<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
_ TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-21738
ON-POINT TECHNOLOGY SYSTEMS, INC.
(Name of small business issuer in its charter)
Nevada 33-0423037
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8444 MIRALANI DR., SAN DIEGO, CALIFORNIA 92126-4349
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (619) 621-5050
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding twelve months, and (2) has
been subject to such filing requirements for the past 90 days. Yes x No_
As of April 20, 1998, 9,855,241 shares of Common Stock ($.01 par value) were
outstanding.
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INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1998 (Unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Operations (Unaudited)
Three months ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Part II. Other Information 8
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<TABLE>
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, December 31,
(Unaudited)
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Assets Thousands of Dollars, except share amounts 1998 1997
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<S> <C> <C>
Current assets:
Cash and cash equivalents $8 $273
Accounts receivable, net 2,558 1,961
Inventories 2,304 2,704
Net investment in sales-type leases 1,894 1,638
Other current assets 132 88
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Total current assets 6,896 6,664
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Plant, property and equipment, net 596 582
Net investment in sales-type leases 5,832 5,364
Property held for operating leases, net 2,405 2,657
Other assets 346 768
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Total assets $16,075 $16,035
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Liabilities and shareholders' equity
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Current liabilities:
Current portion of notes payable $207 $277
Accounts payable 1,005 1,118
Accrued expenses 1,948 2,134
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Total current liabilities 3,160 3,529
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Notes payable, net of current portion 1,638 2,371
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Other liabilities 832 757
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Shareholders' equity:
Preferred stock, no par value, 2,000,000 shares
authorized, no shares issued or outstanding - -
Common stock, $.01 par value, 20,000,000 shares
authorized, 9,787,741 shares issued and outstanding 98 94
Additional paid-in capital 30,540 30,030
Accumulated deficit (20,193) (20,746)
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Total shareholders' equity 10,445 9,378
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Total liabilities and shareholder's equity $16,075 $16,035
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
3
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<TABLE>
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three months ended March 31,
----------------------------
Thousands of dollars/shares, except per share amounts 1998 1997
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<S> <C> <C>
Revenues $4,278 $3,300
Cost of revenues 2,974 2,349
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Gross profit 1,304 951
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Operating expenses:
Selling, general and administrative 670 591
Research and development 189 114
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Total operating expenses 859 705
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Income from operations 445 246
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Other income (expenses)
Interest income 258 57
Interest expense (148) (27)
Other (2) (32)
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Total other income (expense) 108 (2)
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Net income $553 $244
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Earnings per share:
Basic:
Earnings per share $0.06 $0.03
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Weighted average shares 9,475 8,187
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Diluted:
Earnings per share $0.05 $0.03
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Weighted average shares 11,816 9,138
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
4
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<TABLE>
On-Point Technology Systems, Inc. and Subsidiaries
Condensed consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Three months ended March 31,
Thousand of dollars 1998 1997
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<S> <C> <C>
Cash flows from operating activities:
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Net income $553 $244
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization 329 383
Non-cash charges, primarily changes in reserves (17) (53)
Changes in assets and liabilities:
Accounts receivable (597) 78
Inventories 400 (75)
Accounts payable (113) (869)
Accrued expenses (111) 46
Deferred income - (316)
Other 378 95
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Net cash provided by (used for) operating activities 822 (467)
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Cash flows from investing activities:
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Purchases of plant, property and equipment (82) (41)
Net investment in sales-type leases (724) (430)
Investment in property held for operating leases (1) (96)
Fixed asset disposals 9 27
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Net cash used for investing activities (798) (540)
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Cash flows from financing activities:
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Proceeds from equity related transactions 514 -
Proceeds from debt financing - 627
Proceeds from line of credit, net (689) -
Repayment of notes payable (114) (87)
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Net cash provided by (used for) financing activities (289) 540
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Decrease in cash and cash equivalents (265) (467)
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Cash and cash equivalents at beginning of period 273 504
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Cash and cash equivalents at end of period $8 $37
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Supplemental cash flow information:
Cash paid during the period for interest $78 $23
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
5
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ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED
-------------------------------
FINANCIAL STATEMENTS
--------------------
(Unaudited)
1. BASIS OF PRESENTATION The accounting and reporting policies of On-Point
Technology Systems, Inc. and subsidiaries (collectively referred to as the
"Company") conform to generally accepted accounting principles. The condensed
consolidated financial statements for the three months ended March 31, 1998 and
1997 are unaudited and do not include all information or footnotes necessary for
a complete presentation of financial condition, results of operations and cash
flows. The interim financial statements include all adjustments, consisting
only of normal recurring accruals, which in the opinion of management are
necessary in order to make the financial statements not misleading. These
financial statements should be read in conjunction with the Company's December
31, 1997 audited financial statements which are included in the Company's Annual
Report on Form 10-KSB dated December 31, 1997. The results of operations for
the three months ended March 31, 1998 are not necessarily indicative of the
results to be expected for the entire year ending December 31, 1998.
2. CONTINGENCIES Reference is made to the customer dispute and legal
proceedings sections of the Note 10 of Notes to Consolidated Financial
Statements in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997. No material developments occurred during the Company's
quarter ended March 31, 1998 with respect to such matters other than as
previously disclosed.
3. 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.
4. SHAREHOLDERS' EQUITY The $1,067,000 increase in shareholders' equity
from $9,378,000 at December 31, 1997 to $10,445,000 at March 31, 1998 was
comprised of $553,000 of net income and $514,000 of exercised stock warrants.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL The Company's revenues through March 31, 1998 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.
RESULTS OF OPERATIONS Revenues for the three months ended March
31, 1998 increased by $978 thousand or 30% from the prior year and were
comprised of $852 thousand of volume and $126 thousand of pricing. The increase
in revenue was primarily due to greater vending terminal sales and sales-type
lease arrangements, rather than operating lease arrangements, with three lottery
customers. In total, the Company installed or shipped approximately 470 units
in the first quarter of 1998 versus approximately 500 units in the first quarter
of 1997.
Cost of revenues, as a percentage of sales, declined from 71% in
1997 to 70% in 1998 reflecting the change in product mix between years.
Operating expenses, which includes selling, general and
administrative costs and research and development costs, increased by $154
thousand in 1998, or 22%. Selling, general and administrative costs increased
by $79 thousand as a result of increased marketing efforts and bad debt expense.
Research and development costs increased by $75 thousand as a result of
increased new product development activities. As a percentage to sales,
operating expenses declined from 21% in 1997 to 20% in 1998.
As a result of the above factors, the 1998 first quarter generated
income from operations of $445 thousand, which represents an improvement of
$199 thousand from the 1997 first quarter operating profit of $246 thousand.
Total other income and expense improved by $110 thousand from the
prior year primarily reflecting higher amortization of unearned income on sales-
type leases partially offset by higher interest cost reflecting increased
borrowing.
The net income for the three months ended March 31, 1998 of $553
thousand represents a $309 thousand improvement from the 1997 first quarter net
profit of $244 thousand.
7
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LIQUIDITY AND CAPITAL RESOURCES During the three months ended
March 31, 1998, the Company used the $822 thousand of net cash provided by
operating activities principally for investing activities. The principal
investing activity was the net payment of costs associated with the equipment
underlying long-term lease agreements, both sales-type and operating, which
totaled $798 thousand in 1998 versus $540 thousand in 1997. Additionally, in
the first quarter of 1998 debt was reduced by $803 thousand. As a net result of
the above cash activities, cash and cash equivalents declined by $265 thousand
in the quarter ended March 31, 1998 while working capital increased by $601
thousand to over $3.7 million at March 31, 1998.
Management believes the Company has sufficient liquidity, because of
its existing stream of contractual lease payments, its current working capital,
its available borrowings under its $3 million normal course debt financing, and
the April 1998 commitment from its financial lender to increase its credit
facility by $2 million, 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.
8
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3 in the Registrant's Form 10-KSB for the
year ended December 31, 1997 for a description of its legal proceedings. No
material developments occurred during the Registrants' quarter ended March 31,
1998 other than as previously disclosed.
ITEM 2. CHANGES IN SECURITIES
(a) None
(b) None
(c) Sales of Unregistered Securities
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 January 1998, Vanguard Strategies, Inc. and Mr. Robert L.
Burr, former Chairman of the Board and former President and
Chief Executive Officer were each granted stock options for
50,000 shares of the Company's Common Stock at $2.88 per share
pursuant to an agreement to terminate their respective rights
in the Company's international operations. The options expire
on December 31, 2002 and vest on 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
9
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SIGNATURES
In accordance with the requirements of the exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereto duly
authorized.
ON-POINT TECHNOLOGY SYSTEMS, INC.
Date: May 5, 1998 /s/ Kenneth Hoitt
------------------------------
As Chief Financial Officer on behalf
of Registrant and as Registrant's
Principal Financial & Accounting Officer
10
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<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 8
<SECURITIES> 0
<RECEIVABLES> 2,915
<ALLOWANCES> 357
<INVENTORY> 2,304
<CURRENT-ASSETS> 6,896
<PP&E> 1,954
<DEPRECIATION> 1,358
<TOTAL-ASSETS> 16,075
<CURRENT-LIABILITIES> 3,160
<BONDS> 0
0
0
<COMMON> 98
<OTHER-SE> 10,347
<TOTAL-LIABILITY-AND-EQUITY> 16,075
<SALES> 4,278
<TOTAL-REVENUES> 4,278
<CGS> 2,974
<TOTAL-COSTS> 2,974
<OTHER-EXPENSES> 603
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 148
<INCOME-PRETAX> 553
<INCOME-TAX> 0
<INCOME-CONTINUING> 553
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 553
<EPS-PRIMARY> .06
<EPS-DILUTED> .05
</TABLE>
