief Executive Officer December 2, 2004
- ------------------------------------ and Director
Thomas Oliveri
/s/ Richard Gerzof Director, Chairman of the Board December 2, 2004
- ------------------------------------
Richard Gerzof
/s/ Stuart S. Levy Director December 2, 2004
- ------------------------------------
Stuart S. Levy
/s/ Edward Seidenberg Director December 2, 2004
- ------------------------------------
Edward Seidenberg
/s/ William H. Wood Director December 2, 2004
- ------------------------------------
William H. Wood
/s/ Thomas McNeill Vice President, Chief Financial December 2, 2004
- ------------------------------------ Officer and Principal Accounting
Thomas McNeill Officer
33
GLOBAL PAYMENT TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Consolidated Financial Statements of Global Payment Technologies, Inc.:
Reports of Independent Registered Public Accounting Firms F-1 to F-2
Consolidated Balance Sheets as of September 30, 2004 and 2003 F-3
Consolidated Statements of Operations for each of the years in the
three-year period ended September 30, 2004 F-4
Consolidated Statements of Shareholders' Equity and Comprehensive Loss for each
of the years in the three-year period ended September 30, 2004 F-5
Consolidated Statements of Cash Flows for each of the years in the three-year
period ended September 30, 2004 F-6
Notes to Consolidated Financial Statements F-7 to F-23
Financial Statements of Global Payment Technologies Australia Pty Limited:(1)
Reports of Independent Registered Public Accounting Firms F-24 to F-25
Balance Sheets as of June 30, 2004 and 2003 F-26
Statements of Income for each of the years in the three-year period ended
June 30, 2004 F-27
Statements of Stockholders' Equity for each of the years in the three-year period
ended June 30, 2004 F-28
Statements of Cash Flows for each of the years in the three-year period ended
June 30, 2004 F-29
Notes to Financial Statements F-30 to F34
Additional Financial Information Pursuant to the Requirements of Form 10-K:
Schedule II - Valuation and Qualifying Accounts and Reserves S-1
Schedules not listed above have been omitted because they are either
not applicable or the required information has been provided elsewhere in the
consolidated financial statements or notes thereto
(1) Included pursuant to Reg. S-X, Rule 3-09
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Global Payment Technologies, Inc.:
We have audited the accompanying consolidated balance sheet of Global Payment
Technologies, Inc. and subsidiaries as of September 30, 2004, and the related
consolidated statements of operations, shareholders' equity and comprehensive
loss and cash flows for the year then ended. Our audit also included financial
statement Schedule II, listed in the accompanying index as it relates to such
year. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit. We did
not audit the financial statements of Global Payment Technologies Australia Pty
Limited (GPTA) and eCash Management Pty Limited (eCash), 50% and 35%,
respectively, owned investee companies. The Company's investment in GPTA and
eCash was $1,746,000 and $65,000, respectively at September 30, 2004, and its
equity in earnings (loss) of GPTA and eCash was $172,000 and ($64,000),
respectively, for the year then ended. The financial statements of GPTA and
eCash were audited by other auditors whose reports have been furnished to us,
and our opinion, insofar as it relates to the amounts included for GPTA and
eCash, is based solely on the reports of the other auditors.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 audit and the reports of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the reports of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Global Payment Technologies, Inc. and
subsidiaries as of September 30, 2004, and the consolidated results of their
operations and their cash flows for the year then ended, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the financial
statement Schedule II as it relates to the year ended September 30, 2004, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
Eisner LLP
New York, New York
November 18, 2004
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Global Payment Technologies, Inc.:
We have audited the 2003 and 2002 consolidated financial statements of Global
Payment Technologies, Inc., and subsidiaries as listed in the accompanying
index. In connection with our audits of the 2003 and 2002 consolidated financial
statements, we also have audited the fiscal 2003 and 2002 financial statement
Schedule II as listed in the accompanying index. These consolidated financial
statements and financial statement Schedule II are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement Schedule II based on
our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). 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 fiscal 2003 and 2002 consolidated 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, 2003, and the results of their operations and their cash flows for each of
the years in the two year period ended September 30, 2003, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related fiscal 2003 and 2002 financial statement Schedule
II, when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information set
forth therein.
KPMG LLP
Melville, New York
December 29, 2003 (except as to Note 8, which is as of January 13, 2004)
F-2
GLOBAL PAYMENT TECHNOLOGIES, INC.
Consolidated Balance Sheets
September 30, 2004 and 2003
(Dollar amounts in thousands, except share data)
Assets 2004 2003
-------- ---------
Current assets:
Cash and cash equivalents $ 3,453 $ 1,220
Accounts receivable, less allowance for doubtful accounts
of $250 and $234, respectively 385 2,175
Accounts receivable from affiliates 3,780 4,108
Inventory, net 2,573 3,499
Prepaid expenses and other current assets 404 64
Income taxes receivable 115 211
-------- --------
Total current assets 10,710 11,277
Investments in unconsolidated affiliates 1,811 1,722
Property and equipment, net 2,134 2,617
Capitalized software costs, net 1,612 2,159
-------- --------
Total assets $ 16,267 $ 17,775
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt, net of discount of $167 in 2004 $ 253 $ 793
Revolving line of credit -- 1,000
Accounts payable 2,273 2,424
Accrued expenses and other current liabilities 1,280 1,881
-------- --------
Total current liabilities 3,806 6,098
Long-term debt, net of discount of $401 in 2004 1,354 --
-------- --------
Total Liabilities 5,160 6,098
-------- --------
Commitments and contingencies (note 11)
Shareholders' equity:
Common stock, par value $0.01. Authorized 20,000,000 shares;
issued 5,880,750 and 5,829,500 shares, respectively 59 58
Additional paid-in capital 10,800 9,843
Retained earnings 1,283 2,973
Accumulated other comprehensive income 464 302
-------- --------
12,606 13,176
Less treasury stock, at cost, 278,984 shares (1,499) (1,499)
-------- --------
Total shareholders' equity 11,107 11,677
-------- --------
Total liabilities and shareholders' equity $ 16,267 $ 17,775
======== ========
See accompanying notes to consolidated financial statements.
F-3
GLOBAL PAYMENT TECHNOLOGIES, INC.
Consolidated Statements of Operations
Years ended September 30, 2004, 2003, and 2002
(Dollar amounts in thousands, except share and per share data)
2004 2003 2002
----------- ------------ ------------
Net sales:
Non-affiliates $ 15,880 $ 12,989 $ 15,163
Affiliates 8,501 13,087 12,550
----------- ----------- -----------
24,381 26,076 27,713
Cost of sales 19,039 21,949 20,885
----------- ----------- -----------
Gross profit 5,342 4,127 6,828
Operating expenses 6,857 9,758 8,783
----------- ----------- -----------
Loss from operations (1,515) (5,631) (1,955)
----------- ----------- -----------
Other (expense) income:
Equity in income of unconsolidated
affiliates, net 108 676 565
Gain on sale of investment in
unconsolidated affiliate 78 -- 108
Interest expense, net (368) (248) (277)
----------- ----------- -----------
Other (expense) income (182) 428 396
----------- ----------- -----------
Loss before (benefit)
provision for income taxes (1,697) (5,203) (1,559)
(Benefit) provision for income taxes (7) 474 (926)
----------- ----------- -----------
Net loss $ (1,690) $ (5,677) $ (633)
=========== =========== ===========
Net loss per share:
Basic $ (0.30) $ (1.02) $ (0.11)
Diluted (0.30) (1.02) (0.11)
Common shares used in computing net
loss per share amounts:
Basic 5,577,825 5,545,015 5,529,302
Diluted 5,577,825 5,545,015 5,529,302
See accompanying notes to consolidated financial statements.
F-4
GLOBAL PAYMENT TECHNOLOGIES, INC.
Consolidated Statements of Shareholders' Equity and Comprehensive Loss
Years ended September 30, 2004, 2003, and 2002
(Dollar amounts in thousands, except share data)
Common stock Additional
Comprehensive ----------------------- paid-in Retained
income (loss) Shares Amount capital earnings
-------------- --------- ----------- ------------ ------------
Balance at September 30, 2001 5,806,250 $ 58 $ 9,708 $ 9,283
Net loss $ (633) -- -- -- (633)
Cumulative translation
adjustment
of foreign investments 56 -- -- -- --
-----------
Comprehensive loss $ (577) -- -- -- --
===========
Exercise of common stock options,
including income tax
benefits of $16 8,850 -- 53 -- --
---------- ----------- ----------- ----------
Balance at September 30, 2002 5,815,100 58 9,761 8,650
Net loss $ (5,677) -- -- -- (5,677)
Cumulative translation adjustment
of foreign investments 246 -- -- -- --
-----------
Comprehensive loss $ (5,431) -- -- -- --
===========
Exercise of common stock options,
including income tax
benefits of $22 14,400 -- 82 -- --
--------- ----------- ----------- ----------
Balance at September 30, 2003 5,829,500 58 9,843 2,973
Net loss $ (1,690) -- -- -- (1,690)
Cumulative translation
adjustment
of foreign investments 162 -- -- -- --
-----------
Comprehensive loss $ (1,528) -- -- -- --
===========
Exercise of common stock options,
including income tax
benefits of $0 51,250 1 147 --
Common stock warrants issued
with convertible note 506
Beneficial conversion feature
related
to convertible note 304 --
---------- ----------- ----------- ----------
Balance at September 30, 2004 5,880,750 $ 59 $ 10,800 $ 1,283
========== =========== =========== ==========
Other Treasury stock
Comprehensive --------------------------
Income Shares Amount Total
------------ ------------- ----------- ----------
Balance at September 30, 2001 $ -- (278,984) $ (1,499) $ 17,550
Net loss -- -- -- (633)
Cumulative translation
adjustment
of foreign investments 56 -- -- 56
Comprehensive loss -- -- -- --
Exercise of common stock options,
including income tax
benefits of $16 -- -- 53
----------- ------------ ------------ ----------
Balance at September 30, 2002 56 (278,984) (1,499) 17,026
Net loss -- -- (5,677)
Cumulative translation adjustment
of foreign investments 246 -- -- 246
Comprehensive loss -- -- -- --
Exercise of common stock options,
including income tax
benefits of $22 -- -- 82
----------- ----------- ------------ -----------
Balance at September 30, 2003 302 (278,984) (1,499) 11,677
Net loss -- -- -- (1,690)
Cumulative translation
adjustment
of foreign investments 162 -- -- 162
Comprehensive loss -- -- -- --
Exercise of common stock options,
including income tax
benefits of $0 -- -- -- 148
Common stock warrants issued
with convertible note 506
Beneficial conversion feature
related
to convertible note -- -- -- 304
----------- ----------- ------------ -----------
Balance at September 30, 2004 $ 464 (278,984) $ (1,499) $ 11,107
=========== ============ ============ ===========
See accompanying notes to consolidated financial statements.
F-5
GLOBAL PAYMENT TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
Years ended September 30, 2004, 2003, and 2002
(Dollar amounts in thousands)
2004 2003 2002
--------- -------- ---------
Operating activities:
Net loss $(1,690) $(5,677) $ (633)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Equity in income of unconsolidated affiliates (108) (676) (565)
Gain on sale of investment in unconsolidated affiliate (78) -- (108)
Depreciation and amortization 1,421 1,450 1,037
Provision for losses on accounts receivable 102 127 108
Provision for inventory obsolescence 237 847 188
Loss on disposition of assets -- 379 --
Deferred income taxes -- 858 (25)
Amortization of debt discount 242 -- --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 1,744 (920) 2,082
Decrease in accounts receivable from
affiliates 163 1,099 3,160
Decrease in inventory 746 955 10
(Increase) decrease in prepaid expenses and
other current assets (383) 113 291
Decrease (increase) in income tax receivable 96 652 (863)
(Increase) in intangible assets -- -- (405)
Decrease (increase) in other assets -- 86 (269)
(Decrease) increase in accounts payable (151) 363 (1,411)
(Decrease) increase in accrued expenses
and other liabilities (600) 450 (336)
------- ------- -------
Net cash provided by operating activities 1,741 106 2,261
------- ------- -------
Investing activities:
Purchases of property and equipment (347) (406) (896)
Proceeds from sale of investments in unconsolidated affiliates 154 1,877 118
Investments in unconsolidated affiliates (51) (323) (1,380)
Distributions from unconsolidated affiliate 206 21 550
------- ------- -------
Net cash (used in) provided by investing activities (38) 1,169 (1,608)
------- ------- -------
Financing activities:
Repayments of notes payable to bank (1,868) (1,719) (155)
Proceeds from issuance of convertible debt and warrants 2,250 -- --
Issuance of stock upon exercise of stock options 148 60 37
------- ------- -------
Net cash provided by (used in) financing activities 530 (1,659) (118)
------- ------- -------
Net increase (decrease) in cash and
cash equivalents 2,233 (384) 535
Cash and cash equivalents at beginning of year 1,220 1,604 1,069
------- ------- -------
Cash and cash equivalents at end of year $ 3,453 $ 1,220 $ 1,604
======= ======= =======
Cash paid during the year for:
Interest $ 125 $ 248 $ 261
Income taxes 11 -- 55
Non cash financing activities:
Discount on convertible note and increase in additional
paid-in capital resulting from beneficial conversion feature $ 304
See accompanying notes to consolidated financial statements
F-6
(1) ORGANIZATION AND NATURE OF BUSINESS
(a) DESCRIPTION OF BUSINESS
Global Payment Technologies, Inc. (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 Argus, Aurora and IDS validator models. A few key
customers account for a large portion of the Company's revenues.
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.
(b) ORGANIZATION AND DEVELOPMENT OF BUSINESS
The Company has a wholly owned subsidiary, 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.
Additionally, the Company has an 80% controlling interest in Abacus
Financial Management, Inc. USA (Abacus-USA), which has the exclusive
right to distribute the products of Abacus Financial Management
Systems Ltd. (Abacus-UK) in North America. Abacus-UK manufactures cash
management systems for use in retail applications. Abacus USA has not
had material operations to date.
In fiscal 2004, the Company established a wholly owned subsidiary,
Global Payment Technologies, Inc (GPT-Russia) which is based in
Moscow, Russia and is responsible for providing local service of the
Company's products.
See note 2(d) and note 3 for a description of the Company's
investments in unconsolidated affiliates.
(c) SIGNIFICANT CUSTOMERS
The Company's largest customers for 2004, 2003, and 2002 represent the
following percentages of net sales and accounts receivable,
respectively:
2004 2003 2002
-------- -------- --------
Net sales:
Customer A 34% 48% 44%
Customer B N/A N/A 16%
Customer C 11% 15% N/A
Accounts receivable:
Customer A 87% 62% 71%
Customer B N/A N/A 11%
Customer C N/A N/A N/A
There were no other customers that represented 10% or more of net
sales or accounts receivable, respectively, in any of the fiscal years
presented. Customer A is the Company's unconsolidated affiliate in
Australia (see Note 3).
F-7
(d) GEOGRAPHIC AREAS
The Company generated revenues both domestically and internationally.
The following summarizes the geographic dispersion of the Company's
revenues by destination:
Year ended September 30
-----------------------------------
2004 2003 2002
--------- --------- ---------
(In thousands)
Domestic revenues (United States) $ 3,257 $ 2,775 $ 2,615
--------- --------- ---------
International revenues:
Australia 7,647 10,182 9,544
Europe 9,516 9,591 11,291
All others 3,961 3,528 4,263
--------- --------- ---------
21,124 23,301 25,098
--------- --------- ---------
Total revenues $ 24,381 $ 26,076 $ 27,713
========= ========= =========
All of the Company's long-lived assets are domiciled in the United
States, except for an immaterial amount at its subsidiary in the
United Kingdom.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Global
Payment Technologies, Inc., GPT-Europe, Abacus-USA and GPT-Russia. The
accounts of Abacus-USA are presented net of the related minority
interests, which were not material in any period. All intercompany
balances and transactions have been eliminated in consolidation.
(b) REVENUE RECOGNITION
NON-AFFILIATES
The Company recognizes revenue upon shipment of products and passage
of title to its non-affiliated customers, or at the time services are
completed with respect to repairs not covered by warranty agreements.
AFFILIATES
The Company recognizes revenue upon shipment and passage of title, to
its affiliated customers, but defers its proportionate share of the
related gross profit on product sales until sales are made by the
affiliated customers to their third-party end users (customers), in
accordance with APB Opinion No. 18, THE EQUITY METHOD OF ACCOUNTING
FOR INVESTMENTS IN COMMON STOCK (see (d)).
(c) SHIPPING AND HANDLING COSTS
The Company records shipping and handling costs billed to customers in
net sales and classifies the shipping and handling costs associated
with outbound freight in cost of sales.
F-8
(d) INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company applies the equity method of accounting to its investments
in entities where the Company has non-controlling, but influential,
ownership interests. 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 as of September
30. Entities in which the Company's respective ownership interest is
less than 20%, and in which there is a resulting inability to exercise
significant influence, are accounted for using the cost method of
accounting. A description of the Company's unconsolidated affiliates
and the related transactions between the Company and these affiliates
is discussed in note 3.
(e) FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of GPT-Europe and
unconsolidated affiliates are measured using local currency as the
functional currency. Assets and liabilities of such entities are
translated into US dollars at exchange rates in effect at year-end,
while revenues and expenses are translated at average exchange rates
prevailing during the year. The resulting translation gains and losses
are recorded directly to accumulated other comprehensive income
(loss), a separate component of shareholders' equity, and are not
included in net income until realized through sale or liquidation of
the investment. Exchange gains and losses incurred on foreign currency
transactions, which were not material during fiscal 2002, 2003, and
2004, are included in net loss.
(f) 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.
A significant portion of the Company's cash balance in the amount of
$770,000 and $774,000, as of September 30, 2004 and 2003, respectively
consists of currency used to test the Company's products, and although
it could be available, it 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 loss.
(g) 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. These items
could result in future inventory obsolescence.
(h) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is
calculated using the straight-line method over the estimated useful
lives of the assets (note 6) 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, which significantly increase value or extend useful
asset lives are capitalized and depreciated.
F-9
(i) CAPITALIZED SOFTWARE COSTS
In accordance with SFAS No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED,
internally-generated software development costs associated with new
products and significant software enhancements to existing products
are expensed as incurred until technological feasibility has been
established. Pursuant to SFAS No. 86, the Company deems technological
feasibility to be have been met upon completion of a detail program
design. Internally- generated software development costs of $0, $0,
and $320,000 were capitalized during fiscal years 2004, 2003, and
2002, respectively. The Company recorded amortization in accordance
with SFAS No. 86 of $547,000, $519,000, and $396,000 for the fiscal
years ended September 30, 2004, 2003 and 2002, respectively, which is
included in cost of sales in the accompanying Consolidated Statements
of Operations. Unamortized internally-generated software development
costs included in the accompanying consolidated balance sheets as of
September 30, 2004 and 2003 were $1,612,000 and $2,159,000,
respectively.
(j) LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with the
provisions of 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 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 undiscounted
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 effective 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.
(k) INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS. Under SFAS No. 142, goodwill and intangible assets
with indefinite lives are no longer amortized but are reviewed
annually (or more frequently, if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to have
indefinite lives will continue to be amortized over their useful lives
(but with no maximum life). The Company has adopted this standard
effective October 1, 2001. The effect of adoption was not
material.
Intangible assets, recorded at unamortized cost of $345,000,
representing intellectual property owned by the Company associated
with the Company's joint venture with an unrelated third party to
develop and distribute a product with the ability to read "smart
cards" were written off in the fourth quarter of 2003, when the
Company made a strategic decision to no longer pursue this
relationship.
F-10
(l) RESEARCH AND DEVELOPMENT
Research and development costs incurred by the Company are included in
operating expenses in the year incurred. Such costs amounted to
$75,000, $150,000, and $225,000 in fiscal 2004, 2003 and 2002,
respectively.
(m) WARRANTY POLICY
The Company warrants that its products are free from defects in
material and workmanship for a period of one or two years, depending
on the particular product, 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 (see (b)).
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45
requires that the guarantor recognize, at the inception of certain
guarantees, a liability for the fair value of the obligation
undertaken in issuing such guarantee. FIN 45 also requires additional
disclosure requirements about the guarantor's obligations under
certain guarantees that it has issued. The adoption of FIN 45 did not
affect the Company's financial results.
The Company recognizes, and historically has recognized, 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. A summary of the changes in the Company's
accrued warranty obligation (which is included in accrued expenses) is
included in the Company's Schedule of Valuation and Qualifying
Accounts.
(n) 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 net operating loss carryforwards and
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. See note 10.
(o) EARNINGS PER SHARE
Net income (loss) per common share amounts (basic EPS) are computed by
dividing net earnings (loss) by the weighted average number of common
shares outstanding, excluding any potential dilution. Net income
(loss) per common share amounts assuming dilution (diluted EPS) are
computed by reflecting potential dilution from the exercise of stock
options, and warrants, and the conversion into common stock of
convertible loans. Diluted EPS for fiscal years 2004, 2003 and 2002
are the same as basic EPS, as the inclusion of the impact of any
common stock equivalents outstanding during those periods, would be
anti-dilutive. Common stock equivalents not included in EPS are as
follows:
F-11
Year ended September 30
-----------------------------------
2004 2003 2002
----------- --------- -----------
Stock options 887,800 766,600 1,058,600
Stock warrants 200,000 -- --
Convertible Debt 510,563 -- --
----------- --------- -----------
Total 1,598,363 766,600 1,058,600
=========== ========= ===========
A reconciliation between the numerators and denominators of the basic
and diluted EPS computations is as follows:
Year ended September 30
-------------------------------------------
2004 2003 2002
------------ ------------ ------------
(In thousands, except share and per share data)
Numerator:
Net loss attributable to
common stockholders $ (1,690) $ (5,677) $ (633)
------------ ------------ ------------
Denominator:
Weighted average common shares
outstanding - basic 5,577,825 5,545,015 5,529,302
Effect of dilutive securities:
Stock options and warrants -- -- --
Convertible loan -- -- --
------------ ------------ ------------
Weighted average common shares
outstanding - diluted 5,577,825 5,545,015 5,529,302
============ ============ ============
Basic EPS $ (0.30) $ (1.02) $ (0.11)
Diluted EPS (0.30) (1.02) (0.11)
(p) STOCK-BASED COMPENSATION
The Company observes the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," ("SFAS No. 123") by continuing to apply the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees ("APB No. 25").
The Company applies the intrinsic value method as outlined in APB No.
25 and related interpretations in accounting for stock options and
share units granted under its stock option plans which are more fully
disclosed in note 9. 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 on options granted to employees. SFAS No. 123 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 plans had been determined in accordance with
the fair value method prescribed therein. The Company 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 Financial Accounting Standards Board
recently indicated that they will require stock-based employee
compensation to be recorded as a charge to earnings pursuant to a
standard they are currently deliberating. We will continue to monitor
their progress on the issuance of this standard.
F-12
The following table illustrates the effect on net loss and loss per
common share as if the fair value method ("FMV") had been applied to
all outstanding awards in each period presented.
2004 2003 2002
--------- --------- ---------
(In thousands, except per share data)
Net loss:
As reported $ (1,690) $ (5,677) $ (633)
Deduct: Compensation expense
determined under FMV (475) (394) (386)
--------- --------- ---------
Pro forma (2,165) (6,071) (1,019)
Net loss per common
share - basic and diluted:
As reported $ (0.30) $ (1.02) $ (0.11)
Pro forma (0.39) (1.09) (0.18)
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts.
(q) COMPREHENSIVE INCOME (LOSS)
SFAS No. 130, REPORTING COMPREHENSIVE INCOME 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 (loss) is the total
of net income (loss) and all other nonowner changes in equity (or
other comprehensive income (loss)) such as unrealized gains/losses on
securities classified as available-for-sale, foreign currency
translation adjustments and minimum pension liability adjustments. As
of September 30, 2004 and 2003, due to currency fluctuations, the
cumulative currency translation adjustment related to the Company's
investments in foreign affiliates was $464,000 and $302,000,
respectively, which is reflected in shareholders' equity in the
accompanying consolidated balance sheets.
(r) DERIVATIVE INSTRUMENTS
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Company
currently does not use derivative instruments or engage in hedging
activities.
(s) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of all monetary assets and liabilities reflected in
the accompanying consolidated balance sheets approximated fair value
as a result of the short-term nature of such assets and liabilities or
with respect to long-term debt as a result of variable interest rates,
subject to a minimum rate based on the Company's credit rating.
F-13
(t) SEGMENT REPORTING
The Company follows the provisions of SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. Pursuant to this
pronouncement, the reportable operating segments are determined based
on the Company's management approach. The management approach, as
defined by SFAS No. 131, is based on the way that the chief operating
decision-maker organizes the segments within an enterprise for making
operating decisions and assessing performance. The Company's results
of operations are reviewed by the chief operating decision-maker on a
consolidated basis and the Company operates in only one segment.
Geographical sales segment data is presented in note 1(d).
(u) USE OF 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.
(v) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 effects of adoption
were not material to the consolidated financial statements.
Financial Accounting Standards Board Interpretation No. 46,
CONSOLIDATION OF VARIABLE INTEREST ENTITIES (FIN No. 46) was
originally issued in January 2003 and was subsequently revised in
December 2003. FIN No. 46 attempts to clarify the application of
Accounting Research Bulletin No. 51, CONSOLIDATED FINANCIAL
STATEMENTS, to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support. The Company does
not believe that it has any involvement with variable interest
entities that are required to be consolidated under FIN No. 46.
In May 2003, the FASB issued SFAS 150, ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND
EQUITY. SFAS 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were
previously classified as equity. The provisions of SFAS 150 are
effective for (1) instruments entered into or modified after May 31,
2003, and (2) pre-existing instruments as of July 1, 2003. The
adoption of SFAS 150 did not have an effect on the Company's
consolidated financial statements.
F-14
(3) UNCONSOLIDATED AFFILIATES
Net sales to unconsolidated affiliates for fiscal year 2004, 2003 and 2002
and accounts receivable from unconsolidated affiliates as of September 30,
2004 and 2003 are as follows (in thousands):
Accounts receivable
from affiliates
Net sales - affiliates ------------------------------
-------------------------------- September 30, September 30,
2004 2003 2002 2004 2003
-------- --------- --------- ------------- -------------
Australia $ 8,183 $ 12,482 $ 12,179 $ 3,632 $ 3,872
Abacus-UK -- -- 137 148 148
South Africa 318 605 234 -- 88
-------- --------- --------- ------------- -------------
Total $ 8,501 $ 13,087 $ 12,550 $ 3,780 $ 4,108
======== ========= ========= ============= =============
(a) AUSTRALIA
In fiscal 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 2002, the Company and two other shareholders formed
eCash Management Pty. Ltd (eCash), an Australian based company
responsible to market, distribute, service and support automated
teller machines across Australia and New Zealand. The Company owns a
35% interest in this entity. The accompanying consolidated results of
operations include the Company's equity in the results of operations
of these affiliates in the amounts of $273,000, $470,000, and $678,000
in fiscal 2004, 2003, and 2002, respectively. For fiscal 2004, 2003,
and 2002, the Company increased (reduced) its equity in income of
unconsolidated affiliates by $(165,000), $225,000, and $250,000,
respectively, which amounts represent the effect of the Company's
share of the gross profit on sales of the Company's products to these
affiliates, which were unsold by the affiliate as of the Company's
fiscal year-end. Deferred gross profit of $538,000 as of September 30,
2004 is shown as a reduction of accounts receivable from affiliates in
the accompanying balance sheets. The Company also received cash
dividends of $206,000, $0, and $550,000 from these affiliates for
fiscal 2004, 2003, and 2002, respectively.
(b) ABACUS - UK
In fiscal 1999, the Company acquired a non-controlling 25% interest in
Abacus Financial Management Systems Ltd. (Abacus-UK). Abacus-UK 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, which offers the retail market a mechanism for counting,
storing and transporting its cash receipts. The Company invested
$162,000 in this entity to acquire the 25% non-controlling ownership
interest. In fiscal 2004 and 2003, the Company did not make any
additional investment, however, in fiscal 2002, the Company invested
an additional $207,000 in Abacus-UK. The Company's consolidated
results of operations for the years ended September 30, 2004, 2003,
and 2002 include the Company's equity in the loss of this affiliate of
$0, $0, and $131,000, respectively.
F-15
During the fourth quarter of fiscal 2002, the Company recorded a
non-cash charge to operations of $215,000 related to the impairment of
its equity-method investment in Abacus-UK, pursuant to Accounting
Principles Board Opinion No. 18, THE EQUITY METHOD OF ACCOUNTING FOR
INVESTMENTS IN COMMON STOCK. This impairment loss, which was
considered other than temporary, was due to the deterioration of the
financial condition of this entity and is included in equity in income
of unconsolidated affiliates, net, in the accompanying consolidated
statement of operations for the fiscal year ended September 30, 2002.
(c) SOUTH AFRICA
In April 2003, the Company sold a significant portion of its
investments in its South African affiliates. The Company received
approximately $1.9 million in cash for the sale of its entire interest
in the cash handling division of International Payment Systems Pty
Ltd. and a major portion of its interest in Global Payment
Technologies Holdings (Pty) Ltd. ("GPTHL"), its South African gaming
affiliate. As a result of this transaction, which did not result in a
gain or loss, the Company's ownership interest in GPTHL was reduced
from 24.2% to 5%. GPTHL's Vukani division is one of the two licensed
operators in the South African route market province of Mpumalanga.
The cash received was a return of all of the Company's advances and
investments resulting in the Company's recovering the carrying value
of such advances and investments. The Company accounted for its
remaining investment on the cost basis.
In October 2003, the Company invested an additional $51,000 in this
entity. Effective January 15, 2004, the Company's remaining interest
was sold. A gain of $78,000 was realized upon sale of the remaining
interest. The Company's results of operations for the years ended
September 30, 2003, and 2002 include the Company's equity in the loss
of this affiliate of ($14,000), and ($75,000), respectively.
(d) CHINA
During the third quarter of fiscal 2002, the Company sold its 50%
non-controlling interest in its China-based affiliate. As a result,
the Company recorded a gain of $108,000 in the accompanying statement
of operations.
(4) SUMMARY FINANCIAL INFORMATION
Financial information with respect to the Company's Australian affiliates
is included in the accompanying financial statements based on the
affiliates' fiscal year ended June 30. The following summary financial
information reflects the combined assets and liabilities of GPTA and eCash
as of June 30, 2004 and 2003 and their combined operating results for their
fiscal years ended June 30, 2004, 2003, and 2002. Additionally, the
combined 2002 operating results include those of Abacus-UK. Such summary
financial information has been provided herein based upon the respective
individual significance of these unconsolidated affiliates to the
consolidated financial information of the Company for each respective
period.
(in thousands)
June 30, June 30,
2004 2003
--------------------
Current assets $ 8,255 $ 10,966
Non-current assets 695 1,007
Current liabilities 5,264 7,710
Non-current liabilities 84 --
Net assets 3,602 4,263
F-16
(in thousands)
Year ended Year ended Year ended
June 30, 2004 June 30, 2003 June 30, 2002
-----------------------------------------------
Net sales $ 13,892 $ 18,016 $ 19,699
Operating income 621 538 202
Net income 483 604 527
(5) INVENTORY
The following is a summary of the composition of inventory:
September 30
-------------------
2004 2003
-------- --------
(In thousands)
Raw materials $ 1,339 $ 1,725
Work-in-progress 458 787
Finished goods 776 987
-------- --------
$ 2,573 $ 3,499
======== ========
(6) PROPERTY AND EQUIPMENT, NET
Major classifications of property and equipment are as follows:
September 30
-------------------
Useful lives 2004 2003
------------------ -------- --------
(In thousands)
Leasehold improvements Shorter of the
life of the lease
or useful life of
asset $ 266 $ 266
Furniture and fixtures 3 - 7 years 391 391
Machinery and equipment 3 - 10 years 2,882 2,511
Tooling and Molds 7 years 1,839 1,839
Computer software 5 years 995 995
Computer hardware 3 years 1,016 1,002
-------- --------
7,389 7,004
Less accumulated depreciation and
amortization (5,255) (4,387)
-------- --------
$ 2,134 $ 2,617
======== ========
Depreciation and amortization expense was $830,000, $849,000, and $640,000
for the fiscal years ended September 30, 2004, 2003 and 2002, respectively.
F-17
(7) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the
following:
September 30
-------------------
2004 2003
-------- --------
(In thousands)
Accrued legal and accounting $ 229 $ 228
Warranty costs 298 346
Accrued commissions 154 499
Administrative and other 599 808
-------- --------
$ 1,280 $ 1,881
======== ========
(8) DEBT
On March 16, 2004, the Company received aggregate proceeds of $1,500,000
from the sale to Laurus Master Fund Ltd. ("Laurus") of a $1,500,000
principal amount secured convertible term note due in March 2007 (the
"CTN"), pursuant to a Securities Purchase Agreement. The CTN is convertible
into common stock of the Company at any time at the rate of $4.26 of
principal for one share of common stock and is collateralized by
substantially all assets of the Company. The CTN provides for monthly
principal payments of $25,000 from July 2004 to March 2005, $45,000 from
April 2005 to September 2005 and $55,833 from October 2005 to March 2007.
Interest is payable monthly at the prime rate plus 1.5%, with a minimum
rate of 6%. In addition, Laurus received 7 year warrants to purchase an
aggregate of 200,000 shares of the Company's common stock at prices of
$4.87, $5.28 and $5.68 for 100,000, 60,000 and 40,000 warrants,
respectively. Under the agreement, the Company is restricted from paying
dividends or purchasing treasury stock. The Company utilized approximately
$1,200,000 of the proceeds to repay amounts outstanding under a previous
credit agreement. At September 30, 2003, amounts outstanding on the
Company's revolving line of credit with Chase Bank was $1,000,000 and on
the Company's term notes, which were to mature during fiscal 2004, were
$793,000.
The value allocated to the warrants resulted in a debt discount of $506,000
that is being recognized as interest expense over the term of the note.
Additionally, by allocating value to the warrants, Laurus received a
beneficial conversion feature in the amount of $304,000 that resulted in
additional debt discount that is being recognized as interest expense over
the term of the note. Interest expense is computed utilizing the interest
method, which results in a constant effective yield over the term of the
note. For the year ended September 30, 2004, amortization expense was
$242,000. As of September 30, 2004, the unamortized debt discount amounted
to approximately $568,000. Amortization of debt discount will approximate
$370,000 and $198,000 for fiscal 2005 and 2006, respectively, which will be
charged to operations. In the event that the CTN, or any portion of the
CTN, is converted prior to maturity, the unamortized discount related to
the amount converted will be immediately recognized as interest expense and
charged to operations.
On March 16, 2004, the Company also entered into a Security Agreement with
Laurus which provides for a credit facility of $2,500,000 consisting of a
secured revolving note of $1,750,000 (the "RN") and a secured convertible
minimum borrowing note of $750,000 (the "MBN"), both due in March 2007
(both notes collectively referred to as the "LOC"). At closing, the Company
borrowed $750,000 under the MBN. Funds available under the LOC are
determined by a borrowing base equal to 85% and 70% of eligible domestic
and foreign accounts receivable, respectively, and 50% of eligible
inventory. Outstanding amounts under the RN and MBN are convertible into
common stock of the Company at any time at the rate of $4.26 of principal
for one share of common stock and are collateralized by substantially all
assets of the Company. Interest is payable monthly at the prime rate plus
1.5%, with a minimum rate of 6%. At September 30, 2004, no amounts were
outstanding under the RN.
F-18
The agreements provide that Laurus will not convert debt or exercise
warrants to the extent that such conversion or exercise would result in
Laurus, together with its affiliates, beneficially owning more than 4.99%
of the number of outstanding shares, including warrants, of the Company's
common stock at the time of conversion or exercise.
Outstanding debt to Laurus as of September 30, 2004 is as follows:
(In thousands)
Total debt $ 2,175
Less unamortized debt discount (568)
--------
Net 1,607
Less current portion (253)
--------
Long term debt $ 1,354
--------
As of September 30, 2004, annual principal maturities for the amount
outstanding under the notes were as follows:
Amount
--------------
Fiscal year ended September 30: (in thousands)
2005 $ 420
2006 670
2007 1,085
--------------
$ 2,175
==============
F-19
(9) STOCK OPTION PLANS
The Company has several stock option plans in effect covering in the
aggregate 1,500,000 of the Company's common shares pursuant to which
officers, directors and key employees of the Company and consultants to the
Company are eligible to receive incentive and/or nonqualified stock
options. The stock option plans, which expire at varying dates beginning on
October 17, 2004 through January 25, 2010, are all 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 and
administered in accordance with the stock option plans as approved by the
shareholders.
Incentive stock options granted under these various 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 2002, a total of 255,200 incentive stock options and 66,000
nonqualified options were granted. All options granted in 2002 will become
exercisable over varying terms up to four years.
During fiscal 2003, a total of 95,000 incentive stock options and 31,000
nonqualified options were granted. All options granted in 2003 will become
exercisable over varying terms up to four years.
During fiscal 2004, a total of 265,650 incentive stock options and 100,500
nonqualified options were granted. All options granted in 2004 will become
exercisable over varying terms up to four years.
A summary of the Company's stock option plans as of September 30, 2004,
2003, and 2002, and changes during the years then ended, is presented
below.
2004 2003 2002
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
----------- ----------- ----------------------- ----------- -----------
Outstanding at the
beginning of year 766,600 $ 5.02 1,058,600 $ 4.53 880,850 $ 5.16
Granted at fair value 366,150 3.98 126,000 4.05 321,200 3.73
Forfeited (193,700) 5.96 (403,600) 3.55 (134,600) 6.68
Exercised (51,250) 2.88 (14,400) 4.48 (8,850) 4.07
----------- ------------ -----------
Outstanding at end of
the year 887,800 4.48 766,600 5.02 1,058,600 4.53
=========== ============ ===========
Options exercisable at
year end 371,059 5.18 348,120 6.18 555,040 4.51
Weighted average fair value
of options granted during
the year (a) 2.26 2.63 2.51
F-20
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
-----------------------------------
2004 2003 2002
----------- --------- ---------
Risk-free interest rates 4.02% 3.07% 4.83%
Expected lives 5.5 years 7 years 7 years
Expected volatility 66% 65% 66%
Expected dividend yields -- -- --
Summarized information about the Company's stock options outstanding and
exercisable at September 30, 2004 is as follows:
Outstanding Exercisable
-------------------------------------- ---------------------------
Weighted Weighted Weighted
average average average
Exercise price range Options life exercise price Options exercise price
----------------------- ---------- ---------- --------------- ---------- ---------------
$2.40 to $4.00 590,100 5.34 $ 3.75 144,485 $ 3.41
$4.01 to $6.00 216,400 4.60 4.92 145,274 5.06
$6.01 to $8.00 28,800 1.14 6.81 28,800 6.81
$8.01 to $10.00 42,000 1.94 8.99 42,000 8.99
$10.01 to $12.00 10,500 1.25 11.43 10,500 11.43
$12.01 to $14.25 -- -- -- -- --
---------- ----------
887,800 4.81 4.48 371,059 5.18
========== ==========
(10) INCOME TAXES
The provision for (benefit from) income taxes consists of the following:
Fiscal years ended September 30
-------------------------------
2004 2003 2002
------- ------- -------
(In thousands)
Current:
Federal $ (15) $ (211) $ (885)
State and local 8 -- --
------- ------- -------
(7) (211) (885)
------- ------- -------
Deferred:
Federal -- 685 147
State and local -- -- (188)
------- ------- -------
-- 685 (41)
------- ------- -------
Total $ (7) $ 474 $ (926)
======= ======= =======
F-21
Significant components of deferred tax assets and liabilities are as
follows:
September 30
---------------------
2004 2003
--------- ---------
(In thousands)
Deferred tax assets:
Accounts receivable $ 91 $ 89
Inventory 472 507
Accrued expenses and other, net 132 186
Elimination of gross profit on sales to
affiliates 196 141
Tax NOL carryforward 2,154 1,646
--------- --------
Deferred tax asset 3,045 2,569
Less: Valuation allowance (a) (2,429) (1,952)
--------- --------
616 617
Deferred tax liability:
Undistributed earnings of
foreign affiliates (616) (617)
--------- ---------
Net deferred taxes $ -- $ --
========= =========
(a) The Company's ability to recover the reported amounts of deferred
income tax benefit is dependent upon its ability to generate sufficient
taxable income during the periods over which net temporary tax differences
become deductible. The Company has incurred significant operating losses in
the fiscal years 2004, 2003, and 2002. Due to recurring losses and because
of the uncertainty as to the Company's ability to generate sufficient
taxable income to realize the value of its deferred tax asset, during the
fourth quarter of fiscal 2003 the Company provided a full valuation
allowance. This valuation allowance will be periodically assessed and may
be partially or wholly reversed in the future.
As of September 30, 2004, the Company has a net operating loss carryforward
of $5,859,000, which expires in 2023 and 2024.
Reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate is as follows:
Fiscal years ended September 30
-------------------------------
2004 2003 2002
-------- -------- -------
U.S. Federal statutory rate (34.0)% (34.0)% (34.0)%
State income taxes, net of federal benefit (2.5) (3.8) (5.9)
Impact of foreign operations 0.0 6.9 (22.1)
All other, net 4.5 0.5 2.6
Change in valuation allowance 31.6 39.5 --
-------- -------- -------
Effective income tax rate (0.4)% 9.1% (59.4)%
-------- -------- -------
F-22
(11) COMMITMENTS AND CONTINGENCIES
(a) MINIMUM LEASE COMMITMENTS
The operations of the Company are conducted in leased premises. The
Company also leases various office equipment. At September 30, 2004,
the approximate minimum annual rentals under these leases, which expire
through fiscal year 2006, were as follows:
(In thousands)
Fiscal year ending September 30:
2005 $ 415
2006 319
Thereafter --
Total rent expense for all operating leases was $406,000, $474,000, and
$472,000 in fiscal 2004, 2003, and 2002, respectively, including $0,
$27,000, and $40,000 respectively, paid to a related party affiliate.
The operating lease with the related party affiliate was cancelled
during fiscal 2003. The Company's management believes this lease with
the affiliate was on terms, which approximated fair market value.
(b) EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with its two
officers, which expire in April 2005 and 2006. Minimum compensation
requirements are $309,000 and $113,000 for the fiscal years ending
September 30, 2005 and 2006, respectively.
F-23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Global Payment Technologies, Inc
We have audited the accompanying balance sheet of Global Payments Technology Pty
Limited as of June 30, 2004 and the related statement of operations,
stockholders' equity, and cash flows for the year ended June 30, 2004. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 audit provides 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 the Company as of June 30,2004,
and the results of its operations and its cash flows for the year ended June
30,2004, in conformity with US generally accepted accounting principles.
Pitcher Partners,
Sydney, Australia
1 October 2004
F-24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Global Payment Technologies Pty Limited
We have audited the accompanying balance sheet of Global Payment Technologies
Pty Limited as of June 30, 2003 and the related statements of income,
stockholders' equity, and cash flows for each of the years in the two-year
period ended June 30, 2003. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 Pty
Limited as of June 30, 2003, and the results of its operations and its cash
flows for each of the years in the two year period ended June 30, 2003, in
conformity with accounting principles generally accepted in the United States of
America.
KPMG
Sydney, Australia
19 December 2003
F-25
GLOBAL PAYMENT TECHNOLOGIES AUSTRALIA PTY LTD
Balance Sheets
June 30, 2004 and 2003
Assets 2004 2003
----------------- ---------------
Current assets:
Cash and equivalents A$ 2,761,638 2,267,402
Trade accounts receivable, less allowances for doubtful
accounts of A$10,000 and A$10,000 in 2003 2,152,016 2,477,200
Inventories 4,509,809 7,350,859
Deferred income taxes 231,943 523,157
Income taxes receivable 192,545 -
Receivable from affiliate 1,036,688 1,462,246
Other current assets 141,340 50,415
----------------- ---------------
Total current assets 11,025,979 14,131,279
----------------- ---------------
Property, plant and equipment
Machinery and equipment 360,222 352,870
Less accumulated depreciation and amortization (172,556) (130,992)
----------------- ---------------
Net property, plant and equipment 187,666 221,878
----------------- ---------------
Total assets A$ 11,213,645 14,353,157
================= ===============
Liabilities and Stockholders' Equity
Current Liabilities:
Trade accounts payable A$ 5,251,550 8,727,631
Income taxes (receivable)/payable - (8,225)
Accrued liabilities 1,045,963 1,063,045
----------------- ---------------
Total current liabilities 6,297,513 9,782,451
----------------- ---------------
Total liabilities 6,297,513 9,782,451
----------------- ---------------
Commitments and contingencies (Note 1) Stockholders' equity:
Common stock
Issued and outstanding 20,000 shares in 2004 and 20,000 shares 20,000 20,000
in 2003
Retained earnings 4,896,132 4,550,706
----------------- ---------------
Total stockholders' equity 4,916,132 4,570,706
----------------- ---------------
Total liabilities and stockholders' equity A$ 11,213,645 14,353,157
================= ===============
See accompanying notes to consolidated financial statements.
F-26
GLOBAL PAYMENT TECHNOLOGIES AUSTRALIA PTY LTD
Statements of Income
Years ended June 30, 2004, 2003 and 2002
2004 2003 2002
--------------- --------------- -----------------
Net sales A$ 17,409,545 27,537,178 37,229,261
Cost of goods sold 14,690,273 24,364,738 31,522,890
--------------- --------------- -----------------
Gross profit 2,719,272 3,172,440 5,706,371
Selling, general and administrative expenses (1,777,565) (1,937,681) (1,918,794)
Related party royalty -- (1,307,783)
--------------- --------------- -----------------
Operating income 941,707 1,234,759 2,479,794
Other income (expense):
Interest income 140,252 221,318 103,216
Other sundry income 63,240 151,065 --
Interest expense - (4,412) (39,771)
Servicing income 207,416 105,420 90,135
Foreign exchange gains - 202,924 45,108
--------------- --------------- -----------------
Income before income taxes 1,352,615 1,911,074 2,678,482
Income taxes (407,189) (578,232) (817,779)
--------------- --------------- -----------------
Net income 945,426 1,332,842 1,860,703
=============== =============== =================
See accompanying notes to consolidated financial statements
F-27
GLOBAL PAYMENT TECHNOLOGIES AUSTRALIA PTY LTD
Statements of Stockholders' Equity
Years ended June 30, 2004, 2003 and 2002
Total
Common Retained Stockholders'
Stock Earnings Equity
--------------- --------------- ---------------
Balances at June 30, 2001 (unaudited) A$ 20,000 3,357,161 3,377,161
Net income (unaudited) -- 1,860,703 1,860,703
Dividends declared -- -- --
--------------- --------------- ---------------
Balances at June 30, 2002 A$ 20,000 5,217,864 5,237,864
Net income (unaudited) -- 1,332,842 1,332, 842
Dividends declared -- (2,000,000) (2,000,000)
--------------- --------------- ---------------
Balances at June 30, 2003 A$ 20,000 4,550,706 4,570,706
Net income - 945,426 945,426
Dividends declared - (600,000) (600,000)
--------------- --------------- ---------------
Balances at June 30, 2004 A$ 20,000 4,896,132 4,916,132
=============== =============== ===============
See accompanying notes to consolidated financial statements
F-28
GLOBAL PAYMENT TECHNOLOGIES AUSTRALIA PTY LTD
Statements of Cash Flows
Years ended June 30, 2004, 2003 and 2002
2004 2003 2002
--------------- --------------- ---------------
Net income A$ 945,426 1,332,842 1,860,703
Adjusted to reconcile net income to net cash
provided by operating activities:
Depreciation and amortisation of property, plant and equipment 42,209 42,139 34,930
Decrease / (increase) in trade accounts receivable 325,184 2,632,803 (1,389,057)
Decrease / (increase) in inventories 2,841,050 3,316,850 175,233
Decrease / (increase) in other assets (90,925) 146,134 2,363
Decrease / (increase) in intercompany receivables 425,557 (1,462,246) --
Decrease in trade accounts payable (3,476,080) (3,419,624) (1,103,844)
Decrease in accrued liabilities (17,082) (379,767) (329,759)
Increase in prepaid expenses - -- (10,744)
Decrease / (increase) in deferred income taxes 106,894 (196,742) (64,596)
--------------- --------------- ---------------
Net cash provided by/ (used in) operating activities 1,102,233 2,012,389 (824,771)
--------------- --------------- ---------------
Cash flows from investing activities:
Capital expenditures, including interest capitalized (7,997) (101,137) (93,471)
--------------- --------------- ---------------
Net cash used in investing activities (7,997) (101,137) (93,471)
--------------- --------------- ---------------
Cash flows from financing activities:
Dividends paid (600,000) (2,000,000) --
--------------- --------------- ---------------
Net cash used in financing activities (600,000) (2,000,000) --
--------------- --------------- ---------------
Net decrease in cash and cash equivalents 494,236 (88,748) (918,242)
Cash and cash equivalents at beginning of year 2,267,402 2,356,150 3,274,392
--------------- --------------- ---------------
Cash and cash equivalents at end of year A$ 2,761,638 2,267,402 2,356,150
=============== =============== ===============
See accompanying notes to consolidated financial statements
F-29
GLOBAL PAYMENT TECHNOLOGIES AUSTRALIA PTY LTD
Notes to Financial Statements
June 30, 2004, 2003 and 2002
1. Summary of Significant Accounting Policies and Practices
a) Description of Business
Global Payment Technologies Australia Pty Limited (the "Company")
distributes and services paper currency validating equipment used in gaming
and vending machines in Australia and other countries. There were no
significant changes in the nature of the Company's principal activity
during the fiscal year.
b) Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not
bear interest. The allowance for doubtful accounts is the Company's best
estimate of the amount of probable credit losses in the Company's existing
accounts receivable. The Company determines the allowance based on
historical write-off experience by industry and national economic data.
Account balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is considered
remote. The Company does not have any off-balance-sheet credit exposure
related to its customers.
Concentration of credit risk
The Company's largest customer represented 47% (2003: 48%) of trade
accounts receivable as of June 30, 2004 and 59% (2003: 70%) of sales for
the fiscal year ended June 30, 2004. One other customer represented 10% or
more of net sales and trade accounts receivable as of and for the year
ended June 30, 2004.
c) Inventories
Inventories are stated at the lower cost or market value. Cost is
determined using the first-in, first-out method for all inventories.
d) Property, Plant and Equipment
Property, plant and equipment are stated at cost.
Depreciation on plant and equipment is calculated on the straight-line
method over the estimated useful lives of the assets. The depreciation
rates range from 7.5% to 27% (2003: 7.5% to 27%).
e) Other Current Assets and Other Assets
Other assets are comprised of security deposits, prepaid expenses, goods
and services tax due from the Australian Tax Office and other non-trade
receivables.
f) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carry forwards. Deferred tax
F-30
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
g) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
h) Impairment of Long-Lived Assets
Long-Lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying 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 estimated undiscounted
future 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 depreciation ceases.
The Company did not recognize any impairment adjustments in fiscal 2004
(2003: nil; 2002: nil).
i) Revenue Recognition
The Company recognises revenue upon shipment of products and passage of
title to its customers, or at the time services are completed with respect
to repairs not covered by warranty agreements.
j) Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties and other sources are recorded when it is
probable that a liability has been incurred and the amount of the
assessment and/or remediation can be reasonably estimated. No such amounts
were recorded in fiscal 2004, 2003 or 2002.
k) Advertising expenses
Advertising expenses are recognized in the statement of income as incurred.
l) Cash and cash equivalents
Cash and cash equivalents comprise cash on hand, and cash and term deposits
with banking institutions. The Term deposits are for a period of 7 days.
These have been rolled over since year-end. Cash at bank includes cash
denominated in Australian and US dollars. US dollar denominated bank
accounts are restated at year-end to spot rates at year-end with the gain
recognized in the Statement of income.
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2) Income Taxes
All pre tax income is derived from domestic operations.
Total income taxes for the years ended June 30, 2004, 2003 and 2002
consists of:
Current Deferred Total
------------------------------------
Year ended June 30, 2004: A$ 115,975 291,214 407,189
====================================
Year ended June 30, 2003: A$ 757,375 (179,143) 578,232
====================================
Year ended June 30, 2002 A$ 882,376 (64,597) 817,779
====================================
Income tax expense was $407,189, $578,232 and $817,779 for the years ended
June 30, 2004, June 30, 2003 and June 30, 2002, respectively, and differed
from the amounts computed by applying the Australian federal income tax
rate of 30% (2003: 30%; 2002: 30%) to pre tax income as a result of the
following:
2004 2003
-----------------------
Computed "expected" tax expense A$ 405,785 573,322
Increase (reduction) in income taxes resulting from:
Adjustment to deferred tax assets and
liabilities for enacted changes in tax laws and
rates -- --
Under/over provision for prior years -- --
Other, net 1,404 4,910
-----------------------
A$ 407,189 578,232
=======================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at 30 June
2004 and 2003 are presented below.
2004 2003
At 30% tax rate At 30% tax rate
----------------------------------
Deferred tax assets:
Accounts receivable principally due to
allowance for doubtful accounts A$ 3,000 3,000
Inventory 41,183 233,094
Employee leave entitlements 40,226 22,966
Bonus provision 139,620 168,720
Unrealised foreign exchange movements (18,577) 60,877
Other 26,491 34,500
----------------------------------
Total gross deferred tax assets 231,943 523,157
----------------------------------
Net deferred tax assets 231,943 523,157
==================================
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In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods, which the deferred
tax assets are deductible, management believes it is more likely than not
the Company will realize the benefits of these deductible differences at
June 30, 2004.
3) Pension and Other Postretirement Benefits
The Company contributed to a defined contribution superannuation fund on
behalf of its employees. Contributions are based upon Australian statutory
minimum percentage of salary plus any additional contributions included in
employee's employment agreement. The company contributed A$81,692, A$76,127
and A$79,740 during fiscal years 2004, 2003 and 2002 respectively to the
fund. There were no contributions outstanding at year-end.
The Company does not sponsor any other post employment benefits for its
employees.
4) Accrued Liabilities
2004 2003
Goods and services tax payable A$ 160,538 206,336
Accrued expenses 676,340 705,411
Provision for employee leave 134,085 76,554
Warranty provision 75,000 75,000
------------------------
A$ 1,045,963 1,063,301
========================
5) Commitments
Non cancellable operating lease commitments
Future operating lease commitments not provided for 2004 2003
in the financial statements and payable:
Within one year A$ 210,000 210,000
One to two years 210,000 210,000
Two to three years - 210,000
------------------------
A$ 420,000 630,000
------------------------
The Company leases property under a non-cancellable four year operating
lease expiring in 2006. There is an option to renew the lease for a further
four years at the completion of the lease. The Company has not entered into
any capital leases.
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6) Related parties
The company is 50% owned by Global Payment Technologies, Inc, a company
incorporated in the United States of America. The other 50% is owned by a
private trust of which the Managing Director of the company is a
beneficiary. During the year, the Company purchased inventories from Global
Payment Technologies, Inc., which totalled $14,106,885 (2003: $24,880,000).
An amount ofA$5,123,728 is included in Trade accounts payable at balance
date.
As of June 30, 2004 the Company had receivables from eCash
Holdings Pty Limited of $1,036,688, (2003: $1,462,246) which were
primarily attributable to payments made by the Company on behalf
of eCash Holdings Pty Limited to employees and vendors of eCash
Holdings Pty Limited. Interest is charged on the balance at the
rate of 7% p.a.
During the year, the Company had purchases from to eCash Holdings
Pty Limited totalling $nil (2003: $667,600).
During the year, the Company had sales to eCash Holdings Pty
Limited totalling $334,460 and the group $415,784 (2003: nil). An
amount ofA$208,872 is included in Trade accounts receivable at
balance date.
For the year ended June 30, 2004, the Company charged eCash
Holdings Pty Limited a management fee for administrative tasks
conducted by the Company on behalf of eCash
Holdings Pty Limited, which is included in other sundry income in
the accompanying statement of income.
eCash Holdings Pty Limited is owned 35% by Global Payment
Technologies, Inc., 35% by the private trust of the Managing
Director of the Company, and 30% by an unrelated third party.
There were no other transactions with related parties.
F-34
Schedule II
GLOBAL PAYMENT TECHNOLOGIES, INC.
Schedule of Valuation and Qualifying Accounts
Column A Column B Column C Column D Column E
- ------------------------------------ ------------------ ------------------ ------------------ ------------------
Balance at Charged to Deductions - Balance
beginning costs and write off at end
Description of period expenses of accounts of period
- ------------------------------------ ------------------ ------------------ ------------------ ------------------
Allowance for doubtful
accounts:
September 30, 2002 $ 169 $ 108 $ 100 $ 177
September 30, 2003 177 127 70 234
September 30, 2004 234 102 86 250
Warranty Reserve
September 30, 2002 382 281 323 340
September 30, 2003 340 327 321 346
September 30, 2004 346 198 246 298
See accompanying independent auditors' report.
S-1