<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 September 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 November 11, 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 SEPTEMBER 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
September 30, 1996 and December 31, 1995 3
Condensed Statements of Operations
for the three months and nine months
ended September 30, 1996 and 1995 4
Condensed Statements of Cash Flows
for the nine months ended September 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
6 Exhibits and Reports on Form 8-K 10
SIGNATURES 11
Exhibit Index 12
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
INTERNATIONAL LOTTERY, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
ASSETS September 30, 1996 December 31,1995
------------------ ----------------
<S> <C> <C>
Current assets:
Cash $ 103,742 $ 360
Accounts receivable, less allowance for doubtful accounts of $146,614
in 1996 and $101,613 in 1995 2,957,932 3,824,442
Inventories 4,456,187 4,481,156
Prepaid expenses 199,936 337,406
------------ ------------
Total current assets 7,717,797 8,643,364
Property and equipment:
Leased machines 19,496,385 16,968,351
Machinery and equipment 285,420 261,273
Building and improvements 195,225 195,225
Furniture and fixtures 47,585 45,724
------------ ------------
20,024,615 17,470,573
Less accumulated depreciation and amortization 9,127,421 6,363,587
------------ ------------
10,897,194 11,106,986
Product development rights, net of accumulated amortization of $421,666 in 1996
and $366,664 in 1995 678,334 733,336
------------ ------------
$ 19,293,325 $ 20,483,686
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 5,757,134 $ 8,551,156
Current installments of long-term debt 5,039 4,659
Accounts payable 1,050,377 1,024,501
Accounts payable - related party 392,912 113
Accrued expenses 964,670 861,316
Income taxes payable 194,750 --
------------ ------------
Total current liabilities 8,364,882 10,441,745
Long-term debt, excluding current installments 2,194 5,969
Notes payable, excluding current portion - related parties 479,000 479,000
------------ ------------
Total liabilities 8,846,076 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 September 30, 1996 and December 31, 1995 32,100 32,100
Additional paid-in capital 10,376,017 10,376,017
Accumulated deficit (1,295,868) (2,186,145)
------------ ------------
Total stockholders' equity 9,112,249 8,221,972
------------ ------------
$ 19,293,325 $ 20,483,686
============ ============
</TABLE>
See accompanying notes to condensed financial statements
3
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INTERNATIONAL LOTTERY, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
Revenues: 1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Machine and parts sales $ 760,268 $ 3,756,259 $ 4,495,414 $ 6,510,348
Machine leases 2,989,383 2,370,103 8,571,833 6,518,210
Other 339,179 115,794 888,998 312,267
------------ ------------ ------------ ------------
4,088,830 6,242,156 13,956,245 13,340,825
Cost of revenues 2,697,071 4,357,395 9,442,337 8,991,485
------------ ------------ ------------ ------------
Gross margin 1,391,759 1,884,761 4,513,908 4,349,340
Operating expenses:
Selling, general, and administrative 759,774 908,658 2,514,223 2,534,642
expenses
Research and development costs 120,248 20,497 345,515 83,958
------------ ------------ ------------ ------------
Total operating expenses 880,022 929,155 2,859,738 2,618,600
------------ ------------ ------------ ------------
Operating income 511,737 955,606 1,654,170 1,730,740
Other income (expense):
Interest expense (135,000) (206,953) (517,757) (480,073)
Interest income 2,237 792 9,864 10,168
------------ ------------ ------------ ------------
(132,763) (206,161) (507,893) (469,905)
------------ ------------ ------------ ------------
Income before income taxes 378,974 749,445 1,146,277 1,260,835
Income taxes 90,500 -- 256,000 --
------------ ------------ ------------ ------------
Net income $ 288,474 $ 749,445 $ 890,277 $ 1,260,835
============ ============ ============ ============
Net income per share $ .09 $ .23 $ .28 $ .39
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE> 5
INTERNATIONAL LOTTERY, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 890,277 $ 1,260,835
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,818,836 2,097,500
(Increase)/decrease in accounts receivable 866,510 (4,045,023)
(Increase)/decrease in inventories 24,969 (1,351,505)
(Increase)/decrease in prepaid expenses 137,470 (121,346)
Increase in accounts payable 25,876 2,272,617
Increase in accounts payable - related party 392,799 151,311
Increase in accrued expenses 103,354 186,706
Increase in income taxes payable 194,750 --
----------- -----------
Net cash provided by operating activities 5,454,841 451,095
----------- -----------
Cash flows from investing activities:
Cost of leased machines (2,528,034) (3,519,800)
Purchases of property and equipment (26,008) (86,242)
Redemption of collateral bonds -- 250,000
----------- -----------
Net cash used in investing activities (2,554,042) (3,356,042)
----------- -----------
Cash flows from financing activities:
(Repayment of)/proceeds from notes payable, net (2,794,022) 4,237,867
Proceeds from long-term debt -- --
Repayment of long-term debt (3,395) (1,316,776)
Proceeds from notes payable-related parties, net -- (111,500)
Net proceeds from issuance of common stock
----------- -----------
Net cash (used in)/provided by financing activities (2,797,417) 2,809,591
----------- -----------
Increase/(decrease) in cash 103,382 (95,356)
Cash at beginning of year 360 96,316
----------- -----------
Cash at end of period $ 103,742 $ 960
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 492,691 $ 503,799
=========== ===========
Income taxes paid $ 61,250 --
===========
Non-cash activity (common stock issued for compensation) -- $ (68,130)
===========
</TABLE>
See accompanying notes to condensed financial statements
5
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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 nine months ended September 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 nine months ended September 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 September 30, 1996, the Company had sold or leased over 10,000
ITVMs under agreements with sixteen different lotteries, their licensees or
contractors, and had sold or leased 274 PCDMs to eighteen 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 revenues decreased 34% to $4,088,830 from $6,242,156 for
the three months ended September 30, 1996 and 1995, respectively, and revenues
increased 5% to $ 13,956,245 from $ 13,340,825 for the nine months ended
September 30, 1996 and 1995, respectively. Revenues from sales of ITVMs and
PCDMs decreased 80% to $760,268 from $3,756,259 for the three months ended
September 30,1996 and 1995, respectively, while revenues from sales decreased by
31% to $4,495,414 from $6,510,348 for the nine months ended September 30, 1996
and 1995, respectively. Units sold were 155 and 1,067 for the three months, and
1,015 and 1,374 for the nine months, ended September 30, 1996 and 1995,
respectively. The decrease in revenues from sales is primarily the result of the
number and types of units sold rather than a change in unit pricing. The
decrease in the number of units sold in the three months and nine months ended
September 30, 1996, is due to completion of shipments of sales contracts rather
than the loss of any contracts. Revenues from leases increased by 26% to $
2,989,383 from $ 2,370,103 for the three months, and by 32% to $ 8,571,833 from
$ 6,518,210 for the nine months, ended September 30,1996 and 1995, respectively.
The increase in lease revenues results from the increase to 5,836 ITVMs and
PCDMs under lease at September 30, 1996 as compared to 4,583 ITVMs and PCDMs
under lease at September 30, 1995. Lease revenues represented 73% and 38% of the
total revenues for the three months, and 61% and 49% of total revenues for the
nine months, ended September 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. The increase in the number of units
under lease at September 30, 1996 is due to additional deployments under
existing contracts and initial deployments under new contracts.
Cost of revenues decreased 38% to $2,697,071 from $4,357,395 for the
three months, and increased by 5% to $ 9,442,337 from $8,991,485 for the nine
months, ended September 30, 1996 and 1995, respectively. Depreciation charged to
cost of
7
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revenues increased by 32% to $ 970,933 from $ 733,219 for the three months, and
by 36% to $ 2,725,971 from $ 1,999,430 for the nine months, ended September 30,
1996 and 1995, respectively. Service and installation costs increased by 41% to
$ 1,068,483 from $ 758,948 for the three months, and by 62% to $ 2,938,092 from
$ 1,811,432 for the nine months, ended September 30, 1996 and 1995,
respectively, primarily due to the increase in the number of ITVMs and PCDMs
deployed rather than an incremental cost per machine. Expressed as a percentage
of total revenues, cost of revenues decreased to 66% from 70% for the three
months, and remained constant at 68% for the nine months, ended September 30,
1996 and 1995, respectively.
Selling, general, and administrative expenses decreased by 16% to $
759,774 from $908,658 for the three months, and by 1% to $ 2,514,223 from $
2,534,642 for the nine months, ended September 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, by a decrease
in professional fees as compared to 1995 when the Company was involved in merger
negotiations, and management's control of expenses levels.
Net interest expense decreased by 36% to $ 132,763 from $ 206,161 for
the three months, and increased by 8% to $ 507,893 from $469,905 for the nine
months, ended September 30, 1996 and 1995, respectively. The decrease in net
interest expense for the three months ended September 30, 1996, reflect the
lower amount of debt outstanding during the three months in 1996 as compared to
the same period in 1995. The increase in net interest expense for the nine
months ended September 30, 1996 as compared to the same period in 1995, reflects
the higher average balance due on loans in 1996. Interest rates charged to the
Company remained relatively stable throughout the periods.
Net income before provision for taxes on income decreased by 49% to $
378,974 from $ 749,445 for the three months, and by 9% to $ 1,146,277 from
$1,260,835 for the nine months, ended September 30, 1996 and 1995, respectively.
The decrease results primarily from the change in the mix of sales and lease
revenues.
Net income decreased by 70% to $ 228,474 from $ 749,445 for the three
months, and by 29% to $ 890,277 from $ 1,260,835 for the nine months, ended
September 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 as 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 September 30, 1996 the Company
had a total of 5,836 ITVMs and PCDMs deployed under leases as compared to 4,583
ITVMs at September 30, 1995.
The Company finances its operations primarily through cash flow from
8
<PAGE> 9
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 nine months ended September 30, 1996 and 1995 was
$ 5,454,841 and $ 451,095, respectively. The increase for the first nine months
of 1996 as compared to the same period in 1995 reflects the increased
depreciation charged to operations, and a reduction in receivables and
inventories, offset by the decreased income of the Company. The reduction in
receivables in the first nine months of 1996 is the result of collections of
amounts owed from sales during the fourth quarter of 1995 and the first six
months 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 nine months of 1995. Net cash used in investing activities was $ 2,554,042
and $ 3,356,042 for the nine months ended September 30, 1996 and 1995,
respectively. The reduction resulted from the decrease of 393 to 764 ITVMs and
PCDMs deployed under leases in the first nine months of 1996 as compared to
1,157 ITVMs and PCDMs deployed in the first nine months of 1995. Net cash used
in financing activities was $ 2,797,417 for the nine months ended September 30,
1996 as compared to $ 2,809,591 provided by financing activities for the nine
months ended September 30, 1995.
The Company's working capital deficit decreased by $ 1,515,296 to $
647,085 at September 30, 1996 as compared to a deficit of $1,798,381 at December
31, 1995. The reduction in the working capital deficit at September 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 September 30, 1996, the Company was indebted to PCFC in the
aggregate principal amount of $ 5,757,134 and had $ 6,742,866 available under
this credit facility.
CURRENT DEVELOPMENTS
On September 25, 1996 the Company was informed that it was the highest
ranked respondent to a request for proposal to provide ITVMs to the Florida
Lottery. As a result of this selection, the Company will provide the ITVMs to
the Florida Lottery upon the successful completion of contract negotiations and
background investigations.
9
<PAGE> 10
PART II. OTHER INFORMATION
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 September 30, 1996.
10
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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: November 11, 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
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EXHIBIT INDEX
Exhibit Number Description Page Number
- -------------- ----------- -----------
11 Computation of earnings per share 13
27 Financial data schedule (for SEC use only) 14
12
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EXHIBIT 11
INTERNATIONAL LOTTERY, INC
Computation Of Earnings per share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Weighted average common shares 3,210,000 3,210,000 3,210,000 3,206,774
outstanding during the period
Net income $ 288,474 $ 749,445 $ 890,277 $ 1,260,835
Net income per share $ 0.09 $ 0.23 $ 0.28 $ 0.39
Assuming full dilution:
Shares
Weighted average number of
common shares outstanding
during the period 3,210,000 3,210,000 3,210,000 3,206,774
Assuming exercise of options 55,389 58,995 67,946 22,958
------------ ------------ ------------ ------------
Weighted average number of
common shares outstanding
as adjusted 3,265,389 3,268,995 3,277,946 3,229,732
============ ============ ============ ============
Net income $ 288,474 $ 749,445 $ 890,277 $ 1,260,835
Earnings per common share
assuming full dilution $ 0.09 $ 0.23 $ 0.27 $ 0.39
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.<F1>
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 104
<SECURITIES> 0
<RECEIVABLES> 2,958<F2>
<ALLOWANCES> 0<F2>
<INVENTORY> 4,456
<CURRENT-ASSETS> 7,718
<PP&E> 20,025
<DEPRECIATION> 9,127
<TOTAL-ASSETS> 19,293
<CURRENT-LIABILITIES> 8,365
<BONDS> 481
1,335
0
<COMMON> 32
<OTHER-SE> 9,080
<TOTAL-LIABILITY-AND-EQUITY> 19,293
<SALES> 4,495
<TOTAL-REVENUES> 13,956
<CGS> 0
<TOTAL-COSTS> 12,302
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 508
<INCOME-PRETAX> 1,146
<INCOME-TAX> 256
<INCOME-CONTINUING> 890
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 890
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.27
<FN>
<F1>AMOUNTS INAPPLICABLE OR NOT DISCLOSED AS A SEPARATE LINE ON THE CONDENSED
BALANCE SHEET AND STATEMENT OF OPERATIONS ARE REPORTED AS 0 HEREIN.
<F2>NOTES AND ACCOUNTS RECEIVABLE - TRADE ARE REPORTED NET OF ALLOWANCES FOR
DOUBTFUL ACCOUNTS IN THE CONDENSED BALANCE SHEET.
</FN>
</TABLE>
