-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ApppjKmqTQG6Ahoe1LL6Wrzx468D+CYAG9t2XCai8xlZABiUboLy/AG+0YuMB/Nd dGaeetbefhVkkFrkJMqQyQ== 0000950162-01-500952.txt : 20020411 0000950162-01-500952.hdr.sgml : 20020411 ACCESSION NUMBER: 0000950162-01-500952 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELOT INC CENTRAL INDEX KEY: 0000725282 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 860449210 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11551 FILM NUMBER: 1792705 BUSINESS ADDRESS: STREET 1: 301 MERRITT 7 STREET 2: CORPORATE PARK 1ST FLOOR CITY: NORWALK STATE: CT ZIP: 06851 BUSINESS PHONE: 2038408600 MAIL ADDRESS: STREET 1: 301 MERRITT 7 STREET 2: CORPORATE PARK 1ST FLOOR CITY: NORWALK STATE: CT ZIP: 06851 FORMER COMPANY: FORMER CONFORMED NAME: EXECUTONE INFORMATION SYSTEMS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: VODAVI TECHNOLOGY CORP DATE OF NAME CHANGE: 19880802 10-Q 1 elot3rdqtr10q.txt 3RD QUARTER 10Q 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 -------------- ------------------- Commission File No. 0-11551 eLOT, 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.) 101 Merritt 7 Corporate Park, Norwalk, Connecticut 06851 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (203) 840-8600 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (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 ---------- ---------- $ 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 ----------- ----------- 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) --------------- -------------- NET CASH USED BY CONTINUING OPERATING ACTIVITIES (5,707) (12,634) Cash flows used by discontinued operating activities (292) (8,246) ------- ----------- NET CASH USED BY OPERATING ACTIVITIES (5,999) (20,880) --------- ---------- 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 ---------- ----------- 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 --- ---------- ---------------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 1,540 (18,686) ---------- ------------ INC (DEC) IN CASH AND CASH EQUIVALENTS (4,699) 5,611 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 5,731 1,060 ---------- ------------ 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. 13 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 14 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 -----END PRIVACY-ENHANCED MESSAGE-----