FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-11551
eLOT, Inc.
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(Exact name of registrant as specified in its charter)
Virginia 86-0449210
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Merritt 7 Corporate Park, Norwalk, Connecticut 06851
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(Address of principal executive offices) (Zip Code)
(203) 840-8600
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
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
--- ---
The number of shares outstanding of registrant's Common Stock, $.01 par value
per share, as of October 31, 2001 was 87,465,425.
INDEX
eLOT, Inc.
Page #
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 2001 and December 31, 2000. 1
Consolidated Statements of Operations -
Three Months and Nine Months Ended September 30, 2001 and 2000. 2
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2001 and 2000. 3
Notes to Consolidated Financial Statements. 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION 14
SIGNATURES 15
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
eLOT, INC.
CONSOLIDATED BALANCE SHEETS
(DEBTORS - IN - POSSESSION)
(In thousands, except for share and per share amounts) September 30, December 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 1,032 $ 5,731
Accounts receivable 393 222
Prepaid expenses and other current assets 499 709
Net assets of discontinued operations 2,725 8,294
-------- ---------
Total Current Assets 4,649 14,956
PROPERTY AND EQUIPMENT, net 4,288 5,143
INTANGIBLE ASSETS, net 1,189 4,018
OTHER ASSETS 1,511 3,486
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$ 11,637 $ 27,603
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 196 $ 240
Accounts payable 2,427 1,841
Accrued payroll and related costs 402 838
Accrued liabilities 2,167 2,083
---------- ----------
Total Current Liabilities 5,192 5,002
LONG-TERM DEBT 13,462 14,243
------------ --------
Total Liabilities 18,654 19,245
--------- --------
STOCKHOLDERS' EQUITY:
Preferred Stock 280 ---
Common stock: $.01 par value; 130,000,000 shares
authorized; 87,465,425 and 69,645,441 issued and
outstanding 875 696
Additional paid-in capital 99,131 91,911
Accumulated other comprehensive loss (618) (613)
Accumulated deficit (106,685) (83,636)
--------- ---------
Total Stockholders' Equity (Deficit) (7,017) 8,358
--------- ---------
$ 11,637 $ 27,603
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
1
eLOT, INC.AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DEBTORS - IN - POSSESSION)
(Unaudited)
Three Months Ended Nine Months Ended
(In thousands, except for per share amounts) September 30, September 30,
------------------------ -------------------
2001 2000 2001 2000
---- ---- ---- ----
REVENUES $500 $308 $1,441 $558
COSTS AND EXPENSES:
Prizes, content, advertising and promotion 373 722 803 2,017
General and Administrative 1,879 2,807 5,966 7,129
Asset Impairment 6,356 128 6,722 128
Reversal of Stock Compensation Accrual --- --- (500) ---
Depreciation and Amortization 1,563 707 4,013 1,394
----- ------ ----- ------
10,171 4,364 17,004 10,668
------ ------- ------ -----
OPERATING LOSS (9,671) (4,056) (15,563) (10,110)
INTEREST EXPENSE (395) (391) (1,239) (1,193)
OTHER INCOME, NET 47 176 11 980
-------- ------- -------- -------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (10,019) (4,271) (16,791) (10,323)
INCOME TAXES --- --- --- ---
--------- -------- -------- --------
LOSS FROM CONTINUING OPERATIONS (10,019) (4,271) (16,791) (10,323)
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations (1,652) (2,267) (2,371) (6,320)
Gain (loss) on sale of discontinued operations,
(net of tax provision of $15,924 for 2000) --- --- (3,886) 387
--- -------- ------- ------
Loss from discontinued operations (1,652) (2,267) (6,257) (5,933)
------- ------ ------- --------
NET LOSS $(11,671) $ (6,538) $(23,048) $(16,256)
======== =========== ========= =========
BASIC AND DILUTED LOSS PER SHARE:
Loss from continuing operations $ (0.12) $(0.07) $(0.22) $(0.16)
Loss from discontinued operations (0.02) (0.03) (0.03) (0.10)
Gain (Loss) on sale of discontinued operation --- (0.00) (0.05) 0.01
--- ----- ------ -----
NET LOSS PER SHARE $ (0.14) $ (0.10) $(0.30) $(0.25)
======== ======= ====== ======
AVERAGE COMMON SHARES OUTSTANDING: 86,191 65,623 77,682 64,682
====== ======= ====== ======
The accompanying notes are an integral part of these consolidated statements.
2
eLOT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DEBTORS - IN - POSSESSION)
(Unaudited)
(In thousands) Nine Months Ended
September 30,
-------------------------------------
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations $ ( 16,791) $ (10,323)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 4,013 1,394
Accretion on Debentures and Note Payable 274 216
Asset Impairment 6,722 128
Reversal of Stock Compensation Accrual (500) ---
Other 107 ---
Changes in working capital items:
Accounts receivable (171) (310)
Accounts payable and accruals 851 (3,546)
Other working capital items, net (212) ( 193)
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NET CASH USED BY
CONTINUING OPERATING ACTIVITIES (5,707) (12,634)
Cash flows used by discontinued operating activities (292) (8,246)
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NET CASH USED BY OPERATING ACTIVITIES (5,999) (20,880)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (215) (2,951)
Proceeds From Sale of CT Business --- 44,300
Proceeds From Sale of HC Business --- 5,000
Restricted Cash-Proceeds from Sale of CT Business --- (3,505)
ESIP participants loan repayments --- 2,578
Other, net (25) (245)
------------ ------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (240) 45,177
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments/Borrowings under revolving credit facility --- (19,617)
Repayments of other long-term debt --- (455)
Proceeds from issuance of stock 403 1,386
Proceeds from Life Insurance Policies 1,137 ---
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NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 1,540 (18,686)
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INC (DEC) IN CASH AND CASH EQUIVALENTS (4,699) 5,611
CASH AND CASH EQUIVALENTS - BEGINNING
OF YEAR 5,731 1,060
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CASH AND CASH EQUIVALENTS - END
OF PERIOD $ 1,032 $ 6,671
========= ==========
The accompanying notes are an integral part of these consolidated statements.
3
eLOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DEBTORS - IN - POSSESSION)
(Unaudited)
NOTE A - NATURE OF THE BUSINESS
eLOT, Inc. (the "Company" or "eLOT") 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 that leverage the power of the Internet
while political, legal and social issues surrounding the sales of lottery
tickets over the Internet are simultaneously addressed.
eLOT is an application service provider of Internet marketing and advertising
technology for lotteries. The Company's IMARCS (Internet Marketing Analysis
Research and Communications System) database marketing solution enables
government lotteries to attract, register and communicate with lottery players
through advanced Internet technology. In addition, eLOT's subsidiary, eLOTTONET,
Inc., offers a free daily lottery email notification service (LENS) of state
lottery results and other information and services via email.
The Company operated a reward-entertainment lottery portal, eLotteryFreeWay,
which offered lottery and entertainment games (for no consideration) with
registered players earning ePoints that are redeemable for cash and merchandise
credit. eLotteryFreeWay's mission was to build an Internet community whose
members are expected to be highly predisposed to purchase governmental lottery
tickets over the Internet. Due to financial considerations, this website was
shut down in July 2001.
In March 2001, the Company acquired certain subsidiaries of Network60 (now
called DM360), an Internet promotions and permission-based marketing company
that offers a flexible, cost effective direct marketing medium to traditional
corporations, advertising agencies, and online companies. DM360's web sites
include www.easywinnings.com, www.coolwinnings.com, www.radiostakes.com and
www.prizechest.com.
On July 30, 2001, the Company acquired FreeWorldLottery.com ("FWL"), a free
lottery sweepstakes website owned by PlasmaNet, Inc.. See Note G.
The condensed interim financial statements included herein have been prepared by
eLOT, without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC) and reflect all adjustments that are of a normal
recurring nature and that, in the opinion of management, are necessary for a
fair statement of the results for interim periods. Certain information and
footnote disclosures have been condensed or omitted pursuant to such rules and
regulations. Although eLOT believes that the disclosures are adequate to make
the information presented not misleading, it is suggested that these condensed
financial statements be read in conjunction with the financial statements and
the notes thereto included in the Company's latest annual report to
stockholders.
4
NOTE B - BASIS OF PRESENTATION
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.
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.
The accompanying unaudited consolidated condensed financial statements have been
prepared on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities and commitments in the
normal course of business and do not reflect any adjustments that might result
if the Company is unable to continue as a going concern. The filing of the
voluntary Chapter 11 petitions referred to below, losses from operations and
negative cash flow from operations raise doubt about the Company's ability to
continue as a going concern. The appropriateness of using a going concern basis
is dependent upon, among other things, confirmation of a plan or plans of
reorganization, future profitable operations and the ability to generate cash
from operations and financing sources sufficient to meet obligations. As a
result of the filing of the Chapter 11 cases and related circumstances,
realization of assets and liquidation of liabilities is subject to significant
uncertainty. While under the protection of Chapter 11, the Debtors (as defined
below in Note C) may sell or otherwise dispose of assets, and liquidate or
settle liabilities for amounts other than those reflected in the consolidated
condensed financial statements. Further, a plan or plans of reorganization could
materially change the amounts reported in the accompanying consolidated
condensed financial statements. The consolidated condensed financial statements
do not include any adjustments relating to recoverability of the value of
recorded asset amounts or the amount and classification of liabilities that
might be necessary as a consequence of a plan of reorganization. The Company
anticipates significant adjustments to the consolidated condensed financial
statements as a result of applying the provisions of Statement of Position 90-7
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
during the proceedings. At this time, it is not possible to predict the outcome
of the Chapter 11 cases or their effect on the Company's business, its financial
position, results of operations or cash flows. If it is determined that the
liabilities subject to compromise in the Chapter 11 cases exceed the fair value
of the assets, unsecured claims may be satisfied at less than 100% of their face
value and equity interests of the Company's stockholders may have no value. The
Company believes its existing cash resources in connection with federal and
state tax refunds and expense reductions should provide the Company with
adequate liquidity to conduct its business while it prepares a reorganization
plan. However, the Company's liquidity, capital resources, results of operations
and ability to continue as a going concern are subject to known and unknown
risks and uncertainties.
NOTE C - CHAPTER 11 FILING
On October 15, 2001, subsequent to the close of the fiscal quarter ended
September 30, 2001, the Company and its eLottery, Inc. subsidiary (collectively,
the "Debtors") filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy
Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the
Southern District of New York (the "Bankruptcy Court"). The Chapter 11 cases
Nos. 01-15327 (alg) and 01-15328 (alg) (the "Chapter 11 Cases") have been
consolidated for the purpose of joint administration. As of October 15, 2001,
the Debtors are continuing to operate their business as debtors-in-possession
under Chapter 11 of the Bankruptcy Code and are subject to the jurisdiction of
the Bankruptcy Court.
5
As a result of these filings, actions to collect pre-petition indebtedness are
stayed and other contractual obligations against the Debtors may not be
enforceable. In addition, under the Bankruptcy Code, the Debtors may assume or
reject executory contracts, including real estate leases, employment contracts,
personal property leases, service contracts and other unexpired executory
pre-petition contracts, subject to Bankruptcy Court approval. Parties affected
by these rejections may file claims with the Bankruptcy Court in accordance with
the Bankruptcy Code. The Debtors cannot presently determine or reasonably
estimate the ultimate liability that may result from the filing of claims for
all contracts that may be rejected. Substantially all pre-petition liabilities
are subject to settlement under a plan of reorganization to be voted on by the
creditors and equity holders and approved by the Bankruptcy Court. Although the
Debtors expect to file a reorganization plan or plans that provide for emergence
from bankruptcy sometime during early 2002, there can be no assurance that a
reorganization plan or plans will be proposed by the Debtors or confirmed by the
Bankruptcy Court or that any such plan will be consummated.
As provided by the Bankruptcy Code, the Debtors have the exclusive right to
submit a plan of reorganization for 120 days from the date of the filing of the
voluntary petitions. Further extension may be sought and may be granted or
rejected by the Bankruptcy Court. If the Debtors fail to file a plan of
reorganization during such period or if such plan is not accepted by the
required number of creditors and equity holders within the required period, any
party in interest may subsequently file its own plan of reorganization for the
Debtors. A plan of reorganization must be confirmed by the Bankruptcy Court,
upon certain findings being made by the Bankruptcy Court which are required by
the Bankruptcy Code. The Bankruptcy Court may confirm a plan of reorganization
notwithstanding the non-acceptance of the plan by an impaired class of creditors
or equity holders if certain requirements of the Bankruptcy Code are met. A plan
or reorganization also could result in holders of the Company's common stock
receiving no value for their interest. The Chapter 11 filing, the uncertainty
regarding the eventual outcome of the reorganization case and the effect of
other unknown adverse factors could threaten the Company's existence as a going
concern.
At the first day hearing held on October 15, 2001 before United States
Bankruptcy Judge Allan L. Gropper, the Bankruptcy Court entered orders granting
authority to the Debtors to, among other things, pay pre-petition and
post-petition employee wages, salaries, benefits and other employee obligations,
and pay certain administrative fees.
Schedules will be filed with the Bankruptcy Court setting forth the assets and
liabilities of the Debtors as of the filing date as shown by the Company's
accounting records. Differences between amounts shown by the Company and claims
filed by creditors will be investigated and, if necessary, unresolved disputes
will be determined by the Bankruptcy Court. The ultimate settlement terms for
such liabilities are subject to a plan of reorganization, and accordingly, are
not presently determinable.
NOTE D - DEBT
As a result of the Chapter 11 filing on October 15, 2001 (See Note C), the
Company's convertible debentures will be classified as "Liabilities Subject to
Settlement under the Reorganization" in future reporting periods in accordance
with Statement of Position 90-7 " Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" (`SOP 90-7'). No principal or interest
payments will be made without Bankruptcy Court approval until a reorganization
plan has been approved.
Also in accordance with SOP 90-7, the convertible debentures have not been
reclassified as current liabilities in the accompanying balance sheet as of
September 30, 2001 due to the automatic stay provisions of the Chapter 11
filing.
6
NOTE E - EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares of common
stock outstanding during the periods. Common stock equivalents and the
convertible debentures which are antidilutive based upon losses from continuing
operations have been excluded from the computations in both periods.
A reconciliation of the Company's loss per share calculations for the three and
nine months ended September 30, 2001 and 2000, respectively, is as follows:
Loss from Per Share
(in thousands, except for per share amounts) Continuing Operations Shares Amount
--------------------- ------ ------
For the three months ended September 30, 2001:
Basic and Diluted Loss Per Share: $ (10,019) 86,191 $(0.12)
========== ====== =======
For the three months ended September 30, 2000:
Basic and Diluted Loss Per Share: $ (4,271) 65,623 $(0.07)
========= ====== ======
For the nine months ended September 30, 2001:
Basic and Diluted Loss Per Share: $ (16,791) 77,682 $(0.22)
=========== ====== =======
For the nine months ended September 30, 2000
Basic and Diluted Loss per Share $ (10,323) 64,682 $(0.16)
========== ====== =======
NOTE F - DISCONTINUED OPERATIONS
On March 29, 1999, the Company announced that it would divest its Computer
Telephony and Healthcare businesses. By divesting the core Computer Telephony
and Healthcare businesses, the Company focused its resources on its Internet
subsidiary, eLottery, Inc. 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 gross proceeds included
$4.0 million that was held in escrow. The Company and Inter-Tel reached a
settlement agreement regarding indemnity and other claims asserted by Inter-Tel
in 2000 and the Company received approximately $2.5 million (plus interest) of
the escrowed proceeds during the fourth quarter of 2000. A portion of the
proceeds was used to repay all of the Company's outstanding revolving debt
($19.6 million) in January 2000.
On July 21, 2000, the Company completed the sale of its Healthcare
Communications division to Grinnell Corporation for $5.0 million in cash. eLOT
is also continuing to pursue the sale of all or part of 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. The net investment in DCC as of
September 30, 2001 is approximately $1.0 million.
The Company recorded an after tax gain of $14.9 million on the sale of the
computer telephony division in the first quarter of 2000. This was offset by a
$5 million reserve related to the sale of Healthcare Communication division and
a $6 million valuation allowance against deferred tax assets. In March 2001, the
Company recorded an additional $3.9 million valuation reserve against deferred
tax assets based upon a further review of the realizability of this asset due to
changes in market conditions.
7
Summarized financial information for the discontinued operations is as follows
(000):
For the three months ended September 30, 2001 2000
- ---------------------------------------- ----------- ----------
Revenues $ 0 $ 732
Loss from Discontinued
Operations (1,652) (2,267)
Loss on sale of discontinued operations 0 ---
For the nine months ended September 30, 2001 2000
- --------------------------------------- ----------- ----------
Revenues $ 0 $17,479
Loss from Discontinued
Operations (2,371) (6,320)
Gain (Loss) on sale of discontinued operations,
Net of Taxes (3,886) 387
As of September 30, 2001 and December 31, 2000 2001 2000
- ---------------------------------------------- ---------- ----------
Current Assets $ --- $ ---
Total Assets 5,647 11,745
Current Liabilities 1,293 4,981
Total Liabilities 1,293 4,981
Net Assets 4,354 6,764
The loss from discontinued operations for the three and nine months ended
September 30, 2001 is primarily due to the Company's equity share of the loss of
DCC for the period.
On May 8, 2001, the Company reached a settlement with regard to certain claims
made by Twelve Oaks Liquidating Trust ("Twelve Oaks") with respect to the
acquisition in January 2000 by eLOT of 254,686 shares of DCC in exchange for
254,686 shares of eLOT common stock. A member of eLOT's board of directors is
the Liquidating Trustee of Twelve Oaks. The settlement agreement calls for the
Company to put 150,000 shares of DCC common stock in escrow for the benefit of
Twelve Oaks. The Company shall retain title and voting rights until the escrowed
shares are transferred pursuant to the settlement agreement. Twelve Oaks shall
receive a pro-rata share of the proceeds from the sale by the Company of the
shares of DCC, subject to a minimum of $400,000 and a maximum of $500,000. If
Twelve Oaks receives less than $400,000 from the full or partial sale of the
escrowed shares, the Company has agreed to pay Twelve Oaks the difference
between the proceeds received and $400,000 either in cash or through the sale of
additional escrowed shares during the escrow period of one year.
NOTE G - ASSET IMPAIRMENT
In the third quarter, the Company re-evaluated certain of its Intangible assets
in accordance with the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets for Assets to be Held and Used" Based upon this
review, the Company recorded an asset impairment charge of $6.4 million in the
quarter ended September 30, 2001.
8
Approximately $5.8 million of the charge was related to intangibles recorded
upon the acquisition of unique users related to the Lottery notification
business, ("Elottonet") from PlasmaNet during 2000. The Internet advertising
market continues to decline thus reducing the market value of opt-in names in
the industry and as a result the future cash flows to be generated by these
unique users was not sufficient to support the previous carrying value.
Approximately $.6 million of this charge is related to the excess of the
purchase price over the fair value of the assets acquired in connection with the
acquisition of the Network 60 subsidiaries in March 2000. The future cash flows
of this business do not support the carrying value of this intangible due to the
continued decline in the internet advertising industry.
NOTE H - ACQUISITION OF FREEWORLDLOTTERY.COM
On July 31, 2001, the Company acquired the FWL website, (which began operations
on January 23, 2001) from PlasmaNet, Inc. in exchange for newly issued preferred
stock which is convertible into a maximum number of 22.7 million common shares.
The conversion of the preferred stock is contingent upon the website achieving
certain net cash contribution milestones over the 18-month period of the
agreement. In addition, the Company entered into a management agreement with
PlasmaNet, Inc. to operate the website. PlasmaNet, Inc. would receive a monthly
management fee of $75,000 for these management services. For the purposes of
recording this acquisition, the preferred stock was recorded at its liquidation
value of $280,000.
On September 15, 2001, the Company announced that as of that date, it had not
received any of its expected revenues from its FreeWorldLottery ("FWL")
acquisition and that it may never receive any of the anticipated revenues from
this business. Management is currently evaluating its legal remedies under both
the asset purchase and management agreements.
NOTE I - OTHER MATTERS
For the nine-month periods ended September 30, 2001 and 2000, the Company made
cash payments of approximately $.6 million and $1.2 million, respectively for
interest expense on indebtedness. For the nine-month periods ended September 30,
2001 and 2000 respectively, the company made cash payments for income taxes of
approximately $11,000 and $264,000. The Company did not make its semi-annual
interest payment due on September 15, 2001 on the company's convertible
debentures (See Note D).
In December 2000, the Company accrued stock compensation expense of $650,000
related to certain management compensation to be paid in stock. A portion of the
compensation was satisfied by the issuance of stock options issued at fair
market value in 2001. As a result, $500,000 of this accrual is no longer
required and was reversed into earnings during the second quarter of 2001.
9
Item 2. 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 September 30, 2001 and results of operations for the three and
nine-month periods ended September 30, 2001 and 2000. 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-Q, and with the Company's audited
consolidated financial statements and notes thereto for the year ended December
31, 2000 included in Form 10-K. 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 that 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.
On October 15, 2001, subsequent to the close of the fiscal quarter ended
September 30, 2001, the Company and its eLottery, Inc. subsidiary (collectively,
the "Debtors") filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy
Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the
Southern District of New York (the "Bankruptcy Court"). The Chapter 11 cases
Nos. 01-15327 (alg) and 01-15328 (alg) (the "Chapter 11 Cases") have been
consolidated for the purpose of joint administration. As of October 15, 2001,
the Debtors are continuing to operate their business as debtors-in-possession
under Chapter 11 of the Bankruptcy Code and are subject to the jurisdiction of
the Bankruptcy Court.
As a result of these filings, actions to collect pre-petition indebtedness are
stayed and other contractual obligations against the Debtors may not be
enforceable. In addition, under the Bankruptcy Code, the Debtors may assume or
reject executory contracts, including real estate leases, employment contracts,
personal property leases, service contracts and other unexpired executory
pre-petition contracts, subject to Bankruptcy Court approval. Parties affected
by these rejections may file claims with the Bankruptcy Court in accordance with
the Bankruptcy Code. The Debtors cannot presently determine or reasonably
estimate the ultimate liability that may result from the filing of claims for
all contracts that may be rejected. Substantially all pre-petition liabilities
are subject to settlement under a plan of reorganization to be voted on by the
creditors and equity holders and approved by the Bankruptcy Court. Although the
Debtors expect to file a reorganization plan or plans that provide for emergence
from bankruptcy sometime during early 2002, there can be no assurance that a
reorganization plan or plans will be proposed by the Debtors or confirmed by the
Bankruptcy Court or that any such plan will be consummated.
As provided by the Bankruptcy Code, the Debtors have the exclusive right to
submit a plan of reorganization for 120 days from the date of the filing of the
voluntary petitions. Further extension may be sought and may be granted or
rejected by the Bankruptcy Court. If the Debtors fail to file a plan of
reorganization during such period or if such plan is not accepted by the
required number of creditors and equity holders within the required period, any
party in interest may subsequently file its own plan of reorganization for the
Debtors. A plan of reorganization must be confirmed by the Bankruptcy Court,
upon certain findings being made by the Bankruptcy Court, that are required by
the Bankruptcy Code. The Bankruptcy Court may confirm a plan of reorganization
notwithstanding the non-acceptance of the plan by an impaired class of creditors
or equity holders if certain requirements of the Bankruptcy Code are met. A plan
of reorganization also could result in holders of the Company's common stock
receiving no value for their interest. The Chapter 11 filing, the uncertainty
regarding the eventual outcome of the reorganization case and the effect of
other unknown adverse factors could threaten the Company's existence as a going
concern.
10
At the first day hearing held on October 15, 2001 before United States
Bankruptcy Judge Allan L. Gropper, the Bankruptcy Court entered orders granting
authority to the Debtors to, among other things, pay pre-petition and
post-petition employee wages, salaries, benefits and other employee obligations,
and pay certain administrative fees.
Schedules will be filed with the Bankruptcy Court setting forth the assets and
liabilities of the Debtors as of the filing date as shown by the Company's
accounting records. Differences between amounts shown by the Company and claims
filed by creditors will be investigated and, if necessary, unresolved disputes
will be determined by the Bankruptcy Court. The ultimate settlement terms for
such liabilities are subject to a plan of reorganization, and accordingly, are
not presently determinable.
The accompanying unaudited consolidated condensed financial statements have been
prepared on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities and commitments in the
normal course of business and do not reflect any adjustments that might result
if the Company is unable to continue as a going concern. The filing of the
voluntary Chapter 11 petitions referred to below, losses from operations and
negative cash flow from operations raise doubt about the Company's ability to
continue as a going concern. The appropriateness of using a going concern basis
is dependent upon, among other things, confirmation of a plan or plans of
reorganization, future profitable operations and the ability to generate cash
from operations and financing sources sufficient to meet obligations. As a
result of the filing of the Chapter 11 cases and related circumstances,
realization of assets and liquidation of liabilities is subject to significant
uncertainty. While under the protection of Chapter 11, the Debtors may sell or
otherwise dispose of assets, and liquidate or settle liabilities for amounts
other than those reflected in the consolidated condensed financial statements.
Further, a plan or plans of reorganization could materially change the amounts
reported in the accompanying consolidated condensed financial statements. The
consolidated condensed financial statements do not include any adjustments
relating to recoverability of the value of recorded asset amounts or the amount
and classification of liabilities that might be necessary as a consequence of a
plan of reorganization. The Company anticipates significant adjustments to the
consolidated condensed financial statements as a result of applying the
provisions of Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" during the proceedings. At this time,
it is not possible to predict the outcome of the Chapter 11 cases or their
effect on the Company's business, its financial position, results of operations
or cash flows. If it is determined that the liabilities subject to compromise in
the Chapter 11 cases exceed the fair value of the assets, unsecured claims may
be satisfied at less than 100% of their face value and equity interests of the
Company's stockholders may have no value. The Company believes its existing cash
resources plus federal and state tax refunds and expense reductions should
provide the Company with adequate liquidity to conduct its business while it
prepares a reorganization plan. However, the Company's liquidity, capital
resources, results of operations and ability to continue as a going concern are
subject to known and unknown risks and uncertainties.
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 COMPARED WITH THE SAME
PERIODS LAST YEAR.
RESULTS OF OPERATIONS
REVENUES: Revenues for the three and nine month periods ended September 30, 2001
were $500,000 and $1,441,000, respectively, as compared to $308,000 and
$558,000, respectively, in 2000. The increase is attributable to the acquisition
of the Network 60 promotional web sites, and the launch of the Lottery
Notification business in the third quarter of 2000, offset by a significant
decline in advertising rates.
PRIZES, CONTENT, ADVERTISING AND PROMOTION: Prizes, content, advertising and
promotions for the three and nine month periods ended September 30, 2001 were
$373,000 and $803,000, respectively, versus $722,000 and $2.0 million,
respectively, in 2000. The decline is due to expense reductions implemented in
response to the decline in advertising rates. These expenses include "ePoints"
earned by registered players on the eLotteryfreeway entertainment site, cost of
editorial content, advertising expenses and special promotional programs
designed to acquire new registered players and reward our existing player base.
11
GENERAL & ADMINISTRATIVE: General & Administrative expenses were $1.9 million
and $6.0 million for the three and nine month periods ended September 30, 2001,
down from $2.8 million and $7.1 million for the comparable periods in 2000. The
decrease in General & Administrative expenses is attributable to the continued
reductions in employee related costs, lobbying costs and other expenses.
STOCK COMPENSATION EXPENSE: In December 2000, the Company recorded stock
compensation expense of $650,000 related to certain management compensation to
be paid in stock. A portion of this compensation was satisfied by the issuance
of stock options issued at fair market value during 2001. As a result, $500,000
of the accrual is no longer required and was reversed into earnings during the
second quarter of 2001.
ASSET IMPAIRMENT: During 2001, the Company performed an evaluation of the
realizability of certain assets and determined that certain intangibles and
certain prepaid assets were permanently impaired. As a result of this review,
the Company recorded an asset impairment charge of $366,000 in the first quarter
and an additional charge of $6.3 million in the third quarter.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense for the
three and nine month periods ended September 30, 2001 was approximately $1.3
million and $4.0 million, respectively as compared to $707,000 million and $1.4
million in 2000. The increase is attributable to depreciation expense related to
capital expenditures incurred throughout 2000 and the amortization of intangible
assets.
INTEREST EXPENSE: Interest expense for the three and nine-month periods ended
September 30, 2001 was $395,000 and $1.2 million, respectively, as compared to
$391,000 and $1.2 million, respectively in 2000.
OTHER INCOME, NET: Other income (expense), net, for the three and nine months
ended September 30, 2001 was $47,000 and $11,000, respectively, as compared to
$176,000 and $980,000 for the comparable 2000 period. The change is primarily
due to lower invested capital and interest rates on the investment of corporate
funds in the comparable periods.
DISCONTINUED OPERATIONS: There were no revenues from discontinued operations for
the three and nine-month periods ended September 30, 2001 as compared to
$732,000 and $17.5 million, respectively for 2000. The decrease in revenue is
due entirely to the sale of the Computer Telephony business in January 2000 and
the Healthcare business in July 2000. The loss from discontinued operations for
the three and nine-month periods ended September 30, 2001 was $1.6 million and
$2.4 million, respectively, versus $2.3 million and $6.3 million for 2000. The
2001 loss is attributable to the Company's equity share of the loss of DCC for
the period offset by a gain on a litigation settlement.
The Company recorded an after-tax loss for the nine months ended September 30,
2001 of $3.9 million related to the discontinued operations. This represents an
additional valuation reserve recorded against the deferred tax asset.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, the Company had approximately $1.0 million of cash and
cash equivalents. The Company has incurred recurring losses from continuing
operations during the transition to the Company's new business strategy.
Revenues from eLOT operations were affected by the decline in Internet
advertising pricing throughout 2000 and further deterioration in 2001. In
addition, revenues have been slow to materialize in the lottery business due to
governmental lotteries migrating much more slowly than expected onto the
Internet due to legislative, political and social issues.
On September 15, 2001, the Company announced that it did not make the $613,000
interest payment on its convertible debentures that was due on that date. The
Company also announced that as of that date, it had not received any of its
expected revenues from its FreeWorldLottery ("FWL") acquisition and that it may
never receive any of the anticipated revenues from this business. As a result,
the Company's liquidity was severely impacted and the Company filed on October
15, 2001 a voluntary petition for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. See Chapter 11 filing described above.
12
Cash used by continuing operating activities was $5.7 million in the first nine
months of 2001 versus $12.6 million for 2000. Cash used by discontinued
operating activities in the first nine months of 2001 was $ 292,000 versus $8.2
million for the same period in 2000.
Cash provided by divestiture activities was approximately $46.0 million in the
first nine months of 2000, primarily due to the proceeds received from the sale
of the Computer Telephony business of $44.3 million, the sale of the Healthcare
Communications business for $5.0 million and the repayment by certain key
management of the ESIP loans for $2.6 million, offset partially by the purchase
of property and equipment. Cash used by investing activities totaled $215,000
for the first nine months of 2001 representing Capital Expenditures.
During the first nine months of 2001, the Company generated $1.5 million in cash
from financing activities through loans against executive life insurance
premiums paid by the company in previous periods and the sale of stock. The
Company used $18.7 million in cash from financing activities during the first
nine months of 2000. The primary use of cash in 2000 was the repayment of the
outstanding balance under the credit facility of $19.6 million and other
long-term debt of $.5 million, offset partially by proceeds from the exercise of
stock options.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
11 - Statement Regarding Computation of Per
Share Earnings (see Note C of Notes to
Consolidated Financial Statements in Part I,
Item 1).
b) Reports on Form 8-K
Current Report on Form 8-K dated Ocober 18, 2001
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report for the quarterly period ended June 30,
2001 on Form 10-Q to be signed on its behalf by the undersigned thereunto duly
authorized.
eLOT, Inc.
Dated: November 14, 2001 /s/ Edwin J. McGuinn
--------------------------------------------
Edwin J. McGuinn
President and Chief Executive Officer
Dated: November 14, 2001 /s/ David J. Parcells
--------------------------------------------
David J. Parcells
Vice President, Finance and
Chief Financial Officer
15