<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 March 31, 1997
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 May 12 , 1997
- ---------------------------- ----------------------------
Common Stock, $.01 Par Value 3,210,000 shares
Page 1 of 14
Exhibit Index on page 12
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INTERNATIONAL LOTTERY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
NUMBER PART I. FINANCIAL INFORMATION NUMBER
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<S> <C> <C>
1 Financial Statements:
Condensed Balance Sheets (unaudited) as of
March 31, 1997 and December 31, 1996 3
Condensed Statements of Income (unaudited)
for the three months ended March 31, 1997 and 1996 4
Condensed Statements of Cash Flows (unaudited)
for the three months ended March 31, 1997 and 1996 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
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ITEM 1. FINANCIAL STATEMENTS PART I. FINANCIAL INFORMATION
INTERNATIONAL LOTTERY, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)
MARCH 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
ASSETS
March 31, 1997 December 31,1996
-------------- ----------------
<S> <C> <C>
Current assets:
Cash $ 573,523 $ 188,586
Accounts receivable, less allowance for doubtful accounts of $118,553
in 1997 and $115,425 in 1996 1,677,150 3,217,019
Inventories 4,277,910 5,086,547
Prepaid expenses 226,054 154,254
------------ ------------
Total current assets 6,754,637 8,646,406
Property and equipment:
Leased machines 22,807,438 20,872,885
Machinery and equipment 327,498 318,360
Building and improvements 207,811 195,225
Furniture and fixtures 59,922 36,495
------------ ------------
23,402,669 21,422,965
Less accumulated depreciation and amortization 11,147,990 10,192,638
------------ ------------
12,254,679 11,230,327
Product development rights, net of accumulated amortization of $458,333 in 1997 641,667 660,000
and $440,000 in 1996
Deferred tax asset 456,000 456,000
------------ ------------
$ 20,106,983 $ 20,992,733
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 6,126,264 $ 7,230,171
Current installments of long-term debt 4,755 5,641
Accounts payable 1,024,749 924,213
Accounts payable - related party 344,081 306,529
Accrued expenses 1,220,492 1,067,532
Income taxes payable -- 101,750
------------ ------------
Total current liabilities 8,720,341 9,635,836
Long-term debt, excluding current installments -- 328
Notes payable, excluding current portion - related parties 479,000 479,000
------------ ------------
Total liabilities 9,199,341 10,115,164
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 March 31, 1997 and December 31, 1996 32,100 32,100
Additional paid-in capital 10,376,017 10,376,017
Accumulated deficit (835,475) (865,548)
------------ ------------
Total stockholders' equity 9,572,642 9,542,569
------------ ------------
$ 20,106,983 $ 20,992,733
============ ============
</TABLE>
3
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INTERNATIONAL LOTTERY, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Machine sales $ 528,944 $ 1,554,272
Machine leases 3,272,246 2,748,633
Other 362,777 240,706
----------- -----------
4,163,967 4,543,611
Cost of revenues 2,932,114 3,022,699
----------- -----------
Gross profit 1,231,853 1,520,912
Operating expenses:
Selling, general, and administrative expenses 886,792 935,308
Research and development costs 142,656 177,263
----------- -----------
Total operating expenses 1,029,488 1,112,571
----------- -----------
Operating income 202,405 408,341
Other income:
Interest expense (152,800) (226,615)
Interest income 466 4,743
----------- -----------
(152,334) (221,872)
----------- -----------
Income before income taxes 50,071 186,469
Income taxes 20,000 20,000
----------- -----------
Net income 30,071 166,469
=========== ===========
Net income per share $ .01 $ .05
=========== ===========
</TABLE>
4
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INTERNATIONAL LOTTERY, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
----------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 30,071 166,469
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 973,687 901,815
Decrease in accounts receivable 1,539,869 800,849
Decrease in inventories 808,637 70,148
Increase in prepaid expenses (71,800) (7,866)
Increase in accounts payable 100,536 443,514
Increase in accounts payable - related party 37,552 190,625
Increase in accrued expenses 152,960 100,544
Increase (decrease) in income taxes payable (101,750) 20,000
----------- -----------
Net cash provided by operating activities 3,469,762 2,686,098
----------- -----------
Cash flows from investing activities:
Cost of leased machines (1,934,553) (487,289)
Purchases of property and equipment (45,151) (4,787)
Net cash used in investing activities (1,979,704) (492,076)
----------- -----------
Cash flows from financing activities:
Repayment of notes payable, net (1,103,907) (2,192,907)
Repayment of long-term debt (1,214) (1,115)
Net cash used in financing activities (1,105,121) (2,194,022)
----------- -----------
Increase in cash 384,937 --
Cash at beginning of year 188,586 360
----------- -----------
Cash at end of period $ 573,523 360
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 147,172 212,832
=========== ===========
</TABLE>
5
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INTERNATIONAL LOTTERY, INC.
Notes to Condensed Financial Statements
1. 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 ended March 31, 1997 and 1996 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 financial statements should be
read in conjunction with the summary of significant accounting policies
footnotes which appear in the Company's 1996 Annual Report and Form 10-K filed
with the Securities and Exchange Commission. The results of operations for the
three months ended March 31, 1997 are not necessarily indicative of the results
to be expected for the entire year ending December 31, 1997.
6
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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 March 31, 1997, the Company had sold or leased over 11,000 ITVMs
and PCDMs under agreements with 18 different state lotteries, their licensees
or contractors, as well as to 35 vendors of prepaid telephone calling cards.
Additionally, lotteries in six states and eight foreign jurisdictions, as well
as seven vendors of prepaid telephone calling cards, are either testing or have
requested the Company to provide ITVMs or PCDMs for testing.
RESULTS OF OPERATIONS
Lease revenues represented 78.6% and 60.5% of total revenues for the
three months ended March 31, 1997 and 1996, respectively. This revenue mix
continues to reflect the Company's primary strategy of leasing rather than
selling ITVMs and PCDMs when possible. The Company believes that the consistent
revenue stream provided by leases and the potential to deploy a greater number
of ITVMs and PCDMs within a customer's budget justify the initial capital
investment required to manufacture ITVMs and PCDMs for lease.
The Company's revenues decreased 8% to $4,163,967 from $4,543,611 for
the three months ended March 31, 1997 and 1996, respectively. The $379,644
decrease in net revenues for the three months ended March 31, 1997 was
primarily the result of a decrease of 254 units sold to 123 ITVMs and PCDMs
sold for the three months ended March 31, 1997, combined with an increase of
333 to 451 ITVMs deployed under leases during the three months ended March 31,
1997. Over 6,500 ITVMs and PCDMs were deployed under leases at March 31, 1997
as compared to 5,190 units deployed under leases at March 31, 1996, an increase
of 26%. Other revenues increased by 51% to $362,777 for the three months ended
March 31, 1997 from $240,706 for the three months ended March 31, 1996, as a
result of the deployment of additional ITVMs under the service contract for
ITVMs deployed in New York and the continuing service revenues from the service
contract for ITVMs deployed in Maryland.
Cost of revenues decreased 3% to $2,932,114 from $3,022,699 for the
three months ended March 31, 1997 and 1996, respectively. Depreciation charged
to cost of revenues increased by 8% to $932,254 from $864,052 for the three
months ended March 31, 1997 and 1996, respectively, due to the additional
number of machines deployed under leases. Cost of units and parts sold was
$348,706 and $1,111,950 for the three months ended March 31, 1997 and 1996,
respectively. Service and installation costs increased by 44% to $1,291,979
from $868,510 for the three months
7
<PAGE> 8
ended March 31, 1997 and 1996, respectively, primarily due to the increase in
the number of ITVMs and PCDMs leased and serviced during the first quarter of
1997 as compared to the number leased and serviced during the first quarter of
1996. As a percentage of total revenues, cost of revenues increased by 4% to
71% from 67% for the three months ended March 31, 1997 and 1996, respectively,
as the result of the initial cost of deployment of leased machines and a small
increase in plant operating costs combined with the decrease in revenues.
Gross margin decreased by 19% to $1,231,853 from $1,520,912 for the
three months ended March 31, 1997 and 1996, respectively. Gross margin was
impacted by deployments of a greater number of ITVMs under leases which
recognizes the gross margin over the life of the lease rather than at time of
shipment.
Selling, general, and administrative expenses decreased by 5% to
$886,792 from $935,308 for the three months ended March 31, 1997 and 1996,
respectively. The reduction of expenses was primarily the result of lower legal
fees, reflecting reduced litigation activity, combined with lower costs of
insurance.
Net interest expense decreased by 31% to $152,334 from $221,872 for
the three months ended March 31, 1997 and 1996 respectively. The decrease
reflects the Company's ability to finance more ITVMs and PCDMs through cash
flow rather than financing.
Net income decreased by 73% to $30,071 from $166,469 for the three
months ended March 31, 1997 and 1996, respectively. The decline in the net
income reflects the lower revenue for the first three months of 1997 as
compared to the first three months of 1996 as well as the greater percentage of
new deployment as leases rather than sales.
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 March 31, 1997 the
Company had a total of 6,536 ITVMs and PCDMs deployed under leases as compared
to 5,190 at March 31, 1996.
The Company finances its operations primarily through cash flow from
operations and a revolving credit facility from Princeton Capital Finance
Company ("PCFC"). Net cash provided by operations for the three months ended
March 31, 1997 and 1996 was $3,469,762 and $2,686,098, respectively. The
increase for the first quarter of 1997 as compared to the same period in 1996
primarily reflects the higher amount of depreciation charged to operations and
a reduction in receivables and inventories. The reduction in receivables in the
first quarter of 1997 is the result of collections of amounts owed from sales
during the fourth 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 quarter of 1996. Net cash used in investing
activities was $1,979,704 and $492,076 for the three months ended March 31,
1997 and 1996, respectively, reflecting an increase of 333 to 451
8
<PAGE> 9
ITVMs deployed under leases during the three months ended March 31, 1997. Net
cash used in financing activities was $1,105,121 and $2,194,022 for the three
months ended March 31, 1997 and 1996, respectively.
The Company's working capital deficit increased by $976,274 to
$1,965,704 at March 31, 1997 as compared to a deficit of $989,430 at December
31, 1996. The deficits at both dates reflect the classification of the
Company's revolving credit facility as a current debt. The larger deficit
reflects the Company's use of cash generated from operations to finance the
increase of leased ITVMs.
At March 31, 1997, the Company was indebted to PCFC in the aggregate
principal amount of $6,126,264 pursuant to a three year revolving credit
agreement entered into as of September 21, 1995. At March 31, 1997, the Company
had $6,373,736 available under this agreement.
9
<PAGE> 10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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 March 31, 1997.
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: May 12, 1997 /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
<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
March 31,
1997 1996
---------- ----------
<S> <C> <C>
Weighted average common shares outstanding during the period 3,210,000 3,210,000
Net income $ 30,071 $ 166,469
Net income per share $ 0.01 0.05
========== ==========
Assuming full dilution:
Net income $ 30,071 166,469
Shares
Weighted average number of
common shares outstanding during the 3,210,000 3,210,000
period
Assuming exercise of options 5,617 54,758
Weighted average number of
common shares outstanding
as adjusted ---------- ----------
3,215,617 3,264,758
========== ==========
Earnings per common share
assuming full dilution $ 0.01 0.05
========== ==========
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 574
<SECURITIES> 0
<RECEIVABLES> 1,796<F1>
<ALLOWANCES> 119
<INVENTORY> 4,278
<CURRENT-ASSETS> 6,755
<PP&E> 23,403
<DEPRECIATION> 11,148
<TOTAL-ASSETS> 20,107
<CURRENT-LIABILITIES> 8,720
<BONDS> 479
1,335
0
<COMMON> 32
<OTHER-SE> 9,541
<TOTAL-LIABILITY-AND-EQUITY> 20,107
<SALES> 529
<TOTAL-REVENUES> 4,164
<CGS> 349
<TOTAL-COSTS> 4,311
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 152
<INCOME-PRETAX> 50
<INCOME-TAX> 20
<INCOME-CONTINUING> 30
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
<FN>
<F1>NOTES AND ACCOUNTS RECEIVABLE-TRADE ARE REPORTED NET OF ALLOWANCES FOR DOUBTFUL
ACCOUNTS IN THE CONDENSED BALANCE SHEETS.
</FN>
</TABLE>
