<PAGE> 1
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 FOR THE YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-21738
ON-POINT TECHNOLOGY SYSTEMS, INC.
---------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 33-0423037
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION)
1370 W. SAN MARCOS BLVD, STE 100
SAN MARCOS, CALIFORNIA 92069
--------------------------------------
(ADDRESS OF REGISTRANT'S EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (760) 510-4900
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
CHECK WHETHER THE ISSUER (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15 (d) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS
(OR 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 [ ].
THE REGISTRANT'S REVENUES FOR FISCAL YEAR ENDED DECEMBER 31, 1999
WERE $14,444,000
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON STOCK HELD BY
NONAFFILIATES OF THE REGISTRANT AS OF MARCH 31, 2000, WAS $18,071,000
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON
STOCK AS OF MARCH 31, 2000, WAS 10,266,401
DOCUMENTS INCORPORATED BY REFERENCE: NONE
<PAGE> 2
ITEM 1. BUSINESS
GENERAL
On-Point Technology Systems, Inc., (the "Company" or "On-Point")
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"), and prepaid phone card vending terminals (the "Debit Card
Retailer" or "DCR"). Our 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 have been sold or leased to state and
provincial governments primarily in the United States and, to a lessor
extent, in Canada and Europe. The DCR terminals are sold or leased
principally to commercial customers in the United States and, to a
lesser extent, to governmental entities and their licensees in Asia and
South America.
We have three reportable business segments:
- Instant ticket and debit card vending and dispensing products
(Product Segment);
- Financing, which we provide to our customers in the form of
both operating and finance leases (Financing Segment); and,
- Servicing, which we provide primarily to our instant ticket
vending customers (Service Segment).
The description and operating results of these segments are more fully
described herein and in Notes to Consolidated Financial Statements.
In 1999, our goals were to:
- continue the development and begin the marketing of our next
generation lottery products;
- develop new market opportunities for these products;
- establish strategic relationships with other companies to
leverage the advantages of the new products;
- transition On-Point's business (primarily production, field
service and administration) to include On-Point's next
generation lottery product offerings;
- reevaluate On-Point's existing non-lottery products and
determine future strategic plans; and,
- begin to evaluate a diversification program that could enable
us to incorporate other technologies for the development of
other new product offerings and markets.
We believe that we made significant progress in achieving our goals for
1999 by the introduction of our next generation lottery products at the
North American State and Provincial Lottery conference. Our next
generation lottery products not only expand our product offerings to
our lottery customers, they provide enhanced features, such as the
ability to dispense instant tickets in conjunction with central
computer processing of those tickets. We believe that this feature,
which is patent protected, is not presently available in the lottery
industry. Our next generation lottery products include PlayPoint, our
new automated instant ticket vending terminal, and CounterPoint, our
new instant ticket dispensing product that is uniquely suited for
retail countertop installation. These new products can provide
lotteries with the platform on which dynamic new features, such as
progressive jackpots, can be designed into instant ticket games.
On-Point also continued evaluating strategic alliances during 1999 to
leverage the advantages of its new lottery products. During 1999,
management entered into a number of discussions with companies in the
lottery industry regarding strategic alternatives. Although the focus
of those discussions were initially for strategic alliances, those
discussions ultimately resulted in entering into extensive negotiations
with GTECH Corporation (NYSE: GTK) for the acquisition of On-Point by
GTECH. Management also held discussions with other companies for the
acquisition of On-Point in order to ensure that we were maximizing
stockholder value.
The negotiations with GTECH ultimately resulted in a definitive
agreement on January 7, 2000 (see
2
<PAGE> 3
Notes to Consolidated Financial Statements herein for a further
description of the transaction). The agreement was subject to a number
of conditions, including the approval of the transaction by the
stockholders of On-Point. Subsequent to the execution of the agreement
with GTECH
- An action was filed by a shareholder claiming, among other
things, that the price for On-Point was too low and that the
board of directors breached its fiduciary duties in reaching
its agreement with GTECH at such a price.
- We restated our prior year financial statements primarily to
record leases of equipment to Solutioneering, Inc, a
non-lottery customer in the prepaid phone card business that
filed for bankruptcy protection during 1999, as operating
leases rather than sales-type leases.
- Two class actions were commenced against us and some of our
officers and directors, alleging violations of securities
laws resulting from the restatement of our financial
statements.
In April 2000, GTECH sent notice of termination of the January
agreement and has entered into discussions with On-Point for a new
agreement encompassing any issues resulting from the events occurring
after the January agreement. Although we are continuing to engage in
discussions with GTECH, with respect to a potential merger or other
strategic arrangements, we cannot assure you that we will be able to
enter into any agreement with GTECH or that, if we enter into an
agreement with GTECH, either we or our stockholders will receive the
same benefits as under the January agreement.
Our goals for 2000 are to:
- complete the development and industrialization of our next
generation lottery products;
- fully explore merger, acquisition and strategic alliance
arrangements with other companies that would provide greater
resources for us to achieve our strategic plans and enhance
shareholder value;
Subject to new arrangements with GTECH or other merger and/or
acquisition events:
- develop and implement a financing strategy to fund the growth
plans of On-Point;
- begin the marketing of On-Point's patented product for the
deployment of centrally-host computer activated instant
scratch tickets in the lottery industry;
- continue to reevaluate On-Point's existing non-lottery
products and determine future strategic plans for those
products;
- continue to evaluate a diversification program that could
enable us to incorporate other technologies for the
development of other new product offerings and markets,
specifically for high volume cash-oriented transactions.
ABOUT ON-POINT
We are a Nevada Corporation organized in March 1990. Our executive
offices are located at 1370 W. San Marcos Blvd, Ste 100, San Marcos,
California, telephone (760) 510-4900.
FORWARD - LOOKING STATEMENTS
Some of the statements in this report are forward looking statements
about what may happen in the future. They include statements regarding
our current beliefs, plans, expectations and assumptions about matters
such as our expected financial position and operating results, our
business strategy and our financing plans. These statements can
sometimes be identified by our use of forward looking words such as
"anticipate," "believe," estimate," "expect," "intend," "plan," "seek,"
"should," and similar expressions. We cannot guarantee that our
forward-looking statements will turn out to be correct or that our
beliefs, plans, expectations and assumptions will not change. Any
forward-looking statements in this release are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation Act of
1995. Investors are cautioned that actual results may differ
substantially from such forward-looking statements. Forward-looking
statements involve risks and uncertainties including, but not
3
<PAGE> 4
limited to, continued acceptance of our products and services in the
marketplace, our negotiation of a new agreement with GTECH, competitive
factors, new products and technological changes, our successful entry
into new markets, our successful transition to our next generation
product line, our ability to increase our customer base, as well as
general political and other uncertainties related to customer
purchases, our ability to obtain financing as required for the
development of our business, our ability to sustain adequate cash flow
from operations, and other risks described in "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this report.
RISK FACTORS
The following risk factors apply to On-Point and its business segments.
If any of the following risks actually occurs, On-Point's business,
financial condition or results of operations could be materially
adversely affected.
WE MAY EXPERIENCE FLUCTUATIONS IN OUR FINANCIAL RESULTS AND, AS A
RESULT, OUR STOCK PRICE.
In the past, we have experienced significant fluctuations in our
financial results. Our revenues, capital expenditures and operating
results can vary significantly due to:
- Our dependence on a small number of major customers;
- Relatively long sales cycles;
- The unpredictable timing and amount of contracts awarded by
state lotteries and telephone companies; the extended time
between the award of a contract and the receipt of revenues
from the sale or lease of ITR's and DCR's;
- Changes in customer budgets; and
- Working capital required for manufacturing ITR's and DCR's
pursuant to new orders.
These factors may make it difficult to forecast revenues and
expenditures over extended periods. Consequently, our operating results
for any period could be below the expectations of securities analysts
and investors. This in turn could lead to sudden and sometimes dramatic
declines in the market price of our stock.
WE WILL NEED ADDITIONAL FINANCING.
Although On-Point has extended its line of credit for three years, in
order to successfully market its new product and develop other
products, On-Point will require additional funding. Unless its new
products receive early market acceptance, it may only be possible to
raise additional capital on terms that are dilutive to On-Point
stockholders, and future stock sales may hurt the On-Point stock price.
OUR BUSINESS WILL DEPEND UPON CONTINUED MARKET ACCEPTANCE OF ITR'S AND
DCR'S.
Our ability to generate additional revenues and earnings will depend
upon the continuation of existing leases of ITR's and DCR's, the
distribution of ITR's and DCR's in additional states and international
jurisdictions, the approval of lotteries in remaining states and
international jurisdictions and increased future orders of ITR's and
DCR's. The market for ITR's has grown rapidly since first deployed to
serve instant lotteries in 1991. As of December 31, 1999, 37 states,
the District of Columbia and eight international jurisdictions used
ITR's as part of their instant ticket distribution system. We leased or
sold ITR's in 5 of those states and in one international jurisdiction.
Similarly, the use of DCR's to distribute prepaid telephone calling
cards has grown significantly over the past five years. However, the
popularity of instant lottery games and prepaid telephone calling cards
and the demand for ITR's and DCR's may not continue and, as a result,
we may not be able to successfully market and sell our products. It is
critical to our continued success that we develop relationships with
additional lotteries
4
<PAGE> 5
and telephone companies and that additional states authorize instant
lotteries.
WE DEPEND ON LARGE CONTRACTS FROM A LIMITED NUMBER OF ITR CUSTOMERS.
We have traditionally derived a significant portion of our revenues
from a limited number of state lottery authorities or their
representatives for the lease, sale or service of ITR's. This can cause
our revenues and earnings to fluctuate between quarters based on the
timing of orders and realization of revenues from these orders.
Further, none of our large customers has any obligation to lease or
purchase additional machines from us. A loss of any of these large
contracts could have a material adverse effect on our business,
financial condition and results of operations.
WE MAY NOT BE SUCCESSFUL IN PROTECTING OUR PROPRIETARY RIGHTS OR
AVOIDING CLAIMS THAT WE INFRINGE THE PROPRIETARY RIGHTS OF OTHERS.
We principally rely upon patent, copyright, trademark and trade secret
laws, license agreements and employee nondisclosure agreements to
protect our proprietary rights and technology. These laws and
contractual provisions provide only limited protection. We could incur
substantial costs and diversion of management resources in the defense
of any claims relating to the proprietary rights of others, which could
have a material adverse effect on our business, financial condition and
results of operations.
WE MAY NOT BE ABLE TO ADAPT TO CHANGES IN TECHNOLOGY, PRODUCTS AND
INDUSTRY STANDARDS.
The markets in which we compete are characterized by rapidly changing
technology and evolving industry practices. Competitors may introduce
other types of lottery, gaming and prepaid telephone calling card
products. If we are unable to develop or obtain the rights to
developing technologies and use such technologies to enhance our
present products and develop new products in a timely manner, we may be
unable to retain our present customers or attract new customers.
OUR CONTRACTS WITH STATE LOTTERIES MAY BE TERMINATED WITH LITTLE
NOTICE.
Revenue from state and government-operated lotteries accounted for a
substantial majority of our revenue in 1999 and 1998. Our contracts
with lotteries, like government contracts in general, typically permit
a lottery to terminate the contract upon 30 days written notice upon
certain events. Our business would be impaired in the event of the
termination of our lottery contracts. Although lease agreements
cannot be cancelled without a breach, any changes in state policy on
lotteries which reduces the need for new equipment could adversely
affect our ability to sell or lease our terminals.
ANY PAYMENT OF LIQUIDATED DAMAGES UNDER OUR LOTTERY CONTRACTS COULD
IMPAIR OUR BUSINESS.
Our lottery contracts impose demanding installation, performance and
maintenance requirements and provide for substantial liquidated damages
in the event that we fail to perform. Our business generally and our
cash flow and reputation could be materially impaired in the event that
we are required to pay liquidated damages under these contracts.
OUR LEASE CONTRACTS MAY RESULT IN LOSSES.
Our standard ITR lease agreements provide for fixed lease payments
during the term of the agreement and typically permit the lottery to
order additional ITR's at any time during the lease term. If a lottery
orders a large number of ITR's near the end of the lease term, we would
incur significant manufacturing costs but may receive lease payments
for only a relatively short period of time through the remainder of the
lease term.
5
<PAGE> 6
Additionally, we are unable to pass along to the lottery any increases
in manufacturing and service costs during the term of the lease
agreement. Our standard lease agreements provide for a short initial
term, such as one year, with an option for the lottery to extend the
lease term for additional one-year periods. If the lottery does not
extend the initial lease term, we might incur a loss on the manufacture
of the ITR's if we are unable to re-lease or sell the ITR.
THE ITR AND DCR MARKETS ARE VERY COMPETITIVE.
The ITR and DCR markets are relatively new markets that have grown
rapidly in recent years. We may not be able to compete successfully
against current or future competitors, many of whom may have greater
resources and experience than us. The instant ticket market also may
face competition from other types of lottery and gaming products,
particularly on-line lottery products. The long distance telephone
market similarly may face competition from other types of
communications products, including facsimile, e-mail and other on-line
products. If the ability to provide ITR's and DCR's internationally
becomes a competitive advantage in the instant ticket lottery and
prepaid calling card industries, we will have to expand our presence
internationally or risk a competitive disadvantage relative to our
competitors. Increased competition could cause us to increase our
selling and marketing expenses and research and development costs. We
may not be able to offset the effects of any such increased costs
through an increase in the number of lottery contracts and higher
revenue from sales and leases of ITR's and DCR's, and we may not have
the resources to compete successfully. These developments could have a
material adverse effect on our business, financial condition and
results of operation.
OUR ABILITY TO PURCHASE PRODUCTS MAY BE IMPAIRED BY OUR RELIANCE ON A
LIMITED NUMBER OF SUPPLIERS.
We currently purchase certain important parts, such as components of
our ITR and DCR dispensers from limited sources. As a result, we may be
subject to risks associated with this reliance, such as the potential
unavailability of supplies, price increases and production delays, any
of which could have a material adverse effect on our business,
financial condition and results of operations.
WE MAY NOT BE ABLE TO RETAIN OUR KEY EXECUTIVES AND RESEARCH AND
DEVELOPMENT PERSONNEL.
As a small company with only 106 employees, our success depends in
large part on the continued service of our key management, sales,
product development and operational personnel. Except for Mr. Sandvick,
we do not currently have employment agreements with any of our
employees. Our success also depends on our ability to attract and
retain additional personnel with a variety of skills, especially
engineering and marketing expertise. Our inability to hire and retain
qualified personnel would likely have a material adverse effect on our
current business, any new product development efforts and future
business prospects.
THE SUCCESS OF OUR INTERNATIONAL ACTIVITIES IS SUBJECT TO MANY
UNCERTAINTIES.
In 1999 and 1998, our sales and leases of ITR's and DCR's outside the
United States represented a small portion of our total revenues.
However, we intend to increase our marketing activities in
international jurisdictions, including expansion into several
countries. Our ability to expand our business into international
markets may be adversely affected by the following:
- Customizing our products for use in international countries;
- Longer accounts receivable payment cycles;
- Difficulties in managing international operations;
- Availability of trained personnel to install and implement our
systems;
- Exchange rate fluctuations;
6
<PAGE> 7
- Political instability;
- Tariffs and other trade barriers;
- Potentially adverse tax obligations;
- Restrictions on the repatriation of earnings; and
- The burdens of complying with a wide variety of international
laws and regulations.
In addition, the laws of some countries do not protect our intellectual
property rights to as great an extent as the laws of the United States.
Such factors could have a material adverse effect on our international
revenues and earnings and our overall financial performance.
OUR INDUSTRY IS SUBJECT TO SIGNIFICANT GOVERNMENT REGULATION THAT COULD
NEGATIVELY AFFECT US.
State and local governments strictly regulate the operation of
lotteries and the sales and leasing of ITR's. Further, international
jurisdictions that operate lotteries impose strict regulations which
may vary from those in the United States. Any adverse change in the
lottery laws of any jurisdiction in which we sell and lease ITR's could
impose burdensome requirements or requirements that we may be unable to
satisfy. Our failure to comply with changing lottery-related laws and
regulations could have a material adverse effect on our business,
financial condition and results of operation.
In addition, state laws provide for background investigations on each
of the lottery's vendors and their affiliates, subcontractors,
officers, directors, employees and principal stockholders. The failure
of any of these parties associated with us to obtain or retain approval
in any jurisdiction could have a material adverse effect on our
business, financial condition and results of operation.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD ADVERSELY
AFFECT OUR STOCK PRICE AND OUR ABILITY TO RAISE FUNDS IN NEW STOCK
OFFERINGS.
The market price of our common stock could drop as a result of sales of
large numbers of shares in the market, or the perception that such
sales could occur. This is particularly true due to our relatively
small number of stockholders and the resulting low trading volume of
our common stock in the public market. These factors also could make it
more difficult for us to raise funds through future offerings.
OUR REPORTABLE BUSINESS SEGMENTS
On-Point has three reportable business segments: Products; Financing,
and; service. On-Point markets, manufactures and sells products to two
industry sectors: (1) State and foreign lotteries and (2) commercial
customers. A discussion of Company products in each industry sector
follows:
PRODUCT SEGMENT
LOTTERY PRODUCTS
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
7
<PAGE> 8
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 On-Point.
As of December 1999, lotteries were operated in 38 states, the District
of Columbia and five provinces of Canada. Lotteries are also operated
in Europe, Asia, Central America and South America. 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. We estimate 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 approximate 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, We believe
that instant ticket games continue to 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.
Our 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. On-Point's PTR terminals and Versatile Ticket Retailer ("VTR")
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. During 1999, we did not
sell any PTR or VTR terminals and, to date, this market has been
limited.
INSTANT TICKET RETAILER From its inception through December 31, 1999,
On-Point has sold or leased approximately 15,000 ITR terminals, of
which approximately 850 were sold or leased during 1999. Since we
received our first contract from the State of Virginia in 1991, we have
since signed contracts to provide terminals to numerous state lottery
customers including California, Missouri, Washington, Pennsylvania, New
York, Illinois, Connecticut, the Provinces of Ontario and Quebec, and
other foreign countries. An order has been received from the French
Lottery, the largest instant ticket lottery in the world, to provide
for up to 2,500 terminals, with an initial shipment of 500 in 1999.
This order provides for up to $10 million in revenue from 1999 to 2002.
The ITR terminals have been placed in supermarkets, convenience stores,
bowling alleys, restaurants with bars, and other locations. We also may
enter into service contracts in connection with sales of ITR terminals
pursuant to which it receives monthly maintenance fees (see "Service
Segment" herein).
8
<PAGE> 9
ITR LOTTERY TERMINALS In 1990, On-Point 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, we introduced an esthetically updated ITR-8500
terminal. In 1996, On-Point developed the first 12-bin ITR terminal and
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).
During 1997, as a result of the average mean time to failure rate of
our dispenser being in excess of nine years, we were able to initiate a
program of retrofitting older terminals to incorporate new
technologies. During 1998, On-Point began shipments of its ITR-8500SL
terminal, which can vend as many as 15 instant ticket games in a
smaller footprint than its previous 12-game model.
In 1999, On-Point introduced its next generation of lottery products.
Depending on market acceptance of these new products, we intend to
transition the marketing of our lottery products to include not only
our existing ITR technology but the new PlayPoint technology. We plan
to continue offering the existing models wherever the new PlayPoint
technology is not considered to be an advantage or where lotteries may
want the existing models. However, management believes PlayPoint will
be superior to any existing model and, therefore, be the preferred
model of choice by the lotteries in the future. PlayPoint will provide
advanced electronic, software, communication and dispensing
capabilities as well as new ergonomically designed features. PlayPoint
will be capable of dispensing both instant tickets and pull-tab
tickets. PlayPoint will also be capable of dispensing up to 20 instant
ticket games, another industry first for dispensing technology. In
1999, On-Point also introduced CounterPoint, our new instant ticket
dispensing product that is uniquely suited for retail countertop
installation. Management believes PlayPoint and CounterPoint have
superior features to any existing model. However, no assurances can be
given to the ultimate market acceptance of the new models.
We believe that 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 twenty 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 our knowledge and experience we believe that
customers prefer to see the actual tickets being dispensed. On-Point's
patented Windows feature is unique in this regard among similar
products available to lottery jurisdictions. Our lottery terminals
incorporate other patented features designed to 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 our
optional Shadow communication program.
COMMERCIAL PRODUCTS
Currently the only commercial product manufactured and marketed
consists of DCR vending
9
<PAGE> 10
machines, marketed principally for the resale of prepaid phone cards.
On-Point is seeking to augment this business with vending machines to
dispense such items as smart cards, credit cards, combination cellular
phone and prepaid phone card dispensing units.
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. 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.
It is our understanding that public awareness of prepaid phone cards
was minimal in the early 1990's, but has increased dramatically since
then. We believe dispensing machines have become an important element
of the distribution network of prepaid phone cards, 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
we repackaged our DCR technology into a new cabinet styling. In 1998 we
expanded our DCR product line to include 3 and 8 bin terminals in
response to the specific application needs of our customers.
In many foreign countries, especially those less developed than the
United States, the majority of residents does 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. We believe 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 that we 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. On-Point 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".
DEBIT CARD RETAILER In 1993 On-Point recognized the potential to
utilize its lottery technology in the evolving prepaid phone card
industry and developed its DCR-2000 debit card vending machine. To
date, these terminals have been placed in many different types of
establishments where there is a market for prepaid phone or debit
cards. Company sales of DCR products and services totaled $660,000 and
$1.1 million for the years ended December 31, 1999 and 1998
respectively. Those sales were primarily to foreign customers in each
year.
THE DCR TERMINAL On-Point 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
10
<PAGE> 11
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 our 4-bin terminal. As with the ITR terminal, the DCR
machine includes a display that 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 our optional
"Shadow" communication program.
Management believes that the DCR market, much like the lottery ITR
market, has become extremely competitive. In addition, technological
advances may modify the market over the next few years. During 1999
management underwent a reevaluation process for the potential of the
DCR market both domestically and internationally. As a result of our
focus primarily on our next generation lottery products, no significant
developments were made to the DCR products in 1999 and sales decreased.
We plan to continue our evaluation of the DCR products in 2000 to
determine whether new developments may be necessary to stay competitive
and attain a continuing market share.
OTHER POTENTIAL PRODUCTS
In addition to the advances we have made in On-Point's lottery product
offerings, we began to develop a strategy for a diversification program in 1999
that would broaden On-Point's product offerings and markets. This
diversification was focused in the area of automated electronic solutions for
high-volume cash-oriented transactions, primarily with respect to prepaid
products and services. It is management's belief that prepaid products and
services have gained a large market share and that electronic solutions for this
market are in great demand. In September 1999, On-Point formed e-Point
Technologies, Inc. (e-Point), a wholly owned subsidiary, for the primary purpose
of developing a more defined business strategy for this area of the market. The
initial focus of e-Point has been to develop the launch of e-Cel, a process for
prepayment of cellular phone airtime. We initially expected the launch for e-Cel
to occur in the United Kingdom by April 2000, but delays in the market and our
limited capital resources, as well as our change in overall corporate strategy
respecting the sale of On-Point to GTECH, has indefinitely delayed further
progress with e-Cel. As a result, we discontinued our efforts with e-Cel in the
United Kingdom. However, we continue to evaluate our strategies for other
automated electronic solutions in the global retail market.
FINANCING SEGMENT
On-Point offers in-house financing for both lottery and commercial customers
under two types of contractual arrangements: Sales-type Lease Agreements and
Operating Lease Agreements.
Sales-type Lease Agreements Under the typical Sales-type Lease Agreement, we
install and maintain lottery and/or DCR terminals and provide 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.
11
<PAGE> 12
Operating Lease Agreements While the Operating Lease Agreements are similar to
the Sales-type Lease Agreements with respect to our installation, maintenance
and service obligations, they are for shorter terms, and ownership of the
terminals remains with On-Point after the lease term. The lease amount may or
may not include the monthly maintenance fee. Typically, the lessee is given the
option to extend the leases in one-year increments
SERVICE SEGMENT
On-Point currently provides ITR service in the states of: Illinois, Missouri,
New York, and Virginia, which are provided through service facilities at its San
Marcos, California headquarters and in each of those states. These facilities
provide installation and relocation services, perform repairs and respond to
service calls. We maintain 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. We generally provide a warranty period of one
year on our terminals and provide an option for an extended warranty period if
purchased by the customer. Warranty costs are generally included within our
service agreements and not separately provided in product sales.
On-Point 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. Our administrative staff closely
monitors 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.
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.
SUPPORT
MARKETING AND SALES
On-Point markets its products domestically through an in-house
marketing and sales staff and internationally primarily through
distributorships. We solicit 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 On-Point'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.
MARKETING TO LOTTERIES 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,
12
<PAGE> 13
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, we have employed registered lobbyists and paid
consultants in certain states. Although we believe 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.
MARKETING OF DCR TERMINALS Three distinct groups of potential customers
have been targeted for the sale or lease of DCR terminals: major
telephone companies, medium-sized telephone companies and long-distance
resellers. To our 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, but these customers normally have limited
capital. Our future efforts will be limited to vertical distributorship
and joint venture relationships that will increase its presence in the
DCR market place with limited credit exposure; however, there can be no
assurance that we will be successful in developing these relationships.
INTERNATIONAL MARKETING 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 1999 and 1998 we delivered terminals to various lotteries
and telecommunication service providers for market testing.
Nonetheless, our foreign operations are relatively small, and no
assurance can be provided that a meaningful international market for
our terminals will develop. In June 1995 we entered into a distributor
agreement with a Brazilian corporation to distribute our products on an
exclusive basis in Brazil that was subsequently terminated in 1999. In
December 1997 we entered into a distributor agreement with Editec, a
French Corporation, to distribute On-Point's products on an exclusive
basis throughout most of Western Europe.
RESEARCH AND DEVELOPMENT
General research and development expenditures totaled $ .7 million and
$1.4 million in 1999 and 1998, respectively. The 1999 and 1998
expenditures were primarily directed towards the development of
PlayPoint together with the associated development of On-Point's first
counter-top dispenser, CounterPoint. PlayPoint features advanced
electronic, software, communication and dispensing capabilities. We
believe that our recently developed dispensing system, which will be
incorporated into PlayPoint and CounterPoint, is the most advanced,
space efficient and cost effective dispenser of instant tickets in the
world. In addition, the PlayPoint cabinet has been ergonomically
designed to not only generate increased impulse purchasing desires, but
to fully comply with all ADA established guidelines.
Patents have been filed and/or received for PlayPoint's and
CounterPoint's proprietary features.
13
<PAGE> 14
These include:
On-Line Instant Ticket, Patent 5,772,510 - awarded June 1998
- Other patents filed through December 1999 but still pending:
- Ticket Dispenser and Vending Machine, 3345-2130
- Ticket Distribution System and Method, 3345-2140
- Ticket Dispensing Module and Method, 3345-2170
- Gaming Device and Method, 3345-2180
- Pre-Paid Mobile Telephone Airtime Supply System and Method,
3345-2190
- Ticket Dispensing Device, Installation and Displays, 3345-2210
- CheckWriter Design, 3345-2212
All of the patents pending have been designed to protect On-Point's
proprietary designs from use by competitors. As these products are
still in development, On-Point has not yet generated any income from
any of the patent applications filed in 1998 and 1999, nor from Patent
5,772,510 awarded in June 1998. None of the patent applications would
have a material impact on future sales as currently generated by
On-Point, if they were not awarded. Patent 5,772,510, is expected to
become important as we begin to market patented on-line capabilities in
2000 and beyond. Patent pendings 3345-2170, 3345-2180, and 3345-2210
are expected to become important if our next generation lottery
equipment gains market acceptance.
None of On-Point's general research and developments costs was borne
directly by our customers. On-Point's research and development
department, augmented by contract employees, 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.
MANUFACTURING AND SUPPLY
On-Point's lottery and DCR terminals are designed in a modular form to
facilitate manufacturing assembly and serviceability. We use 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
Marcos facility. Key vendors include California Chassis, which
currently produces cabinets and Mars, which provides the majority of
the bill acceptors. Although components and parts are available from
multiple sources, the loss of any key vendors would have a significant
impact on On-Point or its operations.
EMPLOYEES
As of March 1, 2000, On-Point had 106 full-time employees, of whom 18
were in executive or administrative positions, 19 in quality control
and production, 3 in research and development, 59 in field service, 6
in the warehouse and 1 in maintenance. In addition, we employed 20
people on a part-time basis in its field service department. None of
our employees are currently represented by a union, and we believe that
relations with our employees are good.
14
<PAGE> 15
FACILITIES
On-Point occupies approximately 32,000 square feet of space in San
Marcos, California. The premises include office, manufacturing and
warehouse space. We currently pay monthly rent of $15,663 for this
space. This lease terminates January 31, 2009. We believe that current
facilities are adequate to meet our anticipated needs through the term
of the lease.
OTHER BUSINESS INFORMATION
BACKLOG
On-Point's potential backlog of orders at December 31, 1999 totaled
approximately 3,500 ITR's. The backlog consists of contracts awarded,
which determines the pricing for a maximum number of units which may be
purchased over the term of the contract, usually three - five years.
The rate at which we receive orders from customers is affected from
time to time by the nature of our market. State lottery authorities are
allocated budgets on an annual basis, and their desire and ability to
order products from vendors, including On-Point, 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.
COMPETITION
On-Point believes that it possesses a strong competitive position in
the sale of lottery terminals. We have established a reputation for
providing quality terminals and service. As a consequence, we have been
able to secure contracts in eleven states, in the Provinces of Ontario
and Quebec, the country of France and other foreign countries. In
addition, we generally enjoy repeat or renewal orders from existing
customers and are conducting tests with overseas lottery organizations.
Interlott Technologies, Inc. ("ILI") has sold or leased machines in
twenty-two 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 we believe
that it possesses a strong competitive position by virtue of its
previous 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 our 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 are relatively new. Consequently, it is difficult to
identify all the competitors in this market. Nonetheless, we believe we
possess a strong competitive position in the sale of DCR terminals
within the United States and overseas. At present, our principal
competitors are Marketing & Vending Concepts, ILI, VendTek and Opal, in
addition a number of smaller vending machine companies. 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. While we
believe we possess an advantage in obtaining future customers by virtue
of our 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 our
technology obsolete. The prepaid phone card and debit card market may
also face competition from other types of products.
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
15
<PAGE> 16
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.
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.
On-Point 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, we believe we are in
substantial compliance with these provisions.
The international jurisdictions in which On-Point 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.
On-Point has employed registered lobbyists and retained paid
consultants in certain states. Failure to comply with state regulatory
provisions relating to the activities of our advisors could adversely
affect our 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.
ITEM 2. DESCRIPTION OF PROPERTIES
At March 1, 2000 On-Point had the following properties under lease:
Office, manufacturing, R & D and warehouse space in San Marcos,
California
Office, repair depot and warehouse space in Syracuse, New York
Office, repair depot and warehouse space in Arnold, Missouri
Office, repair depot and warehouse space in Richmond, Virginia
ITEM 3. LEGAL PROCEEDINGS
On-Point is a party to legal proceedings in the ordinary course of its
business; the most significant of which are described below.
On April 21, 2000, an action was filed against On-Point in U.S.
District Court, Southern District of Ohio, by Interlott Technologies,
Inc.(ILI). The action alleges that On-Point breached a Settlement
Agreement and Mutual Release dated May 30, 1991 with ILI in that
On-Point was using elements of ILI's technology in On-Points new
PlayPoint technology. We believe ILI's suit to be without merit.
On-Point is in the process of preparing a response to the action and
will contest it vigorously.
16
<PAGE> 17
On April 20, 2000, a shareholder class action was filed against
On-Point and Frederick Sandvick in U.S. District Court, Southern
District of California. The action, which seeks an unspecified amount
of damages on behalf of all similarly situated shareholders, alleges
that On-Point violated federal securities laws by the dissemination of
materially false and misleading financial statements. On-Point has been
informed that a similar action was also filed but we have not been
served with any additional actions at this time. On-Point intends to
vigorously defend against these claims and is in the process of
preparing a response to the action filed.
On January 14, 2000, an action was filed against On-Point and its
directors on behalf of a stockholder in Superior Court of California,
County of San Diego. The action alleges that the consideration to be
paid by GTECH for all of On-Point's stock was inadequate and that the
directors breached their fiduciary duties relating to the proposed sale
of On-Point to GTECH. On-Point will seek dismissal of this action since
GTECH has provided notice of termination of the agreement upon which
the action was based.
On January 11, 1999, On-Point filed an action against Solutioneering,
Inc. in Superior Court of California, County of San Diego. A first
amended complaint of said action was filed on February 9, 1999. The
action arises from the lease to Solutioneering a total of 2,193 prepaid
phone card vending terminals under a March 1, 1995 Master Lease
Agreement and two amendments thereto (the "Agreement"). In the action,
we assert that Solutioneering has breached the Agreement and has
claimed damages of approximately $9 million. Solutioneering
subsequently sought bankruptcy protection in 1999 and we are pursuing
our claim with the bankruptcy court. The financing lender to
Solutioneering has raised a claim that it has a priority security
interest over the leased machines ahead of On-Point based on the
allegation that On-Point sold the machines to Solutioneering rather
than leased the machines. We believe the arrangement with
Solutioneering was clearly a lease and that the financing lender's
claim to be without merit. On-Point's net balance sheet carrying value
of the Solutioneering leased machines at December 31, 1998 and 1999 was
approximately $3.3 million and $2.5 million, respectively. We believe
we will recover the assets and that the underlying value of our
equipment at Solutioneering exceeds the carrying value on On-Point's
books.
On January 23, 1996, On-Point's principal competitor, Interlott
Technologies, Inc. ("ILI"), filed a civil action against On-Point in
the Common Pleas Court of Hamilton County, Ohio. The action arose from
an agreement in principle between Interlott Technologies, Inc. and
On-Point, which was signed on March 23, 1995 regarding a proposed
merger transaction. On-Point asserted a counterclaim against ILI
seeking declaratory judgment with regard to certain aspects of the
agreement, seeking to recover On-Point's own costs and expenses, and
seeking compensatory damages from ILI for certain competition and
torturous interference with business relations. The parties reached a
full and complete settlement of this action on March 4, 1999 by the
payment of On-Point of approximately $600,000, which had been
previously accrued in the three years prior to December 31, 1998. No
liability was admitted by either party pursuant to the settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
None.
17
<PAGE> 18
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On-Point'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 On-Point's common stock, as reported on NASDAQ, for the
quarters presented. The bid prices represent inter-dealer quotations,
without adjustments for retail mark-ups, markdowns or commissions and
may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
1999 1998
High Low High Low
-------------------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
First Quarter $ 2.563 $ 1.688 $ 3.813 $ 1.750
Second Quarter $ 3.500 $ 1.750 $ 3.000 $ 1.750
Third Quarter $ 2.875 $ 1.375 $ 2.063 $ 1.281
Fourth Quarter $ 3.000 $ 1.438 $ 2.563 $ 1.000
-------------------------- ----------------- ----------------- ----------------- -----------------
</TABLE>
The number of stockholders of record of On-Point's common stock, par
value $.01 per share, as of March 31, 2000, was 290. The approximate
number of beneficial shareholders was 2,400.
On-Point 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 require approval of
On-Point's line of credit lenders, as well as depend on earnings,
capital requirements, financial condition and other relevant factors.
On-Point had the following unregistered sales of securities 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 January 1997, Frederick Sandvick, Chief Executive Officer of
On-Point, received a warrant to purchase 500,000 shares of
On-Point'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 On-Point's Common Stock at $.72 per
share pursuant to a consulting agreement entered into with
On-Point. 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 On-Point's Common Stock at $1.00 per
share pursuant to a consulting agreement entered into with
On-Point. 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 On-Point's Common Stock at $2.52 per share in
consideration for facilitating financing for On-Point. The warrant
as 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 On-Point's Common Stock at $2.00 per share
pursuant to a financing agreement entered into with On-Point. 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
On-Point's Common Stock at $1.24 per share pursuant to a
commission
18
<PAGE> 19
settlement agreement entered into with On-Point. The warrants had
a one-year term and have been exercised.
- 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 On-Point's Common Stock at $2.88 per share pursuant to
an agreement to terminate their respective rights in On-Point's
international operations. The options expire on December 31, 2002
and vest 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.
- In April 1998, Darius Anderson and James Bouskos each received an
option to purchase 10,000 shares of On-Point's Common Stock at
$2.09 per share pursuant to their appointment as Advisory
Directors. Mr. Anderson's options have subsequently been
terminated. Mr. Bouskos' options vest by April 1999 and expire in
April 2001.
- In May 1998, Allan Halladay and Brian Roberts each received an
option to purchase 50,000 shares of On-Point's Common Stock at
$2.09 per share pursuant to their assignment of certain
intellectual property to On-Point. The options vest the earlier of
April 1, 2001 or upon the satisfaction of certain performance
conditions. The options expire on December 31, 2001.
- In July 1998, Coast Business Credit received a warrant to purchase
10,000 shares of On-Point's Common Stock at $1.63 per share
pursuant to an amendment to a financing agreement entered into
with On-Point. The warrant became exercisable in July 1998 and
expires on July 5, 2000, as amended.
- In September 1998, Elizabeth Williams received an option to
purchase 5,000 shares of On-Point's Common Stock at $1.66 per
share pursuant to a consulting agreement entered into with
On-Point. The option vests over 2 1/2 years and expires on
September 30, 2003.
- In October 1998, Robert Burr received an option to purchase 50,000
shares of On-Point's Common Stock at $2.00 per share pursuant to
his consulting agreement with On-Point. The option vests on March
31, 2001, or earlier, if certain conditions are met. The option
expires on September 30, 2001.
- In July 1999, James Bouskos and Miles Scully received options to
purchase 20,000 shares and 10,000 shares, respectively, of
On-Point's common stock at $1.97 per share pursuant to their
arrangements as Advisory Directors. The options vest in one year
and expire in three years from date of grant.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL On-Point's revenues through 1999 have been generated from (i)
sales of vending terminals (ii) operating leases of vending terminals,
(iv) financing income from sales-type leases, (iii) performance of
service on vending terminals, and (iv) sales of associated parts. Our
products are sold or leased to a limited number of customers worldwide.
As a result, we have experienced fluctuations in our financial results
and capital expenditures because of the timing of significant
individual contract awards and customer orders as well as associated
product delivery schedules. Our 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 require us to invest capital or otherwise finance the
manufacture of the vending terminals. We have obtained the resources
necessary to finance our expanding base of leased
19
<PAGE> 20
terminals over the past three years through our line of credit,
existing cash flow and private placement financing.
RESULTS OF OPERATIONS - 1999 COMPARED TO 1998
The results of operations are based, where applicable, on segment
information, which is included in Note 2 to the Financial Statements.
1999 revenues decreased by approximately $1.3 million or 9% from 1998.
The decrease was due to the combination of (1) a $1.0 million increase
in product sales resulting from an increase in the number of units
sold, (2) a $1.9 million decrease in financing revenue resulting from a
decrease in the number of new units leased or renewed, and (3) a $700
thousand decrease in service revenue resulting primarily from the loss
of a service contract for the State of Washington. The product mix
among segments is dependent upon new product orders received, which may
vary from year to year, based on which lotteries place new requests for
bid and on our competitive success.
Cost of sales, as a percentage of sales, increased by 15% from 68% in
1998 to 83% in 1999 due to the combination of the following: (1)
product cost of sales as a percentage of revenues increased 21% from
63% in 1998 to 84% in 1999; (2) financing cost of sales increased 29
percentage points, as a percentage of revenues, from 41% in 1998 to 70%
in 1999; and (3) service cost of sales decreased 8 percentage points as
a percentage of revenues from 94% in 1998 to 86% in 1999. Product cost
of sales increased as a percentage of sales due to a combination of
lower margins on ITR units resulting from competitive bidding pressures
on new units sold, increased depreciation expense associated with the
assets under lease with Solutioneering more fully described below.
Financing costs as a percentage of sales increased due primarily to the
decrease in revenue recognized during 1999 as compared to 1998. Service
costs decreased as a percentage of sales due to a combination of
renegotiated contract pricing and of economies achieved from a
preventative maintenance program initiated in 1997. Future gross
margins will be affected by competitive bidding requirements,
quantities of units in production, transitioning of On-Point's existing
products to its next generation products, and available resources.
Subject to those and other factors, we anticipate that 2000 margins
will improve. However, the margins could be adversely impacted by
higher costs during the initial production runs of On-Point's next
generation lottery products should the products gain market acceptance.
We developed the next generation lottery products in order to gain
greater market share and ultimately achieve better gross margins. The
next generation lottery products were unveiled in 1999 and On-Point has
initiated its marketing efforts to gain market acceptance of the new
products.
Included in cost of sales in 1999 and 1998 is depreciation of $741
thousand and $652 thousand, respectively, from non-performing equipment
held under lease by Solutioneering (see Note 7 of Notes to Consolidated
Financial Statements). These non-cash charges were significant reasons
for decreased gross margins in both years. During 1999, On-Point filed
an action to recover amounts owed by Solutioneering and, subsequent to
the action, Solutioneering filed for creditor protection under the U.S
Bankruptcy Code. On-Point is pursuing its rights to recover all the
equipment held under the lease with Solutioneering so the equipment can
be redeployed or sold to other customers. Until the equipment is
recovered or otherwise held for sale, it is anticipated that On-Point
will continue to depreciate the equipment as part of cost of sales. We
are currently in negotiations with third parties to recover and
redeploy the equipment; however, no assurances can be given that the
equipment will be recovered and, if recovered, redeployed under terms
favorable to On-Point. Future charges to expense will occur if the
equipment is not recovered and redeployed or sold on terms favorable to
On-Point.
As a result of the decreased gross margins during 1999, gross profit
decreased by $2.4 million, from $4.7 million in 1998 to $2.3 million in
1999.
20
<PAGE> 21
Operating expenses, as a percentage of sales, decreased by 14
percentage points as a result a combination of the following: (1) a
$1.6 million reduction in selling, general and administrative expenses,
and (2) a $.7 million reduction in general research and development
costs. The reduction in selling, general and administrative expenses
resulted from: (i) a decrease in salaries and related expenses due to
reductions in corporate and administrative personnel and to reductions
to the chief executive officer's salary; (ii) a decrease in legal and
outside professional fees; and (iii) a decrease in bad debt expense.
Bad debt expenses in 1998 included $206 from Fone America and $649 from
US Telecard, all related to sales made in prior years. General research
and development costs decreased as a result of the completion of some
of the overall development aspects of On-Point's next generation
lottery products. We anticipate continued development efforts in 2000
as On-Point receives marketing feedback on prototype units and as
On-Point continues to expand its product development efforts on other
product concepts. Thereafter, the extent of On-Point's development
efforts will depend on management's evaluation of the positioning of
its other products.
Total other expense increased by $279 thousand, from $254 thousand in
1998 to $533 thousand in 1999, as average borrowings increased during
1999.
As a net result of the above-described factors, On-Point incurred a net
loss of $721 thousand in 1999, versus a net loss of $404 in 1998.
LIQUIDITY AND CAPITAL RESOURCES In 1999, On-Point used approximately
$2.0 million of net cash provided by financing activities to fund
approximately $1.8 million in operating activities and $.2 million in
investing activities. Included in operating activities in 1999 was an
increase to inventories of approximately $2.6 million and an increase
of approximately $1.0 of predevelopment costs relating to a previously
awarded contract. In 1998, On-Point generated approximately $1.1million
of net cash from operating activities that was used in combination with
the $2.2 million provided by financing activities to finance $3.5
million in investing activities. Working capital was approximately $5.7
million at December 31, 1999 an increase of approximately $1.7 million
from the $4 million in working capital at December 31, 1998. The 1999
working capital included an increase in inventory of approximately $2.6
million primarily due to additional finished goods from contract orders
on hand at the end of the year, additional materials ordered to begin
production for On-Point's new next generation lottery products, and
additional used units on hand at the end of the year that were returned
from expiration of lease arrangements.
On May 5, 1997, On-Point entered into a Loan and Security Agreement for
a revolving line of credit whereby On-Point could borrow up to $3
million. Such agreement was amended on July 7, 1998 to increase the
borrowing limit to $5 million and further amended on July 2, 1999 to
increase the borrowing limit to $6 million. The loan bears interest at
prime plus 2%, which is reduced by .5% annually if On-Point meets
certain performance benchmarks, matures on July 31, 2000 and is secured
by virtually all of On-Point's assets. At December 31, 1999, On-Point
had borrowed approximately $4.7 million under this Agreement which was
approximately the availability under the line of credit as of that
date. In April 2000, On-Point extended the maturity date of the line
three years (from July 2000 to July 2003) and increased the borrowing
limit from $6 million to $10 million. The borrowing availability under
the line is subject to a number of restrictions (see Note 4 of Notes to
Consolidated Financial Statements).
During 1999, On-Point received $1 million from GTECH and issued GTECH a
note that matures on August 15, 2000 with interest at prime plus 3% per
annum. Subsequent to December 31, 1999, On-Point received another $.5
million from GTECH under the same terms as the original note. On-Point
and GTECH are in discussions regarding the potential acquisition of
On-Point.
21
<PAGE> 22
On-Point also received $.8 million from Galt Asset Management
subsequent to December 31, 1999 pursuant to a note that matures in
September 2000 with interest at 10% per annum. On-Point is pursuing a
private equity placement in which it would receive another $1 million
and convert the existing debt from Galt into the private placement. The
terms and completion of the private placement are subject to the
results of discussions with GTECH.
Management believes On-Point has sufficient liquidity because of its
existing stream of contractual lease payments, its current working
capital and its available borrowings under its $10 million debt
financing, to maintain its current level of operations for at least 12
months. However, if On-Point is unable to liquidate its current assets
timely, then additional capital will be required to fund existing
operations. Management believes this funding will be available through
private placement financing. Further, in order to accommodate recent
contract awards from the French, Missouri, Illinois and California
lotteries for up to 6,000 ITR's with a potential value of $28 million
over the next three years, together with other growth related
opportunities in 2000 and beyond, On-Point will require additional
financing. Therefore, we plan to seek additional financing for these
purposes during 2000.
YEAR 2000 COMPLIANCE The Company's process for becoming Year 2000 ("Y2K")
compliant has been to perform an ongoing comprehensive study and review of
computer hardware, software and systems, both internal and external, and
non-computer related systems, which may be affected by certain computerized
functions. The Company completed this process in preparation for Y2K issues,
prior to the end of the year. As of April 22, 2000, the Company is not aware of
any Y2K problem in any of our corporate applications, significant service
providers, vendors, suppliers, subcontractors, financial institutions,
consultants, various government agencies or non-information technology/embedded
systems. However, the success to date of our Y2K efforts and the efforts of
third party vendors or business partners cannot guarantee that there will not be
a material adverse effect on our business should a Y2K problem manifest or
become apparent in the future.
The costs of expected modifications were estimated to be minimal and immaterial.
For the year ended December 31, 1999, approximately $105,000 was charged to
expense related to this issue. Remaining costs to be incurred in 2000, if any,
are not expected to be material.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Financial Statements are filed as part of this Annual Report on
Form 10-KSB.
22
<PAGE> 23
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. and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the two years in the period ended December 31, 1999.
These financial statements are the responsibility of On-Point's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial statements present fairly, in all
material respects, the financial position of On-Point Technology Systems, Inc.
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States of America.
Deloitte & Touche LLP
San Diego, California
May 27, 2000
23
<PAGE> 24
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Assets Thousands of dollars, except share amounts
Cash and cash equivalents $ 157 $ 129
Accounts receivable, net 883 2,744
Inventories 6,325 3,143
Net investment in sales-type leases 1,619 1,359
Other current assets 199 122
-------- --------
Total current assets 9,183 7,497
-------- --------
Plant, property and equipment, net 565 422
Net investment in sales-type leases 2,402 2,723
Property under operating leases, net 275 1,852
Property under lease agreement with Solutioneering, net 2,513 3,255
Other assets 1,712 595
-------- --------
Total assets $ 16,650 $ 16,344
======== ========
Liabilities and shareholders' equity
Accounts Payable $ 1,793 $ 1,190
Notes Payable 1,000 104
Accrued expenses & current liabilities 706 2,372
-------- --------
Total current liabilities 3,499 3,666
-------- --------
Long-term debt 4,730 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, 10,266,401 and 10,094,826 shares issued and 103 101
outstanding, respectively
Additional paid-in capital 31,590 31,256
Accumulated deficit (23,272) (22,551)
-------- --------
Total shareholders' equity 8,421 8,806
-------- --------
Total liabilities and shareholders' equity $ 16,650 $ 16,344
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 25
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
THOUSANDS OF DOLLARS/SHARES, EXCEPT PER SHARE AMOUNTS
<S> <C> <C>
Revenues $ 13,481 $ 14,768
Cost of sales 11,144 10,044
-------- --------
Gross profit 2,337 4,724
-------- --------
Operating expenses:
Selling, general and administrative 1,801 3,449
Research and development 724 1,405
-------- --------
Total operating expenses 2,525 4,854
-------- --------
Loss from operations (188) (130)
-------- --------
Other expenses:
Interest expense 519 237
Other 14 17
-------- --------
Total other expenses 533 254
-------- --------
Loss before provision for income tax (721) (384)
Provision for income taxes current 20
Net loss $ (721) $ (404)
======== ========
Basic and diluted loss per share:
Loss per share ($ 0.07) ($ 0.04)
======== ========
Weighted average shares 10,190 9,882
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 26
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock Additional
Thousands shares/dollars --------------------- Paid in Accumulated
Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998 9,421 $94 $30,227 ($22,147) $8,174
-------------------------------------------------------------
Exercise of stock warrants 669 7 904 911
Exercise of stock options 5 5 5
Issuance of stock options and warrants
for services provided 120 120
Net loss (404) (404)
-------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 10,095 101 31,256 (22,551) 8,806
-------------------------------------------------------------
Exercise of stock warrants 60 1 119 120
Exercise of stock options 111 1 115 116
Issuance of stock options and warrants
for services provided 100 100
Net loss (721) (721)
-------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 10,266 $103 $31,590 ($23,272) $8,421
=============================================================
</TABLE>
See accompanying notes to consolidated financial statements
26
<PAGE> 27
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
THOUSAND OF DOLLARS 1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net loss ($721) ($404)
Adjustments to reconcile net loss to net cash
provided by (used in)operating activities:
Depreciation and amortization 1,921 2,000
Issuance of options and warrants for services provided 100 120
Provision for doubtful accounts (281) 713
Changes in assets and liabilities:
Accounts receivable 2,143 (960)
Inventories (2,634) (210)
Other current assets (77) 299
Other assets (1,196)
Accounts payable 603 72
Accrued expenses (1,666) (490)
Deferred income 505 --
------- -------
Net cash provided by (used in) operating activities 1,808 1,140
------- -------
Cash flows used in investing activities:
Purchases of plant, property and equipment (445) (283)
Net investment in sales type leases 256 (1,890)
Investment in property under operating leases (224)
Investment in property under lease agreement with
Solutioneering (1,212)
Loss on Fixed asset disposals 35 81
------- -------
Net cash (used in) provided by investing activities (154) (3,528)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock upon
exercise of warrants and options 236 916
Proceeds from line of credit, net 858 1,605
Proceeds from notes payable, net 896 (277)
------- -------
Net cash provided by financing activities 1,990 2,244
------- -------
Increase (Decrease) in cash and cash equivalents 28 (144)
------- -------
Cash and cash equivalents at beginning of year 129 273
------- -------
Cash and cash equivalents at end of year $ 157 $ 129
======= =======
Supplemental cash flow information:
Cash paid during the period for interest $ 451 $ 306
Cash paid during the period for income taxes $ 117
Supplemental disclosure of non cash activities:
Costbasis of machines returned from Fone America
transferred from net investment in sales type leases to
property under lease agreement with Solutioneering $ 23
Increase (decrease) of reserves for inventory obsolescence $ 96 ($368)
</TABLE>
27
<PAGE> 28
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization. On-Point Technology Systems, Inc. and subsidiaries, formerly
Lottery Enterprises, Inc. (collectively, the "Company" or "On-Point") designs,
manufactures, and services vending terminals for retail sale and leasing. Its
Instant Ticket Retailer (ITR) product line sells or leases instant-winner
lottery terminals to state and provincial governments in the United States and
Canada and to foreign governments and their licensees. Its Debit Card Retailer
(DCR) product line sells or leases vending machines for prepaid telephone cards
and other specialty retail products generally to commercial customers in the
United States and in foreign markets.
Basis of Presentation. The accompanying consolidated financial statements have
been prepared on a going concern basis. As of December 31, 1999, the Company has
a note payable to GTECH Corporation in the amount of $1.0 million which is due
August 15, 2000. Subsequent to December 31, 1999, an additional $500,000 was
advanced to the Company from GTECH under the same terms. Also subsequent to
December 31, 1999, $850,000 was advanced to the Company from a note payable from
Galt Asset Management which bears interest at 10% and is due September 30, 2000.
In the event the Company is unable to successfully generate sufficient cash flow
from operations to payoff these notes payable or renegotiate the term of the
notes payable, the lenders thereunder have the right to exercise their remedies
under these agreements.
Although the Company believes that they will be able to generate sufficient cash
flow to realize its assets and discharge its liabilities in the normal course of
business, there can be no assurances that the Company will generate sufficient
cash flows. The Company has increased its revolving line of credit and extended
its maturity date to July 2003 and continues to manage its expenses. The
accompanying consolidated financial statements do not include any adjustments
related to the recoverability and classification of recorded assets or its
classifications of recorded liabilities that might be necessary should the
Company be unable to continue as a going concern.
Principles of Consolidation. The consolidated financial statements include the
accounts of On-Point and all majority owned subsidiaries after elimination of
significant inter-company balances and transactions.
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.
Accounts Receivable. Accounts receivable consists of amounts due to On-Point
from its normal business activities. On-Point maintains an allowance for
doubtful accounts to reflect the expected uncollectibility of accounts
receivable based on collection history.
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.
Leases. Property held under lease agreements are stated at cost. Depreciation is
provided using the straight-line method, over estimated useful lives of 2 - 5
years.
Revenue Recognition. Under provision of SFAS No. 131, On-Point has three
reportable business segments: Products, Financing and Service. Segment
information is included as Note 3. Revenue recognition for each segment is as
follows:
PRODUCTS
Revenues from terminal sales are recognized upon shipment, except where
contract terms require On-Point to provide installation prior to
acceptance, in which cases revenue is recognized when the product is
installed. Revenues from sales-
28
<PAGE> 29
type leases are recognized at the present value of the future minimum
payments and are recorded as product sales.
FINANCING
Income from operating leases is recognized as rentals are due according to
provisions of the leases. Units under operating leases are treated as
depreciable assets and depreciated over their useful lives, with
depreciation on such units charged to cost of sales.
Interest income is recognized on sales-type leases as earned, based on
amortization schedules. The difference between the total future minimum
payments plus the residual value of the equipment and the present value is
recorded as unearned income and amortized over the term of the lease so as
to produce a constant rate of return.
SERVICE
On-Point employs a field service department to service ITR terminals sold
or leased to customers. Most service agreements provide for a preventive
maintenance visit at regular intervals (e.g. every 60 to 120 days), covers
all labor costs, costs to repair and replace parts, and provides for
emergency visits if the terminal is non-operational. Income is recognized
monthly, ratably over the lease term, for all ITR sales. When a terminal is
leased to a customer, the service fee is separately identified in the lease
agreement or included as a component of a single lease payment. If service
is included as a component of a single lease payment, a service fee is
estimated and classified as deferred executory costs. All service revenue
is recognized ratably over the service agreement. On-Point provides for the
estimated amount of future losses on any service contract.
All ITR and DCR sales include a warranty, ranging from one to three years,
which includes free repair or replacement of defective parts and may
include associated labor costs. Future warranty costs are estimated and
charged to income at time of sale, unless the lease includes a service
component, in which case the estimated costs reduces the minimum lease
payment. On-Point has no commitment under any lease to guarantee
performance in a manner more extensive than the typical product warranty or
which effectively protects the lessee from obsolescence.
Research and Development. General research and development costs are expensed as
incurred.
Significant Customers and Concentration of Credit. Revenues from the state
lotteries of Virginia, Illinois, New York and Missouri individually accounted
for 20%, 29%, 12% and 11% respectively, of total revenue in 1999. Revenues from
the state lotteries of Virginia, Illinois and Washington individually totaled
23%, 23% and 12% , respectively of total revenue in 1998. These customers
accounted for 29% and 18% of On-Point's receivables at December 31, 1999 and
1998. No DCR customers accounted for 10% or more of revenues in either 1999 or
1998. Foreign sales amounted to approximately $2 million in 1999 (15% of total
revenues), substantially all of which was for shipments to the French Lottery,
and $800 thousand in 1998 (5% of total revenues), of which $622 thousand was for
Hong Kong.
Income Taxes. Deferred income taxes are recorded to reflect the tax consequences
on future years of differences between the tax bases 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 ("FASB") 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 excludes dilution and is computed using the weighted average
shares of common stock outstanding plus contingently issuable shares. Diluted
EPS is computed using the weighted average shares outstanding plus additional
common shares that would have been outstanding if dilutive potential common
shares had been issued, using the treasury stock method.
Options to purchase 2,200,530 and 2,083,835 shares of On-Point's Common Stock
and warrants to purchase 1,580,000 and 2,911,958 shares of On-Point's Common
Stock were outstanding during 1999 and 1998, respectively, but were not included
in the computation of diluted EPS because On-Point incurred a net loss in 1999
and 1998.
Fair Value of Financial Instruments. 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.
29
<PAGE> 30
Cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and deferred income carrying cost reasonably approximates their fair
value because of the short maturities of these investments.
On-Point believes that the carrying amount of its outstanding debt at December
31, 1999 and 1998 is a reasonable estimate of its fair value based on a review
of borrowing rates available to On-Point at December 31, 1999 and 1998 for loans
with similar terms and average maturities.
Impairment of Long-Lived Assets. On-Point 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.
Predevelopment Contract Costs. Costs related to modifications of existing
products for a specific contract are capitalized and amortized over the life of
the contract as revenues are recognized.
Recently Issued Accounting Standards. In June 1997, the FASB issued SFAS No. 130
"Reporting Comprehensive Income," which establishes standards for reporting and
the display of comprehensive income and its components in a full set of
general-purpose financial statements. This Statement requires that an enterprise
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a balance sheet. This Statement is effective for fiscal years
beginning after December 15, 1997. On-Point does not have any items of other
comprehensive income. As such, the implementation of SFAS 130 will not have an
impact on the financial statements.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments and for hedging activities.
It requires the entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in fair value of these derivatives
("hedge accounting") depends on the intended use and designation. An entity that
elects to apply hedge accounting is required to establish at the inception of
its hedge the method it will use for assessing the effectiveness of the hedging
derivative and the measurement approach for determining the ineffective aspects
of the hedge. These methods must be consistent with the entity's approach to
managing risk. On-Point has not yet evaluated the effect of adopting SFAS 133.
Estimates. The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S. 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. This includes the use of standard costs for product sales;
establishment of reserves for inventory obsolescence and reserves for bad
debts. Actual results could differ from those estimates.
Reclassifications. Certain balances in the 1998 financial statements have been
reclassified to conform to 1999 reporting.
2. SEGMENT INFORMATION
On-Point has adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information", which changes the way On-Point reports information
about its operating segments. On-Point has three reportable segments: product
sales, financing and service. The product segment includes all products sold by
On-Point, including ITR and DCR vending machines via product sales and
sales-type lease agreements. The financing segment includes revenues and
expenses associated with (1) financing the sale of units via sales-type leases
and (2) operating leases. The service segment includes revenues and expenses
associated with its service and warranty contracts.
On-Point evaluates performance for each segment based on gross profits.
<TABLE>
<CAPTION>
($000) Non-Allocated
Products Financing Service Total
<S> <C> <C> <C> <C> <C>
1999
OPERATING DATA:
Revenues $6,889 $2,240 $4,352 $13,481
Gross profit 1,102 666 569 2,337
Income (loss) from operations (405) (188) 405 (188)
BALANCE SHEET DATA (AT END OF PERIOD):
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Assets (allocated by segment) 5,673 8,227 1,187 2,06 17,155
CASH FLOW INFORMATION:
Depreciation and amortization $338 $1,574 $10 $1,921
Capital expenditures $445 $445
1998
OPERATING DATA:
Revenues $5,870 $3,823 $5,075 $14,768
Gross profit 2,177 2,252 295 4,724
Income (loss) from operations (78) (160) 108 (130)
BALANCE SHEET DATA (AT END OF PERIOD):
Assets (allocated by segment) $4,883 $9,766 $1,076 $619 $16,344
CASH FLOW INFORMATION:
Depreciation and amortization $342 $1,571 $87 $2,000
Capital expenditures $283 $283
</TABLE>
Total assets for the segments excludes cash, other current assets and other
assets, as such assets are not specifically identifiable to a particular
segment. Selling, general and administrative expense, excluding specifically
identified amounts, has been allocated based on the percentage of the total
assets of the respective segment divided by the total assets of all segments.
3. OTHER FINANCIAL DATA.
Details concerning certain balance sheet accounts and operating income detail as
of December 31, 1999 and 1998 follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Accounts receivable:
Trade accounts receivable $ 993 $2,896
Less allowance for doubtful accounts (110) (152)
------ ------
Total $ 883 $2,744
====== ======
Inventories:
Materials $3,301 $2,843
Work in process 738 274
Finished goods 2,926 619
Reserve for obsolescence (640) (593)
------ ------
Total $6,325 $3,143
====== ======
Property, plant and equipment:
Computers and equipment $1,418 $1,236
Furniture and fixtures 331 325
Tooling 392 248
Building and improvements 76 51
------ ------
$2,217 1,860
Less accumulated depreciation (1,652) (1,438)
------ ------
Total $565 $422
====== ======
Other assets:
Patents $852 $715
Deposits 99 134
Predevelopment contract costs 992
Other, net of reserves of $475 in 1999 and $867 in 1998 625 425
------ ------
2,568 1,274
Less accumulated amortization (856) (679)
------ ------
Total $1,712 $595
====== ======
</TABLE>
31
<PAGE> 32
4. DEBT Debt consists of the following as of December 31, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Revolving line of credit $4,730 $3,872
Notes payable 1,000 104
------ ------
Total debt $5,730 $3,976
Less current portion 1,000 104
------ ------
Long Term Debt $4,730 $3,872
====== ======
</TABLE>
On-Point entered into a loan and security agreement on May 5, 1997, which
provided for a revolving credit line of up to $3,000,000, which was amended on
July 7, 1998 to increase the borrowing limit to $5,000,000 and further amended
on July 2, 1999, to increase the revolving credit line to $6,000,000. In April
2000, the loan was amended to provide for a three year extension and an increase
in the borrowing limit to $10,000,000. The line bears interest at the prime rate
which was 8.5% at December 31,1999 plus 2% over prime. The rate is reduced by
.5% annually if On-Point meets certain performance benchmarks. The loan matures
on July 31, 2003 and is secured by virtually all of On-Point's assets.. As of
December 31, 1999 the line requires On-Point to maintain a minimum of $5.5
million of equity, as defined. On-Point was in compliance with this debt
covenant at December 31, 1999. The available borrowings under the revolving
credit line are subject to a number of restrictions, which are primarily related
to percentages of various assets of On-Point and multiples of monthly cash
flows. As of December 31, 1999, On-Point had available approximately $4.8
million under the credit line of which approximately $4.7 million had been
borrowed.
Notes payable at December 31, 1999 consists of a note payable to GTECH
Corporation in the amount of $1 million which bears interest at prime plus 3%
due August 15, 2000. As of December 31, 1998, notes payable consisted of a note
to a financial institution in the amount of $104 thousand that was fully paid
during 1999. Subsequent to December 31, 1999, On-Point received another $.5
million from GTECH under the same terms as the original note. On-Point also
received $.8 million from Galt Asset Management in March 2000 pursuant to a
note that bears interest at 10% per annum and matures in September 2000.
On-Point is pursuing a private equity placement in which it would receive
another $1 million and convert the existing debt from Galt into the private
placement.
Future principal payments on debt as of December 31, 1999, are as follows (in
thousands):
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
2000 $1,000
2001 0
2002 0
2003 4,730
</TABLE>
5. OPERATING LEASES
On-Point 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, 1999 and 1998 consisted of approximately
$727 thousand and $4.9 million, respectively, less accumulated depreciation of
approximately $452 thousand and $3.1 million at December 31, 1999 and 1998,
respectively.
Approximate future minimum lease payments receivable by On-Point under operating
leases as of December 31, 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
2000 $ 449
2001 229
</TABLE>
Current operating leases may be extended in one-year increments, upon expiration
of current leases. On-Point believes that the net book value is fully
recoverable through future lease receipts and the underlying value of the assets
as of December 31, 1999 and 1998.
6. SALES-TYPE LEASES On-Point leases certain of its vending terminals under
agreements accounted for as sales-type leases. Included in product sales are
approximately $2.3 million and $1.9 million of revenues related to sales-type
32
<PAGE> 33
leases for the years ended December 31, 1999 and 1998, respectively. These
non-cancelable leases expire over the next one to three years.
The following lists the components of the net investment in sales-type leases as
of December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net minimum lease payments receivable $ 3,077 $3,118
Estimated unguaranteed residual value 1,251 1,278
Less unearned interest income (307) (314)
------- -------
Net investment in sales type leases $ 4,021 $ 4,082
======= =======
Sales type leases consist of:
Net investment in sales type leases - short term $ 1,619 $1,359
Net investment in sales type leases - long term 2,402 2,723
------- -------
Net investment in sales type leases, as above $ 4,021 $ 4,082
======= =======
</TABLE>
The minimum lease payments are recorded net of future estimated service and
warranty costs of $ 930 thousand in 1999 and $828 thousand in 1998, which are
deferred and recorded as income on a monthly basis over the term of the
agreement. Future minimum lease payments, excluding service payments, due from
customers under sales-type leases as of December 31, 1999, are as follows (in
thousands):
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
2000 $ 1,769
2001 857
2002 451
-------
$3,077
=======
</TABLE>
The amortization of unearned income for sales-type leases amounted to
approximately $323 thousand and $330 thousand for the years ended December 31,
1999 and 1998, respectively.
7. PROPERTY UNDER LEASE AGREEMENT WITH SOLUTIONEERING
As part of its effort to increase its presence in the DCR marketplace in 1997,
On-Point entered into an agreement with Solutioneering, Inc. ("Solutioneering")
to provide up to an additional 2000 DCR terminals under long-term lease
arrangements. Under the arrangement, On-Point would be Solutioneering's
exclusive DCR provider. Although On-Point realized Solutioneering was
undercapitalized, On-Point believed the deployment of the DCR terminals to
retail locations under relatively long-term lease agreements would create
adequate underlying value to support repayment of On-Point's leases should
Solutioneering fail to pay. While Solutioneering defaulted on its obligations in
1998, On-Point did not foreclose on the equipment leased to Solutioneering
primarily because management believed the underlying value of Solutioneering's
leased locations could be sold in one package for an amount in excess of the
total obligations owed by Solutioneering. On-Point also believes that it will
recover the assests and that the fair value of On-Point's leased assets held by
Solutioneering exceeded the carrying amount of the leased assets as of December
31, 1999 and 1998. When Solutioneering was unwilling to accept terms offered by
a prospective buyer in early 1999, On-Point subsequently filed suit to collect
the amounts due.
In 1997 and 1998, On-Point shipped a total of 2033 DCR terminals to
Solutioneering. Of the terminals shipped in 1997 and 1998, 1198 were refurbished
machines that had been previously returned to On-Point from another DCR
customer, Fone America.
The vending machines leased to Solutioneering have been classified as "Property
under lease agreement with Solutioneering" as the property is non-performing and
unavailable for lease. This property is being depreciated over a five-year
estimated useful life. The depreciation expense is classified as cost of sales,
consistent with other operating leases. On-Point is in the process of attempting
to recover its equipment.
33
<PAGE> 34
The activity in the Property under Lease agreements with Solutioneering is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Cost Balance - beginning of year $ 4,136 $ 2,644
Additions:
DCR's returned from Fone America 23
Manufactured and other 1,469
------- -------
Cost Balance - end of year 4,136 4,136
Less: accumulated depreciation (1,623) (881)
------- -------
Net Balance - end of year $ 2,513 $ 3,255
======= =======
</TABLE>
Fone America returned 1,266 DCR terminals during 1997 and 1998 under an
agreement with On-Point to partially satisfy their outstanding receivable
balance. The Fone America net receivable balance was $2.4 million at December
31, 1996, which consisted of the net unamortized balance of net investment in
sales type leases for prior years' sales to Fone America, less reserves for
refurbishment costs and bad debt
A bad debt reserve was established as of December 31, 1997 of $284 thousand. As
Fone America returned terminals, On-Point reduced the Fone America receivable
balance with an estimated cost basis per terminal. This estimated cost basis
represented the lower of cost or fair value of the returned terminals. The
resulting cost basis ranged from $1,340 for a 2-bin terminal to $2,386 for a
4-bin terminal. The balance of $206 thousand, after all machines were returned,
was charged to bad debts in 1998. During 1999, $184 thousand of amounts charged
to bad debts in 1998 were reversed.
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>
1999 1998
<S> <C> <C>
Tax expense (benefit) computed at the statutory federal rate
rate of 34% $(245) $(131)
State income tax expense, net of federal income tax effect (0) 20
Expenses not deductible for income tax purposes 8 (6)
Change in valuation allowances for deferred income tax assets 237 137
----- -----
Provision for income taxes - current $ 0 $ 20
===== =====
</TABLE>
The components of the income tax expense for the year ended December 31, 1999
and 1998 consists of the following
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Current:
Federal $--
State $ 0 20
--- ---
20
Deferred:
Federal -- --
State -- --
--- ---
-- --
--- ---
Provision for income taxes - current $ 0 $20
=== ===
</TABLE>
Deferred income tax assets and the related valuation allowance as of December
31, 1999 and 1998, result from the following temporary differences:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net operating loss carryforwards $ 5,503 $ 5,475
Inventory and other reserves 1,076 868
Valuation allowance (6,579) (6,343)
------- -------
Net deferred income tax assets $ -- $ --
======= =======
</TABLE>
34
<PAGE> 35
Due to significant losses for income tax reporting purposes prior to 1999 as
well as the other issues currently being addressed by On-Point, management has
concluded that it is more likely than not that the deferred tax assets will not
be realized and that a valuation allowance is needed to reduce the carrying
value of deferred income tax assets to zero.
At December 31, 1999, On-Point has $15.4 million of operating loss available to
offset future federal taxable income, which expire during the years 2011 through
2018.
9. SHAREHOLDERS' EQUITY
Private Placement On-Point completed an equity financing and a debt financing
in 1997. The equity financing, which was subsequently registered with the SEC,
was a private placement of $800 thousand of equity Units. The Units consisted of
one share of Common stock of On-Point 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 was 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 was exercisable to purchase one share of Common Stock at a
price of $2.00 per share expiring March 18, 1999.
Preferred Stock On-Point 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. No shares
have ever been issued.
Stock Warrants Exercised In 1998, various warrants were exercised to purchase
On-Point's Common Stock for total proceeds of $911 thousand. Warrants from the
private placement, discussed above, were exercised in 1998 to purchase 540,986
shares of On-Point's Common Stock at $1.25 per share. Other warrants were
exercised in 1998 to purchase 25,000, 37,500 and 65,000 shares of On-Point's
Common Stock at $1.24, $1.25 and $.69 per share, respectively. In 1999, warrants
from the private placement were exercised to purchase 60,000 shares of
On-Point's common stock at a price of $2 per share.
Stock Option Plans On-Point has two employee stock option plans whereby
options to purchase 1,972,500 shares of On-Point's common stock may be granted
to certain executives and employees, and an option plan for directors under
which options for 525,000 shares of On-Point's common stock may be issued to
directors of On-Point. Information regarding these option plans, including
options outstanding for non-employees of 295,000 and 424,000 shares as of
December 31, 1999 and 1998, respectively, follows:
<TABLE>
<CAPTION>
1999 1998
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding at January 1 2,083,835 $ 1.61 1,280,380 $ 1.44
Granted 543,500 $ 1.73 882,000 $ 1.88
Exercised (111,575) $ 1.04 (5,085) $ 0.90
Expired -- -- (50,000) $ 2.00
Forfeited (315,230) $ (1.95) (23,460) $ 2.21
--------- -------- --------- --------
Outstanding at December 31 2,200,530 $ 1.63 2,083,835 $ 1.61
========= ======== ========= ========
Options exercisable at year end 1,560,530 $ 1.15 1,095,376 $ 1.47
Weighted average fair value per share of options
granted during the year $ 0.97 $ 0.76
</TABLE>
35
<PAGE> 36
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- --------------------------------
Number Weighted Ave Weighted- Number Weighted-
Range of Outstanding at Remaining Average Outstanding at Average
Exercise Prices 12/31/99 Contractual Life Exercise Price 12/31/99 Exercise Price
--------------- -------- ---------------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C>
$0.80 - 1.00 937,395 3.59 $0.81 913,395 $0.80
1.41 - 1.81 680,000 4.33 $1.53 558,000 $1.53
1.97 - 2.09 383,135 2.78 $2.02 46,635 $2.03
2.25 - 2.88 100,000 2.36 $2.67 42,500 $2.50
7.45 100,000 4.75 $7.45
-------------- ---------------- ---------------- --------------- ---------------
$0.80 - 7.45 2,200,530 3.67 $1.63 1,560,530 $1.15
============== ================ ================ =============== ===============
</TABLE>
On-Point has adopted the disclosure-only provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation" for employee stock options. Accordingly, no
compensation cost has been recognized for the stock option plans. Had
compensation for On-Point's three stock option plans been determined based on
the fair value at the grant date for awards in 1999 and 1998 consistent with the
provisions of SFAS No. 123, On-Point's net earnings (loss) and earnings (loss)
per share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998
----- ----
Net Per Share Net Per Share
Loss Basic Diluted Loss Basic Diluted
---- ----- ------- ---- ----- -------
<S> <C> <C> <C> <C> <C> <C>
As Reported $ (721) $ (0.07) $ (0.07) $ (404) $ (0.04) $ (0.04)
======= ======== ======== ======= ======== ========
Pro Forma $ (877) $ (0.09) $ (0.09) $ (484) $ (0.05) $ (0.05)
======= ======== ======== ======= ======== ========
</TABLE>
In 1999 the fair value of options granted to employees is estimated as
approximately $0.97 per share 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%; expected volatility of 72%; risk free interest
rate of 5.80%; and expected lives of 4.84 years. In 1998 the fair value of
options granted to employees is estimated as approximately $0.71 per share 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%; expected volatility of 51%; risk free interest rate of 4.68%; and expected
lives of 4.65 years.
In July 1999, two advisory board members of On-Point each received three-year
options to purchase 20,000 shares and 10,000 shares, respectively, of On-Point's
common stock at $1.97 per share. These options vest in July 2000 and October
1999, respectively. The fair value of the options at the date of grant totaled
$27,000; $8 thousand of which was expensed to selling, general and
administrative expense in 1999 and the remainder will be expensed over the
expected term of the respective advisory director.
In October 1998, Robert Burr, a former Chairman of the Board, President and CEO
of On-Point, received a three-year option to purchase 50,000 shares of
On-Point's Common Stock at $2.00 per share pursuant to his consulting agreement
with On-Point. The option vests on March 31, 2001, or earlier, if certain
conditions are met. The fair value of the option at December 31, 1999 totaled
$64 thousand, of which $2 thousand and $21 thousand were expensed to selling,
general and administrative expense during the years ended December 31, 1998 and
1999, respectively. The remainder will be expensed over 22 months.
In September 1998, a consultant received an option to purchase 5,000 shares of
On-Point's Common Stock at $1.66 per share pursuant to a consulting agreement
entered into with On-Point. The option vests over 2 1/2 years. The fair value of
the option at December 31, 1999 totaled $8 thousand; of which $1 thousand and $2
thousand were expensed to selling, general and administrative expense during the
years ended December 31, 1998 and 1999. The remainder will be expensed to
selling, general and administrative expense over the remaining 14-month term of
the consulting agreement.
In May 1998, two individuals, one of whom is an officer of On-Point, each
received an option to purchase 50,000 shares of On-Point's Common Stock at $2.09
per share pursuant to their assignment of certain intellectual property to
On-Point. The options vest the earlier of April 1, 2001, or upon the
satisfaction of certain performance conditions. No expense was recorded as the
fair value of the options granted was in exchange for intellectual property.
In April 1998, an advisory board member of On-Point received a three-year option
to purchase 10,000 shares of On-Point's Common Stock at $2.88 per share pursuant
to his appointment as an Advisory Director. Subsequent to his appointment, the
advisory director resigned and the options were terminated. Prior to the
termination of the options, $7
36
<PAGE> 37
thousand was expensed to selling, general and administrative expense during the
year ended December 31, 1998 representing that portion of the fair value of the
options prior to termination.
In March 1998, Vanguard Strategies, Inc. (VSI)and Mr. Robert L. Burr, a former
chairman and chief executive officer of On-Point, were each granted five-year
stock options for 50,000 shares of On-Point's Common Stock at $2.88 per share
pursuant to an agreement to terminate their respective rights in On-Point's
international operations. The options would have vested 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; however, the options were
terminated effective January 1, 1999. Prior to the termination of the options,
$18 thousand was expensed to selling, general and administrative expense during
the year ended December 31, 1998 representing that portion of the fair value of
the options prior to termination.
In January 1998, a consultant received an option to purchase 10,000 shares of
On-Point's Common Stock at $2.09 per share pursuant to a consulting agreement.
The option vests over two years. The fair value of the options at December 31,
1999 totaled $9 thousand, of which $4 thousand and $5 thousand were expensed to
selling, general and administrative expense in 1998 and 1999, respectively.
Stock Warrants
In July 1998, Coast Business Credit received a warrant to purchase 10,000 shares
of On-Point's Common Stock at $1.63 per share pursuant to a financing agreement
entered into with On-Point. The warrant has a two-year term and became
exercisable in July 1998. The fair value of the warrant totaled $5 thousand at
the date of grant of which $1 thousand and $2 thousand were expensed to selling,
general and administrative expense during 1998 and 1999, respectively. The
remaining balance will be expensed over 6 months.
In May 1997, Coast Business Credit and a consultant received warrants to
purchase 50,000 shares and 45,000 shares, respectively, of On-Point's common
stock at $2.00 per share and $2.52 per share, respectively, in consideration for
the debt financing. The warrants each have a three-year term and became
exercisable in May 1997. The fair value of the warrants totaled $79 thousand,
which is being expensed over 36 months. On-Point expensed $26 thousand to
financing costs in both 1998 and 1999.
In January 1997, the Chairman and Chief Executive Officer of the Company
received a warrant to purchase 500,000 shares of the Company's Common Stock at
$.63 per share in connection with his personal guaranty and indemnity of a $2
million performance bond for the Company. The warrant has a five-year term and
became exercisable in January 1997. The fair value of the warrant totaled $178
thousand at the date of grant; $59 thousand of which was expensed to selling,
general and administrative expense in each of the years ended December 31, 1999
and 1998.
10. COMMITMENTS AND CONTINGENCIES
Lease Commitments On-Point leases facilities under operating leases expiring at
various dates through January 2009. Rent expense for such facilities totaled
$272 thousand and $244 thousand for the years ended December 31, 1999 and 1998,
respectively. Future minimum rentals under noncancelable operating leases as of
December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000 $ 244
2001 245
2002 238
2003 211
2004 211
Thereafter 861
======
$2,010
</TABLE>
Customer Dispute Since 1994, On-Point had 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 was estimated at more than $1.9 million. The CSL had refused
to honor the claim and had responded with a claim of $1.7 million in liquidated
damages for On-Point's alleged delay in responding to service calls in 1994 and
1995. Further, the CSL withheld payment of more that $300 thousand in
outstanding invoices for products and services from On-Point. No amounts related
to this receivable were recorded in the accompanying financial statements as of
December 31, 1997. During 1998, On-Point amicably resolved the dispute and
received a payment of approximately $350,000 from the CSL.
37
<PAGE> 38
Legal Proceedings On-Point is a party to legal proceedings in the ordinary
course of its business, the most significant of which are described below.
On April 21, 2000, an action was filed against On-Point in U.S. District Court,
Southern District of Ohio, by On-Point's principal competitor, Interlott
Technologies, Inc. (ILI) alleging that On-Point breached a settlement agreement
and mutual release dated May 30, 1991 with ILI in that On-Point was using
elements of ILI's technology in On-Point's new PlayPoint technology. Management
believes that ILI's suit is without merit, and On-Point is in the process of
preparing a response to the matter.
On April 20, 2000, a shareholder class action was filed against On-Point and its
chief executive officer, in U.S. District Court, Southern District of
California. The action, which seeks an unspecified amount of damages on behalf
of all similarly situated shareholders, alleges that On-Point violated federal
securities laws by the dissemination of materially false and misleading
financial statements. On-Point has been informed that a similar action was also
filed but has not been served with any additional actions at this time. On-Point
intends to vigorously defend against these claims and is in the process of
preparing a response to the action filed.
On January 14, 2000, an action was filed against On-Point and its directors on
behalf of a stockholder in Superior Court of California, County of San Diego.
The action alleges that the consideration to be paid by GTECH Corporation for
all of On-Point's stock pursuant to an agreement entered into by On-Point and
GTECH in January 2000 was inadequate and that the directors breached their
fiduciary duties relating to the proposed sale of On-Point to GTECH. On-Point
will seek dismissal of this action since GTECH has provided notice of
termination of the agreement upon which the action was based.
On January 11, 1999, On-Point filed an action against Solutioneering, Inc. in
Superior Court of California, County of San Diego. A first amended complaint of
said action was filed on February 9, 1999. The action arises from the lease to
Solutioneering of a total of 2,193 prepaid phone card vending terminals (2,033
of which were shipped in 1997 - 1998) under a March 1, 1995 Master Lease
Agreement and two amendments thereto (the "Agreement"). In the action, On-Point
asserts that Solutioneering has breached the Agreement and has claimed damages
of approximately $9 million. Solutioneering subsequently sought bankruptcy
protection in 1999. On-Point is now pursuing its claim to the leased machines
through the bankruptcy court. The financing lender to Solutioneering has raised
a claim that it has a priority security interest ahead of On-Point to the leased
machines based on their allegation that On-Point sold the machines to
Solutioneering rather than leased the machines. We believe the arrangement with
Solutioneering was clearly a lease and that the financing lender's claim to be
without merit. On-Point's net balance sheet carrying value of the Solutioneering
leased machines at December 31, 1999 was approximately $2.5 million. Management
expects to recover the assets and believes the underlying value of On-Point's
equipment at Solutioneering exceeds the carrying value on On-Point's books.
On January 23, 1996, ILI filed an action against On-Point in the Common Pleas
Court of Hamilton County, Ohio arising from an agreement in principle between
ILI and On-Point, which was signed on March 23, 1995 regarding a proposed
merger transaction. In the action, ILI contended that, under the agreement in
principle, On-Point was responsible to pay ILI's reasonable fees and expenses
in connection with the proposed merger because the transaction did not proceed
due to On-Point's actions. In addition, ILI contended that another provision of
the agreement in principle obligated On-Point to pay a "break-up fee" in the
event On-Point 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 sought 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. On-Point removed ILI's action to the United States District Court for the
Southern District of Ohio on February 26, 1996. On March 4, 1996 On-Point filed
an answer denying all liability to ILI. On-Point also asserted a counterclaim
against ILI seeking a declaratory judgment that the break-up fee had not been
triggered under the terms of the agreement in principle, seeking to recover
On-Point'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 parties reached a full and
complete settlement of the action on March 4, 1999 by the payment of On-Point
of approximately $600,000, which was accrued over the three years prior to
December 31, 1998. No liability was admitted by either party pursuant to the
settlement and the settlement had no material adverse effect on On-Point's
results of operations.
Executive Compensation Agreement On-Point has an employment agreement with
On-Point's Chief Executive Officer (the "CEO") for a three-year term commencing
January 9, 1996, which automatically extends annually an additional year unless
notice has otherwise been given by On-Point. As of December 31, 1999, the term
expires on December 2001. While On-
38
<PAGE> 39
Point is committed under the agreement to provide for an annual base salary of
at least $300 thousand, plus a bonus equal to 5% of the first million of
On-Point's pre-tax income and 7% thereafter, only $138 thousand and $177
thousand was paid to Mr. Sandvick in salary in 1999 and 1998, respectively, and
no bonuses were paid to Mr. Sandvick in either year. Mr. Sandvick waived all
accrued bonuses and unpaid wages effective December 31, 1999. The amount of
accrued wages waived amounted to $169 thousand.
The employment agreement with the CEO also provides for severance upon
termination by On-Point without cause or termination by the CEO for "good
reason," as defined, in the amount equal to the base salary the CEO would have
earned during the 36 month period commencing on the date of termination plus
three times the CEO's average annual bonus received over the prior three fiscal
years. The CEO would also have the right to receive all other benefits that
would have been received under his employment arrangement for that 36-month
period. Further, all shares underlying outstanding stock options granted to the
CEO would become fully exercisable for a period of 18 months after termination.
11. RELATED PARTY TRANSACTIONS
In January 1997, VSI was granted an additional warrant to purchase 250,000
shares of On-Point's common stock at a price of $.72 pursuant to the extension
of a loan with U.S. Mortgage Bankers Corp.(USMBC), a company wholly-owned by a
director of On-Point and relative of On-Point's chief executive officer,
pursuant to an agreement entered into between VSI and On-Point prior any
relation between On-Point and VSI, On-Point's chief executive officer or USMBC.
The warrant has a five-year term and became exercisable in January 1997. The
fair value of this warrant totaled $102 thousand at the date of grant, which was
expensed during the year ended December 31, 1997.
In connection with the engagement of VSI to raise capital for On-Point and
pursue other business restructuring alternatives and the continuing arrangements
with Mr. Burr, VSI and Mr. Burr were provided an option to purchase 80% (40%
each) of a subsidiary to be formed to carry on On-Point's international
operations. The option was provided to VSI and Mr. Burr as an incentive for them
to aggressively pursue international sales. However, on March 19, 1998 On-Point
and VSI entered into an agreement whereby the original agreement with VSI
referred to above was terminated. Pursuant to the termination agreement and for
future consulting service, VSI and Mr. Burr were each granted options to
purchase 50,000 shares of On-Point's common stock at $2.88 per share, the
closing market price of On-Point's common stock on such date. The options would
have expired on December 31, 2002 and vest at the earlier on 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; however, the options were terminated
effective January 1, 1999 (see Note 10).
12. RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS (UNAUDITED)
As previously reported in the Company's 1998 Annual Report included in Form
10-KSB/A filed on March 30, 2000, On-Point determined that long-term leases of
vending machines to Solutioneering, Inc. should have been recorded as operating
leases, rather than as sales type leases. In 1997, On-Point and Solutioneering
entered into a long-term lease arrangement pursuant to which On-Point furnished
Solutioneering with 2,033 vending machines during 1997 and 1998, including
1,198 refurbished machines that had been previously returned to On-Point from
another DCR customer, Fone America. On-Point's management has concluded that
based on the financial condition of Solutioneering at the inception of the
lease, the lease should have been accounted for as an operating lease, as the
collectibility of the lease payments was not reasonably predictable.
Revenues previously recorded as sales-type transactions of $1.9 million in 1998
and $3.5 million in 1997, have been reversed, the leased equipment has been
capitalized, depreciation is being taken over the estimated useful life of the
assets, and operating lease revenue has been recorded only to the extent of cash
receipts from Solutioneering of $205 thousand in 1997. The net impact of all
adjustments to Solutioneering was a decrease in net income of $741 thousand in
1999 and $2.1 million in 1998. On-Point's net balance sheet carrying value of
the Solutioneering leased machines at December 31, 1999 is approximately $2.5
million. The leased vending machines have been separately classified as
"Property under lease agreement with Solutioneering" as a non-current asset,
since the assets are non-performing and are not available for sale or lease. See
also Note 7.
In addition, On-Point has reclassified $855 thousand in 1998 from cost of sales
to selling, general and administrative expense for amounts representing bad debt
expenses. Interest income, attributable to sales-type lease financing of $330
thousand in 1998 was also reclassified from other (income) expenses to revenues.
39
<PAGE> 40
Additionally, On-Point has applied the provisions of SFAS 123, "Accounting for
Stock Based Compensation" to options and warrants granted to the Chief Executive
Officer and to Vanguard Securities, a company wholly owned by him, as
transactions not related to normal employee duties and to options and warrants
granted for services to other outside parties in fiscal years 1996 through 1999.
The additional expense in 1999 and 1998 was $100 thousand and $120 thousand,
respectively, of which $50 thousand and $70 thousand, respectively, were
attributable to grants to the Chief Executive Officer, including Vanguard
Securities (See Note 11 of the Financial Statements).
As a result, the 1999 and 1998 quarterly condensed consolidated financial
statements have been restated from amounts previously reported to properly
reflect these transactions and reclassifications. A summary of the significant
effects of the restatement is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998
---- ----
As Previously As Previously
Reported As Restated Reported As Restated
-------- ----------- -------- -----------
THREE MONTHS ENDED MARCH 31:
----------------------------
<S> <C> <C> <C> <C>
Revenues $ 5,294 $ 4,975 $ 4,278 $ 3,776
Cost of sales 3,606 3,634 2,974 2,776
-----------------------------------------------------------------------------------------------------------------
Gross profit 1,688 1,341 1,304 1,000
Operating expenses 985 1,010 859 750
-----------------------------------------------------------------------------------------------------------------
Income from operations 703 331 445 250
Other income (expense) (29) (119) 108 (150)
-----------------------------------------------------------------------------------------------------------------
Income before income taxes 674 212 553 100
Provision for income taxes 0 0 0 0
-----------------------------------------------------------------------------------------------------------------
Net income $ 674 $ 212 $ 553 100
=================================================================================================================
Net income per share - basic $ 0.07 $ 0.02 $ 0.06 $ 0.01
Net income per share - diluted $ 0.06 $ 0.02 $ 0.05 $ 0.01
MARCH 31:
Current assets:
Cash and cash equivalents $ 47 $ 47 $ 8 $ 8
Accounts receivable, net 2,333 2,333 2,558 2,558
Inventories 2,811 2,968 2,304 2,304
Net investment in sales-type leases 1,700 1,700 1,894 1,894
Other current assets 173 153 132 132
-----------------------------------------------------------------------------------------------------------------
Total current assets 7,064 7,201 6,896 6,896
Plant, property and equipment, net 449 449 596 596
Net investment in sales-type leases 9,369 3,181 5,832 1,657
Property under operating leases, net 1,887 1,726 2,405 2,223
Property under lease agreement with
Solutioneering, net 3,070 2,835
Other assets 1,061 538 346 212
-----------------------------------------------------------------------------------------------------------------
Total assets $ 19,830 $ 16,165 $ 16,075 $ 14,419
=================================================================================================================
Liabilities and shareholders' equity:
Accounts payable 1,617 1,617 1,005 1,005
Current portion of long-term debt 60 60 207 207
Accrued expenses 1,564 1,535 1,948 1,919
-----------------------------------------------------------------------------------------------------------------
Total current liabilities 3,241 3,212 3,160 3,131
Other liabilities 100 100 832 832
Long-term debt 3,686 3,686 1,638 1,638
Shareholders' equity 12,803 9,167 10,445 8,818
-----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 19,830 $ 16,165 $ 16,075 $ 14,419
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1999 1998
---- ----
As Previously As Previously
Reported As Restated Reported As Restated
-------- ----------- -------- -----------
THREE MONTHS ENDED JUNE 30:
---------------------------
<S> <C> <C> <C> <C>
Revenues $ 5,135 $ 5,162 $ 4,144 $ 3,056
Cost of sales 3,770 3,906 2,651 2,024
------------------------------------------------------------------------------------------------------------------
Gross profit 1,365 1,256 1,493 1,032
</TABLE>
40
<PAGE> 41
<TABLE>
<S> <C> <C> <C> <C>
Operating expenses 746 771 1,088 1,118
------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 619 485 405 (86)
Other income (expense) (54) (144) 138 (93)
------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 565 341 543 (179)
Provision for income taxes 0 0 0 0
------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 565 $ 341 $ 543 $ (179)
==================================================================================================================
Net income (loss) per share - basic $ 0.06 $ 0.03 $ 0.05 $ (0.02)
Net income (loss) per share - diluted $ 0.05 $ 0.03 $ 0.05 $ (0.02)
==================================================================================================================
JUNE 30:
Current assets:
Cash and cash equivalents $ 190 $ 190 $ 269 $ 269
Accounts receivable, net 4,361 4,311 5,148 5,148
Inventories 2,563 2,770 2,245 2,245
Net investment in sales-type leases 1,769 1,769 2,103 2,103
Other current assets 230 197 134 134
------------------------------------------------------------------------------------------------------------------
Total current assets 9,113 9,237 9,899 9,899
Plant, property and equipment, net 429 429 531 531
Net investment in sales-type leases 9,440 3,252 5,927 433
Property under operating leases, net 1,715 1,554 2,256 2,081
Property under lease agreement with 2,884
Solutioneering, net 3,455
Other assets 1,360 837 394 260
------------------------------------------------------------------------------------------------------------------
Total assets $ 22,057 $ 18,193 $ 19,007 $ 16,659
==================================================================================================================
Liabilities and shareholders' equity:
Accounts payable $ 2,003 $ 2,003 $ 893 $ 893
Current portion of long-term debt 30 30 181 181
Accrued expenses 1,559 1,530 3,136 3,107
------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,592 3,563 4,210 4,181
Other liabilities 100 100 899 899
Long-term debt 4,930 4,930 2,635 2,635
Shareholders' equity 13,435 9,600 11,263 8,944
------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 22,057 $ 18,193 $ 19,007 $ 16,659
==================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1999 1998
---- ----
As Previously As Previously
Reported As Restated Reported As Restated
-------- ----------- -------- -----------
THREE MONTHS ENDED SEPTEMBER 30:
--------------------------------
<S> <C> <C> <C> <C>
Revenues $ 3,465 $ 2,062 $ 3,828 $ 3,689
Cost of sales 2,691 1,913 2,446 2,463
------------------------------------------------------------------------------------------------------------------
Gross profit 774 149 1,382 1,226
Operating expenses 652 725 1,130 1,160
------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 122 (576) 252 66
Other income (expense) (27) (124) 167 (195)
------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 95 (700) 419 (129)
Provision for income taxes 0 0 0 0
------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 95 $ (700) $ 419 $ (129)
==================================================================================================================
Net income (loss) per share - basic $ 0.01 $ (0.07) $ 0.04 $ (0.01)
Net income (loss) per share - diluted $ 0.01 $ (0.06) $ 0.04 $ (0.01)
SEPTEMBER 30:
Current assets:
Cash and cash equivalents $ 166 $ 166 $ 92 $ 92
</TABLE>
41
<PAGE> 42
<TABLE>
<S> <C> <C> <C> <C>
Accounts receivable, net 4,076 2,541 3,246 3,246
Inventories 4,776 5,931 2,827 2,827
Net investment in sales-type leases 1,904 1,904 2,711 2,711
Other current assets 308 275 126 126
------------------------------------------------------------------------------------------------------------------
Total current assets 11,230 10,817 9,002 9,002
Plant, property and equipment, net 529 529 428 428
Net investment in sales-type leases 8,905 2,669 6,661 666
Property under operating leases, net 529 368 2,100 1,932
Property under lease agreement with 2,699
Solutioneering, net 3,431
Other assets 1,548 1,025 423 289
------------------------------------------------------------------------------------------------------------------
Total assets $ 22,741 $ 18,107 $ 18,614 $ 15,748
==================================================================================================================
Liabilities and shareholders' equity:
Accounts payable $ 2,111 $ 2,111 $ 710 $ 710
Current portion of long-term debt 5,498 5,498 149 149
Accrued expenses 1,542 1,513 2,126 2,097
------------------------------------------------------------------------------------------------------------------
Total current liabilities 9,151 9,122 2,985 2,956
Other liabilities 50 50 821 821
Long-term debt 2,999 2,999
Shareholders' equity 13,540 8,935 11,809 8,972
------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 22,741 $ 18,107 $ 18,614 $ 15,748
==================================================================================================================
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
Executive Officers and Directors
The names, ages and positions of the directors (1), executive officers and key
employees of On-Point are as follows:
<TABLE>
<CAPTION>
Name Age Position
-------------------- --- -------------------------------------------------
<S> <C> <C>
Frederick Sandvick 42 Chief Executive Officer and Chairman of the Board
John H. Olbrich(2)(3) 37 Director
Richard Mahan(2)(3) 47 Director
Arthur Lipper III(2)(3)(4) 68 Director
Samuel W. Stearman 60 Chief Financial Officer, Secretary and Treasurer
Brian J. Roberts 52 Senior Vice President
</TABLE>
(1) Each director of On-Point holds office until the next annual
meeting of shareholders and until a successor has been elected
and qualified, or until his earlier resignation or removal.
(2) Audit Committee Member.
(3) Compensation Committee Member.
(4) Appointment effective May 30, 2000
42
<PAGE> 43
Frederick Sandvick has been the Chief Executive Officer and Chairman of the
Board of On-Point since January 1996. Mr. Sandvick is President and the
principal stockholder of Vanguard Strategies, Inc., a privately held strategic
planning company he founded in 1995. From 1990 to 1995, Mr. Sandvick was
Executive Vice President and Chief Financial Officer of Jackpot Enterprises,
Inc., a company listed on the NYSE and engaged in the gaming/entertainment
industry.
John H. Olbrich has been the owner and President of U.S. Mortgage Bankers
Corporation, a residential mortgage brokerage firm since 1991. Mr. Olbrich has
been in the real estate mortgage business for approximately 12 years. Mr.
Olbrich is Mr. Sandvick's half brother. See "Certain Relationships and Related
Transactions", herein.
Richard Mahan has been the chief executive officer and managing partner of Mahan
& Nash, a full service management consulting firm, since 1989. Prior to forming
Mahan & Nash, Mr. Mahan served a Vice President and Assistant to the Chairman of
the Board of Shapell Industries, one of the largest real estate developers in
the United States. From 1982 through 1986, Mr. Mahan served as Executive
Director of California's "Little Hoover Commission," which develops and presents
recommendations to state and local governments on how they can benefit from
applying private sector business principles to their organizations. Mr. Mahan
did not file a Form 5, Annual Statement of Changes in Beneficial Ownership, for
1999 in connection with a grant of options to purchase 20,000 shares of On-Point
Common Stock under the 1994 Stock Option Plan for Directors that vest one year
from date of grant. Mr. Mahan has not purchased or sold any shares of On-Point
common stock in his capacity as a director, nor does he own any shares of
On-Point common stock. He has informed the Company that he overlooked the filing
of such Form in connection with the stock options and that he intends to file it
by June 1, 2000.
Arthur Lipper III was appointed to the Board of Directors on May 22, 2000,
effective May 30, 2000. Mr Lipper is Chairman of British Far East Holdings,
Ltd. and president of Communications Management Associates, privately owned
companies which provide and arrange financial and management advisory services.
Mr Lipper has been associated with the international financial community since
1954 and currently serves as an officer to: Officer, Director or Advisor. Lion
Brothers (world's oldest/largest embroidered emblem manufacturer), Access
Direct systems (Mass market, laser printing lettershop), DKS Technologies
(diesel engine performance enhancement), Waterside Productions (multimedia
literary agency), Innovest Value Dynametrics (ecological risk evaluation
services), Gazelles, Inc. and Master of Business Dynamics program (relevant
executive education), Cavion.COM Inc, (Serving the electronic communications
and processing needs of credit unions), ArrayComm (intelligent base station
antennas), Zi Corporation (ZICA) (enables typing Chinese and other ideographic
languages), Electropure (electrodeionization technology and Laserpure water
purify measurement), Manhattan Scientifics (MHTX)(technology incubator),
Pacific Datavision (management command software), MeterNet Corporation (set top
box providing Internet access for tv sets), Magellan University (virtual
education delivery system)...Pan America Capital Group (investment banking
services) Wired Retail Network (proprietary, interactive, shopping mall consumer
information units), Auto Life (engine cleaning equipment). Cargo4less.com
(Internet marketed international freight forwarding service matching customer
bids and service offerings), AcuMatch LLC ( Internet introduction New
Relationships.com for individuals, a program using proprietary algorithm for
preference weighting)... Inprint.com (electronic distribution of out of print
and short run titles) Woodward Labs (anti-microbial health
products)...InPrint.com (exploitation of literary rights & printing on
demand)... Deal Management Systems(document and process management).
Samuel W. Stearman has been a certified public accountant with his own
consulting practice since 1990. Mr. Stearman also was the chief financial and
operating officer of Choice Technologies, Inc., a development stage marketing
and software company, from 1996 to 1997.
Brian J. Roberts has been On-Point's Senior Vice President since July 1996. From
December 1994 to July 1996, Mr. Roberts was On-Point's Director of Marketing and
Business Development. From 1984 to 1994, Mr. Roberts was a Vice President of
International Lottery and Totalizator Systems, Inc.
ITEM 10. MANAGEMENT REMUNERATION AND TRANSACTIONS
EXECUTIVE COMPENSATION
The following information relates to compensation of On-Point's Chief Executive
Officer for On-Point's fiscal years ended December 31, 1999, 1998 and 1997. No
other executive officer of On-Point received total annual salary and bonuses in
excess of $100,000 during those fiscal years.
The Compensation Committee did not have a substantial role in setting
compensation in 1999, 1998 and 1997 because the Chief Executive Officer was
engaged pursuant to an employment agreement, which fixed compensation. The role
of the Compensation Committee and its policies will continue to increase as
employment agreements expire and compensation packages are negotiated with key
executives.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation Awards
------------------------------------ ---------------------------------------------------
Other Securities Long-Term All
Name and Annual Restricted Underlying Incentive Other
Principal Compensation Stock Options/ Plan Compensation
Position Year Salary($) Bonus($) ($)(1)(2) Awards($) SAR's(#) Payouts($) ($)
-------- ---- --------- -------- --------- --------- -------- ---------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Frederick Sandvick 1999 138,461(4) 0 59,000 0 250,000 0 0
1998 176,909(4) 0 70,006 0 290,000(3) 0 0
1997 141,000 0 168,012 0 750,000(2) 0 0
</TABLE>
(1) Includes a $7,243 car allowance in 1997 to cover automobile expenses.
(2) Includes options to purchase 870,000 shares of common stock which vested
pursuant to Mr. Sandvick's employment agreement, warrants to purchase
500,000 shares of common stock in connection with a guarantee of a
performance bond in 1997 and warrants to purchase 700,000 shares of common
stock in 1996 and 250,000 shares in 1997 granted to Vanguard Strategies,
Inc. (see "Certain Relationships and Related Transactions" herein). The
calculated fair value of the options and warrants described above included
in "Other Annual Compensation" was $59,000 in 1999 d $70,006 in 1998 and
$160,769 in 1997.
43
<PAGE> 44
(3) Includes options to purchase 240,000 shares of common stock granted to Mr.
Sandvick and options to purchase 50,000 shares of common stock granted to
Vanguard Strategies, Inc (see "Certain Relationships and Related
Compensation" herein); the options to purchase 50,000 shares of common
stock to Vanguard Strategies, Inc. have been terminated.
(4) While the terms of the employment contract called for an annual salary of
$300,000 and $255,000 in 1999 and 1998, respectively, only $138,451 and
$176,909 were paid to Mr. Sandvick in 1999 and 1998, respectively. Mr.
Sandvick waived all accrued pay and bonuses as of December 31, 1999.
EMPLOYMENT AGREEMENTS
Mr. Sandvick serves as Chairman of the Board and Chief Executive Officer of
On-Point pursuant to a three-year employment agreement commencing on January 9,
1996. The agreement has been extended for three additional years and will
terminate unless further extended or sooner terminated, on December 31, 2001.
The term of the agreement is automatically extended annually for an additional
year unless notice is given by either party that such party does not wish to
extend the agreement term. The agreement provides for an annual base salary of
$180,000 through June 30, 1996 with $30,000 annual increases thereafter. The
agreement provides for an increase in the annual base salary to at least
$300,000 per year if On-Point's pre tax income as defined, for any calendar year
equals or exceeds $2 million. Mr. Sandvick is entitled to an annual bonus equal
to 5% of the first $10 million of On-Point's pre tax income and 7% of On-Point's
pre tax income in excess of $10 million. Pursuant to the agreement, on the
commencement of employment Mr. Sandvick was granted a ten-year option to acquire
870,000 shares of On-Point's common stock at a price of $.80 per share, such
price representing the greater of (1) the closing price on the date of stock
holder approval of the First Amendment to On-Point's 1994 Stock Option Plan or
(2) the average of the closing sales price for the 20 trading days preceding the
effective date of the agreement. One-third of the shares subject to the option
award became exercisable on January 9, 1996 and one-third of the shares became
exercisable over the next two years in equal annual increments. Mr. Sandvick is
also entitled to participate in other employee benefit plans and On-Point is
obligated to reimburse Mr. Sandvick for, or pay directly, the costs of a
personal plan of disability providing for $15,000 per month disability benefits.
The employment agreement with Mr. Sandvick also provides for severance upon
termination by On-Point without cause or termination by Mr. Sandvick for "good
reason" in the amount equal to the base salary Mr. Sandvick would have earned
during the 36 month period commencing on the date of termination plus three
times Mr. Sandvick's average annual bonus received over the prior three fiscal
years. Mr. Sandvick would also have the right to receive all other benefits that
would have been received under his employment arrangement for that 36-month
period. Further, all shares underlying outstanding stock options granted to Mr.
Sandvick would become fully exercisable for a period of 18 months after
termination. Mr. Sandvick shall have "good reason" to terminate his employment
if, among other events, (i) On-Point fails to comply with any material provision
of the employment agreement; (ii) On-Point gives Mr. Sandvick notice of
nonrenewable; or (iii) for any reason within one year following the occurrence
of a change in control, as defined. Change in control occurs if (i) any person,
excluding existing relationships, becomes the beneficial owner of securities
representing 20% or more of the combined voting power of On-Point's then
outstanding voting securities; (ii) a change occurs in the majority of the Board
of Directors; (iii) the stockholders approve a merger in which at least 51% of
On-Point's combined voting power is given to a new entity not in On-Point's
control or the effect of such merger is that any person acquires 20% or more of
the combined voting power of On-Point. On January 27, 1997, On-Point hired
Michael Wright to serve as On-Point's President. Mr. Wright served as President
from January 27 to December 25, 1997 during which time Mr. Sandvick's annual
salary was reduced by $84,000. Mr. Sandvick also voluntarily reduced his salary
in 1998 and 1999.
OPTION GRANTS IN FISCAL 1999
The following table represents certain information regarding stock option grants
to each of the Named Executive Officers during the fiscal year ended December
31, 1999.
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------------------------------
Number of Percent of Total
Securities Options Granted
Underlying To Employees in Exercise of Base
Name Options Granted Fiscal Year Price ($/Share) Expiration Date
---- --------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
Frederick Sandvick 250,000 53 1.63 9/08/04
</TABLE>
OPTION EXERCISES IN FISCAL 1999 AND FISCAL YEAR-END OPTION VALUES
44
<PAGE> 45
The following table presents certain information regarding stock option
exercises during fiscal 1999.
<TABLE>
<CAPTION>
Shares
Acquired Value Number of Securities Value of Unexercised
on Exercise Realized Underlying Unexercised In-the-Money Options/SARS at
Name (#) ($) Options/SARs at FY-End FY-End
---- --- --- ---------------------- ------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Frederick Sandvick 0 0 2,810,000 0 $4,645,000 0
</TABLE>
(1) Includes options to purchase 870,000 shares of common stock which vested
pursuant to Mr. Sandvick's employment agreement, warrants to purchase
500,000 shares of common stock in connection with a guarantee of a
performance bond, options to purchase 490,000 shares of common stock
pursuant to annual employee grants, and warrants to purchase 950,000 shares
of common stock granted to Vanguard Strategies, Inc. (see "Certain
Relationships and Related Transactions" herein).
COMPENSATION OF DIRECTORS
During 1999, 1998 and 1997 each outside director was automatically
granted 10,000 shares of On-Point's common stock pursuant to the July 26, 1996
amendment to the 1994 Stock Option Plan for Directors which provided a formula
for granting options to outside directors. Mr. Robinson was paid $2,500 in March
1998 for services as a Director during the period July 26, 1996 through August
27 1997 pursuant to the compensation arrangement in effect during that service
period.
1993 STOCK OPTION PLAN
On March 1, 1993, On-Point adopted the 1993 Stock Option Plan (the "Plan") under
which 472,500 shares of common stock may be issued to officers and other key
employees who have substantial responsibility for the direction and management
of On-Point. Options issued under the Plan are either incentive stock options
under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
or non-qualified stock options, as determined in the discretion of the
Compensation Committee of the Board of Directors of On-Point at the time the
options are granted. In addition, the Compensation Committee, subject to the
provisions of the Plan, has authority to determine the employees to whom options
will be granted, the time or times at which options will issue, the exercise
price of granted options and any conditions for their exercise. The Plan
requires that the exercise price of stock options be not less than the fair
market value on the date of grant and that stock options expire not later than
ten years from the date of grant. In addition, the Plan provides that no
incentive stock options may be granted to any employee who owns more that 10% of
On-Point's voting securities unless the exercise price is a least 110% of the
fair market value of the underlying common stock and the option expires on
before five years from the date of grant. The Plan contains an anti-dilution
provision whereby the shares of common stock, which underlie outstanding
options, are increased proportionately in the event of a stock split or
dividend. As of December 31, 1999, 312,635 options have been granted under this
Plan.
1994 STOCK OPTION PLAN
On April 21, 1994, On-Point adopted the 1994 Stock Option Plan (the "Plan")
under which 525,000 shares of common stock may be issued to officers and other
key employees who have substantial responsibility for the direction and
management of On-Point. On January 8, 1996 the plan was amended to increase the
shares available for issuance to 1,500,000. Such amendment was approved by the
stockholders on July 26, 1996. Options issued under the Plan are either
incentive stock options under Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), or non-qualified stock options, as determined in the
discretion of the Compensation Committee of the Board of Directors of On-Point
at the time the options are granted. In addition, the Compensation Committee,
subject to the provisions of the Plan, has authority to determine the employees
to whom options will be granted, the time or times at which options will issue,
the exercise price of granted options and any conditions for their exercise. The
Plan requires that the exercise price of stock options be not less than the fair
market value on the date of grant and that stock options expire not later than
ten years from the date of grant. In addition, the Plan provides that no
incentive stock options may be granted to any employee who owns more than 10% of
On-Point's voting securities unless the exercise price is at least 110% of the
fair market value of the underlying common stock and the option expires on or
before five years from the date of grant. The Plan contains an anti-dilution
provision five years from the date of grant. The Plan contains an anti-dilution
provision whereby the shares of common stock, which underlie outstanding
options, are increased proportionately in the event of a stock split or
dividend. As of December 31, 1999, 1,500,000 options have been granted under
this plan.
45
<PAGE> 46
1994 STOCK OPTION PLAN FOR DIRECTORS
On April 21, 1994, On-Point adopted the 1994 Stock Option Plan for Directors
(the "Directors' Plan") under which 525,000 shares of common stock may be issued
to Directors of On-Point. Options issued under the Directors' Plan are
non-qualified stock options. The Board of Directors, excluding outside Directors
who are eligible for the Directors' Plan, subject to the provisions of the
Directors' Plan, has authority to determine the outside Directors to whom
Options will be granted, the time or times at which options will issue, the
exercise price of granted options and any conditions for their exercise. The
Directors' Plan requires that the exercise price of stock options be not less
than the fair market value on the date of grant and that stock options expire
not later than ten years from the date of grant. The Directors' Plan contains an
anti-dilution provision whereby the shares of common stock, which underlie
outstanding options, are increased proportionately in the event of a stock split
or dividend. As of December 31, 1999, 100,000 options have been granted under
this plan.
On July 26, 1996, the Board amended the Directors' Plan to provide for the
automatic issuance of options in order to satisfy the requirements of Securities
and Exchange Commission Rule 16b-3. The Amendment provided for the automatic
issuance of stock options for 10,000 shares to each outside director on July 26,
1996 and as of each June 30 thereafter. Also, each new outside director is
automatically granted stock options for 10,0000 shares as of the date of
becoming a member of the Board, unless that date falls between April 1 and June
30 of any year. These options become exercisable six months after grant and
expire three year after date of grant. The exercise price is equal; to the fair
market value at date of grant, but not less than one dollar.
On August 28, 1998 and August 27, 1997, the Board amended the Directors' Plan by
modifying the formula for granting option to outside directors by providing for
the annual grant of a stock options for 10,000 share in lieu of regular cash
compensation of serving as director. These options become exercisable on the
date of the next annual meeting of shareholders and have a three year life.
BONUS POLICY
While On-Point has no established policy, other than as provided in the Chief
Executive Officer's employment agreement, to award cash or stock bonuses to its
officers, it may elect to pay bonuses to reward the performance of its officers.
On-Point awarded cash bonuses of approximately $16 thousand and $108 thousand in
1999 and 1998, respectively. No cash bonuses were paid to the Chief Executive
Officer.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 2000, the shares of On-Point's
Capital Stock beneficially owned by each 5% beneficial owner, by each Director
or nominee, by each named executive officer individually, and by all Directors
and executive officers as a group:
<TABLE>
<CAPTION>
Number of Shares Percentage
Beneficially Of
Name and Address of Beneficial Owner Owned(1) Class
------------------------------------ -------- -----
<S> <C> <C>
Frederick Sandvick(2)
108 Ivy Street
San Diego, CA 92101 2,850,000 21.3%
John H. Olbrich(3)
3256 Loma Vista Drive
Jamul, CA 91935 271,667 2.0%
Richard Mahan - -
4640 Admiralty Way, Suite 216
Marina Del Ray, CA 90292
All directors and executive officers as a 3,259,400 24.3%
group(5 persons)
</TABLE>
46
<PAGE> 47
(1) Unless otherwise indicated, all shares are owned beneficially and of
record.
(2) Of the shares of common stock reflected in the table above, 40,000 are
registered in Mr. Sandvick's name. The table includes options to purchase
870,000 shares of common stock which vested pursuant to Mr. Sandvick's
employment agreement, warrants to purchase 500,000 shares of common stock
in connection with a guarantee of a performance bond and warrants to
purchase 950,000 shares of common stock granted to Vanguard Strategies,
Inc. (see "Certain Relationships and Related Transactions" herein). The
table also includes options to purchase 240,000 and 250,000 shares of
common stock granted to Mr. Sandvick in 1998 and 1999, respectively.
(3) Of the shares of common stock reflected in the table above, 201,667 are
registered in Mr. Olbrich's name. The table includes options to purchase
70,000 shares of common stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 8, 1996, On-Point entered into an agreement with Vanguard Strategies,
Inc. ("VSI"), a private strategic planning company, in which VSI would assist
On-Point as its exclusive consultant for at least 120 days in negotiating debt
and equity financing and in developing On-Point's strategic plans. Mr. Sandvick
is the president and principal stockholder of VSI. In January 1996 VSI assisted
On-Point in obtaining a $450,000 loan from U.S. Mortgage Bankers Corp.
("USMBC"). John Olbrich, the president of USMBC, is Mr. Sandvick's half-brother.
As compensation for these services, VSI was granted warrants, subject to
On-Point receiving financing of at least $1.5 million, to purchase up to 450,000
shares of common stock of On-Point at a price of $0.60 per share exercisable for
five years. In July 1996, VSI was granted an additional warrant to purchase
250,000 shares of On-Point's common stock at a price of $0.69 pursuant to the
extension of the USMBC promissory note under this agreement. In January 1997,
VSI was granted an additional warrant to purchase 250,000 shares of On-Point's
common stock at a price of $.72 pursuant to the extension of the USMBC
promissory note under this agreement.
In connection with the engagement of VSI (an unaffiliated third party prior to
entering into the agreement) to raise capital for On-Point and pursue other
business restructuring alternatives and the continuing arrangements with Mr.
Burr, VSI and Mr. Burr were provided an option to purchase 80% (40% each) of a
subsidiary to be formed to carry on On-Point's international operations. The
option was provided to VSI and Mr. Burr as an incentive for them to aggressively
pursue international sales. However, on March 19, 1998 On-Point 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 were each
granted options to purchase 50,000 shares of On-Point's common stock at $2.88
per share, the closing market price of On-Point's common stock on such date. The
options were to expire on December 31, 2002 and vest at the earlier on 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; however, VSI's options were
subsequently terminated.
47
<PAGE> 48
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
<TABLE>
<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 ITR Sale and Lease Agreement, dated as of April 19, 1994, between
Registrant and the State of Missouri)
10.3.2 Amendment No. 1 to ITR Sale and Lease Agreement between Registrant and
the State of Missouri
10.3.3 Amendment No. 2 to ITR Sale and Lease Agreement between Registrant and
the State of Missouri
10.3.4 Amendment No. 3 to ITR Sale and Lease Agreement between Registrant and
the State of Missouri
10.3.5 Amendment No. 4 to ITR Sale and Lease Agreement between Registrant and
the State of Missouri
10.3.6 Amendment No. 5 to ITR Sale and Lease Agreement between Registrant and
the State of Missouri
10.3.7 Amendment No. 6 to ITR Sale and Lease Agreement between Registrant and
the State of Missouri
10.4 ITR Sales and Service Agreements dated March 21, 1991 between
Registrant and the Commonwealth of Virginia, as amended (C)
10.4.1 ITR Sales and Service Agreement dated October 1, 1998 between
Registrant and the Commonwealth Virginia
10.4.2 Amendment No. 1 to ITR Sales and Lease Agreement between Registrant
and the Commonwealth of Virginia
10.4.3 Amendment No. 2 to ITR Sales and Lease Agreement between Registrant
and the Commonwealth of Virginia
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)
10.5.2 ITR Lease machines and Purchase Parts Agreement for the California
State Lottery dated September 16, 1998 between the Registrant and
GTECH.
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 the
Registrant and certain of
</TABLE>
48
<PAGE> 49
<TABLE>
<S> <C>
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)
10.26 Amendment Nos. 1, 2 and 3 to Loan and Security Agreement between
Registrant and Coast Business Credit(L)
10.26.1 Amendment No. 4 to Loan and Security Agreement between Registrant and
Coast Business Credit dated April 20, 2000.*
10.27 Master Lease Agreement dated March 1, 1995 between the Registrant and
Solutioneering, Inc.(M)
10.27.1 Amendment No. 1 to Master Lease Agreement dated December 24, 1996(M)
10.27.2 Amendment No. 2 to Master Lease Agreement dated December 24, 1997(M)
10.28 Distributor Agreement between the Registrant and Editec, dated
December 30, 1997(M)
10.28.1 Agreement for the French Lottery Contract dated February 24, 1998
between the Registrant and Editec(M)
10.28.2 English Translation of Contract with La Francaise Des Jeux, dated
January 27, 1999*
10.30 Service Agreement for the Illinois Lottery between the Registrant and
IGOR, dated July 15, 1994(M)
10.30.1 ITR Sale and Lease Agreement between the Registrant and Illinois State
Lottery, dated July 1, 1994(M)
10.31 Agreement and Plan of Merger, dated as of January 7, 2000 with GTECH
Corp.
10.31.1 Voting Agreement, dated as of January 7, 2000 between Robert L. Burr,
John Olbrich, Brian J. Roberts, Frederick Sandvick and Vanguard
Strategies, Inc. and GTECH Corp.(N)
10.31.2 Option Agreement, dated as of January 7, 2000 with GTECH Corp.(N)
10.32 Stipulated judgment against US Telecard, Inc., dated November 12,
1999.*
24.1 Power of attorney (reference is made to Page II-5 of the Registration
Statement as originally filed.)(A)
</TABLE>
49
<PAGE> 50
Codes for documents included by reference to previous filings
(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 Sep 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) Incorporated by reference to Registrant's Annual Report on Form 10-KSB for
the year ended December 31, 1997.
(L) Incorporated by reference to Registrant's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1998
(M) Incorporated by reference to Registrant's Annual Report on Form 10-KSBA, as
restated on March 31, 2000 for the year ended December 31, 1998.
(N) Incorporated by reference to SC 13D, filed by GTECH Corp on January 18,
2000
*Included herein
B) REPORTS ON FORM 8-K
February 18, 2000 - Form 8K was filed, reporting that On-Point was in the
process of restating its financial statements for 1997 and 1998. No exhibits or
financial statements were attached.
50
<PAGE> 51
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: May 24, 2000 By: /s/Frederick Sandvick
---------------------------------
Frederick Sandvick
Chief Executive Officer and
Chairman of the Board of Directors
Dated: May 24, 2000 By: /s/Samuel W. Stearman
---------------------------------
Samuel W. Stearman
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: May 24, 2000 By: /s/John H. Olbrich
---------------------------
John H. Olbrich, Director
Dated: May 24, 2000 By: /s/Richard Mahan
---------------------------
Richard Mahan, Director
51
