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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Mark One)
[X] AMENDMENT NO 2 TO THE ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE
ACT OF 1934 [No Fee Required]
For Fiscal Year ended December 31, 1998
Commission file number 0-21738
ON-POINT TECHNOLOGY SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
NEVADA 33-0423037
(State of incorporation) (I.R.S. Employer Identification)
1370 W. San Marcos Blvd, Ste 100
San Marcos, California 92069
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(Address of registrant's executive offices) (Zip Code)
Former address: 8444 Miralani Drive, San Diego, CA 92126
Registrant's telephone number, including area code: (760) 510-4900
Former telephone number: (619) 621-5050
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on
which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or
if such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes[X] No[ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB [ ].
The Registrant's revenues for fiscal year ended December 31, 1998 were
$14,768,000
The aggregate market value of the registrant's common stock held by
nonaffiliates of the Registrant is $18,271,000 as of March 5, 1999.
The number of shares outstanding of the Registrant's common stock is 10,098,921
as of March 5, 1999.
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1. DESCRIPTION OF BUSINESS
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 limited to, continued acceptance of the
company's products and services in the marketplace, competitive factors, new
products and technological changes, the company's successful entry into new
markets, the company's successful transition to its next generation product
line, dependence upon third-party vendors, a limited number of customers,
political and other uncertainties related to customer purchases, and other risks
detailed in the company's periodic filings with the Securities and Exchange
Commission.
This amendment is filed as a result of a restatement of The Company's 1998
and 1997 financial statements. The Company has determined that long-term leases
made to Solutioneering in 1998 and 1997, originally accounted for as a
sales-type lease, should have been accounted for as operating leases. The leased
vending machines have been included as "Property under lease agreement with
Solutioneering," a non-performing asset in the Company's balance sheet.
Additionally, the Company has added disclosures to provide information regarding
segments in accordance the Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures about Segments of an Enterprise and Related Information.
The Company has three reportable business segments: Products, Financing and
Service. Certain other reclassifications have also been made to conform to the
new segment reporting. See, LEGAL PROCEEDINGS, MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS herein and Note 8 to
the Financial Statements for a further discussion concerning Solutioneering and
Note 2 to the Financial Statements to view the impact of the restatement on the
1998 and 1997 financial statements.
A. GENERAL
On-Point Technology Systems, Inc., (the "Company" or "On-Point"), is
headquartered in San Marcos, California and was incorporated in Nevada in March
of 1990. 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"). The
Company's ITR and DCR terminals accept bills of various denominations; provide a
secure means of product distribution; and include software, which automatically
accounts for product sales and inventories. The ITR terminals are sold or leased
to state and provincial governments in the United States and Canada and the
Company is starting to expand its marketing efforts to lotteries run by other
foreign governments and their licensees. The DCR terminals are sold or leased
principally to commercial customers in the United States and, to a lessor
extent, to governmental entities and their licensees in Asia and South America.
During 1996, the Board of Directors appointed Frederick Sandvick, the
current Chief Executive Officer and Chairman of the Board of the Company, to
oversee the development of the new strategic plans. The Company underwent a
right sizing effort during 1996 and 1997, which reduced personnel and overhead
costs and reassigned duties to other personnel to achieve greater efficiencies.
The Company's right sizing enabled the Company to improve operating margins and
dramatically reduce general and administrative expenses.
During 1998, management assessed that, notwithstanding the efficiencies
achieved due to right sizing, if the Company did not advance its current
products increasing competitive pressures and technological advancements would
likely bring lower margins in 1999 and beyond. Based on this assessment,
management chose to begin investing a significantly larger amount of its
resources in 1998 into the development of what management believes will be the
next generation lottery products. Management focused on the Company's lottery
products first because they believed the lottery market to be the largest, most
stable industry to deploy its products. Management believes that the overall
market for the Company's next generation products is in excess of $200 million
per year worldwide. However, although management believes its next generation
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products will be well positioned to take advantage of this large lottery market,
there can be no assurances as to the amount of revenues the Company's next
generation lottery products will generate.
Based on extensive market research, management identified design
specifications for a new generation of lottery products. Research and
development costs were substantially increased from $253 thousand in 1996, to
$582 thousand in 1997 and $1.4 million in 1998. The increase was achieved by
augmenting core engineering staff using onsite contract employees, under Company
supervision and review. Contract employees were used to provide the greater
flexibility and cost control needed for the Company's changing efforts. As a
result of its development efforts, On-Point intends to introduce in 1999 its
next generation lottery products. Its principal products will be: (i) the
Company's next generation automated self-service instant ticket lottery vending
terminal ("PlayPoint"); and (ii) the Company's first automated instant ticket
lottery counter-top dispensing terminal ("CounterPoint"). PlayPoint will provide
advanced electronic, software, communication and dispensing capabilities as well
as new ergonomically designed features to generate increased impulse purchasing.
Management believes PlayPoint will be far superior to the Company's existing ITR
terminal.
CounterPoint is designed to be the most flexible, automated counter-top
dispensing system available. Although currently no lottery has deployed any
significant number of automated counter-top dispensing systems, management
believes that many of CounterPoint's proprietary features, which were not
previously available to lotteries, will enhance the Company's ability to deploy
this new product to lotteries worldwide. However, although management believes
the lotteries can receive many new benefits from deploying this product, there
can be no assurances that any lottery will order this new product.
As a result of its focus on its development efforts in 1998 for new
products for the lottery market, the Company did not aggressively market its DCR
or other non-lottery products other than to existing customers. However, the
Company continued to ship DCR terminals to Solutioneering, Inc., a prepaid phone
card company, as they expanded their retail outlets. Solutioneering subsequently
filed for bankruptcy protection in 1999, due to a number of market factors
including their inability raise additional capital needed to support operations.
Additionally, the Company has also added disclosures to provide information
regarding segments in accordance the Statement of Financial Accounting Standards
("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The Company has three reportable business segments: Products,
Financing and Service. A discussion of each segment follows:
B. PRODUCT SEGMENT
The Company markets, manufactures and sells products to two industry
sectors: (i) State and foreign lotteries and (ii) commercial customers. A
discussion of Company products in each industry sector follows:
(1) 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 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.
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As of December 1998, 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. The Company estimates from industry reports
that on-line ticket sales account for approximately 60% of total U.S. lottery
sales and that scratch-off games (the type of instant winner game predominantly
used by state lotteries) hold an 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, the
Company believes 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. The Company's ITR terminals provide additional
security and automate these procedures, resulting in greater efficiencies and
flexibility to offer multiple games simultaneously.
Recent advances in print technology have improved the security of Pull Tab
tickets to the levels demanded by the lottery industry. As a result several U.S
lottery jurisdictions have introduced Pull Tab ticket games. The Company's PTR
terminals and Versatile Ticket Retailer ("VTR") 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
1998, the Company did not sell its PTR or VTR terminals and, to date, this
market has been limited.
INSTANT TICKET RETAILER From its inception through December 31, 1998, the
Company had sold or leased approximately 14,000 ITR terminals, of which
approximately 850 were sold or leased during 1998. Since the Company received
its first contract from the State of Virginia in 1991, the Company has 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.
The Company 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).
ITR LOTTERY TERMINALS In 1990, the Company introduced the ITR-7000
terminal, which was replaced with the upgraded ITR-7500 in August 1992. This
series of products has been installed at sites throughout the United States. In
1995, the Company introduced the esthetically updated ITR-8500 terminal. In
1996, the Company developed the first 12-bin ITR terminal 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 the Company's dispenser being in excess of
nine years, the Company was able to initiate a program of retrofitting older
terminals to incorporate new technologies. During 1998, the Company 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.
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The Company intends to transition the marketing of all its existing models
of ITR terminals to the new PlayPoint technology, once development is completed.
The existing ITR terminals will continue to be marketed to developing countries
in South America and Asia. Management believes PlayPoint will be far 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; however, no
assurances can be given to the ultimate market acceptance of the new models.
The Company believes that the lottery terminals substantially expand the
market for retail sales of instant winner lottery tickets, in that they are
designed to streamline and enhance the operation and marketing of instant winner
tickets by providing greater opportunity for the impulse purchase. The lottery
terminals are designed to provide secure, high visibility points of presence at
the point of sale while using a minimum of floor space. The terminals are
available in several models, which house four to fifteen games. The units are
available in counter-top and stand alone models (the latter incorporating a
security storage cabinet). All models accept bills in $1, $5, $10, and $20
denominations and can be manufactured to accommodate coins or foreign currency.
The customer inserts a bill in the terminal, receives credit, and then
selects from among any or all of the games offered by pressing the button
located immediately under the appropriate ticket display. The terminals
generally dispense either a single ticket or a string of uncut tickets, which
move past a window, allowing the customer to view the purchase. Based on its
knowledge and experience the Company believes that customers prefer to see the
actual tickets being dispensed. The Company's patented Windows feature is unique
in this regard among similar products available to lottery jurisdictions. The
Company's lottery terminals incorporate other patented features, which in the
Company's opinion, enhance the likelihood of impulse purchases of game tickets.
Each lottery terminal includes a display, which shows instructional and
promotional information to the customer. The terminal can also be equipped with
the "Grabber", a multi-color LED sign, which is mounted on top of the terminal
and includes a built-in memory. The Grabber provides the ability to promote new
games or winning jackpots at the point of sale. A customized message typically
is input prior to installation of the terminals. These messages can be changed
on-site using a hand-held remote control or from remote locations with the
Company's optional Shadow communication program described below.
(2) COMMERCIAL PRODUCTS
Currently the only commercial product manufactured and marketed consists of
DCR vending machines, marketed principally for the resale of prepaid phone
cards. The Company 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
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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.
Recent studies indicate that in the United States only a small percentage
of the public have used or are aware of prepaid phone cards. Therefore,
distribution is essential to gaining public awareness. Dispensing machines are
an important element of the distribution network, providing visual recognition
and 24-hour convenient access to the product. An important aspect of the vending
machine is that its design must promote product awareness to effectively sell
cards, not merely dispense them. In 1997 the Company repackaged its DCR
technology into a new cabinet styling. In 1998 the Company expanded its DCR
product line to include 3 and 8 bin terminals in response to the specific
application needs of its customers.
In many foreign countries, especially those less developed than the United
States, the majority of residents do not own telephones and rely on public pay
telephones. Management estimates that commercial and government entities in over
100 countries now use or are in the process of evaluating the purchase of
telephones equipped to accept prepaid phone cards. The Company believes many of
these entities are looking to dispensing machines capable of handling prepaid
phone cards to widen the acceptance and availability of the prepaid phone cards.
The foreign market for prepaid phone card vending machines is in its infancy,
however, and there can be no assurances this Company will be successful in
developing this market.
In addition to prepaid phone cards, there are many other debit cards, which
can be dispensed using the DCR terminal, including bus and subway passes.
Several countries have begun using a multi-purpose debit card to provide easy
access to pay telephones, gasoline pumps, subway passes, and bus passes. The
Company is providing terminals to both Hong Kong and Brazil that dispense such
multi-purpose cards, or different types of cards or passes, including "smart
cards". Total foreign DCR sales accounted for $662 thousand in 1998 and $1.1
million in 1997.
DEBIT CARD RETAILER In 1993 the Company recognized the potential to utilize
its lottery technology in the evolving prepaid phone card industry and developed
its DCR-2000 debit card vending machine. 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, 1998 and 1997
respectively.
THE DCR TERMINAL The Company believes that the DCR terminal substantially
expands the distribution potential of prepaid phone cards. Similar to the
lottery terminals, the DCR terminal is designed to provide high security and
high visibility using a minimum of floor or counter-top space. The terminals are
available in several models, which house either one, two or more bins and are
able to accept various denominations of foreign and domestic currency. The
terminals can be manufactured to accommodate coins and to make change. The
customer inserts a bill or coin into the DCR terminal, receives credit, and then
selects the denomination of prepaid phone card or other card/pass by pressing
the button located immediately under the appropriate card display. The terminal
dispenses a single card to the buyer.
Each bin in a DCR terminal stores approximately 400 cards, depending on the
thickness of the cards, thus providing a maximum capacity of about 1,600 cards
in the Company's 4-bin terminal. As with the ITR terminal, the DCR machine
includes a display 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 the Company's optional "Shadow" communication program described below.
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. In 1999 management intends on reevaluating
the potential of the DCR market and determine whether new developments may be
necessary to stay competitive and attain a continuing market share.
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C. FINANCING SEGMENT
The Company 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,
the Company installs and maintains lottery and/or DCR terminals and provides
ancillary support services to customers. These contracts generally provide for
scaled payments, based upon the type of terminal purchased and the total number
of terminals sold under the agreement. In addition, the Sales Agreements
typically provide for the payment of monthly service fees for product repair,
routine maintenance and customer service activities (based upon the number of
terminals installed). In many cases, the service portion of the contract extends
beyond the period provided by the contract for the sale of terminals.
Operating Lease Agreements While the Operating Lease Agreements are similar
to the Sales-type Lease Agreements with respect to the Company's installation,
maintenance and service obligations, they are for shorter terms, and ownership
of the terminals remains with the Company 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
D. SERVICE SEGMENT
The Company currently provides ITR service in the states of: Connecticut,
Delaware, Missouri, New York, Virginia, and Washington, which are provided
through service facilities at its San Marcos, California headquarters and in the
states of Connecticut, Missouri, New York, Virginia and Washington. These
facilities provide installation and relocation services, perform repairs and
respond to service calls. The Company maintains toll-free telephone lines
staffed by service personnel to assist retailers and, where possible, resolve
minor service problems over the telephone. If the problem cannot be resolved
easily, a field technician is immediately paged and a service call scheduled.
Each agreement provides for a specified response or service time. A function of
the field service operation is to provide installation and retailer training on
the operation and use of the machine. The Company generally provides a warranty
period of one year on its terminals and provides an option for an extended
warranty period if purchased by the customer.
Company service technicians also perform routine preventative maintenance
of machines. If required, by agreement, each terminal is subject to on-site
cleaning and diagnostic testing of key components. In addition, on-site
modifications or upgrades may be performed. The Company's administrative staff
closely 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.
E. SUPPORT
MARKETING AND SALES
The Company markets its products domestically through an in-house marketing
and sales staff and internationally primarily through distributorships. The
Company solicits interest in its terminals primarily at trade shows and through
direct contact with customers. The initial marketing package consists of product
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brochures and other supportive documentation, e.g., sales analysis of other
customer installations. References from other customers using the Company's
terminals are routinely supplied, along with an offer to demonstrate and test
the terminals. Where possible, print advertising is keyed to feature articles in
trade journals, particularly advertisements targeting the prepaid phone card
market.
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, product
quality, performance capability (measured in part by demonstrated experience in
performing comparable projects), security, integrity, and experience. In
addition, state lottery authorities consider the applicant's affirmative action
policies and use of minority, handicapped, and women-owned subcontractors and
suppliers. Lottery authorities also show a preference for vendors that use
in-state subcontractors and suppliers. To assist it's marketing to state
lotteries, the Company has employed registered lobbyists and paid consultants in
certain states. Although the Company believes there remains a substantial market
for lottery terminals, no assurances can be given that lottery authorities will
award new contracts or order additional terminals.
Due to the particularly sensitive nature and high profile of gambling
activities, state lottery authorities are directed by statute to act in a
manner, which promotes and ensures the integrity, security, honesty and fairness
of their operations. Thus, applicants typically must provide detailed financial
and historical information concerning their business operations and principals,
and certain employees must consent to background investigations.
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 the
Company's knowledge, the major telephone companies, AT&T, MCI and Sprint, have
not yet implemented any significant marketing plans involving the use of vending
terminals to distribute prepaid phone cards on a large-scale basis. However, the
medium-sized telephone groups have been pursuing vending contracts for prepaid
phone cards. Similar to the sales process with state lotteries, many of these
companies seek requests for proposals from vending companies and require testing
prior to awarding contracts. The contract process permits more flexibility and
creativity; however, it requires greater marketing time and energy to win
contracts. Long distance resellers, smaller telephone companies, and pay
telephone route operators are seeking vending contracts, but these customers
normally have limited capital. The Company's 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 the Company 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 1998 the Company
delivered terminals to various lotteries and telecommunication service providers
for market testing. Nonetheless, the Company's foreign operations are relatively
small, and no assurance can be provided that a meaningful international market
for the Company's terminals will develop. In June 1995 the Company entered into
a distributor agreement with a Brazilian corporation, to distribute the
Company's products on an exclusive basis in Brazil. The Company can terminate
this agreement at its option. In December 1997 the Company entered into a
distributor agreement with Editec, a French Corporation, to distribute the
Company's products on an exclusive basis throughout most of Western Europe.
RESEARCH AND DEVELOPMENT
Research and Development expenditures totaled $1.4 million and $582
thousand in 1998 and 1997,
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respectively. The 1998 expenditures were primarily directed towards the
development of PlayPoint together with the associated development of the
Company's first counter-top dispenser, CounterPoint. PlayPoint features advanced
electronic, software, communication and dispensing capabilities. The Company
believes that its 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. These include:
On-Line Instant Ticket, Patent 5,772,510 - awarded June 1998 Other patents
filed in 1997/1998 but still pending:
- Helical separator/dispenser, 3345-2170,
- ITDS cash voucher system, 3345-2140
- PlayPoint designs, 3345-2230
- GamePoint design, 3345-2180
- CounterPoint Design, 3345-2210
All of the patents pending have been designed to protect the Company's
proprietary designs from use by competitors. As these products are still
in development, the Company has not yet generated any income from any of patent
applications filed in 1997 or 1998, nor from Patent 5,772,510 awarded in June
1998. None of the patent applications would have a material impact on future
sales, if they were not rewarded. Patent 5,772,510, however, is expected to
become important as the Company begins to market is on-line capabilities in 2000
and beyond.
None of the Company's research and developments costs were borne directly
by the Company's customers. The Company'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
The Company's lottery and DCR terminals are designed in a modular form to
facilitate manufacturing assembly and serviceability. The Company uses vendors
to manufacture and supply some components and sub-assemblies, including the bill
acceptor and electronic modules. Final assembly and quality control of the
terminals is performed by Company personnel at its San Marcos facility. Key
vendors include California Chassis, which currently produces cabinets and Mars,
which provides the majority of the bill acceptors. All components and parts are
available from multiple sources, and the loss of any key vendors would not have
a significant impact on the Company or its operations.
EMPLOYEES
As of March 1, 1999, the Company 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, the Company employed 20 people on a
part-time basis in its field service department. None of the Company's employees
are currently represented by a
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<PAGE> 10
union, and the Company believes that its relations with its employees are good.
FACILITIES
The Company occupies approximately 32,000 square feet of space in San
Marcos, California. The premises include office, manufacturing and warehouse
space. The Company currently pays monthly rent of $15,663 for this space. This
lease terminates January 31, 2009. The Company believes that its facilities are
adequate to meet its anticipated needs through the term of the lease.
F. OTHER BUSINESS INFORMATION
BACKLOG The Company's potential backlog of orders at December 31, 1998
totaled approximately 2,000 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 the Company receives orders from its customers is affected from time to
time by the nature of the Company's market. State lottery authorities are
allocated budgets on an annual basis, and their desire and ability to order
products from vendors, including the Company, can be affected by the status of
the budgetary process at any given time. For example, a lottery which has not
spent its budget as the end of a budgetary year approaches may be encouraged to
place orders with vendors, whereas a lottery which has exhausted its budget may
not be able to place orders until the beginning of a new budgetary year.
COMPETITION The Company believes that it possesses a strong competitive
position in the sale of lottery terminals. The Company has established a
reputation for providing quality terminals and service. As a consequence, the
Company has been able to secure contracts in eleven states, in the Provinces of
Ontario and Quebec and in several other foreign countries. In addition, the
Company generally enjoys repeat or renewal orders from existing customers and is
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 the Company
believes that it possesses a strong competitive position by virtue of its
proprietary position, installed base and reputation, there can be no assurance
that a better capitalized competitor will not successfully establish itself in
the market or develop a machine which renders the Company's technology obsolete.
The instant ticket market may also face competition from other types of lottery
products.
In the United States, the prepaid phone card and, more generally, the debit
card market are relatively new. Consequently, it is difficult to identify all
the competitors in this market. Nonetheless, the Company believes it possesses a
strong competitive position in the sale of DCR terminals within the United
States and overseas. At present, the Company's 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 the Company believes that it possesses an advantage in
obtaining future customers by virtue of its proprietary position and installed
base, there can be no assurance that a better-capitalized competitor will not
successfully establish itself in the market or develop a machine, which renders
the Company's technology obsolete. The prepaid phone card and debit card market
may also face competition from other types of products.
CUSTOMER DEPENDENCY The Company's products are sold or leased to a limited
number of customers worldwide. As a result, the Company has experienced
fluctuations in its financial results and capital expenditures because of the
timing of significant individual contract awards and customer orders as well as
associated product delivery schedules. The Company's sales cycle can, at times,
be relatively long due to the lead time required for business opportunities to
result in signed sales or lease agreements. In 1998, revenues from three
customers individually exceeded 10% of total revenues and in total comprised 58%
of total revenues. Revenues from two customers individually exceeded 10% of
total revenues in 1997 and in total comprised 44% of total revenues in 1997. See
Note 1 the Financial Statements.
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GOVERNMENT REGULATION Lotteries are not permitted in the United States
unless expressly authorized by legislation in the subject jurisdiction. Once
authorized, the award of lottery contracts and ongoing state operations are
highly regulated. State rules and regulations specify, among other things, the
qualifications of lottery directors, the prize structure, the allocation of
revenue, the types of games and amounts of wagers permitted, the manner in which
the lottery is marketed, and the procedures for selecting vendors of equipment
and services.
To ensure the integrity of the contract award and subsequent contract
performance, jurisdictions typically conduct background investigations of, and
require detailed disclosure on a continuous basis from, vendors and their
affiliates, subcontractors, officers, directors, and principal shareholders
(including 5% shareholders of publicly traded corporations). Background
investigations of vendors' employees are also generally conducted, and most
states reserve the right to require the removal of employees they deem to be
unsuitable or whose presence they believe may adversely affect the operational
security or integrity of the lottery.
The Federal Gambling Devices Act of 1962 (the "Federal Act") makes it
unlawful for a person to manufacture, deliver or receive gaming machines or
similar devices across interstate lines unless that person has first registered
with the Attorney General of the United States. The Company has registered under
the Federal Act and must renew its registration annually. The Federal Act also
imposes various record keeping and equipment identification requirements.
Violation of the Federal Act may result in seizure or forfeiture of equipment,
as well as other penalties. As of the date of this filing, the Company believes
that it is in substantial compliance with these provisions.
The international jurisdictions in which the Company operates or intends to
market its products have similar legislation and regulations governing lottery
operations. In addition, restrictions are often imposed on foreign corporations
seeking to do business in such jurisdictions. Failure to comply with these
provisions could result in contract cancellation or the institution of legal
proceedings.
The Company has employed registered lobbyists and retained paid consultants
in certain states. Failure to comply with state regulatory provisions relating
to the activities of the Company's advisors could adversely affect the Company's
ability to bid successfully upon lottery contracts.
It remains unclear what telecommunication regulations, if any, relate to
the sale of prepaid phone cards or to the dispensing of those cards using
vending machines. There appears to be a strong movement towards requiring
certification as a reseller in states where entities sell prepaid phone cards.
Vermont prohibits the sale of these cards from any venue. In addition, some
states subject DCR terminals and machines to use or similar taxes.
ITEM 2. DESCRIPTION OF PROPERTIES
At March 1, 1999 the Company 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
Office, repair depot and warehouse space in Olympia, Washington
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to legal proceedings in the ordinary course of its
business, the most significant of which are described below.
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On January 11, 1999, the Company 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, the Company asserts that
Solutioneering has breached the Agreement and has claimed damages of
approximately $9 million. The Company's net balance sheet carrying value of the
Solutioneering leased machines at December 31, 1998 is approximately $3.3
million. The Company believes the underlying value of the Company's equipment at
Solutioneering exceeds the carrying value on the Company's books. Solutioneering
subsequently sought bankruptcy protection in 1999 and the Company is pursuing
its claim through the courts.
On January 23, 1996, the Company's principal competitor, Interlott
Technologies, Inc. ("ILI"), filed a civil action against the Company in the
Common Pleas Court of Hamilton County, Ohio. The action arose from an agreement
in principle between Interlott Technologies, Inc. and the Company, which was
signed on March 23, 1995 regarding a proposed merger transaction. The Company
asserted a counterclaim against ILI seeking declaratory judgment with regard to
certain aspects of the agreement, seeking to recover the Company'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. No liability was admitted
by either party pursuant to the settlement and the settlement had no material
adverse effect on the Company's results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
a) The Company's common stock is traded in the over-the-counter market
(NASDAQ symbol: ONPT). The following table sets forth the high and low
bid prices for the Company's common stock, as reported on NASDAQ, for
the quarters presented. The bid prices represent inter-dealer
quotations, without adjustments for retail mark-ups, markdowns or
commissions and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
1998 1997
High Low High Low
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $ 3 13/16 $ 1 3/4 $ 2 1/32 $ 5/8
Second Quarter $ 3 $ 1 3/4 $ 3 $ 1 3/16
Third Quarter $ 2 1/16 $ 1 9/32 $ 2 13/16 $ 1 5/8
Fourth Quarter $ 2 9/16 $ 1 $ 3 1/4 $ 1 5/8
--------------------------------------------------------------------------------------
</TABLE>
b) The number of stockholders of record of the Company's common stock, par
value $.01 per share, as of March 5, 1999, was 289. The approximate number of
beneficial shareholders was 2400.
c) The Company has never paid any cash dividends on its common stock and
does not anticipate that it will do so in the foreseeable future. The future
payment of dividends, if any, on the common stock is within the discretion of
the Board of Directors and will depend on the Company's earnings, its capital
requirements, financial condition and other relevant factors.
Following are unregistered sales of securities issued by the Registrant
during the last three years. These securities were issued pursuant to Section
4(2) of the Securities Act of 1933, as amended. No placement agent was engaged
in connection with such issuances and no commissions or discounts were paid to
any person.
In January and July 1996, Vanguard Strategies, Inc. received warrants to
purchase 450,000 and 250,000 shares, respectively, of the Company's Common Stock
at $.60 and $.69, respectively, pursuant to a consulting agreement entered into
with the Company. Mr. Sandvick, Chief Executive Officer of the Company, is the
President and principal shareholder of Vanguard Strategies, Inc. The warrants
have a five-year term and warrants to purchase 200,000 shares became exercisable
in January 1996 and warrants to purchase 500,000 shares became exercisable in
July 1996.
In August 1996, Metal Masters, Inc. received warrants to purchase 165,000
shares of the Company's Common Stock at $.69 pursuant to a settlement of a legal
action. The warrants became exercisable in August 1996 and 100,000 shares had a
one-year term and 65,000 shares had a two-year term. All of the warrants have
been exercised.
In January 1997, Frederick Sandvick, Chief Executive Officer of the
Company, received a warrant to purchase 500,000 shares of the Company's Common
Stock at $.63 per share pursuant to his personal guaranty and indemnity in
connection with a $2,000,000 performance bond. The warrant has a five-year term
and became exercisable in January 1997.
In January 1997, Vanguard Strategies, Inc. received a warrant to purchase
250,000 shares of the Company's Common Stock at $.72 per share pursuant to a
consulting agreement entered into with the Company. The warrant has a five-year
term and became exercisable in January 1997.
In January 1997, S & H Systems, Inc. received a warrant to purchase 4,000
shares of the Company's Common Stock at $1.00 per share pursuant to a consulting
agreement entered into with the Company. The warrant has a four-year term and
became exercisable in January 1997.
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<PAGE> 14
In May 1997, GMB Capital Partners received a warrant to purchase 45,000
shares of the Company's Common Stock at $2.52 per share in consideration for
facilitating financing for the Company. 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 the Company's Common Stock at $2.00 per share pursuant to a financing
agreement entered into with the Company. The warrant has a three-year term and
became exercisable in May 1997.
In May 1997, Capital Structures Corporation and Colliers Iliff Thorn each
received a warrant to purchase 25,000 shares of the Company's Common Stock at
$1.24 per share pursuant to a commission settlement agreement entered into with
the Company. The warrants 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 the Company's Common Stock at
$2.88 per share pursuant to an agreement to terminate their respective rights in
the Company's international operations. The options expire on December 31, 2002
and vest 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 the Company's Common Stock at $2.09 per share pursuant
to their appointment as Advisory Directors. The 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 the Company's Common Stock at $2.09 per share pursuant
to their assignment of certain intellectual property to the Company. 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 the Company's Common Stock at $1.63 per share pursuant to an amendment
to a financing agreement entered into with the Company. 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 the Company's Common Stock at $1.66 per share pursuant to a consulting
agreement entered into with the Company. 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 the Company's Common Stock at $2.00 per share pursuant to his consulting
agreement with the Company. The option vests on March 31, 2001, or earlier, if
certain conditions are met. The option expires on September 30, 2001.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL The Company's revenues through 1998 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. The Company's products are sold
or leased to a limited number of customers worldwide. As a result, the Company
has experienced fluctuations in its financial results and capital expenditures
because of the timing of significant individual contract awards and customer
orders as well as associated product delivery schedules. The Company's sales
cycle can, at times, be relatively long due to the lead time required for
business opportunities to result in signed sales or lease agreements. Operating
results may be affected by such lead time as well as working
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<PAGE> 15
capital requirements associated with manufacturing vending terminals pursuant to
new orders, increased competition, and the extended time which may elapse
between the customer's firm order and the receipt of revenue from the sale or
lease of the applicable vending terminals. In addition, there has been an
accelerating trend by customers to lease rather than purchase vending terminal
equipment. Leasing vending terminals requires the Company to invest capital or
otherwise finance the manufacture of the vending terminals. The Company has
obtained the resources necessary to finance its expanding base of leased
terminals over the past two years through its line of credit, as well as through
its existing cash flow and equity financing.
RESTATEMENT Subsequent to the issuance of the 1998 financial statements,
the Company 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, the Company and Solutioneering entered into a
long-term lease arrangement pursuant to which the Company furnished
Solutioneering with 2,033 vending machines during 1997 and 1998, including 1,198
refurbished machines that had been previously returned to the Company from
another DCR customer, Fone America. The Company'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 $2.1 million in
1998 and $1.4 million in 1997. The Company's net balance sheet carrying value of
the Solutioneering leased machines at December 31, 1998 is approximately $3.3
million. The net assets 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 8 to the
Financial Statements.
In addition, the Company has reclassified $855 thousand in 1998 and $284
thousand in 1997 from cost of sales to selling, general and administrative
expense as amounts representing bad debt expenses. Interest income, attributable
to sales-type lease financing, of $330 thousand in 1998 and $123 in 1997 was
also reclassified from other (income) expenses to revenues.
Additionally, the Company 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 a company wholly owned by him, for
transactions not related to normal employee duties and to options and warrants
granted to other outside parties in fiscal years 1996 through 1998. The
additional expense in 1998 and 1997 was $120 thousand and $197 thousand,
respectively, of which $70 thousand and $161 thousand, respectively, were
attributable to grants to the Chief Executive Officer, including Vanguard
Securities (See Note 12 of the Financial Statements).
The Company has also added its disclosures to provide information
regarding segments, and has provided disclosures for three reporting segments:
Products, Financing and Service. Segment reporting is included as Note 3 of the
Financial Statements.
As a result, the 1997 and 1998 financial statements have been restated from
amounts previously reported to properly reflect these transactions,
reclassifications and disclosures.
The effects of the restatement are presented in Note 2 of the Financial
Statements and have been reflected herein.
1998 COMPARED TO 1997 The 1998-1997 comparison is based, where applicable,
on segment reporting, which is included as Note 3 to the Financial Statements.
1998 revenues increased by approximately $534 thousand or 4% from 1997, due to
(1) a $140 thousand decrease in product sales resulting
15
<PAGE> 16
from a decrease in the number of units sold and (2) a $701 thousand increase in
service revenue resulting from an increase in both volume and price due to new
contracts and existing contract renegotiations. The product mix among segments
sectors 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 the
Company's competitive success.
Cost of sales, as a percentage of sales, decreased by 1% from 69% in 1997
to 68% in 1998 due to the following: (1) product cost of sales as a percentage
of revenues decreased 10% from 73% in 1997 to 63% in 1998 due primarily to a
change in the mix of products sold; (2) financing cost of sales increased 8%, as
a percentage of revenues, from 33% in 1997 to 41% in 1998 due primarily to the
decrease in revenue recognized during 1998 as compared to 1997 and the increase
in depreciation expense incurred on the Property under lease agreement with
Solutioneering; and (3) service cost of sales decreased 2% as a percentage of
revenues from 96% in 1997 to 94% in 1998 due to a combination of renegotiated
contract pricing and as a result of the preventative maintenance program
initiated in 1997. Management anticipates that 1999 margins will continue to be
lower as a result of increased competitive pressures on bid prices.
Based on the above, gross profit increased by $313 thousand, from $4.4
million in 1997 to $4.7 million in 1998. The Company has invested in its next
generation lottery products, intended to produce higher margins. However, no
assurances can be given that higher margins will be achieved.
Operating expenses, as a percentage of sales, increased by 7 % as a result
of the following: (1) a $823 thousand increase in research and development.
Research and development activities increased although the number of personnel
decreased, as a majority of the work was performed by contracted services; and
(2) a $352 thousand increase in provision for doubtful accounts. The Company
anticipates continued increased development efforts until the introduction of
its next generation lottery products in 1999. Thereafter, the extent of its
development efforts will depend on management's evaluation of the positioning of
its other products. Bad debt expenses $206 thousand and $284 thousand from Fone
America in 1998 and 1997, respectively, and $649 thousand from US Telecard in
1998, relating to sales made in prior years. Additional detail on Fone America
is included in Note 8 to the Financial Statements.
As a result of the above factors, the Company incurred a loss from
operations of $130 thousand in 1998, a decline of $915 thousand from 1997's
operating income of $785 thousand.
Total other expense decreased by $324 thousand in 1998 due to (1) lower
interest expense resulting from the payoff of various notes payable during the
year and (2) a $143 thousand reduction in costs associated with the disposal of
fixed assets in 1997 that did not occur in 1998.
As a net result of the above-described factors, the Company incurred a net
loss of $404 thousand in 1998, versus net income of $171 in 1997, a decrease of
$575.
LIQUIDITY AND CAPITAL RESOURCES In 1998, the Company generated
approximately $1.1 million of net cash from operating activities which was used
in combination with the $2.2 million provided by financing activities to finance
$3.5 million in investing activities. In 1997, the Company generated
approximately $2.4 from financing activities that was used to provide $2.3
million for investing activities. Working capital was approximately $4.1 million
at December 31, 1998 an increase of approximately $2.5 million over the
approximate $1.6 million at December 31, 1997. The increase in working capital
included an increase in accounts receivable of $1.1 million, the net investment
in the current portion of sales-type leases of $700 thousand and inventories of
$200 thousand and a decrease in accrued expenses of $500 thousand. The
receivable increase was due primarily to a $1.1 million product sale in November
and December, 1998 to the State Lottery of Virginia.
The Company completed an equity financing and a debt financing during the
second quarter of 1997. The equity financing, representing a private placement
of $800 thousand of equity Units, was subsequently registered with the SEC. The
Units consisted of one share of Common Stock of the Company per $0.75 of equity
investment, one-half Class A Warrants per $1.00 of equity investment and one
Class B Warrant per $1.00 of equity
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<PAGE> 17
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 is exercisable to purchase one share of Common Stock at a price of $2.00
per share expiring March 18, 1999. Net proceeds to the Company from the private
placement approximated $684 thousand in 1997. The Company received an additional
$911 thousand in cash in 1998 from the exercise of warrants from the private
placement.
On May 5, 1997, the Company entered into a Loan and Security Agreement for
a revolving line of credit whereby the Company could borrow up to $3 million.
Such agreement was amended on July 7, 1998 to increase the borrowing limit to $5
million. The loan bears interest at prime plus 2%, which is reduced by .5%
annually if the Company meets certain performance benchmarks, matures on March
31, 2000 and is secured by virtually all of the Company's assets. At December
31, 1998, the Company had borrowed approximately $3.9 million under this
Agreement. There were no covenants as of December 31, 1997. As of December 31,
1998 the line requires the Company to maintain a minimum of $5.5 million of
equity, as defined. The Company was in compliance with this debt covenant at
December 31, 1998.
Management believes the Company has sufficient liquidity because of its
existing stream of contractual lease payments, its current working capital, and
its available borrowings under its $5 million debt financing to maintain its
current level of operations. However, 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 1999 and beyond, the Company
plans to seek additional financing during 1999. The initial order under these
contracts is projected at $7 million.
IMPACT OF INFLATION Inflation has not had any significant effect on the
Company's operating costs. However, the sales price, lease payment and service
fees contained in the Company's agreements with various states are fixed and the
Company will be unable to pass along any increases in manufacturing and service
costs during the term of these agreements.
SEASONALITY OF BUSINESS The Company's operations may be affected by the
fiscal year ends of its state lottery customers, which generally occur on June
30. States that have a surplus of funds available prior to year-end may
accelerate their purchases of new equipment, while states that experience a
shortage of funds available may delay their purchases until the next fiscal
year.
YEAR 2000 COMPLIANCE The Year 2000 computer issue creates potentially
significant risks for the Company. If ITR or DCR terminals that the Company
supplies to customers or management information systems that the Company uses
internally do not correctly recognize and process date information beyond the
year 1999, there could be an adverse impact on customers' and/or the Company's
operations. The Company is actively managing its program to assess the
capability of its ITR and DCR products and its interfaces to customer systems to
handle the Year 2000. With respect to customer systems, the major challenge for
the Company in remediating the Year 2000 issue is the coordination that is
required with customers, suppliers and employees. The Company has established a
Year 2000 project team and a program office at its corporate headquarters, made
up of dedicated and shared resources, to provide the guidance and support
necessary to accomplish the Year 2000 initiative. The Company's Year 2000
program consists of the following phases:
- The inventory phase consists of compiling a comprehensive list of
software and hardware technologies in use by the Company. This phase
is complete.
- The assessment phase consists of determining the compliance status of
each technology identified in the inventory phase and of contacting
key vendors and customers to determine any unresolved problems. This
phase is complete.
- The planning phase consists of developing plans to upgrade hardware
and/or software to Year 2000 compliance and of developing alternative
processing due to any key vendor and customer unresolved Y2K problems.
This phase is complete.
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- The implementation phase consists of executing the tasks identified in
the planning phase. This phase is complete.
- The quality assurance phase consists of testing and validating systems
replaced or modified as part of the implementation phase. This phase
will be completed concurrently as new chips are put in service at
customer sites and are scheduled for completion by the end of November
1999.
- The special case phase consists of developing and implementing
specific plans for any Year 2000 issues that cannot be handled by the
previous phases. This phase will include monitoring each site for
change control, contingency planning, monitoring vendor compliance
issues and other matters that may arise. This phase is scheduled to
start in September 1999.
The Company is actively working with and seeking to enlist the cooperation
of its customers to ensure integration with their systems and telecommunications
networks. The Company is also actively working with critical suppliers of
products and services to determine that the suppliers' operations and the
products and services they provide are Year 2000 capable. This is an ongoing
process.
The majority of the internal management information systems in use by the
Company (including Fourth Shift accounting software, Novell and various
Microsoft products) have received year 2000 certification from the Information
Technology Association of America. During 1998 the Company tested its central
network system hardware and software as well as the hardware and software of
each of its computer workstations. As a result, minor expenditures, under $25
thousand total cost, have been made to upgrade certain computer hardware, PC
software and fax equipment to make them year 2000 compliant. The Company
believes that it will be Year 2000 compliant with respect to its existing
computer hardware, software and fax equipment by the end of November 1999 and,
therefore, believes that potential risks, including any potential third party
risks, relating to year 2000 issues to be minimal. The Company's telephone
system was not year 2000 compliant at December 31, 1998 and was upgraded in
March 1999 at a cost of $13 thousand.
The contingency plan consists of identifying alternates based on a worse
case scenario, including identifying alternative MIS processing sites and field
service routines to address potential customer problems.
Year 2000 issues could have a significant impact on the Company's
operations and its financial condition and results if unforeseen needs or
problems arise, or systems operated by third parties are not Year 2000
compliant. Based on currently available information, management does not believe
that the Year 2000 matters discussed above will cause significant operational or
financial problems for the Company; and that the risks of any Y2K problems, if
any, will be minimized by the Company's contingency plans, however there can be
no assurance that this will be the case.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Financial Statements are filed as part of this Annual
Report on Form 10-KSB.
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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, 1998 and 1997, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the two years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1998 in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 2, the accompanying 1998 and 1997 consolidated financial
statements have been restated.
Deloitte & Touche LLP
San Diego, California
March 25, 1999 (except for the effects of matters disclosed in Note 2, as to
which the date is March 15, 2000)
19
<PAGE> 20
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
Assets Thousands of dollars, except share amounts (As restated - See Note 2)
<S> <C> <C>
Cash and cash equivalents $ 129 $ 273
Accounts receivable, net 2,744 1,644
Inventories 3,143 2,933
Net investment in sales-type leases 1,586 872
Other current assets 122 88
-------------------------------------------------------------------------------------------------------------
Total current assets 7,724 5,810
-------------------------------------------------------------------------------------------------------------
Plant, property and equipment, net 422 582
Net investment in sales-type leases 2,723 2,423
Property under operating leases, net 1,852 2,575
Property under lease agreement with Solutioneering, net 3,255 2,644
Other assets 368 768
-------------------------------------------------------------------------------------------------------------
Total assets $ 16,344 $ 14,802
==============================================================================================================
Liabilities and shareholders' equity
-------------------------------------------------------------------------------------------------------------
Accounts payable $ 1,190 $ 1,118
Current portion of long term debt 104 277
Accrued expenses 2,372 2,862
-------------------------------------------------------------------------------------------------------------
Total current liabilities 3,666 4,257
-------------------------------------------------------------------------------------------------------------
Long-term debt 3,872 2,371
-------------------------------------------------------------------------------------------------------------
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, 10,094,826 and 9,421,255 shares issued and 101 94
outstanding, respectively
Additional paid-in capital 31,256 30,227
Accumulated deficit (22,551) (22,147)
-------------------------------------------------------------------------------------------------------------
Total shareholders' equity 8,806 8,174
-------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 16,344 $ 14,802
==============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 21
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
(As restated - See Note 2)
THOUSANDS OF DOLLARS/SHARES, EXCEPT PER SHARE AMOUNTS
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 14,768 $14,234
Cost of sales 10,044 9,823
--------------------------------------------------------------------------------------------------------
Gross profit 4,724 4,411
--------------------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 3,449 3,044
Research and development 1,405 582
--------------------------------------------------------------------------------------------------------
Total operating expenses 4,854 3,626
--------------------------------------------------------------------------------------------------------
Income (loss) from operations (130) 785
--------------------------------------------------------------------------------------------------------
Other expenses:
Interest expense 237 418
Other 17 160
--------------------------------------------------------------------------------------------------------
Total other expenses 254 578
--------------------------------------------------------------------------------------------------------
Income (loss) before provision for income tax (384) 207
Provision for income taxes - current 20 36
--------------------------------------------------------------------------------------------------------
Net income (loss) $ (404) $ 171
========================================================================================================
Earnings per share:
Basic:
Earnings (loss) per share ($ 0.04) $ 0.02
========================================================================================================
Weighted average shares 9,882 9,011
========================================================================================================
Diluted:
Earnings (loss) per share ($ 0.04) $ 0.02
========================================================================================================
Weighted average shares and assumed
conversions 9,882 10,850
========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
21
<PAGE> 22
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
(As restated - See Note 2)
-----------------------------------------------------------------
Common Stock Additional
Thousands shares/dollars -------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 8,187 $82 $ 29,157 ($22,318) $6,921
------------------------------------------------------------------------------------------------------------------
Issuance of common stock, net of $116
issuance costs 1,067 11 673 684
Exercise of stock warrants 142 1 100 101
Exercise of stock options 25 25 25
Issuance of stock options and warrants
for services provided 272 272
Net income 171 171
------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 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
==================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
22
<PAGE> 23
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
(As restated - See Note 2)
THOUSAND OF DOLLARS 1998 1997
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (404) $ 171
Adjustments to reconcile net income (loss) to net cash
provided by (used in)operating activities:
Depreciation and amortization 2,000 1,683
Issuance of options and warrants for services provided 120 272
Provision for doubtful accounts 713 361
Changes in assets and liabilities:
Accounts receivable (960) (407)
Inventories (210) (476)
Other current and other assets 299 451
Accounts payable 72 (1,563)
Accrued expenses and other liabilities (490) (304)
Deferred income (518)
------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,140 (330)
------------------------------------------------------------------------------------------------------------
Cash flows from (used in) investing activities:
Purchases of plant, property and equipment (283) (176)
Net investment in sales-type leases (1,890) (521)
Investment in property under operating leases (224) (1,188)
Property under lease agreement with
Solutioneering (1,212) (536)
Fixed asset disposals 81 99
------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,528) (2,322)
------------------------------------------------------------------------------------------------------------
Cash flows from financing activities: Proceeds from issuance of
common stock:
Equity financing 684
Exercise of warrants and options 916 126
Proceeds from line of credit, net 1,605 2,267
Advances on notes payable 655
Repayment of notes payable (277) (1,311)
------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,244 2,421
------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (144) (231)
------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 273 504
------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $129 $273
============================================================================================================
Supplemental cash flow information:
Cash paid during the period for interest $306 $ 281
Cash paid during the period for income taxes $117 $ 27
Supplemental disclosure of non-cash activities:
Cost basis of machines returned from Fone America
transferred from net investment in sales-type leases
to property under
lease agreement with Solutioneering $ 23 $ 2,337
Increase (decrease) of reserves for inventory obsolescence $(368) $561
------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
23
<PAGE> 24
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
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 the 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.
Liquidity The Company 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 consist of one
share of Common stock of the Company per $0.75 of equity investment, one-half
Class A Warrant per $1.00 of equity investment and one Class B Warrant per $1.00
of equity investment. Each Class A Warrant is 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. Net proceeds to the Company in
1997 from the private placement was $684 thousand. The Company received $911
thousand in cash in 1998 from the exercise of warrants from the private
placement.
On May 5, 1997, the Company entered into a Loan and Security Agreement for
a revolving line of credit whereby the Company could borrow up to $3,000,000.
Such agreement was amended on July 7, 1998 to increase the borrowing limit to
$5,000,000. The loan bears interest at Prime plus 2%, which is reduced by .5%
annually if the Company meets certain performance benchmarks, matures on March
31, 2000 and is secured by virtually all of the Company's assets. At December
31, 1998, the Company had borrowed approximately $3.9 million under this
Agreement. The Company was in compliance with loan covenants as of December 31,
1998 and 1997. See Note 5 and 10.
Management believes the Company has sufficient liquidity because of its
existing stream of contractual lease payments, its current working capital, and
its available borrowings under its $5 million debt financing to maintain its
current level of operations.
Principles of Consolidation The consolidated financial statements include
the accounts of the Company 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 the
Company from its normal business activities. The Company maintains an allowance
for doubtful accounts to reflect the expected uncollectibility of accounts
receivable based on collection history.
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 4 - 5 years.
Revenue Recognition Under provision of SFAS No. 131, the Company has three
reportable business segments: Products, Financing and Service. Segment
information is included as Note 3. Revenue recognition for each segment is as
follows:
24
<PAGE> 25
PRODUCTS
Revenues from terminal sales are recognized upon shipment, except where
contract terms require the Company to provide installation, in which cases
revenue is recognized when the product is installed. Revenues from
sales-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
The Company employs a field service department to service DCR 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 DCR 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, a service
fee is estimated and classified as deferred executory costs. All service
revenue is recognized ratably over the service agreement. The Company
provides reserves 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 Research and development costs are expensed as
incurred.
Significant Customers and Concentration of Credit Revenues from the state
lotteries of Virginia, Illinois and Washington individually accounted for 23%,
23% and 12% respectively of total revenue in 1998. Revenues from the state
lotteries of Virginia and Illinois individually totaled 29% and 15%,
respectively of total revenue in 1997. These customers accounted for 18% and 53%
of the Company's receivables at December 31, 1998 and 1997. No DCR customers
accounted for 10% or more of revenues in either 1998 or 1997. Foreign sales
amounted to $800 thousand in 1998 (5% of total revenues), of which $622 thousand
was in Hong Kong, and $1.2 million in 1997 (9% of total), of which $478 thousand
was in Hong Kong and $557 thousand was in Brazil.
Income Taxes Deferred income taxes are recorded to reflect the tax
consequences on future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end. If it is
more likely than not that some portion or all of a deferred income tax asset
will not be realized, a valuation allowance is recognized.
Per Share Information In February 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
128 "Earnings per Share" establishing standards for computing and presenting
Basic Earnings Per Share ("Basic EPS") and Diluted Earnings Per Share ("Diluted
EPS"). Basic EPS excludes dilution and is computed using the weighted average
shares of common stock outstanding plus contingently issuable shares. Diluted
EPS is computed using the weighted average shares outstanding plus additional
common shares that would have been outstanding if dilutive potential common
shares had been issued, using the treasury stock method.
25
<PAGE> 26
<TABLE>
<CAPTION>
Income Per-Share
(Loss) Shares Amount
----------- ---------- ----------
For the year ended December 31, 1998:
- -------------------------------------
<S> <C> <C> <C>
BASIC EPS
(Loss) available to common stockholders ($ 404,000) 9,881,622 ($0.04)
EFFECT OF DILUTIVE SECURITIES
None
----------- ---------- ------
DILUTED EPS
(Loss) available to common stockholders
plus assumed conversions ($ 404,000) 9,881,622 ($0.04)
=========== ========== ======
For the year ended December 31, 1997:
BASIC EPS $ 171,000 9,011,055 $ 0.02
Income available to common stockholders
EFFECT OF DILUTIVE SECURITIES
Warrants 1,166,395
Stock Options 672,558
----------- ---------- ------
DILUTED EPS
Income available to common stockholders
plus assumed conversions $ 171,000 10,850,008 $ 0.02
=========== ========== ======
</TABLE>
Options to purchase 462,000 and 2,083,835 shares of the Company's Common
Stock and warrants to purchase 45,000 and 2,911,958 shares of the Company's
Common Stock were outstanding during 1997 and 1998, respectively, but were not
included in the computation of diluted EPS because the Company incurred a net
loss in 1998 and the exercise price was greater than the average market price of
the common shares.
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.
Cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses carrying cost reasonably approximates their fair value because
of the short maturities of these investments.
The Company believes that the carrying amount of its outstanding debt at
December 31, 1998 and 1997 is a reasonable estimate of its fair value based on a
review of borrowing rates available to the Company at December 31, 1998 and 1997
for loans with similar terms and average maturities.
Impairment of Long-Lived Assets The Company periodically assesses its
ability to recover the carrying value of its long-lived assets. If management
concludes that the carrying value will not be recovered, an impairment write
down is recorded to reduce the asset to its estimated fair value.
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
26
<PAGE> 27
fiscal years beginning after December 15, 1997. The Company 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. The Company has not yet evaluated the effect of adopting SFAS
133.
Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. 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.
2. RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of its 1998 financial statements, the Company
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, the Company and Solutioneering entered into a long-term lease
arrangement pursuant to which the Company furnished Solutioneering with 2,033
vending machines during 1997 and 1998, including 1,198 refurbished machines that
had been previously returned to the Company from another DCR customer, Fone
America. The Company'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 $2.1 million in
1998 and $1.4 million in 1997. The Company's net balance sheet carrying value of
the Solutioneering leased machines at December 31, 1998 is approximately $3.3
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 8.
In addition, the Company has reclassified $855 thousand in 1998 and $284
thousand in 1997 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 and $123 in
1997 was also reclassified from other (income) expenses to revenues.
Additionally, the Company 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 to other outside parties in fiscal years 1996 through 1998. The
additional expense in 1998 and 1997 was $120 thousand and $197 thousand,
respectively, of which $70 thousand and $161 thousand, respectively, were
attributable to grants to the Chief Executive Officer, including Vanguard
Securities (See Note 12 of the Financial Statements).
The Company has also added its disclosures to provide information
regarding segments, and has provided disclosures for three reporting segments:
Products, Financing and Service. Segment reporting is included as Note 3 of the
Financial Statements.
27
<PAGE> 28
As a result, the 1997 and 1998 financial statements have been restated from
amounts previously reported to properly reflect these transactions,
reclassifications and disclosures. A summary of the significant effects of the
restatement is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
As Previously As As Previously As
Reported Restated Reported Restated
-------- -------- -------- --------
YEAR ENDED DECEMBER 31:
-----------------------
<S> <C> <C> <C> <C>
Revenues $ 16,416 $ 14,768 $ 17,439 $ 14,234
Cost of sales 11,538 10,044 12,566 9,823
----------------------------------------------------------------------------------------------------------------------
Gross profit 4,878 4,724 4,873 4,411
Operating expenses 4,018 4,854 3,145 3,626
----------------------------------------------------------------------------------------------------------------------
Income from operations 860 (130) 1,728 785
Other income (expense) 871 (254) (120) (578)
----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,731 (384) 1,608 207
Provision for income taxes 20 20 36 36
----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,711 ($ 404) $1,572 $171
======================================================================================================================
Net income (loss) per share - basic $ 0.17 ($ 0.04) $ 0.17 $ 0.02
Net income (loss) per share - diluted $ 0.15 ($ 0.04) $ 0.15 $ 0.02
DECEMBER 31:
Accounts receivable $ 2,744 $ 2,744 $ 1,961 $ 1,644
Inventories 3,143 3,143 2,704 2,933
Net investment in sales-type leases 1,586 1,586 1,638 872
----------------------------------------------------------------------------------------------------------------------
Total current assets 7,724 7,724 6,664 5,810
----------------------------------------------------------------------------------------------------------------------
Net investment in sales-type leases 8,911 2,723 5,364 2,423
Property under operating leases, net 2,013 1,852 2,657 2,575
Property under lease agreement with Solutioneering, net 3,255 2,644
Other assets 502 368 768 768
----------------------------------------------------------------------------------------------------------------------
Total assets $ 19,572 $ 16,344 $ 16,035 $ 14,802
======================================================================================================================
Stockholders' Equity $ 12,005 $ 8,806 $ 9,378 $ 8,174
======================================================================================================================
</TABLE>
3. SEGMENT INFORMATION
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", which changes the way the Company reports
information about its operating segments. The Company has three reportable
segments: product sales, financing and service. The product segment includes all
products sold by the Company, 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.
The Company evaluates performance for each segment based on
gross profits.
<TABLE>
<CAPTION>
Non-
Products Financing Service Allocated Total
-------- --------- ------- --------- -----
1998
<S> <C> <C> <C> <C>
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>
28
<PAGE> 29
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1997
OPERATING DATA:
Revenues $6,010 $3,850 $4,374 $14,234
Gross profit 1,642 2,592 177 4,411
Income (loss) from operations 383 428 (26) 785
BALANCE SHEET DATA (AT END OF PERIOD):
Assets (allocated by segment) $3,448 $9,188 $1,037 $1,129 $14,802
CASH FLOW INFORMATION:
Depreciation and amortization $ 425 $1,258 $ 1,683
Capital expenditures 176 176
</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.
4. OTHER FINANCIAL DATA.
Details concerning certain balance sheet accounts and operating income
detail as of December 31, 1998 and 1997 follows
<TABLE>
<CAPTION>
1998 1997
---- ----
Accounts receivable:
<S> <C> <C>
Trade accounts receivable $ 2,896 $ 1,938
Less allowance for doubtful accounts (152) (294)
--------------------------
Total $ 2,744 $ 1,644
==========================
Inventories:
Materials $ 2,843 $ 2,805
Work-in-process 274 220
Finished goods 619 869
Reserve for obsolescence (593) (961)
--------------------------
Total $ 3,143 $ 2,933
==========================
Property, plant and equipment:
Computers and equipment $ 1,236 $ 1,162
Furniture and fixtures 325 332
Tooling 248 324
Building and improvements 51 37
--------------------------
1,860 1,855
Less accumulated depreciation (1,438) (1,273)
--------------------------
Total $ 422 $ 582
==========================
Other assets:
Patents $ 715 $ 677
Deposits 134 628
Other 198 136
--------------------------
1,047 1,441
Less accumulated amortization (679) (673)
--------------------------
Total $ 368 $ 768
==========================
Operating Income Detail:
Revenues:
Products $ 5,870 $ 6,010
Financing:
Operating lease rentals 3,493 3,727
</TABLE>
29
<PAGE> 30
<TABLE>
<S> <C> <C>
Interest income 330 123
--------------------------
Total financing 3,823 3,850
Service 5,075 4,374
--------------------------
Total revenues 14,768 14,234
--------------------------
Cost of sales
Products 3,693 4,368
Financing 1,571 1,258
Service 4,780 4,197
--------------------------
Total cost of sales 10,044 9,823
--------------------------
Gross Profit 4,724 4,411
Operating expenses:
Research and development 1,405 582
Bad debt expense 713 361
Depreciation 2,000 1,683
Less depreciation included in cost of sales (1,785) (1,529)
Other Selling, general and administrative 2,521 2,529
-------- --------
Total operating expenses 4,854 3,626
-------- --------
Income (loss) from operations $ (130) $ 785
==========================
</TABLE>
5. DEBT Debt consists of the following as of December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revolving line of credit $3,872 $2,267
Notes payable 104 381
---------------------
Total debt 3,976 2,648
Less current portion 104 277
---------------------
Long Term Debt $3,872 $2,371
=====================
</TABLE>
The Company 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. The line
bears interest at prime plus 2%, or 9.75% at December 31, 1998, which is reduced
by .5% annually if the Company meets certain performance benchmarks, matures on
March 31, 2000 and is secured by virtually all of the Company's assets. There
were no covenants as of December 31, 1997. As of December 31, 1998 the line
requires the Company to maintain a minimum of $5.5 million of equity, as
defined. The Company was in compliance with this debt covenant at December
31, 1998.
Notes payable at December 31, 1998 and 1997 consist of notes to various
financial institutions, which bear interest at rates ranging from 8.8% to 14.8%.
All but one note payable, totaling $104 thousand was paid off during 1998.
Future principal payments on debt as of December 31, 1998, are as follows
(in thousands):
<TABLE>
Year ending December 31,
<S> <C>
1999 $ 104
2000 3,872
------
$3,976
======
</TABLE>
6. OPERATING LEASES
The Company leases certain of its vending terminals to customers under
agreements accounted for as operating leases. The net investment in vending
terminals held under operating leases at December 31, 1998 and 1997 consisted of
approximately $4.9 million and $5.0 million, respectively, less accumulated
depreciation of approximately $3.1 million and $2.4 million at December 31, 1998
and 1997, respectively.
Approximate future minimum lease payments receivable by the Company under
operating leases as of December 31, 1998, are as follows (in thousands):
Year ending December 31,
<TABLE>
<CAPTION>
<S> <C>
1999 $ 1,735
</TABLE>
30
<PAGE> 31
Current operating leases may be extended in one-year increments, upon
expiration of current leases. The Company believes that the net book value is
fully recoverable through future lease receipts and underlying value of the
assets as of December 31, 1998 and 1997.
7. SALES-TYPE LEASES The Company leases certain of its vending terminals under
agreements accounted for as sales-type leases. Included in product sales are
approximately $1.9 million and $1.5 million of revenues related to sales-type
leases for the years ended December 31, 1998 and 1997, respectively. These
non-cancelable leases expire over the next one to five years.
The following lists the components of the net investment in sales-type
leases as of December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------------
<S> <C> <C>
Net minimum lease payments receivable $ 4,212 $ 3,157
Estimated unguaranteed residual value 1,278 1,071
Less unearned interest income (314) (659)
Less reserves for sales-type leases (867) (274)
------------------------
Net investment in sales-type leases $ 4,309 $ 3,295
========================
ales-type leases consist of:
Net investment in sales-type leases - short term $1 586 $ 872
Net investment in sales-type leases - long term 2,723 2,423
------------------------
Net investment in sales-type leases, as above $ 4,309 $ 3,295
========================
</TABLE>
The minimum lease payments are recorded net of future estimated service and
warranty costs of $828 in 1998 and $830 in 1997, 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, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1999 $ 2,590
2000 1,217
2001 405
-------
$ 4,212
=======
</TABLE>
The amortization of unearned income for sales-type leases amounted to
approximately $330 thousand and $123 thousand for the years ended December 31,
1998 and 1997, respectively.
8. PROPERTY UNDER LEASE AGREEMENT WITH SOLUTIONEERING
As part of its effort to increase its presence in the DCR marketplace, the
Company 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, the Company would be Solutioneering's
exclusive DCR provider. Although the Company realized Solutioneering was
undercapitalized, the Company 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 the Company's leases should
Solutioneering fail to pay. While Solutioneering defaulted on its obligations in
1997, the Company 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. The Company also believes that the
fair value of the Company's leased assets held by Solutioneering exceeded the
carrying amount of the leased assets as of December 31, 1998 and 1997. When
Solutioneering was unwilling to accept terms offered by a prospective buyer in
early 1999, the Company subsequently filed suit to collect the amounts due.
In 1997 and 1998, the Company 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 the Company from another DCR
customer, Fone America.
31
<PAGE> 32
The vending machine 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. Operating lease
revenues have been recognized only for cash payments received from
Solutioneering of $205 thousand in 1997.
The activity in the Property under Lease agreements with Solutioneering is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance - beginning of year $2,644 $ --
Additions:
DCR's returned from Fone America 23 $2,337
Manufactured and other 1,240 536
Less: accumulated depreciation (652) (229)
-----------------------
Balance - end of year $3,255 $2,644
=======================
</TABLE>
Fone America returned 1,266 DCR terminals during 1997 and 1998 under an
agreement with the Company 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. The following summarizes the activity in the
Fone America receivable balance during 1997 and 1998:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Receivable balance, beginning of year $ 989 $3,326
Less: reserves for refurbishment (476) (933)
Less: reserves for bad debts (284) --
----------------------
Net receivable balance, beginning of year 229 2,393
Plus: utilization of reserve for refurbishment -- 457
Less: cost basis of returned terminals (23) (2,337)
Less: bad debt expense (206) (284)
----------------------
Net receivable balance - end of year $ -- $ 229
======================
</TABLE>
A bad debt reserve was established as of December 31, 1997 of $284
thousand. As Fone America returned terminals, the Company 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.
9. 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>
1998 1997
---- ----
<S> <C> <C>
Tax expense (benefit) computed at the statutory federal rate
rate of 34% $(131) $ 70
State income tax expense, net of federal income tax effect 20 36
Expenses not deductible for income tax purposes (6) (9)
Change in valuation allowances for deferred income tax assets 137 (61)
----------------------
Provision for income taxes - current $ 20 $ 36
======================
</TABLE>
32
<PAGE> 33
The components of the income tax expense for the year ended December 31,
1998 and 1997 consists of the following
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current:
Federal $ -- $ --
State 20 36
----------------
20 36
Deferred:
Federal -- --
State -- --
----------------
-- --
----------------
Provision for income taxes - current $ 20 $ 36
================
</TABLE>
Deferred income tax assets and the related valuation
allowance as of December 31, 1998 and 1997, result from the
following temporary differences:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net operating loss carryforwards $ 5,475 $ 3,128
Inventory and other reserves 868 3,250
Valuation allowance (6,343) (6,378)
------ -------
Net deferred income tax assets $ -- $ --
====== =======
</TABLE>
Due to significant losses for income tax reporting purposes prior to 1998
as well as the other issues currently being addressed by the Company, 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, 1998, the Company has $14.6 million of operating loss
available to offset future federal taxable income, which expire during the years
2011 through 2018.
10. SHAREHOLDERS' EQUITY
Preferred Stock The Company is authorized to issue up to two million shares
of preferred stock without further shareholder approval; the rights, preferences
and privileges of which would be determined at the time of issuance. No shares
have ever been issued.
Stock Warrants Exercised In 1998, various warrants were exercised to
purchase the Company's Common Stock for total proceeds of $911 thousand.
Warrants from the private placement, discussed in Note 1, were exercised to
purchase 540,986 shares of the Company's Common Stock at $1.25 per share. Other
warrants were exercised to purchase 25,000, 37,500 and 65,000 shares of the
Company's Common Stock at $1.24, $1.25 and $.69 per share, respectively. In
1997, two warrants were exercised to purchase the Company's Common Stock for
total proceeds of $101 thousand. The warrants were exercised to purchase 100,000
and 42,630 shares of the Company's Common Stock at $.69 and $.75 per share,
respectively.
Stock Option Plans The Company has two employee option plans whereby
options to purchase 1,972,500 shares of the Company'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 the Company's common stock may be
issued to directors of the Company. Information regarding these option plans,
options, including options outstanding for non-employees of 424,000 and 306,500
shares outstanding as of December 31, 1998 and 1997 respectively follows:
33
<PAGE> 34
<TABLE>
<CAPTION>
1998 1997
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at January 1 1,280,380 $1.44 1,171,577 $2.21
Granted 882,000 1.88 367,080 1.13
Exercised (5,085) 0.90 (25,000) 1.00
Expired (50,000) 2.00 -- --
Forfeited (23,460) 2.21 (233,277) 4.83
---------- ----- ---------- -----
Outstanding at December 31 2,083,835 $1.61 1,280,380 $1.44
========== ===== ========== =====
Options exercisable at year end 1,095,376 $1.47 806,190 $1.72
Weighted average fair value per share of options
granted during the year $0.76 $0.48
</TABLE>
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- --------------------------------
Number Weighted Ave Weighted-Average Number Weighted-Average
Range of Outstanding at Remaining Exercise Outstanding at Exercise
Exercise Prices 12/31/98 Contractual Life Price 12/31/98 Price
--------------- -------- ---------------- ----- -------- -----
<S> <C> <C> <C> <C> <C>
$0.80 - 1.00 1,071,835 6.1 years $ 0.82 945,376 $ 0.81
1.41 - 1.81 470,000 4.6 1.50 20,000 1.81
2.00 - 2.09 292,000 3.2 2.07 10,000 2.03
2.25 - 2.88 150,000 3.5 2.78 20,000 2.44
7.45 100,000 5.8 7.45 100,000 7.45
--------- --- ------ --------- ------
$0.80 - 7.45 2,083,835 5.2 $ 1.61 1,095,376 $ 1.47
========= === ====== ========= ======
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" for employee stock option plans.
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation for the Company's three stock option plans been
determined based on the fair value at the grant date for awards in 1998 and 1997
consistent with the provisions of SFAS No. 123, the Company's net earnings
(loss) and earnings (loss) per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
----- ----
Net Per Share Net Per Share
Loss Basic Diluted Earnings Basic Diluted
---- ----- ------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
As Reported $(404) $(0.04) $(0.04) $ 171 $0.02 $0.02
===== ===== ===== ===== ===== =====
Pro Forma $(484) $(0.05) $(0.05) $ (41) $(0.01) $(0.01)
===== ===== ===== ===== ===== =====
</TABLE>
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 1997 the fair value of
options granted is estimated as approximately $0.51 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 70%; risk free interest rate of 5.71%; and expected lives of 3.02
years.
Other Stock Options
In October 1998, Robert Burr, a former Chairman of the Board, President and
CEO of the Company, received a three-year option to purchase 50,000 shares of
the Company's Common Stock at $2.00 per share pursuant to his consulting
agreement with the Company. The option vests on March 31, 2001, or earlier, if
certain conditions are met. The fair value of the option totaled $24 thousand,
$2 thousand of which was expensed during the year ended December 31, 1998. The
remainder will be expensed over 37 months.
34
<PAGE> 35
In September 1998, a consultant received an option to purchase 5,000 shares
of the Company's Common Stock at $1.66 per share pursuant to a consulting
agreement entered into with the Company. The option vests over 2 1/2 years. The
fair value of the option totaled $5 thousand at the date of grant; $700 of which
was expensed to selling, general and administrative expense during the year
ended December 31, 1998. The remainder will be expensed to selling, general and
administrative expense over the remaining 26 month term of the consulting
agreement.
In May 1998, two individuals, one of whom is an officer of the Company,
each received an option to purchase 50,000 shares of the Company's Common Stock
at $2.09 per share pursuant to their assignment of certain intellectual property
to the Company. 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 were in exchange for intellectual property.
In April 1998, two advisory board members of the Company each received
three-year options to purchase 10,000 shares of the Company's Common Stock at
$2.88 per share pursuant to their appointment as Advisory Directors. The options
vest in April 1999. The fair value of the options totaled $12 thousand; $5
thousand of which was expensed to selling, general and administrative expense
during the year ended December 31, 1998. The remainder will be expensed to
selling, general and administrative expense over the remaining term of their
appointment as advisory board members, which expire in 1999.
In March 1998, Vanguard Strategies, Inc. and Mr. Robert L. Burr were each
granted five-year stock options for 50,000 shares of the Company's Common Stock
at $2.88 per share pursuant to an agreement to terminate their respective rights
in the Company's international operations. The options vest at the earlier of
June 30, 2002 (subject to certain conditions) or March 31 following the fiscal
year end during which cumulative gross revenues for fiscal years beginning in
1998 from Central and South America exceed $5,000,000. The fair value of the
options totaled $110 thousand; $18 thousand of which was
expensed to selling, general and administrative expense during the year ended
December 31, 1998. The expense is being recorded over the 60 month term of the
agreement.
In January 1998, a consultant received an option to purchase 10,000 shares
of the Company'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
totaled $7 of which $4 thousand was expensed to
selling, general and administrative expense in 1998. The remaining $3 thousand
will be expensed in 1999.
In January 1997, three consultants were granted options to purchase a total
of 30,000 shares of the Company's common stock at $.90 per share. 25,000 shares
vested in 1997 and the remaining 5,000 shares vested in 1998.
Stock Warrants
In July 1998, Coast Business Credit received a warrant to purchase 10,000
shares of the Company's Common Stock at $1.63 per share pursuant to a financing
agreement entered into with the Company. 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 was expensed to selling,
general and administrative expense during 1998. The remaining balance will be
expensed over 18 months.
In May 1997, GMB Capital received a warrant to purchase 45,000 shares of
the Company's Common Stock at $2.52 per share in consideration for facilitating
financing for the Company. The warrant has a three-year term and became
exercisable in May 1997. The fair value of the warrant totaled $35 thousand at
the date of grant, of which $11 thousand and $8 thousand were expensed to
selling, general and administrative expense during 1998 and 1997, respectively.
The remaining balance will be expensed over 16 months.
In May 1997, Capital Structures Corporation and Colliers Iliff Thorn each
received a warrant to purchase 25,000 shares of the Company's Common Stock at
$1.24 per share pursuant to a commission settlement agreement entered into with
the Company. The warrants had a one-year term and expired in May 1998. The fair
value of the warrants totaled $88 thousand at the date of grant, which was
expensed to selling, general and administrative expense during 1997.
In May 1997, Coast Business Credit received a warrant to purchase 50,000
shares of the Company's Common Stock at $2.00 per share pursuant to a financing
agreement entered into with the Company. The warrant has a three-year term and
became exercisable in May 1997. The fair value of the warrant totaled $44
thousand at the date of grant, of
35
<PAGE> 36
which $15 thousand and $10 thousand were expensed to selling, general and
administrative expense during 1998 and 1997, respectively. The remaining balance
will be expensed over 16 months.
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 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. 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, 1998 and 1997.
The remaining balance will be expensed in 1999.
In January 1997, Vanguard Strategies, Inc. ("VSI"), a corporation
wholly-owned by the Chief Executive Officer, received a warrant to purchase
250,000 shares of the Company's Common Stock at $.72 per share pursuant to a
consulting agreement entered into with the Company. The warrant has a five-year
term and became exercisable in January 1997. The fair value of the warrant
totaled $102 thousand at the date of grant, which was expensed to selling,
general and administrative expense during the year ended December 31, 1997.
In January 1997, S&H Systems Inc. received a warrant to purchase 4,000
shares of the Company's Common Stock at $1.00 per share pursuant to a consulting
agreement. The warrant has a four-year term and became exercisable in January
1997. The fair value of the warrant totaled $6 thousand at the date of grant,
which was expensed to selling, general and administrative expense during 1997.
11. COMMITMENTS AND CONTINGENCIES
Lease Commitments The Company leases facilities under operating leases
expiring at various dates through January 2009. Rent expense for such facilities
totaled $244 thousand and $264 thousand for the years ended December 31, 1998
and 1997, respectively. Future minimum rentals under noncancelable operating
leases as of December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 254
2000 283
2001 279
2002 253
2003 215
Thereafter 1,073
-------
$ 2,357
=======
</TABLE>
Customer Dispute Since 1994, the Company 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 the Company'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 the Company. No amounts
related to this receivable were recorded in the accompanying financial
statements as of December 31, 1997. During 1998, the Company amicably resolved
the dispute and received a payment of approximately $350,000 from the CSL.
Legal Proceedings The Company is a party to legal proceedings in the
ordinary course of its business, the most significant of which is described
below.
On January 11, 1999, the Company 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, the Company asserts that Solutioneering has breached the Agreement and
has claimed damages of approximately $9 million. The Company's net balance sheet
carrying value of the Solutioneering leased machines at December 31, 1998 is
approximately $3.3 million. The Company believes the underlying value of the
Company's equipment at Solutioneering exceeds the carrying value on the
Company's books.
On January 23, 1996, the Company's principal competitor, ILI, filed an
action against the Company in the Common Pleas Court of Hamilton County, Ohio.
The action arises from an agreement in principle between ILI and the
36
<PAGE> 37
Company, which was signed on March 23, 1995. The agreement in principle related
to a proposed merger transaction between ILI and the Company. After certain due
diligence and negotiations, in July 1995 the parties decided not to proceed with
the transaction reflected in the agreement in principle. In the action, ILI
contends that, under the agreement in principle, the Company is responsible to
pay ILI's reasonable fees and expenses in connection with the proposed merger
because the transaction did not proceed due to the Company's actions. In
addition, ILI contends that another provision of the agreement in principle
obligates the Company to pay a "break-up fee" in the event the Company entered
into a "binding commitment to engage in a recapitalization, debt issuance or
working capital financing other than in the ordinary course of business within
one year of the public announcement of such abandonment or termination of the
proposed merger transaction." In the action, ILI seeks reimbursement of alleged
fees and expenses of $240 thousand, payment of a break-up fee in the amount of
$989 thousand and reasonable attorney's fees. The Company removed ILI's action
to the United States District Court for the Southern District of Ohio on
February 26, 1996. On March 4, 1996 the Company filed an answer denying all
liability to ILI. The Company also asserted a counterclaim against ILI seeking a
declaratory judgment that the break-up fee has not been triggered under the
terms of the agreement in principle, seeking to recover the Company's own costs
and expenses in connection with the proposed merger agreement and seeking
compensatory damages from ILI for unfair competition and tortuous interference
with business relations. The Company's counterclaim sought compensatory damages
in excess of $500 thousand, plus attorney's fees, costs and reimbursement of the
merger related expenses. In February 1997 the court rendered judgment on behalf
of ILI with regard to certain expenses incurred by it during the merger
negotiations in the amount of approximately $238,000. However, upon motion by
the Company, the court reconsidered this ruling and reversed its ruling that the
Company is legally responsible for fees relating to the merger. Following the
court's ruling, ILI filed another brief requesting the court reconsider its
reversal of the summary judgment on the issue of merger costs. In March 1998,
the court rendered summary judgment on behalf of ILI with regard to the
Company's claims of unfair competition and tortuous interference with business
relations. The Company believes that no amounts are owed to ILI under the
agreement in principle. The Company is contesting the lawsuit vigorously and
intends to appeal the court's ruling with regard to its claims of unfair
competition and tortuous interference with business relations.
Executive Compensation Agreement The Company has an employment agreement
with the Company'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 the Company. As of December 31,
1998, the term expires on December 2001. While the Company 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 the Company's pre-tax income
and 7% thereafter, only $177 thousand and $141 thousand was paid to Mr. Sandvick
in salary in 1998 and 1997, respectively, and no bonuses were paid to Mr.
Sandvick in either year.
The employment agreement with the CEO also provides for severance upon
termination by the Company 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.
12. RELATED PARTY TRANSACTIONS
On January 8, 1996, the Company entered into an agreement with Vanguard
Strategies, Inc. ("VSI"), a private strategic planning company, in which VSI
would assist the Company as its exclusive consultant for at least 120 days in
negotiating debt and equity financing and in developing the Company's strategic
plans. VSI is wholly owned by Frederick Sandvick, the Company's Chief Executive
Officer. In January 1996, VSI assisted the Company in obtaining a $450,000 loan
from U.S. Mortgage Bankers Corp. ("USMBC"). The president of USMBC is related to
Mr. Sandvick. As compensation for these services, VSI was granted warrants,
subject to the Company receiving financing of at least $1.5 million, to purchase
up to 450,000 shares of common stock of the Company at a price of $.60 per share
exercisable for five years.
In July 1996, VSI was granted an additional warrant to purchase 250,000
shares of the Company's common stock at a price of $.69 pursuant to the
extension of the USMBC promissory note under this agreement. The Company
recognized $80 thousand of compensation expense related to the 1996 warrants. In
January 1997, Mr. Sandvick received a warrant to purchase 500,000 shares of the
Company's Common Stock at $.63 per share pursuant to his personal guaranty and
indemnity in connection with a $2,000,000 performance bond. The warrant has a
five-year term and became exercisable in January 1997. The fair value of the
warrant totaled $178 thousand at the date of grant; $59
37
<PAGE> 38
thousand of which was expensed to selling, general and administrative expense in
each of the years ended December 31, 1998 and 1997.
In January 1997, VSI was granted an additional warrant to purchase 250,000
shares of the Company's common stock at a price of $.72 pursuant to the
extension of the USMBC promissory note under this agreement. 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 the Company
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 the Company'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 the Company 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 the Company's common stock at $2.88 per
share, the closing market price of the Company's common stock on such date. The
options 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. The fair value of the options totaled $130
thousand at the date of grant; $22 thousand of which was expensed during the
year ended December 31, 1998.
13. SUBSEQUENT EVENT
The Company reached a full and complete settlement with Interlott
Technologies on March 4, 1999 regarding the civil action filed on January 23,
1996 (See Note 11). No liability was admitted by either party pursuant to the
settlement and the settlement had no material adverse effect on the Company's
results of operations.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
38
<PAGE> 39
PART III.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers and Directors
The names, ages and positions of the directors (1), executive officers and
key employees of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
-------------------- --- -------------------------------------------
<S> <C> <C>
Frederick Sandvick 41 Chief Executive Officer and Chairman of the Board
John H. Olbrich (2) (3) 36 Director
Ed M Bacani (2) (3) 60 Director
Kenneth Hoitt 51 Chief Financial Officer, Secretary and Treasurer
Brian J. Roberts 51 Senior Vice President
</TABLE>
(1) Each director of the Company 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.
Frederick Sandvick has been the Chief Executive Officer and Chairman of the
Board of the Company 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.
Ed M. Bacani has been the owner of Bacani Accountancy, an accounting and
business-consulting firm, since October 1995. From 1989 to 1995, Mr. Bacani was
the managing partner of the San Diego office of J.H. Cohn & Co., a national
accounting firm. Mr. Bacani is a certified public accountant. Mr. Bacani was
appointed to the Board in April 1998.
Kenneth Hoitt has been Chief Financial Officer of the Company since
February 1996. From 1992 to February 1996 Mr. Hoitt was the owner of Planning
Strategies, a privately held consulting firm which provided business planning
services. From 1988 to 1992, Mr. Hoitt was Chief Financial Officer, Treasurer
and Corporate Secretary for International Lottery and Totalizator Systems, Inc.,
a manufacturer of computer - based ticket processing systems.
Brian J. Roberts has been the Company's Senior Vice President since July
1996. From December 1994 to July 1996, Mr. Roberts was the Company'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 the Company's Chief
Executive Officer for the Company's fiscal years ended December 31, 1998, 1997
and 1996. No other executive officer of the Company received total annual salary
and bonuses in excess of $100,000 during those fiscal years.
The Compensation Committee did not have a substantial role in setting
compensation in 1998, 1997 and 1996 because the Chief Executive Officer was
engaged pursuant to an employment agreement, which fixed compensation. The role
of the Compensation Committee and its policies will continue to increase as
employment agreements expire and compensation packages are negotiated with key
executives.
39
<PAGE> 40
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation Awards
------------------------------------ -----------------------------------------------------
Name and Other Restricted Securities Long-Term All
Principal Annual Stock Underlying Incentive Other
Position Year Salary ($) Bonus ($) Compensation Awards ($) Options/ Plan Compensation
($) (1) (2) SAR's (#) Payouts ($) ($) (2) (3)
-------- ---- ---------- --------- ------------ ---------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Frederick Sandvick 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
1996 191,129 0 0 0 1,570,000 (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 $70,006 in 1998 and $160,769 in 1997.
(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).
(4) While the terms of the contract called for an annual salary of $255,000,
plus a performance bonus, only $176,909 was paid to Mr. Sandvick in 1998.
Mr. Sandvick subsequently waived all accrued pay and bonuses accrued as of
December 31, 1998.
EMPLOYMENT AGREEMENTS
Mr. Sandvick serves as Chairman of the Board and Chief Executive Officer of
the Company 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 the Company'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 the Company's pre tax income and 7% of
the Company'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 the Company'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 the Company'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 the Company 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 the Company 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) the Company fails to comply with any
material provision of the employment agreement; (ii) the Company 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 the Company'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 the Company's combined voting power is given to
a new entity not in the Company's control or the effect of such merger is that
any person acquires 20% or more of the combined voting power of the Company. On
January 27, 1997,
40
<PAGE> 41
the Company hired Michael Wright to serve as the Company'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 $84,000.
OPTION GRANTS IN FISCAL 1998
The following table represents certain information regarding stock option
grants to each of the Named Executive Officers during the fiscal year ended
December 31, 1998.
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------------------------------------
Number of Percent of Total
Securities Options Granted To
Underlying Options Employees in Fiscal Exercise of Base
Name Granted Year Price ($/Share) Expiration Date
---- ------- ---- --------------- ---------------
<S> <C> <C> <C> <C>
Frederick Sandvick 240,000 43 $1.41 09/30/03
</TABLE>
OPTION EXERCISES IN FISCAL 1998 AND FISCAL YEAR-END OPTION VALUES
The following table presents certain information regarding stock option
exercises during fiscal 1998.
<TABLE>
<CAPTION>
Shares Number of Securities
Acquired Underlying Unexercised Value of Unexercised
on Value Options/SARs at FY-End In-the-Money
Exercise Realized --------------------------------- ----------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
----- --- --- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Frederick Sandvick 0 0 2,320,000 (1) 290,000 (2) 2,788,420 119,040
</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 and warrants to purchase 950,000 shares of common stock
granted to Vanguard Strategies, Inc. (see "Certain Relationships and
Related Transactions" herein).
(2) 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. in 1998 (see "Certain Relationships and Related
Transactions" herein).
COMPENSATION OF DIRECTORS
During 1998, 1997 and 1996 each outside director was automatically granted
10,000 shares of the Company'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. In addition, each outside director,
other than Mr. John Robinson, received an additional grant of 10,000 shares of
the Company's common stock in lieu of cash compensation for serving as a
director pursuant to the August 28, 1997 amendment to the 1994 Stock Option Plan
for Directors which modifies the formula for granting options to outside
directors by providing for the grant of options in lieu of cash compensation for
serving as director. 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, the Company 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 the Company. 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 the Company 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
the Company'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
41
<PAGE> 42
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, 1998, 459,920 options have been granted under this
Plan.
1994 STOCK OPTION PLAN
On April 21, 1994, the Company 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 the Company. 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 the
Company 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 the Company'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, 1998, 1,165,000 options have been granted under
this plan.
1994 STOCK OPTION PLAN FOR DIRECTORS
On April 21, 1994, the Company 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 the Company. 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, 1998, 80,000 options have been granted under
this plan.
BONUS POLICY
While the Company 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. The Company awarded cash bonuses of approximately $108 thousand and
$14 thousand in 1998 and 1997, respectively. No cash bonuses were awarded in
1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 5, 1999, the shares of the
Company'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:
42
<PAGE> 43
<TABLE>
<CAPTION>
Number of Shares Percentage
Beneficially Of
Name and Address of Beneficial Owner Owned (1) Class
------------------------------------ --------- -----
<S> <C> <C>
Robert and Catherine Burr (2)
5168 Renaissance Drive
San Diego, CA 92122 784,662 5.11%
Frederick Sandvick (3)
108 Ivy Street
San Diego, CA 92101 2,600,000 20.26%
John H. Olbrich (4)
3256 Loma Vista Drive
Jamul, CA 91935 241,667 1.88%
Ed M. Bacani (5)
8076 el Extenso Court
San Diego, CA 92119 12,000 0.09%
All directors and executive officers as a
group (5 persons) 3,791,165 29.54%
</TABLE>
(1) Unless otherwise indicated, all shares are owned beneficially and of
record.
(2) Of the shares of common stock reflected in the table above, 7,984 are
registered in Mr. Burr's name, and 35,556 are held as community property by
Mr. and Mrs. Burr. The table includes 741,122 shares held by The Burr
Family Trust. Mr. and Mrs. Burr, as trustees of the trust, exercise sole
voting and investment control over these 741,122 shares of common stock.
(3) 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. The table also includes options to purchase 240,000 shares of common
stock and options to purchase 50,000 shares of common stock granted to Mr.
Sandvick in 1998 (see "Certain Relationships and Related Transactions"
herein).
(4) Of the shares of common stock reflected in the table above, 141,667 are
registered in Mr. Olbrich's name. The table includes warrants to purchase
50,000 shares of common stock and options to purchase 50,000 shares of
common stock.
(5) The number includes 2,000 shares of common stock owned by Mrs. Bacani to
which Mr. Bacani disclaims any beneficial ownership and options to purchase
10,000 shares of common stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 1995, Mr. Robinson, who was then an outside Director of the
Company, loaned the Company $250,000 at an interest rate of 10% per annum and
secured by a certain lease agreement and related equipment. The remaining
principal and interest on this loan totaling $118,745 was paid to Mr. Robinson
in May 1997. Mr. Robinson received a warrant to purchase 25,000 shares of the
Company's common stock at $2.50 per share as additional consideration for the
loan.
On January 8, 1996, the Company entered into an agreement with Vanguard
Strategies, Inc. ("VSI"), a private strategic planning company, in which VSI
would assist the Company as its exclusive consultant for at least 120 days in
negotiating debt and equity financing and in developing the Company's strategic
plans. Mr. Sandvick is the president and principal stockholder of VSI. In
January 1996 VSI assisted the Company in obtaining a $450,000 loan from U.S.
Mortgage Bankers Corp. ("USMBC"). The president of USMBC is related to Mr.
Sandvick'. As compensation for these services, VSI was granted warrants, subject
to the Company receiving financing of at least $1.5 million, to purchase up to
450,000 shares of common stock of the Company at a price of $0.60 per share
exercisable for five years. In July 1996, VSI was granted
43
<PAGE> 44
an additional warrant to purchase 250,000 shares of the Company'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 the Company'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 the Company 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 the Company'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 the Company
and VSI entered into an agreement whereby the original agreement with VSI
referred to above was terminated. Pursuant to the termination agreement, VSI and
Mr. Burr were each granted options to purchase 50,000 shares of the Company's
common stock at $2.88 per share, the closing market price of the Company'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.
44
<PAGE> 45
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
Exhibit
Numbers Description of Documents
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)
45
<PAGE> 46
10.10 Technology Transfer Agreement, dated as of April 9, 1993, between
the Registrant and certain of its shareholders (confidential
treatment requested as to certain portions) (B)
10.11 Agreement to Purchase and Sale of Assets, dated February 9, 1993,
between Registrant, CVS and Michael C. Brown (confidential
treatment requested as to certain portions) (B)
10.12 Documents relating to purchase of ITR terminals by the Province of
Ontario (B)
10.13 Stock Option Agreement between Robert L. Burr and the Trust, as
amended (C)
10.14 Lease with regard to 9190 Activity Road, San Diego, CA premises (D)
10.15 1993 Stock Option Plan (D)
10.16 1994 Stock Option Plan (E)
10.17 1994 Stock Option Plan for Directors (E)
10.18 Agreement to acquire 50% of LEI Mexico (E)
10.19 Agreement to sell machines to LEI Mexico (E)
10.20 John Robinson Note (F)
10.21 Employment agreement with Frederick Sandvick (G)
10.22 Loan Agreement between Registrant and U.S. Mortgage Bankers
Corporation (I)
10.23 Employment Agreement with Michael Wright (I)
10.24 Loan and Security Agreement between Registrant and Coast Business
Credit (J)
10.25 Termination of Agreement between Registrant and Vanguard
Strategies, Inc. (K)
10.26 Amendment Nos. 1, 2 and 3 to Loan and Security Agreement between
Registrant and Coast Business Credit (L)
10.27 Master Lease Agreement dated March 1, 1995 between the Registrant
and Solutioneering, Inc.
10.27.1 Amendment No. 1 to Master Lease Agreement dated December 24, 1996
10.27.2 Amendment No. 2 to Master Lease Agreement dated December 24, 1997
10.28 Distributor Agreement between the Registrant and Editec, dated
December 30, 1997
10.28.1 Agreement for the French Lottery Contract dated February 24, 1998
between the Registrant and Editec
10.29 Contract between the Registrant and The French Lottery, dated
January 25, 1999
10.30 Service Agreement for the Illinois Lottery between the Registrant
and IGOR, dated July 15, 1994
10.30.1 ITR Sale and Lease Agreement between the Registrant and Illinois
State Lottery, dated July 1, 1994
24.1 Power of attorney (reference is made to Page II-5 of the
Registration Statement as originally filed.) (A)
46
<PAGE> 47
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
B) REPORTS ON FORM 8-K
February 18, 2000 - Form 8K was filed, reporting that the Company was in the
process of restating its financial statements for 1997 and 1998. No exhibits or
financial statements were attached.
47
<PAGE> 48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amendment to annual report to
be signed on its behalf by the undersigned, thereunto duly authorized.
ON-POINT TECHNOLOGY SYSTEMS, INC.
Dated: March 28, 2000 By: /s/Frederick Sandvick
---------------------------------
Frederick Sandvick
Chief Executive Officer and
Chairman of the Board of Directors
Dated: March 28, 2000 By: /s/Samuel W. Stearman
---------------------------------
Samuel W. Stearman
Chief Financial
and Accounting Officer
By: /s/Samuel W. Stearman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and dates indicated.
Dated: March 28, 2000 By: /s/John H. Olbrich
--------------------------------
John H. Olbrich, Director
Dated: March 28, 2000 By/s/Richard Mahon
--------------------------
Richard Mahon, Director
48
<PAGE> 1
Exhibit 10.3.1
State of Missouri
Missouri Lottery Commission
INVITATION FOR BID
IFB NO.: 00117
RETURN BID BY: April 19, 1994 at 3:00 PM
CONTACT NAME: Alan Barnes (314) 751-4050
TITLE: Electronic Lottery Ticket Dispensers
This document constitutes an invitation for sealed bids including prices from
qualified individuals and organizations to furnish items as described herein.
Bids must be mailed to the Missouri Lottery, P.O. Box 1603, Jefferson City,
Missouri 65102, or delivered to its offices at 1823 Southridge Drive, Jefferson
City, Missouri so that they will be received no later than 3:00 p.m. April 19,
1994. Bids received after 3:00 p.m. April 19, 1994, will be marked late and will
not be opened or evaluated.
The enclosed "Sealed Bid for IFB #00117" sticker should be attached to the
outside of the envelope or box containing the offeror's bid.
All questions or requests for clarification of the information contained in this
document or about the bid and evaluation process in general should be submitted
in writing to the contact person listed above by April 1, 1994. Answers to the
questions and IFB amendments (if necessary) will be prepared in writing and
distributed by April 6, 1994.
The offeror hereby agrees to provide the items at the prices quoted, pursuant to
the terms of this document which are incorporated by reference and further
understands that signature by an authorized official of the Missouri Lottery
constitutes acceptance and a contract shall exist between the offeror and the
Missouri Lottery.
PLEASE PRINT THE FOLLOWING INFORMATION EXCEPT FOR THE REQUIRED SIGNATURE:
Offeror's Company Name Lottery Enterprises, Inc.
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Mailing Address 7320 Convoy Court
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City/State/Zip Code San Diego, CA 92111
-----------------------------------------------------------
Telephone (619)569-5266 Fax No. (619) 569-9157
---------------------------------- -------------------------
MO State Sales Tax # Fed. Tax ID #SS# 33-042-30
----------------------- ----------------
MO Corporate Charter # MO Payroll Withholding # 004033
--------------------- ---------
MO State Vendor # (if known)
---------------------------------------------------
Offeror's Authorized Signature /s/ Catherine Winchester Date 16/4/94
------------------------------ ------------
NOTICE OF AWARD
This proposal is accepted by the Missouri Lottery.
/s/ James R. Scroggins 6/17/94
---------------------------------------- ------------------
James R. Scroggins, Executive Director Date
<PAGE> 1
Exhibit 10.3.2
AMENDMENT #1 TO CONTRACT 00117
ELECTRONIC LOTTERY TICKET DISPENSERS
1. Contract 00117 between the Missouri Lottery and Lottery Enterprises Inc
shall hereby be amended as follows:
Page 6, Paragraph 13 shall be added as follows:
13. The contractor shall be responsible for loss of or damages to
vending machines leased by the Missouri Lottery in cases where the
loss of or damages to the vending machines is not a result of
negligence or an intentional act by the Missouri Lottery or the
Missouri Lottery's retailer.
2. All other terms and conditions of the contract shall remain the same.
/s/ Catherine Winchester 13 March 1995
- ------------------------------------- ---------------
Contractor's Authorized Signature Date
/s/ James R. Scroggins 3-17-95
- ------------------------------------- ---------------
Missouri Lottery Authorized Signature Date
<PAGE> 1
Exhibit 10.3.3
AMENDMENT #2 TO CONTRACT 00117
ELECTRONIC LOTTERY TICKET DISPENSERS
1. Contract 00117 between the Missouri Lottery and Lottery Enterprises Inc.
shall be renewed for the period of July 1, 1995 through June 30, 1996
subject for the acceptance of this amendment by the Missouri Lottery.
2. All other terms and conditions of the contract shall remain in effect,
except as modified by any other agreements and/or amendments.
/s/ Catherine Winchester 22 May 95
- ------------------------------------- ---------------
Contractor's Authorized Signature Date
/s/ James R. Scroggins 6-5-95
- ------------------------------------- ---------------
Missouri Lottery Authorized Signature Date
<PAGE> 1
Exhibit 10.3.4
AMENDMENT #3 TO CONTRACT 00117
ELECTRONIC LOTTERY TICKET DISPENSERS
1. Contract 00117 between the Missuri Lottery and Lottery
Enterprises Inc. shall be renewed for the period of July 1,
1996 through June 30, 1997 subject to the acceptance of this
amendment by the Missouri Lottery.
2. all other terms and conditions of the contract shall remain in
effect, except as modified by any other agreements and/or amendments.
/s/ Catherine Winchester 6/96
------------------------------------ --------
Contractor's Authorized Signature Date
/s/ James Scroggins 6/96
------------------------------------ --------
Missouri Lottery Autorized Signature Date
<PAGE> 1
Exhibit 10.3.5
AMENDMENT #4 TO CONTRACT 00117
ELECTRONIC LOTTERY TICKET DISPENSERS
1. Contract 00117 between the Missouri Lottery and On-Point Technology
Systems, Inc shall hereby be amended to establish the following prices for
relocation of instant ticket vending machines:
$ 125 for each relocation of 30 miles or less
$ 150 for each relocation of more than 30 miles
2. All other terms and conditions of the contract shall remain in effect,
except as modified by and other agreements and/or amendments.
/s/ Brian J. Roberts 12/2/96
- ------------------------------------- ---------------
Contractor's Authorized Signature Date
/s/ James R. Scroggins 12/9/96
- ------------------------------------- ---------------
Missouri Lottery Authorized Signature Date
<PAGE> 1
Exhibit 10.3.6
AMENDMENT #5 TO CONTRACT 00117
ELECTRONIC LOTTERY TICKET DISPENSERS
1. Contract 00117 between the Missouri Lottery and On-Point Technology
Systems shall be renewed for the period of July 1, 1997 through June 30,
1998 subject to the acceptance of this amendment by the Missouri Lottery.
2. All other terms and conditions of the contract shall remain in effect,
except as modified by any other agreements and/or amendments.
/s/ Brian J. Roberts 6/9/97
- ------------------------------------- ---------------
Contractor's Authorized Signature Date
SR. VP MARKETING & ADMINISTRATION
- ------------------------------------- ---------------
Missouri Lottery Authorized Signature Date
<PAGE> 1
Exhibit 10.3.7
AMENDMENT #6 TO CONTRACT 00117
ELECTRONIC LOTTERY TICKET DISPENSERS
1. Contract 00117 between the Missouri Lottery and On-Point Technology
Systems shall be renewed for the period of July 1, 1998 through June 30,
1999 subject to the acceptance of this document by the Missouri Lottery.
2. All other terms and conditions of the contract shall remain in effect,
except as modified by any other agreements and/or amendments.
/s/ Brian J. Roberts Sr. Vice President 7/18/98
- ------------------------------------- ---------------
Contractor's Authorized Signature Date
/s/ James R. Scroggins 7/21/98
- ------------------------------------- ---------------
Missouri Lottery Authorized Signature Date
<PAGE> 1
Exhibit 10.4.1
CONTRACT
- --------------------------------------------------------------------------------
CONTRACT NO.: 35520-355
CONTRACT TERM: October 1, 1998 - September 30, 2001
- --------------------------------------------------------------------------------
ISSUED BY: Virginia Lottery, 900 East Main Street, Richmond, Virginia 23219
- --------------------------------------------------------------------------------
CONTRACTOR'S NAME: On-Point Technology Systems, Inc.
8444 Miralani Drive
San Diego, California
FIN# 619-621-5060
- --------------------------------------------------------------------------------
SUPPLIES/SERVICES:
ITVM PURCHASE AND MAINTENANCE
Contract consists of this Page 1 with signatures and Pages 2 through 5 which are
attached hereto.
================================================================================
VALUE OF CONTRACT: $8,973,797 Estimated
ACCOUNTING DATA: Cost Code: 833 Account Code: 3311 - $5,613,845
Cost Code: 833 Account Code: 1274 - $3,359,952
Contract Officer: Patricia MacKenzie, 804-692-7645
Send Invoices to: Virginia Lottery
900 East Main Street
Richmond, Virginia 23219-3519
Attention: Accounts Payable
- --------------------------------------------------------------------------------
In witness whereof, the parties have caused this contract to be executed as set
forth below.
ON-POINT TECHNOLOGY SYSTEMS, INC. VIRGINIA LOTTERY
By /s/ Brian J. Roberts By /s/ Michael J. Bacile
---------------------------------- ---------------------------------
(Signature) (Signature)
Brian J. Roberts, Sr. Vice President Michael J. Bacile, Purchasing Manager
- ------------------------------------ ------------------------------------
Name and Title Name and Title
Date September 28, 1998 Date September 25, 1998
------------------------------- ------------------------------
<PAGE> 2
This Contract entered into as of 1st day of October, 1998 by On-Point Technology
Systems, Inc. ("Contractor"), and the State Lottery Department ("Lottery" or
"Virginia Lottery "), an agency of the Commonwealth of Virginia, both sometimes
hereinafter referred to as the "Parties".
The Lottery and the Contractor agree that the terms and conditions of this
Contract shall be:
A. CONTRACT TERM: The term of this Contract shall be from October 1, 1998 to
September 30, 2001. This Contract may be extended by the Virginia Lottery
for two consecutive one year periods under the terms of the current
Contract. Any such decision to extend shall be made at a reasonable time
(approximately 90 days) prior to the expiration date.
B. SCOPE OF SERVICE: The Contractor shall provide equipment and services as
described in the Request for Proposals dated May 18, 1998, Lottery's
letter dated June 12, 1998, Contractor's Proposal dated June 24, 1998, and
modified by Contractor's letters dated July 21, 1998, August 6, 1998 and
August 11, 1998, and modified as follows:
1. Contractor shall deliver and install #ITR-85005L-8 ITVM units in
lots of 50 machines beginning five (5) weeks after receipt of
Lottery Blanket Order Release form.
2. Contractor shall deliver #ITR-85005L-12 ITVMs in lots of 50 machines
beginning seven (7) weeks after receipt of Lottery Blanket Order
Release form.
3. Contractor agrees to maintain a perpetual inventory of 20 ITVM
units, of which 10 will be held at its Virginia office for immediate
shipment, and 10 will be held at its San Diego facilities. The bin
size of the units shall be specified by the Lottery from time to
time. Contractor understands that units from the perpetual inventory
will be billed to the Lottery upon installation.
4. Contractor will provide the Lottery ITVM sales and performance
reports from On-Point's service database. Reports shall be issued to
the Lottery at least every 60 days.
5. Contractor agrees that ITVMs shipped will be equipped with the
appropriate firmware to allow acceptance of new US $20 currency. In
the event that Mars has not provided to Contractor appropriate
firmware prior to shipment of ITVM units to the Lottery, Contractor
agrees to retrofit units already shipped at no additional charge to
the Lottery.
6 Contractor shall provide the Lottery EPROM chips to enable
acceptance of new US currency for currently installed ITVM units at
actual cost. Field installation of EPROM chips shall be performed
during routine preventative maintenance, and at no additional charge
to the Lottery.
7. Contractor shall provide internal labels identifying each dispenser
in the ITVM to provide ease of identification of the dispenser.
8. Contractor shall install baffles to separate ticket bins in each
ITVM.
9. Contractor shall reposition the ITVM printer for greater ease of
access.
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<PAGE> 3
10. The Contractor agrees to install Medico locks with small key heads
on all ITVM units to be shipped.
11. Contractor agrees to provide field upgrades, as required by the
Lottery, of #ITR-85005L-12 units to #ITR8500SL-15 units. The
additional hardware, software and installation involved in the field
upgrade shall be covered by Contractor's warranty.
12. Contractor agrees to provide field upgrades of ITVMs in order to add
the communication option during routine preventative maintenance.
13. Contractor shall provide an 18 month warranty in accordance with
Contractor's proposal.
14. Contractor will work with the Lottery to customize ITR-85005L-12
and/or 15 game machines to the Lottery's specific requirements to
include, but not be limited to, paint color and placement, window
placement and size, window lighting, button membrane design.
15. Trade In Options: the Contractor agrees to provide the following
trade-in allowance: Existing Model Trade-In Allowance
-------------- ------------------
ITR-7500-8 $500 each
ITR-85005L-8 $1,200 each
ITR-8500-12 $1,500.00
(ex remanufactured program)
16. Contractor agrees to provide preventative maintenance, repairs,
installations, de-installations and swaps for the Lottery's existing
887 ITVM units. Preventive maintenance shall be performed on all
ITVM units on a 60-day cycle.
17. Contractor agrees to provide spare parts, as required by the
Lottery, at the Contractor's Most Favorable Parts Replacement and
Repair Price.
18. Penalties for Missed Preventative Maintenance - Failure on the part
of the Contractor to provide preventative maintenance as scheduled
will result in a penalty of $100 per incident, and the Contractor
shall continue to be assessed $100 per week until preventive
maintenance has been performed.
19. Penalties for Excess Response Time - Failure to repair ITVMs within
the required response time shall result in a penalty. In all cases,
the determination as to whether or not an ITVM is in operational
condition shall be determined by the Lottery. For purposes of this
Contract, a service call begins when the call is dispatched by
Lottery Retailer Support to the Contractor.
20. Contractor shall be assessed a penalty at the rate of $100 per hour
or fraction thereof beyond the appropriate required response time.
In applying the penalties herein described, the Lottery will
consider the circumstances which precipitated the delays.
21. No credits shall accrue to the Contractor for timely performance.
22. All penalty payments will be due to the Lottery within thirty (30)
calendar days of being assessed to the Contractor. At the Lottery's
option, penalty payments may be taken as credits against
Contractor's invoices.
23. Section 2.2 Scope of Requirements, Lot I - ITVM Equipment Purchase,
3
<PAGE> 4
Paragraph G.3 is hereby deleted.
C. COMPENSATION: The Lottery and the Contractor agree to the following
provisions for compensation:
Lot I
ITR8S00SL-8 $4,095 x 310 = $1,269,450
ITR8S00SL-12 $5,895 x 700 = $4,126,500
ITR8S00SL-15* $6,795
Beta Brites $285 x 747 = $212,895
Training: $500 x 10= $5,000
Field Upgrade ITR8500SL-12 to
ITR85005L15 $1,575 each*
Total Purchase Price: $5,613,845
Lot II
Preventative Maintenance/Repair - New Equipment:
@$42 ea/mo.
Yr 1: $42 x 710 x 12 = $357,840
Yr 2: $42 x 860 x 12 = $433,440
Yr 3: $42 x 1010 x 12 = $509,040 $1,249,920
Preventative Maintenance/Repair - Current Equipment
887 x $42 x 12 = $447,048 x 3 years: $1,341,144
Installation: $65 x 444/yr x 3 years: $86,580
De-installation $45 x 180/yr x 3 years: $24,300
Swapping $65 x 120/yr x 3 years: $23,400
Total Moves and Changes: $134,280
Extended Warranty (following 18 mo warranty)- New Equipment
ITR8500SL-8 @$12 each per month
ITR8500SL-12 @$14 each per month
Estimated 3 year total: $187,560
Extended Warranty - Current Equipment:
887 ITVMs @ $14 each per month. Estimated 3 year total: $447,048
Total Maintenance and Repair: $3,359,952
Total Estimated Contract Amount: $8,973,797
*Item not included in price totals.
D. GENERAL PROVISIONS - Nothing in this Contract shall be construed as
authority for either party to make commitments which will bind the other
party beyond the provisions contained herein. Furthermore, the Contractor
shall not assign, sublet, or
4
<PAGE> 5
subcontract any work related to this Contract or any interest it may have
herein without the prior written consent of the Lottery.
E. INTEGRATION OF CONTRACT - This Contract, the Request for Proposals dated
May 18, 1998, Lottery's letter dated June 12, 1998, the Contractor's
Proposal dated June 24, 1998, and the Contractor's letters dated July 21,
1998, August 6, 1998, and August 11, 1998 constitute the entire agreement
between the Lottery and the Contractor. No alteration, amendment or
modification of this Contract shall be effective unless it is reduced to
writing, signed by the parties and attached hereto.
F. PRECENDENCE OF TERMS - Except for Paragraphs B.1.1, B.1.2, B.1.3, B.1.6,
B.1.9, b.1.11, B.1.13, B.1.14, B.1.15 and B.1.16 of the General Terms and
Conditions, which shall apply in all instances, in the event there is a
conflict between the General Terms and Conditions and any Special Terms
and Conditions used in a particular procurement, the Special Terms and
Conditions shall apply.
G. GENERAL PROVISIONS - Nothing in this Contract shall be construed as
authority for either party of make commitments which will bind the other
party beyond the provisions contained herein. Furthermore, the Contractor
shall not assign, sublet, or subcontract any work related to this Contract
or any interest it may have herein without the prior written consent of
the Lottery.
H. DISPUTES - Resolution of disputes arising under this Contract will proceed
in accordance with the Lottery Department's Regulations.
I. APPLICABLE LAW AND COURTS - This Contract shall be governed in all
respects by the laws of the Commonwealth of Virginia, and any litigation
with respect thereto shall be brought in the courts of the Commonwealth of
Virginia. The Contractor shall comply with applicable federal, state and
local laws and regulations.
5
<PAGE> 1
Exhibit 10.4.2
CONTRACT AMENDMENT
- --------------------------------------------------------------------------------
CONTRACT NO.: 33520-350 AMENDMENT NO.: 01
AMENDMENT DATE: November 6,1998
AMENDMENT TERM: November 6, 1998 - September 30, 2001
- --------------------------------------------------------------------------------
ISSUED BY: Virginia Lottery, 900 East Main Street, Richmond, Virginia 23219
- --------------------------------------------------------------------------------
CONTRACTOR'S NAME: On-Point Technology Systems, Inc.
8444 Miralani Drive
San Diego, California 92126
FIN# 33-042-303-7
- --------------------------------------------------------------------------------
SUPPLIES/SERVICES:
The purpose of this amendment is to furnish and install duratran sets in the
existing ITR-8500-8SL machines; to install advertising decals; to furnish 4,000
membrane switch labels; and to change the Contract No. to read: 33520-350, and
Contractor's FIN # to read: 33-042-303-7 from the original Contract.
This amendment consists of this Page 1 with signatures and Page 2 and 3 which is
attached hereto.
- --------------------------------------------------------------------------------
Value of Contract Amendment: $17,070.00
ACCOUNTING DATA: Cost Code: 833 Account Code: 1312 - $12,410.00
Cost Code: 833 Account Code: 1274 - $4,660.00
Contract Officer: Patricia MacKenzie, 804-692-7645
Send Invoices to: Virginia Lottery
900 East Main Street
Richmond, Virginia 23219-3519
Attention: Accounts Payable
ON-POINT TECHNOLOGY SYSTEMS, INC. VIRGINIA LOTTERY
By: /s/ Brian J. Roberts By /s/ Michael J. Bacile
- ----------------------------------- ----------------------------------------
(Signature) (Signature)
Brian J. Roberts Sr. Vice President Michael J. Bacile, Purchasing Manager
- ----------------------------------- ----------------------------------------
Name and Title Name and Title
Date November 20, 1998 Date November 6, 1998
------------------------------ -----------------------------------
<PAGE> 2
This Amendment entered into as of this 6th day of November, 1998 by On-Point
Technology Systems, Inc. ("Contractor"), and the State Lottery Department
("Lottery" or "Virginia Lottery "), an agency of the Commonwealth of Virginia.
The Lottery and the Contractor agree to the following modification to the
original Contract.
1. AMENDMENT TERM: The term of this Amendment shall be November 6, 1998 to
September 30, 2001.
2. SCOPE OF WORK:
A. The Contractor agrees to furnish and install 466 duratrans sets for
the existing Lottery ITR-8500-8SL machines.
B. The Contractor agrees to deinstall the current duratrans and decals
on all 466 existing Lottery machines and install duratrans and
advertising decals (decals to be provided to On-Point by the
Virginia Lottery).
C. The Contractor agrees to furnish 1,000 each membrane switch labels
of $1, $2, $3, and $5 denominations. Total: 4,000 each.
D. The Contractor agrees to provide specifications of membrane switch
labels to the Lottery for future reorders from local vendors.
3. COMPENSATION: The Lottery and the Contractor agree to the following
modification to the provisions for compensation.
Quantity Unit Price Extended Price
-------- ---------- --------------
466 sets (3-piece/set) $25.00/set $11,650.00
4,000 each switch labels $0.19 each $760.00
Installation: Dura-trans and decal sets @$10 each x 466 sets: $4,660.00
Total Amendment Price: $17,070.00
4. INTEGRATION OF CONTRACT - This Amendment, and the Contract dated October
1, 1998, as amended and modified constitute the entire agreement between
the Lottery and the Contractor. It is agreed that the order of precedence
for the purpose of interpretation is this Contract, the Contractor's
proposal, and the Request for Proposal. No alteration, amendment or
modification of this agreement shall be effective unless it is reduced to
writing, signed by the parties and attached hereto.
5. GENERAL PROVISIONS - Nothing in this contract shall be construed as
authority for either party to make commitments which will bind the other
party beyond the provisions contained herein. Furthermore, the Contractor
shall not assign, sublet, or subcontract any work related to this Contract
or any interest it may have herein without the prior written consent of
the Lottery.
2
<PAGE> 3
6. DISPUTES - Resolution of disputes arising under this Contract, as amended,
will proceed in accordance with the Lottery Department's Regulations.
7. RATIFICATION - Except as expressly amended by this agreement, the Contract
shall remain in full force and effect, and the Contractor and the Lottery
shall ratify and affirm the terms and conditions.
3
<PAGE> 1
Exhibit 10.4.3
CONTRACT AMENDMENT #02
================================================================================
CONTRACT NUMBER: ......................................................33520-350
TITLE: ............................................ITVM PURCHASE AND MAINTENANCE
CONTRACT TERM: ..............................October 1,1998 - September 30, 2001
ISSUED BY: .....................................................Virginia Lottery
900 East Main Street
Richmond, Virginia 23219
CONTRACTOR: ...................................On-Point Technology Systems, Inc.
1370 San Marcos Boulevard, Suite 100
San Marcos, California 92069
================================================================================
SERVICES: Rental of #7500 4-bin Instant Ticket Vending Machines for the period
of February 1, 1999 - December 31, 1999.
This Amendment consists of this Page 1 with signatures and Pages 2 - 3 which are
attached hereto.
================================================================================
TOTAL AMOUNT OF CONTRACT, including Amendments 1-2 Estimate: ......$9,027,867.00
TOTAL AMOUNT OF AMENDMENT #02 Estimate: ..............................$54,070.00
INVOICE ADDRESS ................................................Virginia Lottery
Attention: Accounts Payable
900 East Main Street
Richmond, Virginia 23219
CONTRACT OFFICER: ..............................Patricia MacKenzie, 804-692-7645
ACCOUNTING DATA ..............................Cost Code: 833; Account Code: 1534
================================================================================
On-Point Technology Systems, Inc. Virginia Lottery
By: /s/ Brian J. Roberts By: /s/ Patricia MacKenzie
----------------------------- -----------------------------
Signature Signature
Brian J. Roberts Patricia MacKenzie
- --------------------------------- ---------------------------------
Print Name Print Name
Sr. Vice President Senior Contract Officer
- --------------------------------- ---------------------------------
Title Date Title Date
<PAGE> 2
This Amendment entered into this 16th day of March, 1999 by On-Point Technology
Systems, Inc. ("Contractor"), and the State Lottery Department, ("Lottery" or
"Virginia Lottery"), an agency of the Commonwealth of Virginia.
The Lottery and the Contractor agree to the following modification to the
original Contract:
1. AMENDMENT TERM: The term of this Amendment shall be from March 16, 1999 to
December 31, 1999.
2. SCOPE OF SERVICE: The Lottery agrees to pay to the Contractor a monthly
rental for the use of On-Point 4-bin Instant Ticket Vending Machines
(ITVMs) as follows:
3.
A. The Lottery will rent 132 4-bin ITVMs from March 16, 1999 to
December 31, 1999. Rental shall include the following:
1) Repair on an as-needed basis, but not preventive maintenance.
2) A one time installation of 64 4-bin ITVMs currently warehoused
at On-Point free of charge.
3) Removal of all 4-bin ITVMs from Lottery retail locations. This
shall include those 4-bin ITVMs removed because of the
installation of new ITVM equipment, and all 4-bin ITVMs at the
end of the rental term, December 31, 1999, or at any time when
an ITVM cannot be repaired.
B. The Lottery agrees to pay a $65 installation charge for all other
4-bin ITVMs.
C. It is agreed that the quantity of 4-bin ITVMs subject to the rental
charge will remain constant at 132 units from March 16, 1999 to
September 30, 1999. Thereafter, the quantity of ITVMs subject to a
rental charge may decrease and shall represent only those 4-bin
units physically installed at a Lottery retail location.
D. The Lottery agrees to pay, retroactively, rental of 145 4-bin ITVMs
for the period February 1, 1999 through February 28, 1999.
E. The Lottery agrees to pay, retroactively, rental of 132 4-bin ITVMs
from March 1,1999 through March 15, 1999.
2
<PAGE> 3
3. COMPENSATION: The Lottery and the Contractor agree to the following method
of compensation:
Rental of 4-bin ITVM units: $35 x 132 (approx) x 10 months = $46,200.00
Rental of 4-bin ITVM units: $35 x 145 = $5,075.00
Installation Charge: $65 x 43 (approx) = $2,795.00
Total Amount of Amendment, estimated: $54,070.00
4. TERMS AND CONDITIONS: All other terms and conditions previously specified
in the original contract, dated January 22, 1996, as amended and modified
shall remain unchanged.
5. INTEGRATION OF CONTRACT: Amendment #002, Amendment #001 and the Contract
dated October 1, 1998, constitute the entire agreement between the Lottery
and the Contractor. No alteration, amendment, or modification of this
agreement shall be effective unless and until it is reduced to writing,
signed by the parties and attached hereto.
6. DISPUTES: Resolution of disputes arising under this Contract, as amended,
will proceed in accordance with the Lottery Department's Regulations.
7. RATIFICATION: Except as expressly amended by this agreement, the Contract
shall remain in full force and effect, and the Contractor and the Lottery
shall ratify and affirm the terms and conditions.
3
<PAGE> 1
Exhibit 10.5.2
AGREEMENT TO LEASE MACHINES AND PURCHASE PARTS
THIS AGREEMENT is made and entered into on the dates indicated below by
and between ON-POINT TECHNOLOGY SYSTEMS, INC., Nevada corporation with its
principal office at 8444 Miralani Drive, San Diego, California 92126
("On-Point"), and GTECH CORPORATION, a Delaware corporation with its principal
office at 55 Technology Way, West Greenwich, Rhode Island 02817 ("GTECH") in
accordance with the following facts and objectives:
A. On-Point manufactures and sells and/or leases vending machines for
dispensing instant lottery tickets, commonly known as "ITVMs."
B. On-Point previously sold over 3,800 of its ITR(TM)-7500 ITVMs to the
California State Lottery ("CSL") and GTECH currently provides
preventive and remedial maintenance service to the CSL for such
ITVMs.
C. The CSL has issued an Invitation For Bid, IFB #7-001-B ("IFB")
requesting bids to provide future preventive and remedial
maintenance for the CSL-owned ITR(TM)-7500 ITVMs, to install and
relocate ITVMs, and to lease to the CSL and service a minimum of
five hundred (500) new 12-bin ITVMs, with an option to lease up to
an additional one thousand (1,000) 12-bin ITVMs during the term of
the Contract.
D. On-Point and GTECH desire to enter into this Agreement pursuant to
which On-Point agrees to manufacture its ITR(TM) ITVMs for use by
the CSL ("Machines") and GTECH agrees to lease such Machines and
purchase any proprietary spare parts for the CSL-owned ITVMs in
accordance with the terms and provisions of this Agreement.
IT IS AGREED, THEREFORE, as follows:
1. Manufacture and Lease of Machines.
(a) GTECH hereby agrees to lease from On-Point and On-Point agrees to
lease to GTECH the Machines ordered by the CSL pursuant to the
contract resulting from the IFB ("CSL Contract") in the event GTECH
is awarded the CSL Contract, for the monthly Lease Payment per
Machine as shown on Exhibit A, which is attached hereto and
incorporated herein by this reference, or pro rata portion thereof
for part of a month (determined on the basis of a thirty (30) day
month), plus shipping costs and applicable local and state taxes. It
is agreed and acknowledged by the parties that GTECH will sublease
the Machines to the CSL in accordance with the CSL Contract.
(b) The Lease Term for each Machine shall commence on the earlier of the
date of installation or fifteen (15) days after delivery of the
Machine to GTECH and shall end on the third anniversary of the date
of the CSL Contract, unless sooner terminated or extended. The Lease
Term shall be extended for an additional period up to two (2) years
in the event and to the extent the CSL exercises its right to extend
the lease term with GTECH in accordance with the CSL Contract. GTECH
shall provide On-Point with written notice of any such extension.
GTECH, by providing written notice to On-Point, shall have the right
to terminate the lease of any Machine in the event the CSL
terminates its lease of such Machine from GTECH in accordance with
the CSL Contract. In the event GTECH terminates its lease of any
Machine before the end of the initial Lease Term, GTECH shall
thereafter for the balance of the initial Lease Term and any
extension use its reasonable efforts, in coordination with On-Point
and the CSL, to locate a replacement site for installation of such
Machine.
<PAGE> 2
The re-leasing of any Machine shall be on the same terms as agreed
in this Agreement for originally leased Machines.
(c) GTECH shall submit written orders for Machines to On-Point. On-Point
will fill all orders in compliance with the IFB, the CSL Contract
and the requests of the CSL. On-Point agrees that for purposes of
this Agreement, it is not commercially unreasonable to expect
delivery of the first five hundred (500) Machines within six (6)
weeks of receipt of the written order and it is not commercially
unreasonable to expect delivery of the next one thousand (1000)
Machines within eight weeks receipt of the written order. On-Point
shall pay GTECH liquidated damages of $255, as increased
corresponding to any increase by the CSL in the CSL Contract in the
daily rate of liquidated damages, for each day On-Point's delivery
is delayed beyond the requirements of the CSL Contract, subject,
however, to the CSL assessing GTECH liquidated damages for failure
to install such Machine on a timely basis in accordance with the CSL
Contract. On-Point shall not be liable for any delay in or failure
of performance under this Agreement due to a "Force Majeure"
occurrence provided that On-Point shall use reasonably diligent
efforts to avoid or otherwise minimize the impact of an event of
Force Majeure on On-Point's performance. Any such delay in or
failure of performance shall not constitute a default or give rise
to any liability for damages. A Force Majeure occurrence shall be as
defined in Article III, Section A, 7 of the IFB. On-Point will use
its best efforts to advice GTECH in advance of any inability to make
full and timely delivery of any Machines which GTECH has previously
ordered. Should GTECH order any Machine from On-Point when twelve
(12) months or less remains on the initial Lease Term, GTECH shall
thereafter use its reasonable efforts, in coordination with On-Point
and the CSL, to seek an extension of the Lease Term for such Machine
for the full twenty-four (24) month extension period.
(d) On-Point shall send invoices to GTECH on a monthly basis, dated as
of the last day of each month during the Lease Term. GTECH agrees to
send invoices to the CSL on a monthly basis in accordance with the
CSL Contract. Monthly Lease Payments to On-Point shall be due on the
earlier of (i) four (4) business days after GTECH's receipt of
payment from the CSL for such month, or (ii) fifty (50) days after
the invoice date. On all amounts not properly paid by GTECH when due
under this Agreement, interest shall accrue at the rate specified in
Article III, Section D, 2 of the IFB.
(e) Within the earlier of three (3) days of installation or thirty (30)
days of the date of delivery of each Machine, GTECH will provide
On-Point with a Certificate of Acceptance in the form agreed to by
the parties. Such Certificate of Acceptance shall confirm the
delivery and operation of the Machine and shall be sufficient to
deem the Machine accepted by GTECH. In the event of dispute as to
the date of delivery, the Bill of Lading shall be deemed controlling
as to date. Each Machine shall be deemed accepted by GTECH unless
written notice of rejection of the Machines for nonconformance with
this Agreement or for being nonoperational is given to On-Point
prior to the due date of the Certificate of Acceptance. Such notice
of rejection shall specify the reasons therefor and On-Point shall
have a reasonable opportunity to cure any defect.
(f) GTECH shall install Machines at sites designated by the CSL.
On-Point shall provide to GTECH and GTECH shall include within the
response to the IFB parameters and instructions for effective use
and operation of the Machines, including requirements for the proper
operating environment. The response to the IFB shall provide that
any warranty shall not extend to Machines which fail or are damaged
due to operation or use in a manner
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or environment not conforming to any published instructions or specifications
issued by On-Point.
(g) GTECH shall use its reasonable efforts to ensure the CSL will not
use or permit the use of the Machines for any purpose which,
according to the specifications of On-Point, the Machines are not
designed or reasonably suited. GTECH shall use its reasonable
efforts to ensure the CSL will use the Machines in a careful and
proper manner and comply with all of On-Point's instructions,
governmental rules, regulations, requirements and laws, if any, with
regard to the use, operation or maintenance of the Machines.
(h) GTECH, at its expense, shall be solely responsible for the delivery.
installation, maintenance, repair and relocation of the Machines.
Except as provided in Paragraph 6, during the Lease Term, GTECH, at
its expense, shall keep the Machines in good repair, condition and
working order, and shall furnish any and all parts, mechanisms and
devices required to keep the Machines in good mechanical and working
order. Shipping point shall be FOB San Diego County to location(s)
specified by GTECH within California. All costs of shipping and
insurance shall be borne by GTECH and paid within thirty (30) days
of invoice.
(i) Whenever On-Point shall deliver or cause to be delivered to a common
carrier any Machines ordered by GT, whether the particular carrier
shall have been designated in the shipping or routing instructions
of GTECH or not, On-Point shall not be responsible for any delays
or damages in shipment. On-Point shall be responsible for the
proper packaging for shipment of all Machines delivered under this
Agreement.
(j) GTECH shall perform monthly Preventive Maintenance (PM) on the
installed Machines in accordance with the IFB.
(k) GTECH acknowledges and agrees that its obligation to pay Lease
Payments and other sums payable under this Agreement, and the rights
of On-Point, shall be absolute and unconditional in all events, and
shall not be subject to any abatement, reduction, set-off, defense,
counterclaim or recoupment due or alleged to be due by reason of any
past, present at future claims GTECH may have against On-Point.
Notwithstanding the foregoing, GTECH shall have the right to
withhold any monthly payment from On-Point in the event and to the
extent the CSL does not pay GTECH pursuant to its right to off-set
payments owed to GTECH under the liquidated damages clauses of the
CSL Contract if such off-set relates to matters within the control
of On-Point as manufacturer of the Machines and not to matters
within the control of GTECH as the service provider under the CSL
Contract.
(l) The Machines leased under this Agreement shall at all times be and
remain the sole and exclusive property of On-Point. GTECH shall have
no right, title or interest therein or thereto except as expressly
set forth in this Agreement. GTECH agrees to execute and deliver
financing statements and any other such instruments as On-Point may
believe to be reasonably necessary to grant to On-Point or its
assigns a first priority security interest in, and to perfect such
security interests in, this Agreement, any amounts due hereunder, or
the Machines.
(m) On-Point and GTECH intend and agree, and GTECH hereby covenants,
that the Machines shall at all times be and remain personal property
and shall not be so affixed to realty as to become a fixture or
otherwise to lose its identity as the separate property of
On-Point.
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(n) GTECH shall, at its expense, keep the Machines free and clear of all
levies, liens, and encumbrances, except those in favor of On-Point
or its assigns or which arise as a result of actions by On-Point or
its assigns.
(o) GTECH shall pay any sales tax, property tax, and other applicable
taxes resulting from leasing of Machines hereunder, other than
income taxes of On-Point. These taxes shall be shown as separate
line items on Exhibit A.
(p) On-Point shall maintain all insurance required by the IFB and the
CSL Contract on the Machines throughout the Lease Term. GTECH shall
maintain the automobile insurance and all bonds required by the IFB
and the CSL Contract.
(q) Within the period described below after the Termination Date, GTECH
shall return the Machines to On-Point in good repair, condition and
working order, ordinary wear and tear resulting from the proper use
thereof alone excepting, by delivering the Machines at GTECH's cost
and expense to the destination designated by On-Point in San Diego
County. The Termination Date shall mean the date on which the Lease
Term ends for the Machines or, where there is an earlier
termination, the date on which all of GTECH's obligations under this
Agreement relating to the lease of Machines have been fully
discharqed. If the lease is terminating for twenty (20) or fewer
Machines, the Machines shall be returned to On-Point within five (5)
days of the Termination Date. If the lease is terminating for all
Machines, the Machines shall be returned to On-Point within
forty-five (45) days of the Termination Date. If the lease is
terminating for more than twenty (20) Machines and less than all
Machines, the parties will agree, in good faith, on a reasonable
time period for return of the Machines, using the foregoing time
periods as guidelines. If GTECH shall without cause fail to deliver
the Machines to On-Point in accordance with this paragraph, GTECH
shall be treated as a holdover tenant for the Machines for a month
to month renewal Lease Term and shall continue to pay Lease Payments
for the Machines as required by this Agreement. This paragraph shall
not derogate from On-Point's right, to be exercised in its sole
discretion, to obtain return of any Machine within the applicable
periods described above, or to declare a default for any failure of
GTECH to so return the Machine.
2. Purchase of Spare Parts.
(a) GTECH hereby agrees to purchase from On-Point and On-Point agrees
to sell to GTECH proprietary spare parts necessary to maintain the
CSL-owned ITVMs in good working order and repair, for the purchase
prices indicated on Exhibit A (plus shipping costs and applicable
local and state taxes), which prices are a discount from On-Point's
most favored pricing for such spare parts. The prices on Exhibit A
shall only apply in the event GTECH is awarded and executes the CSL
Contract. On-Point may increase the prices for spare parts on or
after the third anniversary of the CSL contract on an annual basis
consistent with an increase in the cost of living. In addition,
On-Point may increase the prices for spare parts upon thirty (30)
days written notice to GTECH and upon a showing that any such
increase is required by and consistent with increases in the cost of
manufacturing the spare parts. As an alternative to GTECH purchasing
proprietary spare parts on an as needed basis, GTECH shall have the
option to elect an extended warranty from On-Point on proprietary
spare parts used on the CSL-owned ITVMs during the term of this
Agreement for the monthly extended warranty fee as provided in
Exhibit A. Such election must be made by GTECH prior to the
execution of the CSL Contract.
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(b) GTECH shall submit written purchase orders for spare parts to
On-Point. On-Point will fill all orders within fourteen (14) days.
On-Point shall not be liable for any delay in or failure of
performance under this Agreement due to a "Force Majeure" occurrence
provided that On-Point shall use reasonably diligent efforts to
avoid or otherwise minimize the effect of an event of Force Majeure
on On-Point's performance. Any such delay in or failure of
performance shall not constitute a default or give rise to any
liability for damages. A Force Majeure occurrence shall be as
defined in Article III, Section A, 7 of the IFB. On-Point will use
its best efforts to advise GTECH in advance of any inability to make
full and timely delivery of any spare parts which GTECH has
previously ordered.
(c) GTECH shall pay On-Point the purchase price for the spare parts,
F.O.B. the place of shipment. The place of shipment shall be
On-Point's facility in San Diego County, California. GTECH shall pay
to On-Point the full purchase price for the spare parts, plus
shipping costs and applicable local and state taxes, within thirty
(30) days of invoice.
(d) Whenever On-Point shall deliver or cause to be delivered to a
common carrier any spare parts ordered by GTECH, whether the
particular carrier shall have been designated in the shipping or
routing instructions or GTECH or not, On-Point shall not be
responsible for any delays or damages in shipment. On-Point shall be
responsible for the proper packaging for shipment of all spare parts
sold and delivered under this Agreement.
3. Bid to CSL.
(a) GTECH shall submit to the CSL, on a timely basis, a complete and
competitive response to the IFB in conformance with the requirements
of the IFB. Such IFB response shall list On-Point as a
subcontractor/supplier for the Machines and proprietary spare parts
and On-Point shall cooperate fully with GTECH in responding to the
IFB.
(b) As long as GTECH does not have the right to terminate this Agreement
pursuant to Paragraphs 12 or 13, GTECH agrees that On-Point shall be
the exclusive manufacturer for supplying GTECH and any subsidiary
with ITVMs for use by the CSL (and proprietary spare parts for such
ITVMs) pursuant to the IFB and GTECH or any subsidiary will not
manufacture ITVM or purchase and/or lease any ITVMs from any person
or entity other than On-Point for use by the CSL in accordance with
the IFB, without the express written consent of On-Point, which
consent may be withheld in its sole discretion.
(c) GTECH agrees that in the event GTECH is not awarded the CSL
Contract, GTECH or any subsidiary shall not provide any preventive
or remedial maintenance services to the CSL for ITVMs at a price
less than the price bid in response to the IFB, either under a
contract directly with the CSL or under subcontract to the person or
entity awarded the CSL Contract, unless GTECH is awarded a contract
under a separate Invitation for Bid issued by the CSL or GTECH's
current contract with the CSL is extended.
4. Representations and Warranties of On-Point. On-Point represents and
Warrants that:
(a) It is a corporation duly organized, validly existing, and in good
standing under the laws of Nevada, is qualified to transact business
and is in good standing in California, and has all necessary
corporate powers to own its properties and to operate its business
as now owned and operated by it.
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(b) It has the right, power. legal capacity, and authority to enter
into, and perform its obligations under this Agreement, and no
approvals or consents of any persons are necessary in connection
with it.
(c) The Machines will meet the specifications of the IFB and will be
year 2000 compliant. To the best of its knowledge, based on the
written opinion of an independent expert engaged by On-Point, the
Machines comply with the Americans with Disabilities Act of 1990
("ADA").
(d) The Machines do not infringe on the intellectual property rights of
any third party.
5. Representations and Warranties of GTECH. GTECH represents and warrants
that:
(a) It is a corporation duly organized, validly existing, and in good
standing under the laws of Delaware, is qualified to transact
business and is in good standing in California, and has all
necessary corporate powers to own its properties and to operate its
business as now owned and operated by it.
(b) It has the right, power, legal capacity, and authority to enter
into, and perform its obligation, under this Agreement, and no
approvals or consents of any persons are necessary in connection
with it.
6. Warranty on Machines. The Machines will be fully guaranteed against
defects in material and workmanship for the Lease Term. Warranty will
include, but not be limited to, all hardware, components, chassis,
electrical and software. Should any defect he noted during the Lease Term,
On-Point must promptly be notified by GTECH or its representative and will
repair or replace the defective component or Machine at no cost to GTECH.
All shipping coats associated with repair and replacement of Machines
under warranty will be the responsibility of On-Point.
The warranty set forth above does not extend to: (a) products not
purchased or leased from On-Point; (b) any Machines which have been
damaged or rendered defective as a result of accident, misuse, or abuse;
(c) by the use of parts not manufactured, authorized or sold by On-Point;
(d) by modification or as a result of service by anyone other than
On-Point, GTECH, or an authorized On-Point Warranty service provider; (e)
Machines not containing original components or original replacement of
components; (f) damage during shipment, unless due to incorrect packaging
by On-Point; or (g) Machines which fail or are damaged after delivery
thereof to GTECH due to shipment, handling, storage. operation, use or
maintenance in a manner or environment not conforming to any published
instructions or specifications issued by on-Point.
With the exception of the warranties set forth above, On-Point MAKES NO
EXPRESS OR IMPLIED WARRANTIES OF ANY KIND, INCLUDING WITHOUT LIMITATION:
THOSE OF MERCHANTABILITY OR FITNESS FOR PURPOSE OR USE, OF CONDITION,
PERFORMANCE, SUITABILITY OR DESIGN, OR CONFORMITY TO ANY LAW, RULE,
REGULATION, AGREEMENT OR SPECIFICATION.
7. Other On-Point Products. GTECH agrees to use its reasonable efforts to
promote the use of On-Paint's other products by the CSL upon such terms
and at such time as mutually agreed by the parties.
8. Confidential Information. GTECH and On-Point have entered into a
Confidentiality Agreement dated August 19, 1998, a copy of which is
attached hereto as Exhibit B and incorporated herein by this reference.
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9. GTECH's Indemnity. GTECH shall indemnify, defend, and hold On-Point
harmless against and in respect of any and all claims, demands, losses,
costs, expenses, obligations, liabilities, damages, recoveries, and
deficiencies, including interest, penalties, and reasonable attorneys'
fees, incurred or suffered by On-Point that arise or result from or relate
to any breach of, or failure by GTECH to perform, any of its
representations, warranties, commitments, covenants, or agreements in this
Agreement ("Indemnity Obligation").
10. On-Point's Indemnity. On-Point shall indemnify, defend, and hold GTECH
harmless against and in respect of any and all claims, demands, losses,
costs, expenses, obligations, liabilities, damages, recoveries, and
deficiencies, including interest, penalties, and reasonable attorneys'
fees, incurred or suffered by GTECH that arise or result from or relate to
any breach of, or failure by On-Point to perform any of its
representations, warranties, commitments, covenants, or agreements in this
Agreement ("Indemnity Obligation"). In addition, in the event On-Point
breaches its representation in Paragraph 4(d) and, as a result, GTECH
and/or the CSL is enjoined from using the Machines and such injunction is
not promptly removed by On-Point, On-Point shall either obtain a license
to allow continued use of the Machines or will modify the Machines, at its
cost and expense, to eliminate any infringement with similar
functionality.
11. Indemnification Procedure.
(a) Promptly, upon receipt by the party to be indemnified ("Indemnified
Party") and held harmless from and against an Indemnity Obligation,
of a demand, claim, action, assessment or proceeding made or brought
by a third party, including a governmental agency ("Third Party
Claim") relating to an Indemnity Obligation, the Indemnified Party
shall notify the party obligated to indemnify it (the "Indemnitor")
in writing of its existence, setting forth the relevant facts and
circumstances, specifying the basis upon which the Indemnified
Party's claim for indemnification is asserted and tender the defense
of the Third Party Claim to the Indemnitor.
If Indemnitor accepts responsibility for the defense of the Third
Party Claim, then the Indemnitor shall have the right to contest,
defend and litigate the Third Party claim and shell have the right,
in its discretion exercised in good faith and upon the advice of
counsel, to settle any such matter, either before or after the
initiation of litigation, at such time and upon such terms as it
deems fair and reasonable, provided that at least ten (10) days
prior to any such settlement, it shall give written notice of its
intention to settle to the Indemnified Party and provided further
that such settlement otherwise complies with the provisions of
paragraph 11(b). The Indemnified Party shall have the right to be
represented by counsel at its own expense in any defense conducted
by Indemnitor.
(b) Notwithstanding the foregoing, in connection with any settlement
negotiated by Indemnitor, no Indemnified Party shall be required to:
(i) Enter into any settlement (A) that does not include the
delivery by the claimant or plaintiff to the Indemnified Party
of a release from all liability in respect of such claim or
litigation, (B) if the Indemnified Party shall, in writing to
Indemnitor within the ten (10) day period prior to such
proposed settlement, disapprove of such settlement proposal
and desire to have Indemnitor tender the defense of such
matter back to the Indemnified Party, or (C)
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that requires an Indemnified Party to take any affirmative
actions as a condition of such settlement, or
(ii) Consent to the entry of any judgment that doom not include a
full dismissal of the litigation or proceeding against the
Indemnified Party with prejudice.
It is expressly provided, however, that should the Indemnified Party
disapprove of a settlement proposal pursuant to paragraph 11(b)
(1)(B) above, the Indemnitor's liability to the Indemnified Party
shall, upon final resolution of such Third Party Claim, be limited
to the amount at which the Indemnitor proposed to settle such Third
Party Claim prior to the exercise by the Indemnified Party of its
right as set forth above.
(c) If an Indemnified Party shall be entitled to indemnification against
a Third Party Claim, and if Indemnitor shall fail to accept the
defense of a Third Party Claim which has been tendered in accordance
with this Paragraph, the Indemnified Party shall have the right,
without prejudice to its right of indemnification hereunder, in its
discretion exercised in good faith and upon the advice of counsel,
to contest, defend and litigate such Third Party Claim, and may
settle such Third Party Claim, either before or after the initiation
of litigation, at such time and upon such terms as the Indemnified
Party deems fair and reasonable, provided that at least ten (10)
days prior to any such settlement, written notice of its intention
to settle is given to Indemnitor, which notice is for information
purposes only and is not intended to provide any additional rights
to the Indemnitor. If, pursuant to this paragraph, the Indemnified
Party so defends or settles a Third Party Claim for which it is
entitled to indemnification hereunder, as hereinabove provided, the
Indemnified Party shall be reimbursed by Indemnitor for the
reasonable attorneys' fees and other expenses. No failure by
Indemnitor to acknowledge in writing its indemnification obligations
under this Agreement shall relieve it of such obligations to the
extent they exist.
12. Right of Either Party to Terminate. Either party, at its option, may
terminate this Agreement immediately upon written notice to the other
party in the event:
(a) A receiver or trustee is appointed of all or a substantial portion
of the assets of the other party.
(b) The other party becomes insolvent or unable to pay debts as they
mature, makes a general assignment for the benefit of creditors or
voluntarily files under any bankruptcy or similar act or takes
advantage of any debtor relief proceedings under any present or
future federal or state law.
(c) Any involuntary petition in bankruptcy is filed against the other
party and not dismissed within ninety (90) days.
Termination in this manner does not constitute a waiver of any damages, or
any other remedies that a party may have in addition to the right to
terminate.
13. Termination by Either Party For Cause. If either party defaults in the
performance of its obligations under this Agreement or breaches any or its
representations, warranties or covenants hereunder, the non-defaulting
party may give written notice of default to the defaulting party,
specifying the nature of the default. If such default is not cured within
thirty (30) days after the date of such notice, the non-defaulting party
may terminate this Agreement, effective immediately, by giving written
notice of termination to
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the defaulting party. Termination in this manner does not constitute a
waiver of any damages, or any other remedies the non-defaulting party may
have in addition to the right to terminate.
14. License of Technology. Within sixty (60) days of the date of this
Agreement and in the event GTECH is awarded the CSL Contract, the parties
shall negotiate in good faith an arrangement (excluding an escrow
arrangement) pursuant to which GTECH shall become a licenser of On-Point
proprietary information and technology necessary to fulfill the CSL
Contract if On-Point is unable to fulfill its obligations under this
Agreement as a result of the occurrence of one of the events described in
Paragraph 12.
15. Notices. All notices and other communications which are required or which
may be given under the provisions of this Agreement shall be in writing
and may be delivered to a party by personal service at the indicated
address, or by facsimile, or may be mailed by registered or certified
mail, postage prepaid, to the parties as follows;
In the case of On-Point, to:
Frederick Sandvick, Chairman and CEO
On-Point Technology Systems, Inc.
8444 Miralani Drive
San Diego, CA 92126
Fax 613-621-5060
In the case of GTECH, to:
Dan McKinzey, Account General Manager
GTECH Corporation
3810 Rosin Court, Suite 100
Sacramento, CA 95834
Fax: 916-924-0716
All notices and communications shall be deemed to have been received by
the party to whom it was addressed on the date of personal delivery of
facsimile or on the third business day following the date of mailing.
Either party may change its address at any time by written notice to the
other party at the addresses set forth above.
16. Completeness of Instrument. This Agreement, including all Exhibits,
contains all of the agreements, understandings, representations,
conditions, warranties, or covenants made between the parties with respect
to the subject matter hereof. Unless set forth herein, neither party shall
be liable for any representations made, and all modifications and
amendments hereto must be in writing.
17. Assignment. GTECH shall not transfer or assign this Agreement or any part
thereof without the written consent of On-Point, which consent shall not
be unreasonably withheld. On-Point shall not transfer or assign this
Agreement or any part thereof without the written consent of GTECH, which
consent shall not be unreasonably withheld.
18. No Implied Waivers. The failure of either party at any time to require
performance by the other party of any provision hereof shall not affect in
any way the full right to require such performance at any time thereafter.
Nor shall the waiver by either party of a breach of any provision hereof
be taken or held to be a waiver of the provision itself.
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19. Controlling Law. The validity, interpretation and performance of this
Agreement shall be controlled by and construed under the laws of the State
of California. To the extent legal questions arise concerning the sale or
lease of goods by On-Point to GTECH, the Uniform Commercial Code, as
adopted by the State of California, shall be the controlling law.
20. Legal Fees. In the event of the bringing of any action or suit by any
party hereto against the other by reason of any breach of any of the
covenants, conditions, agreements, or provisions on the part of the other
party arising out of this Agreement, the prevailing party shall be
entitled to have and recover from the other party all costs and expenses
of the action or suit, including reasonable attorneys' fees.
21. Binding on Successors. This Agreement shall bind and benefit the parties
hereto, their successors, affiliates, agents and assigns.
22. Severability. If any term, provision, covenant or condition of this
Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remaining provisions shall remain in full force and
effect.
23. Counterparts; Facsimile Signature. This Agreement may be executed in two
counterparts, each of which shall be deemed an original and together shall
constitute one and the same Agreement. This Agreement shall become binding
upon delivery of a facsimile or original signature by both parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
dates indicated below.
ON-POINT TECHNOLOGY SYSTEMS, INC.
Date: Sept. 16, 1998 By: /s/ Frederick Sandvick
-------- ------------------------------
Frederick Sandvick,
Chairman and CEO
GTECH CORPORATION
Date: Sept. 15, 1998 By: /s/ Steven P. Nowick
-------- ------------------------------
Print Name: Steven P. Nowick
-----------------------
Title: Sr. VP and COO
----------------------------
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Exhibit 10.27
MASTER LEASE AGREEMENT # (5/95)
This Master Lease Agreement dated and effective as of March 1, 1995 between
Lottery Enterprises, Inc., a Nevada corporation, with its principal office at
9190 Activity Road, San Diego, CA 92111 (the "Lessors") and Solutioneering,
Inc., 555 Republic Drive, Suite 101, PIano, TX 75074 (the "Lessee").
WHEREAS, Lessor agrees to lease to Lessee and Lessee agrees to hire from Lessor,
up to 1,000 units of the Equipment described in each Schedule from time to time
entered into pursuant to this Master Lease Agreement in accordance with the
terms of this Master Lease Agreement.
The parties, therefore, agree as follows:
TERMS AND CONDITIONS 1. Definitions
(a) Commencement Date shall mean the date on which Lessee's obligation to
pay Lease Payments for leased Equipment covered by a Schedule begins and for all
Equipment shall be the date upon which the Equipment is delivered to Lessee or
its designee.
(b) Equipment shall mean all of the personal property, including hardware
and any software or licensed products, which is listed on any Schedule. Wherever
possible, items of Equipment shall be identified on the Schedule by serial
number, and, if no serial number is available, the Equipment shall be identified
by the best available means, and Lessee shall take all steps necessary to
prevent confusion of the Equipment covered by the Schedule with other equipment.
(c) Equipment Acceptance shall mean the date of delivery to Lessee or its
designees of conforming Equipment as indicated on the Certificate of Acceptance
or as provided in section 5(b).
(d) Initial Lease Term for each Schedule shall mean the period initially
agreed between the parties to constitute the lease period and shall be three (3)
years unless otherwise agreed by Lessor and Lessee.
(e) Lease shall mean this Master Lease Agreement and the Schedule(s)
between the parties. The Master Lease Agreement and each Schedule are intended
to function in combination as a separate agreement for the lease of personal
property.
(f) Lease Term for each Schedule shall mean the period from the
Commencement Date for the first item of Equipment on such schedule to the end of
the Schedule and it shall include the Initial Lease Term and any Renewal Lease
Term(s).
(g) Manufacturer shall mean the entity which fabricates the Equipment or
which, using its facilities, combines for sale or lease Equipment which is
fabricated in whole or in part from equipment obtained from other sources.
<PAGE> 2
(h) Master Lease Agreement shall mean this document, consisting of
Sections 1 to 19 the purpose of which is to provide the terms and conditions for
all leases between the parties after the effective date referenced above.
(i) Master Lease Agreement Acceptance shall mean the review at Lessor's
principal office of the appropriateness of the Master Lease Agreement between
the parties and determination by Lessor to accept the Master Lease Agreement by
signature of an authorized agent of Lessor.
(j) Renewal Lease Term shall mean any periods of lease subsequent to the
Initial Lease Term which come about either by agreement of the parties or by
operation of law.
(k) Lease Payment shall mean the payment by Lessee to Lessor of money for
the lease of the Equipment covered by the Schedule. Lessee's obligation to pay
shall begin on the Commencement Date and terminate at the end of the Lease Term.
Where the Schedule contains more than one item of Equipment, Lessee's obligation
to pay on each item of Equipment shall begin on the Commencement Date for such
Equipment.
(l) Schedule shall mean the document, substantially as attached hereto as
Exhibit A, executed by the parties, and specifying the Equipment, Lease
Payments, Lessor's costs and other information. Each Schedule shall be executed
by the parties and shall incorporate the terms and conditions of this Master
Lease Agreement and any riders which the parties may agree to in writing and
which are approved in accordance with the Master Lease Agreement. The purpose of
the Schedule is to permit the parties, from time to time, to specify the
Equipment Lease Payments, and other terms and conditions specific to a single
transaction which is otherwise subject to the basic terms and conditions agreed
to by the parties in this Master Lease Agreement. Conflicts between the
provisions of this Master Lease Agreement and any Schedule shall be governed by
the provisions of the Schedule. The term "Schedule' may be used hereafter in
singular or plural.
(m) Schedule Acceptance shall mean the review at Lessor's principal office
of the appropriateness of the particular Schedule between the parties and
determination by the Lessor to accept the Schedule by signature of its
authorized representative.
(n) Termination Date shall mean the date on which the Lease Term ends or,
where there is an earlier termination, the date on which all of Lessee's
obligations under the Schedule and Master Lease Agreement have been fully
discharged. The Termination Date may not precede the date upon which all
Equipment has been returned to Lessor in the condition required by the Lease.
(o) Down Payment shall mean the sum of $500 per DCR-2000, $250 per DCR
1200, per unit received by Lessor before shipment of the Equipment will be
authorized.
(p) Certificate of Acceptance shall mean that document evidencing proof of
delivery to Lessee.
2. Lease
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<PAGE> 3
Lessor agrees to lease to Lessee, and Lessee agrees to hire from Lessor,
subject to the terms and conditions of this Master Lease Agreement, up to 1,000
units of the Equipment described in each Schedule from time to time entered into
between the parties. Each Schedule hereunder shall constitute a separately
assignable agreement between the parties, shall incorporate in full the terms
and conditions of this Master Lease Agreement and shall not be binding against
either party until Schedule Acceptance pursuant to this Master Lease Agreement.
The Equipment leased under each Schedule shall at all times be and remain the
sole and exclusive property of Lessor. Lessee shall have no right, title or
interest therein or thereto except as expressly set forth in the Schedule and
any riders thereto.
3. Term of Master Lease Agreement and Schedules
(a) The term of this Master Lease Agreement shall commence on the
Commencement Date set forth above and shall continue until the Termination Date.
The Commencement Date for any item of Equipment leased under this Master Lease
Agreement shall be before June 15, 1996.
(b) The Initial Lease Term for each Schedule shall be as set forth thereon
and shall be three (3) years unless otherwise agreed by Lessor and Lessee.
(c) Lessee shall have the option to purchase the terminals at end of the
initial Lease Term priced at DCR 2000: $300.00; DCR 1200: $150.00. Lessee's
option to purchase shall be exercised by providing written notice and payment of
the option price in full to Lessor at least thirty (30) days prior to the end of
the Initial Lease Term or Renewal Lease Term then in effect. The terms of this
Agreement will be null and void regarding any terminal purchased under this
option. Each terminal purchased shall have its serial number removed from the
list of terminals subject to this Agreement.
4. Lease payments; Non-Abatement; Late Payments.
(a) Lessee acknowledges and agrees that its obligation to pay Lease
Payments and other sums payable under each Schedule, and the rights of Lessor,
shall be absolute and unconditional in all events, and shall not be subject to
any abatement, reduction set-off, defense, counterclaim or recoupment due or
alleged to be due by reason of any past, present or future claims Lessee may
have against Lessor, the Manufacturer, or any person for any reason whatsoever.
(b) On all amounts not properly paid by Lessee when due under each
Schedule, interest shall accrue at the rate of one percent (1%) per month or
portion thereof (or the maximum rate allowable by law, if less) from the due
dates thereof until received by Lessor, and shall be payable to Lessor without
demand.
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<PAGE> 4
5. Selection; Inspection; Acceptance
Lessee represents, acknowledges and agrees that:
(a) The Equipment is of a size, design, capacity and manufacture selected
by Lessee.
(b) Within five (5) days of delivery of each item of Equipment, Lessee
will provide Lessor with a Certificate of Acceptance in the form of Exhibit B
hereto for such Equipment. Such Certificate of Acceptance shall confirm the
delivery and operation of the Equipment and shall be sufficient to deem the
Equipment accepted by Lessee as of the delivery date. In the event of dispute as
to the date of delivery, the Bill of Lading shall be deemed controlling as to
date. The Equipment shall be deemed accepted by Lessee as of the delivery date
unless written notice of rejection of the Equipment for non conformance with
this Lease or for being non operational is given to Lessor within five (5) days
of the delivery date. Such notice of rejection shall specify the reasons
therefor and Lessor shall have a reasonable opportunity to cure any defect.
6. Warranties: Quiet Enjoyment and Disclaimer
(a) Lessor warrants that, as long as Lessee is not in default of any
Schedule, Lessor will not interfere with Lessee's quiet use and enjoyment of the
Equipment thereunder.
(b) Lessor shall save and hold harmless Lessee from liability of any
nature or kind arising out of a claim or suit for or on account of the use of
any copyright, trademark or patent infringement on any item of Equipment
furnished to Lessee. Lessor agrees to assume the defense of any and all such
suits and pay the costs and expenses incidental thereto. Lessee may, at its
option, provide additional legal counsel at its own expense.
(c) With the exception of the warranties set forth above, LESSOR MAKES NO
EXPRESS OR IMPLIED WARRANTIES OF ANY KIND, INCLUDING WITHOUT LIMITATION: THOSE
OF MERCHANTABILITY OR FITNESS FOR PURPOSE OR USE, OF CONDITION, PERFORMANCE,
SUITABILITY OR DESIGN, OR CONFORMITY TO ANY LAW, RULE, REGULATION, AGREEMENT OR
SPECIFICATION.
Equipment carries a manufacturers warranty of one year from date of delivery on
electronic and mechanical parts.
7. Installation; Use; Repair and Maintenance
(a) Lessee shall provide a place of installation, operating environment
and facilities which conform to the requirements of the Manufacturer. Lessee
will be responsible for all phone services to support the pre-paid calling
cards, including but not limited to, line installation and all monthly charges
and pertinent local, state and federal taxes, if any.
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<PAGE> 5
(b) Subject to the terms of the Lease, Lessee shall be entitled to
unlimited use of the Equipment. Lessee shall not use or permit the use of the
Equipment for any purpose which, according to the specifications of the
Manufacturer, the Equipment is not designed .or reasonably suited. Lessee shall
use the Equipment in a careful and proper manner and shall comply with all of
the Manufacturer's instructions, governmental rules, regulations, requirements
and laws, if any, with regard to the use, operation or maintenance of the
Equipment.
(c) Lessee shall, at its expense, be solely responsible for the
installation, maintenance and repair of the Equipment. During the Lease Term,
Lessee shall, at its expense, keep the Equipment in good repair, condition and
working order, in accordance with specifications of the Manufacturer and shall
furnish any and all parts, mechanisms and devices required to keep the Equipment
in good mechanical and working order. Shipping point shall be FOB San Diego to
specified location or locations, as specified by Lessee, within the continental
United States. All costs of shipping and insurance shall be borne by Lessee.
(d) Lessee and/or its designees shall install Equipment at designated
retail sites according to the schedule of installations agreed to by the Lessor
and Lessee.
(e) Lessor shall provide one week of training to Lessee's and/or its
designees' technical personnel at Lessor's training facility in San Diego, CA
for $300.00 per person, food and lodging not included.
(f) Lessee or its designee shall collect money from the Equipment on a
regular basis (based upon individual retailer sales volume) to ensure bill
collectors and coin acceptors, if applicable, do not reach maximum storage
capacity thereby causing the Equipment to be unavailable for sales.
8. Ownership; Inspection, Relocation, Personal Property
(a) The Equipment shall at all times be and remain the sole and exclusive
property of Lessor. Lessee agrees to execute and deliver financing statements
and any other such instruments as Lessor may believe to be reasonably necessary
to grant to Lessor or its assigns a first priority security interest in, and to
perfect such security interests in, any Lease, any amounts due thereunder, or
the Equipment.
(b) Lessor, its assigns or their agents shall be permitted free access at
reasonable times to the Equipment, for the purpose of inspection or any other
purpose contemplated by the Lease.
(c) Lessor and Lessee intend and agree, and Lessee hereby covenants, that
the Equipment shall at all times be and remain personal property and shall not
be so affixed to realty as to become a fixture or otherwise to lose its identity
as the separate property of Lessor.
9. Liens; Taxes
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<PAGE> 6
(a) Lessee shall at its expense keep the Equipment free and clear of all
levies, liens, and encumbrances, except those in favor of Lessor or its assigns
or which arise as a result of actions by Lessor or its assigns;
(b) Lessee shall pay any sales tax, property tax, and other applicable
taxes resulting from leasing of Equipment hereunder, other than income taxes of
Lessor.
10. Risk of Loss
(a) With regard to any item of Equipment, commencing upon delivery and
continuing throughout the Lease Term, Lessee hereby assumes, and shall bear, the
entire risk of loss with respect to any damage, destruction, loss, theft, or
governmental taking, whether partial or complete. No loss or damage to the
Equipment or any part thereof shall impair any obligation of Lessee under this
Master Lease Agreement which shall continue in full force and effect.
(b) If any item of Equipment is damaged, Lessee shall promptly notify
Lessor and Lessee shall at its expense, within 10 days, or as soon as
practicable of such damage, cause to be made such repairs as are necessary to
return such item to its previous condition.
11. Insurance.
Lessee at its expense shall obtain, prior to delivery of the Equipment,
and maintain until termination of the Lease and return of the Equipment (i) fire
and extended coverage insurance against loss, theft, damage, or destruction of
the Equipment, in an amount not less than the replacement value of the Equipment
as determined by the Manufacturer from time to time. Insurance provided pursuant
to (i) above shall name Lessor as an insured and loss payee and its assignee(s)
as an additional insured and loss payee. Each insurance policy shall comply with
prudent industry practices and shall contain a clause requiring the insurer to
give the insureds and additional insureds at least one months prior written
notice of the cancellation or any alteration in the terms of such policy and
shall state that all claims thereunder shall be payable to such parties
irrespective of any breach of warranty or other act or omission of Lessor. No
insurance shall be subject to any co-insurance clause. Each insurance policy
shall be with an insurance carrier approved by Lessor and licensed to provide
all such insurance in the state where the Equipment is located.. Lessee shall
provide a Certificate(s) of Insurance as proof of compliance with this
requirement and Lessor's obligation to deliver Equipment to Lessee shall be
subject to Lessor's receipt of such Certificate of Insurance.
12. Surrender of Equipment.
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<PAGE> 7
(a) On the Termination Date, Lessee shall return the Equipment to Lessor
in good repair, condition and working order, ordinary wear and tear resulting
from the proper use thereof alone excepting, by delivering such Equipment at
Lessee's cost and expense to Lessors facilities in San Diego, CA, or equivalent
distance from equipment location unless the purchase option is exercised
pursuant to 3(c)..
13. Representations and Warranties of Lessee.
Lessee represents and warrants for the benefit of Lessor and its assigns,
and will provide supporting documents to the effect that, as of the time of
execution of the Master Lease and each Schedule:
(a) Lessee is an entity as described on page 1 hereof and is organized and
existing under and by virtue of the authorizing statue or constitutional
provisions of its state of incorporation.
(b) The Master Lease Agreement and each Schedule have been duly
authorized, executed and delivered by Lessee and constitute a valid, legal and
binding agreement of Lessee, enforceable in accordance with its terms, except as
enforceability may be limited by state or federal statutes affecting the rights
of creditors generally or application of equitable principles if equitable
remedies are sought;
(c) No approval, consent or withholding of objection is required from any
federal or other governmental authority or instrumentality with respect to the
entering into or performance by Lessee of this Master Lease Agreement or any
Schedule;
(d) The entering into and performance of the Master Lease Agreement or any
Schedule will not violate any judgment, order, law or regulation applicable to
Lessee, or result in any breach of, or constitute a default under, or result in
the creation of, any lien, charge, security interest or other encumbrance upon
any assets of Lessee or on the Equipment or pursuant to any instrument to which
Lessee is a party or by which it or its assets may be bound
(e) To the best of Lessee's knowledge and belief, there are no suits or
proceedings pending or threatened in court or before any regulatory commission,
arbitral tribunal, board or other administrative or governmental body against or
affecting Lessee, which if determined adversely to Lessee will have a material
adverse effect on the ability of Lessee to fulfill its obligations under the
Master Lease Agreement or any Schedule.
(f) The Equipment will be free and clear of all liens, encumbrances and
security interests, except those in favor of Lessor or its assigns.
14. Default and Remedies.
(a) The occurrence of any of the following events shall constitute an
event of default ("Event of Default") under any Schedule: (i) The nonpayment by
Lessee of Lease Payments or any other sum payable hereunder by the date on which
it is
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<PAGE> 8
due; (ii) The failure by Lessee to perform or observe any other term, covenant
or condition of this Lease and/or the Schedule, which is not cured within ten
(10) days after written notice thereof from Lessor; (iii) Any affirmative act of
insolvency by Lessee, or the filing by Lessee of any petition or action under
any bankruptcy, reorganization, insolvency or moratorium law, or any other law
or laws for the relief of, or relating to, debtors; (iv) The filing of any
involuntary petition under any bankruptcy statute against Lessee which is not
dismissed within sixty (60) days thereafter, or the appointment of any receiver
or trustee to take possession of the properties of Lessee, unless such petition
or appointment is set aside, withdrawn or ceases to be in effect within sixty
(60) days from the date of said filing or appointment; (v) The subjection of a
substantial part of Lessee's property or any part of the Equipment to any levy,
seizure, assignment or sale for or by any creditor or governmental agency; (vi)
A change in circumstances, whether through Lessee's fault or otherwise, which
renders untrue in any material respect any representation or warranty made by
Lessee in the Schedule or in any document furnished by Lessee to Lessor in
connection with the Schedule or with the acquisition or use of the Equipment, or
if any covenant, warranty or representation of Lessee shall be untrue when given
or made.
(b) Upon the occurrence of an Event of Default by Lessee and at any time
thereafter Lessor may, in its sole discretion, do any one or more of the
following: (i) Proceed by appropriate court action to enforce the performance of
the terms of the Schedule and/or recover damages; (ii) Upon notice to Lessee,
take possession of the Equipment wherever located, or cause Lessee, and Lessee
hereby agrees, to return such Equipment to Lessor in accordance with the
requirements of Section 12 hereof; (iii) By notice to Lessee, declare
immediately due and payable and recover from Lessee, as liquidated damages and
not as a penalty, (a) all Lease payments and other amounts due and becoming due,
due and payable; and (b) costs, fees, expenses and (c) interest on (a) from the
date of default at 1% per month or portion thereof (or the highest rate
allowable by law, if less) and, on (b) from the date Lessor incurs such fees,
costs or expenses.
(c) In the event of a dispute between the parties to the Agreement, the
prevailing parties attorney's fees and any court costs shall be paid by the
losing party.
15. Effect of Waiver; Substitute Performance by Lessor.
(a) No delay or omission to exercise any right or remedy accruing to
Lessor upon any breach or default of Lessee shall impair any such right or
remedy or be construed to be a waiver of any such breach or default, nor shall
any waiver of any single breach or default be construed to waive or impair
Lessor's rights and remedies with respect to any breach or default thereto for
or thereafter occurring. Any waiver, permit, consent or approval on the part of
Lessor of any breach or default under this Lease, or of any provision or
condition hereof, must be in writing and shall be effective only to the extent
such writing specifically sets forth.
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<PAGE> 9
All remedies, either under this Lease, by law or otherwise afforded to Lessor,
shall be cumulative and not alternative.
(b) Lessee understands and agrees that each Schedule is a net lease, and
as explicitly provided therein, Lessee shall be responsible for all costs and
expenses as set out in the Schedule. Should Lessee fail to make any payment or
do any act as herein provided, Lessor shall have the right, but not the
obligation, and without releasing Lessee from any obligation hereunder to make
or do the same, to pay, purchase, contest or compromise any encumbrance, charge
or lien which in the judgment of Lessor appears to affect the Equipment and in
exercising any such rights, incur any liability and expend whatever amounts
Lessor may in its absolute discretion deem necessary therefor.
16. Assignment by Lessor; Assignment or Sublease by Lessee.
(a) Lessee understands and agrees that Lessor may, with Lessee's prior
written consent which shall not be unreasonably withheld, (i) assign all or a
portion of Lessor's right, title and interest in this Master Lease Agreement or
any Schedule, (ii) grant a security interest in the right, title and interest of
Lessor in the Master Lease Agreement, any Schedule and/or any Equipment; and/or
(iii) sell or transfer its title and interest as owner of any item of Equipment
and/or as Lessor under any Schedule; and Lessee further understands and agrees
that Lessor's assigns may each do the same (hereunder collectively
`Assignment"). All such Assignments shall be subject to Lessee's rights under
the assigned Schedule. Lessee hereby agrees to execute and deliver promptly upon
notice thereof such acknowledgments, agreements, and other instruments as
reasonably necessary to effect such Assignment. Upon any such Assignment, all
references to Lessor under the Lease shall also include all such assigns,
whether specific reference thereto is otherwise made herein.
(b) Lessee shall not (i) assign, sublease, transfer, pledge or hypothecate
the Master Lease Agreement, any Schedule, the Equipment, any part thereof, or
any thereof, or any interest in the foregoing without the written consent of
Lessor which shall not be unreasonably withheld or (ii) permit the Equipment or
any part thereof to be used by anyone other than Lessee, its employees or
customers except as contemplated by this Agreement.
17. Indemnity.
Lessee shall indemnify Lessor against, and hold Lessor harmless from, any
and all claims, actions, suits proceedings, costs, expenses, damages, and
liabilities, including attorney's fees, arising out of, connected with, or
resulting from, the Equipment, including, without limitation, the possession,
use, operation, or return of the Equipment, except in the case of Lessor's
negligence or willful misconduct or product liability of manufacturer.
18. Delivery of Related Documents.
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<PAGE> 10
For each Lease, Lessee will execute or provide, as required by Lessor, the
following documents and information satisfactory to Lessor: (a) A certificate by
Lessee confirming the accuracy and completeness of information contained in the
Lease and related documents, disclosing to potential assignees material facts
concerning the Lessee and the terms of the Lease; (b) financing statements; and
(c) Other documents as reasonably required by Lessor or otherwise specified
herein.
19. Miscellaneous.
(a) Notices. Any notice required or permitted to be given by the
provisions of this Master Lease Agreement or any Schedule shall be conclusively
deemed to have been received by a party hereto on the day it is delivered to
such party at the address first given above (or at such other address as such
party shall specify to the other party in writing) or, if sent by certified
mail, on the third business day after the day on which mailed, addressed to such
party at such address.
(b) Applicable Law and Disputes; Venue. Regarding all issues related to
contract formation and contract performance and any issues which may arise in
any dispute between .the parties, the Master Lease Agreement and each Schedule
shall be governed by, and construed in accordance with, the laws of California.
The parties specifically agree to submit to the jurisdiction of the courts in
San Diego, California.
(c) Counterparts. The single executed original of this Master Lease
Agreement and each Schedule marked "Original" shall be the "Original" and all
other counterparts hereof shall be marked and be a "Copy". To the extent, if
any, that the Master Lease Agreement, a Schedule, or the two combined shall
constitute chattel paper (as such term is defined in the Uniform Commercial Code
as in effect in any applicable jurisdiction), no security interest in the same
may be created through the transfer or possession of any counterpart other than
the "Original ". For these purposes the Original of any Schedule and rider(s)
thereto, together with a copy of this Master Lease Agreement, shall serve as the
original chattel paper for each Lease. Although this Master Lease Agreement and
each Schedule may be for convenience dated "as of a certain date written
thereon, the actual date or dates of execution thereof by the parties thereto
(and of acceptance by Lessor) is or are, respectively, the date or dates set
forth opposite the signatures thereon.
(d) Financial Statements. Lessee shall promptly furnish, or cause to be
furnished, to the Lessor or its assigns such financial statements respecting the
condition operations of Lessee or respecting the Equipment as Lessor or its
assigns may from time to time reasonably request.
(e) Severability and Ambiguity. In the event any provision of the Master
Lease Agreement or any Schedule shall be determined by a court of competent
jurisdiction to be invalid or unenforceable, the parties hereto agree that such
provision shall be ineffective as to such instrument without invalidating the
remaining provisions thereof. Lessee and Lessor hereby represent and agree that
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<PAGE> 11
the language contained herein is to be construed as jointly proposed and
accepted, and in the event of any subsequent determination of ambiguity all
parties shall be treated as equally responsible therefor.
(f) Successors. Except as expressly provided for herein, the Master Lease
Agreement and each Schedule shall be binding upon and inure to the benefit of
Lessee, Lessor, Lessee's and Lessor's assigns and their respective successors
and assigns.
(g) Headings. The section headings and titles used in the Master Lease
Agreement or any Schedule are for convenience of reference only and shall not be
construed in any way to define, limit or describe the scope or intent of any
provisions or sections of the same.
(h) Entire Agreement. Lessor and Lessee acknowledge that there are no
agreements or understandings, written or oral, between them with respect to the
Equipment, other than as set forth in this Master Lease Agreement and in each
Schedule and that this Master Lease Agreement and each Schedule contain the
entire agreement between Lessor and Lessee. Neither this Master Lease Agreement
nor any Schedule may be altered, modified, terminated, or discharged except by a
writing signed by the party against whom enforcement of such action is sought.
(i) Parties. The parties hereto represent to each other that they are
entitles fully familiar with transactions of the kind reflected by this
document, and are capable of understanding the terminology and meaning of its
terms and conditions and of obtaining legal advice and analysis pertaining
thereto. IN WITNESS WHEREOF, Lessor and Lessee have caused this Master Lease
Agreement to be executed by their duly authorized representatives as of the date
first set forth above.
LESSOR: LESSEE:
Lottery Enterprises, Inc. Solutioneering
By: /s/ Brian P. Roberts By: /s/ Shawn Lane
-------------------------------- -------------------------------------
Brian J. Roberts Shawn Lane
Sr. VP Marketing President
& Administration
DATE: 1/20/97 DATE: 5/10/95
------------------------------ -----------------------------------
Per conversation with Shawn Lane and in the absence of an executed agreement by
Marshall Geller.
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EXHIBIT "A"
EQUIPMENT SCHEDULE NO. __ dated as of April 1, 1995 to Master Lease Agreement #
dated as March 1, 1995 between the Lessee and Lessor below.
THIS EQUIPMENT SCHEDULE is entered into by and between the undersigned Lessee
and Lessor pursuant to the Master Lease Agreement identified above. All terms
and conditions of such Master Lease Agreement are incorporated herein and made a
part of hereof, and unless otherwise specified herein, the terms used in this
Equipment Schedule shall have the same meanings as used in the Master Lease
Agreement. Conflicts between the provisions of the Master Lease Agreement and
this Equipment Schedule are governed by the provisions hereof. Conflicts between
the provisions of this Schedule and the Rider(s) specified below shall be
governed by the provisions of such Rider(s).
By its signature hereon, Lessee represents it has read, understands and agrees
to the Terms and Conditions of the Master Lease Agreement identified above, the
provisions of this Schedule, and the provisions of the Rider(s) identified
below.
IN WITNESS WHEREOF, Lessee and Lessor reaffirm all of the terms and conditions
of the Master Lease Agreement, except as modified hereby, and cause this
Equipment Schedule to be executed by their duly authorized representatives.
By LESSEE: By LESSOR:
/s/ Shawn K. Lane
Name: Shawn K. Lane Name:
Title: President Title:
Date: April 1, 1995 Date:
1. Rent Commencement Date: April 1, 1995
2. Initial Lease Term. Three (3) years
3. Lease Payments
The period from and including the Commencement Date to and including the last
day of March, 1998.
a. The Lease Payment indicated below shall be due on the first day of each month
for the Lease Term;
(i) Lease payments for the Equipment shall be as follows:
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<PAGE> 13
A down payment of $500.00 per DCR 2000; $250.00 per DCR 1200 per unit, payable
with placement of purchase order, then, Monthly Lease Payment of $144 per month
per unit for each DCR 2000; $71.00 per month per unit, plus options as stated
below for each DCR 1200 for the term of this Agreement. Optional equipment on
the DCR-1200 will be leased at a monthly rate of: Grabber-$10.50 and
Pedestal-$6.95. The initial payment for each unit shall be due 30 (thirty) days
from date of shipment to Lessee, thereafter payment is due as set forth in 3(a)
above. LEI shall also receive 1.5% (one and one-half percent of the gross
revenue after taxes generated by each DCR terminal for the term of this lease
and any renewal terms. Lessee will further provide a monthly breakdown of sales
figures for each item of Equipment for Lessor.
(ii) Other charges as defined above.
4. Location of Equipment.
Various Locations through-out the continental United States (see attached
Equipment Location and Description List). All Equipment will be secured by
UCC-1's and the assignment of vending rights for each location where equipment
is installed by Lessee or its designees and other security as specified in the
Master Lease Agreement.
5. Equipment Description. Debit Card Retailer (DCR) terminals, specifically DCR
2000 DCR(TM) with Grabber and Datacom.
Manufacturer: Lottery Enterprises, Inc.
Certain number of DCR-1200 Debit Card Retailer terminals with Printer and
Datacom. (see attached Equipment Location and Description List).
6. Execution.
This Equipment Schedule shall not be binding on Lessor until executed and
delivered by Lessee and accepted by Lessor.
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EQUIPMENT LOCATIONS AND DESCRIPTIONS FOR SCHEDULE # ___
<TABLE>
<CAPTION>
Qty Model/Feature Description Equipment Location
--- ------------- ----------- ------------------
<S> <C> <C> <C>
6 DCR 2000 Plano, Texas
</TABLE>
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EXHIBIT B
Certificate of Acceptance
Schedule No. ___ dated as of April 1, 1995 to Master Lease Agreement #
dated as of March 1, 1995 (collectively the "Lease") between Lottery
Enterprises, Inc. ("Lessor") and (the "Lessee")
1. Items of Equipment. The Lessor hereby certifies that the items of
Equipment set forth and described in the above mentioned Equipment Schedule have
been delivered to the location indicated below, inspected, and found to be in
good order as items of Leased Equipment under the Lease, all on the date of
delivery set forth below:
Location of Items of Equipment: Plano, Texas
See Attached listing.
72011242, 72011243, 72011244, 72011245, 72011246, 72011247
Date of Delivery: April 1, 1995
LESSOR:
By: /s/ Shawn K. Lane
Name: Shawn K. Lane
Title: President
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<PAGE> 1
Exhibit 10.27.1
ORIGINAL
AMENDMENT TO MASTER LEASE AGREEMENT
THIS AMENDMENT TO MASTER LEASE AGREEMENT is made and entered into as of the 24th
day of December, 1996 by and between On-Point Technology Systems, Inc., formerly
Lottery Enterprises, Inc., a Nevada corporation , with its principle offices at
8444 Miralani Drive, San Diego, CA 92126 (the "Lessor") and Solutioneering,
Inc., a Texas corporation, 555 Republic Drive, Suite 303, Plano, TX 75074 (the
"Lessee") in accordance with the following facts and objectives:
A. Lessor and Lessee entered into a Master Lease Agreement dated March 1,
1995 ("Master Lease Agreement"), whereby Lessor leased to Lessee Equipment to
dispense telephone calling cards.
B. Lessor now has Equipment that is being returned from leases with other
parties and Lessor has offered Equipment to Lessee and Lessee agrees to hire
from Lessor a minimum of 1,000 units of Equipment described in each Schedule
from time to time entered into pursuant to this Master Lease Agreement in
accordance with the Master Lease Agreement.
IT IS AGREED, THEREFORE, as follows:
1. The Commencement Date for any Equipment leased under this Master Lease
Agreement shall be before June 1, 1998.
2. The Initial Lease Term for each Schedule shall be as set forth thereon and
shall be five (5) years.
3. Lessee shall have the option to purchase the Equipment at the end of the
Initial Lease Term or any Renewal Lease Term for the fair market value. Fair
market value shall be determined by agreement of the Lessor and Lessee within
fifteen (15) days of the date of the Exercise Notice or, if Lessor and Lessee
cannot agree within such period, by an independent appraiser selected by the
parties within thirty (30) days of the date of the Exercise Notice. If Lessor
and Lessee cannot agree on an appraiser within such thirty (30) day period, then
each party shall select an appraiser within such time period and the appraisers
so selected shall select a third appraiser who alone shall make the
determination of fair market value. Lessee shall exercise its option to purchase
by payment of the option price in full to lessor within fifteen (15) days of the
date the fair market value is determined. If lessee does not pay the purchase
price in full within such period, its option shall not be exercisable until the
next option period.
<PAGE> 2
Amendment to Master Lease Agreement, Page: 2
4. Lessor will refurbish and ship pursuant to the terms herein the Equipment in
working condition and carrying a manufacturers warranty of ninety (90) days from
the date of installation on electronic and mechanical parts. In the event that
the Equipment is not installed within thirty (30) days of shipment the ninety
(90) day warranty period not withstanding the above will commence on the
thirtieth (30th) day after the shipment date and expire ninety (90) days
thereafter. Lessee understands that the Equipment is refurbished and as such may
be shipped with cosmetic defects including scratches, dents and other
imperfections in the exterior appearance of the Equipment. The Equipment is
specifically described as Debit Card Retailer (DCR) terminals model DCR-2000
with Grabber, and model DCR-1200 with printer and pedestal. Each unit will have
two sets of keys.
5. Lessor will, subject to availability, ship to Lessee on a weekly basis
twenty-five (25) units of Equipment, as described above, unless agreed
otherwise. Of the twenty-five (25) units of Equipment, fifteen (15) will be the
refurbished DCR-2000 model and ten (10) will be the refurbished DCR-1200 model
subject to model availability. Lessor shall not be obligated to ship units if
the Lessor does not have refurbished units available. If refurbished DCR-2000
models are not available, Lessor may instead ship up to twenty-five (25)
refurbished DCR-1200 model units per week if Lessor has such model available.
6. Lessor will ship the Equipment to Lessee's offices in Plano, Texas unless
otherwise notified that a Schedule of Equipment be shipped to another office of
the Lessee.
7. Lessee will make monthly lease payments to Lessor in the amounts of $79.00
for the DCR-2000 and $53.00 for the DCR-1200, there is no down payment or
commissions payable under the lease Schedules pursuant to this amendment to the
Master Lease Agreement. Payments will be due on the 1st day of each month
commencing thirty-three (33) days from the date of shipment. Payments due for
Equipment not shipped on the first day of a month shall be prorated by
one-thirtieth (1/30) for each day in the month prior to date of shipment plus
three (3) days. (e.g., if shipped on the 10th day of a month, payment for the
Equipment for that month would be 17/30 of the monthly lease payment amount).
8. Lessor and Lessee acknowledge Lessor's right to receive one and one-half
percent (1.5%) of the gross revenue after taxes generated by Equipment shipped
under the master lease. Lessor agrees that Lessee will not be obligated to pay
such commissions provided that the Lessee has cured any default under any term
or condition of the Master Lease Agreement, including amendments and any
applicable Schedules, within thirty (30) days of written notice of default.
9. Lessor shall use its best efforts in finding the most economic shipping
available; however, all shipping costs associated with the leased Equipment
shall be Lessee's responsibility.
<PAGE> 3
Amendment to Master Lease Agreement, Page: 3
10. Lessee shall have the right to purchase any or all of the Equipment
Schedules at any time during the first three years under the Schedules. The
Equipment purchase price will be an amount equal to the base price of $2,995.00
for each DCR-2000 and $1,995.00 for each DCR-1200 less an amount equal to forty
(40%) percent of each of the first twelve (12) Lease Payment paid, plus
forty-five (45%) percent of each of the next twelve (12) Lease Payments paid,
plus fifty (50%) percent of each of the next twelve (12) Lease Payments paid
which shall be applied as principle. (e.g. the purchase price of a DCR-2000
after 18 monthly payments of $79.00 will be: $2,995-(($79*.4*12)+(79*.45*6))=
$2,402.50).
11. All terms and provisions of the Master Lease Agreement and each Equipment
Schedule thereto shall remain in full force and effect, unless inconsistent with
the terms of this Amendment.
IN WITNESS WHEREOF, Lessor and Lessee have caused this Amendment to be executed
by their duly authorized representatives as of the date first set forth above.
LESSOR:
ON-POINT TECHNOLOGY SYSTEMS, INC.
By: /s/ Frederick Sandvick
-----------------------------------
Frederick Sandvick, President & CEO
LESSEE:
SOLUTIONEERING, INC.
By: /s/ Shawn Lane
-----------------------------------
Shawn Lane, President
<PAGE> 1
Exhibit 10.27.2
AMENDMENT TO MASTER LEASE AGREEMENT
THIS AMENDMENT TO MASTER LEASE AGREEMENT is made and entered into as of the 24th
day of December, 1997 by and between On-Point Technology Systems, Inc., a
Nevada corporation with its principle offices at 8444 Miralani Drive, San
Diego, CA 92126 (the "Lessor") and Solutioneering, Inc., a Texas corporation,
with its principle offices at 661 East 18th Street, Plano, TX 75074 (the
"Lessee") in accordance with the following facts and objectives:
A. Lessor and Lessee entered into a Master Lease Agreement dated March
1, 1995 ("Master Lease Agreement") and as amended December 23, 1996,
whereby Lessor leased to Lessee Equipment to dispense telephone
calling cards.
B. Lessor and Lessee now wish to amend the Master Lease Agreement to
reflect the following:
i). Lessor has an inventory of component parts and sub-assemblies to
build two-hundred (200) model DCR-2000 Equipment which Lessor will
repackage in a new cabinet style and Lessee agrees to lease from
Lessor two-hundred (200) such repackaged Equipment designated model
DCR-2001-4.
ii). Lessor will develop a new model of Equipment designated
DCR-1250-3 and Lessee agrees to lease from Lessor a minimum of 1,200
units per year of Equipment at a minimum rate of 100 units of
Equipment per month for a period of five (5) years.
IT IS AGREED, THEREFORE, as follows:
1. The Commencement Date for any Equipment leased under this Master Lease
Agreement shall not be before January 1, 1998 or later than November
30,2002.
2. The Initial Lease Term for each Schedule shall be as set forth thereon and
shall be five (5) years.
3. Lessee shall have the option to purchase the Equipment during the Term of
the Lease, at the end of the Initial Lease Term or any Renewal Term in
accordance with the conditions in the Master Lease Agreement and as
amended.
4. Lessor will repackage the inventory of DCR-2000 components and
subassemblies into a new style cabinet designated DCR-2001-4, the design
of which shall be approved by the Lessee.
5. Lessee understands and agrees that the DCR-2001-4 will be manufactured in
a limited quantity of two hundred (200) under the terms of the Master
Lease Agreement and Lessor will make no further production of this model
for lessor unless otherwise agreed.
<PAGE> 2
Amendment to Master Lease Agreement, Page 2 of 3
6. The quantity two hundred (200) DCR-2001-4 Equipment will be delivered to
Lessee by Lessor at a rate of one hundred (100) per month in February and
March 1998
7. Lessor will develop a new three-bin model of the Equipment exclusively for
the Lessee's use in the United States. The design of the three bin model
designated the DCR-1250-3 will be as approved by the Lessee, and will be
available for delivery to Lessee in March 1998. Lessee understands and
agrees that this exclusivity applies only to Equipment ultimately placed
in the United States and only to the specific design of model DCR-1250-3
and will not preclude Lessor from designing and marketing three-bin phone
card machines of a different design or appearance.
8. Lessee will provide Lessor with the PMS color codes for the paint finish
of the DCR-1250-3 and the point of sales materials to be affixed to the
Equipment during manufacture should the Lessee require Lessor to affix
such material.
9. Lessor agrees to provide the DCR-1250-3 Equipment to Lessee on an
exclusive basis in accordance with paragraph 7 provided:
9.1 Lessee continues to accept delivery of a minimum of one hundred 100
units per month during 1998 and continues to accept delivery of
Equipment on an average minimum of one hundred (100) units of
Equipment thereafter. The monthly average will be based on a rolling
average of the total units of Equipment delivered during the prior
four (4) months.
9.2 Lessee maintains timely payment of all Lease Payments under the
Master Lease Agreement and any amendment thereto.
9.3 Lessee is not in default on any of the Terms and Conditions of the
Master Lease Agreement and any amendment thereto.
10. Lessor will ship the Equipment to Lessee's offices in Plano, Texas unless
otherwise notified that a Schedule of Equipment be shipped to another
office of the Lessee within the continental U.S.
11. Lessee will make sixty (60) monthly Lease Payments to Lessor in the amount
of $80.00 for each DCR-2001-4 and DCR-1250-3 inclusive of packaging and
shipping within the continental U.S., but exclusive of any and all taxes.
Lease Payments will be due on the 1st day of each month commencing
thirty-three (33) days from the date of shipment. Payment due for
Equipment not shipped on the first day of a month shall be prorated by
one-thirtieth (1/30) for each day in the month prior to date of shipment
plus three (3) days. (E.g., if shipped on the 10th day of a month,
payments for the Equipment for that month would be 17/30th of the monthly
lease payment amount).
<PAGE> 3
Amendment to Master Lease Agreement, Page 3 of 3
12. For purposes of the buyout option under the Master Lease Agreement the
purchase price of the DCR-1250-3 including shipping is
three-thousand-four-hundred-ten dollars ($3,410.00) per machine.
13. All terms and provisions of the Master Lease Agreement and each Equipment
Schedule thereto shall remain in full force and effect, unless
inconsistent with the terms of this Amendment, in that instance, the
Amendment to the Master Lease Agreement shall control.
IN WITNESS WHEREOF, Lessor and Lessee have caused this Amendment to be executed
by their duly authorized representatives as of the date first set forth above.
LESSOR:
ON-POINT TECHNOLOGY SYSTEMS, INC.
By: /s/ Brian J. Roberts 12/26/97
-----------------------------------
Brian J. Roberts, Sr. Vice President
LESSEE:
SOLUTIONEERING, INC.
By: /s/ Shawn Lane
-----------------------------------
Shawn Lane, President
<PAGE> 4
[Letterhead of ON-POINT TECHNOLOGY SYSTEMS, INC.]
July 2, 1997
Shawn Lane
President
Solutioneering, Inc.
661 East 18th Street
Plano, TX 75074
RE: Amendment to Master Lease Agreement
Dear Shawn:
This letter will serve to amend the Master Lease Agreement dated March 1, 1995,
and as subsequently amended on December 24, 1996 between On-Point Technology
Systems, Inc. ("Lessor"), and Solutioneering, Inc. ("Lessee").
1. Lessee agrees to hire from Lessor a minimum of 2,000 units of equipment
described in each Schedule from time-to-time entered into pursuant to the
Master Lease Agreement in accordance with the Master Lease Agreement.
2. All terms and provisions of the Master Lease Agreement and each Equipment
Schedule thereto shall remain in full force and effect.
IN WITNESS WHEREOF, Lessor and Lessee have caused this Amendment to be executed
by their duly authorized representatives as of the date first set forth above.
LESSOR:
ON-POINT TECHNOLOGY SYSTEMS, INC.
By: /s/ Brian J. Roberts
----------------------------------------
Brian J. Roberts, Sr. VP, Mktg. & Admin.
LESSEE:
SOLUTIONEERING, INC.
By: /s/ Shawn Lane
----------------------------------------
Shawn Lane, President
dg:BJR
<PAGE> 1
Exhibit 10.28
DISTRIBUTOR AGREEMENT
THIS AGREEMENT is made and entered into by and between ON-POINT TECHNOLOGY
SYSTEMS, INC., a Nevada corporation, with its principal place of business at
8444 Miralani Drive, San Diego., California 92126 (hereinafter also referred to
as "On-Point" or "Producer"), and EDITEC, SARL., a French corporation with its
principal office at 111 Avenue de la Republique 94500, Champigny sur Maine,
France, (hereinafter referred to as "Editec" or "Distributor") in accordance
with the following facts and objectives:
A. On-Point manufactures, sells and leases, among other things, lottery ticket
dispensing machines, pull-tab dispensing machines, and other similar lottery
related machines, referred to as ("Lottery Machines").
B. On-Point wishes to appoint Distributor and Distributor wishes to accept an
appointment as On-Point's distributor for its Lottery Machines in accordance
with the terms and conditions of this Agreement.
THEREFORE, for valuable consideration, receipt of which is hereby acknowledged,
the parties agree as follows:
ARTICLE I
DISTRIBUTORSHIP
1.1 Exclusive Appointment.
(a) On-Point appoints Editec as the exclusive distributor for the sale or
lease of its Lottery Machines in Western Europe excluding Italy, and
excluding the sales or leases to Organizations in England while the term
of the representative agreement with John Orrock ("Orrock") is in effect,
and non exclusively once such agreement has expired, hereinafter referred
to as the "Territory". Editec may distribute Lottery Machines in Italy and
Eastern Europe on a non exclusive basis.
(b) During the continuance of this Agreement, On-Point shall not sell or
distribute its Lottery Machines, within such Territory to any other
person, firm, or corporation, nor appoint any such person or entity as
distributor of the Lottery Machines without the written consent of
Distributor, except for sales or leases to Orrock's customers in England.
1.2 Competition.
During the term of this Agreement and for a period of twenty-four (24) months
thereafter, the Distributor or any shareholder or officer of Distributor, or any
other entity in which such shareholder or officer owns directly or indirectly an
ownership or profit interest in such entity, shall not, directly or indirectly,
represent or engage in any business in the Territory that is in competition with
the present business of On-Point without prior written consent of On-Point.
Editec Distributor Agreement Page 1 of 12 [Initials]
<PAGE> 2
ARTICLE II
TERM AND TERMINATION
2.1 Term.
2.1.1 Initial Term.
The initial term of this Agreement shall be for five (5) years from the
effective date. During this term the Agreement can only be terminated for cause
pursuant to II. 2.2., or non-performance pursuant to II. 2.3.
2.1.2 Extended Term.
At the end of the initial term and each renewal term thereafter, this Agreement
shall be automatically renewed for successive one year terms, unless either the
Distributor or Producer elects to terminate this Agreement as of the end of the
initial term or any renewal tens by providing at least six (6) months written
notice of termination to the other party.
2.2 Termination For Cause.
Both parties, at their option, may cancel this Agreement immediately upon
written notice to the other party in the event that:
(a) A receiver or trustee is appointed of all or a substantial portion of the
assets of the other party,
(b) The other party becomes insolvent or unable to pay debts as they mature,
makes a general .assignment for the benefit of creditors or voluntarily
files under any bankruptcy or similar act or takes advantage of any debtor
relief proceedings under any present or future law,
(c) Any involuntary petition in bankruptcy is filed against the other party
and not dismissed within thirty (30) days,
(d) Any levies of attachment, executions, tax assessments or similar processes
are issued against the other party and not released within thirty (30)days
thereof,
(e) The other party defaults in the performance of its obligations under this
Agreement. In this case, a non-defaulting party shall give written notice
of default to the defaulting party, specifying the nature of the default.
If such default is not cured within thirty (30) days after the date of
such notice, the non-defaulting party may terminate this Agreement
immediately by giving written notice of termination to the defaulting
party. Termination in this manner does not constitute a waiver of any
damages, or any other remedies the non-defaulting party may have in
addition to the right to terminate.
In addition, On-Point may terminate this Agreement immediately upon written
notice to Distributor in the event Distributor engages in any illegal activity
or in any conduct which materially threatens or impairs On-Point's business
operations.
Editec Distributor Agreement Page 2 of 12 [Initials]
<PAGE> 3
2.3. Termination For Not Achieving Minimum Quantity Purchase.
On-Point may, at its option, cancel this Agreement upon ninety (90) days written
notice that the Agreement will be terminated for not achieving minimum quantity
purchases. Distributor agrees that during the term of the Agreement minimum
annual purchased quantities need to be achieved in accordance with one of the
following schedules to avoid termination for non-performance:
<TABLE>
<CAPTION>
Schedule A: Year Minimum Quantity To Be Purchased
---- --------------------------------
<S> <C> <C>
1998 300
1999 800
2000 1,000
2001 1,000
2002 1,000
Schedule B: Year Cumulative Quantities To Be Purchased
---- -------------------------------------
1998 300
1999 1500
2000 2500
2001 3500
2002 4500
</TABLE>
As shown in Schedule B, in the event that Distributor achieves cumulative
purchases in a given year pursuant to Schedule B by the end of the applicable
year, the minimum purchases shown in Schedule A will not apply for that year.
E.g. If purchases in year 1998 total 1,000 Lottery Machines but in year 1999
purchases only total 500 Lottery Machines the Agreement will not terminate for
non-performance since the cumulative amount of 1,500 was achieved.
2.4 Termination Resulting From Buyout.
Distributor agrees that this Agreement may terminate upon:
(a) Change of control of Distributor. In such an event, On-Point may at its
sole option terminate this Agreement immediately.
(b) The acquisition of Distributor by On-Point pursuant to Section IX 9.5
Right to Purchase.
2.5 Consequences.
(a) Notice and termination of the Agreement do not invalidate sales
contracts, which were concluded in performance of this Agreement.
On-Point will supply Lottery Machines to the Distributor under the terms
and conditions of Section 3.3 herein so that it can fulfill all contracts
with third parties, which were concluded before the termination in the
normal course of dealing.
(b) In the event of termination of this Agreement by either party for any
reason, On-Point shall repurchase from the Distributor at the invoice
price paid by the Distributor, any of On-Point's Lottery Machines and
repair and replacement parts on hand in the Distributor's place of
business or in the possession of the Distributor, except as provided
Editec Distributor Agreement Page 3 of 12 [Initials]
<PAGE> 4
below. On demand and the tender of 25% of the repurchase price, the
Distributor shall be obligated to deliver such goods to On-Point
forthwith, at the Distributor's expense. On-Point reserves the right,
however, to reject any Machine or repair or replacement part not in first
class condition or sold to the Distributor more than one (1) year prior to
the date of termination.
(c) Upon termination of this Agreement, Distributor will hand over to On-Point
a list with names of all customers to whom Distributor sold Lottery
Machines during the five (5) year period before-termination. Unless
On-Point terminates this Agreement for cause pursuant to Article II,
Section 2.2, the Distributor will receive, (i.) if the sales price is at
least the same as the last .price of Lottery Machines sold to such
customer, a commission of ten percent (10%) of the sales prices and, (ii.)
if the sales price is less than the list price of Lottery Machines sold to
such customer and the machine sold is substantially similar to the
previous Lottery Machines sold to such customer five percent (5%) of the
sales price of any Lottery Machines sold to those customers on such list
during a period of two (2) years after termination of this Agreement. The
commission shall be paid to Distributor within thirty (30) days of
On-Point's receipt of payment of the sales price from the customer.
(d) For orders from customers who bought Lottery Machines of On-Point within a
period of eighteen (18) months before the termination of the Agreement in
order to test these Lottery Machines, Distributor will receive a
commission of ten percent (10%) of the sales prices of any Lottery
Machines sold to the customers during a period of two (2) years after the
termination of this Agreement. Distributor will hand over a list with
those customers to On-Point at the termination. The commission shall be
paid to Distributor within thirty (30) days of On-Point's receipt of
payment of the sales price from the customer.
ARTICLE III
SALES CONDITIONS
3.1 Orders and Acceptance.
(a) Although On-Point is not required to accept Distributor's orders or any
parts thereof, On-Point shall use its best efforts to accept any
reasonable orders for the Lottery Machines placed by Distributor, subject
to On-Point production and delivery schedules.
(b) Unless otherwise agreed, this Agreement shall apply to and become a part
of the sale contracts to be made hereunder among the parties.
(c) Distributor shall give orders for the Lottery Machines to On-Point in
written form.
(d) All orders shall be deemed to be accepted unless On-Point rejects the
order within fifteen (15) days of receipt.
Editec Distributor Agreement Page 4 of 12 [Initials]
<PAGE> 5
3.2 Title and Risk.
Unless otherwise agreed in writing, On-Point shall sell the Lottery Machines on
the basis of F.O.B. the place of shipment. On-Point shall determine the place of
shipment. Title to and risk of loss with respect to the Lottery Machines shall
be transferred from On-Point to Distributor at the time and point of acceptance
thereof by a carrier at such place of shipment.
3.3 Price.
(a) The Distributor shall pay On-Point for its Lottery Machines the
Distributor's price, which shall be equal to at least a forty (40%)
percent markup of On-Point's full cost, unless otherwise agreed by
On-Point. On-Point shall provide a price list to Distributor which may be
changed at any time during the term by providing Distributor with sixty
(60) days written notice of such price change. The price list will be
F.O.B. the place of shipment, according to the attached Exhibit A.
On-Point shall determine the place of shipment.
(b) On-Point may increase the above prices earlier than sixty (60) days
written notice to the Distributor upon showing that any increase is
required by and is consistent with increases in the cost of manufacturing
the Lottery Machines, the cost of shipping to the F.O.B. point, or
properly allocated overhead expenses, as the case may be.
(c) The Distributor shall pay On-Point for Lottery Machines in U.S. Dollars
within thirty (30) days of invoice or upon such other terms as the parties
shall agree from time to time. Amount not paid within 30 days, shall be
subject to a one percent (l%) per month late charge.
3.4 Warranties.
On-Point warrants that all goods, software, and other products sold by On-Point
under this Agreement, will be in a merchantable condition, and free from defects
in design or manufacture for a period of twelve (12) months after they are
received by the Distributor. In the event of any breach of warranty, On-Point
will pay the reasonable cost necessary to replace or repair the defective part,
item, or Machine, and the cost of all labor necessary to complete any repair or
replacement, together with costs of freight. On-Point shall not be obligated to
accept from the Distributor any products or parts returned, nor to make an
exchange thereof, nor to credit the Distributor therefor if On-Point was not
notified of the defect or breach within twelve (12) months after the machine or
part was received by the Distributor, unless On-Point shall have otherwise
agreed. Further, On-Point shall not be obligated to accept from the Distributor
any part, item or Machine returned, nor to make an exchange thereof, nor to
credit the Distributor therefor if Distributor has used, modified or integrated
any part, item or Machine into or with other equipment or system without the
express written consent of On-Point.
With the exception of the warranties set forth above, ON-POINT MAKES NO EXPRESS
OR IMPLIED WARRANTIES OF ANY KIND, INCLUDING WITHOUT LIMITATION: THOSE OF
MERCHANTABILITY OR FITNESS FOR PURPOSE OR USE, OF CONDITION, PERFORMANCE,
SUITABILITY OR DESIGN, OR CONFORMITY TO ANY LAW, RULE, REGULATION, AGREEMENT OR
SPECIFICATION.
Editec Distributor Agreement Page 5 of 12 [Initials]
<PAGE> 6
3.5 Delivery Times and Common Carriers.
The parties will agree on binding delivery times from time to time. Whenever
On-Point shall deliver or cause to be delivered to a common carrier any goods
ordered by the Distributor, whether the particular carrier shall have been
designated in the shipping or routing instructions of the Distributor or not,
On-Point shall not be responsible for any delays or damages in shipment.
On-Point shall be responsible for the proper packaging for shipment of all items
sold and delivered under this Agreement.
ARTICLE IV
SALES PROMOTION/TRADE FAIRS
4.1 Sales Promotion.
(a) Distributor shall exert its best efforts in promoting the sales of the
Lottery Machines in the Territory at its own costs.
(b) For the purpose of introducing the Lottery Machines in the Territory and
of making salient features known to potential customers, Distributor
shall, at his own costs, advertise the products, maintain adequate
showrooms to display the products, and conduct such other sale promotion
activities as Distributor deems to be necessary or desirable.
(c) The Distributor's place of business and facilities shall be satisfactory
to On-Point at all times and On-Point shall have the right at all
reasonable times during business hours to inspect the place of business
and facilities of the Distributor.
4.2 Trade Fairs.
The Distributor shall exhibit at all fairs and exhibitions that are important
for the sale of the Lottery Machines in Europe and permanently display the name
On-Point or such other name as Producer notifies Distributor.
4.3 Support of On-Point.
On-Point will support the promotional efforts of the Distributor by listing
Distributor on all promotional materials as "European Representative."
ARTICLE V
TRAINING
5.1 Training and Expenses.
Distributor may request reasonable assistance of On-Point in the training of the
personnel of the customers. If Distributor requests such reasonable assistance,
On-Point shall dispatch its personnel to the offices of the Distributor in the
Territory to assist Distributor. All travel expenses to and from the Territory
more than twice per year shall be borne by Distributor, unless otherwise agreed
upon. All local lodging expenses at an adequate hotel and other living expenses
shall be borne by the Distributor.
Editec Distributor Agreement Page 6 of 12 [Initials]
<PAGE> 7
ARTICLE VI
INFORMATION
6.1 Reports.
The Distributor shall send to On-Point monthly competitive marketing reports
which shall include full and detailed analyses of the final market situation for
the Lottery Machines in each of the countries of the Territory, as far as
possible. The Distributor also shall provide to On-Point monthly reports on all
sales and/or leases of Lottery Machines in the Territory.
6.2 Product Information.
On-Point shall furnish Distributor with copies of the operating, installation,
and dismantling instructions with each Lottery Machine. In addition, On-Point
shall give Distributor a repair manual (trouble shooting instructions) for each
Lottery Machine and the hotline software.
ARTICLE VII
SERVICE/PRODUCTION
7.1 Service.
(a) On-Point will provide, upon written request from Distributor, a one (1)
week technical training class to five (5) qualified engineers of
Distributor at On-Point's production facilities in the United States. All
expense shall be borne by Distributor.
(b) The Distributor shall provide and maintain at its own expense an efficient
installation and maintenance service for all of the Lottery Machines
installed in the Territory, unless otherwise provided in its contract with
its customers. If the Distributor is responsible for maintenance of
Lottery Machines, the Distributor shall: (i) see that all necessary
repairs to and replacements of the Lottery Machines are promptly and
properly made; and (ii) use every reasonable effort to maintain a standard
of service consistent with the policy of On-Point. The Distributor shall
carry in stock an adequate quantity of repair and replacement parts.
(c) On-Point shall supply Distributor with spare parts necessary for
maintenance and repair service of the Lottery Machines during the term of
this Agreement and for a period of three (3) years after a discontinuance
of sale of the Lottery machines by Distributor. In order to service the
Lottery Machines without delay, Distributor shall maintain an inventory of
spare parts which sufficient to meet the immediate demand, especially in
cases of warranty. The purchase price for spare parts not covered by the
warranty shall he ten (10) percent less than the current price on
On-Point's international price list, F.O.B. the place of shipment. Parts
used from the spare parts inventory for repair under warranty will be
replaced by On-Point upon receipt of the faulty parts from Distributor.
Editec Distributor Agreement Page 7 of 12 [Initials]
<PAGE> 8
(d) On-Point will generate an Optimal Inventory Level ("OIL") and Distributor
shall maintain such OIL to effectively maintain the installed based of
Lottery Machines throughout the Territory. OIL shall mean the minimum
level of inventory needed to reasonably maintain the installed base of
Lottery Machines. The OIL will be mutually agreed between On-Point and
Distributor based on On-Point's US service requirements for similar
supplies and spare parts which is approximately five percent (5%)of the
Lottery Machines in use. Distributor will purchase the supplies and spare
parts from On-Point at a discounted price of twenty percent (20%) from
On-Point's current parts price list.
(e) Distributor shall establish bench repair facilities at its offices in
France and at other locations throughout the territory to perform routine
repairs to non-operational components and to minimize the return of
non-operational components to On-Point for repair.
(f) On-Point will establish software development facilities to provide
Distributor controlled access to software source code pertaining to
Distributor's customers. This facility will be provided to permit
Distributor to make minor modifications, under the control of On-Point.
The facility does not permit the Distributor to make major modifications
or add additional features and functions to the software system without
the express written approval of On-Point. Distributor will be allowed to
down load via E-mail modified software object code to produce new EPROMs
for operational Lottery Machines sold to customers in the Territory.
On-Point reserves the right to include or exclude such software
modifications, made by Distributor, into On-Point's standard base software
system. Should On-Point exclude such modifications from the standard base
software system Distributor must request that such modified software
version to be used for specific orders to Distributor's customers.
7.2 Production.
After this Agreement has been in effect for two (2) years, at the option of
Distributor, the parties agree to negotiate in good faith to amend this
Agreement to permit the Distributor to assemble Lottery Machines in Europe using
printed circuit boards, dispensers and certain other parts manufactured by
On-Point at a price and license fee to be agreed upon by the parties.
ARTICLE VIII
GOVERNING LAW/ARBITRATION
8.1 Governing Law.
The validity, interpretation and performance of this Agreement, which has been
prepared and executed in the English language, shall be controlled by and
construed under the laws of the State of California. To the extent legal
questions arise concerning the sale of goods by On-Point to the Distributor, the
Uniform Commercial Code, as adopted by the State of California, shall be the
controlling law. Any arbitration or litigation arising out of this Agreement
shall be brought in the County of San Diego, State of California, in the court
of proper jurisdiction, and the Distributor and On-Point hereby consent to
jurisdiction in San Diego, California.
Editec Distributor Agreement Page 8 of 12 [Initials]
<PAGE> 9
8.2 Arbitration.
Any controversy or claim arising out of, or relating to, this Agreement, or the
making, performance, or interpretation of it, shall be settled by arbitration in
San Diego, California under the commercial arbitration rules of the American
Arbitration Association then existing, and judgment on the arbitration award may
be entered in any court having jurisdiction over the subject matter of the
controversy. Any arbitration shall be conducted in the English language.
ARTICLE IX
FINAL PROVISIONS
9.1 Trade Secrets and Property Rights.
(a) During the term of this Agreement, the Distributor will have access to and
become acquainted with various pieces of confidential information ("Trade
Secrets"), which are owned by and regularly used in the operation of the
business of On-Point. The Distributor recognizes the proprietary interest
of On-Point in any Trade Secrets of On-Point. The Distributor acknowledges
and agrees that any and all Trade Secrets of On-Point shall be and are the
property of On-Point. As used herein, "Trade Secret" means, without
limitation, any document or information relating to On-Point's products,
processes or services, including On-Point's financial information,
business plans or projections, and to On-Point's purchasing, customer or
supplier lists, which documents or information have been disclosed to the
Distributor or made known to it as a consequence of or through its
engagement by On-Point, which is not generally known in the relevant trade
or industry. The Distributor understands that the Trade Secrets are
treated as confidential by On-Point and that the Trade Secrets affect the
successful conduct of On-Point's business. The Distributor acknowledges
and agrees that On-Point is entitled to prevent the disclosure of its
Trade Secrets. As a portion of the consideration for the appointment of
the Distributor by On-Point, the Distributor shall not use or disclose any
of the Trade Secrets, directly or indirectly, or make such Trade Secrets
known to any person, firm, corporation or business entity, or take
advantage of the Trade Secrets during the term of this Agreement or at any
time thereafter, except as required in the course of its duties under this
Agreement. All files, records and documents of On-Point, whether prepared
by the Distributor or otherwise coming into its possession, shall remain
the exclusive property of On-Point. For purposes of this entire Section,
the term "Distributor" includes employees, agents and sub-distributors of
the Distributor.
(b) Upon termination of this Agreement, the Distributor will promptly deliver
to On-Point all materials, property, documents, data, and other
information belonging to On-Point or pertaining to Trade Secrets. The
Distributor shall not take any materials, property, documents or other
information, or any reproduction or excerpt thereof, belonging to On-Point
or containing or pertaining to any Trade Secrets.
Editec Distributor Agreement Page 9 of 12 [Initials]
<PAGE> 10
(c) The Distributor acknowledges and agrees that the remedy at law for any
breach of the above covenants and the covenant in Section I 1.2 will be
inadequate and On-Point, in addition to all other available remedies
(including without limitation seeking such damages as it can show it has
sustained by reason of such breach), shall be entitled to injunctive
relief without being required to post bond or other security and without
having to provide the inadequacy of the available remedies at law.
(d) The Distributor agrees that it will maintain the reliability, security and
integrity of the Lottery Machines and that it will not use, modify or
install the Lottery Machines or any component part or sub-assembly in
other equipment or system without written approval from On-Point.
(e) The Distributor agrees that the type and duration of the restrictions
imposed are fair and reasonable and are reasonably required for the
protection of On-Point and the goodwill associated, with the business of
On-Point and are given as an integral part of this Agreement. If any of
the covenants contained in this Agreement, or any part thereof, are
construed to be invalid or unenforceable, such determination shall not
affect the remainder of the covenant or covenants, which shall be given
full effect without regard to the invalid portions. If any of the
covenants contained in this Agreement, or any part thereof, is held to be
unenforceable because of the duration of such provision, the parties agree
that the court making such determination shall have the power to reduce
the duration of such provision and, in its reduced form, such provision
shall then be enforceable.
9.2 Waiver.
The failure of either party hereto at any time to exercise any of his rights
under this Agreement shall not be deemed a waiver thereof nor shall such failure
in any way prevent said party from subsequently asserting or exercising such
rights.
9.3 Force Majeure.
Except as provided otherwise, neither party shall be liable for any defaults
hereunder due to cause beyond its reasonable control and without its fault or
negligence, including, but not limited to, acts of God or the public enemy, war,
fire, flood, marine accidents, strikes, shortages of transportation or
government orders, regulations or sections; provided that, in order to excuse
its default thereunder for anyone or more of the events enumerated above, such
party shall, upon the occurrence thereof, notify the other of the occurrence and
expected practical effect of any such event.
9.4 Assignment.
Unless otherwise provided herein, this Agreement or any rights or obligations
hereunder are not assignable by any party hereto without the prior written
consent of the other parties.
Editec Distributor Agreement Page 10 of 12 [Initials]
<PAGE> 11
9.5 Right to Purchase.
Distributor agrees that at any time during the initial term or renewal term of
this Agreement On-Point will have the right to purchase this Distributor
Agreement for Editec. The purchase price to be paid will be based on the
appraised value of the Distributor Agreement as valued by two independent
appraisers nominated, one each, by the parties. In the event that the appraisers
can not agree on an appraised value the two appraisers will nominate a third
appraiser to appraise the value of the Distributor Agreement. The third
appraiser evaluation will be binding on the parties.
9.6 Invalidity and Severability.
Should any provision of this Agreement in whole or in part be or become invalid
or inoperable, then the validity of the remaining provisions of this Agreement
shall not be effected thereby. The same shall apply, if this Agreement should
fail to provide for any relevant matter. In lieu of the invalid or inoperable
provision or in order to provide for an omitted provision, this Agreement shall
be applied in a reasonable manner which, as far as legally permissible, comes as
close as possible to what the parties intended or would have intended according
to, the spirit and purpose of this Agreement, if they had considered the matter
at the time of execution of this Agreement.
9.7 Completeness of Instrument.
This Agreement contains all of the agreements, understandings, representations,
conditions, warranties, or covenants made between the parties hereto. Unless set
forth herein, neither party shall be liable for any representations made, and
all modifications and amendments hereto must be in writing.
EXECUTED in San Diego, California, as of the dates set forth below.
ON-POINT TECHNOLOGY SYSTEMS, INC
By: /s/ Frederick Sandvick As Amended by "Amendment to Distributor
------------------------------ Agreement"
Frederick Sandvick, CEO
Dated: 2/12/98
DISTRIBUTOR
By: /s/ Franck Attal
------------------------------ [LOGO]
Franck Attal, Managing Director
Dated: 12/30/1997
Editec Distributor Agreement Page 11 of 12 [Initials]
<PAGE> 12
EXHIBIT A
PRICE LIST - US Dollars
(December 22, 1997)
<TABLE>
<CAPTION>
Unit Price Unit Price Unit Price
BASE MODEL* QUANTITY: 1 to 100 101 to 500 501+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ITR-8500-5SL $3,970.00 $3,780.00 $3,590.00
ITR-8500-8SL $4,920.00 $4,690.00 $4,450.00
<CAPTION>
OPTIONS Unit Price
- ----------------------------------------
<S> <C>
Bill Acceptor $945.00
(Ardac - World)
Coin Acceptor $180.00
(Mars)
Coin Change Dispenser $1,170.00
(Two [2] Coin)
Grabber $310.00
Comm Board $190.00
Shadow Windows NT:
a. Unlimited ITRs License $25,000.00
b. ITR License $190.00
</TABLE>
Note: Shadow License may be purchase with an Unlimited one time license or on a
per Lottery Machine (ITR) one time fee basis.
All Prices are FOB San Diego and are exclusive of any and all applicable taxes
and duties.
*Base Model: Cabinet, electronics, dispensers, keypad and printer, excluding:
bill acceptor, coin acceptor and any other Optional equipment.
PRICES MAY CHANGE IN ACCORDANCE WITH ARTICLE III 3.3.
[LOGO]
Editec Distributor Agreement Page 12 of 12 [Initials]
<PAGE> 1
Exhibit 10.28.1
AGREEMENT
THIS AGREEMENT is made and entered into by and between ON-POINT TECHNOLOGY
SYSTEMS, INC., a Nevada corporation, with its principal place of business at
1370 W. San Marcos Boulevard, Suite 100, San Marcos, California 92069
(hereinafter also referred to as "On-Point"), and EDITEC, SARL., a French
corporation, with its principal office at 70-74, rue du Marechal du Lattre de
Tassigny 94700, Maison-Alfort - France (hereinafter referred to as "Editec") in
accordance with the following facts and objectives.
A. On-Point manufactures, sells and leases, among other things, lottery
ticket dispensing machines and other similar lottery related machines ("Lottery
Machines")
B. On-Point and Editec entered into a Distributor Agreement signed by
Editec on December 30, 1997 and by On-Point on February 12, 1998, as amended by
an Amendment to Distributor Agreement dated December 30, 1997 and signed by
Editec on February 24, 1998 and by On-Point on February 12, 1998 (the
"Distributor Agreement")
C. On-Point and Editec, jointly and severally, contemplate entering into
an Agreement with La Francaise des Jeux pursuant to which La Francaise des Jeux
will purchase Lottery Machines manufactured by On-Point ("French Lottery
Contract")
D. On-Point and Editec desire to enter into this agreement in order to
allocate their rights and obligations under the French Lottery Contract, to the
extent such rights and obligations are inconsistent with the Distributor
Agreement.
THEREFORE, for valuable consideration, receipt of which is hereby
acknowledged, the parties agree as follows:
1. On-Point's Responsibilities.
(a) On-Point shall manufacture the Lottery Machines ordered by La
Francaise des Jeux in accordance with the French Lottery Contract.
(b) On-Point shall have the Lottery Machines available for shipment six
(6) weeks prior to the delivery date established by La Francaise des Jeux,
provided purchase orders for Lottery Machines are placed with On-Point at least
sixteen (16) weeks (thirteen (13) weeks for the first order)prior to such
delivery date and Editec provides On-Point with coin acceptors and modems for
the Lottery Machines on a timely basis.
Page 1 of 6
<PAGE> 2
(c) On-Point will make its personnel available for training in accordance
with the Distributor Agreement.
(d) On-Point shall invoice Editec upon shipment of the Lottery Machines.
2. Editec's Responsibilities.
(a) Editec shall provide to On-Point, at Editec's expense, coin acceptors
made by Mars to be installed in the Lottery Machines, F.O.B., destination at
On-Point's facilities in San Diego County, California. Editec shall also provide
to On-Point a French Telecom certified modem to be installed in the Lottery
Machines F.O.B., destination at On-Point's facilities in San Diego County,
California. It is understood that the price of each such modem will not exceed
two hundred and sixty (260) French francs. On-Point will reimburse Editec
one-half of the modem price, up to a maximum of one-hundred and thirty (130)
French francs per modem, upon receipt of invoices for such modems. Editec shall
be responsible for ensuring that such coin acceptors and modems are received by
On-Point in sufficient time to meet its delivery schedule under Paragraph 1(b).
Editec shall arrange for shipment of the Lottery Machines from On-Point's
facilities in San Diego County, California to France. As provided in the
Distributor Agreement, On-Point shall sell the Lottery Machines to Editec on the
basis of F.O.B., the place of shipment, which shall be On-Point's facilities in
San Diego County, California. Title to and risk of loss with respect to the
Lottery Machines shall be transferred from On-Point to Editec at the time and
point of acceptance of the Lottery Machines by a carrier at the place of
shipment. Editec shall be responsible for all customs documentation and fees.
Editec shall be responsible for all applicable taxes, duties, licenses and fees.
(b) Editec shall be responsible for delivery of the Lottery Machines to La
Francaise des Jeux on-time in accordance with the French Lottery Contract,
subject to On-Point's responsibility for having the Lottery Machines available
for shipment in accordance with Paragraph 1(b). Any penalties assessed by La
Francaise des Jeux for late delivery of the Lottery Machines shall be borne by
the responsible party.
(c) Editec shall invoice La Francaise des Jeux for the purchase price of
Lottery Machines delivered to them on a regular basis (at least monthly) with
instructions to make payment of the purchase price directly into a joint account
to be maintained by On-Point and Editec. On-Point and Editec shall provide joint
written instructions to the institution maintaining such bank account with
respect to the division of monies in the account. On-Point shall be paid within
two days of the date La Francaise des Jeux remits payments. Of the invoiced
amounts, and monies deposited into the joint account, On-Point shall be paid the
following: Three thousand eight hundred and sixty U.S. dollars (US$3,860) for
each
Page 2 of 6
<PAGE> 3
Lottery Machine; two hundred and five French francs (205FF) for the optional
wheels on each Lottery Machine; and one-half of the "Exchange Rate Gain," if
any. The "Exchange Rate Gain" means the amount determined by the formula (x)
minus (y), where (x) is the quotient of 27,977F. (twenty-seven thousand nine
hundred seventy seven French francs) divided by the current exchange rate for
French francs to U.S. dollars, and (y) is US$4,647 the U.S. dollar amount the
day the price was submitted to La Francaise des Jeux. For example, if the
exchange rate is 5.6 french francs for each U.S. dollar, the Exchange Rate Gain
shall be: 27,977 + 5.6 -$4,995.89 - $4,647 = $348.89. Editec's failure to
execute joint written instructions providing for payment to On-Point consistent
with the foregoing provisions of this paragraph shall be considered an event of
default by Editec under the Distributor Agreement.
(d) Editec shall be responsible for warranty repair of the Lottery
Machines during the warranty period in accordance with the French Lottery
Contract; subject, however, to On-Point's warranty obligation under the
Distributor Agreement. Any penalties assessed by La Francaise des Jeux for
failure to make timely warranty repairs shall be borne by the responsible party.
Editec shall communicate all technical bulletins relating to the Lottery
Machines to La Francaise des Jeux and the party responsible for maintaining the
Lottery Machines.
(e) Editec shall purchase and maintain an inventory of spare parts in
France in accordance with the French Lottery Contract.
(f) Editec shall furnish all consumables related to the Lottery Machines
in accordance with the French Lottery Contract and shall invoice La Francaise
des Jeux for the same.
(g) Editec shall be solely responsible for the "Buy-Back" obligations as
described in ARTICLE 14 of the French Lottery Contract.
(h) Editec shall be responsible for translating all technical documents
and user manuals provided by On-Point relating to the Lottery Machines to the
French Language.
(i) Editec shall be responsible for providing training as required by the
French Lottery Contact; subject, however, to On-Point's obligation to make its
personnel available for training in accordance with the Distributor Agreement.
3 Notices.
(a) Neither Editec nor On-Point shall send any notice to La Francaise des
Jeux without the prior consent of the other party. Notwithstanding the
foregoing, any proposed notice to be sent by
Page 3 of 6
<PAGE> 4
Editec or On-Point to La Francaise des Jeux shall be sent via facsimile first to
the other party, who shall be deemed to consent to such notice if it does not
object within forty-eight (48) hours, excluding weekends and holidays.
(b) On-Point and Editec shall promptly send via facsimile to the other
party any notice received from La Francaise des Jeux.
4. Editec's Indemnity.
Editec shall indemnify, defend, and hold On-Point harmless against and in
respect of any and all claims, demands, losses, costs, expenses, obligations,
liabilities, damages, recoveries and deficiencies, including interest,
penalties, and reasonable attorneys' fees, incurred or suffered by On-Point that
arise or result from or relate to any breach of, or failure by Editec to
perform, any of its representations, warranties, commitments, covenants, or
agreements in the French Lottery Contract, the Distributor Agreement or this
Agreement ("Indemnity Obligation").
5. On-Point's Indemnity.
On-Point shall indemnify, defend and hold Editec harmless against and in
respect of any and all claims, demands, losses, costs, expenses, obligations,
liabilities, damages, recoveries, and deficiencies, including interest,
penalties, and reasonable attorneys' fees, incurred or suffered by Editec that
arise or result from or relate to any breach of, or failure by On-Point to
perform, any of its representations, warranties, commitments, covenants, or
agreements in the French Lottery Contract, the Distributor Agreement or this
Agreement ("Indemnity Obligations").
6. Indemnification Procedure.
(a) Promptly, upon receipt by the party to be indemnified ("Indemnified
Party") and held harmless from and against an Indemnity Obligation, of a demand,
claim, action, assessment or proceeding made or brought by a third party,
including a governmental agency ("Third Party Claim") relating to an Indemnity
Obligation, the Indemnified Party shall notify the party obligated to indemnify
it (the "Indemnitor") in writing of its existence, setting forth the relevant
facts and circumstances, specifying the basis upon which the Indemnified Party's
claim for indemnification is asserted and tender the defense of the Third Party
Claim to the Indemnitor.
If Indemnitor accepts responsibility for the defense of the Third
Party Claim, then the Indemnitor shall have the right to contest, defend and
litigate the Third Party Claim and shall have
Page 4 of 6
<PAGE> 5
the right, in its discretion exercised in good faith and upon the advise of
counsel, to settle any such matter, either before or after the initiation of
litigation, at such time and upon such terms as it deems fair and reasonable,
provided that at least ten (10) days prior to any such settlement, it shall give
written notice of its intention to settle to the Indemnified Party and provided
further that such settlement otherwise complies with the provision of paragraph
6(b). The Indemnified Party shall have the right to be represented by counsel
at its own expense in any defense conducted by Indemnitor.
(b) Notwithstanding the foregoing, in connection with any settlement
negotiated by Indemnitor, no Indemnified Party shall be required to:
(i) Enter into any settlement (A) that does not include the delivery
by the claimant or plaintiff to the Indemnified Party of a release from
all liability in respect of such claim or litigation, (B) if the
Indemnified Party shall, in writing to Indemnitor within the ten (10) day
period prior to such proposed settlement, disapprove of such settlement
proposal and desire to have Indemnitor tender the defense of such matter
back to the Indemnified Party, or (C) that requires an Indemnified Party
to take any affirmative actions as a condition of such settlement, or
(ii) Consent to the entry of any judgment that does not include a
full dismissal of the litigation or proceeding against the Indemnified
Party with prejudice.
It is expressly provided, however, that should the Indemnified Party
disapprove of a settlement proposal pursuant to paragraph 6(b)(i)(B) above, the
Indemnitor's liability to the Indemnified Party shall, upon final resolution of
such Third Party Claim, be limited to the amount at which the Indemnitor
proposed to settle such Third Party Claim prior to the exercise by the
Indemnified Party of its right as set forth above.
(c) If an Indemnified Party shall be entitled to indemnification against a
Third Party Claim, and if Indemnitor shall fail to accept the defense of a Third
Party Claim which has been tendered in accordance with this Paragraph, the
Indemnified Party shall have the right, without prejudice to its right of
indemnification hereunder, in its discretion exercised in good faith upon the
advise of counsel, to contest, defend and litigate such Third Party Claim, and
may settle such Third Party Claim, either before or after the initiation of
litigation, at such time and upon such terms as the Indemnified Party deems fair
and reasonable, provided that at least ten (10) days prior to any such
settlement, written notice of its intention to settle is given to Indemnitor,
which notice is for information purposes only and is not intended to provide any
additional rights to the Indemnitor.
Page 5 of 6
<PAGE> 6
If, pursuant to this paragraph, the Indemnified Party so defends or settles a
Third Party Claim for which it is entitled to indemnification hereunder, as
hereinabove provided, the Indemnified Party shall be reimbursed by Indemnitor
for the reasonable attorneys' fees and other expenses. No failure by Indemnitor
to acknowledge in writing its indemnification obligations under this Agreement
shall relieve it of such obligations to the extent they exist.
7. Effect on Distributor Agreement.
All terms and provisions of the Distributor Agreement shall remain in full
force and effect governing the business relationships between On-Point and
Editec, unless inconsistent with the terms of this Agreement. By signing this
Agreement, neither party is waiving any of its rights under the Distributor
Agreement.
EXECUTED as of the dates set forth below.
ON-POINT TECHNOLOGY SYSTEMS, INC.
Dated: 3/1/99 By: /s/ Frederick Sandvick
------------- -----------------------------------
Frederick Sandvick, CEO
EDITEC, SARL.
Dated: 3/18/99 By: /s/ Frank Attal
------------- -----------------------------------
Frank Attal,
Managing Director
Page 6 of 6
<PAGE> 7
AMENDMENT TO DISTRIBUTOR AGREEMENT
This Amendment to the Distributor Agreement dated December 30, 1997 between
On-Point Technology Systems, Inc., ("On-Point" or "Producer") and EDITEC, SARL.,
("Editec" or "Distributor") is made and entered into effective as of December
31, 1997. Each of the paragraphs below shall replace and be substituted for the
same numbered paragraph in the Distributor Agreement.
ARTICLE II
TERM AND TERMINATION
2.4 (b) The acquisition of Distributor Agreement by On-Point pursuant to
Section IX 9.5 Right to Purchase.
2.5 Consequences.
(c) Upon termination of this Agreement, Distributor will hand over to On-Point
a list with names of all customers to whom Distributor sold Lottery
Machines during the five (5) year period before termination (the "Customer
List"). Unless On-Point terminates this Agreement for cause pursuant to
Article II, Section 2.2, if a sale of a Lottery Machine, substantially
similar to the previous Lottery Machines sold by Distributor, is made to
customer on the Customer List within a two year period from date of
termination, the Distributor will receive, (i.) if the sales price is at
least the same as the last price of Lottery Machines sold to such
customer, a commission of ten percent (10%) of the sales price, but not
greater than the difference between the sales price to the customer and
the Distributor price determined by Section 3.3 herein and, (ii.) if the
sales price is less than the last price of Lottery Machines sold to such
customer a commission of five percent (5%) of the sales price, but not
greater than the difference between the sales price to the customer and
the Distributor price determined by Section 3.3 herein. The commission
shall be paid to Distributor within thirty (30) days of On-Point's receipt
of payment of the sales price from the customer. Should such customer
purchase Lottery Machines that are different from the Lottery Machines
previously sold (e.g. new models that have not been sold anywhere prior to
the termination of this Agreement) to the customer, Distributor will not
receive any commission.
(d) For orders from customers who bought Lottery Machines of On-Point within a
period of eighteen (18) months before the termination of the Agreement in
order to test these Lottery Machines, Distributor will receive a
commission of ten percent (10%) of the sales prices of any substantially
similar Lottery Machines sold to the customers as a result of such test
during a period of two (2) years after the termination of this Agreement
provided that
Editec Distributor Agreement - Amendment Page: 1 of 3
<PAGE> 8
the price of such Lottery Machines provides On-Point at least a forty
percent (4O%) markup of its full cost. The commission shall be reduced by
the amount necessary to provide On-Point with a forty percent (40%) markup
of On-Point's full cost per Section 3.3 herein, including any commissions
to other parties On-Point is required to pay for such sales. Distributor
will hand over a list with those customers to On-Point at the termination.
The commission shall be paid to Distributor within thirty (30) days of
On-Point's receipt of payment of the sales price from the customer.
Should such customer purchase Lottery Machines that are different from the
Lottery Machines previously sold (e.g. new models that have not been sold
anywhere prior to the termination of this Agreement) to the customer,
Distributor will not receive any commission.
ARTICLE VII
SERVICE/PRODUCTION
7.1 Service.
(c) On-Point shall supply Distributor with spare parts necessary for
maintenance and repair service of the Lottery Machines during the term of
this Agreement and for a period of three (3) years after a discontinuance
of sale of the Lottery Machines by Distributor. In order to service the
Lottery Machines without delay, Distributor shall maintain an inventory of
spare parts which is sufficient to meet the immediate demand, especially
in cases of warranty. The purchase price for spare parts not covered by
the warranty shall be twenty (20%) percent less than the current price on
On-Point's international price list, F.O.B. the place of shipment. Parts
used from the spare parts inventory for repair under warranty will be
replaced by On-Point upon receipt of the faulty parts from Distributor.
ARTICLE IX
FINAL PROVISIONS
9.1(d)
The Distributor agrees that it will maintain the reliability, security and
integrity of the Lottery Machines. The Distributor further agrees that it
will not modify the Lottery Machines or any component part or sub-assembly
nor use or install any Lottery Machine or component or sub-assembly in
other equipment or system without written approval from On-Point.
9.5 Right to Purchase.
Distributor agrees that at any time during the initial term or renewal of
this agreement, On-Point will have the right and option to purchase this
Distributor Agreement from Editec.
Editec Distributor Agreement - Amendment Page: 2 of 3
<PAGE> 9
If On-Point desires to purchase this Distributor Agreement, it shall
deliver to Editec a written notice of intent to exercise its option to
purchase. The purchase price to be paid shall be the value of this
Agreement as agreed by Editec and On-Point. If they do not agree upon a
value within thirty (30) days after the date of On-Point's written notice
of exercise, On-Point may give notice ("Appraisal Notice") to Editec of
intention to submit the matter to an appraiser for a determination. Within
fifteen (15) days from the date of delivery of the Appraisal Notice, the
parties shall select a single neutral appraiser. If the parties are unable
to agree upon a single neutral appraiser, then within thirty (30) days
following delivery of the Appraisal Notice, each party shall select an
appraiser and the two appraisers so selected shall appoint a third
appraiser who alone shall determine the value of this Distributor
Agreement ("appraised value"). The decision of the appraiser as to the
appraised value shall be binding upon the parties. All expenses of
appraisal shall be borne pro rata by the respective parties. As soon as
the appraised value of this Distributor Agreement has been determined, the
appraiser shall give written notice to the parties.
EXECUTED as of the dates set forth below.
ON-POINT TECHNOLOGY SYSTEMS, INC.
By: /s/ Frederick Sandvick
-----------------------------------
Frederick Sandvick, CEO
Dated: 2/12/98
DISTRIBUTOR
By: /s/ Frank Attal
- -----------------------------------
Frank Attal, Managing Director
Dated: 2/24/98
Editec Distributor Agreement - Amendment Page: 3 of 3
<PAGE> 1
Exhibit 10.30
LOTTERY ENTERPRISES, INC.
and
IGOR, THE WATCHDOG CORP.
SERVICES AGREEMENT
This Agreement is between Lottery Enterprises, Inc. (hereinafter referred to as
"LEI") and IGOR, The Watchdog Corp. (hereinafter referred to as "IGOR").
WHEREAS, the parties hereto desire to enter into an Agreement for IGOR to
provide for the installation and service of instant ticket vending machines
(ITVM's) in Illinois;
Now, therefore, in consideration of the respective agreements of the parties
hereto, LEI and IGOR agree as follows;
IGOR shall provide warehouse locations in Tinley Park and Springfield for
distribution and installations of ITVM's.
IGOR shall provide for the installation of ITVM's.
IGOR shall provide ITVM training for agents and lottery personnel. including
training new employees and refresher training to existing employees.
IGOR shall provide for the servicing of the ITVM's in accordance with the
procedures set forth in the ITR-7500 ITVM Technical Manual provided by LEI.
IGOR shall provide monthly quarterly preventive maintenance and customer service
visits; as well as delivery of supplies, as needed, for the ITVM's.
Should the Illinois Lottery exercise its option to choose a six (6) days per
week service availability schedule, it is understood that the preventive
maintenance schedule shall be altered to provide for preventive maintenance
service to each ITVM every 60 calendar days.
IGOR shall provide statewide dispatch services.
IGOR shall provide use of their warehouse and depot facilities.
IGOR shall provide limited data processing services.
IGOR will provide personnel to staff the Retailer Support/Dispatch Department.
<PAGE> 2
IGOR will provide one (1) LEI trained technician for every 130 ITVM's in
Illinois.
IGOR will guarantee a response time of four hours for critical calls from the
time a technician is dispatched to the time the technician arrives at the agent
location. Non-critical service calls will be closed out within 24 hours. All
service calls bring a follow-up call by a customer service representative.
IGOR's technicians will have an inoperative ITVM up and running within 30
minutes of arriving at the agent location and obtaining the keys from the
appropriate person.
IGOR agrees that all IGOR technicians will carry pagers, two-way radios or
phones for immediate notification of service needs.
IGOR agrees that all IGOR technicians will carry photo ID badges for proper
identification.
IGOR agrees that all IGOR technicians will wear uniforms and present a
professional image at all times.
IGOR agrees to store supplies and spare parts for the ITVM's and provide a full
and complete inventory of same on the last working day of each month for the
term of this Agreement..
IGOR agrees to represent IGOR, LEI and the Illinois Lottery in a professional,
competent and efficient manner.
IGOR agrees to furnish one (1) bench technician plus space and utilities for the
bench technician's operation should this option be requested in writing by LEI.
LEI agrees that all IGOR technicians will receive thorough training by LEI on
both technical training as well as customer service training.
LEI shall be responsible for dispatch and service telephone costs, including the
in-bound toll-free phone lines and the out bound call back line.
LEI agrees to furnish IGOR all the supplies for the ITVM's, including all
cleaning materials.
LEI agrees to furnish IGOR with all the tools and equipment necessary to provide
service and preventive maintenance on the ITVM's for all technicians and
warehouse staff.
LEI agrees to furnish all the spare parts for the ITVM's and reimburse IGOR for
the cost of shipping parts back to LEI.
<PAGE> 3
LEI agrees to train IGOR's bench technician plus furnish all the tools, benches,
equipment and parts necessary for the bench technician's operation if and when
this option is exercised by LEI..
LEI agrees to furnish IGOR all of the training materials for the operation and
service of the ITVM's.
These materials shall include, but are not limited to the following:
o Operating Manuals.
o Technician Manuals.
o Quick Reference Cards - Operator
o Quick Reference Cards - Technician
o Service forms.
o History cards.
LEI agrees to furnish IGOR with LEI technical support on a continuing basis.
LEI agrees to compensate IGOR as follows:
Maintain ITVM's
$26.50/month* per installed ITVM
(based on Monday through Saturday service from 8:30 am, to 5:00 p.m.)
$20.00/Month* per installed ITVM
(based on Monday through Friday service from 8:30 a.m. to 5:00 p.m.)
Dispatch and Agent Hotline
$ 2/month* per installed ITVM
(based on Monday through Friday service from 8:30 a.m. to 5:00 p.m.)
Installation and removal charges
$80/per ITVM for installation
(not including installation or hooking up LEI Shadow or The Grabber -
Sign)
$60/per ITVM for removal
Bench Technician Services-Optional
$13/per hour x 40 hours per week plus an agreed upon amount per month for
space required and prorated utility cost. This shall be at the written
request of LEI if and when such technician is deemed necessary.
<PAGE> 4
Storage Space
$ 5/per ITVM per month for storage of ITVM's over 30 days at IGOR
warehouses.
Additional services to be performed by IGOR can be negotiated and added to
this agreement as needed.
* per month or fraction thereof
IGOR shall submit monthly invoices to LEI for services rendered by IGOR
pursuant to this Agreement to an address designated by LEI. Payment for such
invoices shall be due within ten (10) days of receipt by LEI. On all amounts not
properly paid by LEI when due under each Schedule, interest shall accrue at the
rate of one percent (1 %) per month or portion thereof (or the maximum rate
allowable by law, if less) from the due dates thereof until received by IGOR,
and shall be payable to IGOR without demand.
The term of this Agreement shall run concurrent to the term of the Contract
between the Illinois Department of - The Lottery "Lottery" and LEI, "The
Contract", attached as Exhibit "A", including any extensions and/or renewals. In
the event of conflicting terms or conditions, the terms of the Contract shall
control.
IGOR will abide by and comply with the laws of the State of Illinois and the
rules and regulations of the Illinois Lottery.
LEI, the Lottery and the State of Illinois do not assume any liability or
responsibility of any kind whatsoever resulting from this Agreement for the
actions or failure to act by IGOR. It is further understood and agreed that all
employee compensation, insurance, benefits and obligations of any type due to
IGOR's employees, their heirs or assigns, shall be the sole responsibility of
IGOR.
LEI and IGOR hereby agree that all terms and conditions of this Agreement are
fully set forth herein and further agree that only those terms and conditions
set forth herein, and the relevant terms and conditions set forth in "Contract"
as set forth above and incorporated by reference shall constitute the final
enforceable Agreement between these parties. No terms and conditions of this
written Agreement can be varied or waived by any representations or promise on
the part of any party hereto unless such modifications be in writing and
mutually signed by the duly authorized agents of the parties hereto.
<PAGE> 5
This Agreement shall only be terminated for the following reasons, and only with
the agreement and approval of the Illinois Lottery;
o Mutual agreement by both parties.
o Termination of the Contract between the Lottery and LEI.
o For Just Cause.
IN WITNESS THEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives.
LOTTERY ENTERPRISES, INC. IGOR, THE WATCHDOG CORP.
By: /s/ Robert Burr By: Mike Guthrie
--------------------------------- ---------------------------
Robert Burr President/CEO Mike Guthrie, President
Address: 9190 Activity Road Address: 7650 Graphic Dr.
San Diego, CA 92126 Tinley Park, IL 60477
Date: 7/15/94 Fed Tax ID: 36-2964204
Approved: State of Illinois Department of Lottery
By:________________________
<PAGE> 6
On-Point Technology Systems, Inc.
and
IGOR, The Watchdog Corp.
Service Agreement - Amendment 2
This amendment to the Service Agreement dated July 15, 1994 and as amended is
made between On-Point Technology Systems, Inc., (hereinafter referred to as
"On-Point") and IGOR, The Watchdog Corp. (hereinafter referred to as "IGOR").
This amendment is made with respect to the additional services to be provided by
IGOR pursuant to On-Point's amended agreement with the Illinois Lottery
(hereinafter referred to as "Lottery"). The additional services to be provided
by IGOR are i). the installation of new software EPROMS in the ITVMs to effect
Y2K compliance, ii). the installation of new software EPROMS in the bill
acceptors to effect the acceptance of new U.S. currency issued by the U.S.
Treasury, and iii). all the other services required in accordance with the
Service Agreement to all On-Point ITVMs which will be owned by the Lottery
during the term of our Agreement.
Now, therefore, in consideration of the respective agreement of the parties
hereto, IGOR agrees as follows:
1. IGOR will install into all On-Point ITVMs owned or leased by the Lottery
new software EPROMs, provided by On-Point, to effect a software
modification to upgrade the ITVMs to Y2K compliance. IGOR will track and
maintain a list of all of the ITVMs by serial number showing those ITVMs
that have been upgraded to Y2K compliance and those ITVMs that are still
to be upgraded. This list will be forwarded to On-Point by the 15th day of
each month. The upgrade program to all of the ITVMs will be completed no
later than November 30, 1999. For any machines not upgraded by November
30, 1999, On-Point shall have the right to withhold all amounts that may
be due to IGOR pursuant to the Service Agreement including any other
rights or remedies available to On-Point, and deduct from any amounts due
any penalties that the Lottery may assess for non-performance.
2. When requested by On-Point during the term of the Service Agreement IGOR
will install the EPROMs, provided by On-Point, into the bill acceptors to
effect the upgrade to permit the acceptance of new U.S. currency. IGOR
will track and maintain a list of all of the ITVMs by serial number
showing those ITVMs' whose bill acceptor has been upgraded together with
the serial number of the bill acceptor that have been upgraded and those
ITVMs that are still to be upgraded. Further, IGOR will provide a list by
serial number of those bill acceptors held in spare parts inventory that
have been upgraded and those that have not been upgraded. IGOR agrees that
the upgrade to bill acceptors held in spare parts inventory will be
upgraded
<PAGE> 7
On-Point and IGOR Service Agreement
Amendment 2
Page 2 of 3
in a separate process from bench repairs and as such the number of bench
repairs normally invoiced to On-Point on a monthly basis will not increase
due to the upgrade process. IGOR will provide these lists to On-Point by
the 15th day of each month. IGOR will complete the upgrade program within
ninety (90) days of written request by On-Point. For any Bill Acceptors
not upgraded within the 90-day period, On-Point shall have the right to
withhold all amounts that may be due to IGOR pursuant to the Service
Agreement including any other rights or remedies available to On-Point,
and deduct from any amounts due any penalties that the Lottery may assess
for nonperformance.
3. IGOR will provide all of the services and upgrades required under the
Service Agreement to all ITVMs that become the property of the Lottery
pursuant to the Lottery's right to purchase the ITVMs upon termination of
their respective leases.
4. Compensation
In consideration of the above services to be provided by IGOR, On-Point
agrees to compensate IGOR by increasing the monthly service fee per ITVM
by two dollars ($2.00). Therefore, effective July 1, 1999 the monthly
service fee for all ITVMs owned or leased by the Lottery will be
thirty-four dollars ($34.00).
The parties agree that the following Schedule of Services and Fees will be
effective from July 1, 1999:
Service Fee
Preventive and Remedial Service
Per Installed ITVM Monday through
Friday 8:30AM to 5:00PM $34.00/Month
Dispatch and Agent Hotline
Per Installed ITVM Monday through
Friday 8:30AM to 5:00PM $2.00/Month
Installations and Removals
Install ITVM 12-bin $150.00
Install ITVM 4 or 8-bin $80.00
Removal ITVM 12-bin $120.00
Removal ITVM 4 or 8-bin $60.00
Install ITVM 12-bin and Removal of
4 or 8-bin from same location $190.00
Page 2 of 3
<PAGE> 8
On-Point and IGOR Service Agreement
Amendment 2
Page 3 of 3
Change of Ownership
Factory reset and initializes an existing
ITVM at an agent location $34.00
This amendment was drafted with the joint participation of the parties and/or
their legal council. Any ambiguity contained in this amendment shall not be
construed against any party as the draftsman, but this amendment shall be
construed in accordance with its fair meaning.
The effective date of this amendment shall commence on July 1, 1999.
All other terms and conditions of the original Service Agreement and amendments
shall remain in force unless modified by this amendment.
IN WITNESS THEREOF, The parties hereto have caused the Amendment to be executed
by their duly authorized representatives.
On-Point Technology Systems, Inc. IGOR, The Watchdog Corp.,
By: /s/ Brian J. Roberts By: /s/ Mike Guthrie
------------------------------ ---------------------------
Name: Brian J. Roberts Name: Mike Guthrie
Title: Senior Vice President Title: President
Date: 7/16/99 Date: 7/27/99
Address: Address:
1370 San Marcos Blvd., Suite 100 3461 Gatlin Drive
San Marcos, CA 92069 Springfield, IL 62707
Page 3 of 3
<PAGE> 1
Exhibit 10.30.1
STATE OF ILLINOIS
DEPARTMENT OF THE LOTTERY
and
LOTTERY ENTERPRISES, INC.
THIS AGREEMENT between the State of Illinois, Department of the Lottery,
(DEPARTMENT) and Lottery Enterprises, Inc., (CONTRACTOR) provides the following:
1. TERM. The term of this Agreement shall be for the period commencing July
1, 1994 or date of Department signature, whichever is later, and shall
terminate June 30, 1997. The Department shall have the option to extend
the term of this Agreement for two (2) consecutive one (1) year periods.
The Department shall notify Contractor of its intent to renew, pursuant to
this paragraph at least 30 days prior to the termination date.
2. SERVICES AND DELIVERABLES/OVERVIEW. For a set monthly fee, Contractor will
deliver, install and maintain up to 1,000 ITR-7500 eight game Instant
Ticket Dispensing Machines ("ITDM's") at designated Illinois Lottery agent
locations throughout the State of Illinois, pursuant to schedules from
time to time entered into between the parties, as well as furnish agent
training and a toll free agent service hotline, as provided in the
following documents (which are incorporated by reference as if fully set
forth herein), and as further detailed in this Agreement:
(a) Department's Instant Ticket Vending Machine and Support Services
Request for Proposal dated February 23, 1994 (the "RFP");
(b) Department's March 3, 1994 response to questions submitted pursuant
to the RFP;
(c) Contractor's March 16, 1994 Response to the RFP (hereinafter also
referred to as the Contractor's proposal);
(d) Department's conditional contract award letter dated May 5, 1994;
(e) Contractor's best and final price quotation dated June 9, 1994;
(f) Graphic depiction of ITDM to be installed at Illinois Lottery agent
locations, attached hereto as Exhibit A.
In the event of any conflict between this Agreement and those documents
incorporated by reference, the provisions of this
<PAGE> 2
Agreement shall prevail.
3. PHYSICAL CHARACTERISTICS. The ITDM's to be provided pursuant to this
agreement shall possess the following physical characteristics in addition
to those which may be specified in the documents referred to in Paragraph
2 above:
- Each machine shall be labeled as follows: "YOU MUST BE AT LEAST 18
TO PLAY ILLINOIS LOTTERY GAMES", "THIS MACHINE DOES NOT GIVE CHANGE"
and "CASH WINNING TICKETS AT SERVICE COUNTER". These notices must be
located above or around the bill acceptor slot.
- Each machine's major components (dispensing units, printer, bill
acceptor, keypad, base cabinet and sign, if applicable) must be bar
coded with part numbers and serial numbers for proper inventory
control.
- Each machine must be of durable construction with resistance to
fading, marring, chipping and rust, and of sufficient material
strength to resist theft, vandalism, intrusion and accidental
damage.
- Decal describing ticket tear off instructions.
- Decal describing how to purchase instructions.
- All locks are to be keyed and number coded separately (Master keys
to be provided to the Department's security office only).
4. DELIVERY/INSTALLATION/REMOVAL Delivery and installation of ITDM's shall be
during normal business hours and shall be consistent with the schedule set
forth on pages 89 - 92 of the Contractor's Response to the Department's
RFP unless notified otherwise in writing by the Department. This schedule
shall begin with the effective date of this Agreement. The Department
shall make its best effort to ensure sufficient installation sites are
identified to permit the scheduled installations.
The Department will notify the Contractor in writing if an ITDM is to be
removed from an agent location for any reason, including but not limited
to relocation to another agent location. The Contractor shall effect such
removal within five (5) business days of receipt of that notification.
Contractor shall not charge a fee for the first five (5) such removals or
relocations made each month at the Department's request. Thereafter,
Contractor shall be entitled to a fee of $75.00 for each removal or
relocation completed at the request of the Department. Contractor shall,
at the Department's request, relocate a machine within a given agent
location.
2
<PAGE> 3
There shall be no fee for such intra-location relocation.
All charges associated with the transportation, delivery, installation or
removal of the ITDM's shall be borne by the Contractor.
Contractor shall provide the Department with written certification of the
delivery of each ITDM and shall specifically certify that training has
been completed. Said certification must be countersigned by the agent or
representative of the agent taking delivery of the ITDM. The Department
and/or its agents shall be entitled to unlimited use and enjoyment of each
ITDM delivered pursuant to this Agreement. The Department and/or its
agents shall not use or permit the use of the ITDM's for any purpose
which, according to the specifications of the manufacturer, the ITDM is
not designed or reasonably suited. Department and/or its agents shall use
the ITDM's in a careful and proper manner and shall comply with all the
Manufacturer's instructions with regard to the use, operation or
maintenance of the ITDM.
The Department covenants that each ITDM shall at all times be and remain
personal property and shall not be so affixed to realty as to become a
fixture or otherwise lose its identity as the separate property of the
Contractor. The Department shall keep the ITDM's free and clear of all
levies, liens and encumbrances except those in favor of the Contractor or
its assigns. In the event Contractor assigns its rights to payment under
this contract, pursuant to paragraph 20 herein, Department agrees to
cooperate in the preparation of those documents and/or materials deemed
necessary to reflect Contractor's interest in the ITDM's as against third
parties.
The Contractor hereby assumes and shall bear the risk of loss with respect
to any damage, destruction, loss, theft or government taking, whether
partial or complete and whether through any fault or neglect of the
Department and/or its agents or otherwise.
5. TRAINING. For each ITDM installed at Illinois Lottery agent locations
(including locations where the Contractor is notified by the Department
that there has been a change of ownership or other circumstance
necessitating re-training), the Contractor shall provide on-site training
in the operation of the ITDM, including loading/unloading of tickets and
basic troubleshooting and repair, and will provide operations manuals and
quick reference materials for the agents' future reference. Said manuals
and materials shall be in the language specified by the Department for
each particular location. Training materials and operations manuals shall
be updated as requested by the Department to address software upgrades or
other deficiencies in the information contained
3
<PAGE> 4
therein. A constant supply of said manuals as well as the following
materials shall be made available, at the Contractor's expense, at each
location: brochures, training manual, reference card and display card.
Additionally, as set forth on page 86 of the Contractor's proposal,
Contractor shall furnish demonstration ITDM's for each of the Department's
six (6) Regional/District offices and for Lottery Central, and shall
furnish training and training materials for Department's staff.
Demonstration ITDM's and training of Lottery staff shall precede the
delivery of ITDM's pursuant to the schedule referenced in Paragraph 4.
These machines are in addition to the potential 1,000 ITDM's set forth in
Paragraph 2 hereof, and need not conform to the color design depicted in
the Exhibit referenced in subparagraph (F) of Paragraph 2 above. Said
machines shall remain at the Department's facilities to meet training and
demonstration needs throughout the term of this Agreement.
Any and all costs and charges for and associated with training, including
but not limited to production of materials (including updates) and
personnel costs, are encompassed by the fee paid by the Department
referred in Paragraph 12 below and any specific costs and expenses
associated with such training shall be borne by the Contractor. Training
should be concluded within two (2) days of installation.
6. MAINTENANCE/SERVICE. Contractor will provide maintenance of each ITDM
installed in the State of Illinois as follows:
Preventive Maintenance: Contractor shall provide on-site preventive
maintenance service to each ITDM every 60 calendar days.
Service Calls: Contractor shall provide repair and maintenance service
upon notification of need for such service by either the Department
directly or its agents.
With respect to service calls placed to the agent hotline which
necessitate the dispatch of service personnel, such personnel shall arrive
at an agent location within four (4) hours of notification for critical
calls (defined as those in which the ITDM is rendered incapable of
dispensing product or accepting payment or recording a transaction) and
within twenty-four (24) hours for non-critical calls. The ITDM will be up
and running within thirty (30) minutes of service personnel gaining access
to the machine.
The Contractor shall replace an ITDM at no cost to the Department in the
event that one or more of the following occurs: (A) a particular ITDM
requires service more than three (3) times in a one-month period, or (B)
an ITDM cannot
4
<PAGE> 5
be repaired within a twenty-four (24) hour period.
Contractor shall maintain records of the date, time and nature of each
preventive maintenance visit or service call for each ITDM. Such records
shall be maintained in the form of a log, with each ITDM. In addition,
Contractor shall maintain a master log of such records and shall retain
such records for a period of five years after the Termination of this
Agreement. Contractor shall furnish copies of such records to the
Department upon request.
Contractor shall provide sufficient personnel so as to respond to service
calls six (6) days per week, Monday through Saturday, inclusive.
Any and all charges for and associated with service/ maintenance are
encompassed in the fee paid by the Department referenced in Paragraph 12
below and any specific expenses or costs associated with such service and
maintenance shall be borne by the Contractor.
7. WARRANTY. All machines shall be completely warranted for the term of the
contract, including any extensions thereof, guaranteed from the date of
installation of each unit. The warranty shall incorporate all costs
associated with the repair and or replacement of the machines (i.e.,
hardware, software, components, electronics, labor, freight, etc.) as well
as replacement of machines per Paragraph 6. In addition, the Department
retains any and all implied warranties available at law including, but not
limited to, warranty of merchantability and warranty of fitness for a
particular purpose.
8. PERSONNEL. All personnel responsible for installation or servicing of
ITDM's for Illinois Lottery agent locations must consent to and clear
background checks for criminal activity, tax compliance and credit
history. Approved personnel must carry photo identification when visiting
agent locations for installation or service.
9. SOFTWARE. The Department's reasonable requests for software modifications'
and upgrades will be honored by the Contractor and programming will be
completed and installed within two months of the date of the request. Any
software modifications/upgrades will be furnished at no charge.
10. CENTRAL REPORTING SYSTEM. During the term of this Agreement, the
Department reserves the right to request the installation of ITDM's with
dial-up capabilities and central system reporting, at or below the prices
set forth in Item 2(e) above. Should the Department make this election,
the Shadow Communications/Database System referred to in the Contractor's
5
<PAGE> 6
proposal shall be set up in Illinois.
11. SUPPORT. Contractor will provide all equipment, supplies, services, and
other items of support which may be necessary to the delivery of
Contractor's services, including but not limited to maintaining, at its
expense, a constant supply of the following:
i) Printer paper
ii) Push button labels in the following denominations
1) One dollar ticket
2) Two dollar ticket
3) Three dollar ticket
4) Five dollar ticket
5) Ten dollar ticket
iii) Machine signage and decals (in English, Spanish and Polish),
as detailed in Paragraph 3
iv) Warning labels, as detailed in Paragraph 3
v) "Sell-in" brochures
vi) "Out of stock" cards
12. COMPENSATION. The Department will pay to the Contractor, for services set
forth in Paragraph 2 provided by the Contractor, who will accept as full
payment for all services the following:
- A fee of $177 per month, in arrears, per 8-bin ITDM installed at an
agent location.
- A fee of $161 per month, in arrears, per 6-bin ITDM installed at an
agent location.
- A fee of $141 per month, in arrears, per 4-bin ITDM installed at an
agent location.
The Department and the contractor shall periodically execute delivery
schedules which shall specify the ITDM's delivered (by serial number),
delivery date and other information. Each schedule shall be executed by
the parties and shall incorporate the terms and conditions of this
Agreement.
The Department may exercise its option to extend this Agreement for up to
two additional one-year periods at a fee of $90 per month per ITDM for an
8-bin unit, $75 per month for a 6-bin unit, and $65 per month for a 4-bin
unit. The Department additionally reserves the right to require repair
service five (5) or seven (7) days per week at the following rates during
the initial term or any extensions thereof:
5 day full service = subtract $7 per month per ITDM
7 day full service = add $12 per month per ITDM
6
<PAGE> 7
All other optional prices are in accordance with the RFP and subsequent
correspondence.
The fee payable to Contractor shall commence on the day of receipt by the
Department of delivery certification referenced in Paragraph 4.
Payment of fees pursuant to certification that is received on any day
other than the first of the month shall be pro-rated for that month in
which certification is received.
Payment will be made by wire transfer directly to Contractor's general
account, as indicated in writing, within 24 hours after the day the
Department receives written notification from the Contractor of the number
of ITDM's in operation for the previous month. The written notification
must list all machines in service for the entire preceding month and
separately list those machines in service for a portion of the month,
indicating the number of days in service for the latter.
13. INSURANCE. Contractor at its expense shall obtain, prior to installation
of the first ITDM, and maintain until termination of this Agreement (i)
fire and extended coverage insurance against loss, theft, damage, or
destruction of the ITDM's, in an amount not less than the Replacement
Value of the ITDM's; (ii) comprehensive public liability insurance against
claims for bodily injury, death and/or property damage arising out of the
use, ownership, possession, operation or condition of the ITDM's; (iii)
fidelity insurance covering theft of the Revenues by the employee(s) of
Contractor; and (iv) money and securities insurance covering theft of the
Revenues by a third party. Insurance provided pursuant to (i) and (ii)
above shall name Contractor as an insured and loss payee and its
assignee(s) as an additional insured and loss payee. Insurance provided in
accordance with sections (iii) and (iv) shall name Contractor and
Department as an insured and loss payee and Contractors assignee(s) as an
additional insured and loss payee and shall be payable as their respective
interests may appear. Each insurance policy shall comply with prudent
industry practices and shall contain a clause requiring the insurer to
give the insureds and additional insureds at least one month's prior
written notice of the cancellation or any alteration in the terms of such
policy and shall state that all claims thereunder shall be payable to such
parties irrespective of any breach of warranty or other act of omission of
Contractor. No insurance shall be subject to any co-insurance clause.
Each insurance policy shall be with an insurance carrier licensed to
provide all such insurance in Illinois.
14. WORK PRODUCT. All documents, including reports and all other
7
<PAGE> 8
work products, produced by the Contractor under this Agreement shall
become and remain the property of the Department.
15. APPROPRIATION. Obligations of the Department will cease immediately
without penalty of further payment being required in any fiscal year the
Illinois General Assembly fails to appropriate or otherwise make available
sufficient funds for this Agreement.
16. DEFINITION OF BREACH AND PROVISION FOR TERMINATION. In the event
Contractor fails to abide by or comply with any of the terms of this
Agreement which failure is not cured within fifteen (15) days after
written notice thereof from the Department; suffers voluntary or
involuntary dissolution; ceases to do business as an ongoing concern; or
becomes insolvent or bankrupt (provided that if an involuntary petition in
bankruptcy is filed against the Contractor, Contractor shall not be
considered bankrupt unless the petition is not dismissed within 60 days),
the Department may elect to declare that the Contractor has breached this
Agreement and may further elect to immediately terminate this Agreement
and all Contractor's rights therein. Payment may be made for work
completed which is acceptable to the Department and which can be utilized
by the Department. All other legal and equitable remedies of the
Department shall remain in effect.
In the event the Department fails to abide by or comply with any of the
terms of this Agreement, which failure is not cured within fifteen (15)
days after written notice thereof from Contractor, the Contractor may
elect to declare that the Department has breached this Agreement and may
further elect to immediately terminate this Agreement and all the
Department's rights therein upon written notice to the Department. All
legal and equitable remedies of the Contractor shall remain in effect.
This Agreement may be terminated for cause by either party upon 60 days'
notice in writing to the other party.
Upon termination of this Agreement, the Contractor shall remove the ITDM's
upon receipt of written notice from the Department. Upon termination,
either party may pursue all legal and equitable remedies available to such
party under applicable law.
17. CHANGE IN OWNERSHIP OR FORM OF BUSINESS. The Department reserves the right
to approve any sale of a majority (51%) interest in the Contractor. In the
event Contractor ceases to do business in its existing form, the
Department shall be entitled to 60 days operation of the ITDM's delivered
hereunder at the same rates and under the same terms and
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conditions as set forth herein.
18. OPTION TO PURCHASE. At the termination of this Agreement (three years),
the Department shall have the option to purchase any and all ITDM's at a
rate of $800 per machine. If this Agreement is extended, pursuant to
Paragraph 1, then at the conclusion of the first extension period the
Department shall have the option to purchase any and all ITDM's at a rate
of $400 per machine. If the Agreement is extended a second time, pursuant
to Paragraph 1, then at the conclusion of the second extension period the
Department shall have the option to purchase any and all ITDM's at a rate
of $1 per machine. Department shall notify Contractor, in writing, of its
intent to exercise its option at least 30 days prior to relevant
termination date in which case title to ITDM's shall transfer to the
Department upon receipt of payment pursuant to this paragraph.
19. RELEASE AND INDEMNITY. Contractor agrees to assume all risk of loss and to
indemnify and hold the Department, its officers, agents and employees
harmless from and against any and all liabilities, demands, claims,
damages, suits, costs, fees, and expenses incident thereto, for injuries
or death to persons and for loss of, damage to, or destruction of property
because of Contractor's negligence, intentional acts or omissions. In the
event of any demand or claim, the Department will notify Contractor in
writing. The Department may elect to defend any such demand or claim
against the Department and bill the Contractor for all damages assessed
against the Department and all reasonable costs and fees incurred by the
Department in its defense of the claim.
20. ASSIGNMENT/SUBCONTRACTING. This Agreement shall not be assigned, nor any
portion of the services subcontracted, without the prior written consent
by the Department. Contractor hereby declares and the Department consents
to the following subcontractors in addition to those set forth on
Attachments B to the Contractor's proposal:
IGOR, The Watchdog Corp.
No substitutions of approved subcontractors is permitted without the
Department's express authorization.
The Illinois Lottery is committed to the development and utilization of
minority, female, and disabled-owned businesses. We encourage the use of
these vendors as subcontractors to this contract.
21. DELAY. If, in the Department's opinion, performance is delayed by a cause
beyond the control of the Contractor, then the times for performance may
be extended, at the Department's
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option, for a period equivalent to the delay experienced by the
Contractor, or any period of time deemed reasonable by the Department,
whichever is shorter. An extension may be granted, after notice and
explanation in writing, if the Department is satisfied the delay was
unavoidable, could not have been reasonably anticipated and is not the
result of any action, inaction, or negligence by the Contractor.
22. STATUS/DEFINITION OF CONTRACTOR. For the purposes of this Agreement,
Contractor shall be deemed to be an Independent Contractor and shall in no
way be considered an employee or agent of the Department. The Contractor
warrants Contractor is the real party in interest to this Agreement and is
not acting for or on behalf of an undisclosed principal. Contractor shall
maintain sufficient supervision and control of its operations to insure
that all aspects of this Agreement are properly performed.
23. PROHIBITION FROM PARTICIPATION IN ILLINOIS LOTTERY GAMES. No ticket shall
be purchased by, and no prize shall be paid to Contractor or any employee
of Contractor, actually performing services pursuant to this Agreement,
nor any spouse, child, brother, sister or parent residing as a member of
the same household in the principal place of residence of such employee.
Contractor is required to provide notice of this prohibition to all
employees providing services to the Illinois State Lottery.
24. FULL AGREEMENT/MODIFICATION. Department and Contractor hereby agree that
all terms and conditions of this Agreement are fully set forth herein and
further agree that only those terms and conditions set forth herein
constitute the final enforceable Agreement between these parties. No terms
and conditions of this written Agreement can be varied or waived by any
representations or promise on the part of any party hereto unless such
modifications be in writing and mutually signed by the duly authorized
agents of the parties hereto.
25. PROJECT REPORTS. Contractor shall submit to the Department upon request
oral or written reports detailing the status of the work to be performed.
All written reports, including any final comprehensive reports, shall be
the property of the Department.
26. TERMINATION OF PRIOR AGREEMENTS. This Agreement cancels and terminates, as
of its effective date, all prior agreements between the parties hereto
covering the services and dates herein, whether written or oral or partly
written and partly oral. This section of this Agreement in no way affects
any agreement between these same parties for different services or
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agreements having a term other than that which is set forth in paragraph 1
of this Agreement.
27. WRITTEN NOTICE. All written notices given or sent hereunder shall be
deposited in the United States mail, proper postage prepaid, addressed to
the respective party at the address set forth on the signature page
herein, or to such other addresses as the parties may designate in writing
from time to time.
28. ADDRESS FOR BILLING. All Contractor billings pursuant to this Agreement
shall be addressed as follows: Illinois Department of the Lottery, 201
East Madison Street, Springfield, Illinois 62702, ATTN: Financial
Accounting.
29. NON-DISCRIMINATION. Contractor shall comply with all applicable provisions
of state and federal constitutions, laws, regulations and judicial orders
pertaining to nondiscrimination and equal employment opportunity including
but not limited to:
a) the Illinois Human Rights Act, as now or hereafter amended (775 ILCS
5/1-101 et seq.);
b) Section 750, Appendix A of the regulations of the Illinois
Department of Human Rights, which clause is hereby incorporated by
reference (44 Ill. Adm. Code 750);
c) the Public Works Employment Discrimination Act, as now or hereafter
amended (775 ILCS 10/0.01 et seq.);
30. CERTIFICATIONS.
a) The Contractor certifies that it is not barred from being awarded a
contract or subcontract under Section 10.1 or 10.3 of the Illinois
Purchasing Act (See 30 ILCS 505/10.1 and 10.3), and
b) The Contractor certifies that it has not been barred from
contracting with a unit of State or local government as a result of
a violation of Section 33E-3 or 33E-4 of the Criminal Code of 1961
(See 720 ILCS 5/33E-3 and 33E-4), and
c) The Contractor certifies that it is not in default on an educational
loan as provided in Public Act 85-827 (See 5 ILCS 385/1-3) (a
partnership shall be considered barred if any partner is in default
on an education loan), and
d) The Contractor is not prohibited from selling goods or services to
the State of Illinois because it pays dues or fees on behalf of its
employees or agents or subsidizes or otherwise reimburses them for
payment of their dues or
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fees to any club which unlawfully discriminates (See 775 ILCS 25/1-3).
e) Under penalties of perjury, I certify that 33-0423037 is my correct
Federal Taxpayer Identification Number. I am doing business as a
(please check one):
|_| Individual |_| Real Estate Agent
|_| Sole Proprietorship |_| Governmental Entity
|_| Partnership |_| Tax Exempt Organization
|X| Corporation (IRC 501 (a) only)
|_| Trust or Estate |_| Not-for-profit
|_| Medical and Health Care Corporation
Services Provider Corporation
f) The Contractor certifies that the Contractor will not engage in the
unlawful manufacture, distribution, dispensation, possession, or use
of a controlled substance in the performance of the contract.
g) The Contractor certifies that the services, programs and activities
provided under this contract are and will continue to be in
compliance with the Americans with Disabilities Act (42 U.S.C. 12101
et seq.) ("ADA") and the regulations promulgated thereunder (28 CFR
35.130).
31. APPLICABLE LAW. This Agreement and Contractor's obligations and services
hereunder are hereby made and must be performed in compliance with all
applicable federal and state laws. This Agreement shall be construed in
accordance with the laws of the State of Illinois.
32. RECORDS. The Contractor shall maintain, for a minimum of 5 years after the
completion of the contract, adequate books, records and supporting
documents to verify the amounts, recipients and uses of all disbursements
of funds passing in conjunction with the contract; the contract and all
books, records and supporting documents related to the contract shall be
available for review and audit by the Auditor General or by the
Department's internal or contractual auditors; and the Contractor agrees
to cooperate fully with any audit conducted by the Auditor General or by
the Department's internal or contractual auditors and to provide full
access to all relevant materials. Failure to maintain the books, records
and supporting documents required by this Section shall establish a
presumption in favor of the State for the recovery of any funds paid by
the State under the contract for which adequate books, records and
supporting documentation are not available to support their purported
disbursement.
33. SEXUAL HARASSMENT. The Contractor shall have written sexual harassment
policies that shall include, at a minimum, the
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following information: (i) the illegality of sexual harassment;, (ii) the
definition of sexual harassment under State law; (iii) a description of
sexual harassment, utilizing examples; (iv) the vendor's internal
complaint process including penalties; (v) the legal recourse,
investigative and complaint process available through the Department of
Human Rights and the Human Rights Commission; (vi) directions on how to
contact the Department of Human Rights and the Human Rights Commission;
and (vii) protection against retaliation as provided by Section 6-101 of
the Illinois Human Rights Act.
IN WITNESS THEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives.
STATE OF ILLINOIS
DEPARTMENT OF THE LOTTERY LOTTERY ENTERPRISES, INC.
By: /s/ Desiree G. Rogers By: /s/ Robert L. Burr
------------------------------- ---------------------------------
Desiree G. Rogers Authorized Officer/Agent
Address: 201 E. Madison St. Address: 9190 Activity Road
Springfield, IL 62702 San Diego, CA 92126
Date: July 14, 1994 Remit: _____________________________
_____________________________
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