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, 2000
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.)
7697 Innovation Way, Mason, Ohio 45040
(Address of principal executive offices, including zip code)
(513) 701-7000
(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, 2000
Common Stock, $.01 Par Value 3,210,000 shares
<PAGE>
INTERLOTT TECHNOLOGIES, INC.
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 2000
Table of Contents
Item Page
Number PART I. FINANCIAL INFORMATION Number
------ ------
1 Financial Statements:
Condensed Balance Sheets as of
June 30, 2000 and December 31, 1999 3
Condensed Statements of Income
for the three months and six months ended
June 30, 2000 and 1999 4
Condensed Statements of Cash Flows
for the six months ended June 30, 2000 and 1999 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 10
Market Risk
PART II. OTHER INFORMATION
4 Submission of Matters to a Vote of Security Holders 11
6 Exhibits and Reports on Form 8-K 11
SIGNATURES 12
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTERLOTT TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
Condensed Balance Sheets
June 30, 2000 and December 31, 1999
ASSETS June 30, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Current assets:
Cash $ 83,751 $ 132,501
Accounts receivable, less allowance for doubtful accounts of $185,872
in 2000 and $158,793 in 1999 6,400,264 3,305,486
Investment in sales type lease, current portion 1,590,876 1,251,144
Inventories 5,955,987 5,214,106
Prepaid expenses 139,631 267,838
---------- ----------
Total current assets 14,170,509 10,171,075
Property and equipment:
Leased machines 37,728,039 35,244,923
Machinery and equipment 688,242 610,968
Building and improvements 390,319 202,441
Furniture and fixtures 60,237 60,237
---------- ----------
38,866,837 36,118,569
Less accumulated depreciation and amortization 15,805,772 14,301,656
---------- ----------
23,061,065 21,816,913
Investment in sales type lease, less current portion 4,542,964 3,775,876
Product development rights, net of accumulated amortization of $696,663 in 2000
and $659,997 in 1999 403,337 440,003
---------- ----------
$42,177,875 $36,203,867
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable 17,980,501 16,005,029
Current installments of long-term debt 79,000 286,698
Accounts payable 2,683,846 1,781,884
Accounts payable - related party 573,844 179,469
Accrued expenses 1,734,691 1,358,253
Income taxes payable 491,916 -
---------- ----------
Total current liabilities 23,543,798 19,611,333
Deferred tax liability 544,715 570,700
---------- ----------
Total liabilities 24,088,513 20,182,033
Series A preferred stock, $.01 par value, 20,000,000 shares authorized,
1,335,000 shares issued and outstanding at June 30, 2000 and December 31, 1999 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, 2000 and December 31, 1999 32,100 32,100
Additional paid-in capital 10,376,017 10,376,017
Retained earnings 6,346,245 4,278,717
---------- ----------
Total stockholders' equity 16,754,362 14,686,834
---------- ----------
$42,177,875 $36,203,867
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
INTERLOTT TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
Condensed Statements of Income
Three Months and Six Months ended June 30, 2000 and 1999
Three Months Ended Six Months Ended
June 30, June 30,
--------- --------
Revenues: 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Machine and parts sales $ 8,275,446 $ 324,724 $10,897,461 $ 694,406
Machine leases 4,556,321 4,281,174 9,002,255 8,350,031
Other 656,774 533,460 1,246,615 1,055,038
---------- --------- ---------- ----------
13,488,541 5,139,358 21,146,331 10,099,475
Cost of revenues 9,021,304 3,452,019 14,052,816 6,651,128
---------- --------- ---------- ----------
Gross profit 4,467,237 1,687,339 7,093,515 3,448,347
Operating expenses:
Selling, general, and administrative
expenses 1,506,050 1,112,033 2,631,051 2,087,134
Research and development costs 157,775 185,689 308,724 310,385
---------- --------- ---------- ----------
Total operating expenses 1,663,825 1,297,722 2,939,775 2,397,519
---------- --------- ---------- ----------
Operating income 2,803,412 389,617 4,153,740 1,050,828
Other income (expense):
Interest expense (415,358) (254,659) (795,782) (484,899)
Other (16,189) (13,253) (23,040) 611,747
---------- --------- ---------- ----------
(431,547) (267,912) (818,822) 126,848
---------- --------- ---------- ----------
Income before income taxes 2,371,865 121,705 3,334,918 1,177,676
Income taxes 901,060 45,700 1,267,390 447,310
---------- --------- ---------- ----------
Net income $ 1,470,805 $ 76,005 $ 2,067,528 $ 730,366
========== ========= ========== =========
Basic and diluted net income
per share $.46 $.02 $.64 $.23
=== === === ===
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
INTERLOTT TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
Six Months ended June 30, 2000 and 1999
Six Months Ended June 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $2,067,528 $ 730,366
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes (25,984) (109,235)
Depreciation and amortization 3,107,069 2,687,474
Principal portion of sales type leases received 646,611 444,908
Gain on sale of equipment under sales type leases (260,875) (22,659
(Increase) decrease in accounts receivable (3,094,778) 664,152
Increase in inventories net of leased equipment returned (20,158) (881,125)
Decrease (increase) in prepaid expenses 128,207 (95,904)
Increase in accounts payable 901,962 240,351
Increase (decrease) in accounts payable - related party 394,375 (109,731)
Increase (decrease) in accrued expenses 376,438 (326,786)
Increase (decrease) in income taxes payable 491,916 (237,341)
--------- ---------
Net cash provided by operating activities 4,712,311 2,984,470
--------- ---------
Cash flows from investing activities:
Cost of leased machines (6,263,683) (5,232,929)
Purchases of property and equipment (265,152) (12,527)
--------- ---------
Net cash used in investing activities (6,528,835) (5,245,456)
--------- ---------
Cash flows from financing activities:
Net proceeds from notes payable 1,975,472 2,470,498
Repayment of long-term debt (207,698) (192,302)
--------- ---------
Net cash provided by financing activities 1,767,774 2,278,196
--------- ---------
Increase (decrease) in cash (48,750) 17,210
Cash at beginning of year 132,501 30,004
--------- ---------
Cash at end of period $ 83,751 $ 47,214
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 784,443 $ 658,591
========= =========
Income taxes paid $ 725,518 $ 847,199
========= =========
NBV of capitalized leased ITVMs returned from the field $ 721,724 $ 223,437
========= =========
</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 three and six months ended June 30, 2000 and 1999 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 for a fair
presentation. The financial statements should be read in conjunction with the
financial statements and notes which appear in the Company's 1999 Annual Report
on Form 10-K. The results of operations for the three and six months ended June
30, 2000 are not necessarily indicative of the results to be expected for the
entire year ending December 31, 2000.
2. Inventories
Inventories at June 30, 2000 and December 31, 1999 consist of the
following:
2000 1999
---- ----
Finished Goods $1,131,126 $1,350,719
Work in process 792,694 376,243
Raw materials and supplies 4,032,167 3,487,144
--------- ---------
$5,955,987 $5,214,106
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
This report contains "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 193. These statements relate to
future economic performance, plans and objectives of management for future
operations and projections of revenue and other financial items that are based
on the beliefs of the Company's management, as well as assumptions made by and
information currently available to the Company's management. The words "expect,"
"estimate," "anticipate," "believe," "intend," and similar expressions are
intended to identify forward-looking statements made in this and our other
filings with the Securities and Exchange Commission. If one or more of these
risks or uncertainties materialize or underlying assumptions prove incorrect,
actual outcomes may vary materially from those indicated.
The Company manufactures instant ticket vending machines or ITVMs, and
telephone card dispensing machines or 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 (1) the lease of ITVMs and PCDMs, (2) the sale of ITVMs and PCDMs,
(3) and to a lesser extent, the service agreements and the sale of parts for
ITVMs and PCDMs.
As of June 30, 2000, the Company had sold or leased over 21,000 ITVMs
and PCDMs under agreements with both domestic and international lotteries and
their licensees or contractors, as well as to both domestic and international
vendors of prepaid telephone calling cards.
Results of Operations
The Company's net revenues increased 162% to $13,488,541 from
$5,139,358 for the three months, and 109% to $21,146,331 from $10,099,475 for
the six months, ended June 30, 2000 and1999, respectively. Revenues from sales
of ITVMs and PCDMs increased 2,448% to $8,275,446 from $324,724 for the three
months ended June 30, 2000 and 1999, respectively, and increased 1,469% to
$10,897,461 from $694,406 for the six months ended June 30, 2000 and 1999
respectively. The increase in revenues from sales resulted from ITVM sales for
use by one state lottery and sales type leases to another state lottery.
Revenues from operating leases increased 6% to $4,556,321 from $4,281,174 for
the three months, and increased 8% to $9,002,255 from $8,350,031 for the six
months, ended June 30, 2000 and 1999, respectively. Lease revenues increased as
the result of additional ITVMs deployed under new or existing contracts. Lease
revenues represented 34% and 83% of total revenues for the three months, and 43%
and 83% of total revenues for the six months, ended June 30, 2000 and1999,
respectively.
Cost of revenues increased 161% to $9,021,304 from $3,452,019
for the three months, and increased 111% to $14,052,816 from 6,651,128 for the
six months, ended June 30, 2000 and 1999, respectively. Depreciation charged to
cost of revenues increased 13% to $1,499,591 from $1,327,428 for the three
7
<PAGE>
months, and increased 18% to $3,010,910 from $2,559,651 for the six months,
ended June 30, 2000 and 1999, respectively. Service and installation costs
decreased 1% to $1,678,026 from $1,687,697 for the three months, and decreased
3% to $3,361,738 from $3,469,414 for the six months, ended June 30, 2000 and
1999, respectively, primarily due to lower parts replacement costs.
As a result of the changes described previously, gross profit increased
165% to $4,467,237 from $1,687,339 for the three months, and increased 106% to
$7,093,515 from $3,448,347 for the six months, ended June 30, 2000 and 1999,
respectively.
Selling, general, and administrative expenses increased 35% to
$1,506,050 from $1,112,033 for the three months, and 26% to $2,631,051 from
$2,087,134 for the six months, ended June 30, 2000 and 1999, respectively.
Increases in travel costs, legal and professional fees and property taxes on
leased equipment were the primary factors related to the increase in cost for
both the three months and six months periods.
Interest expense increased 63% to $415,358 from $254,659 for the three
months, and increased 64% to $795,782 from $484,899 for the six months, ended
June 30, 2000 and 1999, respectively. The increase reflects increased overall
borrowing under the Company's credit facility and increases in interest rates.
Other income (expense) was ($16,189) and ($13,253) for the three
months, and ($23,040) and $611,747 for the six months, ended June 30, 2000 and
1999, respectively. The income for the six month period in 1999 includes a one
time non-recurring item from the settlement of litigation as reported in the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
As a result of the changes discussed above, income before income taxes
increased 1,849% to $2,371,865 from $121,705 for the three months, and increased
183% to $3,334,918 from $1,177,676 for the six months, ended June 30, 2000 and
1999, respectively.
As a result of the foregoing factors, net income increased 1,835% to
$1,470,805 from $76,005 for the three months, and increased 183% to $2,067,528
from $730,366 for the six months, ended June 30, 2000 and 1999, respectively.
8
<PAGE>
Liquidity and Capital Resources
The Company's liquidity and capital resources can be significantly
impacted by the Company's decision to typically utilize leasing as a means to
market its ITVMs and PCDMs. Leasing inherently requires significantly more
capital and longer-term payout than sales. At June 30, 2000 the Company had a
total of 10,253 ITVMs and PCDMs deployed under leases as compared to 8,122 at
June 30, 1999.
The Company finances its operations primarily through cash flow from
operations and a three year revolving credit facility from Mercantile Business
Credit, Inc., or MBCI, entered into as of October 29,1997. The credit facility
with MBCI is a $25,000,000 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 six months ended June 30, 2000
and 1999 was $4,712,311 and $2,984,470, respectively. The increase for the first
six months of 2000 as compared to the same period in1999 results primarily from
the increase in net income, an increase in depreciation and an increase in
accounts payable offset by an increase in accounts receivable. The increases in
net income, accounts receivable and accounts payable are the result of higher
machine sales and a corresponding increase in purchases on account while 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 1999.
Net cash used in investing activities was $6,528,835 and $5,245,456 for
the six months ended June 30, 2000 and 1999, respectively. This increase
primarily reflects the Company's investment in larger and higher value ITVMs and
PCDMs deployed under lease in the first six months of 2000 as compared to units
deployed under lease in the first six months of 1999. Additionally, purchases of
property, plant and equipment increased to $265,152 for the first six months of
2000 as compared to $12,527 for the same period in 1999 mainly as a result of
capital expenditures made in connection with moving to a new manufacturing
facility.
Net cash provided by financing activities was $1,767,774 for the six
months ended June 30, 2000 as compared to $2,278,196 net cash provided by
financing activities for the six months ended June 30,1999. The change is the
result of reduced borrowing under the Company's credit facility, partially
offset by increased repayment of long-term debt.
At June 30, 2000, the Company was indebted to MBCI in the aggregate
principal amount of $17,980,501 and had $7,019,499 available under the credit
facility. The Company's revolving credit facility is classified as current debt
(notes payable) because there is no fixed schedule for repayment that extends
beyond one year. The Company has no long-term debt.
9
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable pursuant to Item 305(e) of Regulation S-K.
10
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The 2000 Annual Meeting of Shareholders was held on May 4, 2000.
(b) Matters voted upon at Annual Meeting
(1) The shareholders voted 2,974,828 shares in the affirmative,
with 12,200 votes withheld, for the re-election of Gary S. Bell, Edmund Turek
and L. Rogers Wells to three-year terms as directors of the Company. The terms
of Kazmier Kasper and H. Jean Marshall as directors continue until the 2001
Annual Meeting and the terms of David F. Nichols and John J. Wingfield continue
until the 2002 Annual Meeting.
(2) The shareholders voted 2,943,718 shares in the affirmative,
with 41,300 shares against and 2,010 shares abstaining, for the ratification of
the appointment of Grant Thornton LLP as independent accountants of the Company
for the fiscal year ending December 31, 2000.
(3) The shareholders voted 2,934,202 shares in the affirmative,
with 47,100 shares against and 5,726 shares abstaining, for the approval of the
Employee Stock Purchase Plan.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule for the Six Months
ended June 30, 2000.
(b) Reports on Form 8-K. No Current Reports on Form 8-K were filed by the
Company during the quarter ended June 30, 2000.
11
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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 14, 2000 /s/ David F. Nichols
-------------------------------------
President and
Chief Executive Officer
(Duly Authorized Officer)
/s/ Dennis W. Blazer
------------------------------------
Dennis W. Blazer
Chief Financial and Accounting Officer
12
