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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 No. 0-25148
Global Payment Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware 11-2974651
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
425B Oser Avenue, Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
(631) 231-1177
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
Shares of Common Stock outstanding on February 3, 2002 5,542,416
Global Payment Technologies, Inc.
Index
PART I. FINANCIAL INFORMATION
Page
Number
------
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 2002 and
September 30, 2002 3
Consolidated Statements of Income - Three Months ended
December 31, 2002 and 2001 4
Consolidated Statements of Cash Flows - Three Months ended
December 31, 2002 and 2001 5
Notes to Consolidated Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis of Financial Condition
and
Results of Operations 9 - 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 2 Above
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
GLOBAL PAYMENT TECHNOLOGIES, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
2002 2002
-------- --------
(Dollar amounts in thousands,
except share data)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,908 $ 1,604
Accounts receivable, less allowance for doubtful accounts
of $168 and $177, respectively 1,665 1,557
Accounts receivable from affiliates 5,548 4,982
Inventory, less allowance for obsolescence of $852 and
$812 respectively 5,292 5,301
Prepaid expenses and other current assets 187 177
Income taxes receivable 775 863
Deferred income tax benefit 976 836
-------- --------
Total current assets 16,351 15,320
Property and equipment, net 3,053 3,115
Investments in unconsolidated affiliates 2,701 2,426
Capitalized software costs 2,552 2,678
Intangible assets 385 405
Other assets 64 86
-------- --------
Total assets $ 25,106 $ 24,030
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4,578 $ 3,512
Accounts payable 2,462 2,061
Accrued expenses and other current liabilities 1,328 1,431
-------- --------
Total current liabilities 8,368 7,004
Shareholders' equity:
Common Stock, par value $0.01; Authorized 20,000,000 shares;
issued and outstanding 5,821,400 and 5,815,100 shares, respectively 58 58
Additional paid-in capital 9,801 9,761
Retained earnings 8,310 8,650
Accumulated other comprehensive income 68 56
-------- --------
18,237 18,525
Less: Treasury stock, at cost, 278,984 shares (1,499) (1,499)
-------- --------
Total shareholders' equity 16,738 17,026
-------- --------
Total liabilities and shareholders' equity $ 25,106 $ 24,030
======== ========
The accompanying notes are an integral part of these financial statements.
3
GLOBAL PAYMENT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months ended December 31,
-------------------------------
2002 2001
----------- -----------
(Dollar amounts in thousands,
except share and per share data)
Net sales
Affiliates $ 3,653 $ 3,270
Non-affiliates 2,307 5,020
----------- -----------
5,960 8,290
Cost of sales 4,570 6,167
----------- -----------
Gross profit 1,390 2,123
Operating expenses 2,112 2,052
----------- -----------
(Loss) income from operations (722) 71
Other income (expense):
Equity in income of unconsolidated affiliates 207 127
Interest expense, net (66) (75)
----------- -----------
Total other income, net 141 52
----------- -----------
(Loss) income before provision (benefit) for income taxes (581) 123
(Benefit) provision for income taxes (241) 5
----------- -----------
Net (loss) income ($ 340) $ 118
=========== ===========
Net income per share:
Basic ($ .06) $ .02
Diluted ($ .06) $ .02
=========== ===========
Common shares used in computing net income per share amounts:
Basic 5,537,629 5,527,266
=========== ===========
Diluted 5,537,629 5,569,696
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
GLOBAL PAYMENT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended December 31,
2002 2001
------- -------
(Dollar amounts in thousands)
OPERATING ACTIVITIES:
Net (loss) income ($ 340) $ 118
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Equity in income of unconsolidated affiliates (207) (127)
Depreciation and amortization 352 262
Provision for losses on accounts receivable 16 16
Provision for inventory obsolescence 45 23
Deferred income taxes (140) --
Changes in operating assets and liabilities:
Decrease in accounts receivable 17 96
Increase in accounts receivable from affiliates (582) (1,514)
Increase in inventory (36) (45)
Decrease (increase) in prepaid expenses and other assets 11 (85)
Decrease in income taxes receivable 99 --
Increase in capitalized software costs -- (209)
Increase in accounts payable 401 1,542
Decrease in accrued expenses and other current liabilities (102) (247)
Decrease in income taxes payable -- (27)
------- -------
NET CASH USED IN OPERATING ACTIVITIES (466) (197)
------- -------
INVESTING ACTIVITIES:
Purchases of property and equipment (144) (333)
Distributions from unconsolidated affiliates 21 --
(Investments in) repayments of advances by unconsolidated affiliates (202) 27
------- -------
NET CASH USED IN INVESTING ACTIVITIES (325) (306)
------- -------
FINANCING ACTIVITIES:
Net borrowings of note payable from bank 1,066 702
Proceeds from the exercise of stock options 29 --
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,095 702
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 304 199
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,604 1,069
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,908 $ 1,268
======= =======
CASH PAID DURING THE PERIOD FOR:
Interest $ 66 $ 82
======= =======
Income taxes $ -- $ --
======= =======
NON-CASH FINANCING ACTIVITIES
Tax benefit from exercise of stock options $ 11 $ --
======= =======
The accompanying notes are an integral part of these financial statements.
5
Global Payment Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Global Payment
Technologies, Inc. (the "Company"), including the September 30, 2002
consolidated balance sheet which has been derived from audited financial
statements, have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. The operating results for the three-month
period ended December 31, 2002 are not necessarily indicative of the results
that may be expected for the fiscal year ending September 30, 2003. We recommend
that you refer to the consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended
September 30, 2002.
NOTE B - RECLASSIFICATIONS AND RESTATEMENT
Effective September 30, 2002, the Company reclassified certain costs, previously
included in inventory, related to the development of software used in its
products and to the acquisition of molds and tooling for production. As a
result, the Company's statement of cash flows for the three months ended
December 31, 2001 reflects the reclassification of $188,000 and $209,000 in
expenditures related to the acquisition of molds and tooling and software costs
respectively. This reclassification has not changed the Company's net income
(loss), total assets or equity for any period.
NOTE C - MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities, at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Among the more significant estimates included in
the consolidated financial statements are the allowance for doubtful accounts,
recoverability of inventory, capitalized software and provisions for warranties.
Actual results could differ from those estimates.
NOTE D - COMPREHENSIVE INCOME
The Company observes the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which requires
companies to report all changes in equity during a period, except those
resulting from investments by owners and distributions to owners, for the period
in which they are recognized. Comprehensive income is the total of net income
and all other non-owner changes in equity (or other comprehensive income) such
as unrealized gains/losses on securities classified as available-for-sale,
currency translation adjustments and minimum pension liability adjustments.
Comprehensive and other comprehensive income must be reported on the face of
annual financial statements or in the case of interim reporting, the footnote
approach may be utilized. For the three months ended December 31, 2001, the
Company's operations did not give rise to material items includable in
comprehensive income which were not already included in net income. Accordingly,
the Company's comprehensive income is the same as its net income for that
period.
For the three months ended December 31, 2002, the Company's comprehensive income
(loss) was as follows:
$000
----
Net (loss) $(340)
Other comprehensive
income (a) 12
------
Comprehensive (loss) $(328)
======
(a) Consisting of cumulative translation adjustments related to the Company's
investments in unconsolidated affiliates. Global Payment Technologies, Inc.
Notes to Consolidated Financial Statements December 31, 2002
6
Global Payment Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
NOTE E - NET INCOME PER COMMON SHARE
The Company accounts for earnings per share pursuant to SFAS No. 128, "Earnings
Per Share". In accordance with SFAS No. 128, net income per common share amounts
("basic EPS") were computed by dividing net income by the weighted average
number of common shares outstanding for the period. Net income per common share
amounts, assuming dilution ("diluted EPS"), were computed by reflecting the
potential dilution from the exercise of stock options and stock warrants. SFAS
No. 128 requires the presentation of both basic EPS and diluted EPS on the face
of the income statement.
A reconciliation between the numerators and denominators of the basic and
diluted EPS computations for net (loss) income appears below:
Three Months Ended Three Months Ended
December 31, 2002 December 31, 2001
(In thousands, except per share data) (In thousands, except per share V
------------------------------------ -----------------------------------
Net (loss) Shares Per Share Net Income Shares Per Share
(Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts
---------- ------------- ------- ---------- ------------ -------
Net (loss) income ($340) $118
----- ----
Basic EPS
Net (loss) income attributable to (340) 5,537.6 ($ .06) 118 5,527.3 $ .02
Common stock
Effect of dilutive securities
Stock options and warrants -- -- (.00) -- 42.4 (.00)
----- ------- -------- ---- ------- --------
Diluted EPS
Net (loss) income attributable to Common
Stock and assumed option and warrant
exercises ($340) 5,537.6 ($ .06) $118 5,569.7 $ .02
===== ======= ======== ==== ======= ========
Options to purchase 150,150 and 756,100 shares of Common Stock in the three
months ended December 31, 2002 and December 31, 2001, respectively, were not
included in the computation of diluted EPS because the exercise prices exceeded
the average market price of the related common shares for this period. Options
to purchase 347,506 shares of common stock in the three months ended December
31, 2002 were not included in the computation of diluted EPS because the Company
incurred a loss during the period and, accordingly, their inclusion would be
anti-dilutive. These options were still outstanding at the end of the related
periods.
NOTE F - ACCOUNTS RECEIVABLE AND SALES DATA FOR UNCONSOLIDATED AFFILIATES
Net sales to unconsolidated affiliates for quarters ended December 31,
2002 and 2001 and accounts receivable from unconsolidated affiliates as of
December 31, 2002 and 2001 are as follows:
Net sales - affiliate Accounts receivable from affiliates as of
-------------------------- --------------------------------------------
2002 2001 December 31, 2002 December 31, 2001
--------- ---------- --------------------- -------------------
Australia $ 3,344 3,127 4,990 8,813
Abacus-UK -- -- 131 7
South Africa 309 143 427 569
--------- ---------- ------------------ --------------------
Total $ 3,653 3,270 5,548 9,389
========= ========== ================== ====================
7
Global Payment Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
NOTE G - SUMMARY FINANCIAL INFORMATION FOR GPT AUSTRALIA PTY LTD AND ECASH PTY
LTD
Summarized financial information for GPT Australia and eCash, in which the
Company owns a 50% and 35% non controlling interest, respectively, is as
follows:
All figures are in U.S. dollars.
Three Months Ended
September 30, 2002
Net sales $5,765,806
Operating income 314,790
Net income 242,486
As of September 30, 2002
Current assets $9,053,930
Non-current assets 126,336
Current liabilities 6,703,851
Non-current liabilities --
Net assets 2,476,415
NOTE H - RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure" ("SFAS 148"). SFAS 148 provides alternative methods
of transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation as originally provided by SFAS No. 123
"Accounting for Stock-Based Compensation". Additionally, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosure in both the
annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The transitional requirements of SFAS 148 will be effective for all financial
statements for fiscal years ending after December 15, 2002. The disclosure
requirements shall be effective for financial reports containing condensed
financial statements for interim periods beginning after December 31, 2002. The
Company expects to adopt the disclosure portion of this statement for the fiscal
quarter ending March 31, 2003. The application of this standard will have no
impact on the Company's consolidated financial position or results of
operations.
8
Global Payment Technologies, Inc.
December 31, 2002
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three months ended December 31, 2002 compared with three months ended December
31, 2001
Sales
Net sales decreased by 28.1%, or $2,330,000, to $5,960,000 in the three months
ended December 31, 2002 as compared with $8,290,000 in the comparative
prior-year period. The decrease was primarily due to lower demand for the
Company's Argus product in Eastern Europe, due principally to product issues,
which have since been resolved.
Gross Profit
Gross profit decreased to $1,390,000, or 23.3% of net sales, in the three months
ended December 31, 2002 from $2,123,000, or 25.6% of net sales, in the
comparative prior-year period. The decrease in gross profit as a percentage of
sales was primarily the result of the mix of product sold and higher costs
relating to new products, principally higher purchasing costs and less efficient
manufacturing operations. This quarter the Company's Argus product accounted for
48.5% of all validator sales as compared to 73.1% in the same prior year period,
due to the Company's sale of a significant order of GII products to Latin
America. In addition, in accordance with Generally Accepted Accounting
Principles, the Company amortized capitalized software development costs related
to its products at the greater of straight-line or estimated costs per unit;
during the quarter, the Company's lower sales units of Argus resulted in
straight-line amortization of Capitalized software costs which exceeded the
amortization based on unit sales life by approximately $82,000, thus lowering
margins by 1.4%. While improvement from lower purchasing costs and manufacturing
efficiencies is expected in the future, our margins will continue to be affected
by the mix of products as well as sales volumes.
Operating Expenses
Operating expenses increased to $2,112,000, or 35.4% of net sales, in the three
months ended December 31, 2002 as compared with $2,052,000, or 24.8% of net
sales, in the comparative prior-year period. This increase of $60,000 in
operating expenses is the result of higher engineering costs of $130,000,
increased professional fees of $63,000, offset in part by lower staffing costs.
While operating expenses increased by $60,000 in absolute dollar terms, this
increase as a percentage of sales rose by 10.6%. This rise is primarily due to
the 28.1% reduction in sales this quarter as compared to the prior year ago
period.
Income Taxes
With respect to the provision for income taxes, the effective rate was 41.5% as
compared to 4.1% in the prior-year period. This increase 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 (Loss) Income
Net (loss) income for the quarter was ($340,000), or ($0.06) per share, as
compared to the $118,000, or $0.02 per share, in the comparative prior-year
period. As an extension of its operations, the Company owns non-controlling
minority 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 the three months ended December 31, 2002 and 2001 are
the Company's share of net profits of these affiliates of $207,000 and $127,000,
respectively. In the three months ended December 31, 2002 and 2001, equity in
income of unconsolidated affiliates increased by approximately $125,000 and
$50,000, respectively, which represents the recognition of the Company's share
of the gross profit on intercompany sales to its affiliates that have been
recognized by these affiliates. Excluding the intercompany gross profit
adjustment, the Company's share of net income of these unconsolidated affiliates
was $82,000 and $77,000 for the three months ended December 31, 2002 and 2001,
respectively.
9
Global Payment Technologies, Inc.
December 31, 2002
Results of Operations - continued
In addition, the Company owns Global Payment Technologies (Europe) Limited and
holds a majority interest in Abacus Financial Management Systems, Ltd., USA,
whose results are consolidated in the Company's financial statements.
Liquidity and Capital Resources
The Company's capital requirements consist primarily of those necessary to
continue to expand and improve product development and manufacturing
capabilities, sales and marketing operations, investments in affiliates, and to
a lesser degree, interest payments on the Company's indebtedness. The Company
believes that its available resources, including its credit facilities, will be
sufficient to meet its obligations as they become due and permit continuation of
its planned expansion throughout fiscal 2003 and beyond.
At December 31, 2002, the Company's cash and cash equivalents were $1,908,000 as
compared with $1,604,000 at September 30, 2002. 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 revolving line of credit "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 December 31, 2002, outstanding borrowings under the term
loans and the RLC were $3,178,000 and $1,400,000 respectively. As of December
31, 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 61% 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 current 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 does not anticipate
that the loans will be required to be paid prior to their scheduled payment
dates.
Net cash used in operating activities was $466,000 in the three months ended
December 31, 2002. This amount is due to net income for the period, adjusted for
non-cash items, of ($274,000), increased accounts receivable of $565,000,
decreased accrued expenses and other current liabilities of $102,000 and
increased inventory of $36,000, offset, in part by, increased accounts payable
of $401,000, decreased income taxes receivable of $99,000 and a decrease in
prepaid expenses and other assets of $11,000. Net cash used in operating
activities was $197,000 in the three months ended December 31, 2001. This amount
is due to net income for the period, adjusted for non-cash items, of $292,000
and increased accounts payable of $1,542,000, reduced by, increased Capitalized
Software Costs of $209,000, increased accounts receivable of $1,418,000,
increased inventory of $45,000, increased prepaid expenses and other assets of
$85,000, decreased accrued expenses and other current liabilities of $247,000
and decreased income taxes payable of $27,000.
10
Global Payment Technologies, Inc.
December 31, 2002
Liquidity and Capital Resources - continued
Cash used in investing activities for the three months ended December 31, 2002
amounted to $325,000 as compared with $306,000 in the prior-year period.
Investments in property and equipment in the three months ended December 31,
2002 amounted to $144,000 as compared with $333,000 in 2001. In addition, the
Company advanced its joint ventures $202,000 for working capital purposes in the
three months ended December 31, 2002, and received $27,000 in loan repayments
from its joint ventures in the three months ending December 31, 2001. The
Company also received a dividend distribution of $21,000 from its South African
affiliate in the three months ending December 31, 2002. These loans and
repayments have been added to or subtracted from the investment in
unconsolidated affiliates based on the terms of the related agreements. The
Company has investments in three unconsolidated affiliates, all of which are
accounted for under the equity method of accounting. In the opinion of
management, the Company is not obligated to fund the operations, or guarantee or
settle any liabilities, of these unconsolidated affiliates.
Cash provided by financing activities in the three months ended December 31,
2002 consisted of net bank borrowings of $1,066,000 and $29,000 from the
exercise of stock options. Cash provided by financing activities in the three
months ended December 31, 2001 consisted of net bank borrowings of $702,000.
At December 31, 2002, future minimum payments under noncancellable operating
leases and payments to be made for long-term bank debt maturing over the next
five years are as follows in ($000):
Fiscal Year Operating Lease Related Party Transactions Debt Repayments
----------- --------------- -------------------------- ---------------
2003 293 25 900
2004 367 31 1,048
2005 360 410
2006 278 410
2007 - 410
In addition to the amounts above, and in the normal course of business, purchase
orders are issued which obligate the Company for future inventory purchases. As
of December 31, 2002, purchase order commitments approximated $4.2 million and
will be used for production requirements up to, and in excess of, six months.
Anticipated cash flows from operations and affiliates, together with existing
lines of credit, are believed to be adequate to meet the Company's working
capital requirements and service the long-term debt as it matures.
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.
11
Global Payment Technologies, Inc.
December 31, 2002
Critical Accounting Policies - continued
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 of these products, and reflects the amortization
of these costs in cost of sales. The annual amortization is calculated using the
greater of (a) the ratio that current gross revenues for a product bear to the
total of current and anticipated future gross revenues for that product or (b)
the straight-line method over the remaining estimated economic life of the
product including the period being reported on. The estimation of both future
sales of products as well as the life of the product are critical estimates that
are affected by both internal and external factors that might affect the
Company's estimates. If the useful life is reduced, or sales projections fall
short of the estimation, amortization expense will increase or accelerate.
Revenue Recognition:
The Company recognizes revenue upon shipment of products to its customers and
the passage of title, including shipments to its unconsolidated affiliates, or
at the time services are completed with respect to repairs not covered by
warranty agreements. With respect to sales to its unconsolidated affiliates, the
Company defers its pro rata share of gross profit on those sales until such time
as its affiliates sell to a third party customer. The timing of sales to
affiliates can have an effect on the Company's recognized profitability.
Warranty Policy:
The Company provides for the estimated cost of product warranty at the time
related sales revenue is recognized. Furthermore, the Company warrants that its
products are free from defects in material and workmanship for a period of one
year, or almost two years relating to its Argus and Aurora products, from the
date of initial purchase. The warranty does not cover any losses or damage that
occur as a result of improper installation, misuse or neglect and repair or
modification by anyone other than the Company and its appointed service centers.
Repair costs beyond the warranty period are charged to the Company's customers.
Reserve for Uncollectible Accounts Receivable:
At December 31, 2002, the Company's accounts receivable balance was $7.2
million. The Company's accounting policy is to reserve for the accounts
receivable of specific customers based on our assessment of certain customers'
financial condition. We make these assessments using our knowledge of the
industry coupled with current circumstances or known events and our past
experiences. This policy is based on our past collection experience. To the
extent that our experience changes, global economic conditions deteriorate or
our customers experience financial difficulty our reserve may need to increase.
Investments in Unconsolidated Affiliates:
The Company applies the equity method of accounting to its investments
(including advances) in entities where the Company has non-controlling ownership
interests of 50% or less. 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.
12
Global Payment Technologies, Inc.
December 31, 2002
Critical Accounting Policies - continued
Long-Lived Assets:
The Company accounts for long-lived assets pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", 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 upon actual impairment events or indicators.
Income Taxes:
The Company accounts for its 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 (loss) 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 its deferred tax assets may be impaired.
Related Party Transactions:
In addition to the related-party transactions described in "Revenue Recognition"
and "Investments in Unconsolidated Affiliates", the Company leases space from an
entity partially owned by the Company's Chairman and Chief Executive Officer.
The Company believes that all such transactions are effected on an arms-length
basis. See Note F for a summary of affiliate balances and transactions.
13
Global Payment Technologies, Inc.
December 31, 2002
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the Company's quantitative and
qualitative disclosures about market risk since the filing of the Company's
Annual Report on Form 10-K for the year ended September 30, 2002.
Special Note Regarding Forward-Looking Statements: A number of statements
contained in this discussion and analysis are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 that involve
risks and uncertainties that could cause actual results to differ materially
from those expressed or implied in the applicable statements. These risks and
uncertainties include but are not limited to: the Company's dependence on the
paper currency validator market and its potential vulnerability to technological
obsolescence; the risks that its current and future products may contain errors
or defects that would be difficult and costly to detect and correct; potential
manufacturing difficulties; possible risks of product inventory obsolescence;
potential shortages of key parts and/or raw materials; potential difficulties in
managing growth; dependence on key personnel; the Company's dependence on a
limited base of customers for a significant portion of sales; the possible
impact of competitive products and pricing; uncertainties with respect to the
Company's business strategy; general economic conditions in the domestic and
international markets in which the Company operates; the relative strength of
the United States currency; and other risks described in the Company's
Securities and Exchange Commission filings.
14
Global Payment Technologies, Inc.
December 31, 2002
Item 4. 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 January 2003, 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.
15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit - 99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this report
is filed.
16
Global Payment Technologies, Inc.
Signatures
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Global Payment Technologies, Inc.
By: s/ Thomas McNeill
-----------------------------
Vice President,
Chief Financial Officer and
Principal Accounting Officer
Dated: February 11, 2003
17
I, Stephen Katz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Global Payment
Technologies, Inc. ("GPT");
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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 quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly 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 quarterly 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: February 11, 2003 S/ Stephen Katz
-----------------------------
Chairman of the Board and CEO
18
I, Thomas McNeill, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Global Payment
Technologies, Inc. ("GPT");
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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 quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly 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 quarterly 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: February 11, 2003 S/ Thomas McNeill
-----------------------------
Vice President and CFO