Reverse Merger Paying Off in Security Company's Stock Rise

By ANDREW SIMONS
Staff Reporter

In the past month, shares of Global ePoint Inc. have risen by 70 percent. Why?

Don't ask Toresa Lou, who became chief executive of the City of Industry-based company last year after the privately held firm she ran, McDigit Inc., took over the public shell in a reverse merger.

"I'm new to running a public company," said Lou. "I'm not sure how the stock market responds yet."

Global ePoint, which at one time manufactured lottery machines, now designs surveillance security systems for airline and law enforcement agencies.

On April 14, the company announced it was acquiring a tiny Glendale-based firm, Perpetual Digital, for $400,000 and performance-based earn-out payments for the next year.

That day, the stock jumped $1.13 a share a 19 percent rise, implying an increase in market value of more than $12 million. At a recent price of $7.04 on April 21, Global ePoint is valued at $75.6 million. Since bottoming at $3.57 in late February, the stock has nearly doubled.

Since acquiring McDigit last August, Global ePoint's business has gotten more robust.

A few days after the merger, Global ePoint was selected by a U.S. Air Force contractor as the sole source to develop an advanced video recorder for use aboard a B-1 Bomber.

For the fourth quarter, net income fell to $135,000, compared with $272,000 for the like period a year ago. The most recent quarter, however, included nearly $700,000 in start-up costs related to its digital video technology division, while sales rose to $13.1 million from $2.5 million.

Global ePoint's origins come from a business far afield of security technology: It used to sell lottery tickets.

Formerly San Diego-based Lottery Enterprises Inc., the company changed its name to On-Point Technology Systems Inc. in 1996, under former Chief Executive Frederick Sandvick.

Sandvick, who had worked in the gaming industry prior to joining On-Point, ran the company through hard times. In 2000, On-Point restated three years' worth of earnings after changing the way it accounted for one of its leases. In 2001, the company changed its name to Global ePoint and agreed to sell its lottery ticket business to Mason, Ohio-based Interlott Technologies Inc.

After that, Sandvick sought to sell what remained of Global ePoint essentially its name, its public company status and a deferred payment agreement with Interlott.

One planned deal fell through, but that's when Sandvick found McDigit.

"Frederick was just looking to merge with another company so he could transition it to another business," said Lou.

In 2002, the two companies began discussing a merger that eventually resulted in Global ePoint agreeing to acquire all the outstanding shares of McDigit, in exchange for 55.1 percent of Global's outstanding shares.

"We asked them why we need to merge with them," said Lou. "After all, we had a company, we are making money."

Sandvick tried the hard sell. "He said there is a lot of benefit to merging because we got a better valuation," she said. "We would have currency. It made me interested."

As a part of that deal, McDigit received $7 million and became a public company. In December, former Los Angeles Police Chief Daryl Gates became vice president of business development for Global ePoint's Sequent digital technology division.

Sandvick left the company in August, after the deal closed, and is now works as a consultant for the firm, Lou said.

One drawback to the way McDigit became public is that Wall Street pays scant attention to the company.

"That's the problem with these reverse mergers," said Brian Mulvaney, an investment banker with Seidler Cos. "As a public company, you need firms to make a market in your stock, you need analysts, you need investors. A reverse merger isn't like a traditional IPO, where you have a road show to introduce yourself to Wall Street."

But the company has attracted several institutional investors, including the California Public Employees' Retirement System and Vanguard Group, and hired an investor relations firm.

Lou said the company has been talking to investment bankers and is looking at acquisitions. She declined to give specifics, but has said in the past that the company plans to expand into other markets, such as medical applications.

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