<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, 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)
--------------------
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, 1997
- ---------------------------- --------------------------------
Common Stock, $.01 Par Value 3,210,000 shares
Page 1 of 14
Exhibit Index on page 12
<PAGE> 2
INTERLOTT TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
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, 1997 and December 31, 1996 3
Condensed Income Statements for the
three months and nine months
ended September 30, 1997 and 1996 4
Condensed Statements of Cash Flows
for the nine months ended September 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 - 10
3 Quantitative and Qualitative Disclosures About
Market Risk 10
PART II. OTHER INFORMATION
6 Exhibits and Reports on Form 8-K 11
SIGNATURES 12
Exhibit Index 13
</TABLE>
2
<PAGE> 3
Item 1. Financial Statement
PART I. FINANCIAL INFORMATION
INTERLOTT TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
ASSETS September 30, 1997 December 31,1996
------------------ ----------------
<S> <C> <C>
Current assets:
Cash $ 144,421 $ 188,586
Accounts receivable, less allowance for doubtful accounts of $145,803
at September 30, 1997 and $115,425 at December 31 1996 2,831,842 3,217,019
Net investment in sales-type lease 286,338 --
Inventories 5,825,430 5,086,547
Prepaid expenses 136,329 154,254
----------- ------------
Total current assets 9,224,360 8,646,406
Property and equipment:
Leased machines 24,906,799 20,872,885
Machinery and equipment 466,533 318,360
Building and improvements 265,153 195,225
Furniture and fixtures 124,359 36,495
----------- ------------
25,762,844 21,422,965
Less accumulated depreciation and amortization 13,205,140 10,192,638
----------- ------------
12,557,704 11,230,237
Product development rights, net of accumulated amortization of $494,999 in 1997
and $440,000 in 1996 605,001 660,000
Net Investment in sales-type lease 1,054,317 --
Deferred tax asset 408,000 456,000
----------- ------------
$23,849,382 $ 20,992,733
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 8,902,756 $ 7,230,171
Current installments of long-term debt 2,261 5,641
Accounts payable 766,309 924,213
Accounts payable - related party 365,920 306,529
Accrued expenses 1,150,872 1,067,532
Income taxes payable 137,050 101,750
----------- ------------
Total current liabilities 11,325,168 9,635,836
Deferred tax liability 152,700 --
Long-term debt, excluding current installments -- 328
Notes payable, excluding current portion - related parties 479,000 479,000
----------- ------------
Total liabilities 11,956,868 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 September 30, 1997 and December 31, 1996 32,100 32,100
Additional paid-in capital 10,376,017 10,376,017
Retained earnings (accumulated deficit) 149,397 (865,548)
----------- ------------
Total stockholders' equity 10,557,514 9,542,569
----------- ------------
$23,849,382 $ 20,992,733
=========== ============
</TABLE>
See accompanying notes to condensed financial statements
3
<PAGE> 4
INTERLOTT TECHNOLOGIES, INC.
CONDENSED INCOME STATEMENTS (UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
Revenues: 1997 1996 1997 1996
----- ----- ---- ----
<S> <C> <C> <C> <C>
Machine and parts sales $ 566,664 $ 760,268 $ 3,995,656 $ 4,495,414
Machine leases 2,823,809 2,989,383 9,744,993 8,571,833
Other 451,463 339,179 1,196,462 888,998
----------- ------------ ------------ ------------
3,841,936 4,088,830 14,937,111 13,956,245
Cost of revenues 2,314,736 2,697,071 9,700,448 9,442,337
----------- ------------ ------------ ------------
Gross margin 1,527,200 1,391,759 5,236,663 4,513,908
Operating expenses:
Selling, general, and administrative 931,634 759,774 2,732,836 2,514,223
expenses
Research and development costs 177,168 120,248 433,197 345,515
----------- ------------ ------------ ------------
Total operating expenses 1,108,802 880,022 3,166,033 2,859,738
----------- ------------ ------------ ------------
Operating income 418,398 511,737 2,070,630 1,654,170
Other income (expense):
Interest expense (201,000) (135,000) (535,183) (517,757)
Interest income 25,029 2,237 25,498 9,864
----------- ------------ ------------ ------------
(175,971) (132,763) (509,685) (507,893)
----------- ------------ ------------ ------------
Income before income taxes 242,427 378,974 1,560,945 1,146,277
Income taxes 34,800 90,500 546,000 256,000
----------- ------------ ------------ ------------
Net income $ 207,627 $ 288,474 $ 1,014,945 $ 890,277
=========== ============ ============ ============
Net income per share $ .06 $ .09 $ .31 $ .28
=========== ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE> 5
INTERLOTT TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,014,945 $ 890,277
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 3,067,501 2,818,836
Deferred income taxes 48,000 --
Decrease in accounts receivable 98,839 866,510
Decrease (Increase) in inventories (738,883) 24,969
Decrease in prepaid expenses 17,925 137,470
Increase (decrease) in accounts payable (157,904) 25,876
Increase in accounts payable - related party 59,391 392,799
Increase in accrued expenses 83,340 103,354
Increase in income taxes payable 188,000 194,750
----------- -----------
Net cash provided by operating activities 3,681,154 5,454,841
----------- -----------
Cash flows from investing activities:
Cost of leased machines (4,033,914) (2,528,034)
Purchases of property and equipment (305,965) (26,008)
Increase in investment in sales-type lease (1,054,317) --
----------- -----------
Net cash used in investing activities (5,394,196) (2,554,042)
----------- -----------
Cash flows from financing activities:
(Repayment of) proceeds from notes payable, net 1,672,585 (2,794,022)
Repayment of long-term debt (3,708) (3,395)
----------- -----------
Net cash provided by (used in) in financing activities 1,668,877 (2,797,417)
----------- -----------
Increase (decrease) in cash (44,165) 103,382
Cash at beginning of year 188,586 360
----------- -----------
Cash at end of period $ 144,421 $ 103,742
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 528,332 $ 492,691
=========== ===========
Income taxes paid $ 310,000 $ 61,250
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements
5
<PAGE> 6
INTERLOTT TECHNOLOGIES, INC.
Notes to Condensed Financial Statements
Basis of Presentation
The accounting and reporting policies of Interlott Technologies, Inc.
conform to generally accepted accounting principles. The financial statements
for the nine months ended September 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 10-K. The
results of operations for the three and nine months ended September 30, 1997 are
not necessarily indicative of the results to be expected for the entire year
ending December 31, 1997.
6
<PAGE> 7
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 September 30, 1997, the Company had sold or leased over 12,000
ITVMs and PCDM's 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 decreased 6% to $3,841,936 from $4,088,830
for the three months and increased 7% to $14,937,111 from $13,956,245 for the
nine months ended September 30, 1997 and 1996, respectively. Revenues from sales
of ITVMs and PCDMs decreased 26% to $566,664 from $760,268 for the three months
ended September 30,1997 and 1996, respectively, and decreased 11% to $3,995,656
from $4,495,414 for the nine months ended September 30, 1997 and 1996,
respectively. The decrease in revenues from sales is primarily the result of
reduced sales volume which is attributable to fewer units being sold in 1997
than in 1996. Revenues from operating leases decreased 6% to $2,823,809 from
$2,989,383 for the three months, and increased 14% to $9,744,993 from $8,571,833
for the nine months, ended September 30,1997 and 1996, respectively. The
decrease in operating lease revenues for the three months ended September 30,
1997 is a result of existing units remaining in the field, at a lower lease
rate, under a new contract with the Ohio Lottery, combined with a net decrease
in the units in the field. The decrease of units in the field was the result of
certain units being removed prior to deployment of new units under the new
contract. Lease revenue increased 14% to $9,744,993 from $8,571,833 as a result
of the increase in the number of units under lease at September 30, 1997 as
compared to the number of units under lease at September 30, 1996. A total of
6,757 ITVMs and PCDMs were under lease at September 30, 1997 as compared to
5,836 ITVMs and PCDMs under lease at September 30, 1996. During the three months
ended September 30, 1997 the total number of units deployed under leases
decreased as the result of ITVMs being removed from the field prior to the
deployment of replacement ITVMs under the new Ohio lease contract. Deployment of
the replacement ITVMs began in the fourth quarter in accordance with the request
of the Ohio Lottery. Other than the existing units maintained under the new
contract, lease pricing has remained stable, and the changes in revenue reflect
the change in units rather than a change in pricing.
7
<PAGE> 8
Cost of revenues decreased by 14% to $2,314,736 from $2,697,071 for
the three months ended September 30, 1997 and 1996, respectively. The decrease
in ITVMs and PCDMs sold along with lower depreciation based on the
establishment of an estimated residual value of the units leased, combined with
the recognition of a higher absorption rate of manufacturing overhead costs,
were the primary reason for the decrease in cost of revenues for the three
months ended September 30, 1997 as compared to the same period in 1996. Cost of
revenues increased 3% to $9,700,448 from $9,442,337 for the nine months ended
September 30, 1997 and 1996, respectively. Higher manufacturing expenses,
higher depreciation due to the greater number of leased units, and higher cost
of service due to the greater number of machines being maintained were
primarily responsible for the increase. As a result of these factors, the gross
margin increased 10% to $1,527,200 from $1,391,759 for the three months and
increases 16% to $5,236,663 from $4,513,908 for the nine months end September
30, 1997 and 1996 respectively.
Selling, general, and administrative expenses increased 23% to
$931,634 from $759,774 for the three months and 9% to $2,732,836 from $2,514,223
for the nine months, ended September 30, 1997 and 1996, respectively. Costs
associated with manufacturing software conversion, the new office facility, and
participation in trade and industry shows were the primary factors resulting in
the increase in selling, general and administrative expenses for the three
months ended September 30, 1997 as compared to the same period in 1996.
Research and development costs increased 47% to $177,168 from $120,248
for the three months and increased 25% to $433,197 from $345,515 for the nine
months ended September 30, 1997 and 1996, respectively. Continuing development
of variations of the Company's dispensing equipment resulted in these
increases.
Net interest expense increased 33% to $175,971 from $132,763 for the
three months and increased less than 1% to $509,685 from $507,893 for the nine
months, ended September 30, 1997 and 1996, respectively. The changes reflect
the difference in the average amounts of loans outstanding rather than a change
in interest rate. Borrowings increased during the year as the number of ITVMs
and PCDMs under lease increased. Interest rates charged to the Company remained
relatively stable throughout the periods.
Income before income taxes decreased 36% to $242,427 from $378,974 for
the three months, and increased 36% to $1,560,945 from $1,146,277 for the nine
months, ended September 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 forgoing factors, net income decreased 28% to
$207,627 from $288,474 for the three months and increased 14% to $1,014,945
from $890,277 for the nine months ended September 30, 1997 and 1996,
respectively.
8
<PAGE> 9
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 September 30, 1997 the Company
had a total of 6,757 ITVMs and PCDMs deployed under leases as compared to 5,836
ITVMs and PCDMs at September 30, 1996.
The Company finances its operations primarily through cash flow from
operations and a three year revolving credit facility from Mercantile Business
Credit, Inc.("MBCI") entered into as of October 29, 1997. The Credit facility
with MBCI is a $15,000,000 three year credit line, secured by a lien on all of
the assets of the Company. This facility replaces the existing $12,500,000
facility with Princeton Capital Finance Company, Inc.. The rate of interest on
this loan is prime or LIBOR plus two percent. Net cash provided by operations
for the nine months ended September 30, 1997 and 1996 was $ 3,681,154 and
$5,454,841, respectively. The reduction for the first nine months of 1997 as
compared to the same period in 1996 results primarily from the increase in
inventory to manufacture ITVMs and PCDMs to be deployed in the fourth quarter
of 1997, a reduction in accounts payable and accrued expenses, and basically no
change in accounts receivable. This activity compares to a significant
reduction in receivables, an increase in accounts payable and accrued expenses
and a slight decrease in inventories for the same period in 1996. The increased
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
1996.
Net cash used in investing activities was $5,394,196 and $ 2,554,042
for the nine months ended September 30, 1997 and 1996, respectively. This
increase reflects the increase of larger and higher value ITVMs and PCDMs
deployed under lease in the first nine months of 1997 as compared to units
deployed under lease in the first nine months of 1996.
Net cash proceeds from financing activities was $1,668,877 for the
nine months ended September 30, 1997 as compared to $2,797,417 net cash used in
financing activities for the nine months ended September 30, 1996. The change
is result of borrowing to fund the increase in leased ITVMs and PCDMs,
inventory and reduction of current liabilities.
The Company's working capital deficit increased by $1,111,378 to
$2,100,808 at September 30, 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 deficit as of
September 30, 1997 reflects the Company's use of cash generated from operations
to finance the increased number of leased ITVMs and PCDMs.
9
<PAGE> 10
At September 30, 1997, the Company was indebted to PCFC in the aggregate
principal amount of $8,902,756 and had $3,597,244 available under this credit
facility.
RECENT DEVELOPMENTS
None
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
10
<PAGE> 11
PART II. OTHER INFORMATION
<TABLE>
<CAPTION>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<S> <C>
(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, 1997.
</TABLE>
11
<PAGE> 12
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: November 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
12
<PAGE> 13
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description Page Number
- -------------- ----------- -----------
<S> <C> <C>
11 Computation of earnings per share 14
27 Financial data schedule (for SEC use only) 15
</TABLE>
13
<PAGE> 1
EXHIBIT 11
Interlott Technologies, Inc.
Computation Of Earnings per share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<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 $ 207,627 $ 288,474 $1,014,945 $ 890,277
Net income per share $ 0.06 $ 0.09 $ 0.32 $ 0.28
Assuming full dilution:
Shares
Weighted average number of
common shares outstanding
during the period 3,210,000 3,210,000 3,210,000 3,210,000
Assuming exercise of options 72,783 55,389 32,261 67,947
Weighted average number of
common shares outstanding
---------- ---------- ---------- ----------
as adjusted 3,282,783 3,265,389 3,242,261 3,277,947
========== ========== ========== ==========
Net income $ 207,627 $ 288,474 $1,014,945 $ 890,277
Earnings per common share
assuming full dilution $ 0.06 $ 0.09 $ 0.31 $ 0.27
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION OF INTERLOTT TECHNOLOGIES
EXTRACTED FROM FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.<F1>
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 144
<SECURITIES> 0
<RECEIVABLES> 2,832<F2>
<ALLOWANCES> 0<F2>
<INVENTORY> 5,825<F2>
<CURRENT-ASSETS> 9,224
<PP&E> 25,768
<DEPRECIATION> 13,205
<TOTAL-ASSETS> 23,849
<CURRENT-LIABILITIES> 11,325
<BONDS> 479
1,335
0
<COMMON> 32
<OTHER-SE> 10,525
<TOTAL-LIABILITY-AND-EQUITY> 23,849
<SALES> 3,996
<TOTAL-REVENUES> 14,937
<CGS> 0
<TOTAL-COSTS> 12,866
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 510
<INCOME-PRETAX> 1,561
<INCOME-TAX> 546
<INCOME-CONTINUING> 1,015
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,015
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.31
<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>
