<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period from____ to ____
Commission File Number 1-12986
INTERNATIONAL LOTTERY, INC.
(Exact name of Registrant as specified in its charter)
Delaware 31-1297916
(State of Incorporation) (I.R.S. Employer
Identification No.)
6665 Creek Road, Cincinnati, Ohio 45242
(Address of principal executive offices, including zip code)
(513) 792-7000
(Registrant's telephone number, including area code)
---------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date.
Class Outstanding at August 9, 1996
- ---------------------------- -----------------------------
Common Stock, $.01 Par Value 3,210,000 shares
Page 1 of 14
Exhibit Index on page 12
<PAGE> 2
INTERNATIONAL LOTTERY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
NUMBER PART I. FINANCIAL INFORMATION NUMBER
------ ------
<S> <C> <C>
1 Financial Statements:
Condensed Balance Sheets as of
June 30, 1996 and December 31, 1995 3
Condensed Statements of Operations
for the three months and six months
ended June 30, 1996 and 1995 4
Condensed Statements of Cash Flows
for the six months ended June 30, 1996 and 1995 5
Notes to Condensed Financial Statements 6
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 - 9
PART II. OTHER INFORMATION
4 Submission of Matters to a Vote of 10
Security Holders
6 Exhibits and Reports on Form 8-K 10
SIGNATURES 11
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
INTERNATIONAL LOTTERY, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)
JUNE 30, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
ASSETS
June 30, 1996 December 31,1995
------------- ----------------
<S> <C> <C>
Current assets:
Cash $ 6,203 $ 360
Accounts receivable, less allowance for doubtful accounts of $131,614
in 1996 and $101,613 in 1995 2,972,127 3,824,442
Inventories 4,569,936 4,481,156
Prepaid expenses 366,827 337,406
----------- -----------
Total current assets 7,915,093 8,643,364
Property and equipment:
Leased machines 18,010,615 16,968,351
Machinery and equipment 285,420 261,273
Building and improvements 195,225 195,225
Furniture and fixtures 47,585 45,724
----------- -----------
18,538,845 17,470,573
Less accumulated depreciation and amortization 8,158,765 6,363,587
----------- -----------
10,380,080 11,106,986
Product development rights, net of accumulated amortization of $403,333 in 1996
and $366,664 in 1995 696,667 733,336
----------- -----------
$18,991,840 $20,483,686
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 5,367,924 $ 8,551,156
Current installments of long-term debt 4,909 4,659
Accounts payable 1,648,710 1,024,501
Accounts payable - related party 272,986 113
Accrued expenses 943,059 861,316
Income taxes payable 113,000 -
----------- -----------
Total current liabilities 8,350,588 10,441,745
Long-term debt, excluding current installments 3,477 5,969
Notes payable, excluding current portion - related parties 479,000 479,000
----------- -----------
Total liabilities 8,833,065 10,926,714
Series A preferred stock, $.01 par value, 20,000,000 shares authorized,
1,335,000 issued and outstanding 1,335,000 1,335,000
Stockholders' equity:
Common stock, $.01 par value; 20,000,000 shares authorized, 3,210,000
shares issued and outstanding at June 30, 1996 and December 31, 1995 32,100 32,100
10,376,017 10,376,017
Additional paid-in capital
Accumulated deficit (1,584,342) (2,186,145)
----------- -----------
Total stockholders' equity 8,823,775 8,221,972
----------- -----------
$18,991,840 $20,483,686
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements
3
<PAGE> 4
INTERNATIONAL LOTTERY, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 20, 1996 AND 1995
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, June 30,
-------- --------
Revenues: 1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Machine and parts sales $ 2,180,874 $ 2,747,094 $ 3,735,146 $ 2,754,089
Machine leases 2,833,817 2,139,550 5,582,450 4,148,107
Other 309,113 100,330 549,819 196,472
----------- ----------- ----------- -----------
5,323,804 4,986,974 9,867,415 7,098,668
Cost of revenues 3,722.567 3,409,179 6,745,266 4,634,089
----------- ----------- ----------- -----------
Gross margin 1,601,237 1,577,795 3,122,149 2,464,579
Operating expenses:
Selling, general, and administrative 819,141 941,640 1,754,449 1,625,985
expenses
Research and development costs 48,004 36,957 225,267 63,460
----------- ----------- ----------- -----------
Total operating expenses 867,145 978,597 1,979,716 1,689,445
----------- ----------- ----------- -----------
Operating income 734,092 599,198 1,142,433 775,134
Other income (expense):
Interest expense (156,142) (148,178) (382,757) (273,120)
Interest income 2,884 1,115 7,627 9,376
----------- ----------- ----------- -----------
(153,258) (147,063) (375,130) (263,744)
----------- ----------- ----------- -----------
Income before income taxes 580,834 452,135 767,303 511,390
Income taxes 145,500 - 165,500 -
----------- ----------- ----------- -----------
Net income $ 435,334 $ 452,135 $ 601,803 $ 511,390
=========== =========== =========== ===========
Net income per share $ .14 $ .14 $ .19 $ .16
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE> 5
INTERNATIONAL LOTTERY, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 601,803 $ 511,390
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,831,847 1,329,920
(Increase)/ decrease in accounts receivable 852,315 (1,750,483)
(Increase)/ decrease in inventories (88,780) 735,659
Increase in prepaid expenses and other assets (29,421) (152,950)
Increase in accounts payable 624,209 672,841
Increase in accounts payable - related party 272,873 155,086
Increase in accrued expenses 81,743 153,418
Increase in income taxes payable 113,000 -
----------- -----------
Net cash provided by operating activities 4,259,589 1,654,881
----------- -----------
Cash flows from investing activities:
Cost of leased machines (1,042,264) (2,514,005)
Purchases of property and equipment (26,008) (38,055)
Redemption of collateral bonds - 250,000
----------- -----------
Net cash used in investing activities (1,068,272) (2,302,060)
----------- -----------
Cash flows from financing activities:
Repayment of notes payable, net (3,183,232) -
Proceeds from long-term debt - -
Repayment of long-term debt (2,242) (1,407,513)
Proceeds from notes payable-related parties, net - 2,025,000
Net proceeds from issuance of common stock
----------- -----------
Net cash (used in)/ provided by financing activities (3,185,474) 617,487
----------- -----------
Increase/ (decrease) in cash 5,843 (29,692)
Cash at beginning of year 360 96,316
----------- -----------
Cash at end of period $ 6,203 $ 66,624
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 371,966 $ 270,874
=========== ===========
Non-cash activity (common stock issued for compensation) $ - $ (68,130)
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements
5
<PAGE> 6
INTERNATIONAL LOTTERY, INC.
Notes to Condensed Financial Statements
Basis of Presentation
The accounting and reporting policies of International Lottery, Inc.
conform to generally accepted accounting principles. The financial statements
for the three months and six months ended June 30, 1996 and 1995 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 to make
the financial statements not misleading. The results of operations for the six
months ended June 30, 1996 are not necessarily indicative of the results to be
expected for the entire year ending December 31, 1996.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
International Lottery, Inc. (the "Company") manufactures instant
ticket vending machines ("ITVMs") and telephone card dispensing machines
("PCDMs") that dispense instant lottery tickets and prepaid telephone calling
cards without the assistance of an employee of the lottery or the telephone
card vendor. The Company derives its revenues from (i) the lease of ITVMs and
PCDMs, (ii) the sale of ITVMs and PCDMs, (iii) and to a lesser extent the
service agreements and the sale of parts for ITVMs and PCDMs.
As of June 30, 1996, the Company had sold or leased 9,286 ITVMs under
agreements with fifteen different state lotteries, their licensees or
contractors, and had sold or leased 222 PCDMs to fourteen vendors of prepaid
long distance telephone calling cards. Additionally, lotteries in seven states
and eight foreign jurisdictions, as well as eight vendors of prepaid telephone
calling cards, are either testing or have requested the Company to provide
ITVMs or PCDMs for testing.
RESULTS OF OPERATIONS
The Company's net revenues increased 7% to $5,323,804 from $4,986,974
for the three months ended June 30, 1996 and 1995, respectively, and net
revenues increased 39% to $ 9,867,415 from $ 7,098,668 for the six months ended
June 30, 1996 and 1995, respectively. Revenues from sales of ITVMs and PCDMs
decreased 21% to $2,180,874 from $2,747,094 for the three months ended June
30,1996 and 1995, respectively, while revenues from sales increased by 36% to
$3,735,146 from $2,754,089 for the six months ended June 30, 1996 and 1995,
respectively. Units sold were 483 and 588 for the three months, and 860 and
588 for the six months, ended June 30, 1996 and 1995, respectively. The
fluctuation in revenues from sales is primarily the result of the number and
types of units sold rather than a change in unit pricing. Revenues from leases
increased by 33% to $2,833,817 from $ 2,139,550 for the three months, and by
35% to $ 5,582,450 from $4,148,107 for the six months, ended June 30,1996 and
1995, respectively. The increase in lease revenues results from the increase
to 5,393 ITVMs and PCDMs under lease at June 30, 1996 as compared to 4,223
ITVMs under lease at June 30, 1995. Lease revenues represented 53% and 43% of
the total net revenues for the three months, and 57% and 58% of total net
revenues for the six months, ended June 30, 1996 and 1995, respectively. The
increase in lease revenues is primarily the result of the total units deployed
under leases rather than an increase in unit pricing.
Cost of revenues increased 9% to $3,722,567 from $3,409,179 for the
three months, and by 46% to $6,745,266 from $4,634,089 for the six months,
ended June 30, 1996 and 1995, respectively. Depreciation charged to cost of
revenues increased by 34% to $890,986 from $666,129 for the three months, and
by 39% to $1,755,038 from $1,266,211 for the six months, ended June 30, 1996
and 1995, respectively. Service and installation costs increased by 58% to
$1,001,099 from $635,250 for the three months, and by 78% to $1,869,609 from
$1,052,484 for the six months, ended June 30, 1996 and 1995, respectively,
primarily due to the increase in the number of ITVMs and
7
<PAGE> 8
PCDMs deployed rather than an incremental cost per machine. Expressed as a
percentage of total net revenues, cost of revenues increased to 70% from 68%
for the three months, and to 68% from 65% for the six months, ended June 30,
1996 and 1995, respectively. The increase in the cost of revenues as a
percentage of total net revenues reflects continued competitive pricing
pressure without a corresponding reduction in the cost of production of the
ITVMs and PCDMs.
Selling, general, and administrative expenses decreased by 13% to
$819,141 from $941,640 for the three months, and increased by 8% to $ 1,754,449
from $1,625,985 for the six months, ended June 30, 1996 and 1995, respectively.
Higher selling activity as the Company seeks to improve its position in
existing markets and establish its position in new markets was the most
significant reason for an increase in expenses. These increases were offset,
particularly in the three months ended June 30, 1996, by a decrease in legal
and professional fees as compared to 1995 when the Company was involved in
merger negotiations.
Net interest expense increased by 4% to $153,258 from $147,063 for the
three months, and increased by 42% to $375,130 from $263,744 for the six
months, ended June 30, 1996 and 1995, respectively. The increases reflect the
Company's use of debt financing to fund the growth in ITVMs and PCDMs deployed
under leases, partially offset by the positive cash flow from operations.
Interest rates charged to the Company remained relatively stable throughout the
periods.
Net income before provision for taxes on income increased by 28% to
$580,834 from $452,135 for the three months, and by 50% to $767,303 from
$511,390 for the six months, ended June 30, 1996 and 1995, respectively. The
improvement reflects the positive impact of lease revenues generated in the
current periods from ITVMs and PCDMs deployed in prior periods when combined
with sales of units in both periods.
Net income decreased by 4% to $435,534 from $452,135 for the three
months, and increased by 18% to $601,803 from $511,390 for the six months,
ended June 30, 1996 and 1995, respectively. The results for both periods
reflect the impact of provision for taxes on income in 1996 which was not
required in 1995 when sufficient net operating loss carry- forwards were
available to offset taxable income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital resources are significantly
impacted by the Company's decision to use leasing as a means to market its
ITVMs and PCDMs. However, leasing inherently requires significantly more
capital and longer-term payout than sales arrangements. At June 30, 1996 the
Company had a total of 5,393 ITVMs and PCDMs deployed under leases as compared
to 4,223 ITVMs at June 30, 1995.
The Company finances its operations primarily through cash flow from
operations and a three year revolving credit facility, from Princeton Capital
Finance Company ("PCFC"), entered into as of September 21, 1995. Net cash
provided by operations for the six months ended June 30, 1996 and 1995 was
$4,259,589 and $1,654,881, respectively. The increase for the first six months
of 1996 as compared to the same period in 1995 reflects the improved income of
the Company, the increased depreciation charged to operations, and a reduction
in receivables offset by a small
8
<PAGE> 9
increase in inventories. The reduction in receivables in the first six months
of 1996 is the result of collections of amounts owed from sales during the
fourth quarter of 1995 and the first quarter of 1996. The increase in
depreciation is the result of the greater number of ITVMs and PCDMs deployed
under leases as compared to the number deployed in the first six months of
1995. Net cash used in investing activities was $1,068,272 and $2,302,060 for
the six months ended June 30, 1996 and 1995, respectively. The reduction
resulted from the decrease of 457 to 321 ITVMs and PCDMs deployed under leases
in the first six months of 1996 as compared to 758 ITVMs deployed in the first
six months of 1995. Net cash used in financing activities was $3,185,474 for
the six months ended June 30, 1996, as compared to $617,487 provided by
financing activities for the six months ended June 30, 1995. This change was
due to the increase in net cash provided by operation activities combined with
the reduction in net cash used in investing activities, which resulted in the
net payments against borrowing in the first half of 1996, as compared to net
borrowing in. the first half of 1995.
The company's working capital deficit decreased by $1,362,885 to
$435,496 at June 30, 1996, as compared to deficit of $1,798,381 at December 31,
1995. The reduction in the working capital deficit at June 30, 1996 as
compared to the deficit at December 31, 1995 resulted from a decrease in
current liabilities, primarily a reduction in current notes payable, offset by
a reduction in current assets, primarily the reduction in accounts receivable.
The deficits at both dates reflect the classification of the Company's
revolving credit facility as a current debt. This classification reflects the
demand clause of the specific notes rather than the three year term of the
revolving credit line.
At June 30, 1996, the Company was indebted to PCFC in the aggregate
principal amount of $5,367,924 and had $7,132,076 available under this credit
facility.
9
<PAGE> 10
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The 1996 Annual Meeting of Shareholders was held on May 9, 1996.
(b) Election of directors
(1) The shareholders voted 2,795,978 shares in the affirmative, with
2,760 shares abstaining, for the re-election of Mr. John J.
Wingfield to a three year term as a director of the Company.
The shareholders voted 2,795,778 shares in the affirmative, with
2,960 shares abstaining, for the re-election of Mr. W. Whitlow
Wyatt to a three year term as a director of the Company
(2) Following the meeting, the Board of Directors consisted of the
following individuals:
Mr. L. Rogers Wells
Mr. Edmund F. Turek
Mr. Gary S. Bell
Mr. Kazmier Kasper
Ms. H. Jean Marshall
Mr. John J. Wingfield
Mr. W. Whitlow Wyatt
(c) The shareholders voted 2,796,589 shares in the affirmative and
489 shares in the negative, with 1,660 shares abstaining, for the
appointment of KPMG Peat Marwick, LLP as independent accountants of
the Company for the fiscal year ending December 31,1996.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 11 - Computation of earnings per share
Exhibit 27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K. no Current Reports on Form 8-K were filed by
the Company during the quarter ended June 30, 1996.
10
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL LOTTERY, INC.
(Registrant)
Date: August 9, 1996 /s/ L. Rogers Wells, Jr.
-------------------------------------
L. Rogers Wells, Jr.
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
/s/ Jerome J. Cain
-------------------------------------
Jerome J. Cain
Chief Financial and Accounting Officer
11
<PAGE> 12
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description Page Number
- -------------- ----------- -----------
<S> <C> <C>
11 Computation of earnings per share 13
27 Financial data schedule (for SEC use only) 14
</TABLE>
12
<PAGE> 1
EXHIBIT 11
INTERNATIONAL LOTTERY, INC
Computation Of Earnings per share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 3,210,000 3,206,034 3,210,000 3,205,135
during the period
Net income $ 435,334 $ 452,135 $ 601,803 $ 511,390
Net income per share $ 0.14 $ 0.14 $ 0.19 $ 0.16
Assuming full dilution:
Shares
Weighted average number of
common shares outstanding
during the period 3,210,000 3,206,034 3,210,000 3,206,034
Assuming exercise of options 93,832 - 74,295 4,641
Weighted average number of
common shares outstanding
as adjusted --------- -------- -------- --------
3,303,832 3,206,034 3,284,295 3,209,776
========= ========= ========= =========
Net income $ 435,334 $ 452,135 $ 601,803 $ 511,390
Earnings per common share
assuming full dilution $ 0.13 $ 0.14 $ 0.18 $ 0.16
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 6
<SECURITIES> 0
<RECEIVABLES> 2,972<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 4,570
<CURRENT-ASSETS> 7,915
<PP&E> 18,539
<DEPRECIATION> 8,159
<TOTAL-ASSETS> 18,992
<CURRENT-LIABILITIES> 8,351
<BONDS> 482
1,335
0
<COMMON> 32
<OTHER-SE> 8,792
<TOTAL-LIABILITY-AND-EQUITY> 18,992
<SALES> 3,735
<TOTAL-REVENUES> 9,867
<CGS> 0
<TOTAL-COSTS> 8,725
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 375
<INCOME-PRETAX> 767
<INCOME-TAX> 165
<INCOME-CONTINUING> 602
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 602
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.18
<FN>
<F1>NOTES AND ACCOUNTS RECEIVABLE - TRADE ARE REPORTED NET OF ALLOWANCES FOR
DOUBTFUL ACCOUNTS IN THE CONDENSED BALANCE SHEETS.
14
</FN>
</TABLE>
