<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, 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 August 14, 1998
- ---------------------------- -----------------------------
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 JUNE 30, 1998
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, 1998 and December 31, 1997 3
Condensed Statements of Operations (unaudited)
for the three months and six months ended
June 30, 1998 and 1997 4
Condensed Statements of Cash Flows (unaudited)
for the six months ended June 30, 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
4 Submission of matters to a vote of Security
Holders
PART II. OTHER INFORMATION
5 Other Information
6 Exhibits and Reports on Form 8-K 10
SIGNATURES 11
Exhibit Index 12
</TABLE>
2
<PAGE> 3
INTERLOTT TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)
JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Current assets:
Cash....................................................... $ 32,622 $ 143,071
Accounts receivable, less allowance for doubtful
accounts of $123,501 in 1998 and $93,501 in 1997......... 4,081,149 2,918,092
Investment in sales type lease, current portion............ 641,800 216,485
Inventories................................................ 4,416,660 4,051,495
Prepaid expenses........................................... 121,319 147,450
----------- -----------
Total current assets......................... 9,293,550 7,476,593
Property and equipment:
Leased machines............................................ 28,642,423 25,718,832
Machinery and equipment.................................... 555,979 519,388
Building and improvements.................................. 265,153 265,854
Furniture and fixtures..................................... 127,378 124,359
----------- -----------
29,590,933 26,628,433
Less accumulated depreciation and amortization............. 13,554,038 11,382,120
----------- -----------
16,036,895 15,246,313
Investment in sales type lease, less current portion........ 3,007,476 1,051,011
Product development rights, net of accumulated amortization
of $549,999 in 1998 and $513,333 in 1997................... 550,001 586,667
Deferred tax asset.......................................... -0- 252,300
----------- -----------
$28,887,922 $24,612,884
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $11,394,024 $ 8,978,036
Current installments of long-term debt.................... -0- 968
Accounts payable.......................................... 1,861,973 1,142,065
Accounts payable - related party.......................... 480,726 328,960
Accrued expenses.......................................... 1,268,578 1,254,182
Income taxes payable...................................... 86,850 100,450
----------- -----------
Total current liabilities................... 15,092,151 11,804,661
Notes payable - related parties............................ 479,000 479,000
Deferred tax liability..................................... 67,175 -0-
----------- -----------
Total liabilities........................... 15,638,326 12,283,661
Series A preferred stock, $.01 par value, 20,000,000 shares
authorized, 1,335,000 shares issued and outstanding at
June 30, 1998 and December 31, 1997....................... 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, 1998
and December 31, 1997...................................... 32,100 32,100
Additional paid-in capital................................. 10,376,017 10,376,017
Retained earnings.......................................... 1,506,479 586,106
----------- -----------
Total stockholders' equity................... 11,914,596 10,994,223
----------- -----------
$28,887,922 $24,612,884
=========== ===========
</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, 1998 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1998 1997 1998 1997
----- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Machine and parts sales $3,244,267 $2,900,048 $5,307,996 $3,428,992
Machine leases 3,534,666 3,648,938 6,913,049 6,921,184
Other 507,829 382,222 929,858 744,999
---------- ---------- ---------- ----------
7,286,762 6,931,208 13,150,903 11,095,175
Cost of revenues 4,830,188 4,453,598 8,996,227 7,385,712
---------- ---------- ---------- ----------
Gross profit 2,456,574 2,477,610 4,154,676 3,709,463
Operating expenses:
Selling, general, and administrative
expenses 1,076,201 914,410 2,009,100 1,801,202
Research and development costs 91,313 113,373 170,196 256,029
---------- ---------- ---------- ----------
Total operating expenses 1,167,514 1,027,783 2,179,296 2,057,231
---------- ---------- ---------- ----------
Operating income 1,289,060 1,449,827 1,975,379 1,652,232
Other income (expense):
Interest expense (273,052) (181,383) (495,695) (334,183)
Interest Income 35,796 3 55,987 469
---------- ---------- ---------- ----------
(237,256) (181,380) (439,708) (333,714)
---------- ---------- ---------- ----------
Income before income taxes 1,051,803 1,268,447 1,535,671 1,318,518
Income taxes 422,300 491,200 615,300 511,200
---------- ---------- ---------- ----------
Net income $ 629,504 $ 777,247 $ 920,371 $ 807,318
========== ========== ========== ==========
Basic and diluted net income
per share $ .19 $ .24 $ .29 $ .25
========== ========== ========== ==========
</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, 1998 AND 1997
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 920,371 $ 807,318
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes 319,475 185,700
Depreciation and amortization 2,208,584 2,064,969
Principal portion of sales type leases received 234,504 70,978
Gain on sale of equipment under sales type lease (847,004) (447,915)
Decrease (Increase) in accounts receivable (1,163,057) 542,368
Decrease (Increase) in inventories (365,165) 1,130,411
Decrease (Increase) in prepaid expenses 26,131 (52,333)
Increase in accounts payable 719,908 683,354
Increase in accounts payable -- related party 151,766 56,566
Increase (Decrease) in accrued expenses 14,396 (14,435)
(Decrease) Increase in income taxes payable (13,600) 185,500
----------- -----------
Net cash provided by operating activities 2,206,309 5,212,481
----------- -----------
Cash flows from investing activities:
Cost of leased machines (4,692,869) (4,114,691)
Purchases of property and equipment (38,909) (217,601)
----------- -----------
Net cash used in investing activities (4,731,778) (4,332,292)
----------- -----------
Cash flows from financing activities:
Proceeds from (repayment of) notes payable, net 2,415,988 (1,003,025)
Repayment of long-term debt (968) (2,449)
----------- -----------
Net cash provided by (used in) financing activities 2,415,020 (1,005,474)
----------- -----------
Decrease in cash (110,449) (125,285)
Cash at beginning of year 143,071 188,586
----------- -----------
Cash at end of period $ 32,622 $ 63,301
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 454,622 $ 329,402
=========== ===========
Income taxes paid $ 309,425 $ 140,000
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE> 6
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, 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
10-K. The results of operations for the six months ended June 30, 1998 are not
necessarily indicative of the results to be expected for the entire year ending
December 31, 1998.
2. Investment in Sales Type Leases
The company leases 200 Instant Tickets Vending Machines to one state
lottery under a sales type lease that commenced in May, 1997 and an additional
388 Instant Ticket Vending Machines were leased to another state under a similar
type lease commencing in May, 1998.
3. Notes Payable
In October, 1997, the Company entered into a revolving credit facility
with a financial institution that permits the Company to borrow through
October, 2000, up to $15,000,000 at the prime interest rate (8.50% at June 30,
1998). In conjunction with the facility the Company maintains a lockbox and
controlled disbursement account with the bank parent of the financial
institution. All lockbox receipts are recorded as payments against the facility
and presented checks are recorded as draws on the facility. Borrowings under
this credit facility are collateralized by all of the assets of the Company and
assignment of proceeds from lease agreements. At June 30, 1998, the Company had
borrowings of $11,394,024 outstanding with additional borrowings of $3,605,976
available under the facility.
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 June 30, 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 net revenues increased 5% to $7,286,762 from $6,931,208 for
the three months, and 19% to $13,150,903 from $11,095,175 for the six months
ended June 30, 1998 and 1997 respectively. Revenues from sales of ITVM's PCDM's
increased 12% to $3,244,267 from $2,900,048 for the three months ended June 30,
1998 and 1997, respectively and increased 55% to $5,307,996 from $3,428,992 for
the six months ended June 30, 1998 and 1997 respectively. The fluctuation in
revenues from sales is the result of the number and type of units sold rather
than change in unit pricing. Revenues from sales include leased ITVMs
categorized as sales-type leases for the lease of 388 ITVMs to the New York
Lottery. Revenues from operating leases decreased 3% to $3,534,666 from
$3,648,938 for the three months, and decreased less than 1% to $6,913,049 from
$6,921,184 for the six months ended June 30, 1998 and 1997, respectively. Lease
revenues decreased as the result of a reduction of certain lease prices,
partially offset by increased pricing on certain replacement units. Lease
revenues represented 49% and 53% of total revenues for the three months, and
53% and 62% of total revenues for the six months ended June 30, 1998 and 1997,
respectively.
Cost of revenues increased 9% to $4,830,188 from $4,453,598 for the three
months, and increased 22% to $8,996,227 from $7,385,712 for the six months
ended June 30, 1998 and 1997, respectively. Depreciation charged to cost of
revenues increased 5% to $1,086,611 from $1,034,049 for the three months, and
increased 5% to $2,072,424 from $1,966,303 for the six months, ended June 30,
1998 and 1997, respectively. Service and installation costs increased 8% to
$1,412,693 from $1,305,007 for the three months, and increased 15% to
$2,996,445 from $2,596,986 for the six months, ended June 30, 1998 and 1997,
respectively, primarily due to the increase in the number of ITVMs and PCDM's
deployed rather than an incremental cost per machine. Gross profit percentage
decreased 1% to 32% from 33% for the six months ended June 30, 1998 and 1997,
respectively, as the result of the changes described previously.
7
<PAGE> 8
Selling, general, and administrative expenses increased 18% to $1,076,201
from $914,410 for the three months, and 12% to $2,009,100 from $1,801,202 for
the six months, ended June 30, 1998 and 1997, respectively. An increase in
personnel, sales activities and costs of a new MIS system were the primary
factors related to the increase in cost for both the three months and six months
ended June 30, 1998 as compared to the same periods in 1997.
Interest expense increased 51% to $273,052 from $181,383 for the three
months, and increased 48% to $495,695 from $334,183 for the six months, ended
June 30, 1998 and 1997, respectively. The increase reflects the difference in
the average amounts outstanding rather than a change in interest rate. Interest
rates charged to the Company remained stable throughout the periods. Interest
income was $35,796 and $3 for the three months, and $55,987 and $469 for the six
months ended June 30, 1998 and 1997, respectively. The increase is the result of
the carrying cost factor of sales type leases.
As a result of the previously discussed changes, income before income taxes
decreased 17% to $1,051,803 from $1,268,477 for the three months, and increased
17% to $1,535,671 from $1,318,518 for the six months, ended June 30, 1998 and
1997, respectively.
As a result of the foregoing factors, net income decreased 19% to $629,504
from $777,347 for the three months, and increased 14% to $920,371 from $807,318
for the six months, ended June 30, 1998 and 1997, 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 longer-term
payout than sales. At June 30, 1998 the Company has a total of 7,353 ITVMs and
PCDMs deployed under leases as compared to 7,033 at June 30, 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 of LIBOR
plus two percent.
Net cash provided by operations for the six months ended June 30, 1998 and
1997 was $2,206,309 and $5,212,481, respectively. The reduction for the first
six months of 1998 as compared to the same period in 1997 results primarily from
the increase in accounts receivable and inventory. 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 six months of 1997.
Net cash used in investing activities was $4,731,778 and $4,332,292 for the
six months ended June 30, 1998 and 1997, respectively. This increase reflects
the increase of larger and higher value ITVM's and PCDM's deployed under lease
in the
8
<PAGE> 9
first six months of 1998 as compared to units deployed under lease in the first
six months of 1997.
Net cash provided by financing activities was $2,415,020 for the six months
ended June 30, 1998 as compared to $1,005,474 net cash used in financing
activities for the six months ended June 30, 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 $1,461,533 to
$5,798,601 at June 30, 1998, as compared to a deficit of $4,337,068 at December
31, 1997. The deficits at both dates reflect the classification of the
Company's revolving credit facility as a current debt. The deficit as of June
30, 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 June 30, 1998, the Company was indebted to MBCI in the aggregate
principal amount of $11,394,024 and had $3,605,976 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. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The 1998 Annual Meeting of Shareholders was held on May 7, 1998.
(b) Election of directors
(1) The shareholders voted 2,955,786 shares in the affirmative, with
2,400 shares abstaining, for the re-election of Mr. Kazmier J. Kasper
and Ms. H. Jean Marshall to a three year term as a director of the
Company.
(c) The shareholders voted 2,957,676 shares in the affirmative, with 500
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, 1998.
ITEM 5. OTHER INFORMATION
(a) SHAREHOLDER PROPOSALS
(1) The proxy to be solicited by management of the Company with respect
to the 1999 annual Meeting of Shareholders will confer discretionary authority
to vote on any proposals of shareholders of the Company intended to be
presented for consideration at such Annual Meeting that are submitted to the
Company after February 22, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 11 - Computation of earnings per share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K. No Current Reports on Form 8-K were filed by the
Company during the quarter ended June 30, 1998.
10
<PAGE> 11
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 13, 1998 /s/ L. Rogers Wells, Jr.
--------------------------------------
L. Rogers Wells, Jr.
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
/s/ Dennis W. Blazer
--------------------------------------
Dennis W. Blazer
Chief Financial and Accounting Officer
11
<PAGE> 12
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,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
<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 $ 629,504 $ 777,247 $ 920,371 $ 807,318
Net income per share $0.19 $0.24 $0.29 $0.25
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 31,719 1,692 13,311 1,203
Weighted average number of
common shares outstanding --------- --------- --------- ---------
as adjusted 3,241,719 3,211,692 3,223,311 3,211,203
========= ========= ========= =========
Net income $ 629,504 $ 777,247 $ 920,371 $ 807,318
Earnings per common share
assuming full dilution $0.19 $0.24 $0.29 $0.25
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 33
<SECURITIES> 0
<RECEIVABLES> 4,081<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 4,417
<CURRENT-ASSETS> 9,294
<PP&E> 29,591
<DEPRECIATION> 13,554
<TOTAL-ASSETS> 28,888
<CURRENT-LIABILITIES> 15,092
<BONDS> 479
1,335
0
<COMMON> 32
<OTHER-SE> 10,376
<TOTAL-LIABILITY-AND-EQUITY> 11,915
<SALES> 5,308
<TOTAL-REVENUES> 13,151
<CGS> 0
<TOTAL-COSTS> 11,175
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 440
<INCOME-PRETAX> 1,536
<INCOME-TAX> 615
<INCOME-CONTINUING> 920
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 920
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
<FN>
<F1>
*NOTES AND ACCOUNTS RECEIVABLE-TRADE ARE REPORTED NET OF
ALLOWANCES FOR DOUBTFUL ACCOUNTS IN THE CONDENSED BALANCE SHEETS.
</FN>
</TABLE>
