<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, 1998
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 001-12986
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 May 15,1998
- ---------------------------- --------------------------
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 MARCH 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
NUMBER PART I. FINANCIAL INFORMATION NUMBER
- ------- ------------------------------ ------
<S> <C> <C>
1 Financial Statements:
Condensed Balance Sheets as of
March 31, 1998 and December 31, 1997 3
Condensed Statements of Income (unaudited)
for the three months ended March 31, 1998 and 1997 4
Condensed Statements of Cash Flows (unaudited)
for the three months ended March 31, 1998 and 1997 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 Disclosures
about Market Risk 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
INTERLOTT TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)
MARCH 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
March 31, 1998 December 31,1997
-------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 6,478 $ 143,071
Accounts receivable, less allowance for doubtful accounts of $108,500
in 1998 and $93,501 in 1997 5,466,856 2,918,092
Investment in sales type lease, current portion 286,338 286,338
Inventories 4,271,013 4,051,495
Income tax receivables 15,250
Prepaid expenses 130,205 147,450
------------- ----------------
Total current assets 10,176,140 7,546,446
Property and equipment:
Leased machines 28,224,142 25,718,832
Machinery and equipment 531,944 519,388
Building and improvements 265,854 265,854
Furniture and fixtures 124,359 124,359
------------- ----------------
29,146,299 26,628,433
Less accumulated depreciation and amortization 12,416,854 11,382,120
------------- ----------------
16,729,445 15,246,313
Investment in sales type lease, less current portion 907,748 981,158
Product development rights, net of accumulated amortization of $581,666 in 1998 568,334 586,667
and $513,333 in 1997
Deferred tax asset
250,900 252,300
------------- ----------------
$ 28,632,567 $ 24,612,884
============= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 10,769,704 $ 8,978,036
Current installments of long-term debt 968
Accounts payable 2,763,011 1,142,065
Accounts payable - related party 521,002 328,960
Accrued expenses 1,479,759 1,254,182
Income taxes payable 100,450
----------------
Total current liabilities 15,533,476 11,804,661
Notes payable, - related parties 479,000 479,000
------------- ----------------
Total liabilities 16,012,476 12,436,361
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, 1998 and December 31, 1997 32,100 32,100
Additional paid-in capital 10,376,017 10,376,017
Retained earnings 876,974 586,106
------------- ----------------
Total stockholders' equity 11,285,091 10,994,223
------------- ----------------
$ 28,632,567 $ 24,612,884
============= ================
</TABLE>
3
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INTERLOTT TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Machine sales $ 2,063,729 $ 528,944
Machine leases 3,378,384 3,272,246
Other 422,028 362,777
----------- -----------
5,864,141 4,163,967
Cost of revenues 4,166,039 2,932,114
----------- -----------
Gross profit 1,698,102 1,231,853
Operating expenses:
Selling, general, and administrative expenses 932,898 886,792
Research and development costs 78,884 142,656
----------- -----------
Total operating expenses 1,011,782 1,029,488
----------- -----------
Operating income 686,320 202,405
Other income:
Interest expense (222,642) (152,800)
Interest income 20,190 466
----------- -----------
(202,452) (152,334)
----------- -----------
Income before income taxes 483,868 50,071
Income taxes 193,000 20,000
----------- -----------
Net income 290,868 30,071
=========== ===========
Basic and diluted net income per share $ .09 $ .01
=========== ===========
</TABLE>
4
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INTERLOTT TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 290,868 $ 30,071
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes 1,400
Depreciation and amortization 1,053,067 973,687
Decrease (Increase) in accounts receivable (2,548,764) 1,539,869
Decrease (Increase) in inventories (219,518) 808,637
Decrease (Increase) in prepaid expenses 17,245 (71,800)
Principal portion of sales type lease received 73,410
Increase in accounts payable 1,620,946 100,536
Increase in accounts payable - related party 192,042 37,552
Increase in accrued expenses 225,577 152,960
Decrease in income taxes payable (115,700) (101,750)
----------- -----------
Net cash provided by operating activities 590,573 3,469,762
----------- -----------
Cash flows from investing activities:
Cost of leased machines (2,505,310) (1,934,553)
Purchases of property and equipment (12,556) (45,151)
----------- -----------
Net cash used in investing activities (2,517,866) (1,979,704)
----------- -----------
Cash flows from financing activities:
Proceed from (repayment)of notes payable, net 1,791,668 (1,103,907)
Repayment of long-term debt (968) (1,214)
----------- -----------
Net cash provided by (used in) financing activities 1,790,700 (1,105,121)
----------- -----------
Increase in cash (136,593) 384,937
Cash at beginning of year 143,071 188,586
----------- -----------
Cash at end of period $ 6,478 573,523
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 202,817 147,172
=========== ===========
Income taxes paid $ 308,700 $-0-
=========== ===========
</TABLE>
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 three months ended March 31, 1998 and 1997 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 1997 Annual Report filed with the Securities and Exchange
Commission as an exhibit to the Company's 1997 Annual Report on Form 10K. The
results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for the entire year ending
December 31, 1998.
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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 March 31, 1998, the Company had sold or leased over 13,000 ITVMs
and PCDMs under agreements with both domestic and international lotteries, their
licensees or contractors, as well as to both domestic and international vendors
of prepaid telephone calling cards. The Company continues to test both ITVM's
and PCDM's in both domestic and international markets.
RESULTS OF OPERATIONS
The Company's revenues increased 41% to $5,864,141 in the first three
months of 1998 from $4,163,967 in the same period in 1997. Revenues from sales
of ITVM's and PCDM's increased 290% to $2,063,729 in the first three months of
1998 from $528,944 for the same period in 1997. The increase resulted from an
increase in number and type of units sold in 1998 rather than from an increase
in unit price. Lease revenues increased 3% to $3,378,384 in the first three
months of 1998 from $3,272,246 for the same period in 1997. This increase
represents the continued deployment of higher lease price units replacing lower
priced units. Other revenues increased 16% to $422,028 in the first three months
of 1998 from $362,777 in the same period in 1997. This increase results from an
increase in the number of units under service contracts rather than an increase
in rates per machine.
Cost of revenues increased 42% to $4,166,039 in the first three months of 1998
from $2,932,114 in the same period in 1997. Cost of machines sold increased 236%
to $1,178,435 in 1998 from $348,706 in 1997. Depreciation charged to cost of
revenues increased 6% to $985,813 in 1998 from $932,254 in 1997 as a result of
an increase in the number of higher unit cost ITVM's and PCDM's being deployed
in 1998 as compared to 1997. Service and installation costs increased 23% to
$1,583,751 in 1998 from $1,291,979 in 1997, primarily due to the higher volume
of ITVM's and PCDM's deployed in the first three months of 1998, and the overall
increase in number of ITVM's and PCDM's leased and serviced during the first
quarter of 1998 as compared to the number leased and serviced during the first
three months of 1997.
Gross margin increased 38% to $1,698,102 in the first three months of 1998 from
$1,231,853 in the same period in 1997. The increase reflects the larger number
of ITVM's and PCDM's sold in 1998 as compared to the same period in 1997. The
higher percent of revenues resulting from sales reflects the impact of specific
contracts rather than a change in philosophy from leasing ITVM's and PCDM's.
7
<PAGE> 8
Selling, general, and administrative expenses increased by 5% to $932,898 in the
first three months of 1998 from $886,792 in the same period in 1997. The
increase reflects the overall activity increase rather than increases
attributable to a specific reason.
Net interest expense increased 33% to $202,452 in the first three months of 1998
from $152,344 in the same period in 1997. The increase reflects the higher
amount borrowed during the first three months of 1998 as compared to the same
period in 1997, rather than the effect of any rate change.
Net income increased 867% to $290,868 in the first three months of 1998 from
$30,071 in the same period in 1997. The increase in net income reflects the
impact of ITVM's and PCDM's being sold in 1998 representing the greater
proportion of deployments as compared to the same period in 1997.
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, 1998 the Company had
over 7,100 ITVMs and PCDMs deployed under leases as compared to 6,500 at March
31, 1997.
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. The rate of interest on this loan is prime or LIBOR
plus two percent. Net cash provided by operations for the three months ended
March 31, 1998 and 1997 was $ 590,573 and $ 3,469,762, respectively. The
reduction for the first three months of 1998 as compared to the same period in
1997 results primarily from the increase in accounts receivable resulting from
the sale of ITVM's and PCDM's deployed in the first quarter of 1998. 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 three
months of 1997.
Net cash used in investing activities was $ 2,517,866 and $ 1,979,704
for the three months ended March 31, 1998 and 1997, respectively. This increase
reflects the increase of larger and higher value ITVM's and PCDM's deployed
under lease in the first three months of 1998 as compared to units deployed
under lease in the first three months of 1997.
Net cash provided by financing activities was $1,790,700 for the three
months ended March 31, 1998 as compared to $1,105,121 net cash used in financing
activities for the three months ended March 31, 1997. The change is the result
of borrowing to fund the increase in leased ITVM's and PCDM's and receivables.
The Company's working capital deficit increased by $1,099,121 to
$5,357,336 at March 31, 1998 as compared to a deficit of 4,258,213 at December
31, 1997. The deficits at both dates reflect the classification of the Company's
revolving credit facility
8
<PAGE> 9
as a current debt. The deficit as of March 31, 1998 reflects the Company's use
of cash generated from operations in addition to draws on the credit facility to
finance the increased number of leased ITVM's and PCDM's.
At March 31, 1998, the Company was indebted to MBCI in the aggregate
principal amount of $ 10,769,704 and had $4,230,296 available under the credit
facility.
IMPACT OF THE YEAR 2000
Like any other company, advances and changes in available technology
can significantly impact the business and operations of the Company. For
example, a challenging problem exists as many computer systems worldwide do not
have the capability of recognizing the year 2000 or the years thereafter. No
easy technological "quick fix" has yet been developed for this problem. The
Company presently believes that by converting to new software, which is
scheduled for completion in 1998, the Year 2000 problem will not pose
significant operational problems for the Company's computer system. There can be
no assurance, however, that the systems of other companies on which the
Company's systems rely also will be timely converted or that any such failure to
convert by another company would not have an adverse effect on the Company's
systems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable
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 March 31, 1998.
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: May 15, 1998 /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 14
</TABLE>
12
<PAGE> 1
EXHIBIT 11
INTERLOTT TECHNOLOGIES, INC
Computation Of Earnings per share
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
----------- -----------
<S> <C> <C>
Weighted average common shares outstanding 3,210,000 3,210,000
during the period
Net income $ 290,868 $ 30,071
Basic net income per share $ 0.09 0.01
=========== ===========
Assuming full dilution:
Net income $ 290,868 30,071
Shares
Weighted average number of
common shares outstanding during the 3,210,000 3,210,000
period
Assuming exercise of options 3,322 660
Weighted average number of
common shares outstanding ----------- -----------
as adjusted 3,213,322 3,210,660
=========== ===========
Net income per share
assuming full dilution $ 0.09 0.01
=========== ===========
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 6
<SECURITIES> 0
<RECEIVABLES> 5,467
<ALLOWANCES> 0<F1>
<INVENTORY> 4,271
<CURRENT-ASSETS> 10,176
<PP&E> 29,146
<DEPRECIATION> 12,417
<TOTAL-ASSETS> 28,632
<CURRENT-LIABILITIES> 15,533
<BONDS> 479
1,335
0
<COMMON> 32
<OTHER-SE> 11,253
<TOTAL-LIABILITY-AND-EQUITY> 28,632
<SALES> 2,064
<TOTAL-REVENUES> 5,864
<CGS> 1,170
<TOTAL-COSTS> 4,166
<OTHER-EXPENSES> 1,012<F2>
<LOSS-PROVISION> 0<F2>
<INTEREST-EXPENSE> 202
<INCOME-PRETAX> 484
<INCOME-TAX> 193
<INCOME-CONTINUING> 291
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 291
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
<FN>
<F1>NOTES AND ACCOUNTS RECEIVABLE - TRADE ARE REPORTED NET OF ALLOWANCES FOR
DOUBTFUL ACCOUNTS IN THE CONDENSED BALANCE SHEETS.
<F2>OTHER COSTS AND EXPENSES INCLUDE THE PROVISION FOR DOUBTFUL ACCOUNTS AND
NOTES.
</FN>
</TABLE>
