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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 0-21738
ON-POINT TECHNOLOGY SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
NEVADA 33-0423037
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(State of incorporation) (I.R.S. Employer Identification)
8444 Miralani Drive
San Diego, California 92126
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(Address of registrant's executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 621-5050
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Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on
which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or if 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[ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB [X].
The Registrant's revenues for fiscal year ended December 31, 1997 were
$17,439,000
The aggregate market value of the registrant's common stock held by
nonaffiliates of the Registrant is $30,426,000 as of March 2, 1998.
The number of shares outstanding of the Registrant's common stock is 9,509,255
as of March 2, 1998.
Documents Incorporated by Reference: The information required by Part III of
this Report on Form 10-KSB is incorporated by reference from the Registrant's
definitive 1998 proxy statement to be filed in accordance with Rule 240. 14a-101
not later than April 30, 1998.
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ITEM 1. DESCRIPTION OF BUSINESS
GENERAL On-Point Technology Systems, Inc., formerly Lottery Enterprises,
Inc. (the "Company" or "ONPT"), is headquartered in San Diego, California and
was incorporated in Nevada in March of 1990. ONPT designs, manufactures, sells,
leases, and services high-security automated point of sale transaction vending
terminals for the sale of instant-winner lottery tickets (the "Instant Ticket
Retailer" or "ITR(R)"), pull-tab lottery tickets (the "Pull-Tab Retailer" or
"PTR(TM)"), prepaid phone cards and "smart cards" (the "Debit Card Retailer" or
"DCR(TM)") and vending terminals that dispense high value products such as cell
phones and pagers. The Company's ITR and DCR terminals accept bills of various
denominations, provide a secure means of product distribution and include
software which automatically accounts for product sales and inventories. The ITR
terminals are sold or leased to state and provincial governments in the United
States and Canada and to other foreign governments and their licensees. The DCR
terminals are sold or leased to commercial customers and to governmental
entities and their licensees. The Company has also developed two additional
products, the "Multiple Product Retailer" or "MPR(TM)" machine, which vends both
lottery tickets and prepaid phone cards, and the Billpayer (TM) which allows
customers to pay utility bills from remote locations. In addition, the Company
has introduced certain specially designed dispensing technology to South
America, Asia, and Europe.
On January 9, 1996, the Board of Directors appointed Frederick Sandvick
as the President, Chief Executive Officer and Chairman of the Board of the
Company to oversee the strategic plans of the Company, to consider all the
business issues of the Company and to develop and implement plans to handle such
issues. Mr. Sandvick is an attorney and certified public accountant as well as
the president of Vanguard Strategies, Inc. ("VSI"), a private strategic planning
company. From 1990 to 1995, Mr. Sandvick was an executive officer with a New
York Stock Exchange listed company in the gaming industry. The Board of
Directors considered many options and believed that the appointment of Mr.
Sandvick was the most effective first step towards implementing its strategic
plans and enhancing shareholder value.
During 1996, the Company restructured its operations and improved its
financial position. During the first and second quarters of 1996, the Company
underwent a "right sizing" effort in order to provide its high quality products
and services at lower costs. In that process, the Company moved its corporate
offices and production to new facilities which were better suited to fit the
Company's administrative and manufacturing needs, and were less expensive to
operate. The Company also reduced personnel and overhead costs and reassigned
duties to other personnel to achieve greater efficiencies. The Company's
restructured operations enabled the Company to improve operating margins and
dramatically reduce general and administrative expenses. The above described
restructuring was accomplished without any recapitalization or debt issuance
that was not in the Company's ordinary course of business.
The Company's strategic plans include diversifying its product lines
and enhancing its existing products. In that regard, during 1996 the Company
changed its corporate name to On-Point Technology Systems, Inc. from Lottery
Enterprises, Inc. in order to obtain broader recognition by current and
potential customers of the Company's expanding line of technologies and to
provide the capital markets with a better definition of the Company's identity.
During 1997, the Company increased revenue by 47% primarily as a result
of both ITR and DCR product sales. The increases in sales combined with
continued operating efficiencies effected during 1996 allowed the Company to
generate substantial income increases in 1997. Through December 31, 1997, the
Company had reported seven consecutive profitable quarters as well as seven
straight comparative increases in quarterly earnings.
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INSTANT TICKET RETAILER GENERAL In March 1991, the Company received its
first contract to install up to 2,000 ITR terminals from the State of Virginia.
The Company has since signed contracts to provide terminals to numerous state
lottery customers including California, Missouri, Washington, Pennsylvania, New
York, Illinois, Connecticut, and the Provinces of Ontario and Quebec, as well as
certain foreign countries. Pursuant to these contracts, from its inception
through December 31, 1997, the Company had sold or leased approximately 13,200
ITR terminals, of which 1,200 were sold or leased during 1997. The ITR terminals
have been placed in supermarkets, convenience stores, bowling alleys,
restaurants with bars, and other locations. The Company also enters into service
contracts in connection with sales of ITR terminals pursuant to which it
receives monthly maintenance fees (see "Customer Service, Training and Product
Repair" herein).
THE INDUSTRY Lotteries are operated by state and foreign governmental
authorities and their licensees in over 155 jurisdictions. Governments use
lotteries primarily as a means of generating non-tax revenues. In the United
States, lottery revenues frequently are designated for particular purposes, such
as education, economic development, conservation, transportation and aid to the
elderly. Many states have become increasingly dependent on lotteries as a
significant source of funding for these purposes.
While the specific amounts vary substantially from state to state, in
general it is estimated from industry reports that about 50% of gross lottery
revenues in the United States is returned to the public in the form of prizes.
Approximately 33% is used to support specific public programs or is contributed
to the state's general fund. Typically, 5% to 6% is reserved for
point-of-purchase commissions for the retailer, and the remainder is used to
fund lottery operations, including the cost of advertising and, depending upon
the state and the type of lottery, amounts paid to vendors such as ONPT.
As of December 1997, lotteries were operated in 37 states, the District
of Columbia and five provinces of Canada. Government lotteries can be
categorized into three principal groups: the traditional draw-type games,
on-line games and "instant" ticket games. Traditional lotteries, in which
drawings are held once a week, while popular abroad, are rare in the United
States. On-line varieties generally refer to computerized games such as lotto
and daily pick 3/4/5/6 games, in which players make their own selections.
Alternatively, they involve low-stakes video gambling, such as poker, blackjack,
bingo and keno. Instant ticket games consist of preprinted tickets in which
players scratch off a coating or pull off tabs to determine whether they have
purchased a winning ticket.
On-line lotteries generate significantly more revenue than both the
draw-type and instant ticket games. The Company estimates from industry reports
that on-line ticket sales account for approximately 60% of total U.S. lottery
sales and that scratch-off games (the type of instant winner game predominantly
used by state lotteries) hold an approximately 40% market share. The instant
ticket games' market share has increased over the past several years as lottery
organizations have realized that the more instant games being sold at one time
increases sales. Some states currently offer up to 30 different games
simultaneously. Notwithstanding the current prevalence of on-line games, the
Company believes that instant ticket games offer a significant potential for
market growth. Of the states conducting instant ticket lotteries, 29 currently
use terminals to dispense instant tickets. Traditionally, instant winner tickets
had been manually dispensed by the retailer. This distribution method, in
addition to being labor intensive, requires the retailer to maintain rigorous
inventory, accounting and security controls, because the tickets are treated as
cash equivalents. The Company's ITR terminals provide additional security and
automate these procedures, resulting in greater efficiencies and flexibility to
offer multiple games simultaneously.
Recent advances in print technology have improved the security of Pull
Tab tickets to the levels demanded by the lottery industry. As a result several
U.S lottery jurisdictions have introduced Pull Tab ticket games. The Company's
PTR terminals and Versatile Ticket Retailer ("VTR(TM)") terminals, which
dispense both instant tickets and pull tab tickets, bring the same benefits of
increased security, automated accounting and enhanced promotion at the point of
sales to Pull Tab tickets as the ITR terminals have provided to instant tickets.
THE ITR, PTR & VTR LOTTERY TERMINALS In 1990 the Company introduced
the ITR-7000 terminal, which was replaced with the upgraded ITR-7500 in August
1992. This series of products has been installed at sites throughout the United
States. In 1995 the Company introduced the esthetically updated ITR-8500
terminal. In 1996 the Company developed the first 12 bin ITR terminal. This
product, another ONPT innovation, allows lotteries to vend up to 12 different
games simultaneously. During 1996 the Company also developed the 8 bin slim-line
terminal (which dispenses 8 games in a terminal that requires half the retail
space of previous 8 bin models). The slim-line terminal has the smallest
serviceable footprint in the industry. During 1997, as a result of the average
mean time to failure rate of the Company's dispenser being in excess of nine
years, the Company was able to initiate a program of retrofitting older
terminals to incorporate new technologies.
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The Company believes that the lottery terminals substantially expand
the market for retail sales of instant winner lottery tickets, in that they are
designed to streamline and enhance the operation and marketing of instant winner
tickets by providing greater opportunity for the impulse purchase. The lottery
terminals are designed to provide secure, high visibility points of presence at
the point of sale while using a minimum of floor space. The terminals are
available in several models which house four to twelve games. The units are
available in counter-top and stand alone models (the latter incorporating a
security storage cabinet). All models accept bills in $1, $5, $10, and $20
denominations and can be manufactured to accommodate coins or foreign currency.
The customer inserts a bill in the terminal, receives credit, and then
selects from among any or all of the games offered by pressing the button
located immediately under the appropriate ticket display. The terminals
generally dispense either a single ticket or a string of uncut tickets, which
move past a window, allowing the customer to view the purchase. Based on its
knowledge and experience the Company believes that customers prefer to see the
actual tickets being dispensed. The Company's patented Windows feature is unique
in this regard among similar products available to lottery jurisdictions. The
Company's lottery terminals incorporate other patented features which in the
Company's opinion enhance the likelihood of impulse purchases of game tickets.
Each lottery terminal includes a display, which shows instructional and
promotional information to the customer. The terminal can also be equipped with
the "Grabber", a multi-color LED sign, which is mounted on top of the terminal
and includes a built-in memory. The Grabber provides the ability to promote new
games or winning jackpots at the point of sale. A customized message typically
is input prior to installation of the terminals. These messages can be changed
on-site using a hand-held remote control or from remote locations with the
Company's optional Shadow communication program described below.
The Company also manufactures a Pull-Tab Ticket Retailer and combined
machines, Multiple Product Retailers, which share the ITR's basic electronic and
software architecture. Pull-Tab tickets are similar to instant winner lottery
tickets in that they have perforated tabs which are broken open to reveal
printed play symbols. In most cases, three matching symbols on one line indicate
a winner. Sales of break-open tickets are traditionally most successful in
on-premises beer and liquor outlets, bingo parlors or any retail outlet where
people gather socially and stay for an extended period of time. Break-open
tickets have been popular in Canada for some time and are now common in the
United States as well. In many cases these games are operated by nonprofit
organizations without the participation of state lotteries. However, as the
popularity of break-open tickets has increased, more lotteries are considering
adding them to their product line.
DEBIT CARD RETAILER GENERAL In 1993 the Company recognized the potential
to utilize its lottery technology in the evolving prepaid phone card industry
and developed its DCR-2000 debit card vending machine. Although prepaid phone
cards have only been available in the U.S. since early 1992, their use has been
growing at a steady pace. In 1997, the estimated size of the debit card market
has grown to over $2 billion, with projected growth to $10 billion by the year
2000. Prepaid phone cards are issued in various denominations by telephone
companies and may be dispensed from as many as four bins in the Company's
machines. The Company expects that the principal markets for its DCR terminals
will be with telephone companies both domestically and in Europe, Asia, and
Latin America. The Company has signed contracts to provide DCR terminals to a
number of customers. Pursuant to these contracts, from its inception through
December 31, 1997, the Company had sold or leased approximately 5200 DCR
terminals, of which 1700 were sold or leased during 1997. To date, these
terminals have been placed in many different types of establishments where there
is a market for prepaid phone or debit cards. The Company also enters into
service contracts in connection with sales of DCR terminals pursuant to which it
receives maintenance fees per month per machine (see "Customer Service, Training
and Product Repair" herein).
THE INDUSTRY Prepaid phone cards are sold by telephone companies
worldwide. These cards contain a pre-programmed amount of credit and can be
inserted into certain pay telephones. The customer can use all or a portion of
the credit on the card to make telephone calls. These card-receptive pay
telephones do not hold cash, thus eliminating security or internal theft
concerns for the owners of the telephones. The cards are either disposable or
reusable and are sold in varying denominations. Since the service is prepaid,
telephone companies often offer discounted rates to card users. Telephone
companies also derive revenue from the sale of advertising space on the cards
which defrays their cost of any discount given. In the United States the
industry is still in the early growth stages and card reader telephones are not
in abundance. Therefore, most of the prepaid calling cards in use in the United
States use an "800" number that is called for verification of the card by
entering a PIN number located on the card.
Prepaid telephone cards generally allow card purchasers to buy blocks
of calling time at a discount. The cards are more convenient, and the use of
prepaid cards eliminates the need to maintain cash on hand to feed the pay
telephone when making a call. Prepaid cards also reduce the risk of credit card
fraud or theft, since a theft of a prepaid phone card results only in the loss
of the face value of the card less any time already used.
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Recent studies indicate that in the United States only a small
percentage of the public have used or are aware of prepaid phone cards.
Therefore, distribution is essential to gaining public awareness. Dispensing
machines are an important element of the distribution network, providing visual
recognition and 24-hour convenient access to the product. An important aspect of
the vending machine is that its design must promote product awareness to
effectively sell cards, not merely dispense them. In 1997 the Company repackaged
its DCR technology into a new cabinet styling.
In many foreign countries, especially those less developed than the
United States, the majority of residents do not own telephones and rely on
public pay telephones. Management estimates that commercial and government
entities in over 100 countries now use or are in the process of evaluating the
purchase of telephones equipped to accept prepaid phone cards. The Company
believes many of these entities are looking to dispensing machines capable of
handling prepaid phone cards to widen the acceptance and availability of the
prepaid phone cards. The foreign market for prepaid phone card vending machines
is in its infancy, however, and there can be no assurances this Company will be
successful in developing this market.
In addition to prepaid phone cards, there are many other debit cards
which can be dispensed using the DCR terminal, including bus and subway passes.
Several countries have begun using a multi-purpose debit card to provide easy
access to pay telephones, gasoline pumps, subway passes, and bus passes. The
Company is providing terminals to both Hong Kong and Brazil that dispense such
multi-purpose cards, or different types of cards or passes, including "smart
cards".
THE DCR TERMINAL The Company believes that the DCR terminal
substantially expands the distribution potential of prepaid phone cards. Similar
to the lottery terminals, the DCR terminal is designed to provide high security
and high visibility using a minimum of floor or counter-top space. The terminals
are available in several models, which house either one, two or more bins and
are able to accept various denominations of foreign and domestic currency. The
terminals can be manufactured to accommodate coins and to make change. The
customer inserts a bill or coin into the DCR terminal, receives credit, and then
selects the denomination of prepaid phone card or other card/pass by pressing
the button located immediately under the appropriate card display. The terminal
dispenses a single card to the buyer.
Each bin in a DCR terminal stores approximately 400 cards, depending on
the thickness of the cards, thus providing a maximum capacity of about 1,600
cards in the Company's 4-bin terminal. As with the ITR terminal, the DCR machine
includes a display which shows instructional and promotional messages and can
also be equipped with the "Grabber," a multi-color LED sign, which is mounted on
top of the terminal and includes a built in memory. A customized message
typically is input prior to installation of the terminals. These messages can be
changed on site using a hand-held remote control or loaded from a remote site
with the Company's optional "Shadow" communication program described below.
ADDITIONAL PRODUCT FEATURES The lottery and DCR terminals are designed to
satisfy the stringently high security demands of state lottery authorities and
commercial customers. The terminals can be bolted to the floor, wall or counter
to prevent removal. Each machine is equipped with an alarm which is triggered
unless the correct password is entered within a specified time period of opening
any of the terminal's doors. The alarm will also sound if power is interrupted
or the terminal is tipped beyond a critical angle. The terminal's doors are
inset to prevent prying or tampering, and the display windows are made from
one-half inch thick lexan. Every terminal has two unique, serialized keys, one
of which opens the bill acceptor door and the other of which provides access to
the terminal ticket or card dispensers, electronics and base storage cabinet.
Each terminal is controlled by a software system that provides security
and tracks the accounting and inventory of each bin. This software enables the
customer to generate a variety of reports. Every report contains the date and
time, the customer number and terminal serial number, as well as sales data for
each ticket bin and a total for the entire terminal. These reports generally
describe sales by day, week or month, the current inventory of tickets, and an
audit transaction report, which gives a breakdown of the last three
transactions, thus allowing a customer to determine whether reported
malfunctions in fact occurred. Additional functions of the software are the
production of cash management and audit reports.
The Company produces a Network Monitoring and Reporting System software
package called "Shadow". This optional software allows customers to monitor
sales and inventory remotely by means of a modem using non-dedicated, regular
telephone lines. This feature permits a central "PC" computer to collect all of
the sales and inventory information from any one locality with a single
telephone call. This software facilitates the preparation of reports, which can
be broken down by customer number, bin number, location category (i.e.,
convenience stores, bars, nightclubs, etc.), and geographic location. In
addition, informational and promotional messages may be automatically downloaded
to the optional Grabber display during connection to the terminal. Messages may
be sent to a specific machine or to an entire group of machines within a
specific customer, region or state. The Shadow software can be used to notify
customers of the need to replenish depleted ticket or card stocks, schedule
maintenance and assist in trouble shooting repairs.
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The Company also has a remote control unit that allows the retailer to
disable the terminal for any reason. For example, if the retailer sees that
minors are attempting to purchase lottery tickets or that anyone is attempting
to vandalize the equipment, he can turn off the terminal at a distance of up to
one hundred feet.
The Company continues to work on improving the lottery and DCR
terminals and developing new features (see "Research and Development" herein).
LOTTERY AND DCR CONTRACTS The Company generally conducts business
primarily under three types of contractual arrangements: (a) Sales Agreements,
(b) Standard Lease Agreements, and (c) Alternate Lease Agreements.
SALES AGREEMENTS Under the typical Sales Agreement, the Company
installs and maintains lottery and/or DCR terminals and provides ancillary
support services to customers. These contracts generally provide for scaled
payments, based upon the type of terminal purchased and the total number of
terminals sold under the agreement. In addition, the Sales Agreements typically
provide for the payment of monthly service fees for product repair, routine
maintenance and customer service activities (based upon the number of terminals
installed). In many cases the service portion of the contract extends beyond the
period provided by the contract for the sale of terminals.
STANDARD LEASE AGREEMENTS While the Standard Lease Agreements are
similar to the Sales Agreements with respect to the Company's installation,
maintenance and service obligations, they are distinguishable primarily by the
fact that the Company continues to own the terminals during the lease term and
that monthly lease payments are made, instead of payment in a lump sum. The
lease amount may or may not include the monthly maintenance fee. Typically, the
lessee is given the option to purchase the terminals at the end of the lease
term, either at a set amount or at fair market value at the time of sale.
ALTERNATE LEASE AGREEMENTS In addition to the purchasing and
leasing programs described above, the Company offers a unique approach to the
installation, sale and marketing of lottery or DCR terminals. This program is a
modified leasing arrangement. In general, the program relieves the customer from
the day to day details associated with the marketing and sale of instant tickets
or prepaid phone cards from the Company's terminals. Under these lease
agreements, the Company is entitled to a stated percentage of the revenues
generated from terminal sales or a minimum monthly payment, whichever is
greater. Company personnel assume responsibility for servicing the terminals,
maintaining distribution and inventory records, providing repair and
preventative maintenance, collecting money and distributing the collected funds.
MARKETING AND SALES The Company markets its products, both domestically and
internationally, primarily through an in-house marketing and sales staff. The
Company solicits interest in its terminals primarily at trade shows and through
direct contact with customers. The initial marketing package consists of product
brochures and other supportive documentation, e.g., sales analysis of other
customer installations. References from other customers using the Company's
terminals are routinely supplied, along with an offer to demonstrate and test
the terminals. Where possible, print advertising is keyed to feature articles in
trade journals, particularly advertisements targeting the prepaid phone card
market.
LOTTERY TERMINALS Once a state lottery has accepted vending as a
distribution tool, the process is opened to competitive bidding. In the United
States, lottery authorities commence the contract award process by issuing a
request for proposal, which constitutes an invitation for bids from interested
vendors. The requests for proposal usually stipulate certain requirements, such
as product specifications, performance capabilities, delivery and service
requirements. The requests also specify various insurance, bonding,
indemnification and liquidated damage provisions. Each vendor's reply is
evaluated on the basis of various criteria, including bid price, product
quality, performance capability (measured in part by demonstrated experience in
performing comparable projects), security, integrity, and experience. In
addition, state lottery authorities consider the applicant's affirmative action
policies and use of minority, handicapped, and women-owned subcontractors and
suppliers. Lottery authorities also show a preference for vendors that use
in-state subcontractors and suppliers. To assist it's marketing to state
lotteries, the Company has employed registered lobbyists and paid consultants in
certain states. Although the Company believes there remains a substantial market
for lottery terminals, no assurances can be given that lottery authorities will
award new contracts or order additional terminals.
Due to the particularly sensitive nature and high profile of gambling
activities, state lottery authorities are directed by statute to act in a manner
which promotes and ensures the integrity, security, honesty and fairness of
their operations. Thus, applicants typically must provide detailed financial and
historical information concerning their business operations and principals, and
certain employees must consent to background investigations.
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DCR TERMINALS Three distinct groups of potential customers are
primarily targeted by the Company for the sale or lease of DCR terminals: major
telephone companies, medium-sized telephone companies and long-distance
resellers. To the Company's knowledge, the major telephone companies, AT&T, MCI
and Sprint, have not yet implemented any significant marketing plans involving
the use of vending terminals to distribute prepaid phone cards on a large scale
basis. However, the medium-sized telephone groups have been pursuing vending
contracts for prepaid phone cards. Similar to the sales process with state
lotteries, many of these companies seek requests for proposals from vending
companies and require testing prior to awarding contracts. The contract process
permits more flexibility and creativity; however, it requires greater marketing
time and energy to win contracts. Long distance resellers, smaller telephone
companies, and pay telephone route operators are seeking vending contracts. The
Company intends to seek out additional vertical distributorship and joint
venture relationships to increase its presence in the DCR market place; however,
there can be no assurance that the Company will be successful in developing
these relationships.
FOREIGN OPERATIONS GENERAL Internationally, lottery authorities and foreign
telephone companies do not typically use a formal bidding process, but rather
negotiate proposals with one or more potential vendors. In 1997 the Company
delivered terminals to Brazil and Hong Kong as well as to several European
countries for market testing. Nonetheless, the Company's foreign operations are
relatively new, and no assurance can be provided that a meaningful international
market for the Company's terminals will develop. Pursuant to an agreement with
VSI, the Company agreed to form a subsidiary to transact all international
business. The agreement provided that upon the occurrence of certain events,
including the Company meeting certain pre tax income requirements, VSI and Mr.
Robert L. Burr would each have the right to acquire 40% of such subsidiary the
Company had. However, on March 19, 1998 the Company and VSI entered into an
agreement whereby the original agreement with VSI referred to above was
terminated. Pursuant to the termination agreement, VSI and Mr. Burr have each
been granted options to purchase 50,000 shares of the Company's common stock at
$2.88 per share. The options expire on December 31, 2002 and vest at the earlier
of June 30, 2002 (subject to certain conditions) or March 31 following the
fiscal year end during which cumulative gross revenues for fiscal years
beginning in 1998 from Central and South America exceed $5,000,000.
BRAZIL In June 1995 the Company entered into a distributor
agreement with a Brazilian corporation, to distribute the Company's products on
an exclusive basis in Brazil.
EUROPE In December 1997 the Company entered into a distributor
agreement with Editec, a French Corporation, to distribute the Company's
products on an exclusive basis throughout most of Western Europe.
MEXICO The Company purchased a 50% interest in LEI Mexico, S.A de
CV., a Mexican corporation ("LEI Mexico"), for $500 thousand in October 1994 and
subsequently wrote down the 50% interest to zero value in 1995. The Company and
LEI Mexico entered into an exclusive distributorship agreement whereby the
Company agreed to only sell machines in Mexico to or through LEI Mexico and LEI
Mexico agreed to use only the Company's equipment in its vending operations. The
Company can terminate this agreement at its option. The Company intends to
explore various alternatives available in the pursuit of business opportunities
in the Mexican market.
CUSTOMER DEPENDENCY The Company's products are sold or leased to a limited
number of customers worldwide. As a result, the Company has experienced
fluctuations in its financial results and capital expenditures because of the
timing of significant individual contract awards and customer orders as well as
associated product delivery schedules. The Company's sales cycle can, at times,
be relatively long due to the lead time required for business opportunities to
result in signed sales or lease agreements. In 1997, revenues from three
customers individually exceeded 10% of total revenues and in total comprised 57%
of total revenues. Revenues from two customers individually exceeded 10% of
total revenues in 1996 and in total comprised 37% of total revenues in 1996. One
of the Company's principal customers has generated a significant long term lease
receivable with the Company and is currently seeking additional capital to
expand its business and to finance past and future equipment leases from the
Company. Although the Company has received indications that this financing will
in all likelihood be completed, there can be no assurance to that effect, and
the failure of this customer to raise additional capital could have a material
adverse affect on the Company's financial results in 1998.
BACKLOG The Company's backlog of firm orders at December 31, 1997 totaled
approximately 800 ITR terminals and 1,200 DCR terminals. The rate at which the
Company receives orders from its customers is affected from time to time by the
nature of the Company's market. State lottery authorities are allocated budgets
on an annual basis, and their desire and ability to order products from vendors,
including the Company, can be affected by the status of the budgetary process at
any given time. For example, a lottery which has not spent its budget as the end
of a budgetary year approaches may be encouraged to place orders with vendors,
whereas a lottery which has exhausted its budget may not be able to place orders
until the beginning of a new budgetary year.
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MANUFACTURING AND SUPPLY The Company's lottery and DCR terminals are
designed in a modular form to facilitate manufacturing assembly and
serviceability. The Company uses vendors to manufacture and supply some
components and sub-assemblies, including the bill acceptor and electronic
modules. Final assembly and quality control of the terminals is performed by
Company personnel at its San Diego facility.
CUSTOMER SERVICE, TRAINING AND PRODUCT REPAIR The Company maintains service
facilities at its San Diego, California headquarters and in the states of
Connecticut, Missouri, New York, Pennsylvania, Virginia and Washington. These
facilities, and several smaller ones, oversee installations, coordinate repair,
and respond to service calls. The Company maintains toll-free telephone lines
staffed by service personnel to assist retailers and, where possible, resolve
minor service problems over the telephone. If the problem cannot be resolved
easily, a field technician is immediately paged and a service call scheduled.
Each agreement provides for a specified response or service time. A function of
the field service operation is to provide installation and retailer training on
the operation and use of the machine. The Company generally provides a warranty
period of one year on its terminals and provides an option for an extended
warranty period if purchased by the customer.
The modular designs of the terminals promote cost-effective, timely
repair. All three of the major modular components (the currency acceptor, ticket
dispenser, and electronics module) are easily removed from the terminal. Service
technicians are instructed to replace malfunctioning components if they are
unable to repair a machine within 30 minutes. Any replaced parts are sent to the
service center, where they are examined and repaired in-house or returned to the
manufacturer.
The Company has developed a computer program to identify dispenser
malfunctions from remote locations via the optional Shadow software. This
IBM-compatible program enables a customer to interrogate each ITR or DCR
terminal within a given district to identify problems as diverse as a blocked or
damaged sensor or an inoperable gate mechanism. If a malfunction is detected, a
report is automatically generated, giving the machine location and serial
number, and identifying the type of problem. Although this technology is
available from the Company, to date most customers have elected not to purchase
and install such technology.
Company service technicians also perform routine preventative
maintenance of machines. If required, by agreement, each terminal is subject to
on-site cleaning and diagnostic testing of key components. In addition, on-site
modifications or upgrades may be performed.
The Company's administrative staff closely monitor any problems with
terminals in the field. Service reports are forwarded to engineering, quality
control and production on a weekly and monthly basis. The Field Service
Department is also responsible for pre-installation site surveys to check for
space, telephone service and power.
Since its first contract with the Virginia State Lottery in 1991 the
Company has provided services to install, train, repair and perform preventative
maintenance of its products. From 1991 to 1997, the service function of the
Company has expanded as new contracts have required. The Company believes that
its service organization is larger than any of its direct manufacturing
competitors. The Company currently provides ITR service in the states of:
Connecticut, Delaware, Missouri, New York, Pennsylvania, Virginia, and
Washington. In early 1997, a significant customer's Alternative Lease Agreement
with regard to DCR's, which involved a nationwide service program, was
terminated.
Since 1994, the Company has sought reimbursement from the California
State Lottery for the supply and installation of out-of-warranty spare parts and
related sales tax pursuant to its service contract. The Company's claim for
reimbursement is estimated at more than $1.9 million. The California State
Lottery has refused to honor the claim and has responded with a claim of $1.7
million in liquidated damages for the Company's alleged delay in responding to
service calls in 1995. Moreover, the California State Lottery has withheld
payment of more that $300 thousand in outstanding invoices for products and
services from the Company. The Company contends that the liquidated damage
provision in the service contract is unenforceable because it is impermissibly
punitive and unconscionable and that the liquidated damage claims by California
are unrelated to any real damages, if any, experienced by the California State
Lottery for delayed service call responses. With respect to the quality of the
Company's products and services, the Company notes that the California State
Lottery itself in September 1995 confirmed that the Company manufactured "good"
ITR terminals and that the Company had been "responsive to CSL needs and
concerns and have provided a good level of service overall." The Company also
asserts that the California State Lottery has significantly limited the
Company's cash flow since 1994 by failing to recognize its spare parts
obligation which now totals an estimated $1.9 million and by withholding other
payments due to the Company. The Company is presently examining its legal
options and is analyzing how much of its lost revenues and business
opportunities as well as its cash flow problems and stock price drop in 1995 are
related to the California State Lottery's actions. The Company is also
attempting to negotiate a fair resolution of all claims with the California
State Lottery. To date no legal action has been brought by either party and both
parties are seeking to resolve this matter amicably.
8
<PAGE>
COMPETITION The Company believes that it possesses a strong competitive
position in the sale of lottery terminals. The Company has established a
reputation for providing quality terminals and service. As a consequence, the
Company has been able to secure contracts in eleven states, the Provinces of
Ontario and Quebec as well as customers in several foreign countries. In
addition, the Company enjoys repeat or renewal orders from existing customers
and is conducting tests with overseas lottery organizations. However, as a
result of the proposed merger with Interlott Technologies, Inc. ("ILI"), in 1995
the Company's marketing was impacted as the Company terminated bid protests and
no-bid other contracts due to a belief on the part of management and the Board
of Directors that the merger was going to be consummated and a consequent desire
not to hinder the merger process by competitive actions. The Company believes
that its marketing efforts, subsequent to 1995, have not been impacted by these
terminated bid protests and no-bids. ILI has sold or leased machines in fourteen
states, while the next largest current competitor, International Products of
America, has sold machines pursuant to a contract with one state. Nevertheless,
a substantial risk of new market entrants by domestic and foreign competitors
exists. While the Company believes that it possesses a strong competitive
position by virtue of its proprietary position, installed base and reputation,
there can be no assurance that a better capitalized competitor will not
successfully establish itself in the market or develop a machine which renders
the Company's technology obsolete. The instant ticket market may also face
competition from other types of lottery products.
In the United States, the prepaid phone card and, more generally, the
debit card market is relatively new. Consequently, it is difficult to identify
all the competitors in this market. Nonetheless, the Company believes it
possesses a strong competitive position in the sale of DCR terminals within the
United States and overseas. Currently, the Company believes it has the largest
installed base of DCR terminals in the market place. At present, the Company's
principal competitors are Marketing & Vending Concepts, ILI, VendTek and Opal.
There are a number of smaller vending machine companies in the market which
management believes currently lack the product quality and reliability to
significantly impact its sales efforts. There is also a substantial risk of
additional market entry by domestic and foreign competitors, especially if the
United States customer's response to the use of debit cards and pre-paid phone
cards is favorable. Internationally, the Company has been successful in selling
its DCR terminals into Brazil and Hong Kong. While the Company believes that it
possesses an advantage in obtaining future customers by virtue of its
proprietary position and installed base, there can be no assurance that a better
capitalized competitor will not successfully establish itself in the market or
develop a machine which renders the Company's technology obsolete. The prepaid
phone card and debit card market may also face competition from other types of
products.
RESEARCH AND DEVELOPMENT Research and Development expenditures totaled $582
thousand and $253 thousand in 1997 and 1996, respectively. None of these costs
were borne directly by the Company's customers. The Company's research and
development department designs hardware and software for new products, and
maintains hardware and software support for existing products. Software is
continually enhanced to satisfy customer requests. Many new features have
evolved from the sales process (e.g., access code requirements, security
features such as alarm and theft detection, report capabilities, and display
features). Once developed, these features generally are incorporated as standard
items in the product line. Software upgrades have included diagnostics for field
service and memory management and configuration control. Hardware enhancements
included features to provide local control, remote control and speech functions,
and memory upgrades for software and data storage. Other hardware developments
have focused on the physical size, look and ergonomics of the machines, and
conformance with the requirements of the American Disabilities Act.
GOVERNMENT REGULATION Lotteries are not permitted in the United States
unless expressly authorized by legislation in the subject jurisdiction. Once
authorized, the award of lottery contracts and ongoing state operations are
highly regulated. State rules and regulations specify, among other things, the
qualifications of lottery directors, the prize structure, the allocation of
revenue, the types of games and amounts of wagers permitted, the manner in which
the lottery is marketed, and the procedures for selecting vendors of equipment
and services.
To ensure the integrity of the contract award and subsequent contract
performance, jurisdictions typically conduct background investigations of, and
require detailed disclosure on a continuous basis from, vendors and their
affiliates, subcontractors, officers, directors, and principal shareholders
(including 5% shareholders of publicly traded corporations). Background
investigations of vendors' employees are also generally conducted, and most
states reserve the right to require the removal of employees they deem to be
unsuitable or whose presence they believe may adversely affect the operational
security or integrity of the lottery.
9
<PAGE>
The Federal Gambling Devices Act of 1962 (the "Federal Act") makes it
unlawful for a person to manufacture, deliver or receive gaming machines or
similar devices across interstate lines unless that person has first registered
with the Attorney General of the United States. The Company has registered under
the Federal Act and must renew its registration annually. The Federal Act also
imposes various record keeping and equipment identification requirements.
Violation of the Federal Act may result in seizure or forfeiture of equipment,
as well as other penalties. As of the date of this filing, the Company believes
that it is in substantial compliance with these provisions.
The international jurisdictions in which the Company operates or
intends to market its products have similar legislation and regulations
governing lottery operations. In addition, restrictions are often imposed on
foreign corporations seeking to do business in such jurisdictions. Failure to
comply with these provisions could result in contract cancellation or the
institution of legal proceedings.
The Company has employed registered lobbyists and retained paid
consultants in certain states. Failure to comply with state regulatory
provisions relating to the activities of the Company's advisors could adversely
affect the Company's ability to bid successfully upon lottery contracts.
It remains unclear what telecommunication regulations, if any, relate
to the sale of prepaid phone cards or to the dispensing of those cards using
vending machines. There appears to be a strong movement towards requiring
certification as a reseller in states where entities sell prepaid phone cards.
Vermont prohibits the sale of these cards from any venue. In addition, some
states subject DCR terminals and machines to use or similar taxes.
EMPLOYEES As of March 1, 1998, the Company had 140 full-time employees, of
whom 18 were in executive or administrative positions, 22 in quality control and
production, 7 in research and development, 86 in field service, 6 in the
warehouse and 1 in maintenance. In addition, the Company employed 21 people on a
part-time basis in its field service department. None of the Company's employees
are currently represented by a union, and the Company believes that its
relations with its employees are good.
FACILITIES The Company occupies approximately 28,000 square feet of space in
San Diego, California. The premises include office, manufacturing and warehouse
space. The Company currently pays monthly rent of $13,607 for this space. This
lease terminates December 31, 1998. The Company believes that its facilities are
adequate to meet its anticipated needs through the term of the lease.
ITEM 2. DESCRIPTION OF PROPERTIES
At March 1, 1998 the Company had the following properties under lease:
Office, manufacturing, R & D and warehouse space in San Diego, California at an
annual rent of $135,699 through December 31, 1998.
Warehouse space in San Diego, California on a month-to-month basis at an annual
rent of $6,600.
Office, repair depot and warehouse space in Syracuse, New York on a
month-to-month basis at an annual rent of $13,200.
Office, repair depot and warehouse space in St. Ann, Missouri at an annual rent
of $6,600 through October 1998.
Office, repair depot and warehouse space in Richmond, Virginia on a
month-to-month basis at an annual rent of $23,603.
Office, repair depot and warehouse space in Southington, Connecticut at an
annual rent of $8,004 through January 1999.
Office, repair depot and warehouse space in Olympia, Washington at an annual
rent of $9,600 through June 1999.
Office, repair depot and warehouse space in York Haven, Pennsylvania at an
annual rent of $11,940 through April 1998.
ITEM 3. LEGAL PROCEEDING
The Company is a party to legal proceedings in the ordinary course of
its business, the most significant of which is described below.
10
<PAGE>
On January 23, 1996, the Company's principal competitor, ILI, filed an
action against the Company in the Common Pleas Court of Hamilton County, Ohio.
The action arises from an agreement in principle between ILI and the Company
which was signed on March 23, 1995. The agreement in principle related to a
proposed merger transaction between ILI and the Company. After certain due
diligence and negotiations, in July 1995 the parties decided not to proceed with
the transaction reflected in the agreement in principle. In the action, ILI
contends that, under the agreement in principle, the Company is responsible to
pay ILI's reasonable fees and expenses in connection with the proposed merger
because the transaction did not proceed due to the Company's actions. In
addition, ILI contends that another provision of the agreement in principle
obligates the Company to pay a "break-up fee" in the event the Company entered
into a "binding commitment to engage in a recapitalization, debt issuance or
working capital financing other than in the ordinary course of business within
one year of the public announcement of such abandonment or termination [of the
proposed merger transaction]." The Company denies these contentions and believes
that ILI failed to exercise its best efforts in good faith to negotiate a
transaction. In the action, ILI seeks reimbursement of alleged fees and expenses
of $240 thousand, payment of a break-up fee in the amount of $989 thousand and
reasonable attorney's fees. The Company removed ILI's action to the United
States District Court for the Southern District of Ohio on February 26, 1996. On
March 4, 1996 the Company filed an answer denying all liability to ILI. The
Company also asserted a counterclaim against ILI seeking a declaratory judgment
that the break-up fee has not been triggered under the terms of the agreement in
principle, seeking to recover the Company's own costs and expenses in connection
with the proposed merger agreement as a result of ILI's breach of the agreement
in principle and seeking compensatory damages from ILI for unfair competition
and tortious interference with business relations. The Company's counterclaim
sought compensatory damages in excess of $500 thousand, plus attorney's fees,
costs and reimbursement of the merger related expenses. In February 1997 the
court rendered judgement on behalf of ILI with regard to certain expenses
incurred by it during the merger negotiations in the amount of approximately
$238,000. However, upon motion by the Company, the court reconsidered this
ruling and reversed its ruling that the Company is legally responsible for fees
relating to the Merger. Following the court's ruling, ILI filed another brief
requesting the court to reconsider its reversal of the summary judgement on the
issue of Merger costs. In March 1998, the court rendered summary judgement on
behalf of ILI with regard to the Company's claims of unfair competition and
tortuous interference with business relations. The Company believes that no
amounts are owed by it to ILI under the agreement in principle. The Company is
contesting the lawsuit vigorously and intends to appeal the court's ruling with
regard to its claims of unfair competition and tortuous interference with
business relations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
None.
11
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
a) The Company's common stock is traded in the over-the-counter
market (NASDAQ symbol: ONPT). The following table sets forth the high and low
bid prices for the Company's common stock, as reported on NASDAQ, for the
quarters presented. The bid prices represent inter-dealer quotations, without
adjustments for retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions.
Fiscal 1997 Fiscal 1996
High Low High Low
First Quarter 2 1/32 5/8 1 1/4 5/8
Second Quarter 3 1 3/16 1 1/16 5/8
Third Quarter 2 13/16 1 5/8 15/16 15/32
Fourth Quarter 3 1/4 1 5/8 3/4 1/2
b) The number of stockholders of record of the Company's common
stock, par value $.01 per share, as of March 2, 1998, was 287. The approximate
number of beneficial shareholders is 2400.
c) The Company has never paid any cash dividends on its common
stock and does not anticipate that it will do so in the foreseeable future. The
future payment of dividends, if any, on the common stock is within the
discretion of the Board of Directors and will depend on the Company's earnings,
its capital requirements, financial condition and other relevant factors.
Following are unregistered sales of securities issued by the Registrant
during the last three years. These securities were issued pursuant to Section
4(2) of the Securities Act of 1933, as amended. No placement agent was engaged
in connection with such issuances and no commissions or discounts were paid to
any person.
In October 1995, Mr. Marshall Geller, former interim President and
Chief Executive Officer of the Company, was granted a stock option for 100,000
shares of the Company's Common Stock at $7.45 per share pursuant to his
engagement as the interim President and Chief Executive Officer of the Company.
The option expires in September 2004 and vested immediately.
In April 1995, Mr. John Robinson, a former outside Director of the
Company, received a warrant to purchase 25,000 shares of the Company's Common
Stock at $2.50 per share pursuant to a loan agreement entered into with the
Company. The warrant has a five year term and became exercisable in September
1995.
In June 1995, Mr. Marshall Geller, former interim President and Chief
Executive Officer of the Company, and Mr. Arthur Laffer, former outside Director
of the Company, received 101,000 and 75,000 shares, respectively, of the
Company's Common Stock in consideration of payment of a Company account payable
in the amount of $86,691.
In October 1995, Mr. Robert Burr, former Chairman of the Board and
former President and Chief Executive Officer of the Company, was granted a stock
option for 50,000 shares of the Company's Common Stock at $2.00 per share
pursuant to a consulting agreement entered into with the Company. The option has
a three year term and vested on the grant date.
In January and July 1996, Vanguard Strategies, Inc. received warrants
to purchase 450,000 and 250,000 shares, respectively, of the Company's Common
Stock at $.60 and $.69, respectively, pursuant to a consulting agreement entered
into with the Company. Mr. Sandvick, Chief Executive Officer of the Company, is
the President and principal shareholder of Vanguard Strategies, Inc. The
warrants have a five year term and warrants to purchase 200,000 shares became
exercisable in January 1996 and warrants to purchase 500,000 shares became
exercisable in July 1996.
In August 1996, Metal Masters, Inc. received warrants to purchase
165,000 shares of the Company's Common Stock at $.69 pursuant to a settlement of
a legal action. The warrants became exercisable in August 1996 and 100,000
shares have a one year term and 65,000 shares have a two year term.
12
<PAGE>
In January 1997, Frederick Sandvick, Chief Executive Officer of the
Company, received a warrant to purchase 500,000 shares of the Company's Common
Stock at $.63 per share pursuant to his personal guaranty and indemnity in
connection with a $2,000,000 performance bond. The warrant has a five year term
and became exercisable in January 1997.
In January 1997, Vanguard Strategies, Inc. received a warrant to
purchase 250,000 shares of the Company's Common Stock at $.72 per share pursuant
to a consulting agreement entered into with the Company. The warrant has a five
year term and became exercisable in January 1997.
In January 1997, S & H Systems, Inc. received a warrant to purchase
4,000 shares of the Company's Common Stock at $1.00 per share pursuant to a
consulting agreement entered into with the Company. The warrant has a four year
term and became exercisable in January 1997.
In May 1997, GMB Capital Partners received a warrant to purchase 45,000
shares of the Company's Stock at $2.52 per share in consideration for
facilitating financing for the Company. The warrant has a three year term and
became exercisable in May 1997.
In May 1997, Coast Business Credit received a warrant to purchase
50,000 shares of the Company's Common Stock at $2.00 per share pursuant to a
financing agreement entered into with the Company. The warrant has a three year
term and became exercisable in May 1997.
In May 1997, Capital Structures Corporation and Colliers Iliff Thorn
each received a warrant to purchase 25,000 shares of the Company's Common Stock
at $1.24 per share pursuant to a commission settlement agreement entered into
with the Company. The warrants have a one year term and became exercisable in
May 1997.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL The Company's revenues through 1997 have been generated from (i) sales
of vending terminals (ii) leases of vending terminals (iii) performance of
service on vending terminals, and (iv) sales of associated parts.
The Company's products are sold or leased to a limited number of
customers worldwide. As a result, the Company has experienced fluctuations in
its financial results and capital expenditures because of the timing of
significant individual contract awards and customer orders as well as associated
product delivery schedules. The Company's sales cycle can, at times, be
relatively long due to the lead time required for business opportunities to
result in signed sales or lease agreements. Operating results may be affected by
such lead time as well as working capital requirements associated with
manufacturing vending terminals pursuant to new orders, increased competition,
and the extended time which may elapse between the customer's firm order and the
receipt of revenue from the sale or lease of the applicable vending terminals.
In addition, there has been an accelerating trend by customers to lease rather
than purchase vending terminal equipment. Leasing vending terminals requires the
Company to invest capital or otherwise finance the manufacture of the vending
terminals. The Company has obtained the resources necessary to finance its
expanding base of leased terminals through the sale of certain leases to a
financing company, an equity financing and a debt financing.
1997 COMPARED TO 1996 1997 revenue increased by approximately $5.6 million or
47% over 1996, with approximately $5.2 million of the increase representing
volume and $400 thousand representing price increases. The volume increase is
due primarily to a greater number of vending terminal sales and sales-type lease
arrangements, rather than operating lease arrangements, with one state lottery
customer and one DCR customer. In total, the Company installed or shipped
approximately 2900 units in 1997 versus approximately 1700 units in 1996, an
increase of approximately 1200 units. Operating lease revenue grew by
approximately $1.3 million over 1996, reflecting a higher base of installed
machines and additional revenue from lease extensions. Service revenue declined
by approximately $800 thousand from 1996 due primarily to the loss of a service
contract with one DCR customer.
Cost of revenue, as a percentage of sales, improved by 1 percentage
point from 73% in 1996 to 72% in 1997 reflecting the change in product mix
between years.
Operating expenses, as a percentage of sales, declined by 13 percentage
points from 31% in 1996 to 18% in 1997. The decline reflects management's
continuing efforts to control selling, general and administrative expense
levels. Partially offsetting the reduction in selling, general and
administrative expense was an increase in research and development costs as a
result of increased new product development activities.
13
<PAGE>
As a result of the above factors, 1997 income from operations of
approximately $1.7 million represents an improvement of approximately $2.2
million from the 1996 operating loss of approximately $500 thousand.
Total other income and expense decreased by $764 thousand with:
interest income down $426 thousand due to less amortization of unearned income
on sales type leases, interest expense higher by $162 thousand due primarily to
increased borrowings associated with the equipment manufacturing costs
underlying long-term lease agreements, and "other" costs higher by $176 thousand
reflecting losses on asset disposals.
As a net result of the above described factors, the Company generated
$1.57 million of net income in 1997, an increase of $1.44 million from 1996.
LIQUIDITY AND CAPITAL RESOURCES In 1997 the Company generated approximately
$300 thousand of net cash from operating activities which, when combined with
the approximate $2.5 million of net cash provided by financing activities and
approximately $200 thousand reduction in cash and cash equivalents, was used for
financing activities. In 1996 the Company used $1.3 million of net cash for
operating activities, principally for the reduction of accounts payable and
accrued expenses. Net cash provided by financing activities for 1996 was $1.3
million, while net cash used by investing activities was $1.5 million. The
principal investing activity in 1997 and 1996 was the net payment of costs
associated with the equipment underlying long term lease agreements, both sales
type and operating, which totaled approximately $2.9 million in 1997 and $2
million in 1996. Working capital of approximately $3.1 million at December 31,
1997 represents an increase of approximately $2.8 million over the approximate
$300 thousand at December 31, 1996.
The Company completed an equity financing and a debt financing during
the second quarter of 1997. On April 7, 1997 the Company completed the private
placement of $800 thousand of equity Units. The Units consist of one share of
Common Stock of the Company per $0.75 of equity investment, one-half Class A
Warrants per $1.00 of equity investment and one Class B Warrant per $1.00 of
equity investment. Each Class A Warrant will be exercisable to purchase one
share of Common Stock at a price of $1.25 per share for a period of one year
while each Class B Warrant will be exercisable to purchase one share of Common
Stock at a price of $2.00 per share for a period of eighteen months. Net
proceeds to the Company from the private placement approximated $673 thousand.
On May 5, 1997, the Company entered into a Loan and Security Agreement for a
revolving line of credit whereby the Company can borrow up to $3 million. The
loan bears interest at prime plus 4%, which is reduced by 1% annually if the
Company meets certain performance benchmarks, matures on March 31, 2000 and is
secured by virtually all of the Company's assets. At December 31, 1997, the
Company had borrowed approximately $2.3 million under this Agreement.
Management believes the Company has sufficient liquidity, because of
its existing stream of contractual lease payments, its current working capital,
and its available borrowings under its $3 million normal course debt financing,
to maintain its planned activities in 1998. However, the Company may seek
additional debt or equity financing to facilitate expansion opportunities and
potential acquisitions or for contingencies. See Note 10 of Notes to the
Consolidated Financial Statements in the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1997 for potential other matters which could
affect the Company's liquidity.
IMPACT OF INFLATION Inflation has not had any significant effect on the
Company's operating costs. However, the sales price, lease payment and service
fees contained in the Company's agreements with various states are fixed and the
Company will be unable to pass along any increases in manufacturing and service
costs during the term of these agreements.
SEASONALITY OF BUSINESS The Company's operations may be affected by the
fiscal year ends of its state lottery customers, which generally occur on June
30. States which have a surplus of funds available prior to year-end may
accelerate their purchases of new equipment, while states which experience a
shortage of funds available may delay their purchases until the next fiscal
year.
YEAR 2000 COMPLIANCE As is the case with most other companies using
computers in their operations, the Company is in the process of addressing the
Year 2000 problem. The Company's primary accounting and operational software
provider has received year 2000 certification from the Information Technology
Association of America. The total cost estimate to upgrade certain computer
hardware is not expected to exceed $25 thousand.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Financial Statements are filed as part of this Annual Report on
Form 10-KSB.
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Shareholders of On-Point Technology Systems, Inc.
and Subsidiaries:
We have audited the accompanying consolidated balance sheets of On-Point
Technology Systems, Inc. (formerly Lottery Enterprises, Inc.) and subsidiaries
as of December 31, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of On-Point Technology Systems, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
San Diego, California
March 20, 1998
15
<PAGE>
<TABLE>
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31,
------------------------
Assets THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents, including restricted cash of
$469 in 1996 $273 $504
Accounts receivable, net 1,961 1,334
Inventories 2,704 2,457
Net investment in sales-type leases 1,638 1,752
Other current assets 88 618
- --------------------------------------------------------------------------------------------------------------------
Total current assets 6,664 6,665
- --------------------------------------------------------------------------------------------------------------------
Plant, property and equipment, net 582 825
Net investment in sales-type leases 5,364 3,643
Property held for operating leases, net 2,657 2,389
Other assets 768 789
- --------------------------------------------------------------------------------------------------------------------
Total assets $16,035 $14,311
====================================================================================================================
Liabilities and shareholders' equity
- --------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current portion of notes payable $277 $971
Accounts payable 1,118 2,681
Accrued expenses 2,134 2,227
Deferred income - 518
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,529 6,397
- --------------------------------------------------------------------------------------------------------------------
Notes payable, net of current portion 2,371 54
- --------------------------------------------------------------------------------------------------------------------
Other liabilities 757 939
- --------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, no par value, 2,000,000 shares
authorized, no shares issued or outstanding - -
Common stock, $0.01 par value, 20,000,000 shares
authorized, 9,421,255 shares issued and outstanding 94 82
Additional paid-in capital 30,030 29,157
Accumulated deficit (20,746) (22,318)
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 9,378 6,921
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $16,035 $14,311
====================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
16
<PAGE>
<TABLE>
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Years ended December 31,
-------------------------
THOUSANDS OF DOLLARS/SHARES, EXCEPT PER SHARE AMOUNTS 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $17,439 $11,868
Cost of revenues 12,566 8,645
- --------------------------------------------------------------------------------------------------------------------
Gross profit 4,873 3,223
- --------------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 2,563 3,479
Research and development 582 253
- --------------------------------------------------------------------------------------------------------------------
Total operating expenses 3,145 3,732
- --------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 1,728 (509)
- --------------------------------------------------------------------------------------------------------------------
Other income (expenses)
Interest income 458 884
Interest expense (418) (256)
Other (160) 16
- --------------------------------------------------------------------------------------------------------------------
Total other income (expense) (120) 644
- --------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 1,608 135
- --------------------------------------------------------------------------------------------------------------------
Provision for income taxes 36 -
- --------------------------------------------------------------------------------------------------------------------
Net income $1,572 $135
====================================================================================================================
Earnings per share:
Basic:
Earnings per share $0.17 $0.02
====================================================================================================================
Weighted average shares 9,011 8,187
====================================================================================================================
Diluted:
Earnings per share $0.15 $0.02
====================================================================================================================
Weighted average shares 10,839 8,313
====================================================================================================================
SEE ACCOMPANYING NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
17
<PAGE>
<TABLE>
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended December 31,
------------------------
THOUSAND OF DOLLARS 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $1,572 $135
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization 1,489 1,471
Non-cash charges, primarily changes in reserves (45) (726)
Changes in assets and liabilities:
Accounts receivable (627) (488)
Inventories (247) 163
Accounts payable (1,563) (425)
Accrued expenses (275) (1,098)
Deferred income (518) (229)
Other 551 (150)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 297 (1,347)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
- ------------------------------------------------------------------------------------------------------------------
Purchases of plant, property and equipment (176) (75)
Net investment in sales-type leases (1,607) (834)
Investment in property held for operating leases (1,305) (1,157)
Fixed asset disposals 99 608
- ------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (2,995) (1,458)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
- ------------------------------------------------------------------------------------------------------------------
Proceeds from issuance of common stock 810 -
Proceeds from issuance of warrants - 80
Proceeds from debt financing 655 767
Proceeds from sale of leases - 1,270
Proceeds from line of credit, net 2,267 -
Repayment of notes payable (1,311) (792)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,467 1,325
- ------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (231) (1,480)
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 504 1,984
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $273 $504
==================================================================================================================
Supplemental schedule of non-cash transations:
Warrants issued for services provided $75 $0
==================================================================================================================
Supplemental cash flow information:
Cash paid during the period for interest $281 $101
==================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
18
<PAGE>
<TABLE>
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER' EQUITY
<CAPTION>
Additional
Common Stock Paid-in Accumulated
THOUSANDS SHARES/DOLLARS Shares Amount Capital Deficit Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 8,187 $82 $29,077 ($22,453) $6,706
- ------------------------------------------------------------------------------------------------------------------------------------
Warrants issued in compensation
for services - - 80 - 80
Net income - - - 135 135
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 8,187 82 29,157 (22,318) 6,921
- ------------------------------------------------------------------------------------------------------------------------------------
Warrants issued in compensation
for services - - 75 - 75
Issuance of common stock, net of
issuance costs of $116 1,067 11 673 - 684
Exercise of stock warrants 142 1 100 - 101
Exercise of stock options 25 - 25 - 25
Net income - - - 1,572 1,572
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 9,421 $94 $30,030 ($20,746) $9,378
====================================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
19
<PAGE>
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1997 AND 1996
--------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION On-Point Technology Systems, Inc. and subsidiaries,
formerly Lottery Enterprises, Inc. (collectively, the "Company" or "ONPT")
designs, manufactures, and services vending terminals for the retail sale and
leasing of instant-winner lottery tickets (the "Instant Ticket Retailer" or
"ITR(R)") and for the retail sale and leasing of prepaid telephone calling cards
(the "Debit Card Retailer" or "DCR(TM)"). The ITR terminals are sold or leased
to state and provincial governments in the United States and Canada and to
foreign governments and their licensees. DCR terminals are generally sold or
leased to commercial customers.
LIQUIDITY The Company completed an equity financing and a debt
financing during the second quarter of 1997. On April 7, 1997 the Company
completed the private placement of $800 thousand of equity Units. The Units
consist of one share of Common stock of the Company per $0.75 of equity
investment, one-half Class A Warrant per $1.00 of equity investment and one
Class B Warrant per $1.00 of equity investment. Each Class A Warrant will be
exercisable to purchase one share of Common Stock at a price of $1.25 per share
for a period of one year while each Class B Warrant will be exercisable to
purchase one share of Common Stock at a price of $2.00 per share for a period of
eighteen months. Net proceeds to the Company from the private placement
approximated $673 thousand. On May 5, 1997, the Company entered into a Loan and
Security Agreement for a revolving line of credit whereby the Company can borrow
up to $3,000,000. The loan bears interest at Prime plus 4% which is reduced by
1% annually if the Company meets certain performance benchmarks, matures on
March 31, 2000 and is secured by virtually all of the Company's assets. At
December 31, 1997, the Company had borrowed approximately $2.3 million under
this Agreement.
Management believes the Company has sufficient liquidity because of its
existing stream of contractual lease payments, its current working capital, and
its available borrowings under its $3 million normal course debt financing to
maintain its planned activities in 1998. However, the Company may seek
additional debt or equity financing to facilitate expansion opportunities and
potential acquisitions or for contingencies. See Note 10 for potential other
matters which could affect the Company's liquidity.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements
include the accounts of the Company and all majority owned subsidiaries after
elimination of all significant inter-company balances and transactions.
Investments of 50 percent or less in affiliated companies are accounted for on
the equity method.
ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles 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. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS Cash equivalents consist of highly liquid
investments purchased with original maturities of three months or less and which
are readily convertible into cash.
Included in the Company's cash and cash equivalents balance at December
31, 1996 is approximately $469 thousand of cash collected by the Company under
its "Super Agent" DCR programs. The Company acts as trustee over the cash until
it is distributed to the venture partners on a monthly basis. The Company has
recorded a corresponding payable for these amounts which is included in accounts
payable.
ACCOUNTS RECEIVABLE Accounts receivable consists of amounts due to
the Company from its normal business activities. The Company maintains an
allowance for doubtful accounts to reflect the expected uncollectibility of
accounts receivable based on collection history. The Company's concentration of
credit risk related to accounts receivable balances is limited due to the
geographical diversity of customers making up the Company's customer base, thus
spreading the credit risk. Bad debt expense was $62 thousand and $83 thousand in
1997 and 1996, respectively.
20
<PAGE>
Included in accounts receivable are unbilled receivables representing
amounts billable in accordance with specific contract terms. Substantially all
unbilled receivables at December 31, 1997 are expected to be collected within
one year.
INVENTORIES Inventories include the cost of material, direct labor,
manufacturing overhead, parts and supplies, and terminals assembled or in the
process of assembly. Inventories are stated at the lower of cost, on a first-in,
first-out basis or market.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are
stated at cost. Depreciation is provided using the straight-line method, over
estimated useful lives of 2 to 10 years. Maintenance and repairs are expensed as
incurred.
REVENUE RECOGNITION AND SIGNIFICANT CUSTOMERS Revenues from terminal
sales are recognized when terminals are shipped or installed in accordance with
the terms of specific contracts.
Revenues from sales-type leases are recognized at the present value of
the future minimum payments for terminals, when such terminals are installed.
The difference between the total future minimum payments plus the residual value
of the equipment and the present value of such amounts is recorded as unearned
income and amortized over the term of the lease so as to produce a constant rate
of return. Any unearned income is recognized immediately upon the sale of the
associated lease receivable.
The Company also leases products under leases accounted for as
operating leases. Terminals under operating leases are recorded net of
accumulated depreciation. Income from operating leases is recognized as rentals
become receivable according to provisions of the leases.
Revenues arising from the sale of service and maintenance contracts are
recognized ratably over the terms of the individual contracts. Any estimated
losses on such contracts are charged to operations when identified.
The Company's 1997 revenues include ITR sales and service to the state
lottery of Virginia, to the state lottery of Illinois, and to a DCR customer,
Solutioneering, a telecommunications industry company that markets prepaid phone
cards. Revenues from each of these customers individually exceeded 10% of total
revenues in 1997 and in total comprised 56% of total revenues in 1997. Amounts
receivable from these customers represented 44% of accounts receivable as of
December 31, 1997. The Company's 1996 revenues include ITR sales and service to
the state lottery of Illinois and to a DCR customer, Fone America. Revenues from
each of these customers individually exceeded 10% of total revenues in 1996 and
in total comprised 37% of total revenues in 1996. Amounts receivable from these
customers represented 13% of accounts receivable as of December 31, 1996.
One of the Company's principal customers has generated a significant
long term lease receivable with the Company and is currently seeking additional
capital to expand its business and to finance past and future equipment leases
from the Company. Although the Company has received indications that this
financing will in all likelihood be completed, there can be no assurance to
that effect, and the failure of this customer to raise additional capital could
have a material adverse affect on the Company's financial results in 1998.
RESEARCH AND DEVELOPMENT Research and development costs are expensed
as incurred.
INCOME TAXES Deferred income taxes are recorded to reflect the tax
consequences on future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year-end. If it is
more likely than not that some portion or all of a deferred income tax asset
will not be realized, a valuation allowance is recognized.
PER SHARE INFORMATION In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
128 "Earnings per Share" establishing standards for computing and presenting
Basic Earnings Per Share ("Basic EPS") and Diluted Earnings Per Share ("Diluted
EPS"). Basic EPS is computed on the basis of the weighted average shares of
common stock outstanding plus contingently issuable shares. Diluted EPS is
computed on the basis of weighted average shares outstanding plus contingently
issuable shares and the additional common shares that would have been
outstanding if dilutive potential common shares had been issued, using the
treasury stock method.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 In October 1995,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 123 "Accounting for Stock-Based Compensation."
SFAS No. 123 requires expanded disclosures for the stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25,
"Accounting for Stock Issued to Employees," which recognizes compensation cost
based on the intrinsic value of equity instrument awarded. The Company elected
to continue to apply APB Opinion No. 25 to its stock based compensation awards
to employees and has disclosed the pro forma effect on net income and earnings
per share.
21
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The following disclosure of estimated fair value was determined by available
market information and appropriate valuation methodologies; however,
considerable judgment is necessary to interpret market data and develop the
related estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts that could be realized upon
disposition of the financial instruments. The use of market assumptions and or
estimation methodologies may have a material effect on estimated fair value
amounts.
Cash and cash equivalents, accounts receivable, inventories, investment
in sales type leases, accounts payable and accrued expenses carrying cost
reasonably approximates their fair value because of the short maturities of
these investments.
Other assets are carried at cost or net amortized cost, which, in
management's opinion, is less than fair value.
The Company believes that the carrying amount of its outstanding notes
payable at December 31, 1997 and 1996 is a reasonable estimate of their fair
value. This was determined based on a review of borrowing rates available to the
Company at December 31, 1997 and 1996 for loans with similar terms and average
maturities.
The Company periodically assesses its ability to recover the carrying
value of its long-lived assets. If management concludes that the carrying value
will not be recovered, an impairment write down is recorded to reduce the asset
to its estimated fair value.
2. OTHER FINANCIAL DATA Following are details concerning certain
balance sheet accounts as of December 31, 1997 and 1996 (in thousands):
1997 1996
------------ ------------
Accounts receivable:
Trade billed $1,861 $1,238
Trade unbilled 394 292
------------ ------------
2,255 1530
Less allowance for doubtful accounts (294) (196)
------------ ------------
Total $1,961 $1,334
============ ============
Inventories:
Materials $1,844 $1,840
Work-in-process 220 345
Finished goods 640 272
------------ ------------
Total $2,704 $2,457
============ ============
Property, plant and equipment:
Computers and equipment $1,162 $1,405
Furniture and fixtures 332 332
Tooling 324 308
Building and improvements 37 35
------------ ------------
1,855 2,080
Less accumulated depreciation (1,273) (1,255)
------------ ------------
Total $582 $825
============ ============
Other assets:
Patents $677 $677
Software development costs 268 268
Deposits 628 720
Other 136 3
------------ ------------
1,709 1,668
Less accumulated amortization (941) (879)
------------ ------------
Total $768 $789
============ ============
3. NOTES PAYABLE Notes payable at December 31, 1997 and 1996 consists
of notes aggregating $2,648 thousand and $1,025 thousand, respectively. The
notes bear interest at rates ranging from 0% to 15%. Included in notes payable
is a Loan and Security Agreement entered into by the Company on May 5, 1997 for
a revolving line of credit whereby the Company can borrow up to $3 million. The
loan bears interest at prime plus 4% which is reduced by 1% annually if the
Company meets certain performance benchmarks, matures on March 31, 2000 and is
secured by virtually all of the Company's assets. At December 31, 1997, the
Company had borrowed approximately $2.3 million under this Agreement.
22
<PAGE>
Future principal payments on notes payable as of December 31, 1997, are
as follows (in thousands):
Year ending December 31,
1998 $ 277
1999 104
2000 2,267
-------
$ 2,648
=======
4. OTHER LIABILITIES Other liabilities at December 31, 1997 and 1996
included $757 thousand and $939 thousand, respectively, of various accrued
expenses payable at dates beyond December 31, 1998 and 1997, respectively.
5. OPERATING LEASES The Company leases certain of its vending
terminals to customers under agreements accounted for as operating leases. The
net investment in vending terminals held under operating leases at December 31,
1997 and 1996 consisted of approximately $5.1 million and $3.9 million,
respectively, less accumulated depreciation and reserves of approximately $2.4
million and $1.5 million at December 31, 1997 and 1996, respectively.
Approximate future minimum lease payments receivable by the Company
under operating leases as of December 31, 1997, are as follows (in thousands):
Year ending December 31,
1998 $2,936
1999 1,116
2000 147
-------
$4,199
=======
6. SALES-TYPE LEASES The Company leases certain of its vending
terminals under agreements accounted for as sales-type leases. Included in
product sales are approximately $5 million and $3 million of revenues related to
sales-type leases for the years ended December 31, 1997 and 1996, respectively.
These non-cancelable leases expire over the next one to five years.
<TABLE>
The following lists the components of the net investment in sales-type
leases as of December 31, 1997 and 1996 (in thousands):
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Total minimum lease including service payments to
be received $9,453 $9,358
Less amounts representing estimated executory
costs, including profit (830) (3,537)
------------ ------------
Net minimum lease payments receivable 8,623 5,821
Estimated unguaranteed residual value 1,071 1,839
Less unearned interest income (2,418) (1,013)
Less reserves for sales-type leases (274) (1,252)
------------ ------------
Net investment in sales-type leases $7,002 $5,395
============ ============
</TABLE>
Future minimum lease including service payments due from customers
under sales-type leases as of December 31, 1997, are as follows (in thousands):
Year ending December 31,
1998 $3,107
1999 2,534
2000 1,950
2001 1,220
2002 642
--------
$9,453
========
23
<PAGE>
The amortization of unearned income for sales-type leases amounted to
approximately $458 thousand and $842 thousand for the years ended December 31,
1997 and 1996, respectively, which is included in interest income.
7. LEASE FINANCING...During 1996 the Company's financing efforts included the
sales of leases for which the Company received approximately $1.3 million. The
sale of these leases resulted in a losses of $34 thousand in 1996, which is
included in the "other" category of other income (expense). The security
agreement with MLC Group, Inc. ("MLC"), purchaser of the leases, provides a
security interest in collateral relating to the specific state lottery lease
contracts for leases sold to MLC.
8. INCOME TAXES Following is a reconciliation of the income tax benefit expected
(based on the statutory federal income tax rate) to the actual income tax
provision recorded (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Tax benefit (expense) computed at the statutory federal
rate of 34% $(547) $(49)
State income tax benefit, net of federal income tax effect (95) (11)
Expenses not deductible for income tax
purposes (9) (13)
Change in valuation allowance for
deferred income tax assets 615 73
------------ ------------
Provision for income taxes $(36) $ -
============ ============
</TABLE>
<TABLE>
<CAPTION>
Deferred income tax assets and the related valuation allowance as of
December 31, 1997 and 1996, result from the following temporary differences:
1997 1996
------------ ------------
<S> <C> <C>
Net operating loss carryforwards $1,638 $2,803
Inventory and other reserves 4,412 2,666
Valuation allowance (6,050) (5,469)
------------ ------------
Net deferred income tax assets $ - $ -
============= ============
</TABLE>
Management believes future taxable income of the Company may be
adequate to utilize a portion of the Company's net operating loss carryforwards
and realize a portion of the related deferred income tax asset. However, due to
significant losses for income tax reporting purposes in 1996 as well as the
other issues currently being addressed by the Company, management has concluded
that a valuation allowance is needed to reduce the carrying value of deferred
income tax assets to zero.
At December 31, 1997, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $4.6 million available to
offset future federal taxable income which expire during the years 2011 and
2012.
9. SHAREHOLDERS' EQUITY
PREFERRED STOCK The Company is authorized to issue up to two million
shares of preferred stock without further shareholder approval; the rights,
preferences and privileges of which would be determined at the time of issuance.
STOCK OPTION PLANS The Company has employee option plans whereby
options to purchase 1,972,500 shares of the Company's common stock may be
granted to certain employees, and an option plan for directors under which
options for 525,000 shares of the Company's common stock may be issued to
directors of the Company.
The Company has three fixed option plans which reserve shares of common
stock for issuance to executives, key employees and directors. The Company has
adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been recognized
for the stock option plans. Had compensation for the Company's three stock
option plans been determined based on the fair value at the grant date for
awards in 1997 and 1996 consistent with the provisions of SFAS No. 123, the
Company's net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below:
24
<PAGE>
<TABLE>
<CAPTION>
1997 1996
Net Per Share Net Per
Earnings Basic Diluted Earnings Share
-------- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C>
As Reported $1,572 $0.17 $0.15 $135 $0.02
====== ===== ===== ==== =====
Pro Forma $1,321 $0.15 $0.12 $100 $0.01
====== ===== ===== ==== =====
</TABLE>
In 1997 the fair value of options granted is estimated as approximately
$391 thousand on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used for the grants; dividend
yield of 0%; forfeiture rate of 26%; expected volatility of 70%; risk free
interest rate of 5.69%; and expected lives of 1.77 years. In 1996 the fair value
of options granted is estimated as approximately $168 thousand on the date of
the grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants; dividend yield and forfeiture rate
of 0%; expected volatility of 69.93%; risk free interest rate of 5.94%; and
expected lives of 2 years.
In January 1997, three consultants were granted options to purchase a
total of 30,000 shares of the Company's common stock at $.90 per share. 25,000
shares vested in 1997 and the remaining 5,000 shares will vest in 1998. In
October 1995, pursuant to an agreement, a former officer was granted an option
to purchase 50,000 shares of the Company's common stock at $2.00 per share. This
option vested on the date of grant. In October 1994, pursuant to an agreement,
an officer of the Company was granted an option to purchase 100,000 shares of
the Company's common stock at $7.45 per share. This option vested on the date of
the grant.
<TABLE>
Information regarding these option plans for 1997 and 1996 follows:
<CAPTION>
1997 1996
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
-------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
Outstanding at January 1 1,171,577 $2.21 796,585 $7.54
Granted 367,080 1.13 890,000 .80
Exercised (25,000) 1.00 -- --
Forfeited (233,277) 4.83 (515,008) 8.03
----------- -----------
Outstanding at December 31 1,280,380 1.63 1,171,577 2.21
=========== ===========
<CAPTION>
<S> <C> <C>
Option price range, December 31 $.80 - $7.54 $.80 - $7.86
Options available for grant, December 31 1,372,120 1,475,923
</TABLE>
Options granted in 1996 included 870,000 shares issued at $.80 per share to
Frederick Sandvick, the Company's Chief Executive Officer and Chairman of the
Board of Directors, pursuant to a three year employment agreement.
<TABLE>
The following table summarizes information about fixed-price stock
options outstanding at December 31, 1997:
<CAPTION>
Shares Options Exercise Remaining
Outstanding Exercisable Price ($) Life (Years)
----------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
50,000 50,000 2.00 1
30,000 25,000 .90 2
60,000 20,000 1.00 - 2.44 2 - 3
170,380 31,190 .90 3
100,000 100,000 7.54 7
870,000 580,000 .80 8
</TABLE>
25
<PAGE>
STOCK WARRANTS In January 1997, the Chief Executive Officer of the
Company, received a warrant to purchase 500,000 shares of the Company's Common
Stock at $.63 per share pursuant to his personal guaranty and indemnity in
connection with a $2,000,000 performance bond. The warrant has a five year term
and became exercisable in January 1997. In January 1997, Vanguard Strategies,
Inc. ("VSI") received a warrant to purchase 250,000 shares of the Company's
Common Stock at $.72 per share pursuant to a consulting agreement entered into
with the Company. The warrant has a five year term and became exercisable in
January 1997. In 1996, solely as compensation and not with respect to any
recapitalization, the Company issued warrants to purchase 865,000 shares of the
Company's common stock at prices ranging from $.60 - $.69 for terms of one to
five years. VSI received 700,000 of these warrants pursuant to an agreement with
the Company under which VSI, as exclusive consultant, assisted the Company in
negotiating financing arrangements. The Company's Chief Executive Officer and
Chairman of the Board of Directors, is the president and principal stockholder
of VSI. The Company recognized $80 thousand of compensation expense related to
the 1996 VSI warrants.
10. COMMITMENTS AND CONTINGENCIES
PURCHASE AND LEASE COMMITMENTS As of December 31, 1997 and 1996, the
Company had purchase commitments for production materials of approximately zero
and $600 thousand, respectively. Purchases against such commitments were
approximately $600 thousand in both 1997 and 1996.
The Company leases facilities under operating leases expiring at
various dates through June 1999. Rent expense for such facilities totaled $264
thousand and $199 thousand for the years ended December 31, 1997 and 1996,
respectively. Future minimum rentals under noncancelable operating leases as of
December 31, 1997 are $161 thousand and $5 thousand for the years ending
December 31, 1998 and 1999, respectively.
CUSTOMER DISPUTE Since 1994, the Company has sought reimbursement
from the California State Lottery ("CSL") for the supply and installation of
out-of-warranty spare parts and related sales tax pursuant to its service
contract. The claim is estimated at more than $1.9 million. The California State
Lottery has refused to honor the claim and has responded with a claim of $1.7
million in liquidated damages for the Company's alleged delay in responding to
service calls in 1994 and 1995. Further, the California State Lottery has
withheld payment of more that $300 thousand in outstanding invoices for products
and services from the Company. The Company contends that the contracts
liquidated damage claim is unenforceable because it is impermissibly punitive,
unconscionable and unrelated to any real damages, if any, experienced by the
California State Lottery for delayed service call responses. The Company notes
that the California State Lottery in September 1995 confirmed that ONPT
manufactured good ITR terminals during the three years of the contract and that
ONPT had been "responsive to CSL needs and concerns and have provided a good
level of service overall." The Company also asserts that the California State
Lottery has significantly limited the Company's cash flow since 1994 by failing
to recognize its spare parts obligation which now totals an estimated $1.9
million and by withholding other payments due to the Company. The Company is
presently examining its legal options and is analyzing how much of its lost
revenues and business opportunities as well as its cash flow problems and stock
price drop are related to the California State Lottery's actions. The Company is
also attempting to negotiate a fair resolution of all claims with the California
State Lottery. To date no legal action has been brought by either party and both
parties are seeking to resolve this matter amicably. No amounts related to this
receivable have been recorded in the accompanying financial statements.
LEGAL PROCEEDINGS The Company is a party to legal proceedings in the
ordinary course of its business, the most significant of which is described
below.
26
<PAGE>
On January 23, 1996, the Company's principal competitor, ILI, filed an
action against the Company in the Common Pleas Court of Hamilton County, Ohio.
The action arises from an agreement in principle between ILI and the Company
which was signed on March 23, 1995. The agreement in principle related to a
proposed merger transaction between ILI and the Company. After certain due
diligence and negotiations, in July 1995 the parties decided not to proceed with
the transaction reflected in the agreement in principle. In the action, ILI
contends that, under the agreement in principle, the Company is responsible to
pay ILI's reasonable fees and expenses in connection with the proposed merger
because the transaction did not proceed due to the Company's actions. In
addition, ILI contends that another provision of the agreement in principle
obligates the Company to pay a "break-up fee" in the event the Company entered
into a "binding commitment to engage in a recapitalization, debt issuance or
working capital financing other than in the ordinary course of business within
one year of the public announcement of such abandonment or termination [of the
proposed merger transaction]." In the action, ILI seeks reimbursement of alleged
fees and expenses of $240 thousand, payment of a break-up fee in the amount of
$989 thousand and reasonable attorney's fees. The Company removed ILI's action
to the United States District Court for the Southern District of Ohio on
February 26, 1996. On March 4, 1996 the Company filed an answer denying all
liability to ILI. The Company also asserted a counterclaim against ILI seeking a
declaratory judgment that the break-up fee has not been triggered under the
terms of the agreement in principle, seeking to recover the Company's own costs
and expenses in connection with the proposed merger agreement and seeking
compensatory damages from ILI for unfair competition and tortuous interference
with business relations. The Company's counterclaim sought compensatory damages
in excess of $500 thousand, plus attorney's fees, costs and reimbursement of the
merger related expenses. In February 1997 the court rendered judgement on behalf
of ILI with regard to certain expenses incurred by it during the merger
negotiations in the amount of approximately $238,000. However, upon motion by
the Company, the court reconsidered this ruling and reversed its ruling that the
Company is legally responsible for fees relating to the merger. Following the
court's ruling, ILI filed another brief requesting the court reconsider its
reversal of the summary judgement on the issue of merger costs. In March 1998,
the court rendered summary judgment on behalf of ILI with regard to the
Company's claims of unfair competition and tortuous interference with business
relations. The Company believes that no amounts are owed by it to ILI under the
agreement in principle. The Company is contesting the lawsuit vigorously and
intends to appeal the court's ruling with regard to its claims of unfair
competition and tortuous interference with business relations.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 10. MANAGEMENT RENUMERATION AND TRANSACTIONS
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by items 9, 10, 11 and 12 are incorporated by
reference from the 1998 Proxy Statement to by filed with the Securities and
Exchange Commission within 120 days of the end of the fiscal year covered by
this report.
27
<PAGE>
<TABLE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K AND 8-K/A
a)Exhibits:
---------
<CAPTION>
Exhibit Numbers Description of Documents
- --------------- ------------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of Registrant (B)
3.1.1 Amended and Restated Articles of Incorporation dated March 1, 1993 (D)
3.1.2 Certificate of Amendment to Articles of Incorporation dated August 6, 1996 (H)
3.2 Restated By-Laws of Registrant (C)
3.2.1 Restated By-Laws dated March 1, 1993 and Amendment thereto dated May 27, 1993 (D)
3.3 Certificate of corporate status dated August 3, 1993 (D)
4.1 Specimen Stock Certificate (C)
4.2 Form of Representative's Warrant (C)
10.1 Employment Agreement dated July 1, 1991, between Registrant and Robert L.
Burr, and the January 11 and April 21, 1993, amendments thereto (A)
10.2 Employment Agreement dated July 1, 1991, between Registrant and John F.
Winchester, and the April 21, 1993, amendment thereto (A)
10.3 ITR Sale and Lease Agreement, dated as of January 12, 1993, between
Registrant and the State of Missouri (C)
10.3.1 Amendment No.1 to ITR Sale and Lease Agreement between Registrant and
the State of Missouri (C)
10.4 ITR Sales and Service Agreements dated March 21, 1991 between
Registrant and the Commonwealth of Virginia, as amended (C)
10.5 ITR Sales Agreement dated August 13, 1992 between Registrant and the
California State Lottery, as amended (A)
10.5.1 Extension of ITR Sales Agreement between Registrant and the California Lottery (C)
10.6 ITR Sale and Lease Agreement, dated as of April 9, 1993, between
Registrant and the State of Washington (A)
10.7 Form of Indemnification Agreement between Registrant and its officers and directors (C)
10.8 1993 Stock Option Plan (A)
10.8.1 First Amendment to 1993 Stock Option Plan (C)
10.9 Line of Credit Agreement between Registrant and the Bank of America (A)
10.10 Technology Transfer Agreement, dated as of April 9, 1993, between
Registrant and certain of its shareholders (confidential treatment requested
as to certain portions) (B)
10.11 Agreement to Purchase and Sale of Assets, dated February 9, 1993, between
Registrant, CVS and Michael C. Brown (confidential treatment requested as
to certain portions) (B)
10.12 Documents relating to purchase of ITR terminals by the Province of Ontario (B)
10.13 Stock Option Agreement between Robert L. Burr and the Trust, as amended (C)
10.14 Lease with regard to 9190 Activity Road, San Diego, CA premises (D)
10.15 1993 Stock Option Plan (D)
10.16 1994 Stock Option Plan (E)
10.17 1994 Stock Option Plan for Directors (E)
10.18 Agreement to acquire 50% of LEI Mexico (E)
10.19 Agreement to sell machines to LEI Mexico (E)
10.20 John Robinson Note (F)
10.21 Employment agreement with Frederick Sandvick (G)
10.22 Loan Agreement between Registrant and U.S. Mortgage Bankers Corporation (I)
10.23 Employment Agreement with Michael Wright (I)
10.24 Loan and Security Agreement between Registrant and Coast Business Credit (J)
10.25 Termination of Agreement between Registrant and Vanguard Strategies, Inc. (K)
24.1 Power of attorney (reference is made to Page II-5 of the Registration
Statement as originally filed.) (A)
</TABLE>
(A) Incorporated by reference to Registrant's Registration Statement on Form
S-2 dated April 23,1993 (Registration No. 33-61442)
(B) Incorporated by reference to Registrant's Amendment No. 1 to the
Registration Statement on Form S- 2 filed on June 1, 1993.
(C) Incorporated by reference to Registrant's Amendment No. 2 to the
Registration Statement on Form S- 2 filed on June 21, 1993.
(D) Incorporated by reference to Registrant's Annual Report on Form 10-KSB for
the year ended December 31, 1993.
(E) Incorporated by reference to Registrant's Annual Report on Form 10-KSB for
the year ended December 31, 1994.
(F) Incorporated by reference to Registrant's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1995.
(G) Incorporated by reference to Registrant's Quarterly Report on Form 10-QSB
for the quarter ended March 31, 1996
(H) Incorporated by reference to Registrant's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1996
(I) Incorporated by reference to Registrant's Annual Report on Form 10-KSB for
the year ended December 31, 1996. (J) Incorporated by reference to
Registrant's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1997.
(K) Included herein.
b)REPORTS ON FORM 8-K: The Registrant did not file any reports on Form 8-K
during the last quarter for the year for which this report is filed.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amendment to annual report to
be signed on its behalf by the undersigned, thereunto duly authorized.
ON-POINT TECHNOLOGY SYSTEMS, INC.
Dated: March 30, 1998 By: /s/ Frederick Sandvick
---------------------------------
Frederick Sandvick
Chief Executive Officer and
Chairman of the Board of Directors
Dated: March 30, 1998 By: /s/ Kenneth Hoitt
---------------------------------
Kenneth Hoitt
Chief Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and dates indicated.
Dated: March 30, 1998 By: /s/ John H. Olbrich
---------------------------------
John H. Olbrich, Director
Dated: March 30, 1998 By: /s/ James M. Bouskos
---------------------------------
James M. Bouskos, Director
29
<PAGE>
TERMINATION OF AGREEMENT
This Termination of Agreement is made and entered into on the 19th day
of March, 1998, by and between ON-POINT TECHNOLOGY SYSTEMS, INC., a Nevada
corporation (previously known as Lottery Enterprises, Inc.) ("ON-POINT") and
VANGUARD STRATEGIES, INC., a Nevada corporation ("VSI") with reference to the
following facts and objectives:
A. ON-POINT and VSI entered into an Agreement dated January 9, 1996
relating to the formation of a wholly-owned subsidiary of ON- POINT for the
purpose of handling and pursuing the exclusive rights to all international sales
of ON-POINT's machines and products (a copy of which is attached hereto as
Exhibit A) ("Agreement"). For convenience, such subsidiary is referred to in the
Agreement as "LEI International."
B. The Agreement required ON-POINT to form LEI International within 60
days of the date of the Agreement, which date was postponed indefinitely by VSI.
C. Pursuant to the terms of the Agreement and the stock option
agreements attached thereto, VSI and Robert Burr were to be granted options to
purchase up to eighty percent (80%) of the outstanding common stock of LEI
International, which were to become exercisable upon satisfaction of certain
performance criteria described in the stock option agreements. In addition,
pursuant to such stock option agreements, ON-POINT had the right to repurchase
the stock of LEI International in accordance therewith.
D. ON-POINT and VSI desire to terminate the Agreement as provided
herein.
<PAGE>
IT IS, THEREFORE, AGREED as follows:
1. TERMINATION OF AGREEMENT.
In consideration of granting of the stock options described in
paragraph 2, the Agreement is hereby terminated effective immediately and is
null and void. ON-POINT and VSI acknowledge that the Agreement was never
implemented by the parties.
2. ON-POINT STOCK OPTIONS.
Concurrently with the execution of this Agreement, ON-POINT shall
grant options to purchase ON-POINT common stock to VSI and Robert Burr pursuant
to Stock Option Agreements which shall be in the form as attached hereto as
Exhibits B and C.
EXECUTED in San Diego, California on the date first written above.
ON-POINT TECHNOLOGY SYSTEMS, INC.
By:_______________________________
Frederick Sandvick, CEO
VANGUARD STRATEGIES, INC.
By:_______________________________
CONSENTED AND AGREED TO:
- ---------------------------
Robert L. Burr
2
<PAGE>
EXHIBIT A
AGREEMENT
THIS AGREEMENT is made and entered into as of January 9 , 1996, by and
between LOTTERY ENTERPRISES, INC., a Nevada corporation ("LEI"), and VANGUARD
STRATEGIES, INC., a Nevada corporation ("VSI").
IT IS AGREED as follows:
1. Within sixty (60) days of the date of this Agreement, LEI shall form
a wholly-owned subsidiary for the purpose of handling and pursuing the exclusive
rights to all international sales of LEI's machines and products. The subsidiary
is hereinafter referred to for convenience as "LEI International."
2. LEI shall cause LEI International to initially issue 50,000 shares of
its common stock to LEI in exchange for a contribution and assignment of all of
LEI's right, title and interest in: (a) various distributor agreements relating
to international sales, (b) LEI's ownership interests in Editec and LEI Mexico,
S.A. de C.V., and (c) an exclusive distribution agreement for all LEI machines
and products in locations other than the United States and its territories and
Canada. LEI shall cause LEI International to enter into Stock Option Agreements
with VSI and Robert Burr for a total of 200,000 shares of common stock, which
agreements shall be in the form as attached hereto as Exhibits A and B. No
additional shares of stock of LEI International shall be issued without the
consent of both LEI and VSI until expiration of such options.
3. Each party to this Agreement agrees to perform any further acts and
execute and deliver such further documents which may be reasonably necessary to
carry out the provisions of this Agreement.
4. The covenants and agreements contained herein shall inure to the
benefit of and be binding upon the parties and their respective executors,
administrators and assigns.
5. This Agreement has been entered into in San Diego, California, and
shall be interpreted and governed by the laws of the State of California.
6. This instrument contains the entire Agreement of the parties with
respect to the subject matter hereof. It may be changed only by an agreement in
writing signed by the parties.
7. If any term, provision, covenant or condition of this Agreement is
held by a court of competent jurisdiction to be invalid, void or unenforceable,
the remaining provisions shall remain in full force and effect.
A-1
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
LOTTERY ENTERPRISES, INC.
By: /s/ Catherine Winchester
------------------------------
Catherine Winchester,
Chief Operating Officer
VANGUARD STRATEGIES, INC.
By: /s/ Frederick Sandvick
------------------------------
Frederick Sandvick, President
A-2
<PAGE>
EXHIBIT A (TO EXHIBIT A)
STOCK OPTION AGREEMENT
THIS AGREEMENT is made and entered into as of the ____ day of
___________, 1996, by and between __________________________, a _________
corporation ("LEI International"), and Vanguard
Strategies, Inc., a Nevada corporation ("VSI").
W I T N E S S E T H:
WHEREAS, the Board of Directors of LEI International has agreed to
extend to VSI as of the date of this Agreement (the "Date of Grant") a
non-qualified stock option to purchase shares of common stock of LEI
International ("Stock"); and
WHEREAS, VSI desires to obtain the option set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and
covenants made herein and the mutual benefits to be derived here-
from, the parties hereto agree as follows:
1. GRANT OF STOCK OPTION
LEI International grants to VSI the right and option to purchase, on the
terms and conditions hereinafter set forth, all or any part of an aggregate of
_____________________ (________) shares of Stock ("Option Shares") at the price
of one dollar ($1.00) per share, exercisable from time to time subject to
provisions of this Agreement prior to the close of business on _______________,
2001 [Note: this date is 5 years from Date of Grant] (the "Expiration Date").
The option granted hereby is a non-qualified stock option.
A-3
<PAGE>
2. EXERCISABILITY OF OPTION
Except as otherwise provided in this Agreement, the Option Shares shall
vest and become exercisable on the later of:
(a) the first year anniversary of the Date of Grant, or
(b) the date as of which Lottery Enterprises, Inc. ("LEI"), the
parent corporation of LEI International, has "income before provision
for income taxes" as shown on LEI's Consolidated Statement of Operations
("Pre-tax Income") as determined on a cumulative basis for four (4)
consecutive fiscal quarters of at least one million five hundred
thousand dollars ($1,500,000), as shown on LEI's forms 10-Q and 10-K
filed with the Securities and Exchange Commission; provided, however,
that Pre-tax Income shall be adjusted to reflect only a twenty percent
(20%) ownership interest in LEI International, or
(c) the date VSI has obtained an additional $1,050,000 in
financing for LEI either in the form of debt or equity in accordance
with the Letter Agreement between VSI and LEI dated January ___, 1996.
In no event may this option be exercised after the Expiration Date.
3. METHOD OF EXERCISE OF OPTION AND PAYMENT OF PURCHASE PRICE\
This option shall be exercised, in whole or in part, by the delivery to
the Secretary of LEI International of a written notice stating the number of
Option Shares to be purchased and accompanied by payment of the purchase price
in full by certified or cashiers' check made payable to the order of LEI
International. In addition,
A-4
<PAGE>
VSI shall furnish any written statements required pursuant to
Section 8 below.
4. NON-ASSIGNABILITY OF OPTION
Except as otherwise provided in this Agreement, this option may be
exercised only by VSI. Except as otherwise provided in this Agreement, this
option shall not be offered, sold, transferred, assigned, pledged, hypothecated,
or otherwise disposed of in any way (whether by operation of law or otherwise)
and shall not be subject to execution, attachment or similar process. Upon any
attempt so to transfer, assign, pledge, hypothecate, or otherwise dispose of the
option contrary to the provisions hereof, or upon the levy of any attachment or
similar process upon such option, the option shall immediately become null and
void.
5. OPTION TO PURCHASE BY LEI
During the period commencing with the two (2) year anniversary of the
Date of Grant and ending with the Expiration Date, LEI shall have the option to
purchase from VSI both the unexercised Option Shares and the shares of Stock
issued upon the exercise of the Option Shares (collectively referred to as the
"Option Stock") for a price equal to the Agreed Value or the Appraised Value, as
the case may be, of the Option Stock. If LEI desires to purchase all of the
Option Stock, the Secretary of LEI shall give a written notice of exercise to
VSI ("Notice of Exercise").
The purchase price to be paid for each share of the Option Stock shall
be equal to the Agreed Value or Appraised Value of LEI International, as the
case may be, divided by the number of shares of Stock outstanding, assuming the
exercise of all outstanding
A-5
<PAGE>
stock options. The Agreed Value shall be the value of LEI International as
agreed upon between VSI and LEI. If they do not agree upon a value within thirty
(30) days after the date of the Notice of Exercise, VSI or LEI may give notice
("Appraisal Notice") to the other of intention to submit the matter to an
appraiser for determination. Within fifteen (15) days from the date of delivery
of the Appraisal Notice, the parties shall select a single neutral appraiser to
determine the fair market value of LEI International ("Appraised Value"). If the
parties are unable to agree upon a single neutral appraiser, then within thirty
(30) days following delivery of the Appraisal Notice, each party shall select an
appraiser who shall each determine the fair market value of LEI International.
In the event the difference between fair market value of LEI International as
determined by each of the two appraisers is fifteen percent (15%) or less (such
percentage to be based on the lower determination), the values shall be averaged
and the resulting average shall be the Appraised Value. In the event the
difference between the fair market value of LEI International as determined by
each of the two appraisers is greater than fifteen percent (15%) (such
percentage to be based on the lower determination), and the parties do not agree
to average the values, the two appraisers shall appoint a third appraiser who
alone shall determine the fair market value of LEI International. In determining
the fair market value of LEI International, the appraiser(s) shall take into
consideration among other things the tangible assets of LEI International, its
receivables, securities and other intangible assets, liabilities and past and
current
A-6
<PAGE>
earnings. The decision of the appraiser(s) shall be binding upon the parties. As
soon as the Appraised Value of LEI International has been determined, the
appraiser(s) shall give written notice to the parties. All expenses of
appraisal, including legal fees and costs of the proceedings to petition to
compel arbitration, shall be borne pro rata by the respective parties.
The purchase and sale of the Option Stock between the parties
shall occur at an agreed upon time and place within fifteen (15) days of the
final determination of the Agreed Value or the Appraised Value (the "Closing").
At the Closing, LEI shall pay to VSI the purchase price in cash or at LEI's
option, a combination of LEI common stock and cash (provided the cash shall not
be less than an amount equal to the income taxes owed by VSI resulting from the
transaction) in exchange for the Option Stock.
6. ADJUSTMENTS AND OTHER RIGHTS
In the event that additional shares of Stock are issued pursuant to a
stock split or a stock dividend, the number of unexercised Option Shares shall
be increased proportionately with no increase in the total purchase price of
such Option Shares. In the event that the shares of Stock of LEI International
from time to time issued and outstanding are reduced by a combination of shares,
the number of unexercised Option Shares shall be reduced proportionately with no
reduction in the total price of such Option Shares. In the event that LEI
International should transfer assets to another corporation and distribute the
stock of such other corporation without the surrender of Stock of LEI
International, and if such distribution is not taxable as a dividend and no gain
A-7
<PAGE>
or loss is recognized by reason of Section 355 of the Internal Revenue Code, or
some similar section, then the total purchase price of the unexercised Option
Shares shall be reduced by an amount which bears the same ratio to the total
purchase price then in effect as the market value of the stock distributed in
respect of a share of Stock of LEI International, immediately following the
distribution, bears to the aggregate of the market value at such time of a share
of Stock of LEI International and the stock distributed in respect thereof. All
such adjustments shall be made by the Board of Directors, whose determination
upon the same shall be final and binding upon VSI. Any fractional shares
resulting from the computations pursuant to this Section 6 shall be eliminated
from this option. No adjustments shall be made for cash dividends or the
issuance to stockholders of rights to subscribe for additional Stock or other
securities.
7. LIMITATIONS OF VSI'S RIGHTS
Neither VSI nor any other person entitled to exercise this option shall
have any of the rights or privileges of a shareholder of LEI International in
respect of any shares issuable upon exercise of this option unless and until a
certificate representing such shares shall have been issued in the name of VSI
or such person.
8. REPRESENTATIONS OF VSI
VSI represents, agrees and certifies that:
(a) If VSI exercises this option in whole or in part at a time
when there is not in effect under the Securities Act of 1933, as amended
(the "Act"), a registration statement
A-8
<PAGE>
relating to the shares issuable upon exercise hereof, and available for
delivery to VSI a prospectus meeting the requirements of Section
10(a)(3) of the Act, VSI will acquire the shares issuable upon such
exercise for the purpose of investment and not with a view to their
resale or distribution, and upon each such exercise of this option, VSI
will furnish to LEI International a written statement to such effect,
satisfactory in form and substance to LEI International and its counsel;
(b) If and when VSI proposes to offer to sell shares which are
issued to VSI upon exercise of this option at a time when there is not
in effect under the Act a registration statement relating to the resale
of such shares and available for delivery a prospectus meeting the
requirements of Section 10(a)(3) of the Act, or if VSI is a holder of
10% or more of the stock of LEI International, VSI will notify LEI
International prior to any such offering or sale and will abide by the
opinion of counsel of LEI International as to whether and under what
conditions and circumstances, if any, VSI may offer and sell such
shares; and
(c) No shares may be acquired hereunder pursuant to exercise of
the option granted hereby unless and until any then applicable
requirements of the Securities and Exchange Commission, the California
Department of Corporations, other regulatory agencies, including any
other state securities law commissioners having jurisdiction over LEI
International or
A-9
<PAGE>
such issuance, and any exchanges upon which Stock of LEI International
may be listed, shall have been fully satisfied. VSI understands that the
certificate or certificates representing the shares acquired pursuant to
this option may bear a legend referring to the foregoing matters and any
limitations under the Act and state securities laws with respect to the
transfer of such shares, and LEI International may impose stop transfer
instructions to implement such limitations, if applicable. Any person or
persons entitled to exercise this option under the provisions of Section
4 above shall be bound by and obligated under the provisions of this
Section 8 to the same extent as is VSI.
9. NOTICES
Any notice to be given under the terms of this Agreement shall
be in writing and addressed to the Secretary of LEI International
at its principal office, and to VSI at its principal office, or at
such other address as either party may hereinafter designate in
writing to the other.
10. LAWS APPLICABLE TO CONSTRUCTION
The interpretation, performance and enforcement of this
Agreement and all rights and obligations of the parties hereunder
shall be governed by the laws of the State of California.
11. NECESSARY ACTS
Each party to this Agreement agrees to perform any further acts and
execute and deliver any documents that may be reasonably necessary to carry out
the provisions of this Agreement.
A-10
<PAGE>
12. SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon and shall inure to the
benefit of the parties and their respective successors and assigns.
13. SEVERABILITY
Each provision of this Agreement shall be viewed as separate
and divisible, and in the event any provision shall be held to be
invalid, the remaining provisions shall continue to be in full
force and effect.
14. NO ORAL CHANGES
This instrument contains the entire agreement of the parties. It may be
changed only by an agreement in writing, signed by both parties.
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto as of the date hereinabove set forth.
A-11
<PAGE>
EXHIBIT B (TO EXHIBIT A)
STOCK OPTION AGREEMENT
THIS AGREEMENT is made and entered into as of the ____ day of
___________, 1996, by and between __________________________, a _________
corporation ("LEI International"), and Robert Burr, an individual residing in
San Diego, California ("Burr").
W I T N E S S E T H:
WHEREAS, the Board of Directors of LEI International has agreed to
extend to Burr as of the date of this Agreement (the "Date of Grant") a
non-qualified stock option to purchase shares of common stock of LEI
International ("Stock"); and
WHEREAS, Burr desires to obtain the option set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and
covenants made herein and the mutual benefits to be derived here-
from, the parties hereto agree as follows:
1. GRANT OF STOCK OPTION
LEI International grants to Burr the right and option to purchase, on
the terms and conditions hereinafter set forth, all or any part of an aggregate
of _____________________ (________) shares of Stock ("Option Shares") at the
price of one dollar ($1.00) per share, exercisable from time to time subject to
provisions of this Agreement prior to the close of business on _______________,
2001 [Note: this date is 5 years from Date of Grant] (the "Expiration Date").
The option granted hereby is a non-qualified stock option.
A-12
<PAGE>
2. EXERCISABILITY OF OPTION
Except as otherwise provided in this Agreement, the Option Shares shall
vest and become exercisable on the later of:
(a) the first year anniversary of the Date of Grant, and
(b) the date as of which Lottery Enterprises, Inc. ("LEI"), the
parent corporation of LEI International, has "income before provision
for income taxes" as shown on LEI's Consolidated Statement of Operations
("Pre-tax Income") as determined on a cumulative basis for four (4)
consecutive fiscal quarters of at least one million five hundred
thousand dollars ($1,500,000), as shown on LEI's forms 10-Q and 10-K
filed with the Securities and Exchange Commission; provided, however,
that Pre-tax Income shall be adjusted to reflect only a twenty percent
(20%) ownership interest in LEI International, or
(c) the date VSI has obtained an additional $1,050,000 in
financing for LEI either in the form of debt or equity in accordance
with the Letter Agreement between VSI and LEI dated January ___, 1996.
In no event may this option be exercised after the Expiration Date.
3. EXCLUSIVE SERVICES TO LEI AND LEI INTERNATIONAL
This option shall immediately become null and void in the event Burr
performs services for or engages in any business other than the business of LEI
and LEI International and does not devote his full business time and best
efforts to the business of LEI and LEI International and perform faithfully,
exclusively and to the best of his ability and powers the duties assigned to him
by the
A-13
<PAGE>
Boards of Directors of LEI and LEI International, unless LEI and
LEI International consent otherwise in writing. This Section shall
not apply to passive investments by Burr.
4. METHOD OF EXERCISE OF OPTION AND PAYMENT OF PURCHASE PRICE
This option shall be exercised, in whole or in part, by the delivery to
the Secretary of LEI International of a written notice stating the number of
Option Shares to be purchased and accompanied by payment of the purchase price
in full by certified or cashiers' check made payable to the order of LEI
International. In addition, Burr (or the person or persons exercising the option
if Burr is deceased) shall furnish any written statements required pursuant to
Section 9 below.
5. NON-ASSIGNABILITY OF OPTION; DEATH
During Burr's lifetime, this option may be exercised only by Burr,
except as otherwise provided in this Agreement. This option shall not be
offered, sold, transferred, assigned, pledged, hypothecated, or otherwise
disposed of in any way (whether by operation of law or otherwise) except by will
or the laws of descent and distribution or except as otherwise provided in this
Agreement, and shall not be subject to execution, attachment or similar process.
Upon any attempt so to transfer, assign, pledge, hypothecate, or otherwise
dispose of the option contrary to the provisions hereof, or upon the levy of any
attachment or similar process upon such option, the option shall immediately
become null and void.
In the event of the death of Burr prior to the Expiration Date, this
option, to the extent it shall not have been exercised,
A-14
<PAGE>
may be exercised on or before the Expiration Date by the person or
persons to whom Burr's rights under this option shall pass by will
or by the applicable laws of descent.
6. OPTION TO PURCHASE BY LEI
During the period commencing with the two (2) year anniversary of the
Date of Grant and ending with the Expiration Date, LEI shall have the option to
purchase from Burr both the unexercised Option Shares and the shares of Stock
issued upon the exercise of the Option Shares (collectively referred to as the
"Option Stock") for a price equal to the Agreed Value or the Appraised Value, as
the case may be, of the Option Stock. If LEI desires to purchase all of the
Option Stock, the Secretary of LEI shall give a written notice of exercise to
Burr ("Notice of Exercise").
The purchase price to be paid for each share of the Option Stock shall
be equal to the Agreed Value or Appraised Value of LEI International, as the
case may be, divided by the number of shares of Stock outstanding, assuming the
exercise of all outstanding stock options. The Agreed Value shall be the value
of LEI International as agreed upon between Burr and LEI. If they do not agree
upon a value within thirty (30) days after the date of the Notice of Exercise,
Burr or LEI may give notice ("Appraisal Notice") to the other of intention to
submit the matter to an appraiser for determination. Within fifteen (15) days
from the date of delivery of the Appraisal Notice, the parties shall select a
single neutral appraiser to determine the fair market value of LEI International
("Appraised Value"). If the parties are unable to agree upon a single neutral
appraiser, then within thirty (30)
A-15
<PAGE>
days following delivery of the Appraisal Notice, each party shall select an
appraiser who shall each determine the fair market value of LEI International.
In the event the difference between fair market value of LEI International as
determined by each of the two appraisers is fifteen percent (15%) or less (such
percentage to be based on the lower determination), the values shall be averaged
and the resulting average shall be the Appraised Value. In the event the
difference between the fair market value of LEI International as determined by
each of the two appraisers is greater than fifteen percent (15%) (such
percentage to be based on the lower determination), and the parties do not agree
to average the values, the two appraisers shall appoint a third appraiser who
alone shall determine the fair market value of LEI International. In determining
the fair market value of LEI International, the appraiser(s) shall take into
consideration among other things the tangible assets of LEI International, its
receivables, securities and other intangible assets, liabilities and past and
current earnings. The decision of the appraiser(s) shall be binding upon the
parties. As soon as the Appraised Value of LEI International has been
determined, the appraiser(s) shall give written notice to the parties. All
expenses of appraisal, including legal fees and costs of the proceedings to
petition to compel arbitration, shall be borne pro rata by the respective
parties.
The purchase and sale of the Option Stock between the parties
shall occur at an agreed upon time and place within fifteen (15) days of the
final determination of the Agreed Value or the Appraised Value (the "Closing").
At the Closing, LEI shall pay to
A-16
<PAGE>
Burr the purchase price in cash or at LEI's option, a combination of LEI common
stock and cash (provided the cash shall not be less than an amount equal to the
income taxes owed by Burr resulting from the transaction) in exchange for the
Option Stock.
Any person or persons entitled to exercise this option under
the provisions of Section 5 above shall be bound by and obligated
under the provisions of this Section 6 to the same extent as is
Burr.
7. ADJUSTMENTS AND OTHER RIGHTS
In the event that additional shares of Stock are issued pursuant to a
stock split or a stock dividend, the number of unexercised Option Shares shall
be increased proportionately with no increase in the total purchase price of
such Option Shares. In the event that the shares of Stock of LEI International
from time to time issued and outstanding are reduced by a combination of shares,
the number of unexercised Option Shares shall be reduced proportionately with no
reduction in the total price of such Option Shares. In the event that LEI
International should transfer assets to another corporation and distribute the
stock of such other corporation without the surrender of Stock of LEI
International, and if such distribution is not taxable as a dividend and no gain
or loss is recognized by reason of Section 355 of the Internal Revenue Code, or
some similar section, then the total purchase price of the unexercised Option
Shares shall be reduced by an amount which bears the same ratio to the total
purchase price then in effect as the market value of the stock distributed in
respect of a share of Stock of LEI International, immediately following the
A-17
<PAGE>
distribution, bears to the aggregate of the market value at such time of a share
of Stock of LEI International and the stock distributed in respect thereof. All
such adjustments shall be made by the Board of Directors, whose determination
upon the same shall be final and binding upon Burr. Any fractional shares
resulting from the computations pursuant to this Section 7 shall be eliminated
from this option. No adjustments shall be made for cash dividends or the
issuance to stockholders of rights to subscribe for additional Stock or other
securities.
8. LIMITATIONS OF BURR'S RIGHTS
Neither Burr nor any other person entitled to exercise this
option shall have any of the rights or privileges of a shareholder
of LEI International in respect of any shares issuable upon
exercise of this option unless and until a certificate representing
such shares shall have been issued in the name of Burr or such
person.
9. REPRESENTATIONS OF BURR
Burr represents, agrees and certifies that:
(a) If Burr exercises this option in whole or in part at a time
when there is not in effect under the Securities Act of 1933, as amended
(the "Act"), a registration statement relating to the shares issuable
upon exercise hereof, and available for delivery to Burr a prospectus
meeting the requirements of Section 10(a)(3) of the Act, Burr will
acquire the shares issuable upon such exercise for the purpose of
investment and not with a view to their resale or distribution, and upon
each such exercise of this option, Burr
A-18
<PAGE>
will furnish to LEI International a written statement to such effect,
satisfactory in form and substance to LEI International and its counsel;
(b) If and when Burr proposes to offer to sell shares which are
issued to Burr upon exercise of this option at a time when there is not
in effect under the Act a registration statement relating to the resale
of such shares and available for delivery a prospectus meeting the
requirements of Section 10(a)(3) of the Act, or if Burr is a holder of
10% or more of the stock of LEI International, Burr will notify LEI
International prior to any such offering or sale and will abide by the
opinion of counsel of LEI International as to whether and under what
conditions and circumstances, if any, Burr may offer and sell such
shares; and
(c) No shares may be acquired hereunder pursuant to exercise of
the option granted hereby unless and until any then applicable
requirements of the Securities and Exchange Commission, the California
Department of Corporations, other regulatory agencies, including any
other state securities law commissioners having jurisdiction over LEI
International or such issuance, and any exchanges upon which Stock of
LEI International may be listed, shall have been fully satisfied.
Burr understands that the certificate or certificates representing the
shares acquired pursuant to this option may bear a legend referring to the
foregoing matters and any limitations under the Act and state securities laws
with respect to the transfer of such shares, and LEI International may impose
stop
A-19
<PAGE>
transfer instructions to implement such limitations, if applicable.
Any person or persons entitled to exercise this option under the
provisions of Section 5 above shall be bound by and obligated under
the provisions of this Section 9 to the same extent as is Burr.
10. NOTICES
Any notice to be given under the terms of this Agreement or
pursuant to the Plan shall be in writing and addressed to the
Secretary of LEI International at its principal office, and to Burr
at his address in the records of LEI International, or at such
other address as either party may hereinafter designate in writing
to the other.
11. LAWS APPLICABLE TO CONSTRUCTION
The interpretation, performance and enforcement of this
Agreement and all rights and obligations of the parties hereunder
shall be governed by the laws of the State of California.
12. NECESSARY ACTS
Each party to this Agreement agrees to perform any further
acts and execute and deliver any documents that may be reasonably
necessary to carry out the provisions of this Agreement.
13. SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon and shall inure to the
benefit of the parties and their respective heirs, beneficiaries,
legal representatives, successors and assigns.
14. SEVERABILITY
Each provision of this Agreement shall be viewed as separate and
divisible, and in the event any provision shall be held to be
A-20
<PAGE>
invalid, the remaining provisions shall continue to be in full
force and effect.
15. NO ORAL CHANGES
This instrument contains the entire agreement of the parties. It may be
changed only by an agreement in writing, signed by both parties.
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto as of the date hereinabove set forth.
A-21
<PAGE>
EXHIBIT B
ON-POINT TECHNOLOGY SYSTEMS, INC.
STOCK OPTION AGREEMENT
THIS AGREEMENT is made and entered into as of the 19th day of March,
1998, by and between ON-POINT TECHNOLOGY SYSTEMS, INC., a Nevada corporation
("OPTS"), and Vanguard Strategies, Inc., a Nevada corporation ("VSI").
W I T N E S S E T H:
WHEREAS, the Board of Directors of OPTS has agreed to extend to VSI as
of the date of this Agreement (the "Date of Grant") a non-qualified stock option
to purchase shares of common stock of OPTS ("Stock") in connection with the
termination of an Agreement dated January 9, 1996 between OPTS and VSI relating
to international sales; and
WHEREAS, VSI desires to obtain the option set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and
covenants made herein and the mutual benefits to be derived
herefrom, the parties hereto agree as follows:
1. GRANT OF STOCK OPTION
OPTS grants to VSI the right and option to purchase, on the terms and
conditions hereinafter set forth, all or any part of an aggregate of fifty
thousand (50,000) shares of Stock ("Option Shares") at the price of two and
88/100 dollars ($2.88) per share, exercisable from time to time subject to
provisions of this Agreement prior to the close of business on December 31, 2002
(the "Expiration Date"). The option granted hereby is a non-qualified stock
option.
B-1
<PAGE>
2. EXERCISABILITY OF OPTION
Except as otherwise provided in this Agreement, the Option Shares shall
vest and become exercisable as of the March 31 following the end of the Fiscal
Year (January 1 through December 31) during which the Cumulative Gross Revenues
of OPTS (as defined below) from customers in the Territory (as defined below)
exceed $5,000,000. "Gross Revenues" shall be determined each Fiscal Year by the
independent auditors of OPTS (whose decision shall be final and binding on all
parties) in accordance with generally accepted accounting principles based on
purchase orders from customers located in the Territory, adjusted for returns
and receivables more than sixty (60) days in arrears as of the end of each
Fiscal Year. "Cumulative Gross Revenues" shall mean the sum of the Gross
Revenues during the Fiscal Years ending December 31, 1998, 1999, 2000 and 2001.
"Territory" shall mean Brazil, Mexico and any other country in South America or
Central America.
Notwithstanding the foregoing, the Option Shares shall vest
and become exercisable on June 30, 2002 even if the foregoing
condition has not been satisfied by that date.
3. METHOD OF EXERCISE OF OPTION AND PAYMENT OF PURCHASE PRICE
This option shall be exercised by the delivery to the Secretary of OPTS
of a written notice stating the number of Option Shares to be purchased and
accompanied by payment of the purchase price in full in cash (or by certified or
cashiers' check made payable to the order of OPTS). In addition, VSI shall
furnish any written statements required pursuant to Section 9 below.
B-2
<PAGE>
4. EFFECT OF TERMINATION OF RELATIONSHIP
This option, to the extent such option shall not have been exercised,
shall terminate and become null and void at such time as Frederick Sandvick
("Sandvick") ceases to be a consultant or employee of OPTS, except that:
(a) In the event Sandvick's engagement or employment with OPTS is
terminated for any reason other than death, VSI may at any time within
three (3) months after such termination exercise this option to the
extent this option was vested and exercisable at the date of such
termination; provided, however, that in no event may this option be
exercised after the Expiration Date; and
(b) In the event of the death of Sandvick while still under
contact with or in the employ of OPTS, then this option, to the extent
this option was vested and exercisable by VSI on the date of Sandvick's
death (or earlier termination), may be exercised within three (3) months
after such death by VSI; provided, however, that in no event may this
option be exercised by anyone, under this Section or otherwise, after
the Expiration Date.
5. NON-ASSIGNABILITY OF OPTION
Except as otherwise provided in this Agreement, this option may be
exercised only by VSI. Except as otherwise provided in this Agreement, this
option shall not be offered, sold, transferred, assigned, pledged, hypothecated,
or otherwise disposed of in any way (whether by operation of law or otherwise)
and shall not be subject to execution, attachment or similar process. Upon any
attempt so to transfer, assign, pledge, hypothecate, or otherwise
B-3
<PAGE>
dispose of the option contrary to the provisions hereof, or upon
the levy of any attachment or similar process upon such option, the
option shall immediately become null and void.
6. ADJUSTMENTS AND OTHER RIGHTS
In the event that additional shares of Stock are issued pursuant to a
stock split or a stock dividend, the number of unexercised Option Shares shall
be increased proportionately with no increase in the total purchase price of
such Option Shares. In the event that the shares of Stock of OPTS from time to
time issued and outstanding are reduced by a combination of shares, the number
of unexercised Option Shares shall be reduced proportionately with no reduction
in the total price of such Option Shares. In the event that OPTS should transfer
assets to another corporation and distribute the stock of such other corporation
without the surrender of Stock of OPTS, and if such distribution is not taxable
as a dividend and no gain or loss is recognized by reason of Section 355 of the
Internal Revenue Code, or some similar section, then the total purchase price of
the unexercised Option Shares shall be reduced by an amount which bears the same
ratio to the total purchase price then in effect as the market value of the
stock distributed in respect of a share of Stock of OPTS, immediately following
the distribution, bears to the aggregate of the market value at such time of a
share of Stock of OPTS and the stock distributed in respect thereof. All such
adjustments shall be made by the Board of Directors, whose determination upon
the same shall be final and binding upon VSI. Any fractional shares resulting
from the computations pursuant to this Section 6 shall be eliminated from this
option. No adjustments shall be made for cash
B-4
<PAGE>
dividends or the issuance to stockholders of rights to subscribe
for additional Stock or other securities.
7. LIMITATIONS OF VSI'S RIGHTS
Neither VSI nor any other person entitled to exercise this
option shall have any of the rights or privileges of a shareholder
of OPTS in respect of any shares issuable upon exercise of this
option unless and until a certificate representing such shares
shall have been issued in the name of VSI or such person.
8. REGISTRATION OF SHARES
VSI shall have "piggy-back" registration rights with respect to the
Option Shares.
9. REPRESENTATIONS OF VSI
VSI represents, agrees and certifies that:
(a) If VSI exercises this option in whole or in part at a time
when there is not in effect under the Securities Act of 1933, as amended
(the "Act"), a registration statement relating to the shares issuable
upon exercise hereof, and available for delivery to VSI a prospectus
meeting the requirements of Section 10(a)(3) of the Act, VSI will
acquire the shares issuable upon such exercise for the purpose of
investment and not with a view to their resale or distribution, and upon
each such exercise of this option, VSI will furnish to OPTS a written
statement to such effect, satisfactory in form and substance to OPTS and
its counsel;
(b) If and when VSI proposes to offer to sell shares which are
issued to VSI upon exercise of this option at a time when there is not
in effect under the Act a registration statement relating to the resale
of such shares and available
B-5
<PAGE>
for delivery a prospectus meeting the requirements of Section 10(a)(3)
of the Act, or if VSI is a holder of 10% or more of the stock of OPTS,
VSI will notify OPTS prior to any such offering or sale and will abide
by the opinion of counsel of OPTS as to whether and under what
conditions and circumstances, if any, VSI may offer and sell such
shares; and
(c) No shares may be acquired hereunder pursuant to exercise of
the option granted hereby unless and until any then applicable
requirements of the Securities and Exchange Commission, the California
Department of Corporations, other regulatory agencies, including any
other state securities law commissioners having jurisdiction over OPTS
or such issuance, and any exchanges upon which Stock of OPTS may be
listed, shall have been fully satisfied.
VSI understands that the certificate or certificates representing the
shares acquired pursuant to this option may bear a legend referring to the
foregoing matters and any limitations under the Act and state securities laws
with respect to the transfer of such shares, and OPTS may impose stop transfer
instructions to implement such limitations, if applicable. Any person or persons
entitled to exercise this option under the provisions of Section 4 above shall
be bound by and obligated under the provisions of this Section 9 to the same
extent as is VSI.
10. NOTICES
Any notice to be given under the terms of this Agreement or pursuant to
the Plan shall be in writing and addressed to the Secretary of OPTS at its
principal office, and to VSI at its
B-6
<PAGE>
principal office, or at such other address as either party may
hereinafter designate in writing to the other.
11. LAWS APPLICABLE TO CONSTRUCTION
The interpretation, performance and enforcement of this
Agreement and all rights and obligations of the parties hereunder
shall be governed by the laws of the State of California.
12. NECESSARY ACTS
Each party to this Agreement agrees to perform any further
acts and execute and deliver any documents that may be reasonably
necessary to carry out the provisions of this Agreement.
13. SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon and shall inure to the
benefit of the parties and their respective successors and assigns.
14. SEVERABILITY
Each provision of this Agreement shall be viewed as separate
and divisible, and in the event any provision shall be held to be
invalid, the remaining provisions shall continue to be in full
force and effect.
15. NO ORAL CHANGES
This instrument contains the entire agreement of the parties. It may be
changed only by an agreement in writing, signed by both parties.
B-7
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto as of the date hereinabove set forth.
ON-POINT TECHNOLOGY SYSTEMS, INC.
By: ________________________________
VANGUARD STRATEGIES, INC.
By: ________________________________
B-8
<PAGE>
EXHIBIT C
ON-POINT TECHNOLOGY SYSTEMS, INC.
STOCK OPTION AGREEMENT
THIS AGREEMENT is made and entered into as of the 19th day of March,
1998, by and between ON-POINT TECHNOLOGY SYSTEMS, INC., a Nevada corporation
("OPTS"), and Robert L. Burr ("Contractor").
W I T N E S S E T H:
WHEREAS, the Board of Directors of OPTS has agreed to extend to
Contractor as of the date of this Agreement (the "Date of Grant") a
non-qualified stock option to purchase shares of common stock of OPTS ("Stock")
as an additional incentive for the performance of future services by Contractor
for OPTS; and
WHEREAS, Contractor desires to obtain the option set forth in this
Agreement.
NOW, THEREFORE, in consideration of the mutual promises and
covenants made herein and the mutual benefits to be derived
herefrom, the parties hereto agree as follows:
1. GRANT OF STOCK OPTION
OPTS grants to Contractor the right and option to purchase, on the terms
and conditions hereinafter set forth, all or any part of an aggregate of fifty
thousand (50,000) shares of Stock ("Option Shares") at the price of two and
88/100 dollars ($2.88) per share, exercisable from time to time subject to
provisions of this Agreement prior to the close of business on December 31, 2002
(the "Expiration Date"). The option granted hereby is a non-qualified stock
option.
C-1
<PAGE>
2. EXERCISABILITY OF OPTION
Except as otherwise provided in this Agreement, the Option Shares shall
vest and become exercisable as of the March 31 following the end of the Fiscal
Year (January 1 through December 31) during which the Cumulative Gross Revenues
of OPTS (as defined below) from customers in the Territory (as defined below)
exceed $5,000,000. "Gross Revenues" shall be determined each Fiscal Year by the
independent auditors of OPTS (whose decision shall be final and binding on all
parties) in accordance with generally accepted accounting principles based on
purchase orders from customers located in the Territory, adjusted for returns
and receivables more than sixty (60) days in arrears as of the end of each
Fiscal Year. "Cumulative Gross Revenues" shall mean the sum of the Gross
Revenues during the Fiscal Years ending December 31, 1998, 1999, 2000 and 2001.
"Territory" shall mean Brazil, Mexico and any other country in South America or
Central America.
Notwithstanding the foregoing, the Option Shares shall vest
and become exercisable on June 30, 2002 even if the foregoing
condition has not been satisfied by that date.
3. METHOD OF EXERCISE OF OPTION AND PAYMENT OF PURCHASE PRICE
This option shall be exercised by the delivery to the Secretary of OPTS
of a written notice stating the number of Option Shares to be purchased and
accompanied by payment of the purchase price in full in cash (or by certified or
cashiers' check made payable to the order of OPTS). In addition, Contractor (or
the person or persons exercising the option if Contractor is deceased) shall
furnish any written statements required pursuant to Section 9 below.
C-2
<PAGE>
4. EFFECT OF TERMINATION OF RELATIONSHIP
This option, to the extent such option shall not have been exercised,
shall terminate and become null and void at such time as Contractor ceases to be
a consultant or employee of OPTS, except that:
(a) In the event Contractor's engagement or employment with OPTS
is terminated for any reason other than death, Contractor may at any
time within three (3) months after such termination exercise this option
to the extent this option was vested and exercisable at the date of such
termination; provided, however, that in no event may this option be
exercised after the Expiration Date; and
(b) In the event of the death of Contractor while still under
contact with or in the employ of OPTS, then this option, to the extent
this option was vested and exercisable by Contractor on the date of
Contractor's death (or earlier termination), may be exercised within
three (3) months after such death by the person or persons to whom
Contractor's rights under this option shall pass by will or by the
applicable laws of descent; provided, however, that in no event may this
option be exercised by anyone, under this Section or otherwise, after
the Expiration Date.
5. NON-ASSIGNABILITY OF OPTION; DEATH
During Contractor's lifetime, this option may be exercised only by
Contractor. This option shall not be offered, sold, transferred, assigned,
pledged, hypothecated, or otherwise disposed of in any way (whether by operation
of law or otherwise) except by will or the laws of descent and distribution, and
shall not be
C-3
<PAGE>
subject to execution, attachment or similar process. Upon any
attempt so to transfer, assign, pledge, hypothecate, or otherwise
dispose of the option contrary to the provisions hereof, or upon
the levy of any attachment or similar process upon such option, the
option shall immediately become null and void.
6. ADJUSTMENTS AND OTHER RIGHTS
In the event that additional shares of Stock are issued pursuant to a
stock split or a stock dividend, the number of unexercised Option Shares shall
be increased proportionately with no increase in the total purchase price of
such Option Shares. In the event that the shares of Stock of OPTS from time to
time issued and outstanding are reduced by a combination of shares, the number
of unexercised Option Shares shall be reduced proportionately with no reduction
in the total price of such Option Shares. In the event that OPTS should transfer
assets to another corporation and distribute the stock of such other corporation
without the surrender of Stock of OPTS, and if such distribution is not taxable
as a dividend and no gain or loss is recognized by reason of Section 355 of the
Internal Revenue Code, or some similar section, then the total purchase price of
the unexercised Option Shares shall be reduced by an amount which bears the same
ratio to the total purchase price then in effect as the market value of the
stock distributed in respect of a share of Stock of OPTS, immediately following
the distribution, bears to the aggregate of the market value at such time of a
share of Stock of OPTS and the stock distributed in respect thereof. All such
adjustments shall be made by the Board of Directors, whose determination upon
the same shall be final and binding upon Contractor. Any fractional
C-4
<PAGE>
shares resulting from the computations pursuant to this Section 6
shall be eliminated from this option. No adjustments shall be made
for cash dividends or the issuance to stockholders of rights to
subscribe for additional Stock or other securities.
7. LIMITATIONS OF CONTRACTOR'S RIGHTS
Neither Contractor nor any other person entitled to exercise
this option shall have any of the rights or privileges of a
shareholder of OPTS in respect of any shares issuable upon exercise
of this option unless and until a certificate representing such
shares shall have been issued in the name of Contractor or such
person.
8. REGISTRATION OF SHARES
Contractor shall have "piggy-back" registration rights with
respect to the Option Shares.
9. REPRESENTATIONS OF CONTRACTOR
Contractor represents, agrees and certifies that:
(a) If Contractor exercises this option in whole or in part at a
time when there is not in effect under the Securities Act of 1933, as
amended (the "Act"), a registration statement relating to the shares
issuable upon exercise hereof, and available for delivery to Contractor
a prospectus meeting the requirements of Section 10(a)(3) of the Act,
Contractor will acquire the shares issuable upon such exercise for the
purpose of investment and not with a view to their resale or
distribution, and upon each such exercise of this option, Contractor
will furnish to OPTS a written statement to such effect, satisfactory in
form and substance to OPTS and its counsel;
C-5
<PAGE>
(b) If and when Contractor proposes to offer to sell shares which
are issued to Contractor upon exercise of this option at a time when
there is not in effect under the Act a registration statement relating
to the resale of such shares and available for delivery a prospectus
meeting the requirements of Section 10(a)(3) of the Act, or if
Contractor is a holder of 10% or more of the stock of OPTS, Contractor
will notify OPTS prior to any such offering or sale and will abide by
the opinion of counsel of OPTS as to whether and under what conditions
and circumstances, if any, Contractor may offer and sell such shares;
and
(c) No shares may be acquired hereunder pursuant to exercise of
the option granted hereby unless and until any then applicable
requirements of the Securities and Exchange Commission, the California
Department of Corporations, other regulatory agencies, including any
other state securities law commissioners having jurisdiction over OPTS
or such issuance, and any exchanges upon which Stock of OPTS may be
listed, shall have been fully satisfied.
Contractor understands that the certificate or certificates representing
the shares acquired pursuant to this option may bear a legend referring to the
foregoing matters and any limitations under the Act and state securities laws
with respect to the transfer of such shares, and OPTS may impose stop transfer
instructions to implement such limitations, if applicable. Any person or persons
entitled to exercise this option under the provisions of Section 4 above shall
be bound by and obligated under
C-6
<PAGE>
the provisions of this Section 9 to the same extent as is
Contractor.
10. NOTICES
Any notice to be given under the terms of this Agreement or
pursuant to the Plan shall be in writing and addressed to the
Secretary of OPTS at its principal office, and to Contractor at his
address in the records of OPTS, or at such other address as either
party may hereinafter designate in writing to the other.
11. LAWS APPLICABLE TO CONSTRUCTION
The interpretation, performance and enforcement of this
Agreement and all rights and obligations of the parties hereunder
shall be governed by the laws of the State of California.
12. NECESSARY ACTS
Each party to this Agreement agrees to perform any further
acts and execute and deliver any documents that may be reasonably
necessary to carry out the provisions of this Agreement.
13. SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon and shall inure to the
benefit of the parties and their respective heirs, beneficiaries,
legal representatives, successors and assigns.
14. SEVERABILITY
Each provision of this Agreement shall be viewed as separate and
divisible, and in the event any provision shall be held to be invalid, the
remaining provisions shall continue to be in full force and effect.
C-7
<PAGE>
15. NO ORAL CHANGES
This instrument contains the entire agreement of the parties. It may be
changed only by an agreement in writing, signed by both parties.
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto as of the date hereinabove set forth.
ON-POINT TECHNOLOGY SYSTEMS, INC.
By: _________________________________
Frederick Sandvick,
Chairman and CEO
-------------------------------------
Robert L. Burr
C-8
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 273
<SECURITIES> 0
<RECEIVABLES> 1,961
<ALLOWANCES> 0
<INVENTORY> 2,704
<CURRENT-ASSETS> 6,664
<PP&E> 582
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,035
<CURRENT-LIABILITIES> 3,529
<BONDS> 0
0
0
<COMMON> 94
<OTHER-SE> 9,284
<TOTAL-LIABILITY-AND-EQUITY> 16,035
<SALES> 17,439
<TOTAL-REVENUES> 17,439
<CGS> 12,566
<TOTAL-COSTS> 12,566
<OTHER-EXPENSES> 2,847
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 418
<INCOME-PRETAX> 1,608
<INCOME-TAX> 36
<INCOME-CONTINUING> 1,572
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,572
<EPS-PRIMARY> .017
<EPS-DILUTED> .015
</TABLE>
