Easy Come, Easy Go

In a devastating blow to a company already on the bubble, GTECH Holdings (GTK) announced late Friday that it was pulling out of its proposed $43 million acquisition of On-Point Technology Systems (ONPT). This followed an announcement by On-Point Technology Friday, restating earnings for 1997 and 1998, subsequently erasing $4.4 million of previously announced profits.

Enticing store patrons to impulsively buy lottery tickets, On-Point Technology develops and leases those snazzy, instant-ticket vending machines seen in virtually every supermarket, convenience store and bar. Like the consumers it targets, the company has long been on a collision course with disaster. Investors who have hung on to the stock have endured more grief than Willie Nelson on tax day.

Just three months ago, GTECH announced its buy-out offer of On-Point. GTECH, a leading supplier of online lottery products and services and Internet wagering systems, sought to merge with On-Point in order to expand its presence in the instant-ticket lottery market.

Valued at $43 million, the deal was a mere 15 percent premium over On-Point’s then current $2.59 trading price. A far cry from the company’s all-time high of $24 back in 1993. But, On-Point’s share price has been on a downward spiral, trading consistently under $5 ever since.

Softening the buy-out blow to investors who felt low-balled by the offer, GTECH also announced its intention to pay $5.2 million to separately fund On-Point’s e-Point Technologies’ subsidiary. This division targets electronic automation of cash transactions and would be run by On-Point’s existing executive team. In addition to the merger agreement, On-Point shareholders were to be given e-Point Technologies’ stock, receiving one share of e-Point for every two shares of On-Point stock. Salve for a stinging wound?

Apparently so. On-Point’s share price buoyed up 10 percent to $2.87 over the next six weeks. Until another bombshell was dropped on unsuspecting investors.

On February 23, Nasdaq halted trading of the stock at $2.71 while “additional information [was] requested.”

Trading remained suspended for a week. When it resumed, with only an hour left in the trading day, investors hurriedly hit the panic button, sending the stock plummeting 88 cents, to $1.84. And, it hasn’t recovered since.

The suspension was due to an accounting glitch related to On-Point’s e-Point Technologies division. Apparently, an outstanding receivable with Solutioneering, Inc., a pre-paid phone card company operating under Chapter 11 bankruptcy protection, should have been recorded as an operating lease, rather than a sales-type lease. In not doing so, On-Point had to take a writedown, thus reducing net income substantially for 1997 through 1999, to the tune of $4.4 million. Questions inevitably arose regarding On-Point’s suspect accounting methods.

On-Point officials were quick to point out, however, that the restatement didn’t involve the lottery-side of the business GTECH sought to acquire. While GTECH did not immediately pull out of the deal, it did inform On-Point that until it reviewed the restated numbers, no assurance could be given that the marriage would be consummated.

The official audit lasted another month, in which time investors were left in complete silence to speculate about the GTECH deal. With the stock trading sideways, hovering between the $1.70 and $1.80 mark, investors held on with bated breath.

When the restated numbers were finally released last Friday, the stock closed unchanged at $1.81. Investors felt that the elimination of virtually all profits the past three years still wouldn’t affect the buyer’s value, and an announcement of the same would soon be forthcoming from GTECH. And, it was.

Only, the announ

cement wasn’t quite what investors had in mind.

Fifteen minutes after the market closed shop for the weekend, GTECH let the other shoe fall. On the heels of On-Point’s restated earnings, GTECH officially terminated its previously announced acquisition agreement. Though talks will continue with regard to GTECH’s interest in On-Point’s instant-ticket vending technology, On-Point will now be relegated to the bargain bin and lay helplessly at GTECH’s mercy.

Ironically, also on Friday, a Merrill Lynch analyst upgraded GTECH to “accumulate” with a 12 to 18 month price target of $25. GTECH’s stock rose 3 percent ahead of the press release, to $19.68.

So much for the proposed $43 million, $3 per share buy-out. With barely enough cash to pay the light bill, On-Point’s future looks grim. When the market bell tolls Monday morning, let the blood-letting begin.