**U.S.SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

 

**FORM 10-QSB**

 

| **ý**                                             | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d)**  |
|--------------------------------------------------------|-------------------------------------------------|
|                                                   | **OF THE SECURITIES EXCHANGE ACT OF 1934**      |
| **For  the quarterly period ended September 30, 2001** |
|                                                   |                                            |
| **OR**                                                 |
|                                                   |                                            |
| **o**                                                  | **TRANSITION REPORT UNDER SECTION 13 OR 15(d)** |
|                                                   | **OF THE SECURITIES EXCHANGE ACT OF 1934**      |

 

**Commission file number 0-21738**

 

**GLOBAL ePOINT, INC.**

(formerlyOn-Point Technology Systems, Inc.

(Name of small businessissuer in its charter)

** **

| **Nevada**                                                      |   | **33-0423037**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

 

**1370 W. SAN MARCOS BLVD. SUITE 100, SAN MARCOS, CALIFORNIA92069**

(Address of principalexecutive offices)                          (ZipCode)

 

Issuer’stelephone 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 theExchange Act during the preceding twelve months, and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý No o

 

As ofNovember 1,2001, there were 4,305,584 shares of Common Stock ($.03 parvalue) outstanding.

 

 

**INDEX**

 

 
|     |                  |                                                                                                                   |
|----------|-----------------------|------------------------------------------------------------------------------------------------------------------------|
| Part I.  | Financial Information |
|     |                  |                                                                                                                   |
|     | Item 1.               | Financial Statements                                                                                                   |
|     |                  |                                                                                                                   |
|     |                  | Condensed  Consolidated Balance Sheet   September 30, 2001 (Unaudited)                                                 |
|     |                  |                                                                                                                   |
|     |                  | Condensed  Consolidated Statements of Operations (Unaudited)   Three and Nine Months Ended September 30, 2001 and 2000 |
|     |                  |                                                                                                                   |
|     |                  | Condensed  Consolidated Statements of Cash Flows (Unaudited)   Nine Months Ended September 30, 2001 and 2000           |
|     |                  |                                                                                                                   |
|     |                  | Notes  to Condensed Consolidated Financial Statements (Unaudited)                                                      |
|     |                  |                                                                                                                   |
|     | Item  2.              | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                            |
|     |                  |                                                                                                                   |
| Part II. | Other Information     |
|          |                       |                                                                                                                        |  |  |  |

 

***Global ePoint, Inc. and Subsidiaries***

***Condensed Consolidated Balance Sheet***

*(Unaudited)*

 

 
|                                                                                                  |                                                | **September 30** |   |
|-------------------------------------------------------------------------------------------------------|-----------------------------------------------------|------------------|--------|
| **Assets**                                                                                            | **(*Thousands  of dollars, except share amounts)*** | **2001**         |   |
| Current assets:                                                                                       |                                                |             |   |
| Cash and cash  equivalents                                                                            |                                                | $                | 6,752  |   |
| Accounts  receivable, net                                                                             |                                                | 2                |   |
| Other current  assets                                                                                 |                                                | 360              |   |
| Total current assets                                                                                  |                                                | 7,114            |   |
| Plant, property  and equipment, net                                                                   |                                                | 135              |   |
| Property held  for operating leases, net                                                              |                                                | 91               |   |
| Card dispensing  equipment, net                                                                       |                                                | 3,314            |   |
| Parts inventory,  net                                                                                 |                                                | 856              |   |
| Other assets                                                                                          |                                                | 859              |   |
| Total assets                                                                                          |                                                | $                | 12,369 |   |
| Liabilities and  shareholders’ equity                                                            |                                                |             |   |
| Current liabilities:                                                                                  |                                                |             |   |
| Accounts payable                                                                                      |                                                | $                | 964    |   |
| Notes payable                                                                                         |                                                | 750              |   |
| Accrued expenses  and other liabilities                                                               |                                                | 917              |   |
| Total current  liabilities                                                                            |                                                | 2,631            |   |
| Shareholders’  equity:                                                                           |                                                |             |   |
| Preferred stock,  no par value, 2,000,000 shares authorized, no shares issued or outstanding          |                                                |             |   |
| Common stock, $.03  par value, 13,333,334 shares authorized, 4,305,584 shares issued and  outstanding |                                                | 129              |   |
| Shares to be  issued                                                                                  |                                                | 950              |   |
| Additional  paid-in capital                                                                           |                                                | 33,125           |   |
| Accumulated  deficit                                                                                  |                                                | (24,466          | )      |
| Total  shareholders’ equity                                                                      |                                                | 9,738            |   |
| Total  liabilities and shareholders’ equity                                                      |                                                | $                | 12,369 |   |
|                                                                                                  |                                                |             |   |
|                                                                                                       |                                                     |                  |        |  |  |  |

*Seeaccompanying notes to condensed consolidated financial statements*

 

***Global ePoint, Inc. and Subsidiaries***

***Condensed Consolidated Statements of Operations***

*(Unaudited)*

 
|                                                           |   | **Nine Months Ended  September 30** |   | **Three Months Ended  September 30** |   |
|----------------------------------------------------------------|--------|-------------------------------------|--------|--------------------------------------|--------|
| ***(Thousands of  dollars/shares, except per share amounts)*** |   | **2001**                            |   | **2000**                             |   | **2001** |   | **2000** |   |
| Revenues:                                                      |   |                                |   |                                 |   |   |   |   |   |
| Sales                                                          |   | $                                   | 15     |                                 | $      | 19 |   | $ | 5 |   | $ | 5 |   |
| Interest income                                                |   | 113                                 |   |                                 |   | 69 |   |   |   |
| Other  income                                             |   | 144                                 |   | 29                                   |   | 144 |   | 29 |   |
| Total revenues                                                 |   | 272                                 |   | 48                                   |   | 218 |   | 34 |   |
| Operating  expenses:                                           |   |                                |   |                                 |   |   |   |   |   |
| Cost of sales                                                  |   | 9                                   |   | 9                                    |   | 4 |   | 2 |   |
| Selling, general  and administrative                           |   | 1,338                               |   | 1,493                                |   | 304 |   | 468 |   |
| Interest expense                                               |   | 292                                 |   | 547                                  |   | 26 |   | 169 |   |
| Restructuring  costs                                           |   | 144                                 |   |                                 |   | 144 |   | 0 |   |
| Total operating  expenses                                      |   | 1,783                               |   | 2,049                                |   | 478 |   | 639 |   |
| Operating loss                                                 |   | (1,511                              | )      | (2,001                               | )      | (260 | ) | (605 | ) |
| Other income –  Merger termination                        |   |                                |   | 406                                  |   |   |   | 855 |   |
| Income (loss)  from continuing operations                      |   | (1,511                              | )      | (1,595                               | )      | (260 | ) | 250 |   |
| Discontinued  operations:                                      |   |                                |   |                                 |   |   |   |   |   |
| Income (loss)                                                  |   | 398                                 |   | 1,123                                |   |   |   | (7 | ) |
| Gain on sale                                                   |   | 2,744                               |   |                                 |   |   |   |   |   |
| Income (loss)  from discontinued operations                    |   | 3,142                               |   | 1,123                                |   |   |   | (7 | ) |
| Net Income  (loss)                                             |   | $                                   | 1,631  |                                 | $      | (472 | ) | $ | (260 | ) | $ | 243 |   |
|                                                           |   |                                |   |                                 |   |   |   |   |   |
| Earnings  (loss) per share – Basic and Diluted:      |   |                                |   |                                 |   |   |   |   |   |
| Loss from  continuing operations                               |   | $                                   | (.33   | )                                    | $      | (.46 | ) | $ | (.06 | ) | $ | .07 |   |
| Income from  discontinued operations                           |   | .68                                 |   | .32                                  |   | - |   | - |   |
| Net income  (loss)                                             |   | $                                   | .35    |                                 | $      | (.14 | ) | $ | (.06 | ) | $ | .07 |   |
|                                                           |   |                                |   |                                 |   |   |   |   |   |
| Weighted average  shares                                       |   | 4,622                               |   | 3,489                                |   | 4,622 |   | 3,572 |   |
|                                                           |   |                                |   |                                 |   |   |   |   |   |

*See accompanyingnotes to condensed consolidated financial statements*

 

***Global ePoint, Inc. and Subsidiaries***

***Condensed Consolidated Statements of Cash Flows***

*(Unaudited)*

 

                                                                                                                                                                
|                                                                               |   | **Nine months ended September 30** |   |
|------------------------------------------------------------------------------------|--------|------------------------------------|--------|
| *(Thousands of dollars)*                                                           |   | **2001**                           |   | **2000** |   |
| Cash flows from  operating activities:                                             |   |                               |   |   |   |
| Loss from  continuing operations                                                   |   | $                                  | (1,511 | ) | $ | (1,595 | ) |
| Income from  discontinued operations                                               |   | 398                                |   | 1,123 |   |
| Adjustments to  reconcile income (loss) to net cash used for operating activities: |   |                               |   |   |   |
| Depreciation and  amortization                                                     |   | 372                                |   | 799 |   |
| Issuance of  options and warrants for services provided                            |   | 52                                 |   | 45 |   |
| Other non-cash  charges – primarily merger termination                        |   |                               |   | (755 | ) |
| Changes in  assets and liabilities:                                                |   |                               |   |   |   |
| Accounts  receivable                                                               |   | 105                                |   | (1,530 | ) |
| Inventories                                                                        |   | 332                                |   | 338 |   |
| Accounts payable                                                                   |   | (589                               | )      | 338 |   |
| Accrued expenses  and other liabilities                                            |   | (665                               | )      | 99 |   |
| Other current  assets                                                              |   | (9                                 | )      | (33 | ) |
| Net cash used  for operating activities                                            |   | (1,515                             | )      | (1,171 | ) |
| Cash flows from  investing activities:                                             |   |                               |   |   |   |
| Purchases of plant,  property and equipment                                        |   | (25                                | )      |   |   |
| Net investment  in sales-type leases                                               |   | 710                                |   | (638 | ) |
| Decrease in  other assets                                                          |   | 38                                 |   |   |   |
| Net proceeds  from sale of discontinued operations, including gain of $2,744       |   | 12,665                             |   |   |   |
| Investment in  short-term financial instruments                                    |   | (244                               | )      |   |   |
| Net cash  provided by (used for) investing activities                              |   | 13,144                             |   | (638 | ) |
| Cash flows from  financing activities:                                             |   |                               |   |   |   |
| Proceeds from  exercise of stock warrants and options                              |   |                               |   | 269 |   |
| Repayments of  line of credit, net                                                 |   | (3,786                             | )      | (107 | ) |
| Proceeds from  (repayments of) notes payable, net                                  |   | (1,230                             | )      | 1,730 |   |
| Net cash  provided by (used for) financing activities                              |   | (5,016                             | )      | 1,892 |   |
| Increase  (decrease) in cash and cash equivalents                                  |   | 6,613                              |   | (83 | ) |
| Cash and cash  equivalents at beginning of period                                  |   | 139                                |   | 157 |   |
| Cash and cash  equivalents at end of period                                        |   | $                                  | 6,752  |   | $ | 74 |   |
| Supplemental  cash flow information, cash paid during the period for interest      |   | $                                  | 292    |   | $ | 394 |   |
|                                                                               |   |                               |   |   |   |

*See accompanying notes tocondensed consolidated financial statements*

##  

## **GLOBAL EPOINT, INC. ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATED**

**FINANCIAL STATEMENTS**

(Unaudited)

 

1.     ***Basis of Presentation  ***The accounting and reportingpolicies of Global ePoint, Inc. (formerly On-Point Technology Systems, Inc.)and subsidiaries (collectively referred to as the “Company”) conform toaccounting principles generally accepted in the United States of America.  The condensed consolidated financialstatements for the three and nine months ended September 30, 2001 and 2000 areunaudited and do not include all information or footnotes necessary for acomplete presentation of financial condition, results of operations and cashflows.  The interim financial statementsinclude all adjustments, consisting only of normal recurring accruals, which inthe opinion of management are necessary in order to make the financialstatements not misleading.  Theseconsolidated financial statements should be read in conjunction with theCompany’s December 31, 2000 audited financial statements, which are included inthe Company’s Annual Report on Form 10-KSB/A for the period ended December 31,2000.  The results of operations for thenine months ended September 30, 2001 are not necessarily indicative of theresults to be expected for the entire year ending December 31, 2001.

        OnNovember 6, 2000, the Board of Directors of the Company approved aone-for-three reverse split of the Company’s common stock.  No fractional shares of common stock wereissued in connection with the reverse stock split and in instances where thereverse split resulted in a stockholder becoming the holder of a fractionalinterest in a share, then the number of shares held by such stockholder wasrounded up to the nearest whole share. The accompanying condensed consolidated financial statements for thethree and nine months ended September 30, 2000 have been restated to show theeffects of the reverse stock split as if the split had occurred as of thebeginning of the respective periods.

        In June2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No.’s 141and 142, “Business Combinations” and “Goodwill and Other Intangibles”.  FASB 141 requires all business combinationsinitiated after June 30, 2001 to be accounted for using the purchase method.  Under FASB 142, goodwill is no longer subjectto amortization over its estimated useful life.  Rather, goodwill is subject to at least an annual assessment forimpairment applying a fair-value based test. Additionally, an acquired intangible asset should be separatelyrecognized if the benefit of the intangible asset is obtained throughcontractual or other legal rights, or if the intangible asset can be sold,transferred, licensed, rented, or exchanged, regardless of the acquirer’sintent to do so.  The Company is in theprocess of determining the impact of these pronouncements on its financialposition and results of operations.

        Certainaccounts in the 2000 periods have been reclassified to conform to 2001presentation.

 

2***.     Discontinued Operations  ***On June 1, 2001, the Companysold to Interlott Technologies, Inc. (“Interlott”) those assets used in itsexisting lottery business, relating to the manufacture, sale, lease and serviceof instant ticket vending machines, including the assignment of the Company’sexisting lottery contracts pursuant to a definitive agreement executed onFebruary 23, 2001 (the “Agreement”). Pursuant to the Agreement, the Company received approximately $13.1million at closing which, after sale related costs of approximately $400 thousand,generated net proceeds of approximately $12.7 million.  In addition, the Company accruedapproximately $1.1 million for estimated residual costs of disposal andestimated subsequent purchase price adjustments.  The components of the gain on the sale were as follows:

 

|                                         |   | *(In  thousands)* |   |
|----------------------------------------------|--------|-------------------|--------|
| Proceeds, net of  related costs and accruals |   | $                 | 11,600 |   |
| Net book value  of assets sold               |   | 8,856             |   |
| Gain on sale                                 |   | $                 | 2,744  |   |

 

        TheAgreement also provides for up to $9 million of deferred payments (subject tothe performance of certain contracts assigned to Interlott) over five years andearn-out payments of up to $6 million (subject to certain conditions) over fiveyears.  These payments have not beenaccrued as a receivable but rather will be recorded as income when all theconditions for payment have been met. In addition, the Company and Interlott entered into a separate on-linetechnology agreement to market a proprietary design for an on-line activatedinstant lottery ticket.

        As aresult of the sale, the operations related to the lottery assets have beenreflected as discontinued operations in the accompanying condensed consolidatedfinancial statements.  The results ofdiscontinued operations for the three months and nine months ended September30, 2001 and 2000 were as follows:

 

|                                     |   | **Nine Months Ended  September 30** |   | **Three Months Ended  September 30** |   |
|------------------------------------------|--------|-------------------------------------|--------|--------------------------------------|--------|
| *(in thousands)*                         |   | **2001**                            |   | **2000**                             |   | **2001** |   | **2000** |   |
| Net sales                                |   | $                                   | 2,944  |                                 | $      | 8,877 |   | $ | 0 |   | $ | 2,207 |   |
| Gross profit                             |   | 610                                 |   | 2,215                                |   | 0 |   | 309 |   |
| Operating  expenses                      |   | 212                                 |   | 1,092                                |   | 0 |   | 316 |   |
| Net income from  discontinued operations |   | $                                   | 398    |                                 | $      | 1,123 |   | $ | 0 |   | $ | (7 | ) |

 

For the nine months ended September 30, 2001, cashflows provided by operating and investing activities were $1,920 thousand and$667 thousand, respectively, totaling $2,587 thousand.  For the nine months ended September 30,2000, cash flows provided for operating activities were $197 thousand and cashflows provided by investing activities were $1,074 thousand, netting cashof  $1,271 thousand.

The net assets ofdiscontinued operations that were disposed as of June 1, 2001 were as follows:

* *

|                                   |   | *(In  thousands)* |   |
|----------------------------------------|--------|-------------------|--------|
| Current assets                         |   | $                 | 4,391  |   |
| Plant, property  and equipment, net    |   | 112               |   |
| Net investment  in sales-type leases   |   | 2,652             |   |
| Property under  operating leases, net  |   | 518               |   |
| Other assets                           |   | 1,183             |   |
| Net assets of  discontinued operations |   | $                 | 8,856  |   |

 

3.     ***Restructuring Costs*** As a result of the sale of the Company’s corebusiness operations on June 1, 2001, the Company is in the process ofestablishing new strategic initiatives and transitioning the Company into newbusiness activities.  During the threemonths ended September 30, 2001, the Company incurred approximately $144thousand in restructuring costs.  Therestructuring charges include payroll, facilities costs, refurbishment costsand certain other charges incremental to restructuring operations and preparingfor new business activities.

 

4.     ***Contingencies  ***On April 20, 2000, ashareholder class action was filed against the Company and certain officers anddirectors in the U.S. District Court, Southern District of California.  The action, which seeks an unspecifiedamount of damages on behalf of all similarly situated shareholders, allegesthat the Company violated federal securities laws by the dissemination ofmaterially false and misleading financial statements.  Subsequent cases alleging substantially the same claims, and alsofiled in the same court, have all been consolidated before the same judge.  The Company and the officers and directorshave entered into amended settlement agreements with the class, and the courthas preliminarily approved the amended settlement agreements.  The Company and the other defendants havedenied the liability claims as part of the amended settlements, but believethat settling the cases quickly is in the best interests of the Company inorder for management to more effectively proceed with its strategic businessplans.  Under the settlement agreement,the Company would be permitted to issue shares equal to $950 thousand in valueon the date the shares are required to be issued to the class, which isestimated would occur within twelve months, and $50 thousand of cash.  The affect of the settlement has alreadybeen accrued in the Company’s financial statements.

        On April21, 2000, an action was filed against the Company in U.S. District Court, SouthernDistrict of Ohio, by Interlott.  Theaction alleged that the Company breached a Settlement Agreement and MutualRelease dated May 30, 1991 with Interlott in that the Company was usingelements of Interlott’s technology in the Company’s new PlayPointtechnology.  As a result of the sale ofthe Company’s lottery assets to Interlott, the case has been dismissed.

 

5.     ***Provisions for Income Taxes***   No provisions or benefits for federal orstate income taxes have been made for the nine month period ended September 30,2001 and 2000.  As of December 31, 2000,the Company had approximately $18.3 million of net operating loss available tooffset future income.  (See Note 8 ofNotes to Consolidated Financial Statements in the Company’s Form 10-KSB for theyear ended December 31, 2000).

 

6.     ***Per Share Information***   In February 1997, the Financial AccountingStandards Board issued Statement of Financial Accounting Standards (“SFAS”) No.128 “Earnings per Share” establishing standards for computing and presenting BasicEarnings Per Share (“Basic EPS”) and Diluted Earnings Per Share (“DilutedEPS”).  Basic EPS is computed on thebasis of the weighted average shares of common stock outstanding pluscontingently issuable shares.  DilutedEPS is computed on the basis of weighted average shares outstanding pluscontingently issuable shares and the additional common shares that would havebeen outstanding if dilutive potential common shares had been issued, using thetreasury stock method.  Included in thecomputation for Basic and Diluted EPS for the three months ended September 30,2001 are 316,666 shares, which are contingently issuable pursuant to thesettlement agreements for the class action cases (see Note 4 herein).  For all the periods presented, options andwarrants were not factored into the calculation because they were antidilutiveor because the Company had a net loss. The Company had options and warrants outstanding of approximately 1.8million during 2001 and 1.1 million during 2000.

 

7.     ***Notes Payable  ***As of September 30, 2001,notes payable consisted of a note to GTECH Corporation in the amount of $750thousand, which matures with interest at 10% per annum on February 15,2002.  The note was paid in full inOctober 2001.

** **

**8.***     Shareholders Equity  *Theincrease in shareholder’s equity from approximately $8.1 million at December31, 2000 to approximately $9.7 million at September 30, 2001 was substantiallyall the result of the net income of approximately $1.6 million for the ninemonths ended September 30, 2001.

** **

**ITEM 2.        MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

        ***General  ***The Company is in the process of a majortransition.  The Company is undergoing aseries of actions intended to transform the Company and to strategically moveforward with new market opportunities that can better enhance shareholdervalue.  The Company has been engagedprimarily in the lottery industry over the past 10 years and was one of thelargest providers of vending terminals for the sale of instant-winner lotterytickets.  As part of this transformationprocess, on February 23, 2001, the Company executed a definitive agreement tosell to Interlott Technologies, Inc. (Interlott) the assets used in its existinglottery business, relating to the manufacture, sale, lease, and service ofinstant lottery ticket vending machines 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 theremainder.  A more detailed descriptionof the agreement with Interlott is under “Agreement with Interlott” in theCompany’s Annual Report on Form 10-KSB for the year ended December 31, 2000.  Such sale, which was approved by theCompany’s shareholders on May 18, 2001, was completed on June 1, 2001.

        TheCompany’s revenues through September 30, 2001 had been generated from (i) salesof vending terminals (ii) leases of vending terminals (iii) performance ofservice on vending terminals (iv) upgrades to vending terminals, and (v) salesof associated parts.  The Company’sproducts were sold or leased to a limited number of customers worldwide.  As a result, the Company had experiencedfluctuations in its financial results and capital expenditures because of thetiming of significant individual contract awards and customer orders as well asassociated product delivery schedules. The Company’s sales cycle could, at times, be relatively long due to thelead time required for business opportunities to result in signed sales orlease agreements.  Operating resultswere affected by such lead time as well as working capital requirementsassociated with manufacturing vending terminals pursuant to new orders, increasedcompetition, and the extended time which may elapse between the customer’s firmorder and the receipt of revenue from the sale or lease of the applicablevending terminals.  In addition, therehad been an accelerating trend by customers to lease rather than purchasevending terminal equipment.  Leasingvending terminals required the Company to invest capital or otherwise financethe manufacture of the vending terminals.

        Over the past four years,the Company had undergone an extensive development program in accordance with acomprehensive strategic product development plan for the lottery market.  The plan envisioned the development of aproprietary design for the world’s first central-computer activated instantwinner lottery ticket as well as the next generation of dispensing equipmentfor instant winner lottery tickets capable of ultimately dispensing the newticket design.  Prior to the sale of itslottery assets, the Company had obtained a patent for its on-line instantticket concepts and had finalized most of the development of its next generationlottery equipment.  The Company hadexpended over $5 million on its product development strategy.

As a result of the tremendous focus and resourcesrequired over the past four years for the development of its new nextgeneration lottery products, results of operations were negatively impacted dueto the expense of the development costs and the transitional impact of changingproducts on the Company’s revenue and gross margins.  Since the lottery business accounted for substantially all of theCompany’s business in 2001 and 2000, the discussions relating to the results ofoperations should be read in this context. As a result of the sale of the lottery business, the Company will nolonger be engaged in the business of manufacturing, selling, leasing andservice of lottery vending machines subsequent to June 1, 2001, the close ofthe transaction.

        TheCompany is now positioned to proceed with further actions designed to transformitself into a more diversified company. First, the Company is moving forward with marketing plans for theredeployment and sale of its existing non-lottery related products.  Second, it is reviewing a variety of newmarket opportunities that would provide it with the ability to jump over theinitial development phase generally required of a new product.  In that regard, management is currentlyreviewing the possibilities of merging with an established business and/oracquiring a developed product line.  TheCompany’s goal with respect to securing a new market opportunity is to identifywhich opportunities best leverage its management expertise, technologicalproperty, international relationships and corporate value, while maximizing itsabilities to enhance shareholder value. The Company anticipates that if a new business opportunity is completed,a significant restructuring of its operations would result.  The extent of the restructuring and theeffect on the Company’s financial statements will depend on the particularbusiness opportunity.

 

**Results of Operations**

 

***        ContinuingOperations***   The Company had no significant revenue fromcontinuing operations in 2001 and 2000 prior to the sale of its lotterybusiness.  Although the Company hasnon-lottery products, substantially all of its focus in those periods was onits lottery-related business. Subsequent to the sale of the lottery assets on June 1, 2001, theCompany has been reviewing and moving forward with strategies to maximize valuefrom its non-lottery related assets. During the three months ended September 30, 2001, the Company generatedrevenue from continuing operations of $218 thousand versus revenue of $34thousand in the prior year comparable period. The increase in revenue was primarily from interest and investmentincome resulting from the Company’s cash reserves and investments.  The Company plans to redeploy its carddispensing equipment over the next year as part of its plan to generateadditional cash flow from its existing assets. However, no assurances can be given as to the success of these newstrategies.

        Total operating expenses decreased in the 2001 periods as aresult of restructured operations and borrowings.  Selling, general and administrative costs and expenses for the2001 three month period was $304 thousand, a reduction of $164 thousand fromthe 2000 three month period as a result of the restructuring of the Company’soverhead.  Included in the 2001 threemonth period were restructuring costs of $144 thousand.  The restructuring charges include payroll,facilities costs, refurbishment costs and certain other charges incremental torestructuring operations and preparing for new business activities.  Interest expense for the three months endedSeptember 30, 2001, decreased over the prior year comparable period by $143thousand due to decreased borrowings. Operating expenses for the nine monthperiod were similarly affected by the restructuring of operations anddebt.  Selling, general andadministrative costs decreased by $155 thousand and interest expenses decreasedby $255 thousand.

        During the prior year three and nine month periods, theCompany earned income of $855 thousand and $406 thousand, respectively fromtermination fees from an uncompleted merger during that period.

        As a net result of the above, for the three and nine monthsended September 30, 2001, the Company incurred a net loss from continuingoperations of $1,511 thousand and $260 thousand, respectively, versus a netloss of $1,595 thousand and net income of $250 thousand in the respective 2000periods.

 

***        DiscontinuedOperations  ***Prior to the Company’s change in businessstrategy, the Company had been primarily engaged in the lottery industry. *** ***The company’s customer base in the lottery businessremained relatively constant between the 2001 year and 2000 year althoughincome for the three and nine month periods ended September 30, 2001 decreasedfrom the prior year, primarily as a result of decreases in sales and sales-typeleases of its existing lottery product line. As previously discussed, the Company was in the process of marketing itsnew next generation lottery products and the decreases in sales partly relateto the transitioning required in the introduction of the new products.  Further, because the lottery business wassold on June 1, 2001, the three and nine month periods for 2001 include revenuefor only the five months of the nine month period, respectively, whereas, salesin 2000 were for the full periods.  Theoverall decrease in sales was due to the combination of the above factors.

        The disposal of assets of the lottery operations is beingaccounted for as discontinued operations. The results of operations are summarized as follows:

 

|                        |   | **Nine Months Ended  September 30** |   | **Three Months Ended  September 30** |   |
|-----------------------------|--------|-------------------------------------|--------|--------------------------------------|--------|
| **Results  of Operations:** |   | **2001**                            |   | **2000**                             |   | **2001** |   | **2000** |   |
| Net sales                   |   | $                                   | 2,944  |                                 | $      | 8,877 |   | $ | 0 |   | $ | 2,207 |   |
| Gross profit                |   | 610                                 |   | 2,215                                |   |   |   | 309 |   |
| Operating  expenses         |   | 212                                 |   | 1,092                                |   |   |   | 316 |   |
| Net Income                  |   | $                                   | 398    |                                 | $      | 1,123 |   | $ | 0 |   | $ | (7 | ) |

 

        Grossprofit, operating expenses and net income were all lower in the 2001 periods asthe result of lower sales during 2001 and for the shorter reporting period in2001.

**       **On June 1, 2001, the Company completedthe sale of its lottery business and, as a result, recognized a gain from thesale of approximately $2.7 million.

        As a net result of the above, the Company reported net incomeof approximately $1.2 million for the nine months ended September 30, 2001,versus a loss in the prior year nine months of approximately $.5 million and aloss of approximately $716 thousand for the three months ended September 30,2001, versus a profit in the prior year three months of approximately $250thousand.

 

***Liquidity and Capital Resources  ***Asa result of the proceeds generated by the sale of lottery assets, the Companyhas working capital of approximately $4.5 million and cash and cash equivalentsof approximately $6.8 million. Management believes the Company has sufficient liquidity to fund itsexisting operations and provide a basis for new business opportunities.

 

**PART II.  OTHER INFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS**

 

        On April 20, 2000, a shareholder classaction was filed against the Company and certain officers and directors in theU.S. District Court, Southern District of California.  The action, which seeks an unspecified amount of damages onbehalf of all similarly situated shareholders, alleges that the Companyviolated federal securities laws by the dissemination of materially false andmisleading financial statements. Subsequent cases alleging substantially the same claims, and also filedin the same court, have all been consolidated before the same judge.  The defendants have entered into amendedsettlement agreements with the class, and the court has preliminarily approvedthe amended settlement agreements.  TheCompany and the other defendants have denied the liability claims as part ofthe amended settlements, but believe that settling the cases quickly is in thebest interests of the Company in order for management to more effectivelyproceed with its strategic business plans. Under the settlement agreement, the Company would be permitted to issueshares equal to $950 thousand in value on the date the shares are required tobe issued to the class, which is estimated would occur within twelve months,and $50 thousand of cash.

        On April21, 2000, an action was filed against the Company in U.S. District Court,Southern District of Ohio, by Interlott. The action alleged that the Company breached a Settlement Agreement andMutual Release dated May 30, 1991 with Interlott in that the Company was usingelements of Interlott’s technology in the Company’s new PlayPointtechnology.  As a result of the sale ofthe Company’s lottery assets to Interlott, the case has been dismissed.

 

**ITEM2*. *CHANGES IN SECURITIES**

 

                (a)   None

                (b)   None

                (c)   None

 

**ITEM3.  DEFAULTS UPON SENIOR SECURITIES**

 

*       *None

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

**       **The Company held a special meeting ofstockholders on May 18, 2001 with respect to the sale of its lotteryassets.  The following matters wereacted upon:

 

| **Matter**                                                                                                                     |   | **Votes  For** |   | **Votes  Against** |   | **Abstain** |
|--------------------------------------------------------------------------------------------------------------------------------|--------|----------------|--------|--------------------|--------|-------------|
| Approval of the Asset Purchase Agreement between the  Company and Interlott and the transactions contemplated by the Agreement |   | 2,586,981      |   | 10,852             |   | 13,599      |
| Approval of the Amendment to the Company’s articles  of incorporation to change the name to Global ePoint, Inc.           |   | 2,602,293      |   | 8,866              |   | 6,940       |

 

**ITEM 5.  OTHER INFORMATION**

 

                        N/A

 

**ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)*   Exhibits*

        N/A

 

*(b)  Reportson Form 8-K*

*       *N/A

 

**SIGNATURES**

 

        In accordance with the requirements ofthe exchange Act, the registrant caused this report to be signed on its behalfby the undersigned, thereto duly authorized.

 

 

 
|                    |   | **Global ePoint, Inc.**                                 |
|-------------------------|--------|---------------------------------------------------------|
|                    |   |                                                    |
|                    |   |                                                    |
|                    |   |                                                    |
| Date: November 15, 2001 |   | /s/ Charles R. Broz                                     |
|                    |   | As Principal Financial Officer on behalf of  Registrant |