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, 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, OH 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 November 13, 2000
----------------------------- --------------------------------
Common Stock, $.01 Par Value 3,212,875 shares
<PAGE>
INTERLOTT TECHNOLOGIES, INC.
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 2000
Table of Contents
Item Page
Number PART I. FINANCIAL INFORMATION Number
------ ------
1 Financial Statements:
Condensed Balance Sheets as of
September 30, 2000 and December 31, 1999 3
Condensed Statements of Income
for the three months and nine months ended
September 30, 2000 and 1999 4
Condensed Statements of Cash Flows
for the nine months ended September 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 9
Market Risk
PART II. OTHER INFORMATION
6 Exhibits and Reports on Form 8-K 10
SIGNATURES 11
Financial Data Schedule 12
2
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Item 1. Financial Statements PART I. FINANCIAL INFORMATION
--------------------- --------------------------------
INTERLOTT TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
Condensed Balance Sheets
September 30, 2000 and December 31, 1999
ASSETS September 30, 2000 December 31, 1999
<S> <C> <C>
Current assets:
Cash $ 90,166 $ 132,501
Accounts receivable, less allowance for doubtful accounts of $215,872
in 2000 and $225,501 in 1999 6,581,925 3,305,486
Investment in sales type lease, current portion 1,639,432 1,251,144
Inventories 5,725,644 5,214,106
Prepaid expenses 198,448 267,838
---------- ----------
Total current assets 14,235,615 10,171,075
Property and equipment:
Leased machines 38,672,305 35,244,923
Machinery and equipment 759,380 610,968
Building and improvements 692,379 202,441
Furniture and fixtures 62,448 60,237
---------- ----------
40,186,512 36,118,569
Less accumulated depreciation and amortization 16,651,105 14,301,656
---------- ----------
Net property and equipment 23,535,407 21,816,913
Investment in sales type lease, less current portion 4,347,539 3,775,876
Product development rights, net of accumulated amortization of $696,663 in 2000
and $641,664 in 1999 385,004 440,003
---------- ----------
$42,503,565 $36,203,867
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable 17,853,977 16,005,029
Current installments of long-term debt 79,000 286,698
Accounts payable 2,667,710 1,781,884
Accounts payable - related party 316,860 179,469
Accrued expenses 1,845,687 1,358,253
Income taxes payable 101,283 -
---------- ----------
Total current liabilities 22,864,517 19,611,333
Deferred tax liability 430,098 570,700
---------- ----------
Total liabilities 23,294,615 20,182,033
Series A preferred stock, $.01 par value, 20,000,000 shares
authorized, 1,335,000 shares issued and outstanding at
September 30, 2000 and December 31, 1999 1,335,000 1,335,000
Stockholders' equity:
Common stock, $.01 par value; 20,000,000 shares authorized, 3,212,875
shares issued and outstanding at September 30, 2000 and 3,210,000 at
December 31, 1999 32,129 32,100
Additional paid-in capital 10,405,226 10,376,017
Retained earnings 7,436,595 4,278,717
---------- ----------
Total stockholders' equity 17,873,950 14,686,834
---------- ----------
$42,503,565 $36,203,867
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
3
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INTERLOTT TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
Condensed Statements of Income
Three Months and Nine Months ended September 30, 2000 and 1999
Three Months Ended Nine Months Ended
September 30, September 30,
Revenues: 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Machine and parts sales $ 6,423,750 $ 211,718 $17,321,211 $ 906,124
Machine leases 4,438,200 4,261,893 13,440,455 12,611,924
Other 716,506 521,394 1,963,120 1,576,432
---------- --------- ---------- ----------
11,578,456 4,995,005 32,724,786 15,094,480
Cost of revenues 7,835,434 3,470,232 21,888,250 10,121,360
---------- --------- ---------- ----------
Gross profit 3,743,022 1,524,773 10,836,536 4,973,120
Operating expenses:
Selling, general, and administrative
expenses 1,413,337 1,044,625 4,044,388 3,131,759
Research and development costs 142,386 144,774 451,109 455,160
---------- --------- ---------- ----------
Total operating expenses 1,555,723 1,189,399 4,495,497 3,586,919
---------- --------- ---------- ----------
Operating income 2,187,299 335,374 6,341,039 1,386,201
Other income (expense):
Interest expense (414,310) (283,339) (1,210,092) (768,238)
Other (14,380) (1,591) (37,421) 610,157
---------- --------- ---------- ----------
(428,690) (284,930) (1,247,513) (158,081)
---------- --------- ---------- ----------
Income before income taxes and
extraordinary item 1,758,609 50,444 5,093,526 1,228,120
Income taxes 668,260 19,169 1,935,649 466,479
---------- --------- ---------- ----------
Income before extraordinary item 1,090,349 31,275 3,157,877 761,641
Extraordinary item (less applicable
income taxes of $92,371) - 151,106 - 151,106
---------- --------- ---------- ----------
Net Income $ 1,090,349 $ 182,381 $ 3,157,877 $ 912,747
========== ========= ========== =========
Basic net income per share before
extraordinary item $ .34 $ .01 $ .98 $ .23
===== ===== ===== =====
Diluted net income per share before
extraordinary item $ .33 $ .01 $ .98 $ .23
===== ===== ===== =====
Basic and diluted extraordinary
item per share $ .00 $ .05 $ .00 $ .05
===== ===== ===== =====
Basic net income per share $ .34 $ .06 $ .98 $ .28
===== ===== ===== =====
Diluted net income per share $ .33 $ .06 $ .98 $ .28
===== ===== ===== =====
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
INTERLOTT TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
Nine Months ended September 30, 2000 and 1999
Nine Months Ended September 30,
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net income $3,157,877 $ 912,747
Adjustments to reconcile net income to net cash
provided by operating activities:
Net book value of equipment disposals - 113,564
Deferred income taxes (140,602) (34,173)
Depreciation and amortization 4,765,021 4,068,365
Principal portion of sales type leases received 1,036,267 661,135
Gain on sale of equipment under sales type leases (294,038) (24,402)
(Increase) decrease in accounts receivable (3,276,439) 307,306
Decrease(Increase) in inventories 239,077 (1,113,501)
Decrease(Increase) in prepaid expenses 69,390 (168,872)
Increase in accounts payable 885,826 347,626
Increase in accounts payable - related party 137,391 8,099
Increase (decrease) in accrued expenses 487,434 (155,620)
Increase (decrease) in income taxes payable 101,283 (248,458)
--------- ---------
Net cash provided by operating activities 7,168,487 4,673,816
--------- ---------
Cash flows from investing activities:
Cost of leased machines (8,240,749) (7,692,363)
Purchases of property and equipment (640,561) (26,438)
--------- ---------
Net cash used in investing activities (8,881,310) (7,718,801)
--------- ---------
Cash flows from financing activities:
Net proceeds from notes payable 1,848,948 3,263,692
Proceeds from exercise of stock options 29,238 -
Repayment of long-term debt (207,698) (192,302)
--------- ---------
Net cash provided by financing activities 1,670,488 3,071,390
--------- ---------
(Decrease) Increase in cash (42,335) 26,405
Cash at beginning of year 132,501 30,004
--------- ---------
Cash at end of period $ 90,166 $ 56,409
========= =========
Supplemental disclosure of cash flow information:
Interest paid $1,188,926 $ 921,545
========= =========
Income taxes paid $1,857,648 $ 996,956
========= =========
NBV of capitalized leased ITVMs returned to inventory $ 750,615 $ 868,264
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE>
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 nine months ended September 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. These financial statements should be read in conjunction with the
financial statements and footnotes, including the summary of significant
accounting policies, which appear in the Company's 1999 Annual Report filed with
the Securities and Exchange Commission as an exhibit to the Company's 1999
Annual Report on Form 10-K. The results of operations for the three and nine
months ended September 30, 2000 are not necessarily indicative of the results to
be expected for the entire year ending December 31, 2000.
2. Inventories
Inventories at September 30, 2000 and December 31, 1999 consist of the
following:
2000 1999
---- ----
Finished Goods $1,045,380 $1,350,719
Work in process 895,135 376,243
Raw materials and supplies 3,785,129 3,487,144
--------- ---------
$5,725,644 $5,214,106
3. Stock Split
The Board of Directors has approved a two-for-one stock split of the
common stock. As a result of the split, shareholders will be entitled to receive
one additional share for every share of Interlott common stock held on the
record date, November 30, 2000. Certificates representing shares resulting from
the split will be distributed by the transfer agent on the effective date of the
split, December 20, 2000.
Earnings per share data included in this quarterly report has been
reported on a pre-split basis.
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 1934. 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 which involve risks and
uncertainties such as fluctuations in financial results, a decline in market
acceptance of ITVMs, loss of large contracts, loss of patent protection, changes
in technology and increasing competition. 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
phone 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, and (3) to a
lesser extent, service agreements and the sale of parts for ITVMs and PCDMs.
As of September 30, 2000, the Company had sold or leased over 22,000
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 132% to $11,578,456 from
$4,995,005 for the three months, and 117% to $32,724,786 from $15,094,480 for
the nine months, ended September 30, 2000 and 1999, respectively. Revenues from
sales of ITVMs and PCDMs increased 2,934% to $6,423,750 from $211,718 for the
three months ended September 30, 2000 and 1999, respectively, and increased
1,812% to $17,321,211 from $906,124 for the nine months ended September 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 4% to $4,438,200 from
$4,261,893 for the three months, and increased 7% to $13,440,455 from
$12,611,924 for the nine months, ended September 30, 2000 and 1999,
respectively. Lease revenues increased as the result of additional ITVMs
deployed under new or existing contracts. Lease revenues represented 38% and 85%
of total revenues for the three months, and 41% and 84% of total revenues for
the nine months, ended September 30, 2000 and 1999, respectively.
Cost of revenues as a percent of total revenues decreased 2% to 68%
from 70% for the three months and remained constant at 67% for the nine months
7
<PAGE>
ended September 30, 2000 and 1999, respectively. Depreciation charged to cost of
revenues increased 18% to $1,582,269 from $1,342,027 for the three months, and
increased 18% to $4,593,179 from $3,901,678 for the nine months, ended September
30, 2000 and 1999, respectively. Service and installation costs decreased 13% to
$1,628,832 from $1,874,308 for the three months, and decreased 7% to $4,990,570
from $5,343,722 for the nine months, ended September 30, 2000 and 1999,
respectively, primarily due to lower parts replacement costs. Gross profit
percentage increased 1% to 32% from 31% for the three months, and remained
constant at 33% for the nine months, ended September 30, 2000 and 1999,
respectively.
Selling, general, and administrative expenses increased 35% to
$1,413,337 from $1,044,625 for the three months, and 29% to $4,044,388 from
$3,131,759 for the nine months, ended September 30, 2000 and 1999, respectively.
An increase in personnel, plus legal and professional fees were the primary
factors related to the increase in cost for both the three months and nine
months ended September 30, 2000 as compared to the same periods in 1999.
Interest expense increased 46% to $414,310 from $283,339 for the three
months, and increased 58% to $1,210,092 from $768,238 for the nine months, ended
September 30, 2000 and 1999, respectively. The increase reflects increased
overall borrowing under the Company's credit facility and increases in interest
rates.
Other (expense) income was ($14,380) and ($1,591) for the three months,
and ($37,421) and $610,157 for the nine months, ended September 30, 2000 and
1999, respectively. The income for the nine month period in 1999, includes a one
time non-recurring item from 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 498% to $1,758,609 from $293,921 for the three months, and increased
246% to $5,093,526 from $1,471,597 for the nine months, ended September 30, 2000
and 1999, respectively.
Net income increased 498% to $1,090,349 from $182,381 for the three
months, and increased 246% to $3,157,877 from $912,747 for the nine months,
ended September 30, 2000 and 1999, respectively.
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 September 30, 2000 the Company had
a total of 9,142 ITVMs and PCDMs deployed under leases as compared to 8,059 at
September 30, 1999.
The Company finances its operations primarily through cash flow from operations
and a revolving credit facility from Mercantile Business Credit, Inc. or MBCI,
entered into as of October 29,1997 and extended through November 30, 2000. MBCI
has proposed a 36-month extension of the credit facility. The Company intends
either to extend the facility with MBCI or to enter into a comparable facility
8
<PAGE>
with a new lender. The credit facility with MBCI is a $25,000,000 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 nine months ended September 30,
2000 and 1999 was $7,168,487and $4,673,816, respectively. The increase for the
first nine 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 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 nine months of 1999 and the increase in accounts payable and inventory is
attributable to higher production levels. The increase in accounts receivable is
due to the direct sale of machines to one state lottery.
Net cash used in investing activities was $8,881,310 and $7,718,801 for
the nine months ended September 30, 2000 and 1999, respectively. This increase
reflects the increase in larger and higher value ITVMs and PCDMs deployed under
lease in the first nine months of 2000 as compared to units deployed under lease
in the first nine months of 1999, as well as investments in property plant &
equipment at the new manufacturing facility in Mason.
Net cash provided by financing activities was $1,670,488 for the nine
months ended September 30, 2000 as compared to $3,071,390 for the nine months
ended September 30,1999. The decrease is the result of lower borrowing to fund
the increase in leased ITVMs and PCDMs, partially offset by increased repayment
of long-term debt.
At September 30, 2000, the Company was indebted to MBCI in the
aggregate principal amount of $17,853,977 and had $7,146,023 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable pursuant to Item 305(e) of Regulation S-K.
9
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PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits.
27 - Financial Data Schedule for the Nine Months Ended
September 30, 2000
(b) Reports on Form 8-K. No current reports on Form 8-K were filed by the
Company during the quarter ended September 30, 2000.
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: November 13, 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
11
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