FOR IMMEDIATE RELEASE
On-Point Technology Systems
Quarterly Report (SEC form 10QSB)
May 21, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
General The Company is in the process of a major transition. The Company is undergoing a series of actions designed to transform itself into a more diversified company. The Company has been engaged primarily in the lottery industry over the past 10 years and is presently one of the largest providers of vending terminals for the sale of instant-winner lottery tickets. As part of a planned series of actions, on February 23, 2001, the Company executed a definitive agreement to sell to Interlott Technologies, Inc. (Interlott) the assets used in its existing lottery business, relating to the manufacture, sale, lease, and service of instant lottery ticket vending machines (the Lottery Assets) in exchange for up to $28.5 million, including cash of $13.5 million at closing (subject to closing adjustments), and deferred and earn-out amounts (subject to certain conditions) for the remainder. A more detailed description of the agreement with Interlott is under "Agreement with Interlott" in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000. Such sale, which was approved by the Company's shareholders on May 18, 2001, is subject to customary closing conditions.
The Company's revenues through March 31, 2001 had 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 were sold or leased to a limited number of customers worldwide. As a result, the Company had 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 could, at times, be relatively long due to the lead time required for business opportunities to result in signed sales or lease agreements. Operating results were 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 had been an accelerating trend by customers to lease rather than purchase vending terminal equipment. Leasing vending terminals required the Company to invest capital or otherwise finance the manufacture of the vending terminals.
Over the past four years, the Company has undergone an extensive development program in accordance with a comprehensive strategic product development plan for the lottery market. The plan envisioned the development of a proprietary design for the world's first central-computer activated instant winner lottery ticket as well as the next generation of dispensing equipment for instant winner lottery tickets capable of ultimately dispensing the new ticket design. On-Point has now obtained a patent for its on-line instant ticket concepts and has finalized most of the development of its next generation lottery equipment. Its next generation equipment is now undergoing industrialization and beta tests. On-Point has expended over $5 million since it started its product development strategy.
As a result of the tremendous focus and resources required over that period of time for the development of its new next generation lottery products, results of operations have been negatively impacted due to the expense of the development costs and the transitional impact on the Company's revenue and gross margins. In addition, the Company is in the process of restructuring its operations to accommodate its new strategic plans. This has also negatively impacted results of operations during the transition period.
Since our lottery business accounted for substantially all of our business in 2001 and 2000, the discussions relating to the results of operations should be read in this context. If the transactions contemplated by our agreement with Interlott are completed, we will no longer be engaged in the business of manufacturing, selling, leasing and service of lottery vending machines subsequent to the close of the transaction.
Results of Operations
Continuing Operations The Company had no significant revenue from continuing operations in 2001 and 2000. Although the Company has non-lottery products, substantially all of its focus in those periods were on its lottery related business. Once the sale of the lottery assets is completed, the Company plans to review and implement strategies to maximize value from its non-lottery related assets.
Selling, general and administrative costs and expenses for the 2001 first quarter remained relatively constant between quarters. Interest expense for the 2001 first quarter decreased over the prior year comparable quarter by $19 thousand due to the effect of interest costs, reflecting changes in borrowings.
As a result of the above, for the 2001 three-month period the Company incurred a net loss from continuing operations of $589 thousand versus $579 thousand for the 2000 period.
Discontinued Operations Prior to the Company's change in business strategy, the Company had been primarily engaged in the lottery industry. The Company's customer base in the lottery business remained relatively constant between the 2001 quarter and the 2000 quarter, although revenues for the three-month period ended March 31, 2001 decreased from the prior year, primarily as a result of decreases in sales and sales type leases of its existing lottery product line. As previously discussed, On-Point is now in the process of marketing its new next generation lottery products and the decreases in sales relate to the transitioning required in the introduction of the new products. The decrease was offset partially by an increase in operating leases and service revenue.
Cost of revenues, as a percentage of sales, for the first quarter increased by 3 percentage points from 68% in 2000 to 71% in 2001. The higher percentage of costs of revenues in 2001 versus 2000 is primarily due to change in the product revenue mix with lower product sales, which have a higher percent of gross profit. Operating expenses decreased over the prior year comparable periods by approximately $220 thousand in the three months ended March 31, 2001. The decreases were primarily due to decreased research and development costs expensed in the periods. Research and development costs decreased due to the Company's substantial completion and field-testing of the Company's new lottery products.
As a result of the above, for the 2001 three-month period the Company generated income from discontinued operations of $294 thousand versus $489 thousand for the same period in 2000.
Liquidity and Capital Resources At March 31, 2001, the Company had working capital of approximately $4.9 million (not including the non current assets of the net discontinued assets) and cash and cash equivalents of approximately $553 thousand.
At March 31, 2001, the Company had a $10 million revolving line of credit facility with its asset-based lender, of which $3.9 million was outstanding out of $4 million available based on formula limitations.
The Company's principle source of funds during the three months ended March 31, 2001, was from its investing and financing activities. The Company used its funding for working capital to maintain operations.
Management believes On-Point has sufficient liquidity because of its existing stream of contractual lease payments, its current working capital and its available borrowings under its $10 million debt financing, to maintain its current level of operations for 2001. However, if On-Point is unable to liquidate its current assets timely, then additional capital will be required to fund existing operations. Management believes this funding will be available through private placement financing.
Further, in order to proceed with the Company's plans to develop on-line lotteries and solutions for high-volume, cash-oriented transactions, On-Point will need to seek additional financing for those businesses. If the Company sells its lottery assets pursuant to its agreement with Interlott, the Company would have the necessary funding to proceed with certain of its new market opportunities regardless of additional outside funding availability.
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