<PAGE>
--------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-21738
ON-POINT TECHNOLOGY SYSTEMS, INC.
(Name of small business issuer in its charter)
Nevada 33-0423037
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1370 W. SAN MARCOS BLVD. SUITE 100, SAN MARCOS, CALIFORNIA 92069
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (760) 510-4900
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding twelve months, and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
--- ---
As of November 6, 2000, there were 4,272,134 shares of Common Stock ($.03 par
value) outstanding.
--------------------------------------------------------------------------------
<PAGE>
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page
----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2000 (Unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Operations (Unaudited)
Three and Nine Months Ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information 11
</TABLE>
2
<PAGE>
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 December, 31
2000 1999
Assets THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS (Unaudited)
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 74 $ 157
Accounts receivable, net 2,413 883
Inventories 6,096 6,325
Net investment in sales-type leases 1,393 1,619
Other current assets 223 199
---------------------------------------------------------------------------------------------------------------------------
Total current assets 10,199 9,183
---------------------------------------------------------------------------------------------------------------------------
Plant, property and equipment, net 397 565
Net investment in sales-type leases 2,537 2,402
Property held for operating leases, net 753 275
Inventory,previously under lease with Solutioneering 2,020 2,513
Other assets 1,758 1,712
---------------------------------------------------------------------------------------------------------------------------
Total assets $17,664 $16,650
===========================================================================================================================
Liabilities and shareholders' equity
---------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 2,131 $ 1,793
Notes payable 1,000
Accrued expenses & other current liabilities 798 706
---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,929 3,499
---------------------------------------------------------------------------------------------------------------------------
Long-term debt 6,473 4,730
---------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, no par value, 2,000,000 shares
authorized, no shares issued or outstanding
Common stock, $.03 par value, 6,666,666 shares
authorized, 3,572,134 and 3,422,134 shares issued
and outstanding respectively 107 103
Additional paid-in capital 31,900 31,590
Accumulated deficit (23,745) (23,272)
---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 8,262 8,421
---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $17,664 $16,650
===========================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
THOUSANDS OF DOLLARS/SHARES, EXCEPT PER SHARE AMOUNTS 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------
As Restated As Restated
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $2,212 $2,062 $8,896 $13,162
Cost of revenues 1,901 1,913 6,671 10,416
---------------------------------------------------------------------------------------------------------------------------
Gross profit 311 149 2,225 2,746
---------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 485 616 1,726 2,002
Research and development 251 109 859 504
---------------------------------------------------------------------------------------------------------------------------
Total operating expenses 736 725 2,585 2,506
---------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations (425) (576) (360) 240
---------------------------------------------------------------------------------------------------------------------------
Other income (expenses):
Interest expense (169) (141) (547) (367)
Income related to merger termination,net 855 406
Other (18) 17 29 (20)
---------------------------------------------------------------------------------------------------------------------------
Total other income (expense) 668 (124) (112) (387)
---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 243 $ (700) $ (472) $ (147)
===========================================================================================================================
Earnings (loss) per share:
Basic and diluted:
Earnings (loss) per share $ 0.07 $(0.21) $(0.14) $ (0.04)
===========================================================================================================================
Weighted average shares 3,572 3,410 3,489 3,410
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30
2000 1999
THOUSAND OF DOLLARS restated
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) (472) (147)
Adjustments to reconcile net (loss) to net cash (used for)
provided by operating activities:
Depreciation and amortization 799 1,604
Non-cash charges, net, primarily merger related income in 2000 and
reserves in 1999 (755) 604
Issuance of options and warrants for services provided 45 75
Changes in assets and liabilities:
Accounts receivable (1,530) (1,332)
Inventories 338 (1,633)
Accounts payable 338 921
Accrued expenses 99 (759)
Other current assets (33) 395
--------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by operating activities (1,171) (272)
--------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of plant, property and equipment (350)
Net investment in sales-type leases (638) (1,107)
Fixed asset disposals 42
--------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (638) (1,415)
--------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock warrants and options 269 202
Proceeds from line of credit, net (107) 1,625
Proceeds from notes payable, net 1,730 (103)
--------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,892 1,724
--------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (83) 37
--------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 157 129
--------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period 74 166
==============================================================================================================
Supplemental cash flow information:
Cash paid during the period for interest 394 335
Cash paid during the period for income taxes 5
==============================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION The accounting and reporting policies of On-Point
Technology Systems, Inc. and subsidiaries (collectively referred to as the
"Company") conform to generally accepted accounting principles. The condensed
consolidated financial statements for the three and nine months ended September
30, 2000 and 1999 are unaudited and do not include all information or footnotes
necessary for a complete presentation of financial condition, results of
operations and cash flows. The interim financial statements include all
adjustments, consisting only of normal recurring accruals, which in the opinion
of management are necessary in order to make the financial statements not
misleading. These financial statements should be read in conjunction with the
Company's December 31, 1999 audited financial statements which are included in
the Company's Annual Report on Form 10-KSB dated December 31,1999. The results
of operations for the three and nine months ended September 30, 2000 are not
necessarily indicative of the results to be expected for the entire year ending
December 31, 2000.
On November 6, 2000, the Board of Directors of the Company approved a
one-for-three reverse split of the Company's common stock. No fractional shares
of common stock will be issued in connection with the reverse stock split and in
instances where the reverse split would result in a stockholder becoming the
holder of a fractional interest in a share, then the number of shares held by
such stockholder will be rounded up to the nearest whole share. The accompanying
condensed consolidated financial statements have been restated to show the
effects of the reverse stock split as if the split had occurred as of the
beginning of the respective periods.
The 1999 condensed consolidated financial statements for the three and
nine months ended September 30, 1999 have been restated to reflect adjustments
to record leases of equipment to Solutioneering, Inc. (Solutioneering), a
prepaid phone card company that filed for bankruptcy protection in 1999 as
operating leases rather than sales-type leases, and to record stock compensation
expense for certain warrants and options granted in previous years (see Note 12
of Notes to Consolidated Financial Statements in On-Point's Form 10-KSB for the
year ended December 31, 1999 for a further description of the restatements). As
a result, the 1999 condensed consolidated financial statements have been
restated from amounts previously reported to properly reflect these transactions
and reclassifications. A summary of the significant effects of the restatement
is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1999
----
AS PREVIOUSLY REPORTED AS RESTATED
---------------------- -----------
THREE MONTHS ENDED SEPTEMBER 30:
<S> <C> <C>
Revenues $3,465 $2,062
Cost of revenues 2,691 1,913
-------------------------------------------------------------------------------------------------
Gross Profit 774 149
Operating expenses 652 725
-------------------------------------------------------------------------------------------------
Income (loss) from operations 122 (576)
Other income (expense) (27) (124)
-------------------------------------------------------------------------------------------------
Income (loss) before income taxes 95 (700)
Provision for income taxes 0 0
-------------------------------------------------------------------------------------------------
Net income (loss) $ 95 $ (700)
======== =========
Net income(loss) per share - basic $ 0.03 $(0.21)
Net income(loss) per share - diluted $ 0.03 $(0.21)
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
1999
----
AS PREVIOUSLY REPORTED AS RESTATED
---------------------- -----------
NINE MONTHS ENDED SEPTEMBER 30:
<S> <C> <C>
Revenues 13,894 13,162
Cost of revenues 10,067 10,416
-------------------------------------------------------------------------------------------------
Gross Profit 3,827 2,746
Operating expenses 2,383 2,506
-------------------------------------------------------------------------------------------------
Income (loss) from operations 1,444 240
Other income (expense) (111) (387)
-------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,333 (147)
Provision for income taxes 0 0
-------------------------------------------------------------------------------------------------
Net income (loss) 1,333 (147)
======== =========
Net income(loss) per share - basic $ 0.39 $ (0.04)
Net income(loss) per share - diluted $ 0.33 $ (0.04)
</TABLE>
2. SEGMENT INFORMATION On-Point has adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information", which changes the way
On-Point reports information about its operating segments. On-point has three
reportable segments: product sales, financing, and service. The product segment
includes all products sold by On-Point, including ITR and DCR vending machines
via product sales and sales-type lease agreements. The financing segment
includes revenues and expenses associated with (1) financing the sale of units
via sales-type leases and (2) operating leases. The service segment includes
revenues and expenses associated with its service and warranty contracts.
On-Point evaluates performance for each segment based on gross profits.
<TABLE>
<CAPTION>
($000)
NON-
2000 Products Financing Service Allocated Total
-------- --------- ------- --------- -----
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDING
SEPTEMBER 30,2000
OPERATING DATA:
---------------
Revenues $ 891 $ 297 $ 1,024 $2,212
Gross Profit 272 91 (52) 311
Income (Loss) from Operations (225) (119) (81) (425)
NINE MONTHS ENDING
SEPTEMBER 30,2000
OPERATING DATA:
---------------
Revenues $5,248 $ 448 $ 3,200 $ $8,896
Gross Profit 1,550 132 543 2,225
Income (Loss) from Operations (185) (617) 442 (449) (809)
BALANCE SHEET DATA(AT END OF PERIOD)
------------------------------------
Assets (allocated by segment) $7,924 $6,773 $ 912 $2,055 $17,664
CASH FLOW INFORMATION:
----------------------
Depreciation & Amortization $ 188 $ 604 $ 7 $ 799
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
1999
THREE MONTHS ENDING
SEPTEMBER 30,1999,AS RESTATED
OPERATING DATA:
---------------
Revenues $1,002 $ 75 $ 985 $ 2,062
Gross Profit 72 5 72 149
Income (Loss) from Operations (379) (338) 17 (700)
NINE MONTHS ENDING
SEPTEMBER 30,1999,AS RESTATED
OPERATING DATA:
---------------
Revenues $7,395 $1,461 $4,306 $13,162
Gross Profit 1,099 217 1,430 2,746
Income (Loss) from Operations (328) (714) 1,282 240
BALANCE SHEET DATA(AT END OF PERIOD)
------------------------------------
Assets (allocated by segment) $8,025 $7,750 $1,238 $1,880 $18,893
CASH FLOW INFORMATION:
----------------------
Depreciation & Amortization $ 993 $ 604 $ 7 $ 1,604
Capital Expenditures 350 350
</TABLE>
2. CONTINGENCIES Reference is made to the legal proceedings section of the
Note 11 of Notes to Consolidated Financial Statements in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1999. On April 21, 2000,
On-Point's principal competitor (Interlott Technologies, Inc. "ILI") filed an
action alleging breach of a settlement agreement between ILI and the Company in
that ILI alleges the Company is using elements of ILI's technology in On-Point's
new PlayPoint technology. Management believes that ILI's suit is without merit.
On-Point has filed an answer to the complaint and is contesting the claims
vigorously. During the second quarter, three shareholder class actions were
filed against On-Point, certain directors and officers and On-Point's auditors
seeking unspecified damages and alleging violations of federal securities laws
as a result of the restatement of On-Point's financial statements in prior
periods. On-Point is in the process of preparing a response and will defend the
actions vigorously.
In 1999, On-Point filed an action against Solutioneering (see Notes 7
and 10 of Notes to Consolidated Financial Statements in the Company's Annual
Report on Form 10-KSB for the year ended December 31,1999), for default of
payments due for the lease of equipment. In 2000, the bankruptcy court allowed
On-Point to re-take possession of the equipment. Prior to On-Point re-taking
possession of the equipment, the financing lender to Solutioneering filed an
action in court that raised a claim that it had a priority security interest
ahead of On-Point to the equipment based on its allegation that On-Point sold
the equipment to Solutioneering rather than leased the equipment. In August
2000, On-Point and the lender reached an amicable agreement whereby the lender
waived all claims to the equipment in exchange for the grant of warrants to
purchase 116,667 shares of Common Stock in On-Point at a per share price of
$3.75. As a result, On-Point now has full rights of ownership over all the
equipment and is in the process of re-taking possession of the equipment.
3. PROVISIONS FOR INCOME TAXES No provisions or benefits for federal or
state income taxes have been made for the three-month and nine month periods
ended September 30, 2000 and 1999. No significant changes have occurred to
operating loss carryforwards and net deferred income tax assets since December
31, 1999 (see Note 9 of Notes to Consolidated Financial Statements in On-Point's
Form 10-KSB for the year ended December 31, 1999).
4. PER SHARE INFORMATION In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
128 "Earnings per Share" establishing standards for computing and presenting
Basic Earnings Per Share ("Basic EPS") and Diluted Earnings Per Share ("Diluted
EPS"). Basic EPS is computed on the basis of the weighted average shares of
common stock outstanding plus contingently issuable shares. Diluted EPS is
computed on the basis of weighted average shares outstanding plus contingently
issuable shares and the additional common shares that would have been
outstanding if dilutive potential common shares had been issued, using the
treasury stock method. At September 30,2000, 1,245 thousand options and warrants
were not factored into the calculation due to antidilution.
8
<PAGE>
5. LONG TERM DEBT As of December 31, 1999, the Company had a note payable
to GTECH Corporation in the amount of $1.0 million, which was due August 15,
2000. Subsequent to December 31, 1999, an additional $500,000 was advanced to
the Company from GTECH under the same terms. The monies were loaned primarily in
connection with an acquisition of the Company by GTECH in an agreement signed
between the companies in January 2000. The acquisition discussions were
terminated in July 2000. As a result of the termination, the Company expensed
approximately $449,000 for costs associated with the acquisition. In connection
with the termination, On-Point claimed that it was owed a termination fee under
the agreement. During the third quarter of 2000, the Company amicably settled
the termination fee issue with GTECH by modifying the terms of the outstanding
Note Payable to GTECH. The modification provided for a reduction in the
principal amount from $1,500,000 to $750,000, elimination of all accrued
interest payable under the previous note through the date of the new note,
reduction of the interest rate to 10% per annum, and extension of the maturity
date of the new note to February 15, 2002. In consideration of the note
modification, On-Point waived all claims under the terminated merger agreement
with GTECH. The Company recorded income from the merger termination agreement of
$855,000 in the three months ended September 30, 2000, which, after subtraction
of the merger termination costs of $449,000, netted $406,000 of income in the
nine months ended September 30, 2000.
In May 2000, the Company amended its line of credit with Coast Business
Credit to provide for a three-year extension (from July 2000 to July 2003) and
to increase the maximum borrowings under the line from $6 million to $10
million. As of September 30, 2000, the Company had outstanding approximately
$4.6 million and was able to borrow up to approximately $4.7 million based on
the formulas under the line of credit.
During 2000, the Company received $1,100,000 from certain private
lenders under subordinated notes that were due in September 2000 with interest
at 10% per annum. The Company has renegotiated the notes and is in the process
of issuing new notes that provide for maturity of the principal on February 15,
2002 with interest payable quarterly at a rate of 10% per annum. The notes are
convertible at any time at the option of the lender, in whole or in part, prior
to the maturity date at a conversion price equal to $6.00 per share. The
conversion price is reduced to $1.50 per share if certain conditions are not met
by the Company. In addition, the lenders were granted warrants to purchase
131,667 shares of common stock at a per share price of $3.00 and warrants to
purchase 62,500 shares of common stock at a per share price of $6.00. The
warrants are exercisable through December 31, 2005.
6. SHAREHOLDERS EQUITY The decrease in shareholder's equity from $8.4
million at December 31, 1999 to $8.2 million at September 30, 2000 was comprised
of a decrease due to a net loss of $472 thousand net of an increase due to
compensation expense of $45 thousand recorded for certain stock options and
warrants and the issuance of 450,000 shares upon exercise of stock options for
$269,000 by the Company's chief executive officer.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL The Company's revenues through September 30, 2000 have been
generated from (i) sales of vending terminals (ii) leases of vending terminals
(iii) performance of service on vending terminals (iv) upgrades to vending
terminals, and (v) sales of associated parts.
The Company's products are sold or leased to a limited number of
customers worldwide. As a result, the Company has experienced fluctuations in
its financial results and capital expenditures because of the timing of
significant individual contract awards and customer orders as well as associated
product delivery schedules. The Company's sales cycle can, at times, be
relatively long due to the lead time required for business opportunities to
result in signed sales or lease agreements. Operating results may be affected by
such lead time as well as working capital requirements associated with
manufacturing vending terminals pursuant to new orders, increased competition,
and the extended time which may elapse between the customer's firm order and the
receipt of revenue from the sale or lease of the applicable vending terminals.
In addition, there has been an accelerating trend by customers to lease rather
than purchase vending terminal equipment. Leasing vending terminals requires the
Company to invest capital or otherwise finance the manufacture of the vending
terminals. The Company has obtained the resources necessary to finance its
expanding base of leased terminals through its line of credit and additional
debt financing, as well as through its existing cash flow and equity financing.
9
<PAGE>
The Company began in 2000 to introduce its next generation lottery
products and continues to consider plans to diversify its product lines into
additional high-volume, cash-oriented transactions. As a result, the Company has
been and will continue to be in a transition phase between the introduction of
its new products and the phase-out of the older products. The transition phase
has had and will continue to have a negative impact on revenues and gross
margins. In addition, the Company is considering a restructuring of its
operations to accommodate its plans to introduce its new products and product
lines. This may also negatively impact results of operations during the
transition period. However, management believes that, if it is successful in
transitioning into its new products, the long-term benefits will outweigh the
negative short-term costs.
RESULTS OF OPERATIONS Revenues for the three and nine month periods
ended September 30, 2000 increased by approximately $150 thousand, or 7%, and
decreased $4.3 million, or 32%, respectively from the prior year. The third
quarter $150 thousand increase was comprised of approximately $453 thousand
decrease from sales, $242 thousand increase in lease revenue and $361 thousand
increase in service. The year to date $4.3 million decrease was comprised of
approximately: $2.8 million from sales and sales type leases; $142 thousand from
service and $1.3 million in operating leases. The company installed or shipped
approximately 247 and 899 units in the three and nine month periods ended
September 30, 2000, respectively, versus approximately 400 and 1,700 units,
respectively, during the same periods in 1999.
Cost of revenues, as a percentage of sales, for the third quarter
decreased by 7 percentage points from 93% in 1999 to 86% in 2000, and for the
nine month period by 4 percentage points from 79% in 1999 to 75% in 2000. The
lower percentage of costs of revenues in 2000 versus 1999 is primarily due to
higher gross margins on product sales and sales type leases, which include sales
of a high margin upgrade package for certain machines owned by a customer.
Operating expenses increased over the prior year comparable periods by
$10 thousand and $79 thousand in the three and nine months ended September 30,
2000, respectively. The increases were primarily due to increased research and
development costs expensed in the periods. Research and development costs
increased due to the Company's efforts to complete the industrialization of the
Company's new lottery products. Overall increases were offset by reduced general
and administrative expenses in both the three month and nine month periods as a
result of decreased payroll and payroll related costs. As a result of the above
factors the Company incurred a loss from operations of $425 thousand and $360
thousand, respectively, for the three and nine months ended September 30, 2000
versus a loss of $576 thousand for the three months ended September 30, 1999 and
income of $240 for the nine months ended September 30, 1999.
Total other income (expenses) for the three and nine month periods
ending September 30, 2000 was $668 thousand and $(112) thousand, respectively,
versus $(124) thousand and $(387), respectively, for the same periods in 1999.
The differences were primarily the result of the net effect of higher interest
costs, reflecting increased borrowings, offset by income related to the
termination of the GTECH merger agreement.
As a result of the above, for the three and nine month periods ending
September 30, 2000, the Company incurred a net gain of $243 thousand and a net
loss of $472 thousand, respectively, versus a net loss of $700 thousand and $147
thousand for the same periods in 1999.
LIQUIDITY AND CAPITAL RESOURCES At September 30, 2000, the Company had
working capital of approximately $7.3 million, an increase of approximately $1.6
million from the beginning of the year. Working capital increased primarily as a
result of the renegotiation of all of the Company's short term debt obligations,
which extended those obligations until 2002 and beyond. Included in working
capital is inventory of approximately $6 million, which represented
approximately 68% of revenue for the nine months ended September 30, 2000.
Inventory has increased as a result of the Company's transition into its next
generation lottery products that has required the stocking of both existing
product components and new product components.
At September 30, 2000, the Company has a $10 million revolving line of
credit facility with its asset-based lender, of which $4.6 million was
outstanding out of $4.7 million available based on formula limitations.
The Company's principle source of funds during the nine months ended
September 30, 2000, was from its operating cash and its financing activities.
During the 2000 nine months the Company borrowed $500 thousand from GTECH and
$1.1 million from private lenders. The Company used its funding for working
capital to produce equipment for sale under sales type lease agreements.
10
<PAGE>
During the third quarter, management successfully renegotiated all of
its short-term notes payable. The Company's working capital is now the highest
in its last four years. However, the Company continues to seek additional
funding in order to maintain its current levels of operations and continue its
growth opportunities. In October 2000, the Company completed a private equity
raise of $1 million and is pursuing an additional private equity raise of $5
million. Management believes these financings will be sufficient to transition
the Company into its new products. See Note 10 of Notes to the Consolidated
Financial Statements in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1999 for potential other matters which could affect the
Company's liquidity.
YEAR 2000 COMPLIANCE As is the case with most other companies using
computers in their operations, the Company addressed in prior periods the year
2000 problem. In 1997 the Company set up a committee to review its computer
software and hardware, fax machines and telephone systems for year 2000
compliance.
The Company's primary accounting and operational software provided has
received year 2000 certification from the Information Technology Association of
America. The Company believes that it is now year 2000 compliant with respect to
its existing computer hardware, software and fax equipment and, therefore,
believes that potential risks, including any potential third party risks,
relating to year 2000 issue to be minimal.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the legal proceedings section of Note 11 of Notes
to Consolidated Financial Statements in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1999 and the legal proceedings section of
the Form. There have been no significant developments in the litigation
described in the 1999 Form 10-KSB since the date of that report except as noted
below.
During the second quarter, three separate shareholder class actions
were filed against the Company, certain of the Company's directors and officers,
and the Company's auditors in U. S. District Court, Southern District of
California seeking unspecified damages on behalf of all similarly situated
shareholders, and alleging violations of federal securities laws as a result of
the restatement of the Company's financial statements in prior periods. A
settlement of these actions involving the Company and it's directors and
officers was agreed upon by attorneys for the plaintiff's and the Company's
attorneys in connection with the Company's discussions with GTECH Corporation
concerning a restructured acquisition agreement. The settlement is terminable if
an acquisition of the Company by GTECH did not occur. As disclosed by the
Company in a press release on July 28, 2000, discussions with GTECH regarding an
acquisition have been discontinued. As a result, the Company terminated the
settlement and anticipates vigorously defending these claims.
As disclosed in the 1999 Form 10-KSB, on April 21, 2000, an action was
filed against the Company in U.S. District Court, Southern District of Ohio, by
Interlott Technologies, Inc. (ILI). The action alleges that On-point breached a
Settlement Agreement and Mutual Release dated May 30, 1991 with ILI in that
On-Point was using elements of ILI's technology in On-Point's new PlayPoint
technology. We believe ILI's suit is without merit. On-Point has filed an answer
to the complaint and is contesting the claims vigorously.
ITEM 2. CHANGES IN SECURITIES
(a) None
(b) None
(c) None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
N/A
11
<PAGE>
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.31.3 Note amendment and mutual release agreement
with GTECH corporation dated August 23,2000
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
FEBRUARY 18, 2000 Form 8-K report was filed,
reporting that On-Point was in the process of restating its
financial statements for 1997,1998, and 1999. No exhibits were
attached.
12
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SIGNATURES
In accordance with the requirements of the exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereto duly
authorized.
ON-POINT TECHNOLOGY SYSTEMS, INC.
Date: November 9, 2000 /s/ Charles R. Broz
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As Principal Financial Officer on behalf
of Registrant
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