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, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-25148
GLOBAL PAYMENT TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2974651
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
425B Oser Avenue, Hauppauge, New York 11788
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 631-231-1177
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of the Common Stock of the registrant
held by non-affiliates of the registrant, based on the average bid and asked
prices on December 13, 2002, was approximately $29,600,000.
As of January 7, 2003, the registrant had a total of 5,542,416 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 2003 are incorporated by reference
into Part III of this report.
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PART I
Item 1. Business
General
Global Payment Technologies, Inc. (the "Company") was originally incorporated in
New York in 1988 under the name Coin Bill Validator, Inc. In March 1997, the
Company's shareholders approved a change of the Company's name and state of
incorporation from New York to Delaware, effected through the merger of the
Company into the Company's wholly-owned subsidiary, Global Payment Technologies,
Inc., a Delaware corporation.
The Company designs and manufactures currency validation systems, including
paper currency validators and related paper currency stackers, and sells its
products in the United States and numerous international markets. Validators
receive and authenticate paper currencies in a variety of automated machines,
including gaming and gaming related equipment, beverage and vending machines and
retail equipment that dispense products, services, coinage and other currencies.
Note stackers are sold with most validators and are designed to store validated
paper currency and, in some cases, record and store information on contents,
usually in secure removable cassettes. Although the Company knows of no
commercially available validator that is counterfeit-currency-proof, the
Company's validators and stackers offer significant protection against tampering
and counterfeit currencies and provide tamper-evident storage of validated
currency. The Company's validators are adaptable to a wide variety of original
equipment manufacturer ("OEM") applications and have been engineered into the
design of most major gaming and numerous beverage and vending machines sold
worldwide. The Company's products offer a highly competitive level of
performance and are designed to provide ease of maintenance and repair.
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 currently has a 30% interest in IPS. GPTHL holds
the exclusive distribution rights to the Company's products in the South African
region. Effective August 1, 2000, a division of IPS, GPT Cash Systems, acquired
all the assets including the service contracts of De La Rue Cash Systems
(Proprietary) ("DLR"), the South African wholly owned subsidiary of De La Rue
PLC. DLR received cash and a minority interest in GPT Cash Systems. In addition
to improving GPT Cash Systems' revenue base of sales and service of the De La
Rue product suite, this transaction will provide a base of service operations
which will expand and improve upon existing service capabilities, and allow our
affiliate to service other business markets, including the South African route
market which is expected to commence deployment of gaming machines by early
calendar 2003. 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
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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%.
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.
Background and History
In the 1980s, a general trend developed with respect to an increase in the
incorporation of paper currency validators in a large number of beverage, food
and novelty vending machines that offered primarily low-priced items. During the
1990s, subsequent technological improvements in the sensory capabilities of
validators created the ability to process high volumes of larger denomination
notes, which led to the extensive use of validators in many new applications
including casino gaming machines, lottery ticket dispensing devices and postage,
transportation, parking and high-value vending machines. This trend accelerated
during the 1990s as a result of the realization that currency validators
positively impacted sales revenues and the overall growth in the worldwide
gaming and beverage and vending industries.
Since incorporation, the Company's net sales have grown from approximately
$35,000 in fiscal 1989 to $16.7 million in fiscal 1996, to $23.9 million in
fiscal 1997, to $39.4 million in fiscal 1998, and to 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,
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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.
The Company's international sales amounted to 92%, 90% and 83% of net sales in
fiscal 2002, 2001 and 2000, respectively. Management believes the international
market for currency validation systems may grow at a faster rate than in the
United States and, therefore, may represent the Company's best long-term growth
opportunity.
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 has been
effective in the worldwide gaming market and 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 the completion and delivery of our Argus(TM) and Aurora
products and the imminent launch of our new "Advantage" product, 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 by their opting to use the Company's
products based on its strength internationally and its reputation for working
closely to adapt to customers' needs. The Company has and will attempt to
continue to strengthen and grow its relationships with the OEMs through joint
marketing and advertising efforts and by creating databases and customization,
which will allow OEMs an opportunity to seek new potential markets worldwide.
Today the Company has in excess of 55 country specific databases, which is one
of the largest database libraries in the industry. Further, it plans to build a
large library of databases for its new Aurora beverage and vending validator
product line. As a result, the Company is in position to gain additional
business based on its acceptance as the currency validation standard 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 is developing a new
product that it believes will allow it to penetrate the domestic gaming market
as early as fiscal 2003.
The Company markets its products principally to the OEMs as well as the
end-users (i.e., casino operators) who purchase machines from the OEMs to help
ensure that the Company's validator products will be specified as the product of
choice in new orders. The Company 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
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entry into major casinos or regions previously dominated by currency validators
of the Company's competition. In 1999, the Company began to develop programs and
plans designed to elevate the level of our customers' product knowledge. Such
programs and plans include the development of formally documented maintenance
schedules and similar programs to be 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 increased marketing efforts on explaining the technical features and
customer support programs of current and future products in order to further
differentiate itself from the competition. 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.
The Company's strategy for the significantly larger worldwide beverage and
vending industry will be very similar to that which has been successful in the
gaming marketplace. The Company successfully completed its field trials for its
new beverage and vending product called Aurora in September 2002. In fiscal
2003, the Company plans to vigorously market and sell its new vending 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 Company has already booked sales of its Aurora product. The beverage
and vending industry's annual requirement for currency validation equipment is
approximately $375 million per annum or three times that of the gaming market.
In addition, the successful penetration into the beverage and vending market
will allow the Company to achieve a major portion of its diversification
strategy and which if successful will 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 markets 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 Las Vegas,
Nevada; London, England and Moscow, Russia as well as joint ventures that
provide local sales and service in both Australia and South Africa. It also has
distributors in Russia, Italy, Southeast Asia, Latin America and the Middle
East.
To date, the Company's success has been dependent upon the use of paper or
simulated paper currency in automated payment systems for gaming and beverage
and vending applications. A substantial diminution of the use of paper currency
as a means of payment through a return to extensive use of high-value,
metal-based coinage or the widespread adoption of electronic funds transfer
systems based on credit, debit or "smart-cards" could materially and adversely
affect the Company's future growth until and unless the Company develops other
products that are not solely dependent on the use of paper or simulated paper
currency. The Company 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
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new products and systems. In May 2001, the Company formed a strategic alliance
with Smart Card Integrators, Inc., a smart card applications system integrator,
to jointly develop new products that combine the attributes of the traditional
paper currency validator with the capabilities to process transactions using
credit cards, debit cards, and smart cards. This project is currently in
development with field trials anticipated as early as fiscal 2003. The Company
owns 50% of the joint intellectual property and holds an international
distribution agreement.
Products
Since inception, the Company has endeavored, through its research and
development and manufacturing efforts, to provide products that meet the
specific performance requirements of its customers. These requirements are
continually evolving as the markets for currency validators continue to grow and
as technological advances are incorporated into the products' design. The
Company spent approximately $225,000, $150,000 and $225,000 during fiscal 2002,
2001 and 2000, 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.
The Company's new product development efforts have been focused on the design of
its next generation of validator products, the first of which is Argus(TM).
Argus(TM), the Company's new gaming validator, began selling in January 2001.
Sales of this new product represented 19% of validator sales in fiscal 2001 and
63% of validator sales in fiscal 2002. In the Summer of 2002, the Company
completed the development of its new product designed specifically to address
the requirements of the beverage and vending marketplace. The Company then
followed with successful field trials during the Summer and Fall of 2002 and has
since started receiving sales orders for this new product called "Aurora".
Building from its engineering libraries, the Company anticipates the
introduction of another new product during early calendar 2003 that 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 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, as expected,
sales substantially shifted from the Company's Generation II product line to its
Argus(TM) product line, and this shift is expected to continue in fiscal 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 and will
7
continually assess the adequacy of inventory reserves for the anticipated shift
in demand towards its new beverage and vending product.
The Model 125 ("M-125") is the Company's first generation multi-country,
multi-denominational validator model specifically designed for the beverage and
vending industries where its space-saving upstack design makes it popular for
use in machines where space is at a premium. The M-125's note stackers are fully
detachable and available with capacities of 150, 300 and 600 notes. During
fiscal 2000, 2001 and 2002, M-125 sales were primarily in vending applications
in Italy, helping to grow the Company's presence and credibility in that
important European market. It is expected that this product will begin to be
replaced in fiscal 2003 by its new beverage and vending product called Aurora.
The Model 150 ("M-150") is the Company's first generation multi-country,
multi-denominational validator designed to fit machines where space is available
either to the rear or downward. The M-150 is available with locking removable
cassette bill stackers in 500, 1,000 and 2,000 bill capacities and is United
States Postal Service, Department of Gaming Enforcement ("DGE") and Gaming
Laboratories, Inc. ("GLI") approved. Due to the growth and acceptance of the
Generation II product line, the M-150 product has been substantially reduced and
is expected to be completely phased out during 2003.
The Company's Generation II product line features several technological advances
designed specifically to meet the exacting requirements of the gaming industry.
The Generation II line includes the Company's "IDS," "IDUS," "IBS," and "IBSi"
validators. The IBSi has been positioned as a replacement for the Company's
first generation M-150 validator. Generation II products have been approved by
DGE and GLI, as well as by a number of U.S. and international test labs.
Generation II validators are offered in a wide variety of configurations that
can provide solutions for most worldwide gaming markets, as well as for many
beverage and vending markets. Generation II validators can be configured for
down-stack applications which allow the note stacker, a security removable
cassette, to be reached through a separate front entrance in the gaming machine.
Rear stacker configurations are also available. The front section of all
Generation II validator units can be opened easily to allow for maintenance,
repair or clearance of the currency pathway without violating the integrity of
the associated security stacker. Generation II validators offer currency
acceptance of notes up to 3.34 inches (85 mm) in width and have enhanced
features for gaming and high security applications. These features include a
multi-level high security validation process with side-looking sensors, an
animated bill runway with "smart visuals" for customer attraction and
diagnostics, a user-selectable currency denomination acceptance and an optional
bar-code reader for tickets and coupons. The Generation II line also offers a
"soft drop analyzer" ("SDA") option. This patented SDA feature allows the note
stacker cassette to maintain and track specific information such as currency or
coupons in the cassette by quantity and denomination; the specific machine or
game that the cassette was removed from; the acceptance rate of the validator;
and time-in/time-out of the cassette from the gaming machine. This information
can be easily downloaded, via a
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docking station provided by the Company, to a personal computer allowing instant
feedback/tracking for the machine operator.
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 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 offer with Argus the option of incorporating smart-card
and mag-card technologies. Its 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).
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. Field trials on this product were completed in September 2002 and
orders have since been received for this new product. 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. The future sales of this product are
expected to principally replace the Company's M-125 product.
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 the new Argus and Aurora validators. 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 warranteed as such. To support
its increasing international market presence, the Company has expanded its
warranty and non-warranty support coverage to provide in-country capability in
key worldwide markets (e.g. Australia, 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 2003 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 2002,
2001 and 2000 was $280,000, $145,000 and $328,000, respectively, which
represents actual costs incurred and an estimate of future costs to be incurred.
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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 joint
ventures providing local sales and service in the key markets of South Africa
and Australia and Company-owned sales and service offices in Las Vegas, Nevada
and London, England. In addition, the Company has distributors in Southeast
Asia, Italy and Latin America. 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 2002, the Company's largest customer, GPTA, accounted for
approximately 44% 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 92% of the Company's revenues, with the remaining 8%
primarily from product applications in the beverage and vending industry. The
Company anticipates a further reduction of its dependence on its largest
customer and the gaming industry by expanding its customer base and by the
introduction of its new Aurora validator product for the beverage and vending
marketplace. Until such time as the Company achieves significantly less
dependence on a few important customers, or expands substantially into the
beverage and vending marketplace, it 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
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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.
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, 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. With improvements in sales
anticipated in fiscal 2003 and further improvements in production and purchasing
efficiencies, we anticipate improved margins from both internal manufacturing
and selective outsourcing.
The Company depends on a limited number of suppliers for various stamped or
formed housings, gears, cogs and wheels and electronic assemblies or components,
including certain microprocessor chips. The Company believes that concentrating
its purchases from its existing suppliers provides, in certain cases, better
prices, better quality and consistency and more reliable deliveries. The Company
maintains on-going communications with its suppliers to prevent interruptions in
supply and, to date, generally has been able to obtain adequate supplies in a
timely manner. The Company has entered into volume blanket purchase agreements
with selected suppliers to guard against shortages of unique components, thereby
limiting the Company's exposure to business interruptions. Furthermore, many of
the electronic components used by the Company, including its microprocessors,
are widely used in many applications and are available from a number of sources.
However, the short wavelength light source that forms a critical part of the
Company's optical scanning device is now commercially available from only a very
limited number of suppliers. The Company believes that if such supply were to
become unavailable, its units could be redesigned to use other light sources and
still remain competitive in the marketplace. However, any interruption in the
supply of key components which cannot be quickly remedied could have a
materially adverse effect on the Company's results of operations.
Competition
The market for the Company's products is very competitive and the number of
competitors and their product offerings have increased due to the growing
worldwide marketplace. A number of competitors have significantly greater
financial, technical, sales and marketing resources than the Company.
Additionally, certain of these companies have acquired competitors with
synergistic product lines in an effort to offer a more complete product line. In
1998, Coin Controls Limited ("Coin Controls") acquired Ardac, Inc. ("Ardac"), a
domestic currency validator manufacturer. Coin Controls had primarily focused on
the validation of coins worldwide for the gaming and amusement industries. With
the acquisition of Ardac, Coin Controls changed its name to Money Controls PLC
("MCP") and the two companies together had the ability to package its coin
mechanism with a currency validator for both the gaming and beverage and vending
industries. In November 1999 MCP announced, and subsequently completed, its
agreement to be acquired by Coin Acceptors, Inc. ("Coinco"), a St. Louis based
11
supplier of primarily vending products. This results 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.
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"), Sanyo, Conlux, Coegis and Cashcode Company, Inc.
("Cashcode") are recognized competitors in the growing international beverage
and vending market.
The largest supplier of validators used in the domestic gaming and lottery
markets is JCM. Internationally, the Company competes for gaming machine
business with JCM, MEI, 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, as well as a competitive price
point.
The Company historically has been more willing to address smaller markets than
its larger competitors and expects to encounter increased competition as the
markets addressed by its products continue to grow. Also, the Company has been
willing to adapt its products to a variety of OEMs, which has allowed it to be
flexible to expand when new markets open up to sales. The Company believes that
performance, quality and protection against tampering and counterfeit currency
are relatively more important, and price relatively less important, as
competitive factors in the worldwide gaming marketplace.
Intellectual Property
The Company relies on certain proprietary know-how and trade secrets to protect
its technology. Important components of this proprietary information are the
Company's library of distinguishing characteristics of the currencies, which its
validators scan and validate, and its proprietary algorithms. The Company has
entered into non-disclosure and secrecy agreements with all of its employees
having access to this technology.
The Company holds 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,
12
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 applications, the Company has also
applied for patent protection in a large number of international markets. If
corresponding foreign patents are obtained, the Company believes that these
patents could provide important protection for certain technological advantages
its validators possess in international markets. However, the Company does not
believe that it will be materially and adversely affected if these patents are
not issued. No assurances can be given that any patent applications will result
in the issuance of additional patents. 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.
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.
13
Employees
On January1, 2003, the Company had 155 employees, consisting of 3 executives; 15
sales, and customer service representatives; 33 engineers and software
developers, and technical support representatives; 20 materials, quality control
and quality assurance personnel; 17 administrative and clerical personnel; and
67 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; the pending
commencement of operations for the South African route market; 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 $321,000 in
fiscal 2002, 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. On March 1, 2002 the Company reduced its leased square
footage in Valley Stream, New York, from 2,058 square feet to 1,541 square feet.
The lease expires on August 31, 2004 and the annual base net rental is
approximately $16,500. This facility houses certain executive functions of the
Company. The Company also leases approximately 3,600 square feet in Las Vegas,
Nevada, for a term expiring January 31, 2004, at an annual base rental of
approximately $47,500 increasing annually to approximately $52,000 in the final
year of the term. This facility houses certain sales and service functions of
the Company.
14
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 2001 and 2002.
Common Stock
------------
Quarter Ended High Low
------------- ---- ---
December 31, 2000 6.50 3.25
March 31, 2001 5.375 2.125
June 30, 2001 3.05 2.20
September 30, 2001 4.20 3.00
December 31, 2001 3.90 2.95
March 31, 2002 6.00 3.50
June 30, 2002 6.44 5.35
September 30, 2002 7.397 5.46
b) Holders
The approximate number of beneficial holders and holders of record of the
Company's Common Stock as of January 9, 2003, were 1,450 and 45, respectively.
c) Dividends
The holders of Common Stock are entitled to receive such dividends as may be
declared by the Company's Board of Directors. The Company has not declared or
paid any cash dividends and does not expect to declare or pay any cash dividends
in the foreseeable future.
15
Item 6. Selected Financial Data
FINANCIAL HIGHLIGHTS
(In thousands, except earnings per share)
- ---------------------------------------------------------------------------------------------------------------
Year Ended September 30 1998 1999 2000 2001 2002
- ---------------------------------------------------------------------------------------------------------------
Net sales $39,388 $43,896 $ 22,507 $32,161 $ 27,713
Net income (loss) 3,356(2) 3,962 (1,229)(2) 806 (633)(1)
Diluted earnings (loss) per share (1) .56 .68 (.22)(3) .14 (.11)(3)
Total assets (4) 22,583 26,122 24,460 26,466 24,030
Long- term debt obligations -- 4,994 3,617 2,800 --
Stockholders' equity 13,087 17,038 16,795 17,550 17,026
(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 $225,000 and $221,000 in 1998 and 2000,
respectively, 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.
QUARTERLY INFORMATION
(In thousands, except earnings per share)
Quarter Ended
- ----------------------------------------------------------------------------------------------
Dec. 31 Mar. 31 June 30 Sept. 30 Year
- ----------------------------------------------------------------------------------------------
Fiscal 2001
Net sales $6,588 $8,389 $8,573 $8,611 $32,161
Gross profit 2,169 2,749 2,415 2,421 9,754
Net income (loss) 112 383 181 130 806
Basic earnings (loss) per share .02 .07 .03 .02 .15
Diluted earnings (loss) per share .02 .07 .03 .02 .14
- ----------------------------------------------------------------------------------------------
Fiscal 2002
Net sales $8,290 $8,408 $6,503 $4,512 $27,713
Gross profit 2,123 2,371 1,895 439 6,828
Net income (loss) 118 126 159 (1,036) (633)
Basic earnings (loss) per share .02 .02 .03 (.19)(1) (.11)(1)
Diluted earnings (loss) per share .02 .02 .03 (.19)(1) (.11)(1)
(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.
16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Fiscal year ended September 30, 2002 compared with September 30, 2001
Sales
Net sales for fiscal 2002 decreased by 13.8% to $27.713 million as compared with
$32.161 million in fiscal 2001. The sales decrease in fiscal 2002 is primarily
due to the results of customers lowering their inventory and taking advantage of
the Company's shorter lead-times on its Argus gaming validator, certain Argus
product issues, which have since been resolved, as well as softer worldwide
economic conditions. Gaming sales decreased 14% to $25.5 million and beverage
and vending sales decreased 14% to $2.2 million. Net sales to international
customers accounted for 91.7% and 89.6% of net sales in fiscal 2002 and 2001,
respectively. This year the Company has substantially transitioned its sales to
its new gaming validator, Argus(TM), which represented approximately 63% of its
validator sales in fiscal 2002 as compared to 19% in the prior year period. This
shift to increased sales of its Argus product line is expected to continue in
fiscal 2003. The Company has completed field trials of its new beverage and
vending product called "Aurora" and has started receiving orders subsequent to
September 30, 2002 for shipment in its first fiscal quarter of 2003.
Gross Profit
Gross profit decreased to $6.828 million, or 24.6% of net sales, in fiscal 2002
as compared with $9.754 million, or 30.3% of net sales, in the prior-year
period. This decrease is primarily due to the $4.5 million reduction in sales as
well as higher initial purchasing costs and less efficient manufacturing
operations relating to new products. Argus accounted for 63% of all validator
sales in fiscal year 2002 as compared to 19% in fiscal year 2001. While
improvement from lower purchasing costs and manufacturing efficiencies is
expected in future periods, margins will be affected by the mix of products as
well as sales volumes.
Operating Expenses
Operating expenses in fiscal 2002 increased to $8.783 million, or 31.7% of net
sales, as compared with $8.687 million, or 27.0% of net sales, in fiscal 2001.
The increase in operating expenses as a percentage of sales is primarily due to
the lower sales levels in fiscal 2002. In absolute terms operating expenses
increased by $96,000 or 1.1%. This increase of $96,000 was primarily the result
of higher warranty, travel, insurance, legal and audit costs, offset, in part,
by lower employee related expenses due to reductions in employees. In August
2002, the Company initiated a cost reduction effort which reduced staffing by
14%. The benefits from this initiative will be fully recognized in the first
quarter of fiscal year 2003.
Income Taxes
With respect to the provision for income taxes, the effective rate was 59.4% as
compared to 21.5% in the prior-year period. This increase in the effective tax
rate is the result of the
17
Company's change in mix of earnings from its own operations and earnings derived
from its foreign affiliates.
Net Income (Loss)
The net loss for fiscal 2002 was ($633,000), or ($0.11) per share, as compared
with net income of $806,000, or $0.14 per share, for fiscal 2001. 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. Included in the results of operations for fiscal 2002 and 2001 are the
Company's share of net profits of these affiliates of $565,000 and $169,000,
respectively. In fiscal 2002 and 2001, equity in income of unconsolidated
affiliates includes an increase (decrease) of approximately $250,000 and
($11,000), respectively, which represents the recognition (deferral) of the
Company's share of the gross profits on intercompany sales to its affiliates
that have (have not then) been recognized by these affiliates. Excluding the
intercompany gross profit adjustment, the Company's share of net income of these
unconsolidated affiliates was $315,000 and $180,000 for fiscal 2002 and 2001,
respectively. This increase is primarily the result of higher sales and profits
at the Company's Australian affiliates, including its new eCash joint venture,
offset in part by, startup costs incurred by the Company's South African Vukani
operations and losses at Abacus Financial Management Systems, Ltd., including
the writedown of the Company's net investment totaling $215,000 related to its
purchase of the stock, and loans provided to that entity, due to the
deterioration in the financial condition of that entity. 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 affiliate. Excluding the effect of
this one-time gain, the net loss was ($715,000), or ($.11) per share.
Fiscal year ended September 30, 2001 compared with September 30, 2000
Sales
Net sales for fiscal 2001 increased by 42.9% to $32.161 million as compared with
$22.507 million in fiscal 2000. The sales increase in fiscal 2001 is primarily
due to greater demand for the Company's gaming bill validator products in
Australia and Russia as compared to last fiscal year. Gaming sales increased 49%
to $29.7 million, while beverage and vending sales decreased 7% to $2.4 million.
Net sales to international customers accounted for 89.6% and 83.1% of net sales
in fiscal 2001 and 2000, respectively. This year the Company has started selling
its new gaming validator, Argus(TM), which represented approximately 30% of its
validator sales in the fourth fiscal quarter 2001, and is expected to grow to
approximately 70% by the end of the Company's second fiscal quarter 2002.
Gross Profit
Gross profit increased to $9.754 million, or 30.3% of net sales, in fiscal 2001
as compared with $6.788 million, or 30.2% of net sales, in the prior-year
period. While gross profit, as a
18
percentage of sales, remained essentially flat with that of the prior year, the
current period reflects higher startup costs on its new products which were
offset by increased volume and efficiencies resulting from a 43% increase in
sales and production. During 2002, and as early as the second fiscal quarter,
the Company anticipates benefiting from improved manufacturing efficiencies on
its new products as well as improved purchasing from already existing purchase
agreements.
Operating Expenses
Operating expenses in fiscal 2001 decreased to $8.687 million, or 27.0% of net
sales, as compared with $9.251 million, or 41.1% of net sales, in fiscal 2000.
This decrease of $564,000 was primarily the result of a reduction in certain
personnel related costs, which includes the results of cost cutting efforts in
prior periods as well as throughout this fiscal year. During the year ended
September 30, 2001, the Company also achieved a decrease in operating expenses,
as a percentage of sales, from 41.1% to 27%, while at the same time increasing
sales 43%.
Income Taxes
With respect to the provision for income taxes, the effective rate was 21.5% as
compared to 32.2% in the prior-year period. This decrease 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.
Net Income (Loss)
Net income for fiscal 2001 was $806,000, or $0.14 per share, as compared with a
net loss of ($1.229) million, or ($0.22) per share, for fiscal 2000. 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. Included in the results of operations for fiscal 2001 and 2000
are the Company's share of net profits of these affiliates of $169,000 and
$742,000, respectively. In fiscal 2001 and 2000, equity in income of
unconsolidated affiliates includes a (decrease) increase of approximately
($11,000) and $689,000, 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 $180,000 and $53,000 for fiscal
2001 and 2000, respectively. This increase is primarily the result of higher
sales and profits at the Company's South African affiliate and lower costs at
Abacus Financial Management Systems, Ltd. 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 2000, the Company recognized an
after-tax gain of $221,000, or $.04 per share, which was the result of the sale
of a portion of the Company's shares in its South African affiliate. Excluding
the effect of this one-time gain, the net loss was ($1,450,000), or ($.26) per
share.
19
Liquidity and Capital Resources
The Company's capital requirements consist primarily of those necessary to
continue to expand and improve product development and manufacturing
capabilities, sales and marketing operations, investments in affiliates and, to
a lesser degree, interest payments on the Company's indebtedness. The Company
believes that its available resources, including its credit facilities, should
be sufficient to meet its obligations as they become due and permit continuation
of its planned product development and expansion throughout fiscal 2003 and
beyond.
On July 15, 1999, the Company entered into a $10 million unsecured long-term
credit agreement with The Chase Manhattan Bank. The agreements were comprised of
a $4,000,000 five-year term loan, payable in equal monthly installments with a
fixed interest rate of 7.66% per annum and a $6,000,000 revolving line of credit
("RLC"). The term of the RLC was three years and outstanding borrowings bore
interest at the bank's prime rate, or at the Company's option, for borrowings
greater than $500,000, LIBOR plus a range of 125 to 200 basis points. The
precise borrowing rate was determined by the Company's financial performance
under certain covenants. The Company was in compliance with these covenants at
September 30, 2001, and at all times during the fiscal year then ended. As of
September 30, 2001, outstanding borrowings under the term loan and RLC were
$2,200,000 and $1,400,000, respectively.
On September 10, 2002, the Company entered into a new credit facility with its
existing bank. The total facility is $7,000,000 and replaces all existing bank
loans. It is secured by the Company's accounts receivable. This facility is
comprised of a $3.5 million, three year RLC with interest at the bank's prime
rate or LIBOR plus a range of 0 to 350 basis points, the existing term loan
totaling $1,466,654 with a rate of interest of 7.66% plus a range of 0 to 175
basis points, and a new five-year term loan totaling $2,033,000, payable in
equal monthly installments with an interest rate of LIBOR plus a range of 150 to
350 basis points. As of September 30, 2002, outstanding borrowings under the
term loans and the RLC were $3,433,000 and $0, respectively. As of September 30,
2002 the Company has received a waiver of compliance with certain covenants and
is currently discussing with its bank certain potential amendments to its
covenants for future periods. While the RLC is long term in its contractual
entirety, and approximately 64% of the above mentioned term loans are long term,
the Company has classified all loan balances due as short term until such time
as the Company either receives amendments of covenants for future periods or
anticipates meeting its covenants in the future. The Company is currently in
discussions with its bank and expects to again receive a waiver and or amendment
to its covenants in the near term; however, no assurance can be given that the
Company will be able to do so. The Company has no expectations that the loans
will be required to be paid ahead of their scheduled payment dates.
Net cash provided by operating activities amounted to $2,261,000 in fiscal 2002.
This amount is due to decreased 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 decreased accounts payable of $1,411,000, increased income
taxes receivable of $863,000, increased intangible assets of $405,000, decreased
accrued expenses and other current liabilities of $336,000 and increased other
assets
20
and capitalized software costs of $269,000. Net cash provided by operating
activities amounted to $2,533,000 in fiscal 2001. This amount is due to net
income for the year, adjusted for non-cash items, of $1,686,000, increased
accounts payable of $2,127,000 and decreased income taxes receivable of
$674,000, offset, in part, by increased accounts receivable of $1,550,000,
decreased prepaid expenses and other current assets of $177,000, increased other
assets and capitalized software costs of $162,000, increased inventory of
$47,000 and decreased accrued expenses and other liabilities of $18,000. Net
cash provided by operating activities amounted to $1,094,000 in fiscal 2000.
This amount is due to decreased accounts receivable of $4,095,000, decreased
prepaid expenses and other current assets of $158,000 and increased accrued
expenses and other liabilities of $22,000, offset, in part, by a net loss,
adjusted for non-cash items, of $933,000, increased other assets and capitalized
software costs of $859,000, increased income taxes receivables of $674,000,
increased inventory of $543,000 and decreased accounts payables of $172,000.
Net cash used in investing activities amounted to $1,608,000 in fiscal 2002 as
compared with $1,734,000 in fiscal 2001 and $905,000 in fiscal 2000. The Company
provided net fundings and investments in its joint ventures of $1,380,000 (See
Note 3 in the financial statements for a summary of the Company's $979,000
investment in its South African affiliate in fiscal 2002) in fiscal 2002 as
compared with $298,000 in fiscal 2001 and $181,000 during fiscal 2000. The
outflow of cash from investing activities in fiscal 2002 was offset, in part by
$118,000 of cash received from the sale of the Company's investment in its China
affiliate (see Note 3 in the financial statements). In addition, during fiscal
2000 the Company recognized a pre-tax gain of $330,000, consisting of $100,000
cash and a note for the balance, from the sale of a portion of the equity in its
South African affiliate. Further, the Company received $550,000 in dividend
distributions from its Australian affiliate during fiscal 2002. The remaining
investing activities of $896,000 in fiscal 2002, $1,436,000 in fiscal 2001 and
$824,000 in fiscal 2000 were for the purchase of property and equipment.
Net cash used in financing activities amounted to $118,000 in fiscal 2002, as
compared with $909,000 in fiscal 2001 and $283,000 in fiscal 2000. In fiscal
2002 the Company made repayments (net of proceeds) of $155,000 on its credit
facilities as compared with net repayments of $858,000 in fiscal 2001 and net
borrowings of $1,269,000 in fiscal 2000. In fiscal 2001 the Company used a
portion of its loan to repurchase its common stock amounting to $205,000 (69,784
shares). The remaining cash provided by financing activities of $37,000 in
fiscal 2002, $154,000 in fiscal 2001 and $986,000 in fiscal 2000 were from the
issuance of stock upon the exercise of common stock options and warrants.
21
Commitments:
The operations of the Company are conducted in leased premises, one of which is
leased from an affiliate owned partially by the Company's Chairman (this lease
expires in August 2004). The Company also leases various office equipment. At
September 30, 2002, the approximate minimum annual rentals under these leases,
which expire through fiscal year 2006, were as follows:
Total
(Including
related party Related party
commitments) commitments
Fiscal year ending September 30:
2003 $423 33
2004 398 31
2005 360 --
2006 278 --
Thereafter -- --
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, 2002, purchase order commitments approximated
$3,936,000 and will be used for production requirements up to, and in excess of,
six months.
Critical Accounting Policies
This management discussion and analysis is based on our consolidated financial
statements which are prepared using certain critical accounting policies that
require management to make judgments and estimates that are subject to varying
degrees of uncertainty. While we believe that these accounting policies, and
management's judgments and estimates, are reasonable, actual future events can
and often do result in outcomes that can be materially different from
management's current judgments and estimates. We believe that the accounting
policies and related matters described in the paragraphs below are those that
depend most heavily on management's judgments and estimates.
Inventory:
Inventory is stated at the lower of cost (first-in, first-out method) or net
realizable value. The Company analyzes the net realizable value of its inventory
on an ongoing basis. In determining whether the net realizable value of its
inventory is impaired, the Company considers historical sales performance and
expected future product sales, market conditions in which the Company
distributes its products, changes in product strategy and the potential for the
introduction of new technology or products by the Company and its competitors.
These items, as well as the introduction of new technology on products, could
result in future inventory obsolescence.
Software Capitalization Costs:
Based upon achieving technological feasibility through a detailed program design
for Argus(TM) and Aurora products, the Company has capitalized the cost of
software coding and development
22
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. Prior to fiscal 2002 the Company recorded
these costs in inventory. The Company has reclassified prior year balances in
this annual report.
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, 2002, our accounts receivable balance was $6.6 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. 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
23
its net investment in the United Kingdom based Abacus Financial Management
Systems Limited affiliate based upon the deterioration in that entity's
financial condition.
Long-Lived Assets:
The Company accounts for long-lived assets pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which requires
that long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of those assets may
not be recoverable. The Company reviews its Long-Lived Assets, at least
annually, for indicators of impairment or actual impairment events.
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. Realizability
of deferred tax assets are dependent upon the Company's future profitability. To
the extent the Company experiences continued losses the recoverability of the
deferred tax assets may be impaired.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Fiscal 2002 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 $3.5 million revolving credit facility with borrowings subject
to interest at the bank's prime rate or LIBOR plus a range of 0 to 350 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
24
revolving credit facility, $3.5 million, outstanding for the entire year, each
100 basis point increase would result in an annual increase in interest expense
of approximately $35,000.
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 $2.4 million and $1.2
million at September 30, 2002 and 2001, 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.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
On July 26, 2002 the Board of Directors of Global Payment Technologies, Inc.
(the "Company") dismissed Arthur Andersen LLP ("Andersen") as its independent
certified public accountants and appointed KPMG, LLP ("KPMG") to serve in their
place. These actions were taken at the recommendation of the Company's Audit
Committee.
Andersen had served as the Company's independent public accountants since 1993.
None of Andersen's reports on the Company's consolidated financial statements
for the fiscal years ended September 30, 2001 and 2000 contained an adverse
opinion or disclaimer of opinion, nor was any such report qualified or modified
as to uncertainty, audit scope or accounting principles.
During the fiscal years ended September 30, 2001 and 2000 and through July 26,
2002, there were no disagreements between the Company and Andersen on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure which, if not resolved to Andersen'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 years;
and there were no reportable events as defined in Item 304(a)(1)(v) of
Regulation S-K.
25
During the fiscal years ended September 30, 2001 and 2000 and through the date
hereof, the Company did not consult KPMG 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.
26
PART III
Items 10 through 13 inclusive are omitted per General Instruction G (3). The
information required by Part III shall be incorporated by reference from the
Registrant's definitive proxy statement pursuant to Regulation 14A for the
fiscal year ended September 30, 2002.
PART IV
Item 14. Controls and Procedures
The Company's management maintains disclosure controls and procedures that are
designed to ensure (1) that information required to be disclosed by us in the
reports we file or submit under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), is recorded, processed, summarized, and reported within
the time periods specified in the Securities and Exchange Commission's ("SEC")
rules and forms, and (2) that this information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. In December 2002, under the supervision and review of our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our disclosure controls and procedures. Based on that
evaluation, our Chief Executive Officer and our Chief Financial Officer have
concluded that our disclosure controls and procedures are effective in alerting
them in a timely manner to material information regarding us (including our
consolidated subsidiaries) that is required to be included in our periodic
reports to the SEC. In addition, there have been no significant changes in our
internal controls or in other factors that could significantly affect those
controls since our December 2002 evaluation. We cannot assure you, however, that
our system of disclosure controls and procedures will always achieve its stated
goals under all future conditions, no matter how remote.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. All Financial Statements:
Report of Independent Public Accountants (page F-2)
Consolidated Balance Sheets as of September 30, 2002 and 2001
(page F-5)
Consolidated Statements of Income for the years ended
September 30, 2002, 2001 and 2000 (page F-6)
Consolidated Statements of Shareholders' Equity and
Comprehensive income for the years ended September 30, 2002,
2001 and 2000 (page F-7)
Consolidated Statements of Cash Flows for the years ended
September 30, 2002, 2001 and 2000 (page F-8)
27
Notes to Consolidated Financial Statements (page F-9)
2. Financial statement schedules required to be filed by Item 8
of this Form:
Schedule II - Valuation and Qualifying Accounts (page S-1)
Schedule III - Financial Statements of Global Payment
Technologies Australia PTY LTD (page S-2)
3. Exhibits:
Exhibit No.
3.1 Certificate of Incorporation (2)
3.2 Certificate of Merger (2)
3.3 By-Laws (2)
4.1 Amended and Restated Credit Agreement dated September 10, 2002
between the Company and The Chase Manhattan Bank ("Chase")(7)
4.1(a) Amended and Restated Revolving Credit Note dated September 10,
2002 issued by the Company to Chase (7)
4.1(b) Amended and Restated Term Note A dated September 10, 2002
issued by the Company to Chase (7)
4.1(c) Term Note B dated September 10, 2002 issue by the Company to
Chase (7)
4.1(d) Unlimited Corporate Guaranty dated September 10, 2002 by the
Company to Chase(7)
4.1(e) Amended and Restated Limited Corporate Guaranty dated
September 10, 2002 by Abacus Financial Management Systems Ltd.
USA to Chase (7)
4.1(f) Security Agreement dated September 10, 2002 by the Company and
Chase (7)
4.1(g) Amended and Restated Pledge Agreement dated September 10, 2002
between the Company and Chase (7)
4.1(h) First Amendment and Waiver dated January 13, 2003 to the
Credit Agreement dated September 10, 2002 issued to the
Company by Chase (7)
10.1 Lease dated October 1, 2000 between the Company and Heartland
Associates (5)
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, 2000 between the Company and
Thomas McNeill (4)
10.6 Employment Agreement dated July 1, 2001 between the Company
and Thomas Oliveri (6)
10.7 Employment Agreement dated September 1, 2001 between the
Company and Stephen Katz (6)
21 List of Subsidiaries (7)
23 Consent of Independent Public Accountants (7)
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (7)
28
(1) Incorporated by reference to the Company's Registration
Statement on Form S-8 (File #333-30829).
(2) Incorporated by reference 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) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000.
(5) Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 2000
(6) Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 2001
(7) Filed herewith.
(b) Reports on Form 8-K
No Reports on Form 8-K have been filed during the last quarter of the period
covered by this Report.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Global Payment Technologies, Inc.
By: s/Stephen Katz
-------------------------
Stephen Katz
Chairman of the Board and
Chief Executive Officer
Date: January 14, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
s/Stephen Katz Chairman of the Board January 14, 2003
- --------------------- and Chief Executive Officer
Stephen Katz
s/Henry B. Ellis Director January 14, 2003
- ---------------------
Henry B. Ellis
s/Richard Gerzof Director January 14, 2003
- ---------------------
Richard Gerzof
s/Martin H. Kern Director January 14, 2003
- ---------------------
Martin H. Kern
s/Thomas McNeill Vice President, Chief Financial January 14, 2003
- --------------------- Officer and Principal Accounting
Thomas McNeill Officer
30
I, Stephen Katz, certify that:
1. I have reviewed this annual report on Form 10-K of Global Payment
Technologies, Inc. ("GPT");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. GPT's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for GPT and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to GPT, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of GPT's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. GPT's other certifying officer and I have disclosed, based on our most
recent evaluation, to GPT's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect GPT's ability to record,
process, summarize and report financial data and have identified for
GPT's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in GPT's internal
controls; and
6. GPT's other certifying officer and I have indicated in this annual report
whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: January 14, 2003 S/ Stephen Katz
-----------------------------
Chairman of the Board and CEO
31
I, Thomas McNeill, certify that:
1. I have reviewed this annual report on Form 10-K of Global Payment
Technologies, Inc. ("GPT");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. GPT's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for GPT and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to GPT, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of GPT's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. GPT's other certifying officer and I have disclosed, based on our most
recent evaluation, to GPT's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect GPT's ability to record,
process, summarize and report financial data and have identified for
GPT's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in GPT's internal
controls; and
6. GPT's other certifying officer and I have indicated in this annual report
whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: January 14, 2003 S/ Thomas McNeill
----------------------------
Vice President and CFO
32
GLOBAL PAYMENT TECHNOLOGIES, INC.
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 2002 and 2001 F-5
Consolidated Statements of Operations for each of the years in
the three-year period ended September 30, 2002 F-6
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss)
for each of the years in the three-year period ended September 30, 2002 F-7
Consolidated Statements of Cash Flows for each of the years in
the three-year period ended September 30, 2002 F-8
Notes to Consolidated Financial Statements F-9 to F-26
Additional Financial Information Pursuant to the Requirements
of Form 10-K:
Schedule II - Valuation and Qualifying Accounts and Reserves S-1
Schedule III - Financial Statements of Global Payment Technologies Australia Pty Ltd.(1) S-2
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
F-1
Independent Auditors' Report
The Board of Directors and Stockholders
Global Payment Technologies, Inc.:
We have audited the 2002 consolidated financial statements of Global Payment
Technologies, Inc., and subsidiaries as listed in the accompanying index. In
connection with our audit of the 2002 consolidated financial statements, we also
have audited the fiscal 2002 financial statement schedule as listed in the
accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audit. The 2001 and
2000 consolidated financial statements and financial statement schedule of
Global Payment Technologies, Inc., as listed in the accompanying index, were
audited by other auditors who have ceased operations. Those auditors expressed
an unqualified opinion on those financial statements and financial statement
schedule, before the restatement described in note 2(v) to the consolidated
financial statements, in their reports dated November 16, 2001.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 fiscal 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, 2002, and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related fiscal 2002 financial statement
schedule, 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.
As discussed above, the 2001 and 2000 financial statements of Global Payment
Technologies, Inc. as listed in the accompanying index, were audited by other
auditors who have ceased operations. As described in Note 2(v), the fiscal 2001
and 2000 financial statements have been restated for reclassification of certain
balance sheet items. We have audited the adjustments that were applied to
restate the balance sheet classifications. In our opinion, such adjustments are
appropriate and have been properly applied. However, we were not engaged to
audit, review, or apply any procedures to the 2001 and 2000 financial statements
of Global Payment Technologies, Inc. other than with respect to such
adjustments, and, accordingly, we do not express an opinion or any other form of
assurance on the 2001 and 2000 financial statements taken as a whole.
KPMG LLP
Melville, New York
January 10, 2003
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Global Payment Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Global Payment
Technologies, Inc. (a Delaware corporation) and subsidiaries (the "Company") as
of September 30, 2001 and 2000, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended September 30, 2001. 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 auditing standards generally accepted
in the 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,
Inc. and subsidiaries as of September 30, 2001 and 2000, and the results of its
operations and its cash flows for each of the three years in the period ended
September 30, 2001 in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Melville, New York
November 16, 2001
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with the Company's filing on Form 10-K for the fiscal year ended
September 30, 2001. This audit report has not been reissued by Arthur Andersen
LLP. As described in Note 2 (v), certain prior year balance sheet items have
been reclassified and restated.
F-3
Independent Auditors' Report on Schedule II
To Global Payment Technologies, Inc.:
We have audited, in accordance with auditing standards generally accepted in the
United States of America, the consolidated financial statements of Global
Payment Technologies, Inc. and Subsidiaries included in this Form 10-K and have
issued our report thereon dated November 16, 2001. Our audits were made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. This schedule (Schedule II - Schedule of Valuation and Qualifying
Accounts) is presented for the purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This Schedule has been subjected to the auditing procedures applied in our
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Melville, New York
November 16, 2001
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with the Company's filing on Form 10-K for the fiscal year ended
September 30, 2001. This audit report has not been reissued by Arthur Andersen
LLP. As described in Note 2 (v), certain prior year balance sheet items have
been reclassified and restated.
F-4
GLOBAL PAYMENT TECHNOLOGIES, INC.
Consolidated Balance Sheets
September 30, 2002, 2001
(Dollar amounts in thousands, except share data)
2001
Assets 2002 (as restated)
-------- -------------
Current assets:
Cash and cash equivalents $ 1,604 1,069
Accounts receivable, less allowance for doubtful accounts
of $177 and $169, respectively 1,557 3,747
Accounts receivable from affiliates 4,982 7,891
Inventory, less allowance for obsolescence of $812
and $980, respectively 5,301 5,499
Prepaid expenses and other current assets 177 468
Deferred income taxes 836 795
Income taxes receivable 863 --
-------- -------
Total current assets 15,320 19,469
Investments in unconsolidated affiliates 2,426 1,247
Property and equipment, net 3,115 2,859
Capitalized software costs 2,678 2,756
Intangible assets 405 --
Other assets 86 135
-------- -------
Total assets $ 24,030 26,466
======== =======
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 3,433 800
Notes payable to bank 79 67
Accounts payable 2,061 3,482
Accrued expenses and other current liabilities 1,431 1,767
-------- -------
Total current liabilities 7,004 6,116
Long-term debt -- 2,800
-------- -------
Total liabilities 7,004 8,916
-------- -------
Commitments and contingencies (Note 12)
Shareholders' equity:
Common stock, par value $0.01; Authorized 20,000,000 shares;
issued and outstanding 5,815,100 and 5,806,250 shares, respectively 58 58
Additional paid-in capital 9,761 9,708
Retained earnings 8,650 9,283
Accumulated other comprehensive income 56 --
-------- -------
18,525 19,049
Less: treasury stock, at cost, 278,984 shares (1,499) (1,499)
-------- -------
Total shareholders' equity 17,026 17,550
-------- -------
Total liabilities and shareholders' equity $ 24,030 26,466
======== =======
See accompanying notes to consolidated financial statements.
F-5
GLOBAL PAYMENT TECHNOLOGIES, INC.
Consolidated Statements of Operations
Years ended September 30, 2002, 2001, and 2000
(Dollar amounts in thousands, except share and per share data)
2002 2001 2000
----------- ---------- ----------
Net sales:
Non-affiliates $ 15,163 14,936 11,083
Affiliates 12,550 17,225 11,424
----------- ---------- ----------
27,713 32,161 22,507
Cost of sales 20,885 22,407 15,719
----------- ---------- ----------
Gross profit 6,828 9,754 6,788
Operating expenses 8,783 8,687 9,251
----------- ---------- ----------
Income (loss) from operations (1,955) 1,067 (2,463)
----------- ---------- ----------
Other income (expense):
Equity in income of unconsolidated affiliates, net 565 169 742
Gain on sale of investment in unconsolidated affiliate 108 -- 330
Interest expense (290) (308) (479)
Other income 13 99 58
----------- ---------- ----------
Other income (expense) 396 (40) 651
----------- ---------- ----------
Income (loss) before provision
(benefit) for income taxes (1,559) 1,027 (1,812)
Provision (benefit) for income taxes (926) 221 (583)
----------- ---------- ----------
Net income (loss) $ (633) 806 (1,229)
=========== ========== ==========
Net income (loss) per share:
Basic $ (0.11) 0.15 (0.22)
Diluted (0.11) 0.14 (0.22)
Common shares used in computing net income (loss)
per share amounts:
Basic 5,529,302 5,547,195 5,515,626
Diluted 5,529,302 5,635,961 5,515,626
See accompanying notes to consolidated financial statements.
F-6
GLOBAL PAYMENT TECHNOLOGIES, INC.
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss)
Years ended September 30, 2002, 2001, and 2000
(Dollar amounts in thousands, except share data)
-----------------------
Common stock Additional
Comprehensive ----------------------- paid-in Retained
income (loss) Shares Amount capital earnings
------------- ----------- -------- ---------- --------
Balance at September 30, 1999 5,619,125 $ 56 $8,570 $ 9,706
Exercise of common stock options and warrants 147,125 2 984 --
Net loss and comprehensive loss $ (1,229) -- -- -- (1,229)
============ ----------- ------- ------ -------
Balance at September 30, 2000 5,766,250 58 9,554 8,477
Exercise of common stock options and warrants 40,000 -- 154 --
Purchase of treasury stock -- -- -- --
Net income and comprehensive income $ 806 -- -- -- 806
============ ----------- ------- ------ -------
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
=========== ======= ====== =======
Accumulated ----------------------
Other Treasury stock
Comprehensive ----------------------
Income Shares Amount Total
------------- -------- ------- --------
Balance at September 30, 1999 -- (209,200) $(1,294) $ 17,038
Exercise of common stock options and warrants -- -- -- 986
Net loss and comprehensive loss -- -- -- (1,229)
------ -------- ------- --------
Balance at September 30, 2000 -- (209,200) (1,294) 16,795
Exercise of common stock options and warrants -- -- -- 154
Purchase of treasury stock -- (69,784) (205) (205)
Net income and comprehensive income -- -- -- 806
------ -------- ------- --------
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
====== ======== ======= ========
See accompanying notes to consolidated financial statements.
F-7
GLOBAL PAYMENT TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
Years ended September 30, 2002, 2001, and 2000
(Dollar amounts in thousands)
2001 2000
2002 (as restated) (as restated)
------- ------------- -------------
Operating activities:
Net income (loss) $ (633) 806 (1,229)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Equity in income of unconsolidated affiliates (565) (169) (742)
Gain on sale of investment in unconsolidated affiliate (108) -- (330)
Depreciation and amortization 1,037 761 621
Provision for losses on accounts receivable 108 66 85
Provision for inventory obsolescence 188 180 518
Stock option income tax benefit 16 -- --
Deferred income taxes (41) 42 144
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 2,082 (1,239) 756
Decrease (increase) in accounts receivable from affiliates 3,160 (311) 3,339
Decrease (increase) in inventory 10 (47) (543)
Decrease (increase) in prepaid expenses and
other current assets 291 (177) 158
(Increase) decrease in income tax receivable (863) 674 (674)
Increase in intangible assets (405) -- --
Increase in other assets and capitalized software costs (269) (162) (859)
(Decrease) increase in accounts payable (1,411) 2,127 (172)
(Decrease) increase in accrued expenses
and other liabilities (336) (18) 22
------- ------ ------
Net cash provided by operating activities 2,261 2,533 1,094
------- ------ ------
Investing activities:
Purchases of property and equipment (896) (1,436) (824)
Proceeds from sale of investments in unconsolidated affiliates 118 -- 100
Investments in unconsolidated affiliates (1,380) (298) (181)
Distributions from unconsolidated affiliate 550 -- --
------- ------ ------
Net cash used in investing activities (1,608) (1,734) (905)
------- ------ ------
Financing activities:
Repayments of notes payable to bank (155) (858) (1,269)
Purchase of treasury stock -- (205) --
Issuance of stock upon exercise of stock options and warrants 37 154 986
------- ------ ------
Net cash used in financing activities (118) (909) (283)
------- ------ ------
Net (decrease) increase in cash and
cash equivalents 535 (110) (94)
Cash and cash equivalents at beginning of year 1,069 1,179 1,273
------- ------ ------
Cash and cash equivalents at end of year $ 1,604 1,069 1,179
======= ====== ======
Cash paid during the year for:
Interest $ 261 308 386
Income taxes 55 250 179
See accompanying notes to consolidated financial statements
F-8
GLOBAL PAYMENT TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
September 30, 2002, 2001, and 2000
(1) Organization and Nature of Business
(a) Description of Business
Global Payment Technologies, Inc. (the Company) was established in
1988. The Company designs, manufactures, and markets paper currency
validating equipment used in gaming and vending machines in the
United States and other countries.
Substantially all of the Company's revenues are derived from the
sale of paper currency validators and related bill stackers,
specifically the Company's Argus, IDS, M-125, IBS, M-150, and IDUS
validator models. Fluctuations in the Company's results of
operations may be caused by various factors, including the timing
and market acceptance of new products introduced by the Company and
its competitors, the size and timing of product orders and
shipments, the relative mix of products sold by the Company,
specific economic conditions in the gaming industry, from which the
Company derives a substantial portion of its revenues, and general
economic conditions. Additionally, the Company depends on a single
or limited number of suppliers for certain housings, parts and
components, including certain microprocessor chips and short
wave-length light sources.
(b) Organization and Development of Business
The Company had a 70% controlling interest in Global Payment
Technologies (Europe) Limited (GPT-Europe), which, through the
purchase of the remaining 30%, from the minority shareholder, on
October 1, 2001, became a wholly owned subsidiary. Neither the
acquisition price nor the proforma effect of the acquisition of
their remaining interest were material. GPT-Europe 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.
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 2002, 2001, and 2000 represent
the following percentages of net sales and accounts receivable,
respectively:
2002 2001 2000
---- ---- ----
Net sales:
Customer A 44% 52% 48%
Customer B 16% 15% 11%
Accounts receivable:
Customer A 71% 68% 64%
Customer B 11% 9% 2%
(Continued)
F-9
GLOBAL PAYMENT TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
September 30, 2002, 2001, and 2000
There were no other customers that represented 10% or more of net
sales or accounts receivable, respectively, in any of these fiscal
years presented.
(d) Geographic Areas
The Company generates revenues both domestically and
internationally. The following summarizes the geographic dispersion
of the Company's revenues:
Year ended September 30
----------------------------
2002 2001 2000
------- ------ ------
(In thousands)
Domestic revenues (United States) $ 2,615 3,375 3,756
------- ------ ------
International revenues:
Australia $ 9,544 16,781 10,312
Europe 11,291 8,127 5,577
All others 4,263 3,878 2,862
------- ------ ------
25,098 28,786 18,751
------- ------ ------
Total revenues $27,713 32,161 22,507
======= ====== ======
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 and Abacus-USA. The accounts
of GPT-Europe and Abacus-USA are presented net of the related
minority interests (as applicable for each year presented), which
are not material. 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 profits on product
sales until sales are made to the third-party end user
(customer), in accordance with APB Opinion No. 18 "The Equity
Method of Accounting for Investments in Common Stock" (see
(d)).
(Continued)
F-10
GLOBAL PAYMENT TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
September 30, 2002, 2001, and 2000
(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.
(d) Investments in Unconsolidated Affiliates
The Company applies the equity method of accounting to its
investments in entities where the Company has noncontrolling
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 at the end of the year. A description of the Company's
unconsolidated affiliates and the related transactions between the
Company and these affiliates is discussed in note 3.
(e) 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.
(f) 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.
(g) 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.
(Continued)
F-11
GLOBAL PAYMENT TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
September 30, 2002, 2001, and 2000
(h) 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 $320,000, $372,000 and $898,000 were capitalized during
fiscal years 2002, 2001 and 2000, respectively. The Company recorded
amortization of $396,000, $119,000 and $0 for the fiscal years ended
September 30, 2002, 2001 and 2000, 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, 2002 and 2001 were $2,678,000 and $2,756,000,
respectively.
(i) Long-Lived Assets
The Company accounts for long-lived assets pursuant to Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of", which requires that long-lived assets, certain
identifiable intangibles (including capitalized software costs) and
goodwill related to those assets to be held and used be reviewed for
impairment whenever events or changes in circumstances, both
internally and externally, indicate that the carrying amount of
those assets may not be recoverable. The Company did not recognize
any impairment adjustments, pursuant to SFAS No. 121, in fiscal
2002, 2001 and 2000.
(j) Intangible Assets
Intangible assets, recorded at cost, represent 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". This intellectual property
will be amortized over a five year period.
(k) Goodwill
In June 2001, the FASB issued SFAS No. 141, "Business Combinations"
and No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141
requires all business combinations initiated after June 30, 2001 to
be accounted for using the purchase method of accounting. 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.
(Continued)
F-12
GLOBAL PAYMENT TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
September 30, 2002, 2001, and 2000
(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
$225,000, $150,000, and $225,000 in fiscal 2002, 2001 and 2000,
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)).
(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 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.
(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. Diluted EPS for fiscal year 2002 and
2000 is the same as basic EPS, as the inclusion of the impact of any
common stock equivalents then outstanding, respectively, would be
anti-dilutive. Options to purchase 785,947, 802,084 and 709,033
shares of common stock, were not included in the computation of
diluted earnings per share for fiscal 2002, 2001 and 2000,
respectively, because the exercise price exceeded the average market
price of common shares for the period. These options were still
outstanding at the end of the period.
(Continued)
F-13
GLOBAL PAYMENT TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
September 30, 2002, 2001, and 2000
A reconciliation between the numerators and denominators of the
basic and diluted EPS computations is as follows:
Year ended September 30
--------------------------------------------
2002 2001 2000
------------ --------- ----------
(In thousands, except share and per share data)
Numerator:
Net income (loss) attributable to
common stockholders $ (633) 806 (1,229)
============ ========= ==========
Denominator:
Weighted average common shares
outstanding - basic 5,529,302 5,547,195 5,515,626
Effect of dilutive securities:
Stock options and warrants -- 88,766 --
------------ --------- ----------
Weighted average common shares
outstanding - diluted 5,529,302 5,635,961 5,515,626
============ ========= ==========
Basic EPS $ (0.11) 0.15 (0.22)
Diluted EPS (0.11) 0.14 (0.22)
(p) Stock-Based Compensation
The Company applies the provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees in
connection with stock-based compensation granted to employees and
directors of the Company. The Company provides the required pro
forma disclosures as if the fair value method under SFAS No. 123,
Accounting for Stock-Based Compensation was adopted. Any stock-based
compensation awards to nonemployees are accounted for using the
provisions of SFAS No. 123.
(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. For fiscal years 2001 and 2000, the Company's
operations did not give rise to material items includable in
comprehensive income (loss), which were not already included in net
income (loss). Accordingly, the Company's comprehensive income
(loss) is the same as its net income (loss) for those periods. In
fiscal 2002, due to currency fluctuations, the cumulative currency
translation adjustment related to the Company's investment in
unconsolidated
(Continued)
F-14
GLOBAL PAYMENT TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
September 30, 2002, 2001, and 2000
affiliates was $56,000, which is reflected in the accompanying
balance sheet and statement of shareholders' equity and
comprehensive income (loss).
(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 Company complies with the provisions of SFAS No. 107, Disclosure
about Fair Value of Financial Instruments, which requires
disclosures about the fair value of financial instruments. The
carrying value of all monetary assets and liabilities (including
debt for which the accompanying interest rates are tied to existing
market conditions) reflected in the accompanying consolidated
balance sheets approximated fair value as a result of the short-term
nature of such assets and liabilities at September 30, 2002 and
2001, respectively.
(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,
capitalized software and provisions for warranties. Actual results
could differ from those estimates.
(v) Reclassifications and Restatement
Certain prior-year financial statement amounts have been
reclassified to conform to the current year's presentation. In
addition, in fiscal 2002, the Company reclassified certain costs,
previously included in inventory, related to the development of
software used in its products and the acquisition of molds and
tooling for production. The capitalized software costs of $2,678,000
and $2,756,000, respectively are separately reflected as long-term
assets and molds and tooling costs of $1,840,000 and $1,528,000,
respectively are included in property and equipment as of September
30, 2002 and
(Continued)
F-15
GLOBAL PAYMENT TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
September 30, 2002, 2001, and 2000
2001, respectively. The amortization of such costs is charged to
cost of sales. This reclassification has not changed the Company's
net income, total assets or equity for any period.
The amounts reclassified at September 30, 2001 are as follows:
As reported As restated
----------- -----------
Inventory $9,783 $5,499
Property and equipment 1,331 2,859
Capitalized software costs -- 2,756
(w) Recently Issued Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144 Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement
supersedes SFAS No. 121 and Accounting Principles Board Opinion No.
30 Reporting Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. The Statement
retains the fundamental provisions of SFAS No. 121 for recognition
and measurement of impairment, but amends the accounting and
reporting standards for segments of a business to be disposed of.
The provisions of this statement are required to be adopted no later
than fiscal years beginning after December 15, 2001, with early
adoption encouraged. The Company has adopted SFAS No. 144 as of
October 1, 2002; the impact of the adoption was not material to the
consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies
EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity," under
which a liability for an exit cost was recognized at the date of an
entity's commitment to an exit plan. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be
recognized at fair value when the liability is incurred. The
provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company
does not believe that the adoption of this statement will have a
material impact on its consolidated financial statements.
(3) Unconsolidated Affiliates
Net sales to unconsolidated affiliates for fiscal year 2002, 2001
and 2000 and accounts receivable from unconsolidated affiliates as
of September 30, 2002 and 2001 are as follows:
Net sales - affiliate Accounts receivable from affiliates as of
------------------------------- -----------------------------------------
2002 2001 2000 September 30, 2002 September 30, 2001
------- ------ ------ ------------------ ------------------
Australia $12,179 16,724 10,826 4,686 7,390
Abacus-UK 137 13 1 131 7
South Africa 234 488 597 165 494
------- ------ ------ ----- -----
Total $12,550 17,225 11,424 4,982 7,891
======= ====== ====== ===== =====
(Continued)
F-16
GLOBAL PAYMENT TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
September 30, 2002, 2001, and 2000
(a) Australia
In fiscal 1997, the Company acquired a 50% non-controlling interest
in an Australian affiliate. This entity is responsible for sales and
service of the Company's products in Australia and New Zealand, on
an exclusive basis. The accompanying consolidated results of
operations include the Company's equity in the results of operations
of this affiliate in the amounts of $678,000, $224,000, and $848,000
in fiscal 2002, 2001, and 2000, respectively. For fiscal 2002, 2001,
and 2000, the Company (reduced) increased its equity in income of
unconsolidated affiliates by $250,000, $(11,000), and $597,000,
respectively, which amounts represent the gross profit on sales of
the Company's products to this affiliate which were (unsold) sold by
the affiliate as of fiscal year-end. The Company also received a
cash dividend of $550,000 from this affiliate during the fourth
quarter of fiscal 2002.
(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% noncontrolling
ownership interest. In fiscal 2002, 2001 and 2000, the Company
invested an additional $207,000, $228,000 and $171,000,
respectively, in Abacus-UK. The Company's consolidated results of
operations for the years ended September 30, 2002, 2001, and 2000
include the Company's equity in the loss of this affiliate of
$131,000, $141,000, and $202,000 respectively.
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
The Company has a 24.2% non-controlling interest in a South African
affiliate, Global Payment Technology Holdings (Proprietary) Limited
(GPTHL). This entity is responsible for sales and service of the
Company's products in the South African region, on an exclusive
basis. GPTHL also has the exclusive rights to distribute products of
On-Line Gaming Systems, Inc. In addition, the Company has a 30%
interest in International Payment Systems Pty Ltd. (IPS) which has
the distribution rights of Ingenico, DeLa Rue and Scan Coin
products.
In fiscal 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). Under the terms of the
agreement, the Company had the right to substantially increase its
ownership upon specified conditions and in the second quarter of
fiscal 2002, the Company paid $979,000 to exercise that right and
increase its ownership of GPTHL from 5% to 24.2%.
(Continued)
F-17
GLOBAL PAYMENT TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
September 30, 2002, 2001, and 2000
The accompanying consolidated results of operations include the
Company's equity in the (loss) income of these affiliates in the
amounts of $(75,000), $84,000, and $92,000 in fiscal 2002, 2001 and
2000, respectively. For fiscal 2002, 2001 and 2000, the Company
increased its equity in income of unconsolidated affiliates by $0,
$0 and $91,000, respectively, which amounts represents the gross
profit on sales of the Company's products to these affiliates which
have been sold by these affiliates as of fiscal year-end.
(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
The following summary financial information reflects the combined
interests of GPT Australia and 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. Furthermore, based upon its lack of
significance to the consolidated financial information of the Company, no
summary financial information for South Africa has been provided herein.
As of June 30,
--------------
2002
-------
Current assets $10,603
Non-current assets 180
Current liabilities 7,876
Non-current liabilities 1,149
Net assets 1,758
For the year ended June 30,
---------------------------
2002
-------
Net sales $19,699
Operating income 202
Net income 527
The Company's combined share of income from these unconsolidated
affiliates (excluding the write-off of Abacus-UK) for the fiscal year
ended September 30, 2002 was $547,000.
(Continued)
F-18
GLOBAL PAYMENT TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
September 30, 2002, 2001, and 2000
(5) Inventory
The following is a summary of the composition of inventory:
September 30
-----------------------
2002 2001
------ -----
(In thousands)
Raw materials $3,211 2,547
Work-in-progress 1,216 2,285
Finished goods 874 667
------ -----
$5,301 5,499
====== =====
(6) Property and Equipment, Net
Major classifications of property and equipment are as follows:
September 30
-------------------
Useful lives 2002 2001
------------------------- -------- ------
(In thousands)
Leasehold improvements Shorter of the life of
the lease or useful life
of asset $ 271 271
Furniture and fixtures 3 - 7 years 617 570
Machinery and equipment 3 - 10 years 2,192 1,789
Tooling and Molds 7 years 1,942 1,559
Computer software 5 years 953 938
Computer hardware 3 years 968 920
-------- ------
6,943 6,047
Less accumulated depreciation and
amortization (3,828) (3,188)
-------- ------
$ 3,115 2,859
======== ======
Depreciation and amortization expense was $640,000, $636,000 and $615,000
for the fiscal years ended September 30, 2002, 2001 and 2000,
respectively.
(Continued)
F-19
GLOBAL PAYMENT TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
September 30, 2002, 2001, and 2000
(7) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
September 30
-------------------
2002 2001
------ -----
(In thousands)
Compensation and employee benefits $ 240 421
Warranty costs 340 382
Accrued income taxes and other taxes 259 341
Administrative and other 592 623
------ -----
$1,431 1,767
====== =====
(8) Notes Payable to Bank
At September 30, 2002 and 2001, respectively, the Company had a $79,000
and $67,000 note payable to a bank related to GPT-Europe. The note bears
interest at approximately 8% and matures December 31, 2002.
(9) Current Portion of Long-Term Debt
Current portion of long-term debt consists of the following at September
30, 2002:
Term note A $ 1,400
Term note B 2,033
--------
$ 3,433
========
On September 10, 2002, the Company entered into an Amended and Restated
Credit Agreement (the Agreement) with a certain financial institution. The
Agreement provides for the existence of two separate term loans and a
revolving line of credit with varying interest rates and maturity dates.
Furthermore, the Agreement required the maintenance of certain financial
covenants of which the Company was not in compliance with as of September
30, 2002. The Company has not received a waiver for such non-compliance
which is sufficient for classification of this amount as long-term;
accordingly, this amount is classified as current.
The interest rates and maturities on the two separate term loans and
revolving line of credit are as follows:
Term Note A - This note ($1,399,987 as of 9/30/02) is payable in
twenty-two equal monthly installments of $66,667, matures on June 30,
2004, and bears interest at a fixed rate of 7.66% plus a range of 0 to 175
basis points.
Term Note B - This note ($2,033,000 as of 9/30/02) is payable in sixty
monthly installments of $33,883, matures on August 31, 2007 and bears
interest at LIBOR plus a range of 150 to 350 basis points.
(Continued)
F-20
GLOBAL PAYMENT TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
September 30, 2002, 2001, and 2000
Revolving credit loans - This revolving line of credit, which matures
September 10, 2005, provides for $3.5 million in revolving credit notes.
The revolving credit notes bear interest at the bank's prime rate or LIBOR
plus a range of 0 to 350 basis points.
All of the above borrowing instruments are secured by all of the Company's
accounts receivable and are guaranteed by Abacus -USA, the Company's
80%-owned consolidated affiliate.
As of September 30, 2002 based on the terms of the Agreement, annual
principal maturities for the amount outstanding under the term notes were
as follows:
Amount
----------
Fiscal year ended September 30:
2003 $ 1,200
2004 1,046
2005 407
2006 407
2007 373
----------
$ 3,433
==========
(10) Shareholders' Equity
(a) Stock Repurchase
In June 1998, the board of directors approved a common stock
repurchase plan, providing for the purchase of up to 500,000 shares
of the Company's common stock. In fiscal 2001, the Company
purchased, in a series of transactions, 69,784 shares, of its common
stock at an aggregate cost of $205,000.
Under the Company's existing credit agreement (discussed in note 9),
the Company is restricted from repurchasing common stock in the
future.
(b) 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
(Continued)
F-21
GLOBAL PAYMENT TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
September 30, 2002, 2001, and 2000
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 2000, a total of 162,050 incentive stock options and
51,000 nonqualified options were granted. All options granted in
2000 will become exercisable over varying terms up to five years.
Included in this amount are 186,050 five-year options that contain
an acceleration clause to as early as two years based upon
achievement of specific Company financial performance goals.
During fiscal 2001, a total of 132,950 incentive stock options and
270,000 nonqualified options were granted. All options granted in
2001 will become exercisable over varying terms up to five years. As
part of the aforementioned stock option grants, one executive was
granted 30,000 incentive stock options and 270,000 nonqualified
options, which both vested upon the grant date of those options.
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.
The Company applies the provisions of APB Opinion No. 25 and the
related interpretations in accounting for stock options granted
under these programs. Under APB Opinion No. 25, 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. SFAS No. 123 requires the Company to provide
pro forma information regarding net income (loss) and net income
(loss) per common share as if compensation cost for the Company's
stock option programs had been determined in accordance with the
fair value method prescribed therein.
Had compensation cost for these programs been determined based upon
the fair value at the grant dates consistent with SFAS No. 123, the
Company's pro forma net income (loss) and net income (loss) per
common share would have been as follows:
2002 2001 2000
-------- ------- ------
(In thousands, except per share data)
Net income (loss): As reported $ (633) 806 (1,229)
Pro forma (1,019) (99) (1,574)
Net income (loss) per
common share - basic: As reported (0.11) 0.15 (0.22)
Pro forma (0.18) (0.02) (0.29)
Net income (loss) per
common share - diluted: As reported (0.11) 0.14 (0.22)
Pro forma (0.18) (0.02) (0.29)
The effects of applying SFAS No. 123 in this pro forma disclosure
are not indicative of future amounts.
(Continued)
F-22
GLOBAL PAYMENT TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
September 30, 2002, 2001, and 2000
A summary of the Company's stock option plans as of September 30,
2002, 2001, and 2000, and changes during the years then ended, is
presented below.
2002 2001 2000
-------------------- --------------------- ----------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
------- -------- --------- -------- ---------- --------
Outstanding at the beginning of
year 880,850 $5.16 1,031,400 $5.54 910,425 $5.66
Granted at fair value 321,200 3.73 402,950 3.02 213,050 6.13
Forfeited (134,600) 6.68 (513,500) 4.34 (71,700) 9.12
Exercised (8,850) 4.07 (40,000) 3.88 (20,375) 4.83
--------- --------- ---------
Outstanding at end of the
year 1,058,600 4.53 880,850 5.16 1,031,400 5.54
========= ========= =========
Options exercisable at year end 555,040 4.51 520,670 4.61 628,475 4.49
Weighted average fair value of
options granted during the
year (a) $2.51 $1.81 $3.42
(a) The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted average assumptions:
Year ended September 30
---------------------------------------------
2002 2001 2000
------- ------- -------
Risk-free interest rates 4.83% 3.12% 5.97%
Expected lives 7 years 5 years 5 years
Expected volatility 66% 70% 63%
Expected dividend yields -- -- --
Summarized information about the Company's stock options outstanding
and exercisable at September 30, 2002 is as follows:
Outstanding Exercisable
----------------------------------------------- ----------------------------
Weighted Weighted Average Weighted Average
Exercise price range Options Average life Exercise price Options Exercise price
-------------------------- ---------- ------------ ---------------- ------- ----------------
$2.40 to $4.00 718,750 $ 5.05 $ 3.27 363,370 $ 3.17
$4.01 to $6.00 179,400 4.94 5.61 82,760 5.41
$6.01 to $8.00 50,900 3.16 6.84 38,080 6.79
$8.01 to $10.00 74,550 4.00 9.11 43,130 9.08
$10.01 to $12.00 30,000 3.72 11.56 23,700 11.53
$12.01 to 14.25 5,000 2.57 14.25 4,000 14.25
--------- -------
1,058,600 4.82 4.53 555,040 4.51
========= =======
(Continued)
F-23
GLOBAL PAYMENT TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
September 30, 2002, 2001, and 2000
(11) Income Taxes
The provision for (benefit from) income taxes consists of the following:
Fiscal years ended September 30
------------------------------------------
2002 2001 2000
---------- --------- ----------
(In thousands)
Current:
Federal $ (885) 220 (727)
State and local -- 43 --
---------- --------- ----------
(885) 263 (727)
---------- --------- ----------
Deferred:
Federal 147 (34) 144
State and local (188) (8) --
---------- --------- ----------
(41) (42) 144
---------- --------- ----------
Total $ (926) 221 (583)
========== ========= ==========
Significant components of deferred tax assets are as follows:
September 30
------------------------------------------
2002 2001 2000
---------- --------- ----------
(In thousands)
Current deferred tax assets:
Accounts receivable $ 65 48 66
Inventory 296 286 308
Accrued expenses and other, net 257 215 195
Elimination of gross profit on sales to
affiliates 218 246 268
---------- --------- ----------
Current deferred tax asset $ 836 795 837
========== ========= ==========
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 operating losses in the current
fiscal year and in fiscal year 2000. Should such losses continue in the
future, the Company may determine that it is not likely it will be able to
realize the recorded deferred income tax benefit, and a valuation
allowance will need to be established that would result in the charge-off
of previously reported deferred income tax benefit. However, at this time,
management believes (although there can be no assurance) that it is more
likely than not that the Company will realize the reported deferred income
tax benefit.
(Continued)
F-24
GLOBAL PAYMENT TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
September 30, 2002, 2001, and 2000
Reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate is as follows:
Fiscal years ended September 30
-------------------------------
2002 2001 2000
----- ---- -----
U.S. Federal statutory rate (34.0)% 34.0% (34.0)%
State income taxes, net of federal benefit (5.9) 2.1 --
Impact of foreign operations (22.1) (16.5) --
All other, net 2.6 1.9 1.9
----- ---- -----
Effective income tax rate (59.4)% 21.5% (32.1)%
===== ==== =====
(12) Commitments and Contingencies
(a) Minimum Lease Commitments
The operations of the Company are conducted in leased premises, one
of which is leased from an affiliate owned partially by the
Company's Chairman (this lease expires in August 2004). The Company
also leases various office equipment. At September 30, 2002, the
approximate minimum annual rentals under these leases, which expire
through fiscal year 2006, were as follows:
Total
(including
related party Related party
commitments) commitments
------------- ---------
(In thousands)
Fiscal year ending September 30:
2003 $ 423 33
2004 398 31
2005 360 --
2006 278 --
Thereafter -- --
Total rent expense for all operating leases was $472,000, $511,000,
and $525,000 in fiscal 2002, 2001, and 2000, respectively, including
$40,000, $101,000, and $152,000, respectively, paid to the related
party affiliate. The Company's management believes this lease with
the affiliate is on terms which approximate fair market value.
(Continued)
F-25
GLOBAL PAYMENT TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
September 30, 2002, 2001, and 2000
(b) Employment Agreements
The Company has entered into employment agreements with three
officers of the Company which expire through the end of fiscal 2004,
with minimum compensation requirements as follows (in thousands):
Fiscal year ending September 30:
2003 $ 335
2004 280
(c) Letter of Credit
At September 30, 2002, the Company had an outstanding standby letter
of credit in the amount of approximately $129,000, which expires on
December 31, 2002.
(d) Litigation
The Company is subject to legal proceedings and claims which arise
in the ordinary course of its business. In the opinion of
management, the amount of ultimate liability with respect to these
actions will not materially affect the financial position or results
of operations of the Company.
F-26
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, 2000 $ 288 85 167 206
September 30, 2001 206 66 103 169
September 30, 2002 169 108 100 177
See accompanying independent auditors' report on Schedule II.
S-1
Schedule III
GLOBAL PAYMENT TECHNOLOGIES AUSTRALIA PTY LTD
Financial Statements
June 30, 2002 and 2001
Table of Contents
Page
Independent Auditors' Report 1
Balance Sheets 2
Statements of Income 3
Statements of Stockholders' equity 4
Statements of Cash Flows 5
Notes to Financial Statements 6-11
S-2
Independent Auditors' Report
Independent Auditors' Report
The Board of Directors
Global Payment Technologies, Inc
We have audited the accompanying balance sheet of Global Payment Technologies
Pty Limited as of June 30, 2002, and the related statements of income,
stockholders' equity, and cash flows for the year then ended. 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 auditing standards generally accepted
in the United States of America. 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 Global Payment Technologies Pty
Limited as of June 30, 2002, and the results of its operations and its cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
KPMG Sydney
January 10, 2003
GLOBAL PAYMENT TECHNOLOGIES AUSTRALIA PTY LTD
Balance Sheet
June 30, 2002 and 2001
2001
Assets 2002 Unaudited
------------- -----------
Current assets:
Cash and cash equivalents A$ 2,356,150 3,290,702
Trade accounts receivable, less allowance for doubtful
accounts of A$40,000 in 2002 and A$37,555 in 2001 5,110,003 3,720,946
Inventories 10,667,709 10,842,972
Deferred Income Taxes 344,014 279,418
Other current assets 196,549 43,696
------------ -----------
Total current assets 18,674,425 18,177,734
------------ -----------
Property, plant and equipment
Machinery and equipment 247,412 153,295
Less accumulated depreciation and amortization (88,853) (50,919)
------------ -----------
Net property, plant and equipment 158,559 102,376
------------ -----------
Total assets A$ 18,832,984 18,280,110
============ ===========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to banks A$ -- 16,310
Trade accounts payable 12,147,255 13,251,099
Income taxes payable 319,883 748,196
Accrued liabilities 1,127,982 887,344
------------ -----------
Total current liabilities 13,595,120 14,902,949
------------ -----------
Total liabilities 13,595,120 14,902,949
------------ -----------
Commitments and contingencies (Note 1)
Stockholders' equity:
Common stock
issued and outstanding 20,000 shares in 2002
and 20,000 shares in 2001 20,000 20,000
Retained earnings 5,217,864 3,357,161
------------ -----------
Total stockholders' equity 5,237,864 3,377,161
------------ -----------
Total liabilities and stockholders' equity A$ 18,832,984 18,280,110
============ ===========
See accompanying notes to consolidated financial statements.
2
GLOBAL PAYMENT TECHNOLOGIES AUSTRALIA PTY LTD
Statement of Income
Years ended June 30, 2002, 2001 and 2000
2001 2000
2002 Unaudited Unaudited
------------ ----------- -----------
Net sales A$ 37,229,261 30,777,423 28,563,211
Cost of goods sold 31,522,890 26,836,256 26,407,165
------------ ----------- -----------
Gross profit 5,706,371 3,941,167 2,156,046
Selling, general and administrative expenses (1,918,794) (1,754,276) (1,025,384)
Related party royalty (1,307,783) -- --
------------ ----------- -----------
Operating income 2,479,794 2,186,891 1,130,662
Other income (expense):
Interest income 103,216 234,349 216,912
Interest expense (39,771) (32,311) --
Servicing income 90,135 97,909 150,330
Foreign exchange gain 45,108 153,802 4,119
------------ ----------- -----------
Income before income taxes 2,678,482 2,640,640 1,502,023
Income taxes (817,779) (903,329) (571,999)
------------ ----------- -----------
Net income 1,860,703 1,737,311 930,024
============ =========== ===========
See accompanying notes to consolidated financial statements.
3
GLOBAL PAYMENT TECHNOLOGIES AUSTRALIA PTY LTD
Statement of Stockholders' Equity
Years ended June 30, 2002, 2001 and 2000
Total
Common Retained stockholders'
stock earnings equity
------- ---------- -------------
Balances at June 30, 1999 (unaudited) A$20,000 2,141,826 2,161,826
Net income (unaudited) -- 930,024 930,024
Dividends declared -- (1,452,000) --
------- ---------- ---------
Balances at June 30, 2000 (unaudited) A$20,000 1,619,850 1,639,850
Net income (unaudited) -- 1,737,311 1,737,311
Dividends declared -- -- --
------- ---------- ---------
Balances at June 30, 2001 20,000 3,357,161 3,377,161
Net income -- 1,860,703 1,860,703
Dividends declared -- -- --
------- ---------- ---------
Balances at June 30, 2002 A$20,000 5,217,864 5,237,864
======= ========== =========
See accompanying notes to consolidated financial statements.
4
GLOBAL PAYMENT TECHNOLOGIES AUSTRALIA PTY LTD
Statement of Cash Flows
Years ended June 30, 2002 and 2001
2001 2000
2002 Unaudited unaudited
----------- ---------- ----------
Net income A$ 1,860,703 1,737,311 930,024
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortisation of property, plant and equipment 34,930 21,965 16,361
Increase in trade accounts receivable (1,389,057) (1,852,775) 607,060
Decrease/(increase) in inventories 175,233 (3,713,537) 0
Decrease in other assets 2,363 0 (78,596)
Increase/(decrease) in trade accounts payable (1,103,844) (374,452) (5,901,848)
Increase/(decrease) in provisions and other accruals (329,759) 799,556 8,967,657
Decrease/(increase) in prepaid expenses (10,744) 32,739 (102,372)
Decrease/(increase) in deferred tax balance (64,596) (250,590) 0
----------- ---------- ----------
Net cash provided by operating activities (824,771) (3,599,783) 4,438,286
----------- ---------- ----------
Cash flows from investing activities:
Capital expenditures, including interest capitalized (93,471) (77,942) (6,448)
----------- ---------- ----------
Net cash used in investing activities (93,471) (77,942) (6,448)
----------- ---------- ----------
Cash flows from financing activities:
Dividends paid -- -- (1,452,000)
----------- ---------- ----------
Net cash provided by financing activities -- -- (1,452,000)
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (918,242) (3,677,725) 2,979,838
Cash and cash equivalents at beginning of year 3,274,392 6,952,117 3,972,279
----------- ---------- ----------
Cash and cash equivalents at end of year A$ 2,356,150 3,274,392 6,952,117
=========== ========== ==========
See accompanying notes to consolidated financial statements.
5
GLOBAL PAYMENT TECHNOLOGIES AUSTRALIA PTY LTD
Notes to Financial Statements
June 30, 2002 and 2001
(1) Summary of Significant Accounting Policies and Practices
(a) Description of Business
Global Payment Technologies Australia Pty Ltd (the "Company")
operates in the distribution and servicing of payment technologies.
During the year the company also sold Automated Teller Machine (ATM)
products under an arrangement from eCash Pty Ltd. That arrangement
ceased on June 30, 2002. There were no other significant changes in
the nature of the Company's principal activities during the
financial 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 42% of trade accounts
receivable as of June 30, 2002 and 70% of sales for the fiscal year
ended June 30, 2002. There were no other customers that represented
10% or more of net sales or trade accounts receivable as of and for
the year ended June 30, 2002.
(c) Inventories
Inventories are stated at the lower of 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%.
(e) Other Current Assets and Other Assets
Other assets are comprised of rental bonds, prepaid expenditure,
goods and services tax due from the Australian Tax Office and other
non trade receivables.
GLOBAL PAYMENT TECHNOLOGIES AUSTRALIA PTY LTD
Notes to Financial Statements
June 30, 2002 and 2001
(1) Summary of Significant Accounting Policies and Practices (cont)
(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
carryforwards. Deferred tax 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, such as property, plant and equipment, and
purchased intangibles subject to amortization, 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.
An impairment loss is recognized to the extent that the carrying
amount exceeds the asset's fair value. The Company did not recognize
any impairment adjustments in fiscal 2002.
(i) Revenue Recognition
The Company recognizes revenue when products are shipped and the
customer takes ownership and assumes risk of loss. Interest income
is recognized as it accrues. Service revenue is recognized as the
services are provided.
During the year the Company sold independent automated teller
machines (ATM's) under an arrangement with a related entity, eCash
Pty Limited. The Company assumed all the credit risk associated with
the sales. The machines were purchased from third parties with the
Company assuming all the risks and rewards of ownership of the
inventory. An agreed fee of $1,307,738 was paid to eCash Pty Limited
as a royalty under the arrangement. Revenues and expenses from the
sales under the arrangement have been included in the net sales and
cost of sales of the Company on the basis that the Company had legal
title to the inventories and assumed the full risk for warranty and
bad debts associated with the sales.
GLOBAL PAYMENT TECHNOLOGIES AUSTRALIA PTY LTD
Notes to Financial Statements
June 30, 2002 and 2001
(1) Summary of Significant Accounting Policies and Practices (cont)
(i) Revenue Recognition (continued)
Total sales and cost of sales under the arrangement were $6,252,852
and $4,340,796 respectively. This arrangement, which commenced on
July 1, 2001, did not exist prior to the fiscal year ended June 30,
2002.
On July 1, 2002, the Company ended its sales arrangement with eCash
Pty Limited. Inventories on hand at year totaling $1,619,766 were
sold at carrying value to eCash Pty Limited. In 2002 the business
contributed gross sales of $6,252,852 to the Company.
(j) Commitments and Contingencies
Liabilities for loss contingencies, including environmental
remediation costs, arising from claims, assessments, litigation,
fines and penalties and other sources are recorded when it is
probable that a liability has been incurred and the amount of the
assessment and/or remediation can be reasonably estimated.
(k) Advertising expenses
Advertising expenses are recognized in the statement of income as
incurred.
(l) Cash and cash equivalents
Cash and cash equivalents comprise cash on hand, cash at bank and
term deposits with banking institutions. The Term deposits are for a
period of 7 days. These have been rolled over since year end. Cash
at bank includes cash denominated in Australian and US dollars. US
dollar denominated bank accounts are restated at year end to spot
rates at year end with the gain recognized in the Statement of
income.
(2) Income Taxes
Total income taxes for the three years ended June 30, 2002 consists of:
Current Deferred Total
------- -------- -----
Year ended June 30, 2002 A$ 882,376 (64,597) 817,779
Year ended June 30, 2001 (unaudited) A$ 1,153,919 (250,590) 903,329
Year ended June 30, 2000 (unaudited) A$ 560,825 11,174 571,999
GLOBAL PAYMENT TECHNOLOGIES AUSTRALIA PTY LTD
Notes to Financial Statements
June 30, 2002 and 2001
(2) Income Taxes (continued)
Income tax expense was $817,779, $903,329 (unaudited) and $571,999
(unaudited) for the years ended June 30, 2002, June 30, 2001 and June 30,
2000, respectively, and differed from the amounts computed by applying the
Australian federal income tax rate of 30% (2001: 34%; 2000: 36%) to pretax
income as a result of the following:
2001 2000
2002 Unaudited Unaudited
-------- --------- ---------
Computed "expected" tax expense A$ 803,544 897,818 540,728
Increase (reduction) in income taxes resulting from:
Adjustment to deferred tax assets and
liabilities for enacted changes in tax
laws and rates 35,931 -- --
Other, net 18,748 5,511 31,270
-------- ------- -------
A$ 817,779 903,329 571,999
======== ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June
30, 2002 are presented below.
2002 2001
Unaudited
at 30% tax rate at 34% tax rate
--------------- ---------------
Deferred tax assets:
Accounts receivable principally due to
allowance for doubtful accounts A$ 12,000 12,769
Inventories provisions 109,955 124,616
Employee leave entitlements 25,691 12,013
Bonus provision 132,300 93,500
Other 64,068 36,520
--------- --------
Total gross deferred tax assets 344,014 279,418
Less valuation allowance (--) (--)
--------- --------
Net deferred tax assets 344,014 279,418
--------- --------
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, 2002.
GLOBAL PAYMENT TECHNOLOGIES AUSTRALIA PTY LTD
Notes to Financial Statements
June 30, 2002 and 2001
(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 percentages of salary plus any additional contributions included
in employee's employment agreement. The company contributed A$79,740 and
A$46,964 during fiscal years 2002 and 2001 respectively to the fund. There
were no contributions outstanding at year end.
The Company does not sponsor any other post employment benefits for its
employees.
(4) Accrued Liabilities
2002 2001
unaudited
Goods and services tax payable A$ 312,173 185,595
Accrued expenses 590,172 526,416
Provision for employee leave 85,637 35,333
Other provisions 65,000 65,000
Warranty provision 75,000 75,000
---------- -------
A$ 1,127,982 887,344
========== =======
(5) Commitments
Non cancelable operating lease commitments
Future operating lease commitments not
provided for in the financial statements and 2002 2001
payable: (unaudited)
Within one year A$ 210,000 0
One to two years 210,000 0
Two to three years 210,000 0
Three to four years 210,000 0
Later than four years 0 0
---------- -------
A$ 840,000 0
---------- -------
The Company leases property under a non-cancelable 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.
GLOBAL PAYMENT TECHNOLOGIES AUSTRALIA PTY LTD
Notes to Financial Statements
June 30, 2002 and 2001
(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. Purchases during year totaled
$31,522,890 (2001: $26,836,256).
During the year the Company entered into an arrangement to sell
independent automated teller machines (ATM's) under an arrangement with a
related entity, eCash Pty Limited. eCash Pty Limited is owned 35% by
Global Payments Technology Inc., 35% by the private trust of the Managing
Director of the Company, and 30% by an unrelated third person.
The Company assumed all the credit risk associated with the sales. The
machines were purchased from third parties, independent of eCash Pty
Limited and the Company, with the Company assuming all the risks and
rewards of ownership of the inventory. An agreed fee of $1,307,738 was
paid to eCash Pty Limited as a royalty under the arrangement for the use
of eCash's name and its customer and vendor lists. Revenues and expenses
from the sales under the arrangement have been included in the net sales
and cost of sales of the Company on the basis that the Company had legal
title to the inventories and assumed the full risk for warranty and bad
debts associated with the sales.
There were no other transactions with related parties.
(7) Subsequent events
A dividend of $2,000,000 was declared and paid on September 12, 2002.