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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, 2002
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
---- ----
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 14, 2002
- ---------------------------- --------------------------------
Common Stock, $.01 Par Value 6,466,326 shares
INTERLOTT TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
-----------------
ITEM PAGE
NUMBER PART I. FINANCIAL INFORMATION NUMBER
------ ------
1 Financial Statements:
Condensed Balance Sheets as of September 30, 2002
and December 31, 2001 3
Condensed Statements of Income
for the three months and nine months ended
September 30, 2002 and 2001 4
Condensed Statements of Cash Flows for the nine
months ended September 30, 2002 and 2001 5 - 6
Notes to Condensed Financial Statements 7 - 9
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 14
3 Quantitative and Qualitative Disclosures About 15
Market Risk
4 Controls and Procedures 15
PART II. OTHER INFORMATION
1 Legal Proceedings 16
6 Exhibits and Reports on Form 8-K 16
SIGNATURES 17
CERTIFICATIONS 17 - 19
2
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
INTERLOTT TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
ASSETS September 30, 2002 December 31, 2001
------------------ -----------------
Current assets:
Cash $ 320,438 $ 537,332
Accounts receivable, less allowance for doubtful accounts of $338,101
in 2002 and $203,101 in 2001 10,798,811 7,125,250
Investment in sales type leases, current portion 2,783,507 2,299,706
Inventories 8,879,547 10,628,290
Prepaid & refundable taxes -- 404,220
Deferred tax asset 29,455 182,350
Prepaid expenses 95,205 274,033
------------ ------------
Total current assets 22,906,963 21,451,181
Property and equipment:
Leased machines 35,046,869 33,759,213
Machinery and equipment 784,937 777,687
Building and improvements 689,409 689,409
Furniture and fixtures 182,925 179,182
------------ ------------
36,704,140 35,405,491
Less accumulated depreciation and amortization 21,380,790 16,784,029
------------ ------------
15,323,349 18,621,462
Other assets 583,356 578,386
Goodwill net of accumulated amortization of $166,581 in 2002 and 2001 4,572,655 4,572,655
Value of leases acquired net of accumulated amortization of $927,550 in 2002 and
$499,450 in 2001 3,139,405 3,781,555
Investment in sales type leases, less current portion 6,241,520 5,618,510
Product development rights, net of accumulated amortization of $861,661 in 2002
and $806,661 in 2001 238,339 293,339
------------ ------------
$ 53,005,587 $ 54,917,088
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to financial institutions $ 25,372,296 $ 24,255,659
Current portion of notes payable - related parties 24,124 487,327
Accounts payable 2,437,317 2,249,874
Accounts payable - related party 498,322 317,505
Accrued expenses 2,398,007 1,463,175
------------ ------------
Total current liabilities 30,730,066 28,773,540
Subordinated term note -- 5,000,000
Deferred tax liability 241,488 568,950
------------ ------------
30,971,554 34,342,490
Total liabilities
Commitments and contingent liabilities:
Interest rate swap agreements 351,543 580,174
Notes payable - related parties -- 24,124
Stockholders' equity:
Common stock, $.01 par value; 20,000,000 shares authorized, 6,462,669
shares issued and outstanding in 2002 and 6,441,498 shares issued
and outstanding in 2001 32,248 32,140
Additional paid-in capital 10,536,159 10,482,853
Accumulated comprehensive income (loss) (213,621) (382,915)
Retained earnings 11,327,704 9,838,222
------------ ------------
Total stockholders' equity 21,682,490 19,970,300
------------ ------------
$ 53,005,587 $ 54,917,088
============ ============
See accompanying notes to condensed financial statements.
3
INTERLOTT TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF INCOME
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
Revenues: 2002 2001 2002 2001
---- ---- ---- ----
Machine and parts sales $ 8,194,722 $ 3,423,724 $ 16,728,859 $ 15,612,751
Machine leases 4,752,650 4,662,504 14,207,913 13,649,281
Other 1,472,272 1,618,594 4,775,558 3,526,394
------------ ------------ ------------ ------------
14,419,644 9,704,822 35,712,330 32,788,426
Cost of revenues 10,614,540 7,297,048 25,788,885 23,721,042
------------ ------------ ------------ ------------
Gross profit 3,805,104 2,407,774 9,923,445 9,067,384
Operating expenses:
Selling, general, and administrative
expenses 1,715,253 1,512,627 5,013,018 4,630,129
Research and development costs 166,276 62,322 393,848 279,441
Amortization of goodwill 0 111,879 0 166,306
------------ ------------ ------------ ------------
Total operating expenses 1,881,529 1,686,828 5,406,866 5,075,876
------------ ------------ ------------ ------------
Operating income 1,923,575 720,946 4,516,579 3,991,508
Other income (expense):
Interest expense (544,079) (588,924) (1,804,384) (1,404,808)
Other (118,043) 6,351 (320,453) 22,875
------------ ------------ ------------ ------------
(662,122) (582,573) (2,124,837) (1,381,933)
------------ ------------ ------------ ------------
Income before income taxes 1,261,453 138,373 2,391,742 2,609,575
Income taxes 479,140 53,250 902,260 992,820
------------ ------------ ------------ ------------
Net income $ 782,313 $ 85,123 $ 1,489,482 $ 1,616,755
============ ============ ============ ============
Basic net income per share $ .12 $ .01 $ .23 $ .25
============ ============ ============ ============
Diluted net income per share $ .12 $ .01 $ .22 $ .25
============ ============ ============ ============
See accompanying notes to condensed financial statements.
4
INTERLOTT TECHNOLOGIES, INC.
CONDENSED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Nine months ended September 30,
-------------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 1,489,482 $ 1,616,755
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation & amortization 5,377,113 5,351,235
Principal portion of sales type lease received 1,795,415 921,764
Deferred income taxes (233,904) (30,085)
Gain on sale of equipment under sales type lease (1,356,742) (460,557)
(Increase) in accounts receivable (3,673,561) (275,314)
Decrease (increase) in inventories net of leased equipment returned 1,793,480 (32,786)
Decrease in prepaid expenses 173,859 545,295
Decrease in prepaid & refundable taxes 404,220 --
(Increase) in deferred tax asset -- (217,368)
Increase in accounts payable 187,443 429,582
Increase (decrease) in accounts payable - related parties 180,817 (30,522)
Increase in accrued expenses 582,226 190,176
Increase in income taxes payable 352,606 703,111
------------ ------------
Net cash provided by operating activities 7,072,454 8,711,286
------------ ------------
Cash flows from investing activites:
Cost of leased machines (2,961,079) (6,193,427)
Acquisition of business -- (13,459,646)
Purchases of property & equipment (10,993) (150,212)
------------ ------------
Net cash used in investing activites (2,972,072) (19,803,285)
------------ ------------
Cash flows from financing activites:
Proceeds from notes payable - credit facility 1,116,637 7,313,797
(Payments of) proceeds from subordinated term note (5,000,000) 5,000,000
Proceeds from exercise of stock options 53,414 6,250
Repayment of long-term debt (27,227) (50,425)
Payment of notes payable - related parties (460,100) (852,124)
------------ ------------
Net cash (used for) provided by financing activities (4,317,276) 11,417,498
------------ ------------
(Decrease) increase in cash (216,894) 325,499
Cash, at beginning of year 537,332 46,645
------------ ------------
Cash, at end of period $ 320,438 $ 372,144
============ ============
5
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 1,704,836 $ 1,364,621
Income taxes paid (received net of payments) 594,872 (265,779)
Net book value of capitalized leased ITVMs returned from field and
transferred to inventory 44,738 2,220,634
Interest swap liability 169,294 --
Business combination accounted for as a purchase
Accounts receivable 0 1,043,852
Inventory 0 3,422,053
Value of leases acquired 0 4,281,005
Goodwill 0 4,664,769
------------ ------------
$ 0 $ 13,411,679
============ ============
See accompanying notes to condensed financial statements.
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 in the United States of
America. The financial statements for the three months and nine months ended
September 30, 2002 and 2001 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 2001 Annual Report on Form 10-K. The results of
operations for the three months and nine months ended September 30, 2002 are not
necessarily indicative of the results to be expected for the entire year ending
December 31, 2002. Amortization of leases acquired from On-Point Technologies,
Inc. has been reclassified to cost of revenues in 2001 to conform to the 2002
presentation.
2. Inventories
-----------
Inventories at September 30, 2002 and December 31, 2001 consisted of
the following:
2002 2001
---- ----
Finished goods $ 2,793,153 $ 2,255,882
Work in process 573,280 531,355
Raw materials and supplies 5,513,114 7,841,053
----------- -----------
$ 8,879,547 $10,628,290
3. Acquisition
-----------
On June 1, 2001, Interlott Technologies, Inc. completed the acquisition
of the lottery assets of On-Point Technology Systems, Inc. of San Marcos,
California. Through the purchase, Interlott acquired all of the lottery assets
of On-Point, including patents, technology, accounts receivable, inventory,
service contracts and lease contracts with the New York, Illinois, Virginia and
Missouri state lotteries.
The purchase price included approximately $13 million paid at closing,
deferred payments of $9 million payable, subject to adjustment, over 5 years,
and an earn-out of up to $6 million based upon certain future revenues. In
addition, at the closing Interlott and On-Point entered into a separate
agreement to market a patented design for an on-line activated instant lottery
ticket.
Prior to the closing, to finance the cash payment paid at closing,
Interlott increased its existing credit facility with Fifth Third Bank,
Cincinnati, Ohio (which participated portions of the credit facility to
Huntington Bank and National Bank of Canada) from $25 million to $30 million,
and completed a mezzanine financing of junior debt in the form of a term note
due June 30, 2003 in the principal amount of $5 million
7
with Fifth Third Bank. The note bore interest at the rate of 9% per annum and
the Company was required to pay a success fee equal to 1% of the unpaid
principal balance of the note outstanding on the last day of the fiscal quarter
for each of the four fiscal quarters ending on September 30, 2001, December 31,
2001, March 31, 2002, and June 30, 2002, and equal to 1.5% of the unpaid
principal balance of the note outstanding on the last day of the fiscal quarter
for each of the four fiscal quarters ending on September 30, 2002, December 31,
2002, March 31, 2003, and June 30, 2003. The term note was repaid in full on
August 14, 2002.
The acquisition has been accounted for by the purchase method. Revenues
reported during the three months and nine months ending September 30, 2002 from
lease and maintenance contracts acquired were approximately $1.4 million and
$4.2 million respectively.
4. Goodwill
--------
On July 20, 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001. The Company
adopted SFAS No. 141 on July 1, 2001. The change had no material effect on the
Company's financial position or results of operations.
SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment.
The Company adopted SFAS No. 142 on January 1, 2002, as required. As a
result, there was no amortization of goodwill relating to the On-Point
acquisition for the three or nine months ended September 30, 2002. Goodwill
amortization for the three and nine months ended September 30, 2001 was $111,879
and $166,306, respectively, which, if not recorded, would have had the effect of
adding $69,365 or 1 cent per share, to after-tax results for the three months
ended September 30, 2001 and $103,110 or 2 cents per share for the nine months
ended September 30, 2001. At this time, the Company believes that no impairment
exists.
5. Comprehensive Income
--------------------
Comprehensive income reflects the change in the estimated fair market
value of the Company's interest rate swap agreements. The estimated fair value
is based upon appropriate market information and projected interest rate changes
obtained from a reputable financial institution. Total comprehensive income for
the three and nine months ended September 30, 2002 is summarized as follows:
8
Three months Nine months
----------- -----------
Net income $ 782,313 $1,489,482
Other comprehensive income 51,439 169,294
---------- ----------
Total comprehensive income $ 833,752 $1,658,776
========== ==========
9
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"), pull-tab/break-open ticket vending machines
("PTVMs") and prepaid phone card dispensing machines ("PCDMs") that dispense
instant lottery tickets and prepaid telephone calling cards in a secure and
automated manner. 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.
On June 1, 2001, the Company completed the acquisition of the lottery
assets of On-Point Technology Systems, Inc. of San Marcos, California. The
assets acquired included patents, technology, accounts receivable of $729,000,
$3.4 million of inventory, service contracts, and lease contracts for the New
York, Illinois, Virginia and Missouri state lotteries. The purchase price
included approximately $13 million paid at closing, deferred payments of $9
million payable, subject to adjustment, over 5 years, and an earn-out of up to
$6 million based upon certain future revenues. In addition, at the closing
Interlott and On-Point entered into a separate agreement to market a patented
design for an on-line activated instant lottery ticket.
The Company historically has experienced fluctuations in its financial
results due to the variable nature, timing and results of the lotteries'
contract bid and award process. The Company's revenues and capital expenditures
can vary significantly from period to period because the Company's sales cycle
may be relatively long and because the amount and timing of revenues and capital
expenditures depend on factors such as the amount and timing of awarded
contracts and changes in customer budgets and demands. Operating results may be
affected by the lead-time sometimes required for business opportunities to
result in signed lease or sales agreements, working capital requirements
associated with manufacturing ITVMs pursuant to new orders, competitive bidding
for contract awards and the extended time that may elapse between the award of a
contract and the receipt of revenues from the sale or lease of ITVMs. The
Company's decision to lease a significant portion of its ITVMs generally offers
the Company better gross margins than direct sales agreements. However, leasing
inherently requires more capital and a longer-term payout than sales.
At September 30, 2002, the Company had a total of 11,340 ITVMs and
PCDMs deployed under operating and sales type leases as compared to 11,431 at
June 30, 2002. In the aggregate, the Company has sold or leased over 29,000
ITVMs and PCDMs under agreements with 29 domestic and 14 international lotteries
and their licensees or contractors, as well as to both domestic and
international vendors of prepaid telephone calling cards.
10
RESULTS OF OPERATIONS
- ---------------------
The Company's net revenues increased 49% to $14,419,644 from $9,704,822
for the three months, and 9% to $35,712,330 from $32,788,426 for the nine
months, ended September 30, 2002 and 2001, respectively. Revenues from sales of
ITVMs and PCDMs increased 139% to $8,194,722 from $3,423,724 for the three
months, and 7% to $16,728,859 from $15,612,751 for the nine months, ended
September 30, 2002 and 2001, respectively. The increase in revenues from sales
resulted from purchases by three state lotteries in the three months and nine
months ended September 30, 2002. Revenues from operating leases increased 2% to
$4,752,650 from $4,662,504 for the three months, and 4% to $14,207,913 from
$13,649,281 for the nine months, ended September 30, 2002 and 2001,
respectively. Lease revenues represented 33% and 48% of total revenues for the
three months, and 40% and 42% of total revenues for the nine months, ended
September 30, 2002 and 2001, respectively. Other revenues were $1,472,272 for
the three months ended September 30, 2002 compared to $1,618,594 for the three
months ended September 30, 2001, a 9% decrease, due primarily to a temporary
drop in service revenue as machines are being removed from the field in one
state to be upgraded to higher bin capacity machines which will be redeployed in
the same locations. Other revenues increased 35% to $4,775,558 from $3,526,394
for the nine months ended September 30, 2002 and 2001, respectively, primarily
due to service revenues from the contracts acquired from On-Point that are
reflected in nine months of 2002 compared to seven months in 2001.
Cost of revenues increased 45% to $10,614,540 from $7,297,048 for the
three months, and 9% to $25,788,885 from $23,721,042 for the nine months, ended
September 30, 2002 and 2001, respectively. Depreciation charged to cost of
revenues was $1,431,718 for the three months ended September 30, 2002 compared
to $1,515,887 for the three months ended September 30, 2001, a 6% decrease, due
to older leased machines becoming fully depreciated. Depreciation decreased 7%
to $4,498,474 from $4,844,215 for the nine months ended September 30, 2002 and
2001, respectively, due to the reduced number of capitalized lease machines
being depreciated in 2002 as the result of the expiration of a lease contract in
July 2001. Service and installation costs increased 10% to $2,967,355 for the
three months ended September 30, 2002, compared to $2,688,143 for the three
months ended September 30, 2001, due to increased staffing and costs associated
with deployment of new machines. Service and installation costs increased 26% to
$8,680,875 from $6,875,471 for the nine months ended September 30, 2002 and
2001, respectively, due to a full nine months of expenses related to the leases
and maintenance contracts acquired from On-Point. Amortization of leases
relating to the On-Point acquisition charged to cost of goods sold was $214,050
for both three month periods ended September 30, 2002 and September 30, 2001,
and was $642,150 for the nine months ended September 30, 2002 compared to
$285,400 for the nine months ended September 30, 2001. The nine month period
ended September 30, 2001 only included four months of expense subsequent to the
acquisition on June 1, 2001. As a result of these factors, cost of revenues as a
percentage of revenues decreased to 74% from 75% for the three months, and
remained constant at 72% for the nine months, ended September 30, 2002.
11
Due primarily to higher sales volume, gross profit increased 58% to
$3,805,104 from $2,407,774 for the three months, and increased 9% to $9,923,445
from $9,067,384 for the nine months, ended September 30, 2002 and 2001,
respectively. Gross profit as a percentage of revenues increased slightly from
25% to 26% for the three months and remained constant at 28% for the nine months
ended September 30, 2002, as a result of the previously discussed changes in
expenses.
The Company adopted SFAS No. 142 on January 1, 2002, as required. As a
result there was no amortization of goodwill relating to the On-Point
acquisition for the three months and nine months ended September 30, 2002.
Amortization of goodwill was $111,879 for the three months ended September 30,
2001 and $166,306 for the nine months ended September 30, 2001.
Selling, general, and administrative expenses increased 13% to
$1,715,253 from $1,512,627 for the three months, and 8% to $5,013,018 from
$4,630,129 for the nine months, ended September 30, 2002 and 2001, respectively.
Increases in advertising and promotional costs, wages and benefits and legal and
professional fees were the primary factors related to the increase in costs for
both the three month and nine month periods.
Interest expense decreased 8% to $544,079 from $588,924 for the three
months, and increased 28% to $1,804,384 from $1,404,808 for the nine months,
ended September 30, 2002 and 2001, respectively. The decrease for the three
months reflects lower overall borrowing needs which facilitated retirement of
the $5 million subordinated term note on August 14, 2002 and a decrease in
interest rates. The increase for the nine months ended September 30, 2002 was
due to increased borrowing to finance the On-Point acquisition.
Other income (expense) was ($118,043) and $6,351 for the three months,
and ($320,453) and $22,875 for the nine months, ended September 30, 2002 and
2001, respectively. This increase in expense for the three month period was due
to a non-recurring charge for the settlement of litigation, as described in Part
II, Item 1 (Legal Proceedings), in the amount of $115,000 which was recorded in
the quarter ended September 30, 2002. The nine month period includes a similar
settlement that was recorded in the quarter ended June 30, 2002 in the amount of
$200,000 as previously described in the Company's Form 10-Q Report dated August
14, 2002 at Part II, Item 1.
As a result of the factors discussed above, income before income taxes
increased 812% to $1,261,453 from $138,373 for the three months, and decreased
8% to $2,391,742 from $2,609,575 for the nine months, ended September 30, 2002
and 2001, respectively.
Income taxes were $479,140 for the three months, and $902,260 for the
nine months, ended September 30, 2002. The Company's effective tax rate is 38%
for all periods.
As a result of the foregoing factors, net income after tax increased
819% to $782,313 from $85,123 for the three months, and decreased 8% to
$1,489,482 from $1,616,755 for the nine months, ended September 30, 2002 and
2001, respectively.
12
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Prior to the closing of the acquisition of the lottery assets of
On-Point, to finance the cash payment paid at closing, the Company increased its
existing credit facility with its bank from $25 million to $30 million, and also
completed a mezzanine financing of junior debt in the principal amount of $5
million. The amended credit facility is a three year credit line, secured by a
lien on all of the assets of the Company. The rate of interest on this loan is
based on the prime rate or LIBOR rate adjusted up or down depending on the
Company's funded debt to EBITDA ratio. The current rate is LIBOR plus 2.0%
(3.66% at November 1, 2002). The mezzanine financing consisted of a $5 million
term note due June 30, 2003, which was subordinate to the credit facility. This
note bore interest at a fixed rate of 9% per annum and the Company was required
to pay a success fee equal to 1% of the then-outstanding principal balance of
the note on each of September 30, 2001, December 31, 2001, March 31, 2002, and
June 30, 2002 and equal to 1.5% of the outstanding principal balance on the last
day of each of the four following fiscal quarters. The note could be prepaid
when availability on the credit facility exceeded $2 million and the Company was
in compliance with all loan covenants. The Company paid off this note in its
entirety on August 14, 2002 using funds generated from operations.
Net cash provided by operations for the nine months ended September 30,
2002 and 2001 was $7,072,454 and $8,711,286, respectively. The decrease for the
first nine months of 2002 as compared to the same period in 2001 resulted
primarily from an increase in accounts receivable created by recent large sales
to several state lotteries, partially offset by a decrease in inventories and an
increase in accrued expenses.
Net cash used in investing activities was $2,972,072 and $19,803,285
for the nine months ended September 30, 2002 and 2001, respectively. The nine
months ended September 30, 2001 included the purchase of the lottery assets of
On-Point for $13.4 million. Net cash used in investing activities for the nine
months ended September 30, 2002 consisted primarily of the cost of leased
machines built for deployment under lease contracts.
Net cash used for financing activities was $4,317,276 for the nine
months ended September 30, 2002 as compared to net cash provided by financing
activities of $11,417,498 for the nine months ended September 30, 2001. The
change is primarily the result of the pay off of the $5 million subordinated
term note and payment of $460,100 on notes to related parties in 2002 as
compared to additional borrowings on the credit facility in 2001 related to the
On-Point acquisition.
On November 1, 2002, the Company was indebted to Fifth Third Bank in
the aggregate principal amount of $21,642,903 and had $8,357,097 available on
the credit facility.
On August 29, 2002 the Company's Board of Directors authorized the
repurchase of up to 400,000 shares, or approximately 6 percent, of the Company's
6.5 million shares of outstanding common stock, over the next 12 months. The
timing and terms of purchases will be at the Company's discretion and will be
based on market conditions and the Company's capital requirements. Under the
terms of the repurchase
13
plan, the Company may make purchases in the open market or in privately
negotiated transactions. Repurchases may be suspended or discontinued at any
time and are subject to the requirements of the Company's credit agreement. The
shares acquired will initially be held as treasury stock and may be issued for
employee stock programs and general corporate purposes. As of November 11, 2002,
the Company had repurchased 2,500 shares under the plan, at an average price of
$6.05 per share.
On October 23, 2002, the Company's credit facility with Fifth Third
Bank was amended to permit the redemption of shares of the Company's equity
securities so long as payments for this purpose do not exceed $2 million and the
Company's available credit under the facility equals or exceeds $2 million plus
the amount of such payments.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
-----------------------------------------------------------
The Company entered into an interest rate swap agreement with a total
notional principal amount of $10,000,000 at December 31, 1999 which expired on
November 7, 2002. This agreement was replaced by a new agreement with a total
notional principal amount of $10,000,000 at November 7, 2002 which expires on
May 31, 2004. The Company also entered into an interest rate swap agreement with
a total notional principal amount of $5,000,000 at July 3, 2001 which expires on
May 31, 2004. The objective of these agreements is to convert a portion of the
Company's floating rate revolving credit facility to a fixed rate. The estimated
fair value of the interest rate swap agreements was approximately ($351,543) at
September 30, 2002. The estimated fair value is based upon appropriate market
information and projected interest rate changes obtained from a reputable
institution.
ITEM 4. CONTROLS AND PROCEDURES.
------------------------
As of September 30, 2002, an evaluation was performed under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of the Company's disclosure controls and procedures.
Based on that evaluation, the Company's management, including the CEO and CFO,
concluded that the Company's disclosure controls and procedures were effective
as of September 30, 2002. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to September 30, 2002.
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
On September 16, 2002, the United States Bankruptcy Court for the
Eastern District of Washington approved a compromise and settlement of claims in
IN RE APPLE VALLEY COMPACT VENDING, INC., 01-08218-R5E and IN RE STANLEY A.
BURGHARDT AND MARY JO BURGHARDT, 01-08219-R5E. Litigation between the parties
began on May 8, 2001, when the Company filed an action in the Court of Common
Pleas in Hamilton County, OHIO STYLED INTERLOTT TECHNOLOGIES, INC. VS. APPLE
VALLEY COMPACT VENDING, INC. AND MARY JO BURGHARDT AND STANLEY BURGHARDT
(collectively the "Defendants"), Case No. A0102900, for breach of contract and
declaratory judgment on the rights and obligations of Interlott and Defendants
under agreements relating to the subcontracting of installation and maintenance
services in the State of Washington.
On July 26, 2001, the Defendants filed a related suit in King County,
Washington, Case No. 01-2-21258, which action was removed to the United States
District Court for the Western District of Washington at Seattle. The Company
moved to dismiss the case based on the pendency of the earlier filed Ohio
action.
On October 18, 2001, Defendants Mary Jo and Stanley Burghardt and Apple
Valley Compact Vending, Inc. filed Chapter 7 bankruptcy petitions in Washington
State. On February 4, 2002, Interlott filed a Complaint for Determination of
Non-Dischargeability pursuant to 11 U.S.C. ss.523 relating to the Burghardts'
joint Chapter 7 bankruptcy case.
The settlement approved by the Bankruptcy Court resolves all claims
between the parties for a payment of $115,000 by Interlott to the trustee of the
Defendants' bankruptcy estates in return for a dismissal of all claims and
actions described above. These proceedings were previously reported in the
Company's 2001 Form 10-K Report filed on March 29, 2002 at Part I, Item 3.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits.
10.1 Sixth Amendment to Credit Agreement between the Company and Fifth
Third Bank
(b) Reports on Form 8-K. None
16
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 14, 2002 /s/ David F. Nichols
----------------------------------------
David F. Nichols
President and Chief Executive Officer
/s/ Dennis W. Blazer
----------------------------------------
Dennis W. Blazer
Chief Financial and Accounting Officer
CERTIFICATIONS
I, David F. Nichols, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Interlott
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the
17
disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ David F. Nichols
- ------------------------------------
Chief Executive Officer
I, Dennis W. Blazer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Interlott
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
18
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Dennis W. Blazer
- ------------------------------------
Chief Financial Officer
19