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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 June 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File No. 0-25148
Global Payment Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware 11-2974651
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
425B Oser Avenue , Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
(631) 231-1177
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities 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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES |_| NO |X|
Shares of Common Stock outstanding on August 1, 2003 5,550,516
1
Global Payment Technologies, Inc.
Index
PART I. FINANCIAL INFORMATION
Page Number
-----------
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2003 and September 30, 2002 3
Consolidated Statements of Income - Nine Months ended June 30, 2003
and 2002 4
Consolidated Statements of Income - Three Months ended June 30, 2003
and 2002 5
Consolidated Statements of Cash Flows - Nine Months ended June 30, 2003
and 2002 6
Notes to Consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 20
2
GLOBAL PAYMENT TECHNOLOGIES, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
June 30, September 30,
2003 2002
----------- ------------
(Dollar amounts in thousands,
except share data)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,612 $ 1,604
Accounts receivable, less allowance for doubtful accounts
of $206 and $177, respectively 1,728 1,557
Accounts receivable from affiliates 5,530 4,982
Inventory, less allowance for obsolescence of $696 and
$812, respectively 4,008 5,301
Prepaid expenses and other current assets 151 177
Income taxes receivable 175 863
Deferred income taxes - current -- 836
-------- --------
Total current assets 13,204 15,320
Property and equipment, net 2,840 3,115
Investments in unconsolidated affiliates 1,417 2,426
Capitalized software costs 2,291 2,678
Deferred income taxes - non - current 1,719 --
Intangible assets 344 405
Other assets 81 86
-------- --------
Total assets $ 21,896 $ 24,030
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,094 $ 3,512
Accounts payable 2,912 2,061
Accrued expenses and other current liabilities 1,416 1,431
-------- --------
Total current liabilities 5,422 7,004
Long-term debt 1,000 --
-------- --------
Total liabilities 6,422 7,004
-------- --------
Shareholders' equity:
Common Stock, 20,000,000 shares authorized; $.01 par value;
5,829,500 and 5,815,100 shares issued and outstanding, respectively 58 58
Additional paid-in capital 9,843 9,761
Retained earnings 6,825 8,650
Accumulated other comprehensive income 247 56
-------- --------
16,973 18,525
Less: Treasury stock, at cost, 278,984 shares (1,499) (1,499)
-------- --------
Total shareholders' equity 15,474 17,026
-------- --------
Total liabilities and shareholders' equity $ 21,896 $ 24,030
======== ========
The accompanying notes are an integral part of these financial statements.
3
GLOBAL PAYMENT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months ended June 30,
2003 2002
----------- -----------
(Dollar amounts in thousands,
except share and per share data)
Net sales
Affiliates $ 10,609 $ 10,436
Non-affiliates 9,771 12,765
----------- -----------
20,380 23,201
Cost of sales 16,678 16,812
----------- -----------
Gross profit 3,702 6,389
Operating expenses 6,843 6,492
----------- -----------
Loss from operations (3,141) (103)
Other income (expense):
Equity in income of unconsolidated affiliates 387 631
Gain on sale of investment in unconsolidated affiliate -- 108
Interest expense, net (212) (207)
----------- -----------
Total other income 175 532
----------- -----------
(Loss) income before provision (benefit) for income taxes (2,966) 429
(Benefit) provision for income taxes (1,141) 26
----------- -----------
Net (loss) income $ (1,825) $ 403
=========== ===========
Net (loss) income per share:
Basic $ (.33) $ .07
=========== ===========
Diluted $ (.33) $ .07
=========== ===========
Common shares used in computing net income
per share amounts:
Basic 5,543,161 5,528,516
=========== ===========
Diluted 5,543,161 5,748,503
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
GLOBAL PAYMENT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months ended June 30,
2003 2002
----------- -----------
(Dollar amounts in thousands,
except share and per share data)
Net sales
Affiliates $ 3,565 $ 3,131
Non-affiliates 3,783 3,372
----------- -----------
7,348 6,503
Cost of sales 6,159 4,608
----------- -----------
Gross profit 1,189 1,895
Operating expenses 2,166 2,175
----------- -----------
Loss from operations (977) (280)
Other income (expense):
Equity in income of unconsolidated affiliates 45 395
Gain on sale of investment in unconsolidated affiliate -- 108
Interest expense, net (57) (64)
----------- -----------
Total other income, net (12) 439
----------- -----------
(Loss) income before provision (benefit) for income taxes (989) 159
(Benefit) provision for income taxes (362) --
----------- -----------
Net (loss) income $ (627) $ 159
=========== ===========
Net (loss) income per share:
Basic $ (.11) $ .03
=========== ===========
Diluted $ (.11) $ .03
=========== ===========
Common shares used in computing net income
per share amounts:
Basic 5,549,491 5,529,794
=========== ===========
Diluted 5,549,491 5,885,855
=========== ===========
The accompanying notes are an integral part of these financial statements.
5
GLOBAL PAYMENT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended June 30,
2003 2002
-------- --------
(Dollar amounts in thousands)
OPERATING ACTIVITIES:
Net (loss) income $ (1,825) $ 403
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Gain on sale of unconsolidated affiliate -- (108)
Equity in income of unconsolidated affiliates (387) (631)
Depreciation and amortization 1,083 725
Provision for losses on accounts receivable 63 39
Provision for inventory obsolescence 180 64
(Increase) decrease in deferred income taxes (883) 115
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (769) 3,624
Decrease (increase) in inventory 1,113 (448)
Increase in capitalized software costs -- (298)
Decrease in income taxes receivable 710 --
Decrease (increase) in prepaid expenses and other assets 31 (86)
Increase (decrease) accounts payable 851 (659)
Decrease in accrued expenses and other current liabilities (15) (294)
Decrease in income taxes payable -- (113)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 152 2,333
-------- --------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net of proceeds from disposals (361) (735)
Distributions from unconsolidated affiliate 21 --
Investments in unconsolidated affiliates (323) (866)
Sale of investment in unconsolidated affiliate 1,877 118
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,214 (1,483)
-------- --------
FINANCING ACTIVITIES:
Net repayments of note payable to bank (1,418) (895)
Issuance of stock upon exercise of stock options 60 12
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (1,358) (883)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8 (33)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,604 1,069
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,612 $ 1,036
======== ========
CASH PAID DURING THE PERIOD FOR:
Interest $ 212 $ 222
======== ========
Income taxes $ -- $ --
======== ========
The accompanying notes are an integral part of these financial statements
NON-CASH FINANCING ACTIVITIES
Tax benefit from exercise of stock options included in Paid in Capital $ 22 $ --
======== ========
The accompanying notes are an integral part of these financial statements.
6
Global Payment Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2003
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 and the summary financial information for GPT Australia PTY Limited
and eCash PTY Limited, 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 and nine-month periods ended June 30, 2003 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 nine months ended June 30,
2002 reflects the reclassification of $320,000 and $298,000 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 costs 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. For
the three and nine months ended June 30, 2002, the Company's comprehensive
income was the same as net income.
For the three and nine months ended June 30, 2003, the Company's comprehensive
loss was as follows:
Three months ended 6/30/03 Nine months ended 6/30/03
-------------------------- -------------------------
$000
Net loss $ (627) $(1,825)
Other comprehensive income (a) 177 191
------- -------
Comprehensive loss $ (450) $(1,634)
======= =======
(a) Consisting of cumulative translation adjustments related to the Company's
investments in affiliates.
7
Global Payment Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
June 30, 2003
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 (loss) per common share
amounts ("basic EPS") was computed by dividing net income (loss) by the weighted
average number of common shares outstanding for the period. Net income (loss)
per common share amounts, assuming dilution ("diluted EPS"), was 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 income appears below:
Nine Months Ended Nine Months Ended
June 30, 2003 June 30, 2002
(In thousands, except per share data) (In thousands, except per share data)
---------------------------------------- ---------------------------------------
Net Income Shares Per Share Net Income Shares Per Share
(Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts
----------- ------------- ------- ----------- ------------- -------
Net (loss) income $(1,825) $ 403
------- -------
Basic EPS
Net (loss) income attributable to (1,825) 5,543.2 $(.33) 403 5,528.5 $.07
Common Stock
Effect of dilutive securities
Stock options and warrants -- -- -- -- 220.0 --
------- ------- ----- ------- ------- ----
Diluted EPS
Net (loss) income attributable to Common
Stock and assumed option and warrant
exercises $(1,825) 5,543.2 ($.33) $ 403 5,748.5 $.07
======= ======= ===== ======= ======= ====
Three Months Ended Three Months Ended
June 30, 2003 June 30, 2002
(In thousands, except per share data) (In thousands, except per share data)
---------------------------------------- ---------------------------------------
Net Income Shares Per Share Net Income Shares Per Share
(Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts
----------- ------------- ------- ----------- ------------- -------
Net (loss) income $ (627) $ 159
------- -------
Basic EPS
Net (loss) income attributable to (627) 5,549.5 $(.11) 159 5,529.8 $.03
Common Stock
Effect of dilutive securities
Stock options and warrants -- -- -- -- 356.1 --
------- ------- ----- ------- ------- ----
Diluted EPS
Net (loss) income attributable to Common
Stock and assumed option and warrant
exercises $ (627) 5,549.5 ($.11) 159 5,885.9 $.03
======= ======= ===== ======= ======= ====
Options to purchase 299,800 and 303,800 shares of Common Stock in the nine
months and three months ended June 30, 2003, respectively, and options to
purchase 221,050 and 221,050 shares of Common Stock in the nine months and three
months ended June 30, 2002, were not included in the computation of diluted EPS
because the exercise prices exceeded the average market price of the common
shares for these periods. These options were still outstanding at the end of the
related periods. Diluted EPS for the nine months and three months ended June 30,
2003, is the same as basic EPS, as the inclusion of the impact of any common
stock equivalents then outstanding would be anti-dilutive.
8
Global Payment Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
June 30, 2003
NOTE F - EMPLOYEE STOCK-BASED COMPENSATION
As of June 30, 2003, the Company had a number of share incentive programs as
discussed in more detail in our annual report on Form 10-K for the year ended
September 30, 2002. The Company applies the intrinsic value method as outlined
in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations in accounting for stock options and
share units granted under these programs. Under the intrinsic value method, no
compensation expense is recognized if the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of the grant. Accordingly, no compensation cost has been recognized. SFAS
No. 123, "Accounting for Stock-Based Compensation", requires that the Company
provide pro forma information regarding net earnings and net earnings per common
share as if compensation cost for the Company's stock option programs had been
determined in accordance with the fair value method prescribed therein. The
Company has adopted the disclosure portion of SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure", requiring quarterly SFAS
No. 123 pro forma disclosure. The following table illustrates the effect on net
income and earnings per share as if the fair value method had been applied to
all outstanding and unvested awards in each period presented.
Three Months Ended Nine Months Ended
June 30 June 30
2003 2002 2003 2002
---- ---- ---- ----
(Unaudited)
(In millions, except per share data)
Net (loss) earnings attributable to common stock as reported ($627) $159 ($1,825) $ 403
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards,
net of related tax effects (2) (96) (292) (288)
----- ---- ------- -----
Pro forma net earnings (loss), attributable to common stock ($629) $ 63 ($2,117) $ 115
Earnings (loss) per common share:
Basic - as reported ($.11) $.03 ($ .33) $ .07
Basic - pro forma ($.11) $.01 ($ .38) $ .02
Diluted - as reported ($.11) $.03 ($ .33) $ .07
Diluted - pro forma ($.11) $.01 ($ .38) $ .02
9
Global Payment Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
June 30, 2003
NOTE G - ACCOUNTS RECEIVABLE AND SALES DATA FOR UNCONSOLIDATED AFFILIATES
Net sales to unconsolidated affiliates for the three and nine months ended
June 30, 2003 and 2002 respectively, and accounts receivable from
unconsolidated affiliates as of June 30, 2003 and September 30, 2002,
respectively, are as follows:
Net sales to affiliates
Three months ended
-----------------------
6/30/03 6/30/02
-------- --------
Australia $ 3,502 $ 3,104
Abacus-UK -- --
South Africa 63 27
-------- --------
Total $ 3,565 $ 3,131
======== ========
Net sales to affiliates
Nine months ended
-----------------------
6/30/03 6/30/02
-------- --------
Australia $ 10,139 $ 10,214
Abacus-UK -- 6
South Africa 470 216
-------- --------
Total $ 10,609 $ 10,436
======== ========
Accounts receivable from affiliates as of
-----------------------------------------
June 30, 2003 Sept. 30, 2002
------------- --------------
Australia $5,322 $4,686
Abacus-UK 145 131
South Africa 63 165
------ ------
Total $5,530 $4,982
====== ======
NOTE H - SUMMARIZED FINANCIAL INFORMATION FOR GPT AUSTRALIA PTY LTD AND ECASH
PTY LTD
Summarized aggregate financial information for GPT Australia and eCash, in which
the Company owns 50% and 35% non controlling interests, respectively, is as
follows:
All figures are in U.S. dollars.
Nine Months Ended
March 31, 2003
--------------
Net sales $16,273,072
Operating income 622,268
Net income 541,638
As of March 31, 2003
--------------------
Current assets $10,699,189
Non-current assets 187,994
Current liabilities 7,861,540
Non-current liabilities --
Net assets 3,025,643
10
Global Payment Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
June 30, 2003
NOTE I - RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2002, the Financial Accounting Standards Board ("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 has adopted SFAS No. 146 as of January 1, 2003; the impact of the
adoption was not material to the consolidated financial statements.
In December 2002, the FASB issued SFAS No.148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". 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 adopted the disclosure portion of this statement for the fiscal quarter
ended March 31, 2003. The application of the disclosure portion of this standard
had no impact on the Company's consolidated financial position or results of
operations. The FASB recently indicated that it will require stock-based
employee compensation to be recorded as a charge to earnings pursuant to a
standard it is currently deliberating, which FASB believes will become effective
on January 1, 2004. We will continue to monitor the FASB's progress on the
issuance of this standard.
NOTE J - ACCRUED WARRANTY OBLIGATIONS
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires that the guarantor
recognize, at the inception of certain guarantees, a liability for the fair
value of the obligation undertaken in issuing such guarantee. FIN 45 also
requires additional disclosure requirements about the guarantor's obligations
under certain guarantees that it has issued. The initial recognition and
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The disclosure
requirements of this interpretation are effective for financial statement
periods ending after December 15, 2002. The Company adopted the disclosure
requirements of this interpretation in the current quarter. The adoption of this
interpretation did not have a material impact on its consolidated financial
position, results of operations or cash flows. The Company recognizes the
estimated cost associated with its standard warranty on products at the time of
sale. The estimate is based on historical failure rates and current claim cost
experience. The following is a summary of the changes in the Company's accrued
warranty obligation (which is included in accrued expenses) for the reporting
period:
Beginning Balance as of October 1, 2002 $ 340,053
Deduct: Payments (165,178)
Add: Provision 107,995
---------
Ending Balance as of June 30, 2003 $ 282,870
=========
11
Global Payment Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
June 30, 2003
NOTE K - SALE OF A SIGNIFICANT PORTION OF INVESTMENTS IN SOUTH AFRICAN
AFFILIATES
In April 2003, the Company sold a significant portion of its investments in its
South African affiliates. The Company received approximately $1.9 million in
cash for the sale of its entire interest in the cash handling division of
International Payment Systems Pty Ltd. and a major portion of its interest in
Global Payment Technologies Holdings (Pty) Ltd. ("GPTHL"), its South African
gaming affiliate. As a result of this transaction, which did not result in a
gain or loss, the Company's ownership interest in GPTHL has been reduced from
24.2% to 5%. GPTHL's Vukani division is one of the two licensed operators in the
South African route market province of Mpumalanga. The cash received was a
return of all of the Company's advances and investments resulting in the Company
recovering the carrying value of such advances and investments. The Company no
longer exercises significant influence on this entity and will account for this
remaining investment prospectively on a cost basis.
12
Global Payment Technologies, Inc.
June 30, 2003
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Nine months ended June 30, 2003 compared with nine months ended June 30, 2002
Sales
Net sales decreased by 12.2%, or $2,821,000, to $20,380,000 in the nine months
ended June 30, 2003 as compared with $23,201,000 in the comparative prior-year
period. This decrease was primarily due to lower demand for the Company's Argus
gaming product in Eastern Europe, due principally to product issues, which have
since been resolved, and lower sales in other parts of the world, offset in part
by increased sales of the Company's beverage and vending products. Sales of the
Company's beverage and vending products for the nine months ended June 30, 2003
were $4,137,000, or 20.3% of net sales, as compared with $1,531,000, or 6.6% of
net sales, in the comparable prior-year period. This increase was the result of
the Company's new Aurora beverage and vending product, for which sales
principally commenced in January 2003. Sales of the Company's gaming products
for the nine months ended June 30, 2003 were $16,243,000, or 79.7% of net sales,
as compared with $21,670,000, or 93.4% of net sales, in the comparable
prior-year period.
Gross Profit
Gross profit decreased to $3,702,000, or 18.2% of net sales, in the nine months
ended June 30, 2003 from $6,389,000, or 27.5% of net sales, in the comparative
prior-year period. This decrease in gross profit, as a percentage of net sales,
was primarily the result of substantial startup costs relating to new products,
principally higher initial purchasing costs and less efficient manufacturing
operations on the Company's new beverage and vending product. In this nine-month
period the Company's new Aurora product accounted for approximately 17.5% of net
sales as compared to none in the same prior year-period. While improvement from
lower purchasing costs and manufacturing efficiencies is expected in the future,
the Company's margins will continue to be affected by the mix of products sold
as well as sales volumes.
Operating Expenses
Operating expenses were $6,843,000, or 33.6% of net sales, in the nine months
ended June 30, 2003 as compared with $6,492,000, or 28.0% of net sales, in the
comparative prior-year period. This increase of $351,000 includes a $130,000
charge for remaining contractual payments to the Company's former Chairman and
CEO, as well as the closing of the Company's Valley Stream office. In addition,
the Company had higher engineering costs of $345,000, increased professional
fees of $135,000 and increased recruiting costs of $117,000, offset in part by
lower staffing costs.
Income Taxes
With respect to the (benefit) provision for income taxes, the effective rate was
(38.5%) as compared to 6.1% in the prior-year period. This increase in the
effective rate is the result of the Company's change in mix of earnings of its
own operations and earnings from its foreign affiliates.
Net Income
Net (loss) income for the nine months ended June 30, 2003 was ($1,825,000), or
($0.33) per share, as compared with net income of $403,000, or $0.07 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, except for South Africa which effective April 2003 is accounted
for on a cost basis. Included in the results of operations for the nine months
ended June 30, 2003 and 2002 are the Company's share of net profits of these
affiliates of $387,000 and $631,000, respectively. In the nine months ended June
30, 2003 and 2002, equity in income of unconsolidated affiliates increased by
approximately $185,000 and $350,000, respectively, which represents the
recognition of the Company's previously deferred share of the gross profit on
intercompany sales to its affiliates that have now been recognized by these
affiliates. Excluding the intercompany gross profit adjustment, the Company's
share of net income of these unconsolidated affiliates was $202,000 and $281,000
for the nine months ended June 30, 2003 and 2002, respectively. In addition, the
Company owns 100% of 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.
13
Global Payment Technologies, Inc.
June 30, 2003
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results of Operations (continued)
Three months ended June 30, 2003 compared with three months ended June 30, 2002
Sales
Net sales increased by 13.0%, or $845,000, to $7,348,000 in the three months
ended June 30, 2003 as compared with $6,503,000 in the comparative prior-year
period. This increase is primarily the result of higher sales of the Company's
beverage and vending products offset by lower sales in Russia and Latin America.
Sales of the Company's beverage and vending products for the three months ended
June 30, 2003 were $2,052,000, or 27.9% of net sales, as compared with $844,000,
or 13.0% of net sales, in the comparable prior-year period. This increase was
the result of the Company's new Aurora beverage and vending product, for which
sales principally commenced in January 2003. Sales of the Company's gaming
products for the three months ended June 30, 2003 were $5,296,000, or 72.1% of
net sales, as compared with $5,659,000, or 87.0% of net sales, in the comparable
prior-year period.
Gross Profit
Gross profit decreased to $1,189,000, or 16.2% of net sales, in the three months
ended June 30, 2003 from $1,895,000, or 29.1% of net sales, in the comparative
prior-year period. This decrease in gross profit, as a percentage of net sales,
was primarily the result of substantial startup costs relating to new products,
principally higher initial purchasing costs and less efficient manufacturing
operations on its new beverage and vending product. In this three-month period
the Company's new Aurora product accounted for approximately 24.0% of net sales
as compared to none in the same prior year-period. While improvement from lower
purchasing costs and manufacturing efficiencies is expected in the future, the
Company's margins will continue to be affected by the mix of products sold as
well as sales volumes.
Operating Expenses
Operating expenses decreased in absolute dollar terms by $9,000 to $2,166,000 in
the three months ended June 30, 2003 as compared with $2,175,000 in the
comparative prior-year period. On a percentage of sales basis, operating
expenses decreased to 29.5% from 33.4% due to increased sales levels this
quarter which were achieved without increasing our existing operating structure.
The Company will continue to monitor its overhead structure to properly service
its customers in the most efficient manner and at the same time tightly control
expenses.
Income Taxes
With respect to the (benefit) provision for income taxes, the effective rate was
(36.6%) as compared to 0.0% in the prior-year period. This increase in the
effective rate is the result of the Company's change in mix of earnings of its
own operations and earnings from its foreign affiliates.
Net Income
Net (loss) income for the quarter was ($627,000), or ($.11) per share, as
compared with net income of $159,000, or $.03 per share, in the comparative
prior-year period. As an extension of its operations, the Company owns interests
in various unconsolidated affiliates in key regions of the world, all of which
are accounted for using the equity method, except for South Africa, which
effective April 2003 is accounted for on a cost basis. Included in the results
of operations for the three months ended June 30, 2003 and 2002 are the
Company's share of net profits of these affiliates of $45,000 and $395,000,
respectively. In the three months ended June 30, 2003 and 2002, equity in income
of unconsolidated affiliates increased by approximately $20,000 and $250,000,
respectively, which represents the recognition of the Company's previously
deferred share of the gross profit on sales to its affiliates that have now been
recognized by these affiliates. Excluding the intercompany gross profit
adjustment, the Company's share of net income of these unconsolidated affiliates
was $25,000 and $145,000 for the three months ended June 30, 2003 and 2002,
respectively. In addition, the Company owns 100% of 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.
14
Global Payment Technologies, Inc.
June 30, 2003
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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
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
expansion throughout fiscal 2003 and beyond.
At June 30, 2003, the Company's cash and cash equivalents were $1,612,000 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 was $7,000,000 and replaced 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.
In May 2003, the Company reached an agreement with its bank to amend its credit
facility which now includes new financial covenants. Further, the Company used
the proceeds from the sale of its South African affiliate investment to pay down
its newest term loan and the revolving line of credit by $1,400,000 and
$500,000, respectively. The monthly payments on both term loans will remain the
same. In addition, based upon the Company's analysis of its cash flow it reduced
its RLC facility from $3.5 million to $2.0 million and has provided the bank
additional security in its inventory and cash. The term loans have been
classified as a short term liability due to the agreed upon repayment terms. The
RLC has been classified as a long term liability because no payments are due
within the next twelve months. As of June 30, 2003, the Company is in compliance
with its debt covenants and outstanding borrowings under the term loans and the
RLC were $1,094,000 and $1,000,000 respectively.
Net cash provided by operating activities was $152,000 in the nine months ended
June 30, 2003. This amount is due to a net loss for the period, adjusted for
non-cash items, of ($1,769,000) increased accounts receivable of $769,000 and
decreased accrued expenses and other current liabilities of $15,000, reduced by
decreased inventory of $1,113,000, decreased prepaid expenses and other assets
of $31,000, increased accounts payable of $851,000, and decreased income taxes
receivable of $710,000. Net cash provided by operating activities was $2,333,000
in the nine months ended June 30, 2002. This amount is due to net income for the
period, adjusted for non-cash items, of $607,000 and decreased accounts
receivable of $3,624,000, offset, in part by, decreased accrued expenses of
$294,000, decreased income taxes payable $113,000, decreased accounts payable of
$659,000, increased prepaid expenses and other assets of $86,000, increased
capitalized software costs of $298,000 and increased inventory of $448,000. The
Company sells its products primarily to international markets on terms generally
greater than 30 days. Further the Company has agreements with its affiliates,
which extend payment terms in excess of 90 days. Based upon history, and the
Company's current review of its accounts receivable, it believes it is
adequately reserved for potentially uncollectable accounts.
Cash provided by investing activities for the nine months ended June 30, 2003
amounted to $1,214,000 as compared with cash used in investing activities of
$1,483,000 in the prior-year period. Investments in property and equipment in
the nine months ended June 30, 2003 amounted to $361,000 as compared with
$735,000 in 2002. In addition, the Company advanced its joint ventures
approximately $323,000 in the nine months ended June 30, 2003, as compared with
$866,000 in the prior year period. For the period ended June 30, 2003, the
Company received $1,877,000 from the sale of a significant portion of its South
African affiliate investment. For the nine months ended June 30, 2002, the
Company received $118,000 from the sale of its investment in its China
affiliate. In the nine months ended June 30, 2003 the Company received a
dividend from its South African affiliate investment in the amount of $21,000.
Cash used in financing activities in the nine months ended June 30, 2003
consisted of net repayments of bank borrowings of $1,418,000, offset in part by
$60,000 received from the exercise of stock options. Cash used in financing
activities in the nine months ended June 30, 2002 consisted of net repayments of
bank borrowings of $895,000, offset in part by $12,000 received from the
exercise of stock options.
15
Global Payment Technologies, Inc.
June 30, 2003
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Liquidity and Capital Resources (continued)
At June 30, 2003, future minimum payments under noncancellable operating leases
and payments to be made for long-term bank debt maturing over the next five
years are as follows:
Fiscal Operating Debt
Year Leases Repayments
---- ------ ----------
2003 $ 97,500 $ 302,000
2004 367,000 792,000
2005 360,000 1,000,000
2006 278,000 --
2007 -- --
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 June 30, 2003, purchase order commitments approximated $6.9
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, should 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.
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.
16
Global Payment Technologies, Inc.
June 30, 2003
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Critical Accounting Policies (continued)
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 made by
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 June 30, 2003, the Company's accounts receivable balance was $7.3 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, but
influential, 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.
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.
17
Global Payment Technologies, Inc.
March 31, 2003
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Critical Accounting Policies (continued)
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, which
has been terminated and paid through August 31, 2003, from an entity partially
owned by the Company's former Chairman and Chief Executive Officer. The Company
believes that all such transactions are effected on an arms-length basis. See
Note G for a summary of affiliate balances and transactions.
Recently Issued Accounting Standards
In July 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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 has adopted SFAS No. 146 as
of January 1, 2003; the impact of the adoption was not material to the
consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". 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 adopted the disclosure portion of this statement for the fiscal quarter
ended March 31, 2003. The application of the disclosure portion of this standard
had no impact on the Company's consolidated financial position or results of
operations. The FASB recently indicated that it will require stock-based
employee compensation to be recorded as a charge to earnings pursuant to a
standard it is currently deliberating, which the FASB believes will become
effective on January 1, 2004. We will continue to monitor the FASB's progress on
the issuance of this standard.
18
Global Payment Technologies, Inc.
March 31, 2003
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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; the
Company's dependence on a limited base of customers for a significant portion of
sales; 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 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; and other risks described
in the Company's Securities and Exchange Commission ("SEC") filings.
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 SEC's rules and forms, and (2) that this
information is accumulated and communicated to our management, including our
Interim Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure. In March 2003, under the
supervision and review of our Interim 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 Interim 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. 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.
19
Global Payment Technologies, Inc.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's 2003 Annual Meeting of Stockholders held on May 22, 2003,
stockholders elected the following two persons to serve as Class II
Directors of the Company, by the following vote:
For Against Withheld
--- ------- --------
Martin H. Kern 4,762,118 124,880 663,518
Edward Seidenberg 4,762,118 124,880 663,518
Henry B. Ellis, a Class III Director, continues to serve as director whose
term expire at the 2004 Annual Meeting.
Richard E. Gerzof, a Class I Director, continues to serve as a director
whose term expires at the 2005 Annual Meeting.
No other matters were voted upon at the meeting.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit - 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Exhibit - 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Exhibit - 32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Exhibit - 4.1(l) Amendment and Waiver dated August 1, 2003 to the Credit
Agreement dated September 10, 2002 issued to the Company by JP Morgan
Chase.
b) Reports on Form 8-K
On August 5, 2003, the Company filed a Current Report on Form 8-K dated
August 5, 2003 under Item 12 announcing the Company's financial results
for the quarter ended June 30, 2003. This filing included the Company's
financial statements (balance sheet and income statements).
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: August 7, 2003
20