UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998 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.)
20 East Sunrise Highway, Suite 201, Valley Stream, New York 11581
(Address of principal executive offices) (Zip Code)
(516) 256-1000
(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
past 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 8, 1999 5,372,100
<PAGE>
Global Payment Technologies, Inc.
Index
PART I. FINANCIAL INFORMATION
Page Number
-----------
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1998 and
September 30, 1998 3
Consolidated Statements of Income - Three Months ended
December 31, 1998 and 1997 4
Consolidated Statements of Cash Flows -
Three Months ended December 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 2 Above.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
2
<PAGE>
GLOBAL PAYMENT TECHNOLOGIES, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
-------- --------
(Dollar amounts in thousands,
except share data)
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 820 $ 834
Accounts receivable from affiliates 10,253 4,497
Accounts receivable, less allowance for doubtful accounts
of $256 and $248, respectively 1,518 5,854
Inventory, less allowance for obsolescence of $990 and
$942, respectively 8,903 8,090
Prepaid expenses and other current assets 371 254
Deferred income tax benefit 737 584
-------- --------
Total current assets 22,602 20,113
Property and equipment, net 1,747 1,758
Investments in unconsolidated affiliates 824 582
Other assets 152 130
-------- --------
Total assets $ 25,325 $ 22,583
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 3,770 $ 4,097
Accounts payable 3,962 2,044
Accrued expenses and other current liabilities 2,762 2,925
Income taxes payable 817 430
-------- --------
Total current liabilities 11,311 9,496
-------- --------
Shareholders' equity:
Common Stock, 20,000,000 shares authorized; $.01 par value,
5,571,100 and 5,570,300 shares issued 56 56
Additional paid-in capital 8,348 8,334
Retained earnings 6,880 5,744
-------- --------
15,284 14,134
Less: Treasury stock, at cost, 206,000 and 165,000 shares (1,270) (1,047)
-------- --------
Total shareholders' equity 14,014 13,087
-------- --------
Total liabilities and shareholders' equity $ 25,325 $ 22,583
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
GLOBAL PAYMENT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended December 31,
---------------------------------
1998 1997
----------- -----------
(Dollar amounts in thousands,
except share and per share data)
<S> <C> <C>
Net sales
Affiliates $ 8,935 $ 121
Non-affiliates 3,367 7,565
----------- -----------
12,302 7,686
Cost of sales 7,450 4,385
----------- -----------
Gross profit 4,852 3,301
Operating expenses 2,887 2,449
----------- -----------
Income from operations 1,965 852
Other (expense) income:
Equity in (loss) income of unconsolidated affiliates (185) 57
Interest (expense) income, net (88) 27
----------- -----------
Total other (expense) income (273) 84
----------- -----------
Income before provision for income taxes 1,692 936
Provision for income taxes 556 353
----------- -----------
Net income $ 1,136 $ 583
=========== ===========
Net income per share:
Basic $ .21 $ .11
=========== ===========
Diluted $ .20 $ .10
=========== ===========
Common shares used in computing net income per share amounts:
Basic 5,370,389 5,506,377
=========== ===========
Diluted 5,725,886 5,997,837
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
GLOBAL PAYMENT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended December 31,
------------------------------
1998 1997
------- -------
(Dollar amounts in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,136 $ 583
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Equity in loss (income) of unconsolidated affiliates 185 (57)
Depreciation and amortization 189 150
Provision for losses on accounts receivable 24 39
Provision for inventory obsolescence 146 34
Deferred income taxes (153) (7)
Changes in operating assets and liabilities:
Increase in accounts receivable (1,869) (555)
Increase in inventory (959) (650)
Increase in prepaid expenses and other assets (139) (36)
Increase (decrease) in accounts payable 1,918 (273)
(Decrease) increase in accrued expenses and other current liabilities (163) 314
Increase in income taxes payable 387 233
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 702 (225)
------- -------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net of proceeds from disposals (178) (196)
Investments in unconsolidated affiliates (2) (77)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (180) (273)
------- -------
FINANCING ACTIVITIES:
Net repayments of note payable to bank (327) --
Purchase of treasury stock (223) --
Issuance of stock upon exercise of stock options and warrants 14 1
------- -------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (536) 1
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (14) (497)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 834 1,913
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 820 $ 1,416
======= =======
CASH PAID DURING THE PERIOD FOR:
Interest $ 86 $ --
======= =======
Income taxes $ 321 $ 189
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Global Payment Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Global Payment
Technologies, Inc. (the "Company"), including the September 30, 1998
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, 1998 are not necessarily indicative of the results
that may be expected for the fiscal year ending September 30, 1999. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-KSB for the year
ended September 30, 1998.
NOTE B - RECLASSIFICATION
Certain prior-year financial statement amounts have been reclassified to conform
to the current year's presentation.
NOTE C - STOCK REPURCHASE
In June 1998, the Board of Directors approved a common stock repurchase plan,
providing for the purchase of up to 500,000 shares of the Company's common stock
over a one-year period, using a separately established line of credit. In
September 1998, the Company purchased 165,000 shares of its common stock at a
cost of $1,047,000, and in October 1998, the Company purchased 41,000 shares of
its common stock at a cost of $223,000. In addition, the Company purchased an
additional 3,200 shares of its common stock at a cost of $24,000 during January
1999.
NOTE D - NET INCOME PER COMMON SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("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.
6
<PAGE>
Global Payment Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 1998
NOTE D - NET INCOME PER COMMON SHARE (continued)
A reconciliation between the numerators and denominators of the basic and
diluted EPS computations for net income appears below:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
December 31, 1998 December 31, 1997
(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
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income $1,136 $ 583
------ ------
Basic EPS
Net income attributable to Common Stock 1,136 5,370.4 $ .21 583 5,506.4 $ .11
Effect of dilutive securities
Stock options and warrants -- 355.5 .01 -- 491.4 .01
------ -------- -------- ------ -------- --------
Diluted EPS
Net income attributable to Common
Stock and assumed option and warrant
exercises $1,136 5,725.9 $ .20 $ 583 5,997.8 $ .10
====== ======== ======== ====== ======== ========
</TABLE>
Options to purchase 85,313 and 36,000 shares of Common Stock in the three months
ended December 31, 1998 and 1997, respectively, 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.
NOTE E - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998).
While the Company operates in international markets, it does so presently
without the use of derivatives and therefore SFAS No. 133 is not currently
applicable.
In the first quarter of 1998, the Company adopted 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
7
<PAGE>
Global Payment Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 1998
NOTE E - RECENTLY ISSUED ACCOUNTING STANDARDS (continued)
classified as available-for-sale, foreign 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 fiscal
years 1998 and 1997, and for the quarters ended December 31, 1998 and 1997, the
Company's operations did not give rise to 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 all periods presented.
8
<PAGE>
Global Payment Technologies, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three months ended December 31, 1998 compared with three months ended December
31, 1997
Sales
Net sales increased by 60%, or $4,616,000 to $12,302,000 in the three months
ended December 31, 1998 as compared with $7,686,000 in the comparative prior
year period. The Company attributed the strong revenue growth to increased
demand for its bill validator products in the international gaming industry.
Gross Profit
Gross profit increased to $4,852,000, or 39.4% of net sales, in the three months
ended December 31, 1998 from $3,301,000, or 42.9% of net sales, in the
comparative prior-year period. The decrease in gross profit as a percentage of
sales was primarily the result of a change in the Company's distribution method
which began during the fourth quarter of fiscal 1998, whereby the Company sells
directly to its Australian and South African affiliates which subsequently sell
the Company's products into those respective markets. Previously, the Company
sold directly to the customer, recognizing additional revenues and the related
commission expense. As a result of this change, the Company expects future
operating results to reflect a lower gross profit percentage from these sales
and a commensurate reduction in sales commissions within its operating expenses.
Operating Expenses
Operating expenses increased to $2,887,000, or 23.5% of net sales, in the three
months ended December 31, 1998 as compared with $2,449,000, or 31.9% of net
sales, in the comparative prior-year period. The primary reason for the increase
in operating expenses was additional staffing and related payroll costs to
support the Company's growth strategy in fiscal 1999 and beyond, and to a lesser
extent, the inclusion of the operating expenses of the Company's 70%-owned
European affiliate, formed in June 1998 and consolidated in the results of the
Company's operations thereafter. These increased costs were offset by a
reduction in sales commissions on sales to Australia and South Africa as a
result of the shift in the distribution method noted above.
Net Income
Net income for the quarter was $1,136,000, or $0.20 per share, as compared with
$583,000, or $0.10 per share, in the comparative prior-year period. The Company
owns a one-third interest in its South African affiliate and 50% non-controlling
interests in a local sales and service organization in Australia and in a
manufacturing firm in China, all of which are accounted for using the equity
method. Included in the results of operations for the three months ended
December 31, 1998 and 1997 are the Company's share of (net losses) net profits
of these affiliates of ($185,000) and $57,000, respectively. In the three months
ended December 31, 1998, equity in income of unconsolidated affiliates has been
reduced by approximately $425,000, which represents the gross profit on the
Company' sales to its affiliates that have not yet been recognized by the
affiliates. Excluding the $425,000 elimination of inter-company gross profit,
the Company's share of net income of these unconsolidated affiliates was
$240,000. In addition, the Company owns 70% of GPT-Europe Limited, a local sales
and service organization in Europe whose results are not significant and 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 manufacturing and product development
capabilities and sales and marketing operations, and to a lesser degree,
interest payments on the Company's indebtedness. The Company believes that its
available resources, including its credit facilities, should be sufficient to
meet its obligations as they become due and permit continuation of its planned
expansion throughout fiscal 1999 and beyond.
9
<PAGE>
Global Payment Technologies, Inc.
Liquidity and Capital Resources (continued)
At December 31, 1998, the Company's cash and cash equivalents were $820,000 as
compared with $834,000 at September 30, 1998. In February 1999, the Company
renewed its $5,000,000 line of credit with The Chase Manhattan Bank which allows
for borrowings on an unsecured basis and expires on March 31, 2000. Outstanding
borrowings will bear interest at the bank's prime rate per annum or, at the
Company's option, for borrowings greater than $500,000, LIBOR plus 175 basis
points per annum. As of December 31, 1998, $2,500,000 was outstanding under this
line of credit.
In September 1998, the Company entered into an agreement with The Chase
Manhattan Bank for an additional unsecured line of credit in the amount of
$3,500,000 for the repurchase of up to 500,000 shares of the Company's Common
Stock. Outstanding borrowings bear interest at the bank's prime rate per annum
or, at the Company's option, for borrowings greater than $500,000, LIBOR plus
175 basis points per annum. As of December 31, 1998, $1,270,000 was outstanding
under this line of credit which expires on March 31, 2000.
Net cash provided by operating activities was $702,000 in the three months ended
December 31, 1998. This amount is due to net income for the period, adjusted for
non-cash items, of $1,527,000, increased accounts payable of $1,918,000 and
increased income taxes payable of $387,000, offset by increased accounts
receivable, primarily to affiliates, of $1,869,000, increased inventory of
$959,000, an increase in prepaid expenses and other assets of $139,000, and a
decrease in accrued expenses and other current liabilities of $163,000. Net cash
used in operating activities was $225,000 in the three months ended December 31,
1997. This amount was due to increased inventory of $650,000, increased accounts
receivable of $555,000 and decreased accounts payable of $273,000, offset, in
part, by net income for the period, adjusted for non-cash items, of $742,000, an
increase in accrued expenses and other current liabilities of $314,000 and an
increase in income taxes payable of $233,000.
Cash used in investing activities in the three months ended December 31, 1998
amounted to $180,000 as compared with $273,000 in the prior year period.
Investments in property and equipment in the three months ended December 31,
1998 amounted to $178,000 as compared with $196,000 in 1997. In addition, the
Company loaned its joint ventures approximately $77,000 in the three months
ended December 31, 1997. These loans have been added to the investment in
unconsolidated affiliates based on the terms of the related agreements.
Cash used in financing activities in the three months ended December 31, 1998
consisted of net repayments of bank borrowings of $327,000 and the repurchase of
the Company's common stock for $223,000, offset by proceeds of $14,000 received
from the exercise of stock options and warrants.
Quantitative and Qualitative Disclosures About Market Risk
In the opinion of management, the Company's operations do not give rise to
transactions or financial instruments which are subject to material quantitative
or qualitative market risk.
Year 2000:
The Company has developed a comprehensive plan to address Year 2000 issues. The
plan addresses two main areas: (a) information systems and (b) supply chain
readiness. To oversee the process, the Company has established a Steering
Committee comprised of senior executives. The Company has identified minimal
potential deficiencies related to Year 2000 in its information systems and is in
the process of addressing them through upgrades and other remediation.
Completion of the remediation and testing is expected in the summer
10
<PAGE>
Global Payment Technologies, Inc.
Year 2000 (continued):
of 1999. To mitigate the risk of Year 2000 non-compliance by third parties, the
Company has identified, contacted and met with critical inventory suppliers. The
Company is also in the process of communicating with its larger customers about
their year 2000 readiness. These meetings and communications are ongoing and the
Company is assessing the state of readiness of the various suppliers and
customers. The Company believes it is difficult to specifically identify the
cause of the most reasonable worst case Year 2000 scenario, however, based upon
its work to date, the Company believes it would likely be the result of the
failure of third parties to be Year 2000 compliant. Accordingly, the Company
will formulate contingency plans to limit, to the extent possible, lost revenues
and other adverse effects arising from third party failures. Such plans would
necessarily be limited to matters over which the Company can reasonably control
and may require the acceleration of certain shipments that may necessitate
adjustments to the production and procurement schedules. Incremental
out-of-pocket costs incurred through December 31, 1998 have not been significant
and, based upon the Company's current estimates, the costs of its Year 2000
program are expected to be immaterial. Such costs do not include internal
employee costs and costs related to the deferral of other information technology
projects. While the Company does not have a system to track internal employee
costs specifically related to the Year 2000, those costs are not expected to be
material to the Company's results of operations or financial condition. The
Company's Year 2000 efforts are ongoing and its overall plan, as well as the
implementation of contingency plans, will continue to evolve as new information
becomes available. While the Company anticipates continuity of its business
activities, that continuity will be dependent upon its ability, and the ability
of third parties with whom the Company relies on directly, or indirectly, to be
Year 2000 compliant.
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 Company's and
its customers' and vendors' readiness for Year 2000 compliance; 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 filings.
11
<PAGE>
Global Payment Technologies, Inc.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit # Description
--------- -----------
27 Financial Data Schedule (1)
- ----------
(1) Filed herewith.
b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this report
is filed.
12
<PAGE>
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 12, 1999
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 820
<SECURITIES> 0
<RECEIVABLES> 12,027
<ALLOWANCES> 256
<INVENTORY> 8,903
<CURRENT-ASSETS> 22,602
<PP&E> 3,256
<DEPRECIATION> 1,510
<TOTAL-ASSETS> 25,325
<CURRENT-LIABILITIES> 11,311
<BONDS> 0
0
0
<COMMON> 56
<OTHER-SE> 13,958
<TOTAL-LIABILITY-AND-EQUITY> 25,325
<SALES> 12,302
<TOTAL-REVENUES> 12,302
<CGS> 7,450
<TOTAL-COSTS> 10,337
<OTHER-EXPENSES> 185
<LOSS-PROVISION> 24
<INTEREST-EXPENSE> 88
<INCOME-PRETAX> 1,692
<INCOME-TAX> 556
<INCOME-CONTINUING> 1,136
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,136
<EPS-PRIMARY> .21
<EPS-DILUTED> .20
</TABLE>
