SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
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: 0-11551
eLOT, Inc.
(formerly named EXECUTONE Information Systems, Inc.)
(Exact name of registrant as specified in its charter)
Virginia 86-0449210
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 Merritt 7 Corporate Park
Norwalk, Connecticut 06851
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 840-8600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
N/A None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
7 1/2% Convertible Subordinated Debentures, Due March 15, 2011
(Title of Class)
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 12 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the common stock held by non-affiliates of the
registrant (assuming for this purpose that all executive officers and directors
of the registrant are affiliates) as of February 29, 2000 was $373,892,440,
based on the last sale price for the common stock on that date.
The number of shares outstanding of the registrant's only class of common stock,
$.01 par value per share, as of February 29, 2000, was 63,946,867.
DOCUMENTS INCORPORATED BY REFERENCE
Part III Proxy Statement (Form 14A) for the 2000 Annual Meeting of Shareholders
TABLE OF CONTENTS
Item Page
- ---- ----
PART I
1. Business ......................................................................... 1
2. Properties ....................................................................... 22
3. Legal Proceedings ................................................................ 22
4. Submission of Matters to a Vote of Security Holders .............................. 24
Executive Officers
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters............. 26
6. Selected Financial Data .......................................................... 27
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ......................................................... 28
7A. Quantitative and Qualitative Disclosures About Market Risk ....................... 32
8. Financial Statements and Supplementary Data ...................................... 33
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ........................................... 52
PART III
10. Directors and Executive Officers of the Registrant ............................... 53
11. Executive Compensation ........................................................... 53
12. Security Ownership of Certain Beneficial Owners and Management ................... 53
13. Certain Relationships and Related Transactions ................................... 53
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .................. 54
PART I
ITEM 1. BUSINESS
eLOT, Inc., formerly named Executone Information Systems, Inc. ("ELOT" or
the "Company") intends to be a web-based retailer of governmental lottery
tickets and is committed to leading the governmental lottery industry into the
e-commerce market. ELOT has developed, installed and operated systems that have
processed ten million e-commerce lottery ticket sales and transactions. It has
operated Internet, Intranet, and telephone communications, accounting, banking,
database and other applications and services that can facilitate the electronic
sale of new and existing lottery products worldwide. The Company has also
developed transitional e-commerce solutions for governmental lotteries, which
leverage the power of the Internet, while political, legal and social issues are
simultaneously addressed. For example through the use of the Company's Internet
Marketing, Analysis, Research, and Communications System (IMARCS), lotteries can
maximize ticket sales and marketing efforts by communicating one-on-one with
current players and attract new players via the Internet.
ELOT has also launched a reward-entertainment lottery portal,
eLotteryFreeWay, which offers lottery and entertainment games (for no
consideration) with registered players earning "ePoints" that are redeemable for
cash and merchandise. The eLotteryFreeWay is located at
http://www.elotteryfreeway.com). eLottery's corporate web site is on the World
Wide Web at http://www.eLottery.com.
Capitalized product names used in this report are registered or
unregistered trademarks of the Company or its subsidiaries except where
specifically identified with products of an unaffiliated company.
ELOT's executive offices are located at 301 Merritt 7 Corporate Park,
Norwalk, Connecticut 06851, telephone 203-840-8600. The common stock of ELOT
(the "Common Stock") is traded on the NASDAQ National Market System under the
symbol "ELOT", and its Convertible Subordinated Debentures due 2011 (the
"Debentures") trade on the NASDAQ system under the symbol "ELOTG".
Recent Developments
On March 6, 2000, ELOT announced that it had entered into a strategic
alliance agreement with Global Technologies Limited ("GTL") to facilitate and
develop e-commerce sales and technologies of lottery and other governmental
authorized gaming related products. GTL is a technology incubator that develops
and manages emerging growth businesses focused on the networking solutions,
telecommunications, gaming and e-commerce opportunities. As the first initiative
of the strategic alliance eLOT and GTL announced an agreement under
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which ELOT will be the exclusive web-based retailer for a UK charity lottery.
See "Lottery Distribution Contracts."
Additional initiatives under the strategic alliance include jointly
marketing the Internet distribution of lottery to additional jurisdictions and
examining the feasibility of using ELOT gaming technology by GTL's affiliate
company, The Network Connection Inc. for use in that Company's cruise ship,
hotel and train market places. The companies will also jointly develop lottery
applications using wireless technology.
On February 25, 2000, ELOT, announced it had entered into a letter of
intent to purchase Virtgame.com Corp. (VGTI), a leading provider of Internet
enabling technology to the lottery industry. It is anticipated that ELOT may
issue up to 3.4 million shares to complete the transaction. The proposed
agreement is subject to certain conditions, including the negotiation of
definitive agreements, discontinuation of operations of VGTI's Constellation
virtual casino, completion of due diligence and VGTI shareholder approval.
Effective January 1, 2000, ELOT completed the sale of its computer
telephony business to Inter-Tel Incorporated. The computer telephony business
consisted of telephone system sales and services through a national network of
independent distributors and company direct sales employees to the small to
medium-sized business customer and to smaller locations of large commercial and
governmental organizations. The results of the computer telephony business are
accounted for as a discontinued operation in the financial statements for the
year ended December 31, 1999.
ELOT has announced its intention to sell its healthcare communications
business and its investment in Dialogic Communications Corporation ("DCC").
Discussions with prospective purchasers are continuing for the sale of the
healthcare communications business. The Healthcare Communications Business is
dedicated to developing, manufacturing, selling and servicing communications
solutions for healthcare facilities. The results of the healthcare
communications business are also accounted for as a discontinued operation in
the financial statements for the year ended December 31, 1999.
On February 27, 2000, ELOT called for a special meeting of the
shareholders of Dialogic Communications Corporation to remove all members of the
Board of Directors except Stanley J. Kabala, Chairman and President of ELOT, and
replace them with nominees of ELOT. ELOT also announced that it will request the
new Board to immediately consider various alternatives designed to maximize
value for the shareholders of DCC. ELOT owns 2,186,230 shares of stock in
Dialogic Communications Corporation, which ELOT believes represents
approximately 51% of the currently outstanding shares of that corporation.
Dialogic Communications Corporation is a privately held company headquartered in
Franklin, Tennessee that is an
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established leader in interactive call processing solutions for business,
industry and government. It is the leading provider of voice recognition units
(VRUs and ARUs) to the cable television industry and a successful provider of
emergency notification systems to Public Service agencies, the military,
financial institutions and other customers that have the need to establish
assured contact with large numbers of people in a short period of time. DCC has
been experiencing significant and sustained profitable growth while investing in
a series of products that further advance closed loop communications.
THE eLOTTERY BUSINESS
eLottery History
On December 19, 1995, the Company acquired 100% of the common stock of
eLottery. eLottery's subsidiary, UniStar Entertainment, had an exclusive
five-year contract ending January 2003 to design, develop, finance, and manage
the National Indian Lottery, which was marketed under the brand name U.S.
Lottery, for the Coeur d'Alene Tribe of Idaho ("CDA"). Until December 1998,
UniStar Entertainment provided development and management of the software,
network design and call center applications for the Lottery's operations. In
December 1998, the U.S. District Court for the District of Idaho ruled, in a
case brought by AT&T, that the U.S. Lottery was not authorized by the federal
Indian Gaming Regulatory Act of 1988 ("IGRA") and was governed by state law, and
eLottery and the CDA terminated the U.S. Lottery.
As a result of the adverse legal decision and upon review of the strategic
alternatives and the significant market opportunity for web-based lottery ticket
sales and related business opportunities, the Company developed a new strategy
to utilize eLottery's technology and experience gained in operation of the U.S.
Lottery to become a web-based retailer of lottery tickets and a provider of
Internet marketing and advertising programs for authorized government lotteries.
In March 1999, the Board of Directors of ELOT announced that it would divest the
company's traditional telephony and healthcare businesses, retain the proceeds
of any sales in the company to help it accelerate the achievement of eLottery's
business plans.
eLottery Mission and Strategy.
eLottery, Inc., a wholly-owned subsidiary of ELOT, is pursuing
opportunities to become a web-based retailer of lottery services and to license
its systems and services to state and international lotteries. Lotteries
worldwide generate revenues from ticket sales in excess of $120 billion annually
with retailers receiving commissions on tickets sold. Using its past experience
with the US Lottery and market-tested products, eLottery is committed to leading
the governmental lottery industry into the e-commerce market.
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eLottery has positioned itself to become a leader in the area by
addressing the many complex legal, political and social issues facing
governmental lotteries as they react to the significant market changes signaled
by the rapid growth in Internet sales. eLottery has developed, installed and
operated Internet, Intranet, telephone, communications, accounting, banking,
database and other applications and services to facilitate the electronic sale
of new and existing lottery products worldwide.
In addition to web-based lottery ticket sales the Company is pursuing
several additional related revenue opportunities. eLottery is targeting Internet
advertising and marketing dollars from governmental lotteries. Lotteries
worldwide spend billions of dollars annually on promotions with almost none of
that being spent on the Internet and through the use of eLottery's IMARCS
system, the Company expects to capture a portion of that market. The IMARCS
system also allows eLottery to begin building relationships with the U.S. State
lotteries and potential lottery ticket purchasers. The Company has identified a
process which it believes will lead to states permitting web-based lottery
ticket sales. The first phase is a contract with a state to begin an Internet
marketing program to gather data on customers who both purchase lottery tickets
and are Internet users. The next step is to increase the sales of paper tickets
through promotions on the Internet. Ultimately when approval from the relevant
authorities is received the Company can begin selling lottery tickets on the
Internet. eLottery is committed to leading the governmental lottery industry
into the e-commerce market and conducting Internet advertising and marketing
programs with state lotteries now will position eLottery to sell tickets for the
states when permitted.
eLottery has already begun generating revenues through advertising and
e-commerce transactions on its lottery portal, eLotteryFreeWay. eLotteryFreeWay
offers customers the opportunity to play a variety of games for free and win
cash or discounts on merchandise. There are significant potential benefits
between eLotteryFreeWay and the Company's goal of selling lottery tickets over
the Internet. eLotteryFreeWay is a means through which eLottery is building a
player base with a high propensity to buy lottery tickets on-net.
Through the IMARCS system and eLotteryFreeWay, eLottery is generating
revenues and building a database of customers that are Internet users and play
the lottery, the exact demographic eLottery will be targeting for the web-based
sale of lottery tickets. At the same time, eLottery is seeking to build a brand
name among consumers as well as within the lottery industry.
eLottery Products
eLottery has developed proprietary lottery technologies designed to take
advantage of the impact that eLottery believes recent advances in
telecommunications and computers will have on the nature and delivery of lottery
products and the support systems necessary to administer them. eLottery believes
it is the first to develop and operate secure, integrated Internet, Intranet and
telephone lottery gaming systems. Its Internet and Intranet
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systems provide for the electronic sale and support of both periodic and instant
draw lottery games and instant electronic "scratch-off" games. Using eLottery's
systems, lotteries will be able to electronically distribute lottery tickets for
both periodic and instant draw lottery games over the Internet through its web
site, eLotteryFreeWay.com, through an Intranet, through telephone networks, and
through stand-alone custom-designed electronic lottery terminals. eLottery
believes that the electronic distribution of lottery tickets through these
systems will increase sales for lotteries because the systems make the purchase
of tickets easier and use technology to enhance the lottery gaming experience.
Subject to applicable law, the web site can contain links to the sites of
participating lotteries utilizing eLottery technologies to sell their lottery
tickets over the Internet. eLottery also may sell lottery tickets as an agent
for certain lottery operators.
eLottery believes that its systems provide lotteries with numerous
advantages relative to traditional means of distribution, including player
tracking ability and access to new and more demographically attractive market
segments through sale of tickets over the Internet and entertaining fast-play
instant games. eLottery also provides advanced border control technology and the
ability to control underage play and problem gambling. A web site retailer will
have the ability to remain open 24 hours a day, seven days a week without
incurring additional overhead costs, and will be able to electronically
distribute lottery tickets and games and offer lottery players convenient and
timely product fulfillment. eLottery management believes that the combination of
the advantages of Internet commerce and distribution with eLottery's ability to
customize its systems will result in eLottery becoming an agent and leading
provider of products and services for the lottery industry.
eLottery has developed its systems to provide secure electronic
production, delivery, validation, billing and accounting for lottery games. The
systems are configurable, which allows the addition, deletion and substitution
of games offered. Tickets may be purchased through the lottery operations center
using a personal computer connected via the Internet, via custom-designed
electronic lottery terminals connected over a LAN or over the telephone.
Both the Internet and Intranet systems contain significant features and
procedures to prevent abusive play. eLottery believes that the Internet system
contains processes and procedures to protect against play by minors and to
control problem gaming and that the Intranet system as implemented will provide
protections against such play at least equal to that provided by existing
state-run lottery systems.
The Company's electronic lottery distribution system is potentially
composed of the following elements that can be used together or on a stand-alone
basis depending upon the specific application:
o Basic Operation. A customer registers, opens an account, and
receives a user identification number and password. Registration can
be through the Internet, by telephone or in person at a lottery
retail store. The customer deposits funds into the account by debit
card, cash or check. Once the account is funded, the customer may
use the available balance to purchase tickets to play the games or
other
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merchandise. Any prizes are credited to the account. Customer
withdrawals can be requested through the Internet, by telephone or
in person at a lottery retail store.
o Card Access. The system can also be accessed using player cards.
Player cards add several dimensions to the system, particularly from
a regulatory point of view. Because these cards are issued at
controlled facilities, access to the system can be equally
controlled, enforcing, for example, age requirements, residency
requirements, use of cash and amount of play. In addition, these
lottery cards can be sold through the lotteries' existing agent
distribution channel. Several types of cards are available including
bearer cards, bonus cards, club cards and prepaid lottery cards.
A bearer card has a unique identity (consisting of an ID and
Password embedded in the card) representing an account on the
system. These cards contain no information other than an encrypted
ID and PIN number, which are associated with accounts. These cards
are available throughout the hosting facility. Funds can be added to
the bearer cards at an "Automated Recharge Machine" ("ARM") or at a
cashier's station. Cash can be added at any denomination at the
cashier station, but may be limited to particular dollar increments
at the ARM. Once a player's card is funded (i.e., the associated
account has funds deposited), it may be used in a lottery gaming
station or custom-designed electronic lottery terminal to play
games.
A bonus card is initialized with "bonus" dollars. These are dollars
that can be used to play games but cannot be cashed in. Such cards
could be used as promotional cards to encourage people to begin
playing. They can be "recharged" with cash at any ARM or cashier's
station. However, the bonus dollars would be consumed prior to any
cash added to the card and the bonus dollars cannot be disbursed.
A club card would be generally issued by an authorized lottery
office or authorized agent where player information can be assured
adequate protection and confidentiality. These cards are protected
with personal identification numbers or "PINs". Such cards would be
used as members of the state "Lottery Club" and would entitle them
to various monthly promotions and other forms of communications
about the enhanced lottery games. The play activity would be tracked
on these club cards and would enable the player to qualify for
various club awards that may be established by the state lotteries.
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o Client Server Architecture. The eLottery system is designed so that
players can access the system using several different devices
connected to the centralized server. For example, players can use
personal computers connected over the Internet; custom-designed
electronic lottery terminals connected via a LAN or over the
Internet, or a voice response unit connected by telephone.
Administrative terminals can be connected via the Internet, thus
allowing the operation and administration of the eLottery system to
be conducted from remote locations.
o Centralized Accounting Server. A centralized accounting server keeps
track of all of the transactions on the system. This server accounts
for and controls transactions with customers including registration,
deposits, withdrawals, purchases of tickets or other merchandise and
the awarding of prizes. The centralized accounting server produces a
myriad of reports to monitor both the player's activities as well as
the performance of the games according to their individual working
papers.
o Lottery Server. The lottery server is a centralized network of
computers controlling the essential operations of the games
including the game play, issuance of the tickets or generation of a
random event, determination of a winner and the awarding of the
prize.
o Banking System. This system validates the credit card information
received from the customer with the national Visanet network. The
system is currently capable of processing 10,000 transactions per
hour in about 10 seconds each and is expandable to handle a larger
volume of transactions.
o Intranet System. The Intranet system is based on the same
architecture as the Internet system using private connections
instead of the Internet.
o Lottery Stations. Lottery stations can be several different devices.
The lottery games can be played using personal computers connected
either via the Internet or direct dial. Games can be played using
custom-designed electronic lottery terminals or the draw games can
be played using a telephone. Custom-designed electronic lottery
terminals are built using standard "off the shelf" hardware
components consisting primarily of a touch screen monitor and a
standard Pentium processor networked to the central system.
o Cashier Terminals. The cashier stations can accept the player
deposits. The player presents the card, which is swiped reading the
card ID and password into the system. Funds are received from the
player and entered by the cashier. The central system then adds the
deposit to the balance of the
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account associated with the card. To withdrawal balances from the
card, the player again, presents the card to the cashier, the
cashier then swipes the card and the system displays the "card"
balance. The cashier disburses the requested cash to the player.
o Automatic Recharge Machines ("ARMs"). Funds can also be added
through automated recharge machines. The player inserts the card
into a reader and inserts the amount of money they wish to add into
a bill collector. The system updates the balances, the ARM prints a
receipt and returns the card.
o Agent Cards. The card reader of the ARM will also identify an
authorized agent's card. This access will permit the agent to obtain
information about the machine as well as perform the "empty"
function. To empty a machine, the agent inserts their agent card and
the appropriate PIN. The agent opens the machine and takes out the
bill collection box and inserts a new bill collection box. Once this
process is completed, the agent finishes the empty process and a
receipt is printed that should equal the balance in the box. The
receipt also identifies the ARM from which it was taken, the user ID
of person emptying the machine as well as the date and time of the
process.
Security. eLottery believes the integrity of a lottery is essential to its
successful operation. While operating the US Lottery, eLottery did not encounter
any breaches in security and is unaware of any practical, economically feasible
way to breach the security of its instant lottery tickets that could result in a
material loss to any of its customers, nor is it aware of any breach thereof
that has resulted in any material loss to any of its lottery customers. eLottery
constantly assesses the adequacy of its security systems, incorporating various
improvements, bar coding and additional layers of protection.
Games. The architecture of both of eLottery's Internet and Intranet
systems allow the addition, deletion and substitution of lottery games offered.
The lottery games have been designed to fall within generally accepted
definitions of a "lottery" game. Lottery games generally fall into two broad
classifications: (i) instant games or "Scratchers" in which the outcome is
predetermined and known instantly and (ii) draw games in which the outcome
depends upon a random event in the future. eLottery currently has four families
of games that are available on both the Internet system and Intranet system: (i)
Bingo; (ii) Lotto; (iii) Classics; and (iv) Draw games.
eLottery Lottery Distribution Contracts
On March 6, 2000, eLottery announced it had signed a four-year contract
under which the Company will become the exclusive web-based retailer and
provider of games for a U.K. charity lottery. The U.K. charity lottery is
authorized by the Gaming Board for Great Britain, with GTL Management Ltd.
serving as the
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operating company on behalf of Inter Lotto (UK) Ltd. Through GTL and Inter
Lotto, eLottery has been appointed an exclusive agent to provide for the sale of
lottery products on the Internet on behalf of designated charitable
organizations. The initial lottery product is expected to be Great Britain's
first "Pick 3" game called, "The Daily Number." Proceeds will benefit numerous
charitable causes. eLottery will receive a cash commission for every ticket sold
and Internet sales expected to start in the second quarter of 2000.
The United Kingdom is a large and important market for lottery sales. U.K.
lotteries currently generate sales of approximately U.S.$12 billion annually.
"Pick 3" has been a highly successful game in the United States, where it is a
$6 billion game annually and garners over 16% of overall conventional lottery
ticket sales. Under terms of the agreement with GTL, eLottery will also develop
and provide additional games for the UK charity lottery, subject to review by
the Gaming Board for Great Britain. eLottery will Internet ticket-enable
multiple high traffic web sites and will also web retail via links from
eLottery's www.uklottery.com, www.ukdailynumber.com and www.eLotteryFreeWay.com
URLs. The Internet lottery will be accessible to England, Scotland and Wales --
a combined population of approximately 60 million. Sales to residents of
jurisdictions outside of Great Britain will not be permitted.
On October 25, 1999, eLottery entered into a software licensing and
development agreement and a management agreement with the Jamaica Lottery
Corporation, the government-authorized provider of Jamaican government lottery
products, and eCaribbean.com, Limited, a Jamaican company that has been
designated the exclusive Internet retail agent of the Jamaican Lottery
Corporation. Under the agreement, eLottery has agreed to customize, license and
maintain its proprietary Internet lottery software and systems for use in making
sales of authorized Jamaican government lottery products to eligible Jamaican
citizens and other persons in a manner and under circumstances reasonably
believed to comply with applicable law. The agreement has an initial term of ten
years and provides for compensation to eLottery of a percentage of the net
lottery revenues from sales by eCaribbean.com, Limited, after payment of the
prize pool, required governmental and charitable payments, Internet service
provider fees, and banking fees not charged to customers' accounts. The Jamaica
Lottery Corporation and eLottery currently plan to launch Internet retail sales
of Jamaica Lottery tickets in the first half of 2000.
Strategic Partnership Agreements
eLottery has entered into a Strategic Partnership Agreement, dated May 11,
1999, with Autotote Lottery Corporation. Autotote is a primary supplier of
on-line systems to track the distribution and validate the sales of lottery
products. Autotote has contracts to provide on-line services and equipment that
track retail sales of lottery products for the States of Connecticut and Montana
and the countries of Italy, the Dominican Republic and Barbados. In order to
implement e-Commerce sales capability, eLottery and Autotote will jointly
develop a secure interface between their respective systems in order to allow
tickets sold through eLottery's systems to be
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validated through the Autotote system. eLottery and Autotote intend to jointly
market the eLottery web retail concept to each jurisdiction with which Autotote
has entered into a contract, as well as other jurisdictions to which the parties
may mutually agree. In the event that eLottery, with the assistance of Autotote,
enters into a contract with any web retailer, Autotote will be entitled to an
interface fee to be negotiated at the time of the execution of the contract. In
addition, eLottery must license to Autotote, or to the jurisdiction as
appropriate, its independent system to support the conduct of instant lottery
games to be sold via e-commerce. The system will be licensed without a fee if
eLottery is the web retailer or for a fee to be negotiated if it is not the web
retailer. eLottery granted Autotote an exclusive license for its system in the
jurisdictions with which Autotote has entered into contracts as well as certain
additional states.
eLottery has also entered into a Joint Venture Agreement, dated July 13,
1999, with International Lottery & Totalizator Systems, Inc. (ILTS). ILTS
provides computerized wagering systems equipment and services to lottery and
racing organizations in 18 countries worldwide. eLottery and ILTS will jointly
market an on net lottery to ILTS' international lottery and pari-mutuel
customers. The companies plan to develop an interface that will allow ILTS'
lottery systems to process eLottery's web-based retailing of lottery tickets.
Lottery Advertising and Promotion Applications
eLottery also has transitional e-commerce solutions for governmental
lotteries that leverage the opportunities presented by the Internet, while
lottery jurisdictions simultaneously are addressing political, legal and social
issues. Its IMARCS (Internet Marketing, Analysis, Research and Communications
System) database marketing solution for governmental lotteries is an Internet
tool that will allow lotteries to maximize sales and marketing efforts by
communicating one-to-one with their current players and will assist in
attracting new players. IMARCS leverages the power of the Internet to deliver
one-to-one marketing messages that maximize sales revenue. In addition to
assisting clients capture Internet data, IMARCS campaigns can be an efficient
and very cost effective way for lotteries to achieve their sales and marketing
goals. IMARCS is an Opt-in/Opt-out database that allows the lotteries to create
campaigns that address: birthday clubs, winner awareness, winning number
notifications, jackpot reminders, community events, game suggestions,
co-promotional events, and many additional VIP member benefits. IMARCS also
provides the functionality to communicate through traditional direct mail as
well as e-mail.
The IMARCS program also offers Lotteries the capability to capture
Internet based advertising revenue from their current web sites. Official
lottery web sites receive millions of hits per month, yet yield no advertising
revenue because many are unable to accept revenue that falls outside of lottery
ticket sales. The program can capture, collect and bill third party advertising
revenue as a web based advertising agent. The new revenue can then be exchanged
for IMARCS Internet marketing campaigns and subscription services --- generating
an Internet ad revenue stream that funds Internet direct marketing campaigns to
increase ticket sales. eLottery
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would receive transaction commissions on the outbound Internet marketing
campaigns. This optional IMARCS feature offers Lotteries full discretionary
authority to control who would be allowed to advertise on their web site. The
advertising revenues collected through IMARCS would assist lotteries with their
initial Internet marketing efforts and allow current advertising budgets to be
utilized for other forms of advertising media.
On November 15, 1999, eLottery announced that it had signed an exclusive
agreement to develop the Internet communications element of a players club
program for the Idaho Lottery. In early 2000, the IMARCS solution was installed
as the foundation for the Idaho Lottery's "Very Important Players" club. The
immediate goal of the program is to attract, register and communicate with Idaho
residents on the Internet. The Players Club will provide information and
services to Idaho Lottery patrons who are "logged-in" to an official Idaho
lottery web site. The initial goal of the Idaho Lottery is to have 25% of its
player base enrolled in the players club.
Product Development
eLottery's product development efforts are devoted to continual
improvement in all aspects of the systems. Software developers operating under
exclusive and proprietary development contracts leverage eLottery's ability to
produce games, create database accounting and banking systems, enhance and
customize system features and provide state-of-the-art Internet design and
engineering capability. eLottery believes this an efficient low cost method to
gain access to the best and latest technologies in each of the respective areas.
The system architecture is designed to permit several developers to work
independently on various modules of the system. These games can be modified to
separate key elements to run in a secure client server environment and operate
efficiently on eLottery's electronic lottery distribution systems. This ability
to modify the lottery games allows eLottery to work with all game publishers and
modify their games to operate on the system and significantly add to eLottery's
game portfolio.
eLottery Sales and Marketing
eLottery is marketing (i) directly to state agencies and other licensed
entities, (ii) individually through authorized lottery services companies and
(iii) through strategic alliances with other providers of games and gaming
technology. eLottery is establishing itself as a web-based retailer of lottery
tickets and a provider of technology and systems for a commission on ticket
sales. The ultimate success of eLottery's lottery platform depends on its
acceptance by lottery operators and lottery patrons. eLottery believes that,
from the point of view of lottery operators, the attractiveness of its
electronic lottery distribution systems depends on its ability to increase
lottery sales, its ease of upgrade, maintenance and game change and its
information management. eLottery believes that, from the lottery patron's
perspective, the attractiveness of a platform is a function of entertainment
value. eLottery's sales and marketing strategy is to generate product sales by
highlighting the
11
advantages presented by its electronic lottery distribution systems to lottery
operators, such as the potential for increased lottery ticket sales, and by
positioning itself as a partner with lottery operators. eLottery's marketing
strategy also targets lottery players and will focus on developing brand
recognition for the eLotteryFreeWay.com web site, which eLottery believes can be
accomplished partially through the introduction of lottery games that eLottery
believes deliver greater entertainment value than games used in the traditional
lottery industry.
eLottery intends to position itself as a partner with lottery operators in
establishing the next generation of lottery entertainment. eLottery is working
to develop close relationships with lottery operators, utilizing its marketing
representatives as consultants to lottery operators on methods to increase
lottery ticket sales through the use of eLottery's products. eLottery's
electronic lottery distribution systems have been designed to supplement the
sales and marketing efforts of the operating lotteries enhancing their ability
to attract new players and increase the revenue from their customer base.
Detailed play information is accumulated in the system including lottery games
played, duration of play, time of play, purchase and prize data and a host of
other data elements. When matched with other demographic data, this information
is valuable in designing promotional offers and advertising campaigns.
Specialized e-mail features provide the capability to deliver promotional
programs to specific accounts based upon the results of a contest, completion of
a survey, winning a game of chance or other similar event.
eLottery intends to build a sales and support organization to handle sales
and after-sales service to its lottery customers, and may enter into
distribution arrangements or other strategic relationships to enter additional
markets.
eLotteryFreeWay Website
A reward-entertainment lottery portal, eLotteryFreeWay.com offers lottery
and entertainment games (for no consideration) with registered players earning
"ePoints" that are redeemable for cash and merchandise. eLotteryFreeWay's
mission is to build an Internet community whose members are expected to be
highly predisposed to purchase governmental lottery tickets over the Internet.
Since the site launch on November 9th, 1999, the Company has continually rolled
out new content that delivers a very desirable level of customer retention
("stickiness"). Stickiness is very important in generating advertising revenue.
Advertising revenue potential on the eLotteryFreeWay is determined by the level
of stickiness multiplied by the number of unique visitors.
The site is not yet being ranked by traditional Internet rating services
such as Media Metrics or Nielsen Net Ratings because the eLotteryFreeWay has not
yet built a large enough customer base or traffic history. The Company expects
over the next several months to build a player base large enough to be ranked by
these
12
services. When that occurs management believes eLotteryFreeWay's stickiness,
currently measured by management at over 3 hours per month per unique visitor,
will rank among the stickiest sites on the Internet.
Patents, Trademarks, and Copyrights
Management believes that the success of eLottery will be affected by its
ability to design, develop and market new products and new or enhanced
applications. The patentability of such new products or applications is
evaluated and patent applications are filed where necessary to protect unique
developments. eLottery currently has 8 U.S. patent applications pending as well
as 2 foreign applications.
eLottery has registered or applied to register its trademarks when it
believes registration to be important to its ongoing business operations. In
addition, eLottery has registered and owns numerous Internet domain names that
it is using or may use in the future in its business. eLottery also generally
claims copyright protection for its software used in connection with its
products and relies upon trade secret, contract and copyright laws to protect
its proprietary rights in its software, designs and documentation.
Certain of the eLottery products incorporate technology and software
licensed by eLottery from independent third parties. Generally, these licenses
have required payment of a license fee for the licensed technology.
eLottery Competition
The lottery business is highly competitive, and eLottery faces competition
from a number of domestic and foreign instant ticket manufacturers, on-line
lottery system providers and other competitors.
In particular, there are currently three primary lottery services
competitors in the United States: GTECH Corporation ("GTECH"), Automated
Wagering International, Inc. ("AWI"), a subsidiary of Powerhouse Technologies,
Inc. ("Powerhouse"), and Scientific Games Holdings Corp. ("Sci-Games"). eLottery
believes that these companies engage in vigorous competition with respect to
existing lottery technologies and services and have experienced a decline in the
growth of existing lottery operations. The objective of eLottery is to provide,
either alone or through partnerships with existing lottery services companies,
Internet retail capabilities and value added lottery systems and services for
the domestic and international markets. It is believed that these products,
systems and services can support new methods and styles of lottery
participation, providing new growth opportunities for established state
lotteries and higher margin returns for the providers of related technologies
and services.
13
Internationally, there are many lottery services and product suppliers
that provide competition to eLottery, in addition to the companies listed above.
eLottery believes that it has the ability to provide technologies that support
new methods and styles of lottery participation in foreign countries. In
addition, eLottery believes that applications of its electronic lottery
distribution systems, which are based on the use of standardized components that
support a variety of hardware and software interfaces, can provide
cost-effective solutions to improve lottery operations in remote and developing
nations. eLottery anticipates that a considerable length of time will be needed
to develop an independent market presence in foreign countries other than Canada
and Mexico, and there will be substantially higher costs in pursuing these
markets. Therefore, eLottery anticipates that the marketing of its products and
services internationally will be conducted primarily through joint ventures with
existing providers of lottery services. No assurance can be given that eLottery
will develop such relationships to the point of having a significant impact on
its financial results or operations in the near future.
Both in the domestic market and internationally, factors that influence
the award of lottery contracts in addition to price are believed to include,
among others, the ability to optimize lottery revenues through game design and
technical capability, quality of the product, dependability, production
capacity, marketing experience, financial condition and reputation of the
bidder, the security and integrity of the bidder's production operations,
products and services and the satisfaction of various other requirements and
qualifications imposed by specific jurisdictions.
Competitors have typically either manufactured only instant tickets or
provided only certain on-line services to support conventional sales of paper
lottery tickets, including software for the management systems, marketing
assistance and various other specific duties. However, certain competitors have
announced plans to market Internet-based lottery systems and certain
jurisdictions have already undertaken Internet lottery ticket sales.
eLottery is a relatively recent arrival among the developers of
traditional technology and marketing concepts for lottery operators. In
addition, eLottery's limited experience in the industry is expected to
negatively impact eLottery's competitive position. However, in the delivery of
market tested, secure, integrated telephone, Internet and Intranet technologies
that support new forms of lottery participation and methods of administration,
eLottery believes that its experience level is superior. As the only market
tested provider of products that have the unique capabilities of the electronic
lottery distribution systems, eLottery believes it is the only experienced
provider in its particular market niche. eLottery believes that other lottery
services and product suppliers have for several years made capital investments
intended to position themselves to participate in this market niche. However,
none has yet demonstrated the unique focus or devoted the extensive time and
resources necessary to successfully develop, customize and install an
operational integrated telephone and Internet lottery system similar
14
to that provided by and operated by eLottery for the U.S. Lottery. In addition,
to some extent, the technological developments inherent in eLottery's electronic
lottery distribution systems have the potential to materially reduce the capital
investment required to finance secure lottery operations, which could affect the
perception that the experience and resources of competing companies are as
valuable as they have been in the past. eLottery believes that prior lottery
experience has been a factor in states' prior decisions in connection with the
award of lottery contracts. Thus, eLottery believes its prior lottery experience
will be a factor that limits the ability of eLottery's competitors to compete
with eLottery in the development of this market niche.
eLottery Government Regulation and Legislation
Lotteries are not permitted in various states or jurisdictions of the
United States unless expressly authorized by law. The ongoing operations of
authorized lotteries in the United States typically are extensively regulated.
Applicable legislation varies from jurisdiction to jurisdiction but, in addition
to authorizing the lottery and creating the applicable regulatory authority, the
lottery statutes generally dictate certain broad parameters of lottery
operation, including the percentage of lottery revenues that must be paid out in
prizes. Lottery authorities typically exercise significant control as to the
selection of vendors and award of lottery contracts, ticket prices, types of
games played and marketing strategy, all of which can affect eLottery's
operating results.
Prior to and after granting a lottery contract, governmental authorities
generally conduct an investigation of the company and its employees pursuant to
which such authorities may require removal of an employee deemed to be
unsuitable. Certain states also require extensive personal and financial
disclosure (including, among other things, submission of fingerprints, personal
financial statements and federal and state income tax returns) and background
checks of control persons and entities beneficially owning a specified
percentage (typically 5% or more) of the company's securities. The failure of
such beneficial owners to submit to such background checks and provide such
disclosure could jeopardize the award of a lottery contract to eLottery or
provide the basis for cancellation of any existing lottery contract.
The award of lottery contracts and ongoing operations of lotteries in
international jurisdictions also are extensively regulated, although this
regulation usually varies from that prevailing in the United States.
Restrictions are frequently imposed on foreign corporations seeking to do
business in such jurisdictions. Laws and regulations applicable to lotteries in
the United States and foreign jurisdictions are subject to change and the effect
of such changes on eLottery's ongoing and potential operations cannot be
predicted with certainty.
Currently, there are two bills pending in Congress that may affect
Internet lotteries: Senate Bill S. 692 ES, also known as the Kyl Bill, and H.R.
3125, or the Goodlatte/McCollum Bill. If passed, the Kyl Bill may limit the
purchase of lottery tickets via an electronic network to terminals in places
open to the general public, which would prohibit the purchase of lottery tickets
from a home computer. This prohibition could have a material
15
adverse effect on our ability to carry out our current business plan. The
Goodlatte/McCollum Bill in its current form would permit purchases from a home
computer over either a "closed loop" intrastate computer lottery network or the
Internet so long as the purchaser "receives from the State lottery a user name
and password specific to the individual player for use in betting and wagering
in the State lottery or multi-State lottery." The Goodlatte/McCollum Bill also
would allow purchases of lottery tickets from terminals in places open to the
general public. In their current forms, which are subject to amendment, neither
bill, if passed, would otherwise materially limit the sale of state lottery
tickets offered exclusively to state residents, as envisioned by our business
plan.
The Kyl Bill was referred to the Senate Judiciary Committee on January 27,
2000 and then to the Subcommittee on Crime on February 3, 2000. The Bill awaits
action by the full Senate. The Goodlatte/McCollum Bill was referred to the
Subcommittee on Crime and hearings were held on March 9, 2000. It is uncertain
whether the Kyl Bill, the Goodlatte/McCollum Bill or any bill dealing with
Internet lotteries will be passed by both houses of Congress and signed into
law. If legislation restricting our ability to carry out our business plan is
enacted into law, it could have a material adverse effect on the operations of
ELOT.
Employees
As of March 1, 2000, eLottery employed approximately 20 persons,
including general and administrative management and operational employees,
none of whom are represented by unions. eLottery conducts its product
development activities primarily through the use of independent software
development contracts to improve its access to software development talent
and keep its fixed overhead to a minimum.
EXECUTONE HEALTHCARE COMMUNICATIONS
Executone Healthcare Communication Products
The Executone Healthcare Communications division of ELOT develops,
manufactures, markets and services a line of specialized internal communications
and information systems that are used primarily in the acute care segment of the
healthcare industry. These internal communications systems are
microprocessor-based patient-to-staff and staff-to-staff communication systems,
locator systems, intercoms, paging and sound equipment, and room status
indicators. ELOT is negotiating the sale of the Healthcare Communications
business and it is presented as a discontinued operation of ELOT in the 1999
financial statements.
16
The INFOSTAR/HCP Healthcare Communications Platform is a communications
solution dedicated to a single platform for complete healthcare systems
integration. The HCP platform is the building block allowing for shared
resources resulting in cost efficiencies. It provides a single, digital
communication fabric to facilitate patient-staff and staff-staff communication
throughout a facility. The HCP provides the ability to offer "seamless"
communication among hospital employees, departments and facilities in "real
time", thereby improving operational efficiency throughout a facility. In
addition, the HCP improves efficiency through the integration of Executone
Healthcare's full product line, including LIFESAVER, CARECOM II-E, INFOSTAR/ILS,
TELESEARCH and INFOSTAR/STATLINK.
The CARE/COM II-E nurse call system brings the benefits of a totally
integrated digital communications system to the healthcare market on the
Company's IDS digital platform. The CARE/COM II-E system provides two-way
patient-to-staff and staff-to-staff voice communication on an automatic
three-level call priority basis. Its two-way voice and tone signaling
capability, emergency signaling and sophisticated features facilitate easy
handling of all calls. A five-line LCD display Nurse Control Station allows
simple call processing and system operation. The system is highly flexible to
meet the individually defined needs of today's hospitals and long-term care
facilities.
The Company's LIFESAVER nurse call system is a fully software-driven,
digital nurse call system. The LIFESAVER system is a state-of-the-art
communications network that provides routine and emergency signaling, voice
communications and data transmission. The nurse control station offers
menu-driven functions and step-by-step user prompts. The system is highly
flexible, offering many programmable features that allow customization of its
operations to the hospital's needs. With the capability to answer calls right
from the patient's bedside, this system can dramatically increase the efficiency
of the nursing staff, reduce clerical activity and improve the quality of care
delivered to the patient.0
The INFOSTAR/STATLINK product is designed to provide call management and
integration of EXECUTONE nurse call systems to wireless telephones, pager
devices and extension numbers. INFOSTAR/ STATLINK has the flexibility to modify
patient call flow based on the specific requirements of the healthcare facility.
Calls can be routed on a 4-level priority basis to any extension, telephone or
site pager configured in the database. The system is a communications solution
that can be integrated with any PBX. Patient priorities and requests can be
managed more efficiently and calls can be completed on a more timely basis with
less strain on the staff and patients.
INFOSTAR/ILS Locator Systems. The INFOSTAR/ILS locator system is an
infrared based wireless
17
locating system that allows users to find staff, patients and equipment quickly
and easily via LAN-based PC's, display telephones within the facility, EXECUTONE
nurse communication systems, or any other touch tone telephone inside or outside
the healthcare facility. The ILS is an integrated system using infrared
transmitter badges to communicate location data to sensors installed throughout
a facility. Each person or piece of equipment wears an individually coded badge
that transmits infrared signals to sensors placed throughout the facility. The
badges transmit regularly at user-programmed intervals and can be worn by staff
personnel or attached to equipment. The location data is collected by the
sensors and forwarded to a central processing unit that organizes the data so it
can be accessed at one or more display stations. The display of staff and
equipment location information can be in the form of a list or in the form of a
map of the facility using icons. The display can be filtered to show only
particular staff members, groups of personnel, particular pieces of equipment or
groups of equipment. The system can be integrated with either telephone systems,
allowing the activation of features and display of information on the telephone
set, or EXECUTONE nurse call systems, allowing the activation of features and
display of information at the nurse control station and patient stations.
The INFOSTAR/EPS Events Processing System collects information from the
ILS locator system and generates "alarms" that signal personnel that a user
defined parameter has been exceeded. The system associates the data to logical,
workable and productive real time data for a customer's employees and assets.
Specific applications include: door monitoring, wandering patient alert, staff
presence indicators, badge button press (staff assist or emergency assist),
asset management and equipment tracking. The system is completely programmable,
allowing customers to determine which applications will best fit their needs.
NETWORK ILS, consisting of two software applications, Patient Suite and
LightBoard, is designed to provide hospital staff with real time information on
the location of groups of assets related to their area of responsibility.
Patient Suite monitors the mobility and status of patients throughout a
healthcare facility. Patient Suite consists of three separate applications:
Patient Track, Patient View, and Patient Report. Specifically designed for
ambulatory and outpatient care facilities, Patient Suite allows the
administrator to schedule, monitor, manage wait time, discharge, and create
reports on each patient within the facility. The LightBoard application presents
a real time display of assets located at a designated set of locations
throughout a facility. Asset groups such as nurses, aides, doctors, patients,
and equipment, can be observed at a glance. Detailed information is provided and
reported in real-time, as these assets or people move from one area to another.
Three types of reports, as well as the ability to print a list of people or
assets at any particular location, are also included.
The INFOSTAR/INFOSTAT product is a software package intended for use in
emergency departments
18
to provide complete communication of real time events and data. Used as a daily
operational tool, the INFOSTAT system provides emergency staff with priority
data and conditions affecting the department. INFOSTAT means the end of the
archaic "grease board". Using color codes, the system shows which patients have
been "waiting too long" or "who is next". INFOSTAT provides the speed,
flexibility and efficiency that only a computerized system can provide. At a
glance, staff can check the status of treatment rooms, room and bed assignments,
hospital staff assignment and location, and patient status and location.
INFOSTAT can be configured to meet the unique needs of each hospital and
integrates with a facility's existing administrative software such as ADT
systems.
The REPORTSTAR system is a management reporting package designed to
provide healthcare managers with information generated from data collected by
the HCP Healthcare Platform, LIFESAVER, CARE/COM II-E and INFOSTAR/ILS locator
systems. REPORTSTAR is an Oracle(R)-based program which provides users with 6
different reports that can be viewed on screen, printed as needed or scheduled
to run on any predetermined schedule. Users can select the details of the
desired report from a simple screen designed with a user-friendly graphical user
interface to make it easy for staff to access. Reports are useful for measuring
activity, quality, efficiency and for supporting a facility's risk management
efforts.
Healthcare Sales and Marketing and Competition
The Company's healthcare communications distribution network consists of
(1) domestic independent distributors with approximately 70 locations operating
under exclusive and nonexclusive agreements throughout the United States; (2)
approximately 120 direct healthcare sales and service employees in the United
States; (3) 22 independent distributors operating in 18 foreign countries; and
(4) two National Accounts managers who work with national purchasing groups and
healthcare systems to improve penetration into additional facilities..
Distributors of the Company's healthcare communications products are
required to meet established criteria for sales and service to customers on an
ongoing basis.
No customer of the healthcare business accounts for 10% or more of its
revenue.
Healthcare backlog consists primarily of products that have been ordered
and that will be shipped or installed within 180 days of the order or systems
the installation of which is not yet required by the customer. Healthcare order
backlog as of December 31, 1999, was $12.8 million, compared to $18.5 million at
December 31, 1998, and Executone Healthcare Communications expects virtually all
of such healthcare backlog to be filled,
19
within the current fiscal year.
Executone Healthcare Communications' principal competitors are Hill-Rom
Company, DuKane and Rauland-Borg. Executone Healthcare Communications believes
it has a strong competitive position in nurse call and locator products. The
division competes by offering innovative integrated healthcare communications
products and services to its customers. Healthcare Communications also competes
on the basis of the quality of its products, its customer service, nationwide
distribution and installation, and price.
Healthcare Product Development and Engineering
As of December 31, 1999, Executone Healthcare Communications employed
approximately ten individuals in healthcare product design and development.
During 1999, the division's healthcare engineering efforts focused on
applications-oriented software products.
Healthcare Manufacturing and Warranty
The majority of Executone Healthcare systems are produced in the United
States at ELOT's former facility in Poway, California pursuant to a
manufacturing contract with Inter-Tel which has been assigned to Varian
Corporation, a contract manufacturer, or at domestic subcontractors. The
functions of repair, and certain warehousing and distribution functions for
Executone Healthcare products are also performed at the Company's facility in
Poway pursuant to a warehousing and distribution agreement with Inter-Tel.
Executone Healthcare warrants parts and labor on its systems, typically for one
year, and provides maintenance and service after warranty expiration either on a
contract or time and materials basis.
Healthcare Trademarks, Patents and Copyrights
Management believes that the continued success of Executone Healthcare is
dependent upon the ability to design, develop and market new products and new or
enhanced applications. The patentability of such new products or applications is
evaluated and patent applications are filed where necessary to protect unique
developments. Executone Healthcare currently holds 20 utility patents, expiring
at various times between 2010 and 2019, has 9 U.S. patent applications
pending, and 17 patent applications pending in foreign countries.
Executone Healthcare has registered or applied to register its trademarks
when it believes registration to be important to its ongoing business
operations, generally claims copyright protection for software, circuit
20
designs, schematics and technical documentation used in connection with its
products, and relies upon trade secret, contract and copyright laws to protect
its proprietary rights in its software, designs and documentation.
Certain of the Executone Healthcare products incorporate technology and
software licensed from independent third parties. Generally, these licenses
require payment of a royalty for each system sold that incorporates the licensed
technology or require that the Company purchase the product from the licensor.
Government Regulation of Healthcare Business
Some of the Executone Healthcare systems are designed to be connected to
the public telecommunications network and as such are required to comply with
certain rules of the FCC pertaining to telecommunications equipment. The Company
has not experienced any material adverse effect on its business or operations as
a result of such regulation and compliance.
To the extent the Company markets its healthcare products internationally,
it is required to comply with applicable foreign law, including certification of
its products by appropriate government regulatory organizations.
Healthcare Employees
As of March 1, 2000, Executone Healthcare employed approximately 200
persons. Less than 1% of the employees of Executone Healthcare are represented
by unions, all of which employees are represented by the International
Brotherhood of Electrical Workers. Management believes that the Company's
relations with its employees are good.
21
ITEM 2. PROPERTIES
eLOT's principal offices are located in a leased facility in Norwalk,
Connecticut. Total square footage is approximately 2,750 square feet. The
current annual net rent for the Company's leased and subleased facilities as of
December 31, 1999 is approximately $75,000. .
In March, 2000, the Company leased an additional 7,500 square feet in
Norwalk at an additional annual rental of approximately $167,000. The Company
believes its facilities are adequate and generally suitable for its business
requirements at the present time and for the immediate future.
The Executone Healthcare Communications business subleases a portion
(approximately 28,000 sq ft) of the former Executone headquarters in Milford,
Connecticut from Inter-Tel, which assumed the Milford lease in connection with
its purchase of the computer telephony business. As of December 31, 1999,
Executone Healthcare Communications leased various other office and warehouse
space throughout the United States with an aggregate of approximately 34,000
square feet for its ongoing operations.
ITEM 3. LEGAL PROCEEDINGS
The Company currently is a named defendant in a number of lawsuits and
is a party to a number of proceedings that have arisen in the normal course
of its business. Those lawsuits and proceedings relate primarily to the
collection of indebtedness owed to the Company, the performance of products sold
by the Company, and various contract disputes. In the opinion of the Company,
these proceedings are not expected to have a material adverse effect on the
consolidated financial position, results of operations or liquidity of the
Company and, to the extent they are not covered by insurance, reserves adequate
to satisfy such liabilities have been established.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant's Annual Meeting of Shareholders was held on December 14,
1999.
Proxies were solicited by the Registrant's management pursuant to
Regulation 14 under the Securities Act of 1934; there was no solicitation in
opposition to management's nominees or any proposals listed in the Proxy
Statement dated November 17, 1999, and all such nominees were elected pursuant
to the vote of the shareholders.
22
The asset purchase agreement pursuant to which ELOT sold the computer
telephony business to Inter-Tel, described under "Proposal 1"in the Proxy
Statement dated November 17, 1999, which section is incorporated herein by
reference, was approved by a vote of the majority of the Company's outstanding
Common Stock as follows:
For: 32,654,710
Against: 172,412
Abstain: 83,804
The amendment of the company's Articles of Incorporation to change the
name of the company described under "Proposal 2"in the Proxy Statement dated
November 17, 1999, which section is incorporated herein by reference, was
approved by a vote of the majority of the Company's outstanding Common Stock as
follows:
For: 34,109,849
Against: 128,131
Abstain: 66,114
The amendment of the company's Articles of Incorporation to increase the
authorized common stock described under "Proposal 3"in the Proxy Statement dated
November 17, 1999, which section is incorporated herein by reference, was
approved by a vote of the majority of the Company's outstanding Common Stock as
follows:
For: 30,648,315
Against: 3,560,928
Abstain: 94,851
The adoption of the Company's 1999 Stock Incentive Plan described under
"Proposal 5" in the Proxy Statement dated November 17, 1999, which section is
incorporated herein by reference, was approved by a vote of the majority of the
Company's outstanding Common Stock as follows:
For: 17,773,727
Against: 14,812,007
Abstain: 325,192
The total number of shares of the Company's Common Stock, $.01 par value,
outstanding as of November 16, 1999, the record date for the Annual Meeting, was
63,004,953, and 59,418,228 shares were represented in person or by proxy at the
Annual Meeting.
23
EXECUTIVE OFFICERS
The executive officers of ELOT are as follows:
Name Age Position With Company
- ---- --- ---------------------
Stanley J. Kabala 56 Chairman of the Board, President
and Chief Executive Officer
Edward W. Stone, Jr. 46 Senior Vice President
and Chief Financial Officer
Michael W. Yacenda 48 Executive Vice President and
President, eLottery, Inc.
Robert C. Daum 47 Executive Vice President,
Development and Finance
Barbara C. Anderson 48 Senior Vice President, Law and
Administration and Secretary
Stanley J. Kabala was elected Chairman of the Board, President and Chief
Executive Officer of ELOT in June 1998. Prior to that, he was President and
Chief Executive Officer of Rogers Cantel Mobile Communications, the largest
wireless telephone company in Canada, and Chief Operating Officer of its parent
Rogers Communications, Inc., from 1996 to 1997. During 1995, Mr. Kabala was
President and Chief Executive Officer of Unitel Communications, Inc., Canada's
largest alternative long distance provider. From 1968 through 1994, Mr. Kabala
held various positions at AT&T Corporation, most recently Vice
President--Customer Service for the Business Communications Services Division
and Vice President--AT&T 800 and Business Applications Services.
Edward W. (Ted) Stone, Jr. has served as Senior Vice President and Chief
Financial Officer of ELOT since October 1998. Prior to that time, he served as
Vice President, Finance for the Thomson Corporation Publishing International
group of The Thomson Corporation, a leading publisher of specialized
information, from 1995 to 1998. From 1993 to 1995, Mr. Stone was Vice President
and Chief Financial Officer of Krueger International, Inc., a leading
manufacturer of institutional and commercial furniture. From 1988 to 1993, he
was Controller and then Vice President, Finance for the Searle Pharmaceuticals
subsidiary of The Monsanto Company and General Manager of Searle's Animal Health
division. Earlier in his career, Mr. Stone was Chief Financial Officer for two
entrepreneurial specialty chemical companies and a Division Controller for
Pfizer, Inc. Mr. Stone holds an A. B. degree in Engineering Sciences from
Dartmouth College and an MBA from the Amos Tuck School of Business
Administration at Dartmouth.
Michael W. Yacenda has served as Executive Vice President of ELOT since
January 1990, and as President of eLottery and UniStar Entertainment since 1996.
Prior to that time, he was Vice President, Finance and Chief Financial Officer
of the Company from July 1988 to January 1990. He served as a Vice President of
ISOETEC from 1983 to 1988. From 1974 to 1983, Mr. Yacenda was employed by Arthur
Andersen & Co., a public accounting firm. Mr. Yacenda is a certified public
accountant.
Robert C. Daum has been Executive Vice President, Development and
Finance, since February 2000. From 1978 to 1999, Mr. Daum was employed
in the investment banking industry, focussed on corporate finance, mergers and
acquisitions and capital markets. Between 1994 and 1999 he was a Managing
Director with Warburg Dillon Read and a predecessor, UBS Securities. Prior
to 1994, Mr. Daum was employed by Prudential Securities, Merrill Lynch & Co.,
and Dillon Read and Co., Inc. He holds a B.A. from Colgate University and
an M.B.A. from Harvard University.
Barbara C. Anderson has been Senior Vice President, L:aw and
Administration, and Secretary of ELOT since January 1, 2000, and was Vice
President, Law and Administration and Secretary since October 1998. Prior
24
to that time, she was Vice President, General Counsel and Secretary since 1990.
From 1985 to 1989, she was Corporate Counsel of United States Surgical
Corporation, a manufacturer of medical devices.
25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The number of holders of record of the Company's Common Stock as of the close of
business on February 29, 2000 was approximately 1,600. The Common Stock is
traded on the NASDAQ National Market System under the symbol "ELOT". As reported
by NASDAQ on February 29, 2000, the closing sale price of the Common Stock on
the NASDAQ National Market System was $6.00 per share. The following table
reflects in dollars the high and low closing sale prices for ELOT's Common
Stock as reported by the NASDAQ National Market System for the periods
indicated:
Fiscal Period High Low
------------- ---- ---
1999
First Quarter $4 1/8 $1 17/32
Second Quarter 12 3
Third Quarter 5 15/32 2 15/16
Fourth Quarter 6 28/32 2 3/16
1998
First Quarter $2 19/32 $2 1/8
Second Quarter 2 5/8 1 23/32
Third Quarter 2 1/32 1 2/32
Fourth Quarter 2 3/32 11/16
It is the present policy of the Board of Directors to retain earnings for use in
the business and the Company has not paid any dividends and does not anticipate
paying any cash dividends on the Common Stock in the foreseeable future.
26
ITEM 6. SELECTED FINANCIAL DATA
The following is selected financial data for eLOT for the five years ended
December 31, 1999.
(In thousands, except for per share amounts)
Years Ended December 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------------
Revenues $ 12 $ -- $ -- $ -- $ --
========= ========= ========= ========= =========
Loss Before
Income Taxes From
Continuing Operations $ (12,022) $ (25,617) $ (3,163) $ (3,405) $ (4,739)
========= ========= ========= ========= =========
Loss From
Continuing Operations $ (12,022) $ (25,617) $ (3,163) $ (3,405) $ (4,739)
Income (Loss) From Discontinued
Operations, Net of Taxes (1) (14,906) (11,242) 2,942 27,567 (32,195)
Extraordinary Item - Loss on
Extinguishment of Debt,
Net of Taxes (2) -- -- -- (355) --
--------- --------- --------- --------- ---------
Net Income (Loss) $ (26,928) $ (36,859) $ (221) $ 23,807 $ (36,934)
========= ========= ========= ========= =========
BASIC EARNINGS (LOSS) PER SHARE:
Continuing Operations $ (0.21) $ (0.51) $ (0.06) $ (0.06) $ (0.10)
Discontinued Operations (0.25) (0.23) 0.06 0.53 (0.69)
Extraordinary Item -- -- -- (0.01) --
--------- --------- --------- --------- ---------
Net Income (Loss) $ (0.46) $ (0.74) $ -- $ 0.46 $ (0.79)
========= ========= ========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing Operations $ (0.21) $ (0.51) $ (0.06) $ (0.07) $ (0.10)
Discontinued Operations (0.25) (0.23) 0.06 0.53 (0.69)
Extraordinary Item -- -- -- (0.01) --
--------- --------- --------- --------- ---------
Net Income (Loss) $ (0.46) $ (0.74) $ -- $ 0.45 $ (0.79)
========= ========= ========= ========= =========
Total Assets $ 62,162 $ 72,136 $ 98,728 $ 106,090 $ 98,148
========= ========= ========= ========= =========
Long-Term Debt $ 13,660 $ 22,986 $ 13,821 $ 13,401 $ 29,829
========= ========= ========= ========= =========
Cash Dividends Declared
Per Share (3) $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= =========
(1) Discontinued operations are presented for the Computer Telephony and
Healthcare businesses, along with the Company's investment in Dialogic
Communications Corporation and certain Corporate expenses.
(2) The 1996 extraordinary item relates to the write-off of deferred debt
issue costs associated with the Company's revolving credit facility repaid
in June 1996.
(3) The Company has not declared or paid any cash dividends on its Common
Stock. Refer to "Stock Data."
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis explains trends in the Company's financial
condition as of December 31, 1999 and 1998 and results of operations for each of
the most recent three years in the period ended December 31, 1999. It is
intended to help shareholders and other readers understand the dynamics of the
Company's business and the key factors underlying its financial results. This
discussion should be read in conjunction with the consolidated financial
statements and notes included elsewhere in this Form 10-K, and with the
Company's audited consolidated financial statements and notes thereto for the
year ended December 31, 1999. Management believes that certain statements in
this discussion and analysis constitute forward-looking statements within the
meaning of the U.S. Private Securities Litigation Reform Act of 1995. Such
statements are based on current expectations, estimates and projections about
the industries in which the Company operates, management's beliefs and
assumptions made by management. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such risks,
uncertainties and assumptions include, among others, the following: general
economic and business conditions; demographic changes; rapid technology
development and changes; timing of product introductions; the mix of
products/services; industry capacity and other industry trends; and the ability
of the Company to attract and retain key employees.
OVERVIEW
eLOT, Inc., (formerly Executone Information Systems, Inc.) through its
subsidiary eLottery, Inc., is committed to leading the governmental lottery
industry into the e-commerce market. The Company has developed, installed and
operated systems that have processed ten million e-commerce lottery ticket sales
and transactions. The Company has operated Internet, Intranet, telephone,
communications, accounting, banking, database and other applications and
services that can facilitate the electronic sale of new and existing lottery
products worldwide. The Company has also developed transitional e-commerce
solutions for governmental lotteries, which leverage the power of the Internet.
eLottery also operates a reward-entertainment lottery portal, eLotteryFreeWay,
which offers lottery and entertainment games (for no consideration) with
registered players earning "e-points" that are redeemable for cash and
merchandise. eLotteryFreeWay's mission is to build an Internet community whose
members are expected to be highly predisposed to purchase governmental lottery
tickets over the Internet.
Discontinued Operations
In March 1999, eLOT announced its intention to divest its computer telephony and
healthcare communications divisions in order to focus on the electronic lottery
business conducted by eLottery. eLOT engaged an investment banker to assist the
Company in selling these businesses and in October, 1999 announced the signing
of an asset purchase agreement with Inter-Tel to sell the computer telephony
business for $44.3 million in cash. This transaction closed on January 1, 2000.
The Company continues to execute its business plan to develop the healthcare
communications business while, at the same time, pursuing its sale. The Company
also continues to pursue the sale of its investment in DCC. As a result of the
Company finalizing the plan of disposal for these businesses and investment, the
businesses and investment have been reflected in accompanying consolidated
financial statements and discussion and analysis as discontinued operations.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
RESULTS OF OPERATIONS
REVENUES: During the fourth quarter, the Company's eLottery subsidiary began
generating advertising revenues through its lottery portal web site at
www.eLotteryFreeWay.com launched on November 9, 1999. Revenues were $12,000 for
the year ended December 31, 1999.
28
COST OF REVENUES: Cost of Revenues primarily represents "ePoints" earned by
registered players on the eLotteryFreeWay web site that can be redeemed for cash
or merchandise. Cost of Revenues were $176,000 for the year ended December 31,
1999. Cost of Revenues also includes the cost of editorial content and software.
SELLING, GENERAL & ADMINISTRATIVE: Selling, General & Administrative expenses
were $4.7 million for the year, up from $1.9 million for 1998. In addition to
Selling, General & Administrative expenses for our eLottery subsidiary, the
results also include eLOT corporate expenses. The increase in Selling, General &
Administrative expenses is attributable to the continued development of the
eLottery business plan including the launching of our eLotteryFreeWay portal web
site. All areas of Selling, General & Administrative expenses increased
including advertising and promotion, personnel costs, legal, and occupancy
costs.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense for the
year was approximately $1.1 million in both 1999 and 1998.
ASSET IMPAIRMENT: In response to the legal decision issued December 17, 1998 in
AT&T vs. Coeur d'Alene Tribe, eLottery and the CDA terminated operation of the
NIL and the US Lottery telephone and Internet operations managed by eLottery. As
a result, the Company reevaluated certain of its assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets." Based upon this review, management determined that both the intangibles
and the advances to the NIL had become impaired as of the date of this legal
decision. As of December 17, 1998, net intangibles and advances to NIL of $12.9
million and $11.2 million, respectively, were written down to zero, which
represented the estimated fair value of the assets, as no future cash flows will
be generated by the NIL. The Company also recorded an additional charge of $1.4
million for shutdown costs and the write-off of certain deferred startup
expenses related to the NIL. The total NIL-related write-off included in the
1998 statement of operations was $25.5 million.
In 1999, the Company performed an additional review of the realization of
certain computer software and hardware costs and determined that certain
additional assets were impaired due to changes in technology, which has resulted
in such assets no longer being used in the Company's operations. As a result,
the Company recorded an additional charge of $1.5 million in 1999.
NON-CASH COMPENSATION CHARGE: A non-cash stock compensation charge was recorded
during 1999 in the amount of $2.6 million related to the issuance of stock
options to certain key executives of eLottery who have been instrumental in
developing the current business model and are key to the future success of the
Company. The exercise price of these options was below the market price at the
date of grant.
INTEREST EXPENSE: Interest expense for 1999 was $3.3 million, an increase of
$0.9 million from 1998. The increase is due to higher levels of bank borrowings
in 1999.
OTHER INCOME, NET: Other income, net increased primarily due to a nonrecurring
$1.2 million gain on the receipt of payment from Claricom on a $5.9 million
junior subordinated note plus interest, along with the redemption of the
warrants held by the Company, both of which were part of the consideration
received in the 1996 sale of the direct sales organization.
GAIN ON LITIGATION SETTLEMENT: The Company recorded a nonrecurring gain in 1998
on a negotiated settlement with a former supplier of videoconferencing equipment
totaling $5.3 million. The gain was recorded in the fourth quarter of 1998.
DISCONTINUED OPERATIONS: Revenues from discontinued operations were $128.6
million in 1999 compared to $133.5 million in 1998. The loss from discontinued
operations was $14.9 million for 1999 versus $11.2 million for 1998. Both
revenues and the net losses for the Computer Telephony and Healthcare businesses
were negatively impacted by the uncertainty in their respective markets
associated with the pending change in ownership of these business units.
The loss from discontinued operations includes an estimated loss on disposal of
$5.0 million related to the healthcare business. The estimated loss included the
write-off of goodwill of $3.6 million and estimated costs of disposal of $1.4
million. The Company closed the sale of its Computer Telephony business on
January 1, 2000 for $44.3 million in cash. The Company expects to record an
aftertax gain in the range of $14 - $16 million on this sale in the first
quarter of 2000.
29
During 1998, the Company recorded $9.0 million in special charges related to the
discontinued businesses. These charges include $5.3 million relating to changes
the Company made to restructure its business, primarily involving separation
costs related to changes in senior management of these businesses and a
provision for losses to be incurred in subleasing a portion of the discontinued
businesses leased facilities.
Also included is a $3.7 million charge to settle claims made by Lucent
Technologies (Lucent), which holds the patent rights to certain intellectual
property allegedly used in the Computer telephony business.
OTHER MATTERS
The Company completed the review of its computer systems and the implementation
of new systems during 1999. As a result, the Company did not experience any
significant adverse impact of the Year 2000 problem internally or from any of
its major suppliers or customers.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
RESULTS OF OPERATIONS
REVENUES: The Company had no Revenues or Cost of Revenues in 1998 or 1997. All
expenses related to the operation of the NIL were recorded as advances to the
NIL. See Asset Impairment discussion above.
SELLING, GENERAL & ADMINISTRATIVE: Selling, General & Administrative expenses
were $1.9 million for 1998, down from $2.3 million for 1997. Selling, General &
Administrative expenses only include eLOT corporate expenses for these periods
since all eLottery expenses were charged to the NIL under the terms of the NIL
Management Agreement.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense for 1998
was approximately $1.1 million. There was no depreciation and amortization
expense in 1997 as all costs were deferred as part of the NIL.
INTEREST EXPENSE: Interest expense for 1998 was $2.4 million, an increase of
$0.4 million from 1997. The increase is due to higher levels of bank borrowings
in 1998.
OTHER INCOME, NET: Other income, net decreased compared to the same periods in
1997 due to lower interest income on invested cash and lower royalty income.
DISCONTINUED OPERATIONS: Revenues from discontinued operations were $133.5
million in 1998 compared to $156.4 million in 1997. The loss from discontinued
operations was $11.2 million for 1998 versus a profit of $2.9 million in 1997.
The decline in revenue from 1997 to 1998 was due to changing the Company's past
practice of offering distributor-focused sales incentives at the end of each
quarter and lower healthcare sales attributable to discussions in the industry
of the healthcare business being put up for sale.
During 1998, the Company recorded $9.0 million in special charges related to the
discontinued businesses. These charges include $5.3 million relating to changes
the Company made to restructure its business, primarily involving separation
costs related to changes in senior management of these businesses and a
provision for losses to be incurred in subleasing a portion of the discontinued
businesses leased facilities. Also included is a $3.7 million charge to settle
claims made by Lucent, which holds the patent rights to certain intellectual
property allegedly used in the Computer telephony business.
LIQUIDITY AND CAPITAL RESOURCES
On August 14, 1998, the Company entered into a credit facility with Fleet
Capital Corporation. The credit facility provided a maximum overall credit line
of $30 million consisting of a revolving line of credit for direct borrowings,
along with standby and trade letters of credit. Direct borrowings and letter of
credit advances were made available pursuant to a formula based on the levels of
eligible accounts receivable and inventories. To minimize interest on the
revolving line of
30
credit, the Company had the option to borrow based upon an adjusted prime
borrowing rate or an adjusted LIBOR rate. The credit facility was secured by
substantially all of the Company's assets and had a five-year term. Upon the
sale of the Computer Telephony business on January 1, 2000, the outstanding
balance of $19.6 million under this credit facility was repaid and the facility
was terminated. After paying down this facility, the Company had approximately
$19 million in cash and cash equivalents, $4.4 million of which is restricted in
an escrow account. These funds will be released to the Company in July 2000 and
January 2001, subject to potential indemnity claims by Inter-Tel.
The Company expects that the net cash available from the sale of the Computer
Telephony business and the planned dispositions of the Healthcare business and
investment in DCC will provide sufficient cash and liquidity to finance the
investment in the eLottery business for an additional 18 to 24 months.
At December 31, 1999 and 1998, cash and cash equivalents amounted to $1.1
million and $1.5 million, respectively. Cash used by continuing operating
activities was $2.1 million in 1999, $3.4 million less than in 1998. Cash used
by discontinued operating activities in 1999 was $15.1 million versus $14.4
million in 1998.
Cash provided by investing activities was $6.5 million in 1999, primarily due to
the proceeds received from the Claricom notes of $9.3 million. This was
partially offset by the repayment of $2.2 million in employee stock loans to a
bank, which were guaranteed by the Company in accordance with the terms of the
Executive Stock Incentive Plan. Cash used by investing activities totaled $1.1
million for 1998. This included $5 million in cash proceeds as part of a
negotiated settlement with a former supplier of the Company's videoconferencing
equipment. This was offset by deferred expenses related the operation of the NIL
of $4.4 million (which was later written off as part of the asset impairment)
and capital expenditures of $1.6 million.
The Company generated $10.3 million in cash from financing activities during
1999. The primary source of cash was borrowings of $11.0 million, offset by
payments on capital lease obligations and repurchases of stock. During 1998, the
Company generated $8.0 million in its financing activities, primarily from
additional bank borrowings of $8.6 million.
Total debt at December 31, 1999 was $33.5 million, an increase of $10.0 million
from $23.5 million at December 31, 1998. The increase was a result of $11
million in bank borrowings from the Company's credit facility, and an increase
to the carrying value of the convertible subordinated debentures of $0.2 million
due to accretion. Debt was reduced by the repayment of $1.2 million in capital
lease obligations incurred in connection with equipment and software
acquisitions, along with other debt repayments. Total debt at December 31, 1999
included $19.6 million in revolving debt outstanding which was repaid on January
3, 2000 from the proceeds of the sale of the Computer Telephony business.
31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information presented in the "Notes to Financial Statements" included under
Item 8 is incorporated by reference.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
eLOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per share amounts)
Years Ended December 31,
1999 1998 1997
---- ---- ----
REVENUES $ 12 $ -- $ --
COST OF REVENUES 176 -- --
-------- -------- --------
Gross Profit (Loss) (164) -- --
-------- -------- --------
OPERATING EXPENSES:
Selling, general and administrative 4,745 1,946 2,331
Depreciation and Amortization 1,085 1,116 --
Asset Impairment 1,461 25,486 --
Non-Cash Compensation Charge 2,625 -- --
-------- -------- --------
9,916 28,548 2,331
OPERATING LOSS (10,080) (28,548) (2,331)
INTEREST EXPENSE (3,279) (2,393) (1,985)
GAIN ON LITIGATION SETTLEMENT -- 5,269 --
OTHER INCOME, NET 1,337 55 1,153
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (12,022) (25,617) (3,163)
INCOME TAXES -- -- --
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS (12,022) (25,617) (3,163)
Income (loss) from discontinued operations
(net of tax benefit of $0, $4,232 and $137 for
1999, 1998 and 1997, respectively) (14,906) (11,242) 2,942
-------- -------- --------
NET LOSS $(26,928) $(36,859) $ (221)
======== ======== ========
BASIC AND DILUTED LOSS PER SHARE:
LOSS FROM CONTINUING OPERATIONS $ (0.21) $ (0.51) $ (0.06)
DISCONTINUED OPERATIONS (0.25) (0.23) 0.06
-------- -------- --------
NET LOSS $ (0.46) $ (0.74) $ --
======== ======== ========
AVERAGE COMMON SHARES OUTSTANDING: 58,752 49,755 49,655
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
33
eLOT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share amounts) December 31, December 31,
1999 1998
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,060 $ 1,482
Accounts receivable 12 --
Prepaid expenses and other current assets 174 711
Net assets of discontinued operations 53,402 54,217
-------- --------
Total Current Assets 54,648 56,410
PROPERTY AND EQUIPMENT, net 2,480 4,210
OTHER ASSETS 5,034 11,516
-------- --------
$ 62,162 $ 72,136
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 19,818 $ 504
Accounts payable 5,342 1,148
Accrued payroll and related costs 772 593
Accrued liabilities 3,808 3,141
-------- --------
Total Current Liabilities 29,740 5,386
LONG-TERM DEBT 13,660 22,986
-------- --------
Total Liabilities 43,400 28,372
-------- --------
STOCKHOLDERS' EQUITY:
Common stock: $.01 par value; 80,000,000 shares
authorized; 63,010,953 and 49,834,807 issued and
outstanding 630 498
Preferred stock: $.01 par value -- 7,300
Additional paid-in capital 81,054 71,624
Accumulated other comprehensive loss (336) --
Accumulated deficit (62,586) (35,658)
-------- --------
Total Stockholders' Equity 18,762 43,764
-------- --------
$ 62,162 $ 72,136
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
34
eLOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Years Ended December 31,
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations $(12,022) $(25,617) $ (3,163)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation and amortization 1,085 1,116 --
Asset impairment and other related charges 1,461 25,486 --
Gain on litigation settlement -- (5,269) --
Stock compensation expense 2,625 -- --
Gain on Claricom notes/warrants (1,161) -- --
Other, net 371 118 252
Changes in working capital items:
Accounts receivable (12) -- --
Accounts payable and accruals 5,040 (398) (2,992)
Other working capital items, net 537 5,858 (475)
-------- -------- --------
NET CASH PROVIDED (USED) BY
CONTINUING OPERATING ACTIVITIES (2,076) 1,294 (6,378)
Cash flows used by discontinued operating activities (15,119) (14,427) (2,454)
-------- -------- --------
NET CASH USED BY OPERATING ACTIVITIES (17,195) (13,133) (8,832)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,048) (1,566) (3,165)
Dispositions of business -- 5,000 --
Deferred NIL expenses -- (4,377) (2,111)
Proceeds from Claricom note/warrants 9,261 -- --
Payment of ESIP bank loans (2,154) -- --
ESIP participants loan settlements 925 -- --
Other, net (493) (124) (789)
-------- -------- --------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 6,491 (1,067) (6,065)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility 11,035 8,582 --
Repayments of other long-term debt (192) (751) (444)
Repurchase of stock (1,338) (148) (4,896)
Proceeds from issuance of stock 777 272 268
-------- -------- --------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 10,282 7,955 (5,072)
-------- -------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (422) (6,245) (19,969)
CASH AND CASH EQUIVALENTS - BEGINNING
OF YEAR 1,482 7,727 27,696
-------- -------- --------
CASH AND CASH EQUIVALENTS - END
OF YEAR $ 1,060 $ 1,482 $ 7,727
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
35
eLOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Preferred Stock Additional Accum. Other Accum. Total
(In thousands, except for ------------ --------------- Paid-In Comprehensive Earnings Stockholders'
share amounts) Shares Amount Shares Amount Capital Loss (Deficit) Equity
------ ------ ------ ------ ------- ---- ------- ------
Balance at December 31, 1996 51,173,755 $512 350,000 $7,300 $76,113 $ -- $1,422 $85,347
Proceeds from issuances of stock
from employee stock plans 323,490 3 201 204
Warrants exercised for common
stock 50,000 1 60 61
Repurchase and cancellation of stock (1,886,886) (19) (4,874) (4,893)
Net loss (221) (221)
------------------------------------------------------------------------------------------
Balance at December 31, 1997 49,660,359 $497 350,000 $7,300 $71,500 -- $1,201 $80,498
------------------------------------------------------------------------------------------
Proceeds from issuances of stock
from employee stock plans 314,448 2 150 152
Amortization of deferred
compensation 121 121
Repurchase and cancellation of stock (140,000) (1) (147) (148)
Net loss (36,859) (36,859)
------------------------------------------------------------------------------------------
Balance at December 31, 1998 49,834,807 $498 350,000 $7,300 $71,624 -- $(35,658) $43,764
------------------------------------------------------------------------------------------
Proceeds from issuances of stock
from employee stock plans 296,151 3 3,480 3,483
Amortization of deferred
compensation 120 120
Repurchase and cancellation of stock (420,000) (4) (1,337) (1,341)
Conversion of preferred stock
to common stock 13,299,995 133 (350,000) (7,300) 7,167
Comprehensive loss
Net loss (26,928) (26,928)
Unrealized loss of equity security (336) (336)
------------------------------------------------------------------------------------------
Total comprehensive loss (27,264)
Balance at December 31, 1999 63,010,953 $630 -- $ -- $81,054 (336) $(62,586) $18,762
==========================================================================================
The accompanying notes are an integral part of these consolidated statements.
36
eLOT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - NATURE OF THE BUSINESS AND FORMATION OF THE COMPANY
eLOT, Inc. (the "Company" or "eLOT"), formerly known as Executone Information
Systems, Inc., is committed to leading the governmental lottery industry into
the e-commerce market. The Company has developed, installed and operated systems
that have processed ten million e-commerce lottery ticket sales and
transactions. It has operated Internet, Intranet, telephone, communications,
accounting, banking, database and other applications and services that can
facilitate the electronic sale of new and existing lottery products worldwide.
The Company has also developed transitional e-commerce solutions for
governmental lotteries, which leverage the power of the Internet, while
political, legal and social issues surrounding the sales of lottery tickets over
the Internet are simultaneously addressed.
A reward-entertainment lottery portal, eLotteryFreeWay offers lottery and
entertainment games (for no consideration) with registered players earning
ePoints that are redeemable for cash and merchandise credit. eLotteryFreeWay's
mission is to build an Internet community whose members are expected to be
highly predisposed to purchase governmental lottery tickets over the Internet.
On January 1, 2000, the Company changed its name from Executone Information
Systems, Inc. to eLOT, Inc. to recognize the change in the Company's core
business focus to the governmental lottery industry.
As discussed more thoroughly in Note C, the Company's Computer Telephony and
Healthcare communications businesses, along with certain other assets and
liabilities are presented as discontinued operations in the accompanying
consolidated financial statements.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries. In consolidating the
accompanying financial statements, all significant intercompany transactions
have been eliminated. Investments in affiliated companies owned more than 20%,
but not in excess of 50%, are recorded under the equity method.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition. In 1999, the Company generated its revenues through the
sale of advertising on its web site. Advertising revenue is recognized ratably
in the period in which the advertising is displayed.
Advertising Expense. The Company expenses advertising costs as incurred.
Advertising expense was $312,000, $0 and $0 for the years ended December 31,
1999, 1998, and 1997, respectively.
37
Earnings Per Share. Earnings per share is calculated in accordance with the
provisions of SFAS No. 128, "Earnings Per Share." Basic earnings per share is
based upon the weighted average number of shares of common stock outstanding
during the period. Diluted earnings per share is based upon the weighted average
number of shares of common stock outstanding plus the dilutive effect of stock
options and warrants outstanding during the period. Stock options and warrants,
the convertible preferred stock and the convertible debentures, which are
antidilutive, have been excluded from the computations.
Cash Equivalents. Cash equivalents include short-term investments with original
maturities of three months or less.
Property and Equipment, net. Property and equipment at December 31, 1999 and
1998 consist of the following:
(Amounts in thousands) 1999 1998
---------------------- ---- ----
Furniture and fixtures $ 40 $ 40
Leasehold improvements 115 --
Computer hardware and software 3,376 5,013
------- -------
3,531 5,053
Accumulated depreciation (1,051) (843)
------- -------
Property and equipment, net $ 2,480 $ 4,210
======= =======
Depreciation is provided on a straight-line basis over the estimated economic
useful lives of property and equipment which range from three to five years.
Amortization of leasehold improvements is provided over the lease term of five
years. Amortization of computer hardware and software is provided on a
straight-line basis over the estimated useful life of three years.
Income Taxes. The Company utilizes the liability method of accounting for income
taxes as set forth in SFAS No. 109, "Accounting for Income Taxes". Under the
liability method, deferred taxes are determined based on the difference between
the financial statement and tax bases of assets and liabilities using enacted
tax rates in effect in the years in which the differences are expected to
reverse.
Software and Web Site Development Costs. The Company accounts for these costs in
accordance with AICPA Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Accordingly, the
Company expenses costs incurred in the preliminary stage and, thereafter,
capitalizes costs incurred in the developing or obtaining of internal use
software and web site development. Such capitalized costs are included in
property and equipment and are amortized over a period of three years and are
subject to impairment evaluation in accordance with the provisions of SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets."
Fair Value of Financial Instruments. The fair value of the Company's Convertible
Subordinated Debentures at
38
December 31, 1999 is approximately $12.1 million, based upon market quotes. The
carrying value of all other financial instruments included in the accompanying
consolidated financial statements approximate fair value as of December 31, 1999
based upon current interest rates.
Noncash Investing and Financing Activities. The following noncash investing and
financing activities took place during the three years ended December 31, 1999:
(Amounts in thousands) 1999 1998 1997
---------------------- ---- ---- ----
Conversion of preferred stock to common stock $7,300 $ -- $ --
Common shares exchanged to exercise options
and warrants 24 230 507
Refer to the consolidated statements of cash flows for information on
cash-related operating, investing and financing activities.
Reclassifications. Certain reclassifications have been made to the prior year
amounts to conform to the current year presentation.
NOTE C - DISCONTINUED OPERATIONS
On March 29, 1999, the Company announced that it would divest its Telephony and
Healthcare businesses. By divesting the core Telephony and Healthcare
businesses, the Company plans to focus its resources on its Internet subsidiary,
eLottery, Inc. Accordingly, the Company pursued the sales of these businesses
during the remainder of 1999 while continuing to execute each division's
respective business development plans. During the fourth quarter of 1999, the
Company finalized the plan of disposal for these businesses, and accordingly,
started accounting for the businesses as discontinued operations.
On January 1, 2000, the Company completed the sale of its computer telephony
division to Inter-Tel, Incorporated for $44.3 million in cash plus the
assumption of certain liabilities. The $44.3 million in proceeds includes $4.4
million being held in escrow. These funds will be released to the Company in
July 2000 and January 2001, subject to potential indemnity claims by Inter-Tel.
A portion of the proceeds was used to repay all of the Company's outstanding
revolving debt ($19.6 million) in January 2000. The sales proceeds are subject
to adjustment to be determined in 2000. The Company expects to record an
aftertax gain from this transaction of between $14 million to $16 million in
the first quarter of 2000.
eLOT is also continuing to pursue the sale or other disposition of its
healthcare communications business and its investment in Dialogic Communications
Corporation (DCC), a private company, based in Franklin, Tennessee, that
develops and markets interactive call processing solutions for business,
industry and government. In the meantime, both businesses continue to execute
their respective plans for further business development. The Company expects to
complete the sales of these assets in 2000. The loss from discontinued
operations includes an estimated loss on disposal of $5.0 million related to the
Healthcare business.
39
Summarized financial information for the discontinued operations is as follows
(000):
For the years ended December 31, 1999 1998 1997
--------- --------- ---------
Revenues $ 128,591 $ 133,498 $ 156,396
Income (Loss) before Income Taxes (14,906) (15,474) 2,805
Income (Loss) from Discontinued
Operations, Net of Taxes (14,906) (11,242) 2,942
As of December 31, 1999 1998
--------- ---------
Current Assets $ 57,981 $ 54,539
Total Assets 92,706 92,386
Current Liabilities 36,784 35,017
Total Liabilities 39,304 38,169
Net Assets of Discontinued Operations 53,402 54,217
During 1995, the Company acquired 47% of the common stock and certain other
assets of Dialogic Communications Corporation (DCC), a vendor of certain
telephony products, in exchange for 353,118 shares of the Company's common stock
and $100,000 cash. In January 2000, the Company acquired an additional 254,686
shares of DCC in exchange for 254,686 eLOT shares from a entity controlled by a
director of the Company. The Company believes it now has a 51% interest in DCC.
The purpose of the acquisition of these shares was to maximize eLOT's investment
upon sale of its ownership in DCC.
NOTE D - DEBT
The Company's debt is summarized below at December 31, 1999 and 1998:
(Amounts in thousands) 1999 1998
- ---------------------- ---- ----
Borrowings Under Revolving Credit Facility (a) $19,617 $ 8,582
Convertible Subordinated Debentures (b) 12,995 12,822
Capital Lease Obligations (c) 320 433
Other 546 1,653
------- -------
Total Debt 33,478 23,490
Less: Current Portion of Long-Term Debt 19,818 504
------- -------
Total Long-Term Debt $13,660 $22,986
======= =======
(a) On August 14, 1998, the Company entered into a revolving credit facility
(the "Credit Facility") with Fleet Capital Corporation expiring in 2003.
The Credit Facility provided a maximum overall credit line of $30 million
consisting of a revolving line of credit for direct borrowings, along with
standby and trade letters of credit. Direct borrowings and letter of
credit advances were made available pursuant to a formula based on the
levels of eligible accounts receivable and inventories. The Credit
Facility was fully repaid on January 3, 2000 and is no longer available to
the Company. The average interest rate for the years ended December 31,
1999 and 1998 was 9.3% and 9.4%, respectively.
40
(b) The Company's Convertible Subordinated Debentures (the "Debentures"),
issued in April 1986, are due March 15, 2011 and bear interest at 7 1/2%,
payable March 15th and September 15th. The face value of the outstanding
Debentures at December 31, 1999 was $16.3 million. The face value of the
Debentures was adjusted to fair value in connection with the Company's
1988 quasi-reorganization. The Debentures are convertible at the option of
the holder into Common Stock of the Company at any time on or before March
15, 2011, unless previously redeemed, at a conversion price of $10.625 per
share, subject to adjustment in certain events. Subject to certain
restrictions, the Debentures are redeemable in whole or in part, at the
option of the Company, at par. The Debentures are also subject to annual
sinking fund payments of $1.5 million. In January 1992, $15 million
principal amount of Debentures with a book value of $10.1 million was
exchanged for 674,865 shares of Convertible Preferred Stock and 2,999,400
Common Stock Purchase Warrants. Debentures reacquired by the Company in
the debt-for-equity exchange and in connection with Warrant exercises were
delivered in lieu of cash in satisfying sinking fund requirements. Thus,
no cash sinking fund payment will be due on the Debentures until March
2008.
(c) The Company has entered into capital lease arrangements primarily for
computer hardware and software with a net book value of approximately $0.4
million at both December 31, 1999 and 1998. Such leases have been
capitalized using implicit interest rates which range from 8.4% to 9.5%.
The following is a schedule of future maturities of long-term debt at December
31, 1999:
Years Ending December 31: (Amounts in thousands)
------------------------- ----------------------
2000 $ 19,818
2001 332
2002 133
2003 86
2004 89
Thereafter 13,020
-------
$33,478
=======
The entire outstanding balance under the credit facility of $19.6 million
at December 31, 1999 was repaid on January 3, 2000.
For the years ended December 31, 1999, 1998 and 1997, the Company made cash
payments of approximately $2.7 million, $1.7 million and $1.8 million,
respectively, for interest expense on indebtedness.
NOTE E - INCOME TAXES
eLOT continuing operations have only generated minimal current revenue and there
are no historical earnings to support the realization of any current or deferred
tax benefits. As a result, no current or deferred tax benefit has been recorded
on the Statements of Operations for income taxes applicable to the net losses.
eLOT does have certain deferred tax assets which represent future tax
deductions, but they can only be utilized if eLOT generates sufficient future
taxable income. As of December 31, 1999, a valuation allowance has been provided
for the entire deferred tax asset included in continuing operations and all but
$22.8 million of deferred tax assets reflected in discontinued operations. The
deferred tax asset reflected in discontinued operations is more likely than not
to be realized through the sale of these assets.
41
Deferred tax assets are determined based on the differences between the
financial reporting and tax bases of assets. The significant components of the
Company's deferred tax assets are as follows:
(Amounts in Thousands) 1999 1998
- ---------------------- ---- ----
Net operating loss carryforward $ 11,666 $ 7,792
Debenture revaluation (1,320) (1,411)
Start up costs 1,427 1,997
Property and equipment 226 (445)
Other timing items (1,043) (991)
-------- --------
Total deferred tax assets 10,956 6,942
Valuation allowance (10,956) (6,942)
-------- --------
Deferred tax assets, net $ -- $ --
======== ========
The differences between the benefit for income taxes at the US statutory rate
and the Company's effective rate are summarized as follows:
(Amounts in Thousands) 1999 1998 1997
- ---------------------- ---- ---- ----
Federal tax at statutory rate (34 %) $(4,087) $(8,710) $(1,075)
State income tax, net of federal tax benefit (589) (1,255) (155)
Tax benefit not recorded 3,616 5,148 1,230
Compensation charges 910 -- --
Write off of intangibles -- 4,780 --
Other, net 150 37 --
-----------------------------
$ -- $ -- $ --
=============================
The Company has available federal net operating loss carryforwards (NOLs),
subject to review by the Internal Revenue Service, totaling approximately $113
million at December 31, 1999 of which $83 million relates to discontinued
operations. These net operating losses expire in the years 2000 to 2018. The
Company also has available federal general business tax credit carryforwards of
$4.5 million which expire through 2018 and alternative minimum tax credit
carryforwards of approximately $900,000, which may be carried forward
indefinitely.
For the years ended December 31, 1999, 1998 and 1997, the Company made cash
payments of less than $0.1 million, $0.1 million and $0.4 million, respectively,
for income taxes.
42
NOTE F - EARNINGS PER SHARE
A reconciliation of the Company's earnings (loss) per share calculations from
continuing operations for the three years ended December 31, 1999 is as follows:
(In thousands, except for per
share amounts) Loss from Per Share
Continuing Ops Shares Amount
-------------- ------ ------
For the year ended December 31, 1999:
Basic and Diluted Loss Per Share $(12,022) 58,752 $(0.21)
======== ====== ======
For the year ended December 31, 1998:
Basic and Diluted Loss Per Share $(25,617) 49,755 $(0.51)
======== ====== ======
For the year ended December 31, 1997:
Basic and Diluted Loss Per Share $ (3,163) 49,655 $(0.06)
======== ====== ======
The Company's Convertible Subordinated Debentures (see Note D(b)) are
convertible into approximately 1.5 million shares of common stock as of December
31, 1999. The shares issuable upon conversion of the Debentures were not
included in the computation of diluted earnings per share because they would be
antidilutive for each of the periods presented. Options to purchase
approximately 1.8 million, 163,000 and 139,000 shares of common stock as of
December 31, 1999, 1998 and 1997, respectively, were not included in the
computation of diluted earnings per share due to the net losses for those years.
Options to purchase 1.0 million, 1.8 million and 1.2 million shares of common
stock as of December 31, 1999, 1998 and 1997, respectively, were not included in
the computation of diluted earnings per share because the exercise price was
greater than the average market price of the shares of common stock.
The convertible preferred stock issued in connection with the acquisition of
eLottery was antidilutive, at issuance, and has been excluded from the above
calculations. Effective April 13, 1999, the convertible preferred stock was
converted into common stock. (see Note M).
43
NOTE G - COMMITMENTS AND CONTINGENCIES
Operating Leases. The Company conducts its business operations in leased
premises under a noncancellable operating lease agreement entered into in March
1999 and expiring in March 2004. Rental expense under this operating lease
amounted to $0.2 million for the year ended December 31, 1999. Prior to March
1999, the Company's premises were part of the facilities leased for the Computer
Telephony and Healthcare businesses.
The following represents the future minimum rental payments due under this
noncancellable operating lease as of December 31, 1999:
Years Ending December 31, (Amounts in thousands)
------------------------- ----------------------
2000 $ 75
2001 78
2002 79
2003 82
2004 20
----
$334
====
Litigation: The Company currently is named as a defendant in a number of
lawsuits and is a party to a number of proceedings that have arisen in the
normal course of its business. Those lawsuits and proceedings relate primarily
to the collection of indebtedness owed to the Company and various contract
disputes. In the opinion of the Company, these proceedings are not expected to
have a material adverse effect on the consolidated financial position, results
of operations or liquidity of the Company.
NOTE H - OTHER ASSETS
Other assets consist of the following as of December 31, 1999 and 1998,
respectively:
(Amounts in thousands) 1999 1998
- --------------------- ---- ----
ESIP Receivable $2,983 $1,754
Notes/Warrants from Claricom -- 8,100
Investment in Virtgame (a) 364 700
Prepaid Executive Life Insurance and Other 1,687 962
------ -------
$5,034 $11,516
------ -------
(a) The investment in Virtgame has been written down to the market value of
this investment at December 31, 1999. Such amount is reflected in
Accumulated Other Comprehensive Loss in the accompanying consolidated
financial statements. The Company has also announced its intent to
purchase the remaining outstanding shares of Virtgame (see Note Q).
44
NOTE I - STOCK OPTIONS AND WARRANTS
The Company has established stock option plans under which it is authorized to
grant both incentive stock options and non-qualified stock options to officers
and other key employees. Options are generally granted at a price not less than
the fair market value on the date of the grant and become exercisable over a
four-year period and expire after five to ten years. In December 1999, options
to purchase 1.0 million shares of common stock were issued at a price less than
market value at the date of grant. Accordingly, the Company recorded $2.6
million in compensation expense. Shares available for granting of future options
under these plans amounted to 10.9 million as of December 31, 1999.
The Company also had non-plan options outstanding at December 31, 1999, all of
which were exercisable. These options expire at various dates through March
2001.
A summary of the status of the Company's stock option plans, as well as non-plan
options, as of December 31, 1999, 1998 and 1997 is as follows:
1999 1998 1997
-------------------------- -------------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------------------- -------------------------- -----------------------
Outstanding 1/1 2,255,199 $2.42 1,510,899 $2.89 1,972,485 $2.54
Granted 2,314,900 $2.63 1,407,400 $1.90 251,400 $2.32
Exercised (200,512) $2.66 (138,550) $2.01 (481,786) $1.23
Cancelled (138,612) $3.67 (524,550) $2.51 (231,200) $2.71
-------- -------- --------
Outstanding 12/31 4,230,975 $2.44 2,255,199 $2.42 1,510,899 $2.89
========= ========= =========
Options exercisable
12/31 3,260,975 $2.48 994,025 $3.06 1,017,134 $3.04
========= ======= =========
45
Information relative to options outstanding at December 31, 1999 is as follows:
Options Outstanding Options Exercisable
---------------------------------------------- ---------------------------
Weighted Weighted Weighted
Shares Average Average Shares Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices 12/31/99 Life (yrs) Price 12/31/99 Price
- --------------- ---------------------------------------------------------------------------------
$1.13 - $ 2.00 1,909,600 7.0 $1.39 1,329,600 $1.45
$2.03 - $ 3.00 576,875 2.6 $2.37 576,375 $2.37
$3.10 - $ 3.25 636,900 1.4 $3.13 636,900 $3.13
$3.87 - $ 6.38 1,107,600 5.0 $3.89 718,100 $3.88
--------- ---------
$1.13 - $ 6.38 4,230,975 5.0 $2.44 3,260,975 $2.48
========= =========
The fair value of options granted during 1999, 1998 and 1997 was $3.80, $1.23
and $1.24 per share, respectively. Fair value was estimated using the
Black-Scholes option-pricing model with the following assumptions: expected
volatility ranging from 85% to 150%, a risk-free interest rate ranging from 6.0%
to 6.6%, an expected option life of 5.0 years and no dividend yield. The Company
applies APB Opinion 25 in accounting for its plans. Other than the $2.6 million
recognized for 1.0 million options granted at below market value, no
compensation cost has been recognized for its stock option plans. If
compensation cost had been determined in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation," net income would have been reduced by
$2.6 million, $0.4 million and $0.2 million for 1999, 1998 and 1997,
respectively. The reduction in earnings per share would have been $0.04 in 1999
and immaterial in 1998 and 1997.
As of December 31, 1999, the Company has warrants outstanding that permit the
holders to purchase a total of 325,000 shares of Common Stock at prices ranging
from $1.25 to $5.31 per share, expiring through May 2004. At December 31, 1999,
250,000 of these warrants were exercisable. Warrants were exercised for 50,000
shares of Common Stock for the year ended December 31 1997 at an average price
of $1.21. No warrants were exercised during 1999 or 1998.
NOTE J - STOCK PURCHASE PLAN
A total of 2,750,000 shares of Common Stock are authorized for issuance under
the Company's employee stock purchase plan (the "Employee Plan"). The Employee
Plan permits eligible employees to purchase up to 1,000 shares of Common Stock
at the lower of 85% of the fair market value of the Common Stock at the
beginning or at the end of each six-month offering period. Pursuant to the
Employee Plan, 30,242, 39,866 and 63,904 shares of common stock were sold to
employees during the three years ended December 31, 1999, 1998 and 1997,
respectively. The weighted average fair value of these purchase rights for 1999,
1998 and 1997 was $1.46, $0.86 and $0.67 per share, respectively. Fair value was
estimated using the Black-Scholes option pricing model with the following
assumptions used for all three years: expected volatility ranging from 85% to
150%, risk-free interest rate of 6.6%, an expected term of six months and no
dividend yield.
46
The Company applies APB Opinion 25 in accounting for the Employee Plan and,
accordingly, no compensation cost has been recognized. If compensation cost had
been determined in accordance with SFAS No. 123, the impact on net income and
earnings per share would have been immaterial for 1999, 1998 and 1997.
In 1994, the Company's shareholders adopted the 1994 Executive Stock Incentive
Plan (the "Executive Plan"), which enabled officers and other key employees to
purchase a total of up to 3,000,000 shares of the Company's Common Stock. During
1995 and 1994, the Participants purchased 140,000 and 2,745,000 shares of Common
Stock, respectively, at fair market value, which were financed through
individual bank borrowings at market interest rates by each Participant from
Bank of America Illinois (the "Bank"), payable over five years. In December
1997, the Company agreed, subject to obtaining the agreement of the Bank, that
it would allow the loans to remain outstanding until December 2001. The Company
lends each Participant 85% of the interest due to the Bank and, beginning in
December 1997, the Company also loaned each participant the 15% of the interest
that would otherwise have been currently payable. In October 1999, the Company
repaid $2.2 million to the Bank, representing the entire outstanding principal
owed by the Plan participants. Such repayment was added to the balance
receivable from participants, which had previously consisted only of interest
paid by the Company on behalf of the participants. As of December 31, 1999 and
1998, the amount receivable from Plan participants was $3.0 million and $1.7
million, respectively. Shares acquired under the Executive Plan are held by the
Company as security under a loan and pledge agreement. Subsequent to
December 31, 1999, approximately $2.3 million of the amount receivable under
the Plan was repaid to the Company.
Based upon separation agreements with certain executives effective during 1998,
the Company agreed to repurchase 560,000 shares of Common Stock from
Participants in the Executive Plan, of which 140,000 shares were paid for in
1998 and 420,000 shares in 1999.
NOTE K - 401K SAVINGS
The Company has a 401(k) Savings Plan under which it matches employee
contributions at the discretion of the Company's Board of Directors. The
Company's matching contribution, consisting of shares of its Common Stock
purchased in the open market, is equal to 25% of each employee's contribution,
up to a maximum of $660 per employee. The expense for the matching contribution
for the years ended December 31, 1999, 1998 and 1997 was approximately $13,000,
$10,000 and $7,000, respectively.
NOTE L - OTHER INCOME, NET
Other Income, net consists of the following for the three years ended December
31, 1999:
(Amounts in thousands) 1999 1998 1997
---- ---- ----
Interest income $ 120 $ 157 $ 741
Gain on Claricom note/warrants 1,161 -- --
Other, net 56 (102) 412
------ ----- ------
$1,337 $ 55 $1,153
====== ===== ======
47
NOTE M - PREFERRED STOCK
The preferred stock consisted of 250,000 shares of Cumulative Convertible
Preferred Stock, Series A (Series A Preferred Stock) and 100,000 shares of
Cumulative Contingently Convertible Preferred Stock, Series B (Series B
Preferred Stock). The Series A Preferred Stock was to earn dividends equal to
18.5% of the consolidated retained earnings of eLottery as of the end of a
fiscal period, less any dividends paid to the holders of the Series A Preferred
Stock prior to such date. Each Series B Preferred Stock had voting rights equal
to one share of common stock and, as originally issued, was to earn dividends
equal to 31.5% of the consolidated retained earnings of eLottery as of the end
of a fiscal period, less any dividends paid to the holders of the Series B
Preferred Stock prior to such date. On April 7, 1999, the Company reached
agreement with the preferred shareholders to accelerate conversion of the Series
A and Series B Preferred Stock, with such shares actually being converted
effective April 13, 1999.
NOTE N - ASSET IMPAIRMENT
On December 17, 1998, the United States District Court for the District of Idaho
ruled in the case of AT&T vs. Coeur d'Alene Tribe that the orders previously
issued by the Tribal Court upholding the legality of the US Lottery were
erroneous. In response to this legal decision, eLottery and the CDA terminated
operation of the NIL and the US Lottery in every state where it had been
offered. As a result, the Company has reevaluated certain of its assets in
accordance with the provisions of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets." Based upon such review, management determined that both
the intangibles and the advances to the NIL were impaired as of the date of this
legal decision. As of December 17, 1998, net intangibles and Advances to NIL of
$12.9 million and $11.2 million, respectively, were written down to zero, which
represented the estimated fair value of the assets, as no future cash flows were
to be generated by the NIL. In addition, $0.7 million in NIL startup costs
(primarily post-acquisition building costs) included in other assets were also
impaired. This amount would have been written off as of January 1, 1999 with the
adoption of SOP 98-5. However, due to the termination of NIL operations,
management concluded that it should be written off during the fourth quarter of
1998. Shutdown costs and other adjustments amounted to an additional $0.7
million, all of which was paid as of December 31, 1999.
During 1999, the Company performed an additional evaluation of the realizability
of certain fixed assets and determined that certain computer hardware and
software costs were impaired based upon the current changes in technology which
has resulted in such computer hardware and software no longer being used in the
Company's operations. As a result of this review, the Company recorded an asset
impairment charge of $1.5 million in 1999.
48
NOTE O - OTHER BUSINESS DISPOSITIONS
In February 1999, the Company received $9.3 million from Claricom as payment in
full for a $5.9 million junior subordinated note plus interest, along with the
redemption of warrants. The note and warrants were part of the consideration
received when the Company sold its direct sales and service organization in
1996.
In June 1996, the Company sold its Videoconferencing division to BT Visual
Images LLC for a $0.2 million note, royalties on videoconferencing revenue
through June 1998 and contingent consideration related to the sale of equipment
inventory. The Company recorded a loss of $3.9 million on the transaction. In
October 1998, the Company received $5 million in cash, as part of a negotiated
legal settlement with its former supplier of videoconferencing equipment,
resulting in a $5.3 million gain in 1998.
NOTE P - SELECTED QUARTERLY FINANCIAL DATA
The following is a summary of unaudited selected quarterly financial data for
the years ended December 31, 1999 and 1998:
Three Months Ended
----------------------------------------------------------------
March 31, June 30, September 30, December 31,
(In thousands, except for per share amounts) 1999 1999 1999 1999
---------- ---------- ------------- ------------
Revenues $ -- $ -- $ -- $ 12
Gross Profit (Loss) -- -- -- (164)
Loss Before Income Taxes from
Continuing Operations (662) (2,204) (2,394) (6,762)
Loss From Continuing Operations (662) (2,204) (2,394) (6,762)
Discontinued Operations (2,369) (2,063) (775) (9,699)
Net Loss (3,031) (4,267) (3,169) (16,461)
Loss Per Share:
Continuing Operations (0.01) (0.04) (0.04) (0.11)
Discontinued Operations (0.05) (0.03) (0.01) (0.15)
49
Three Months Ended
----------------------------------------------------------------
March 31, June 30, September 30, December 31,
(In thousands, except for per share amounts) 1998 1998 1998 1998
---------- ---------- ------------- ------------
Revenues $ -- $ -- $ -- $ --
Gross Profit -- -- -- --
Loss Before Income Taxes From
Continuing Operations (1,080) (1,118) (1,603) (21,816)
Income (Loss) From Continuing Operations (1,080) (1,118) (1,603) (21,816)
Discontinued Operations (1,398) (605) (546) (8,693)
Net Loss (2,478) (1,723) (2,149) (30,509)
Loss Per Share:
Continuing Operations (0.02) (0.02) (0.03) (0.44)
Discontinued Operations (0.03) (0.01) (0.01) (0.17)
The three months ended December 31, 1999 and 1998 include the write-off of $1.5
million and $25.5 million, respectively, in assets related to certain computer
hardware and software that is no longer being used and termination of the NIL,
respectively (See Note N). The fourth quarter of 1998 also includes a
nonrecurring $5.3 million gain on a negotiated settlement with a former supplier
of videoconferencing equipment (see Note O).
NOTE Q - SUBSEQUENT EVENT (UNAUDITED)
On February 25, 2000, the Company announced that it has entered into a Letter of
Intent to purchase Virtgame.com Corp. (VGTI), a leading provider of Internet
enabling technology to the lottery and gaming industries. Under terms of the
proposed agreement, the Company may issue up to 3.4 million shares for all the
outstanding shares of VGTI. The agreement is subject to certain conditions,
including the discontinuation of operations of VGTI's Constellation virtual
casino, completion of due diligence, signing a definitive agreement and VGTI
shareholder approval.
On March 6, 2000, the Company announced that it has entered into a strategic
alliance with Global Technologies Limited ("GTL") to facilitate and develop
e-commerce sales and technologies of lottery and other governmental authorized
gaming related products. In connection therewith, the Company agreed to issue
a warrant to GTL to purchase 1,000,000 shares of the Company's stock at
$6.00 per share.
50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
eLOT, Inc.:
We have audited the accompanying consolidated balance sheets of eLOT, Inc. (a
Virginia corporation, formerly Executone Information Systems, Inc.) and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of eLOT, Inc. and subsidiaries as
of December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
February 4, 2000
51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
52
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item, except for information regarding
Executive Officers of the Registrant that is included in Part I, is incorporated
herein by reference to the Proxy Statement of the Registrant for the 2000 Annual
Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the Proxy Statement of the Registrant for the 2000 Annual Meeting of
Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
to the Proxy Statement of the Registrant for the 2000 Annual Meeting of
Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
to the Proxy Statement of the Registrant for the 2000 Annual Meeting of
Shareholders.
53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1), (a)(2) and (d). The financial statements required by this item and
incorporated herein by reference are as follows:
Report of Independent Public Accountants
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Operations - Years ended December 31, 1999, 1998 and
1997
Consolidated Statements of Changes in Stockholders' Equity - Three years ended
December 31, 1999
Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998 and
1997
Notes to Consolidated Financial Statements
The schedule to consolidated financial statements required by this item and
included in this report is as follows:
Report of Independent Public Accountants on Schedule
Schedule II - Valuation and Qualifying Accounts
(a)(3) and (c). The exhibits required by this item and included in this report
or incorporated herein by reference are as follows:
Exhibit No.
- -----------
2-1 Agreement and Plan of Merger by and among EXECUTONE Information Systems,
Inc., Executone Newco, Inc., and Unistar Gaming Corp., dated as of
December 19, 1995. Incorporated by reference to the Registrant's Current
Report on Form 8-K dated January 3, 1996.
3-1 Articles of Incorporation, as amended through December 18, 1995.
Incorporated
54
by reference to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995, filed on April 15, 1996.
3-2 Articles of Amendment dated and filed December 19, 1995, amending the
Company's Articles of Incorporation. Incorporated by reference to the
Registrant's Current Report on Form 8-K dated January 3, 1996.
3-3 Articles of Amendment filed January 4, 2000, amending the Company's
Articles of Incorporation. Filed herewith.
3-4 Bylaws, as amended. Incorporated by reference to the Registrant's
Registration Statement on Form S-3 (File No. 33-62257) filed August 30,
1995.
4-10 Indenture dated March 1, 1986 with United States Trust Company of New York
relating to 7 1/2% Convertible Subordinated Debentures of Vodavi
Technology Corporation due March 15, 2011. Incorporated by reference to
Vodavi Technology Corporation's Registration Statement on Form S-1 (as
amended) (Registration No. 33-3827) filed on March 9, 1986 and amended
April 1, 1986.
4-11 First Supplemental Indenture dated August 4, 1989 with United States Trust
Company of New York relating to 7 1/2% Convertible Subordinated Debentures
due March 15, 2011. Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1989.
4-12 Specimen Certificate representing 7 1/2% Convertible Subordinated
Debentures. Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1989.
10-1 1984 Employee Stock Purchase Plan of EXECUTONE Information Systems, Inc.
Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (File No. 33-23294) declared effective by the Commission on
August 23, 1988.
10-2 1986 Stock Option Plan of EXECUTONE Information Systems, Inc. Incorporated
by reference to the Registrant's Registration Statement on Form S-8 (File
No. 33-23294) declared effective by the Commission on August 23, 1988.
10-3 1999 Stock Incentive Plan. Incorporated by reference to the Registrant's
definitive Proxy Statement ( Form 14A) filed on November 18, 1999.
10-6 1990 Directors' Stock Option Plan as amended July 30, 1996. Incorporated
by reference to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996, filed on March 31, 1997.
10-7 1994 Executive Stock Incentive Plan. Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1994.
55
10-8 1998 Transition and Retention Plan. Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1998.
10-20 Warrant to Purchase 25,000 Shares of Common Stock of the Registrant, in
favor of Jerry M. Seslowe, dated February 1, 1996. Incorporated by
reference to the Registrant's Annual Report on Form 10-K/A for the year
ended December 31, 1996 filed on April 30, 1997.
10-21 Warrant to Purchase 25,000 Shares of Common Stock of the Registrant, in
favor of John P Hectus, dated November 18, 1998. Incorporated by reference
to the Registrant's Annual Report on Form 10-K/A for the year ended
December 31, 1998.
10-22 Warrant to Purchase 25,000 Shares of Common Stock of the Registrant, in
favor of Philip D. Gunn, dated May 21, 1999. Filed herewith..
21 Subsidiaries of eLOT, Inc. Filed herewith.
23 Consent of Arthur Andersen LLP. Filed herewith.
27 Financial Data Schedule. Filed herewith.
Undertakings
- ------------
For the purposes of complying with the rules governing Form S-8 under the
Securities Act of 1933, the undersigned registrant hereby undertakes as follows,
which undertaking shall be incorporated by reference into registrant's
Registration Statements on the following Form S-8 filings:
S-8 Reg. No. 2-91008 filed May 9, 1984 on 1983 Employee Stock Purchase Plan
(650,000 shares)
S-8 Reg. No. 33-959 filed October 17, 1985 on 1984 Stock Option Plan (390,000
shares)
S-8 Reg. No. 33-6604 filed June 19, 1986 on 1983 Stock Option Plan (350,000
shares)
S-8 Reg. No. 33-16585 filed August 24, 1987 on 1986 and 1983 Stock Option Plans
(800,000 shares)
S-8 Reg. No. 33-23294 filed August 23, 1988 on 1986 Stock Option Plan (7,000,000
shares) and Employee Stock Purchase Plan (500,000 shares)
S-8 Reg. No. 33-42561 filed September 4, 1991 on 1984 Employee Stock Purchase
Plan
56
(350,000 shares) and Directors' Stock Option Plan (100,000 shares)
S-8 Reg. No. 33-45015 filed January 2, 1992 on 1984 Employee Stock Purchase Plan
(400,000 shares)
S-8 Reg. No. 33-57519 filed January 31, 1995 on 1984 Employee Stock Purchase
Plan (1,000,000 shares).
Insofar as indemnification arising under the Securities Act of 1933 (the "Act")
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to the court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Reports on Form 8-K
The Registrant filed no reports on Form 8-K during the quarter ended December
31, 1999.
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
eLOT, Inc.
By: /s/ Barbara C. Anderson
_____________________________________
Barbara C. Anderson, Senior Vice
President
March 29, 2000
Norwalk, Connecticut
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
March 29, 2000
/s/ Stanley J. Kabala
-------------------------------------------
Stanley J. Kabala
Chairman, President and Chief Executive
Officer (Principal Executive
Officer)
March 29, 2000 /s/ Edward W. Stone, Jr.
-------------------------------------------
Edward W. Stone, Jr.
Senior Vice President, Finance,
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
March 29, 2000 /s/ Richard J. Fernandes
-------------------------------------------
Richard J. Fernandes, Director
March 29, 2000
-------------------------------------------
Philip D, Gunn, Director
March 29, 2000 /s/ John P. Hectus
-------------------------------------------
John P. Hectus, Director
March 29, 2000 /s/ Jerry M. Seslowe
-------------------------------------------
Jerry M. Seslowe, Director
58
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
eLOT, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of eLOT, Inc. and subsidiaries included in
this Form 10-K, and have issued our report thereon dated February 4, 2000.
Our audit was made for the purpose of forming an opinion on those statements
taken as a whole. The schedule listed in Item 14 is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
February 4, 2000
59
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in Thousands)
Additions Deductions
-------------------------- ---------
Charged Charged
Balance at (Credited) (Credited) Balance at
Beginning to Costs and to Other End of
Description of Period Expenses Accounts Payments Period
- ----------- --------- ------------ --------- -------- -----------
Year ended December 31, 1999
Reserve for Discontinued
Operations $5,424 $1,320 -- $(4,364) $2,480
Year ended December 31, 1998
Reserve for Discontinued
Operations -- 9,028 -- (3,604) 5,424
Year ended December 31, 1997
Reserve for Discontinued
Operations -- -- -- -- --
60