<PAGE>
Final Revisions
<PAGE>
- ----------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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.)
1370 W. SAN MARCOS BLVD. SUITE 100, SAN MARCOS, CALIFORNIA 92069
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (760) 510-4900
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 November 5, 1999 there were 10,229,341 shares of Common Stock ($.01
Par value) outstanding.
<PAGE>
INDEX
Part I. Financial Information Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1999 (Unaudited) and
December 31, 1998 3
Condensed Consolidated Statements of
Operations (Unaudited) Three Months
and Nine Months Ended September 30,
1999 and 1998 4
Condensed Consolidated Statements of
Cash Flows (Unaudited) Nine Months Ended
September 30, 1999 and 1998 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of
Operations 7
Part II. Other Information 9
<PAGE>
<TABLE>
<CAPTION>
On-Point Technology Systems, Inc. and Subsidiaries
Consolidated Balance Sheet
September 30, December 31
1999 1998
Assets Thousands of dollars, except share amounts (Unaudited)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $166 $129
Accounts receivable, net 4,076 2,744
Inventories 4,776 3,143
Net investment in sales-type leases 1,904 1,586
Other current assets 308 122
Total current assets 11,230 7,724
Plant, property and equipment, net 529 422
Net investment in sales-type leases 8,905 8,911
Property held for operating leases, net 529 2,013
Other assets 1,548 502
- ---------------------------------------------------------------------------------------
Total assets $22,741 $19,572
=======================================================================================
Liabilities and shareholders' equity
- ---------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $2,111 $1,190
Current portion of long term debt 1 104
Accrued expenses 1,542 2,301
Total current liabilities 3,654 3,595
=======================================================================================
Other liabilities 50 100
- ---------------------------------------------------------------------------------------
Long-term debt 5,497 3,872
- ---------------------------------------------------------------------------------------
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, 10,229,341 and 10,094,826 shares
issued and outstanding, respectively 102 101
Additional paid-in capital 31,140 30,939
Accumulated deficit (17,702) (19,035)
- ---------------------------------------------------------------------------------------
Total shareholders' equity 13,540 12,005
- ---------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $22,741 $19,572
=======================================================================================
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
On-Point Technology Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
Thousands of dollars/shares, except per share amounts 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $3,465 $3,828 $13,894 $12,250
Cost of revenues 2,691 2,446 10,067 8,071
- --------------------------------------------------------------------------------------------------
Gross profit 774 1,382 3,827 4,179
Operating expenses:
Selling, general and administrative 543 736 1,878 2,038
Research and development 109 394 505 1,039
Total operating expenses 652 1,130 2,383 3,077
Income from operations 122 252 1,444 1,102
Other income (expenses):
Interest income 97 363 245 851
Interest expense (141) (163) (335) (457)
Other 17 (33) (21) 19
_________________________________________________________ _______________________________________
Total other income (27) 167 (111) 413
__________________________________________________________________________________________________
Net income $95 419 $1,333 $1,515
__________________________________________________________________________________________________
Earnings per share:
Basic:
Earnings per share $0.01 $0.04 $0.13 $0.15
__________________________________________________________________________________________________
Weighted average shares 10,226 10,035 10,174 9,810
__________________________________________________________________________________________________
Diluted:
Earnings per share $0.01 $0.04 $0.11 $0.13
__________________________________________________________________________________________________
Weighted average shares 11,848 11,496 11,973 11,729
__________________________________________________________________________________________________
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
On-Point Technology Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30,
Thousand of dollars 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,333 $1,515
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 992 1,031
Non-cash charges, primarily changes in reserves 604 (183)
Changes in assets and liabilities:
Accounts receivable (1,300) (1,162)
Inventories (1,633) 511
Accounts payable 921 (408)
Accrued expenses (761) (82)
Other (428) 273
- ------------------------------------------------------------------------------------------
Net cash provided by operating activities (272) 1,495
- ------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of plant, property and equipment (350) (168)
Net investment in sales-type leases (1,855) (2,882)
Investment in property held for operating leases 748 (125)
Fixed asset disposals 42 70
Net cash used for investing activities (1,415) (3,105)
- ------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock warrants and options 202 916
Proceeds from line of credit, net 1,625 731
Repayment of notes payable (103) (218)
- ------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,724 1,429
- ------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 37 (181)
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 129 273
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $166 $92
==========================================================================================
Supplemental cash flow information:
Cash paid during the period for interest $335 $99
Cash paid during the period for income taxes $5 $120
==========================================================================================
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
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 and nine months
ended September 30, 1999 and 1998 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, 1998 audited financial
statements which are included in the Company's Annual Report on Form 10-KSB
dated December 31,1998. The results of operations for the three and nine
months ended September 30, 1999 are not necessarily indicative of the results
to be expected for the entire year ending December 31, 1999.
2. Contingencies Reference is made to the legal proceedings section of the
Note 9 of Notes to Consolidated Financial Statements in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1998. With respect to
the Company's legal action for breach of contract brought against
Solutioneering, Inc., Solutioneering has filed for creditor protection in a
Chapter 11 bankruptcy proceeding as a result of an injunction the Company
obtained against it. The Company continues to believe that the underlying
value of Solutioneering's retail base exceeds the amount owed to the Company
and is proceeding with discussions involving a reorganization plan to
achieve that objective.
3. Provisions for Income Taxes No provisions for federal or state income
taxes have been made for the three and nine-month periods ended September 30,
1999. At December 31, 1998, the Company had $14.2 million of operating loss
carry forwards and net deferred income tax assets consisting of current
federal income tax loss carry forwards of approximately $11.1 million
available to offset future federal taxable income which expire during the
years 2011 through 2018 and net deferred income tax assets of approximately
$5.2 million.
4. 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.
5. Shareholders' Equity The $1,535,000 increase in shareholders' equity
from $12,005,000 at December 31, 1998 to $13,620,000 at September 30,
1999 was comprised of $1,333,000 of net income and $202,000 of exercised
stock warrants and options.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General The Company's revenues through September 30, 1999 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 its line of credit, as well as through its
existing cash flow and equity financing.
The Company intends on introducing its next generation lottery products
during 1999 as well as diversifying its product lines into additional high-
volume, cash-oriented transactions next year. As a result, the Company has
entered a transition period between the introduction of the new products
and the phase-out of some of its existing products that has negatively
impacted revenues and gross margins. In addition, the Company is
restructuring some of its existing operations to accommodate its plans
to introduce its new products and product lines. This may also negatively
impact results of operations during the transition period. However,
management believes the long-term benefits far outweigh any potential
negative short-term effects.
Results of Operations Revenues for the three and nine month periods ended
September 30, 1999 increased (decreased) by approximately ($363 thousand), or
(9%), and $1,644 thousand or 13%, respectively, from the prior year. The
second quarter $363 thousand decrease was comprised of the net effect of
approximately $1.1 million increase in sales and sales-type leases,
offset by a $700 thousand decrease from service and a $750 thousand
decrease from operating leases. The year-to-date $1,644 thousand
increase was comprised of approximately $3.4 million increase in
sales and sales-type leases, offset by $900 thousand decrease from
service and a $850 thousand decrease from operating leases. The
Company installed or shipped approximately 400 and 1,700 units
in the three and nine month periods ended September 30, 1999,
respectively, versus approximately 150 and 1100 units, respectively,
during the same periods in 1998.
In June 1999, the Company announced the award of a new contract with
the Missouri Lottery which provided, among other things, for the
delivery of up to 300 new ITVMs in the third quarter. However,
a competitor of the Company filed suit against the Missouri
Lottery to stop performance under the Contract and overturn
the Missouri Lottery's decision to enter into a new contract
with the Lottery. As such, the Company has held up any deliveries
under the new contract with the Missouri Lottery until the
outcome has been decided in the case. Although there can be
no assurances as to the outcome of the case, the Company believes
the Missouri Lottery chose On-Point in the best interests of the
State and that the competitor's basis for the suit is without
merit.
Cost of revenues, as a percentage of sales, for the third quarter increased
by 14 percentage points from 64% in 1998 to 78% in 1999. For the nine-month
period there was an increase of 6 percentage points from 66% in 1998 to 72%
in 1999. The higher percentage costs of revenues in 1999 versus 1998
primarily reflect costs associated with the initial build of a foreign
shipment and higher costs due to the above mentioned transition into
its new products. Gross margins for the balance of the year are also
expected to be lower than normal during the transition phase.
Operating expenses decreased by $478 thousand, or 42%, and $694 thousand, or
23%, for the three and nine month periods ended September 30, 1999,
respectively, compared to the same periods in the prior year. Of the
operating expenses, selling, general and administrative expenses
decreased $193 thousand, or 26%, in the third quarter, and
$160 thousand, or 8%, for the year-to-date, primarily due to lower
payroll and payroll related expenses. Research and development
costs which were expensed decreased by $285 thousand, or 72%, and
$534 thousand, or 51%, for the three and nine month periods,
respectively, primarily due to the capitalization of costs associated
with specific projects. As a percentage of sales, operating expenses
were 19% and 17%, for the three and nine month periods ended
September 30, 1999, respectively, a decline of 11% and 8%, respectively,
from the prior year.
As a result of the above factors, net income from operations of $122 and
$1,424 for the 1999 three and nine month periods, represents a decrease of
$130 and increase of $342 from 1998 income from operations of $252 thousand
and $1,102 thousand for the same periods.
<PAGE>
Total other income and expense for the three and nine month periods ended
September 30, 1999 declined by $194 thousand and $524 thousand, respectively,
from the same periods in 1998 primarily due to lower amortization of unearned
income on sales-type leases, and higher interest cost reflecting increased
borrowing.
Net income for the three and nine month periods ended September 30, 1999 of
$95 thousand and $1,333 thousand, respectively, represented a $324 thousand,
or 77% and $182 thousand, or 12%, respectively, decrease from the same
periods in 1998.
Liquidity and Capital Resources During the nine months ended September 30,
1999, and 1998, net cash used for operating activities decreased by
$272 thousand in 1999, due principally to the build-up of inventories and
receivables in excess of earnings and non-cash charges and increased by
$1,495 in 1998. Investing activities, principally due to sales and operating
type leases, resulted in the use of funds of $1,415 and $3,105, respectively.
Additional capital was provided by financing activities of $1.7 million and
$1.4 million, respectively.
As a net result of the above cash activities, cash and cash equivalents
increased by $37 thousand during the nine month period ended September 30,
1999, and declined by $181 thousand during the comparative period in 1998.
Working capital of approximately $7.6 million at September 30, 1999
represents an increase of $3.5 million since December 31, 1998, primarily
as a result of the reclassification of the Company's line of credit from
long-term to short-term debt. The maturity of the Company's line of credit
is in July 2000. The Company intends to renegotiate its credit facilities
or recapitalize the Company on or before the line of credit matures.
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 $6 million debt financing (see Note 6
of Notes to Condensed Consolidated Financial Statements) to maintain current
levels of operations. However, in order to accommodate recent contract
awards, together with other growth related opportunities in 1999 and beyond,
the Company will be receiving additional financing in the fourth quarter on
terms similar to its existing line of credit. 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, 1998 for potential other matters
which could affect the Company's liquidity.
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. In 1997 the Company set up a committee to review
its computer software and hardware, fax machines and telephone systems
for year 2000 compliance.
The Company's primary accounting and operational software provider has
received year 2000 certification from the Information Technology Association
of America. During 1998, the Company tested its central network system
hardware and software as well as the hardware and software of each of its
computer workstations. As a result, minor expenditures, under $25 thousand
total cost, have been made to upgrade certain computer hardware, PC software
and fax equipment to make them year 2000 compliant. The Company believes
that it is now year 2000 compliant with respect to its existing computer
hardware, software and fax equipment and, therefore, believes that potential
risks, including any potential third party risks, relating to year 2000
issues to be minimal.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the legal proceedings section of the Note 9 of Notes to
Consolidated Financial Statements in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998. With respect to the Company's
legal action for breach of contract brought against Solutioneering, Inc.,
as anticipated, Solutioneering has filed for creditor protection in a Chapter
11 bankruptcy proceeding as a result of an injunction the Company obtained
against it. The Company continues to believe that the underlying value of
Solutioneering's retail base exceeds the amount owed to its secured
creditors and is proceeding with preparing a reorganization plan to achieve
that objective.
ITEM 2. CHANGES IN SECURITIES
(a) None
(b) None
(c) None
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on July 29,
1999. The following members were elected to the Company's Board of Directors
for the ensuing year: Frederick Sandvick, John H. Olbrich and Richard C.
Mahon. The stockholders also voted in favor of a proposal to ratify the
appointment of Deloitte & Touche LLP as the Company's independent auditors
for the current fiscal year.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
<PAGE>
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: November 8, 1999 /s/ Sam W. Stearman
----------------------------------------
As Chief Financial Officer on behalf
of Registrant and as Registrant's
Principal Financial & Accounting Officer
