<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, 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
INTERLOTT TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 31-1297916
(State of Incorporation) (I.R.S. Employer
Identification No.)
10830 Millington Ct., Cincinnati, Ohio 45242
(Address of principal executive offices, including zip code)
(513) 792-7000
(Registrant's telephone number, including area code)
International Lottery, Inc.
6665 Creek Road, Cincinnati, Ohio 45242
(Former name and address; changed since last report)
--------------------
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 11, 1997
- ---------------------------- -------------------------------
Common Stock, $.01 Par Value 3,210,000 shares
Page 1 of 14
Exhibit Index on page 12
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INTERLOTT TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
NUMBER PART I. FINANCIAL INFORMATION NUMBER
------ ------
<S> <C> <C>
1 Financial Statements:
Condensed Balance Sheets (unaudited) as of
June 30, 1997 and December 31, 1996 3
Condensed Statements of Income
for the three months and six months
ended June 30, 1997 and 1996 4
Condensed Statements of Cash Flows
for the six months ended June 30, 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
3 Quantitative and Qualitative Disclosure about
Market Risk 9
PART II. OTHER INFORMATION
4 Submission of Matters to a vote of Security Holders 10
6 Exhibits and Reports on Form 8-K 10
SIGNATURES 11
Exhibit Index 12
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS PART I. FINANCIAL INFORMATION
INTERLOTT TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)
JUNE 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
ASSETS June 30, 1997 December 31,1996
------------- ----------------
<S> <C> <C>
Current assets:
Cash $ 63,301 $ 188,586
Accounts receivable, less allowance for doubtful accounts of $131,033
in 1997 and $115,425 in 1996 2,388,313 3,217,019
Net investment in sales - type lease 286,338 --
Inventories 3,956,136 5,086,547
Prepaid expenses 206,587 154,254
----------- -----------
Total current assets 6,900,675 8,646,406
Property and equipment:
Leased machines 24,219,161 20,872,885
Machinery and equipment 382,431 318,360
Building and improvements 265,153 195,225
Furniture and fixtures 120,097 36,495
----------- -----------
24,986,842 21,422,965
Less accumulated depreciation and amortization 12,220,941 10,192,638
12,765,901 11,230,327
Product development rights, net of accumulated amortization of $476,666 in 1997 623,334 660,000
and $440,000 in 1996
Net Investment in sales-type lease 1,145,352 --
Deferred tax asset 423,000 456,000
----------- -----------
$21,858,262 $20,992,733
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 6,227,146 $ 7,230,171
Current installments of long-term debt 3,520 5,641
Accounts payable 1,607,567 924,213
Accounts payable - related party 363,095 306,529
Accrued expenses 1,053,097 1,067,532
Income taxes payable 287,250 101,750
----------- -----------
Total current liabilities 9,541,675 9,635,836
Deferred tax liablility 152,700 --
Long-term debt, excluding current installments -- 328
Notes payable - related parties 479,000 479,000
----------- -----------
Total liabilities 10,173,375 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 June 30, 1997 and December 31, 1996 32,100 32,100
Additional paid-in capital 10,376,017 10,376,017
Accumulated deficit (58,230) (865,548)
----------- -----------
Total stockholders' equity 10,349,887 9,542,569
----------- -----------
$21,858,262 $20,992,733
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE> 4
INTERNATIONAL LOTTERY, INC.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
Revenues: 1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Machine and parts sales $2,900,048 $2,180,874 $ 3,428,992 $3,735,146
Machine leases 3,648,938 2,833,817 6,921,184 5,582,450
Other 382,222 309,113 744,999 549,819
---------- ---------- ----------- ----------
6,931,208 5,323,804 11,095,175 9,867,415
Cost of revenues 4,453,598 3,722,567 7,385,712 6,745,266
---------- ---------- ----------- ----------
Gross profit 2,477,610 1,601,237 3,709,463 3,122,149
Operating expenses:
Selling, general, and administrative 914,410 819,141 1,801,202 1,754,449
expenses
Research and development costs 113,373 48,004 256,029 225,267
---------- ---------- ----------- ----------
Total operating expenses 1,027,783 867,145 2,057,231 1,979,716
---------- ---------- ----------- ----------
Operating income 1,449,827 734,092 1,652,232 1,142,433
Other income (expense):
Interest expense (181,383) (156,142) (334,183) (382,757)
Interest income 3 2,884 469 7,627
---------- ---------- ----------- ----------
(181,380) (153,258) (333,714) (375,130)
---------- ---------- ----------- ----------
Income before income taxes 1,268,447 580,834 1,318,518 767,303
Income taxes 491,200 145,500 511,200 165,500
---------- ---------- ----------- ----------
Net income $ 777,247 $ 435,334 $ 807,318 $ 601,803
========== ========== =========== ==========
Net income per share $ .24 $ .14 $ .25 $ .19
========== ========== =========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE> 5
INTERLOTT TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 807,318 $ 601,803
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,064,969 1,831,847
Deferred income taxes 185,700 --
Decrease in accounts receivable 542,368 852,315
Decrease (increase) in inventories 1,130,411 (88,780)
Increase in prepaid expenses (52,333) (29,421)
Increase in accounts payable 683,354 624,209
Increase in accounts payable - related party 56,566 272,873
Increase (decrease) in accrued expenses (14,435) 81,743
Increase in income taxes payable 185,500 113,000
----------- -----------
Net cash provided by operating activities 5,589,418 4,259,589
----------- -----------
Cash flows from investing activities:
Cost of leased machines (3,346,276) (1,042,264)
Purchases of property and equipment (217,601) (26,008)
Increase in investment in sales-type leases (1,145,352) --
----------- -----------
Net cash used in investing activities (4,709,229) (1,068,272)
----------- -----------
Cash flows from financing activities:
Repayment of notes payable, net (1,003,025) (3,183,232)
Repayment of long-term debt (2,449) (2,242)
----------- -----------
Net cash used in financing activities (1,005,474) (3,185,474)
----------- -----------
Increase (decrease) in cash (125,285) 5,843
Cash at beginning of year 188,586 360
----------- -----------
Cash at end of period $ 63,301 $ 6,203
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 329,402 $ 371,966
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements
5
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INTERLOTT TECHNOLOGIES, INC.
Notes to Condensed Financial Statements
1. Basis of Presentation
The accounting and reporting policies of Interlott Technologies, Inc.
conform to generally accepted accounting principles. The financial statements
for the six months ended June 30, 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 which appears in
the Company's 1996 Annual Report filed with the Securities and Exchange
Commission as an exhibit to the Company's 1996 Annual Report on Form 10K. The
results of operations for the six months ended June 30, 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
Interlott Technologies, 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, 1997, the Company had sold or leased over 12,000 ITVMs
and PCDMs under agreements with twenty-four different lotteries, their licensees
or contractors, and over forty vendors of prepaid telephone calling cards.
Additionally, both domestic and international lotteries, as well as numerous
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 30% to $6,931,208 from $5,323,804
for the three months, and 12% to $11,095,175 from $9,867,415 for the six months
ended June 30, 1997 and 1996, respectively. Revenues from sales of ITVMs and
PCDMs increased 33% to $2,900,048 from $2,180,874 for the three months ended
June 30, 1997 and 1996, respectively and decreased 8% to $3,428,992 from
$3,735,146 for the six months ended June 30, 1997 and 1996, 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 sales
include leased ITVMs categorized as sales-type leases for the lease of 195 ITVMs
to the New Mexico Lottery. Revenues from operating leases increased 29% to
$3,648,938 from $2,833,817 for the three months, and 24% to $6,921,184 from
$5,582,450 for the six months ended June 30, 1997 and 1996, respectively.
Operating lease revenues as a result of a increase to 6,838 from 5,393 ITVMs and
PCDMs under lease at June 30, 1997 and 1996 respectively. The increase in the
number of leased machines results from initial deployment of ITVMs in Florida
and Minnesota, and PCDMs to various telephone card providers , as well as
additional ITVMs deployed in Colorado, Indiana and Texas. The increase in lease
revenues primarily results from the increased number of units under lease rather
than an increase in unit lease pricing. Lease revenues represented 53% of total
revenues for each of the three months, and 62% and 57% of total revenues for the
six months ended June 30, 1997 and 1996, respectively.
Cost of revenues increased 20% to $4,453,598 from $3,722,567 for the
three months, and increased 9% to $7,385,712 from $6,745,266 for the six months
ended June 30, 1997 and 1996, respectively. Depreciation charged to cost of
revenues increased 16% to $1,034,049 from $890,986 for the three months, and
increased 12% to $1,966,303 from $1,755,038 for the six months, ended June 30,
1997 and 1996, respectively. Service and installation costs increased 30% to
$1,305,007 from $1,001,099 for the three months, and increased 39% to $2,596,986
from $1,869,609
7
<PAGE> 8
for the six months, ended June 30, 1997 and 1996, respectively, primarily due to
the increase in the number of ITVMs and PCDMs deployed rather than an
incremental cost per machine. Gross profit percentage increased 6% to 36% from
30% for the three months and increased 1% to 33% from 32% for the six months,
ended June 30, 1997 and 1996, respectively. The decrease in the cost of revenues
as a percentage of total net revenues reflects improved pricing on units sold,
combined with continued lease revenues from fully depreciated ITVMs.
Selling, general, and administrative expenses increased 12% to $914,410
from $819,141 for the three months, and 3% to $1,801,202 from $1,754,449 for the
six months, ended June 30, 1997 and 1996, respectively. Costs associated with
the relocation of corporate offices, the 1996 Annual Report and 1997 Annual
Meeting were the primary factors related to the increase in cost for both the
three months and six months ended June 30, 1997 as compared to the same periods
in 1996.
Net interest expense increased 18% to $181,380 from $ 153,258 for the
three months, and decreased 11% to $333,714 from $375,130 for the six months,
ended June 30, 1997 and 1996, respectively. The changes reflect the difference
in the average amounts outstanding rather than a change in interest rate.
Interest rates charged to the Company remained relatively stable throughout the
periods.
Income before income taxes increased 118% to $1,268,477 from $580,834
for the three months, and 72% to $1,318,518 from $767,303 for the six months,
ended June 30, 1997 and 1996, respectively. The improvement reflects the
positive impact of lease revenues generated in the current periods from ITVMs
and PCDMs deployed in prior periods.
As a result of the foregoing factors, net income increased 79% to
$777,247 from $435,534 for the three months, and increased 34% to $807,318 from
$601,803 for the six months, ended June 30, 1997 and 1996, respectively.
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 a
longer-term payout than sales. At June 30, 1997 the Company had a total of 7,033
ITVMs and PCDMs deployed under leases as compared to 5,393 ITVMs at June 30,
1996.
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, 1997 and 1996 was
$5,589,418 and $4,259,589, respectively. The increase for the first six months
of 1997 as compared to the same period in 1996 reflects the improved net income
of the Company, the increased depreciation charged to operations, and a
reduction in receivables and inventories. The reduction in receivables in the
first six months of 1997 is the result of collections of amounts owed from
sales during the fourth quarter of 1996 and the first quarter of 1997. The
decrease in inventories is the result of deploying ITVMs and PCDMs manufactured
in the fourth quarter of 1996. The increase in depreciation is the
8
<PAGE> 9
result of the greater number of ITVMs and PCDMs deployed under leases as
compared to the number deployed in the first six months of 1996. Net cash used
in investing activities was $4,709,229 and $1,068,272 for the six months ended
June 30, 1997 and 1996, respectively. This increase reflects the increase of
over 900 ITVMs and PCDMs deployed under lease in the first six months of 1997 as
compared to just over 300 ITVMs deployed under lease in the first six months of
1996. Net cash used in financing activities was $1,005,474 for the six months
ended June 30, 1997, as compared to $3,185,474 for the six months ended June 30,
1996.
The company's working capital deficit increased by $1,651,570 to
$2,641,000 at June 30, 1997, as compared to the 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 as of June 30,
1997 reflects the Company's use of cash generated from operations to finance the
increased number of leased ITVMs and PCDMs.
At June 30, 1997, the Company was indebted to PCFC in the aggregate
principal amount of $6,227,146 and had $6,272,854 available under this credit
facility.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
9
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The 1997 Annual Meeting of Shareholders was held on May 8, 1997.
(b) The shareholders voted 2,758,055 shares in the affirmative and 100
shares in the negative, with 300 shares abstaining to amend the
Company's certificate of Incorporation to change the name of the
Company from International Lottery, Inc. to Interlott Technologies,
Inc.
(c) Election of directors
(1) The shareholders voted 2,758,455 shares in the affirmative, which
were all shares voted, for the re-election of Mr. Gary S. Bell, Mr.
Edmund F. Turek and Mr. L. Rogers Wells to a three year term as a
director of the Company.
(d) The shareholders voted 2,756,745 shares in the affirmative, with 1,710
shares abstaining, for the ratification of the appointment of KPMG Peat
Marwick LLP as independent accountants of the Company for the fiscal
year ending December 31,1997.
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, 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.
INTERLOTT TECHNOLOGIES, INC.
(Registrant)
Date: August 11, 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
INTERLOTT TECHNOLOGIES, INC
Computation Of Earnings per share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------- -------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares 3,210,000 3,210,000 3,210,000 3,210,000
outstanding during the period
Net income $ 777,247 $ 435,334 $ 807,318 $ 601,803
Net income per share $ 0.24 $ 0.14 $ 0.25 $ 0.19
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 18,000 93,832 11,843 74,295
Weighted average number of
common shares outstanding
as adjusted ---------- ---------- ---------- ----------
3,228,000 3,299,866 3,221,843 3,290,329
========== ========== ========== ==========
Net income $ 777,247 $ 435,334 $ 807,318 $ 601,803
Earnings per common share
assuming full dilution $ 0.24 $ 0.13 $ 0.25 $ 0.18
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997<F1>
<CASH> 63
<SECURITIES> 0
<RECEIVABLES> 2,388<F2>
<ALLOWANCES> 0<F2>
<INVENTORY> 3,956
<CURRENT-ASSETS> 6,901
<PP&E> 24,987
<DEPRECIATION> 12,221
<TOTAL-ASSETS> 21,858
<CURRENT-LIABILITIES> 9,542
<BONDS> 479
1,335
0
<COMMON> 32
<OTHER-SE> 10,089
<TOTAL-LIABILITY-AND-EQUITY> 21,858
<SALES> 3,429
<TOTAL-REVENUES> 11,095
<CGS> 0
<TOTAL-COSTS> 7,386
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 334
<INCOME-PRETAX> 1,319
<INCOME-TAX> 511
<INCOME-CONTINUING> 807
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 807
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
<FN>
<F1>AMOUNTS INAPPLICABLE OR NOT DISCLOSED AS A SEPERATE LINE ON THE CONDENSED
BALANCE SHEETS AND STATEMENT OF OPERATIONS ARE REPORTED AS 0 HEREIN.
<F2>NOTES AND ACCOUNTS RECIEVABLE-TRADE ARE REPORTED NET OF ALLOWANCES FOR DOUBTFUL
ACCOUNTS IN THE CONDENSED BALANCE SHEETS.
</FN>
</TABLE>
