10QSB 1 0001.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 ( d ) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _______________. Commission File Number: 0-27256 ------- ONLINE GAMING SYSTEMS, LTD. (Exact name of small business issuer as specified in its charter) DELAWARE 65-0512785 (State or other jurisdiction of (I.R.S. Employer Identification number) incorporation or organization) 3225 McLeod Drive 1st Floor, Las Vegas, Nevada 89121 (Address of principal executive offices) Registrant's telephone no., including area code: (702)836-3042 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 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 [ ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. Class Outstanding as of November 15, 2000 ------------------------------------ ----------------------------------- Common Stock, $.001 par value 14,669,180 TABLE OF CONTENTS Heading Page PART 1. - FINANCIAL INFORMATION Item 1. Financial Statements..............................................2 Consolidated Balance Sheet - September 30, 2000 (Unaudited).......3-4 Consolidated Statement of Income and Comprehensive Income (Unaudited)................................................5 Consolidated Statement of Cash Flows - Three Months ended September 30, 2000 (Unaudited) ...................................6-7 Consolidated Statement of Cash Flows - Nine Months ended September 30, 2000 (Unaudited)....................................8-9 Notes to Consolidated Financial Statements (Unaudited)..........10-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................13-15 PART II. - OTHER INFORMATION Item 1. Legal Proceedings...............................................16 Item 2. Changes In Securities...........................................16 Item 3. Defaults Upon Senior Securities.................................16 Item 4. Submission of Matters to a Vote of Securities Holders ..........16 Item 5. Other Information ..............................................16 Item 6. Exhibits and Reports on Form 8-K................................16 Signatures......................................................17 PART 1 Item 1. Financial Statements The following unaudited financial Statements for the period ended September 30, 2000, have been prepared by Online Gaming Systems, Ltd. (the "Company") and Subsidiaries. ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES Financial Statements September 30, 2000 Page 2 of 19 ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (UNAUDITED) AS OF SEPTEMBER 30, 2000 Assets: Current Assets: Cash $ 208,720 Investments 265,000 Prepaid Expenses 8,757 Other Current Assets 15,303 ------------- Total Current Assets 497,780 ------------- Property and Equipment - Net 335,815 ------------- Equipment under Capitalized Lease - Net 157,780 ------------- Other Assets Other Assets 187,264 Investment 1,300,000 ------------- Total Other Assets 1,487,264 ------------- Total Assets $ 2,478,639 ============= The Accompanying Notes are an Integral Part of these Consolidated Financial Statements. Page 3 of 19 ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (UNAUDITED) AS OF SEPTEMBER 30, 2000 Liabilities and Stockholders' Equity: Current Liabilities: Accounts Payable and Accrued Expenses $ 881,319 Notes Payable - Officers 112,350 Note Payable and Advances 2,217,868 Current Portion of Capital Lease Obligations 83,484 ---------------- Total Current Liabilities 3,295,021 Capital Lease Obligations 93,570 ---------------- 3,388,591 Stockholders' Equity: Convertible Preferred Stock - Par Value $.001 Per Share; Authorized 10,000,000 Shares, Issued and Outstanding, 10,610 shares [Liquidation Preference $ 1,061,000] 11 Common Stock - Par Value $.001 Per Share; Authorized 100,000,000 Shares, Issued - 14,298,180 Share 14,298 Additional Paid-in Capital 14,113,400 Treasury Stock, 968,767 Common Shares - At Cost (1,744,547) Accumulated Comprehensive Loss (1,607,000) Accumulated [Deficit] (11,286,114) Deferred Acquisition Costs (400,000) ---------------- Total Stockholders' Equity (909,952) ----------------- Total Liabilities and Stockholders' Equity $ 2,478,639 ================ The Accompanying Notes are an Integral Part of these Consolidated Financial Statements. Page 4 of 19 ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
Three Months ended Nine Months ended September 30, September 30, 2 0 0 0 1 9 9 9 2 0 0 0 1 9 9 9 ------- ------- ------- ------- Revenue $ 303,942 $ 113,575 $ 2,231,027 $ 612,075 Cost of Sales 40,292 195,840 186,277 685,780 ------------ ---------------- ------------- ----------- Gross Profit [Loss] 263,650 (82,265) 2,044,750 (73,705) ------------ ----------------- ------------- ----------- Operating Expenses: General and Administrative 1,144,902 1,511,898 3,390,424 4,136,149 Provision for Doubtful Accounts and Notes -- -- -- 1,222,155 Depreciation and Amortization 58,764 88,968 154,045 224,143 ------------ ---------------- ------------- ----------- Total Operating Expenses 1,203,666 1,600,866 3,544,469 5,582,447 ------------ -------------- ------------- ----------- [Loss] Income from Operations (940,016) (1,683,131) (1,499,719) (5,656,152) ------------- -------------- ------------- ----------- Other [Expenses] Income: Interest Income -- 50 -- 30,926 Interest Expense (13,326) (17,187) (34,817) (39,819) Other Income [Expense] (265,000) (215,818) (1,465,000) (49,172) ------------- -------------- ------------- ----------- Other [Expenses] Income - Net (278,326) (232,955) (1,499,817) (58,065) ------------- ----------------- ------------- ----------- [Loss] from Continuing Operations Before Income Tax [Benefit] Expense (1,218,342) (1,916,086) (2,999,536) (5,714,217) Income Tax [Benefit] Expense -- -- -- (123,691) ------------ ---------------- ------------- ----------- [Loss] Income from Continuing Operations (1,218,342) (1,916,086) (2,999,536) (5,590,526) Discontinued Operations: [Loss] from Operations of Discontinued Business Segment [Net of Income Tax [Benefit] of ($0) and $(30,521), for the nine months ended September 30, 2000 and 1999, Respectively] -- -- -- (54,261) ------------ -------------- --------------- ---------- Net [Loss] (1,218,342) (1,916,086) (2,999,536) (5,644,787) Comprehensive Gain: Unrealized Holding [Loss] Gain arising during period -- (1,033,311) (132,500) (981,142) ------------ -------------- --------------- ---------- Total Comprehensive [Loss] $ (1,218,342) $ (2,949,397) $ (3,132,036) $ (6,625,929) ============ ============== ---------------- ---------- Net [Loss] $ (1,218,342) $ (1,916,086) $ (2,999,536) $ (5,644,787) Preferred Stock Dividend in Arrears 13,263 7,125 38,263 26,750 ------------ -------------- --------------- ------------ Net [Loss] Available to Common Stockholders $ (1,231,605) $ (1,923,211) $ (3,037,799) $ (5,671,537) ----------- -------------- --------------- ------------ [Loss] Per Common Share: Continuing Operations $ (0.09) $ (0.15) $ (0.22) $ (0.44) Basic and Diluted Net [Loss] Income Per Share of Common Stock $ (0.09) $ (0.15) $ (0.22) $ (0.44) Weighted Average Shares of Common Stock Outstanding 14,096,360 13,133,795 14,034,195 12,901,162
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements. Page 5 of 19 ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended Septmeber 30, 2 0 0 0 1 9 9 9 ------- ------- Operating Activities: [Loss] Income from Continuing Operations $ (1,218,342) $ (1,916,086) Adjustments to Reconcile Net [Loss] Income to Net Cash [Used for] Operating Activities: Depreciation and Amortization 58,764 284,182 Insurance of Common Stock for Services Rendered -- 140,000 Regulated Loss on Carrying Value of Investments 265,000 -- Loss on Sale of Investments -- 217,889 Changes in Assets and Liabilities: [Increase] Decrease in: Prepaid Expenses -- (13,959) Notes Receivable -- 130,000 Other Assets 28,324 18,114 Increase [Decrease] in: Accounts Payable and Accrued Expenses (86,372) 51,879 ---------------------- --------------------- Net Cash - Continuing Operations (952,625) (1,087,981) ---------------------- ---------------------- Investing Activities - Continuing Operations: Purchase of Investments -- (274,669) Purchase of Property, Equipment, and Capitalized Software (43,493) (5,486) Sale of Investments -- 573,526 Increase in due from related parties -- (113,000) Purchase of patents and licenses -- (250,000) --------------------- ---------------------- Net Cash - Investing Activities - Forward $ (43,493) $ (69,629)
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements. Page 6 of 19 ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended September 30, ------------- 2 0 0 0 1 9 9 9 -------- ------- Net Cash - Operating Activities - Forwarded $ (952,625) $ (1,087,981) -------------- ------------- Net Cash - Investing Activities - Continuing Operations - Forwarded (43,493) (69,629) -------------- ------------- Financing Activities - Continued Operations: Proceeds from Issuance of Common Stock -- 105 Payment from Notes Receivable -- 1,445,000 Increase in Loan Payable to Officer -- (377,184) Proceeds from Short Term Borrowings 1,135,000 184,000 Payment of Lease Payable (14,711) (10,789) Payment of Note Payable -- (88,774) ------------- ------------ Net Cash - Financing Activities 1,120,289 1,152,358 ------------- ------------ [Decrease] Increase in Cash and Cash Equivalents 124,171 (5,252) Cash and Cash Equivalents - Beginning of Period 84,549 (37,357) ------------- ------------- Cash and Cash Equivalents - End of Period $ 208,720 $ (42,609) ============= ============= Supplemental Disclosures of Cash Flow Information: Cash paid during the years for: Interest $ 13,326 $ 12,576 Supplemental Schedule of Non-Cash Investing and Financing Activities: Purchase of Assets under Capital Lease Financing $ -- $ 3,894
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements Page 7 of 19 ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, 2 0 0 0 1 9 9 9 ------- ------- Operating Activities: [Loss] Income from Continuing Operations $ (2,999,536) $ (5,590,526) Adjustments to Reconcile Net [Loss] Income to Net Cash [Used for] Operating Activities: Depreciation and Amortization 154,045 800,399 Deferred Tax Asset -- (123,691) Provision for Doubtful Accounts -- 1,222,155 Loss on Sale of Investments -- 221,637 Realized Loss on Carrying Value of Investments 1,465,000 -- Issuance of Common Stock for Services Rendered -- 140,000 Issuance of Common Stock for Compensation -- 217,312 Changes in Assets and Liabilities: [Increase] Decrease in: Accounts Receivable -- 13,716 Prepaid Expenses 5,190 (12,708) Notes Receivable -- 108,211 Other Assets 10,208 84,764 Increase [Decrease] in: Accounts Payable and Accrued Expenses (71,414) (54,485) ---------------- -------------- Net Cash - Continuing Operations (1,436,507) (2,973,216) ---------------- -------------- Discontinued Operations: [Loss] from Discontinued Operations -- (54,261) Adjustments to Reconcile Net [Loss] to Net Cash Operations: Depreciation and Amortization -- 38,220 Provision for Doubtful Accounts -- 18,915 Changes in Net Assets and Liabilities -- 238,577 --------------- ------------- Net Cash - Discontinued Operations -- 241,451 --------------- ------------- Net Cash - Operating Activities - Forward (1,436,507) (2,731,765) ---------------- ------------- Investing Activities - Continuing Operations: Increase in Due from Related Parties -- (113,828) Purchase of Investments -- (393,092) Purchase of Property, Equipment, and Capitalized Software (65,829) (71,711) Sale of Investments -- 3,131,291 Purchase of Patents and License -- (450,000) ----------------------------------- Net Cash - Investing Activities - Continuing Operations - Forward $ (65,829) $ 2,102,660
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements. Page 8 of 19 ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, ------------- 2 0 0 0 1 9 9 9 -------- ------- Net Cash - Operating Activities - Forwarded $ (1,436,507) $ (2,731,765) ------------ -------------- Net Cash - Investing Activities - Continuing Operations - Forwarded (65,829) 2,102,660 ------------- ------------- Investing Activities - Discontinued Operations: Purchase of Property and Equipment -- (29,715) Disposition Gain on Sale of Discontinued Operations -- -- ------------ ------------- Net Cash Investing Activities - Discontinued Operations -- (29,715) Financing Activities - Continuing Operations: Proceeds from Issuance of Common Stock 250,000 105 Proceeds from Issuance of Preferred Stock -- 570,000 Purchase of Treasury Stock -- (975,293) Proceeds from Notes Receivable -- 1,445,000 [Decrease] Increase in Loan Payable to Officer 112,350 (193,434) Payment of Notes Payable (5,850) (288,774) Payment of Lease Payable (56,509) (31,373) Decrease in Loan Receivable -- (324,286) Proceeds from Short Term Borrowings 1,585,000 344,000 ------------ ------------- Net Cash - Financing Activities 1,884,931 545,945 ------------ ------------- Financing Activities - Discontinued Operations: Proceeds from Long-Term Debt -- 50,000 Payment of Note Payable -- (41,500) Payment of Lease Payable -- (56,569) ------------ ------------- Net Cash Financing Activities Discontinued Operations -- 2,731 Net Increase [Decrease] in Cash and Cash Equivalents 382,595 (110,144) Cash and Cash Equivalents - Beginning of Years (173,875) 67,535 ------------- ------------- Cash and Cash Equivalents - End of Years $ 208,720 $ (42,609) ============ ============== Supplemental Disclosures of Cash Flow Information: Cash paid during the years for: Interest $ 34,817 $ 37,295 Supplemental Schedule of Non-Cash Investing and Financing Activities: Conversion of Preferred Stock into Common Stock $ 455 $ 649 Purchase of Assets under Capital Lease Financing $ -- $ 77,883 Sale of Subsidiary for Note Receivable $ -- $ 2,400,000
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements Page 9 of 19 ONLINE GAMIING SYSTEMS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) September 30, 2000 Note 1 - Basis of Preparation The accompanying unaudited interim financial statements include all adjustments (consisting only of those of a normal recurring nature) necessary for a fair statement of the results for the interim periods. The results of operations for the nine-month period September 30, 2000, are not necessarily indicative of the results of operations to be reported for the full year ending December 31, 2000. These statements should be read in conjunction with the summary of significant accounting policies and notes contained in the corporation's annual report on form 10-K for the year ended December 31, 1999. Note 2 - Sale of Subsidiary On March 31, 1999 the Company sold 81% of its interest in its wholly owned subsidiary, the Eminet Domain, Inc. to Centerline Associates, Inc., a shareholder of the Company. The sale price was $2,500,000 paid as follows: (i) $10,000 at sale date, (ii) $90,000 in cash payable at the rate of $14,000 per month commencing on April 15, 1999 and (iii) $2,400,000 by the delivery of a promissory note collateralized by shares of the Company's stock with interest at the annual rate of six percent (6%) and payable two years from the closing date. However, on December 10, 1999 the parties reformed the agreement to provide the sale of the company's entire interest in Eminet Domain in exchange for $2,500,000 in convertible preferred stock in Atlantic Internet Holdings, Inc. a Florida Holding company. The sale resulted in a gain of $1,231,751 which is reflected in other income in 1999. The transaction resulted in the Eminet Domain, Inc being treated as a discontinued operation. The investment in the preferred stock has subsequently being written down, the resulting write down of $1,200,000 is reflected in other (Expense). Note 3 - Major Customers Income fees derived from customers are evenly concentrated amongst numerous customers. Note 4 - Notes Payable and Advances During the course of the past 12 months Hosken Consoliated Investments (a South African Corporation) the company's largest single shareholder has undertaken to fund the company on an ongoing basis by the issue of Convertible Debt. This debt is due for repayment in January 2001. If the company cannot repay the debt then HCI has the option of converting this debt into equity. The conversion price will be the lower of 50 cents per share or the price at which the last equity issues was completed to a part other than HCI. Note 5 - Capital Stock During the first quarter of 1999, 5,000 shares of convertible preferred stock valued at $500,000 was converted into 395,823 shares of common stock by virtue of a formula contained in the purchase agreement which results to the average price per share of common stock within the conversion period. During the second quarter of 1999, 2,260 shares of convertible preferred stock valued at $226,000 was converted into 253,933 shares of common stock by virtue of a formula contained in the purchase agreement which results to the average price per share of common stock within the conversion period. Page 10 of 19 In the second quarter of 1999, 5,700 shares of 5% Convertible Preferred Stock, $.001 par value, were issued to the Shaar Fund for $570,000. Each share is convertible into common stock by virtue of a formula contained in the Purchase Agreement which is 78% of the three day average closing bid price for the corporations common stock for the twenty five (25) trading days prior to the delivery of the notice of redemption. The amount of such non-cash discounts which is analogous to a dividend is $53,451 holders of the above preferred stock are entitled to; (i) quarterly cumulative dividends at the rate of 5% per annum of the original issue price of the preferred stock, (ii) a liquidation preference equal to the sum of $100 for each outstanding share of the preferred stock. On April 6, 1999 certain individual employees were issued 110,000 shares of common stock of the company as a signing bonus pertaining to employment agreements between the company and the individuals. In the second quarter of 1999, 75,000 shares of the company's common stock were issued to a consultant for services performed. On July 1, 1999, the Company's largest institutional stockholder, Hosken Consolidated Investments, a South African corporation (the investment company for the Mine Workers Union and South African Clothing Workers Union), consummated its purchase of approximately 1,100,000 shares of the Company's common stock from Norman J. Hoskin, the Company's Chairman of the Board of Directors, which represents substantially all of Mr. Hoskin's holdings in the Company. Mr. Hoskin has resigned his positions as Chairman and Secretary/Treasurer and will limit his activities as a consultant to the Company due to his health. With its purchase, HCI share holdings increases to 2,361,935 shares or approximately 19% of total shares outstanding. In the third quarter of 1999, 52,500 shares of the Common Stock were issued in lieu of expenses paid on behalf of the Company. In the fourth quarter of 1999, 9,300 shares of 5% Convertible Preferred Stock, $.001 par value were issued to the Shaar Fund for $930,000. Each share is convertible into common stock by virtue of a formula contained in the Purchase Agreement which is 78% of the three day average closing bid price for the corporations common stock for the twenty five (25) trading days prior to the delivery of the notice of redemption. The amount of such non-cash discounts which is analogous to a dividend is $105,430 holders of the above preferred stock are entitled to; (i) quarterly cumulative dividends at the rate 5% per annum of the original issue price of the preferred stock, (ii) a liquidation preference equal to the sum of $100 for each outstanding share of the preferred stock. In the first quarter of 2000, 250,000 share of common stock of the company were issued to investors. Page 11 of 19 Note 6 - Per Share Data Per share data are based on the weighted average number of common shares outstanding during the respective periods. The diluted net income per share is based upon the options issued and outstanding as well as the assumed conversion of the Company's issued and outstanding preferred stock. Note 7 - Business Agreements On April 6, 1999 the company signed an agreement to purchase the patent rights, inventions and know-how of Excel Communications, Inc. The major product expected to be produced is a multi-function portable gaming device. In consideration, the company issued seventy-five thousand (75,000) shares of common stock to the company. The company also entered into an agreement to compensate a third party for termination of an exclusive manufacturing, licensing, marketing, and distribution of the invention with the seller. The third party received two hundred thousand dollars ($200,000) plus a stock option to purchase 50,000 shares of common stock of the company. In addition, the company entered into employment agreements with three of the key employees of Excel Communications, Inc. and granted those individuals options to purchase Company stock. On January 2000, the company entered into an exclusive agreement with Inter Global Fund for the worldwide rights for the sale of its products to Internet based casinos not attached to a land based casino. Note 8 - Subsequent Events In October 2000, Hosken Consolidated Investments (a South African Corporation) the company's largest single shareholder purchased from the Shaar Fund approximately 86% of the Convertible Preferred Stock currently held by the Shaar Fund for $600,000. The remaining 14% was satisfied by the payment of $10,000 and the issue of 500,000 shares in the company at 18 cents per share. Page 12 of 19 ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Result of Operations Three Months Ended September, 2000 and 1999 Net Revenues. The Company's revenues increased approximately 168% in 2000 over the same period in 1999. Revenues from operations in the third quarter 2000 were $ 303,942, as compared with $ 113,575 for the same period in 1999. The increase in revenues was the result of the enhancement and upgrading of its product as well as global expansion of the company's products. The Company's overseas distribution outlets namely Australia began generating substantial revenues and continues to make considerable inroads into the Asia Pacific market. The large resources allocated to sales and marketing in 1999 contributed to the revenue growth in 2000. Cost of Revenues. Cost of revenues decreased 80% in 2000 over the same period in 1999. The decrease resulted from the decrease in amortization of capitalized software development costs, which is reflected in cost of revenues. Operating Expenses. Operating expenses decreased by 25% or $ 397,200 in the third quarter 2000 over the same period in 1999. The decrease was largely due to cost cutting efforts, expenses related to product development and decreased support staffing. The company anticipates future cost savings due to the company relocating its operation to Las Vegas, the heart of the gaming industry. Nine Months Ended September 30, 2000 and 1999 Net Revenues. The Company's revenues increased approximately 265% in 2000 over the same period in 1999. Revenues from operations for the nine months ended September 30, 2000 were $ 2,231,027 as compared with $ 612,075 for the same period in 1999. The increase in revenues was the result of the enhancement and upgrading of its product as well as global expansion of the company's products. The Company's overseas distribution outlets namely Australia began generating substantial revenues and continues to make considerable inroads into the Asia Pacific market. The large resources allocated to sales and marketing in 1999 contributed to the revenue growth in 2000. Cost of Revenues. Cost of revenues decreased 73% for the nine months ended September 30, 2000 over the same period in 1999. The decrease resulted from the decrease in amortization of capitalized software development costs, which is reflected in cost of revenues. Page 13 of 19 Operating Expenses. Operating expenses excluding provisions for doubtful accounts decreased by 19% or $ 815,825 for the nine months ended September 30, 2000 over the same period in 1999. The decrease was largely due to cost cutting efforts, expenses related to product development and decreased support staffing. The company anticipates future cost savings due to the company relocating and consolidating its operations to Las Vegas, the heart of the gaming industry. Provision for Doubtful Accounts. Provision for doubtful accounts for the nine months ended September 30, 2000 were $ -0- as compared with $ 1,222,155 for the same period in 1999. The decrease resulted from management only recording revenues when monies have been received from a sale. Page 14 of 19 ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Result of Operations - Continued Nine Months Ended September 30, 2000 and 1999 Other Income (Expense). Other income decreased by approximately $1,133,853 in 2000 over the same period in 1999. A gain on sale of $1,231,751 resulted from a percentage interest sold of the Company's wholly owned subsidiary in 1999. A $ 170,000 gain was recognized in a full and final settlement of a payable. A loss of sale on trading stock for $221,636 was realized. Other expense increased by $1,465,000 in 2000 over the same period in 1999. This resulted from a write down of an investment of convertible preferred stock in the Company's formally wholly owned subsidiary and a write down of high risk priced security. This is conversant with the company's policy of continually reviewing the value of the company's assets. Liquidity and Capital Resources Cash, cash equivalents and marketable securities, which consist primarily of high risk, priced securities totaled $473,720 at September 30, 2000 compared to $1,020,628 at September 30, 1999. The decrease in cash, cash equivalents and marketable securities was due primarily to high risk priced securities decreasing in value and negative cash flow from operations. Management believes that cash generated from future operations as well as a firm commitment from an affiliated company and significant stockholder to fund future operations will be sufficient to satisfy the Company's current anticipated cash requirements. Page 15 of 19 ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES PART II Item 1. Legal Proceedings Litigation - On October 24 ,2000, the company received a summons to appear in court versus Actrade. This was a business deal that had never been followed through upon. The amount due at the time was $132,000. Our council immediately contacted the company and to this day they are in negotiations with them on a settlement amount. There will be no further court action. To management's opinion, this litigation will not materially affect the company's financial position, results of operation or cash flows. Item 2. Changes in Securities This Item is not applicable to the Company. Item 3. Defaults upon Senior Securities This Item is not applicable to the Company. Item 4. Submission of Matters to a Vote of Security Holders This Item is not applicable to the Company. Item 5. Other Information This Item is not applicable to the Company. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (b) Form 8-K - July 7, 1999 27 Financial Data Schedule Page 16 of 19 In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Online Gaming Systems, Ltd. Date: November 27, 2000 By: /s/ Gary Ramos ---------------------------------- (Signature) Gary Ramos, President Chief Executive Officer By: /s/ Peter Lawson ---------------------------------- (Signature) Peter Lawson, Chief Financial Officer Page 17 of 19