-----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, ALPY+AVTXW30282lagBAo2G4hwndesP74XL7354sRgs46i9fMZ9A5YaRAsgkMP0D jwu7HfKq6nKIF/G9vFd05g== 0001019056-01-500528.txt : 20020410 0001019056-01-500528.hdr.sgml : 20020410 ACCESSION NUMBER: 0001019056-01-500528 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ONLINE GAMING SYSTEMS LTD \ CENTRAL INDEX KEY: 0001003739 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 133858917 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-27256 FILM NUMBER: 1782879 BUSINESS ADDRESS: STREET 1: 200 E PALMETTO PARK RD, STE 200 CITY: BOCA RATON STATE: FL ZIP: 33432 BUSINESS PHONE: 5613936685 MAIL ADDRESS: STREET 1: 3225 MCLEDO DRIVE STREET 2: 1ST FLOOR CITY: LAS VEGAS STATE: NV ZIP: 89121 FORMER COMPANY: FORMER CONFORMED NAME: ATLANTIC INTERNATIONAL ENTERTAINMENT LTD DATE OF NAME CHANGE: 19961203 FORMER COMPANY: FORMER CONFORMED NAME: CEEE GROUP CORP DATE OF NAME CHANGE: 19951120 FORMER COMPANY: FORMER CONFORMED NAME: ONLINE GAMING SYSTEMS INC DATE OF NAME CHANGE: 19991115 10QSB 1 olg-q.txt FORM 10QSB 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, 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 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 9, 2001 ----------------------------- ---------------------------------- Common Stock, $.001 par value 34,296,268 TABLE OF CONTENTS Heading Page - ------- ---- PART 1. - FINANCIAL INFORMATION Item 1. Financial Statements..............................................1 Consolidated Balance Sheet - September 30, 2001 (Unaudited).......2-3 Consolidated Statement of Operations - Nine Months Ended September 30, 2001 and 2000(Unaudited)............................4 Consolidated Statement of Cash Flows - Three Months ended September 30, 2001 and 2000(Unaudited) ...........................5 Consolidated Statement of Cash Flows - Nine Months ended September 30, 2001 and 2000(Unaudited)............................6 Notes to Consolidated Financial Statements (Unaudited)............7-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................................11-13 PART II. - OTHER INFORMATION Item 1. Legal Proceedings ................................................14 Item 2. Changes In Securities.............................................14 Item 3. Defaults Upon Senior Securities...................................14 Item 4. Submission of Matters to a Vote of Securities Holders ............14 Item 5. Other Information ................................................14 Item 6. Exhibits and Reports on Form 8-K..................................15 Signatures........................................................15 PART 1 Item 1. Financial Statements The following consolidated unaudited financial Statements for the period ended September 30, 2001, have been prepared by Online Gaming Systems, Ltd. (the "Company") and Subsidiaries. ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES Financial Statements September 30, 2001 Page 1 of 17 ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (UNAUDITED) AS OF September 30, 2001 Assets: Current Assets: Cash $ 34,566 Other Current Assets 26,666 -------- Total Current Assets 61,232 -------- Property and Equipment - Net 203,755 Software Development, Net 80,548 Equipment under Capitalized Lease - Net 73,934 Other Assets 267,374 -------- Total Assets $686,843 ======== The Accompanying Notes are an Integral Part of these Consolidated Financial Statements. Page 2 of 17 ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (UNAUDITED) AS OF September 30, 2001 Liabilities and Stockholders' Equity: Current Liabilities: Accounts Payable and Accrued Expenses $ 272,467 Accrued Interest - Related Party 629,051 Notes Payable - Officers 213,604 Note Payable 20,000 Convertible Notes Payable - Related Party 6,434,907 Capital Lease Obligations 63,786 ------------ Total Current Liabilities 7,633,815 Commitments and Contingencies -- Stockholders' Equity (Deficit): Convertible Preferred Stock-Par Value $.001 Per Share; Authorized 10,000,000 Shares, None Issue or Outstanding -- Common Stock - Par Value $.001 Per Share; Authorized 100,000,000 Shares, Issued - 34,296,268 Shares 34,296 Additional Paid-in Capital 15,060,915 Treasury Stock, 811,767 Common Shares - At Cost (1,730,485) Accumulated [Deficit] (20,311,698) ------------ Total Stockholders' Equity (Deficit) (6,946,972) ------------ Total Liabilities and Stockholders' Equity (Deficit) $ 686,843 ============ The Accompanying Notes are an Integral Part of these Consolidated Financial Statements. 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ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months ended Nine Months ended September 30, September 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Revenue $ 196,798 $ 303,942 $ 693,937 $ 2,231,027 Cost of Sales -- 40,292 17,142 186,277 ------------ ------------ ------------ ------------ Gross Profit 196,798 263,650 676,795 2,044,750 ------------ ------------ ------------ ------------ Operating Expenses: General and Administrative 1,048,271 1,144,902 2,930,995 3,390,424 Depreciation and Amortization 59,984 58,764 185,719 154,045 ------------ ------------ ------------ ------------ Total Operating Expenses 1,108,255 1,203,666 3,116,714 3,544,469 ------------ ------------ ------------ ------------ [Loss] from Operations (911,457) (940,016) (2,439,919) (1,499,719) ------------ ------------ ------------ ------------ Other [Expenses] Income: Interest Expense (174,360) (13,326) (461,342) (34,817) Settlement of debt (200,000) Other Income [Expense] (183,374) (265,000) (183,732) (1,465,000) ------------ ------------ ------------ ------------ Other [Expenses] Income - Net (357,734) (278,326) (845,074) (1,499,817) ------------ ------------ ------------ ------------ [Loss] from Operations Before Income Tax [Benefit] Expense (1,269,191) (1,218,342) (3,284,993) (2,999,536) Income Tax [Benefit] Expense -- -- -- -- ------------ ------------ ------------ ------------ [Loss] from Operations (1,269,191) (1,218,342) (3,284,993) (2,999,536) ------------ ------------ ------------ ------------ Net [Loss] (1,269,191) (1,218,342) (3,284,993) (2,999,536) Comprehensive Gain: Unrealized Holding [Loss] arising during period -- -- -- (132,500) ------------ ------------ ------------ ------------ Total Comprehensive [Loss] $ (1,269,191) $ (1,218,342) $ (3,284,993) $ (3,132,036) ============ ============ ------------ ------------ Net [Loss] $ (1,269,191) $ (1,218,342) $ (3,284,993) $ (2,999,536) Preferred Stock Dividend in Arrears 13,263 -- 38,263 ------------ ------------ ------------ ------------ Net [Loss] Available to Common Stockholders $ (1,269,191) $ (1,231,605) $ (3,284,993) $ (3,037,799) ------------ ------------ ------------ ------------ Basic and Diluted Net [Loss] Income Per Share of Common Stock $ (0.04) $ (0.09) $ (0.15) $ (0.22) Weighted Average Shares of Common Stock Outstanding-Basic and Diluted 33,985,792 14,096,360 22,440,889 14,034,195 The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.
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ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended September 30, ------------------------------- 2001 2000 ----------- ----------- Operating Activities: [Loss] Income from Operations $(1,269,191) $(1,218,342) Adjustments to Reconcile Net [Loss] Income to Net Cash [Used for] Operating Activities: Depreciation and Amortization 59,984 58,764 Realized Gain on Settlement of Debt (38,768) Regulated Loss on Carrying Value of Investments 265,000 Changes in Assets and Liabilities: [Increase] Decrease in: Prepaid Expenses Other Assets (5,810) 28,325 Increase [Decrease] in: Accounts Payable and Accrued Expenses 212,940 (86,372) ----------- ----------- Net Cash - Operating Activities: (1,040,845) (952,625) ----------- ----------- Investing Activities: Purchase of Property, Equipment, and Capitalized Software (80,548) (43,493) ----------- ----------- Net Cash - Investing Activities (80,548) (43,493) ----------- ----------- Financing Activities: Proceeds from Issuance of Common Stock 17,500 Increase in Loan Payable to Officer 7,500 Proceeds from Convertible Note Payable 1,245,000 1,135,000 Proceeds from Note Payable 7,500 Payment of Note Payable (100,000) Payment of Lease Payable (27,421) (14,711) ----------- ----------- Net Cash - Financing Activities 1,150,079 1,120,289 ----------- ----------- [Decrease] Increase in Cash and Cash Equivalents 28,686 124,171 Cash and Cash Equivalents - Beginning of Period 5,880 84,549 ----------- ----------- Cash and Cash Equivalents - End of Period $ 34,566 $ 208,720 =========== =========== Supplemental Disclosures of Cash Flow Information: Cash paid during the years for: Interest $ 19,603 $ 13,326 The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.
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ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended September 30, ------------------------------ 2001 2000 ----------- ----------- Operating Activities: [Loss] Income from Operations $(3,284,993) $(2,999,536) Adjustments to Reconcile Net [Loss] Income to Net Cash [Used for] Operating Activities: Depreciation and Amortization 185,719 154,045 Issuance of common stock in exchange for cancellation of indebtedness 200,000 Realized Gain on Settlement of Debt (38,769) Realized Loss on Carrying Value of Investments 1,465,000 Changes in Assets and Liabilities: [Increase] Decrease in: Prepaid Expenses 5,190 Other Assets (17,622) 10,208 Increase [Decrease] in: Accounts Payable and Accrued Expenses (262,720) (71,414) ----------- ----------- Net Cash - Operating Activities (3,218,385) (1,436,507) ----------- ----------- Investing Activities: Purchase of Property, Equipment, and Capitalized Software (80,548) (65,829) Purchase of Patents and Licenses (125,000) ----------- ----------- Net Cash - Investing Activities $ (205,548) $ (65,829) ----------- ----------- Financing Activities: Proceeds from Issuance of Common Stock 17,500 250,000 Proceeds from sale of Treasury Stock 14,062 Increase in Loan Payable to Officer 91,254 112,350 Proceeds from Note Payable 132,500 -- Payment of Notes Payable (282,500) (5,850) Payment of Lease Payable (85,888) (56,569) Proceeds from Convertible Note Payable 3,538,642 1,585,000 ----------- ----------- Net Cash - Financing Activities 3,425,570 1,884,931 ----------- ----------- Net Increase [Decrease] in Cash and Cash Equivalents 1,637 382,595 Cash and Cash Equivalents - Beginning of Period 32,929 (173,875) ----------- ----------- Cash and Cash Equivalents - End of Period $ 34,566 $ 208,720 =========== =========== Supplemental Disclosures of Cash Flow Information: Cash paid during the years for: Interest $ 37,805 $ 34,817 Supplemental Schedule of Non-Cash Investing and Financing Activities: Conversion of Preferred Stock into Common Stock $ 455 Issuance of 225,000 common stock in exchange for cancellation of indebtedness The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.
Page 6 of 17 ONLINE GAMIING SYSTEMS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) September 30, 2001 Note 1 - Basis of Preparation -------------------- The accompanying consolidated 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 ended September 30, 2001, are not necessarily indicative of the results of operations to be reported for the full year ending December 31, 2001. 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, 2000. Note 2 - Major Customers --------------- Income fees derived from customers are evenly concentrated amongst numerous customers. Note 3 - Convertible Note Payable - Related Party ---------------------------------------- The Company's operating shortfalls have largely been funded via its largest shareholder, Hosken Consolidated Investment Limited (HCI). HCI is a South Africa - based investment holding company that focuses its activities in telecommunications and information technology, media and broadcasting, interactive gaming and entertainment and financial services. During 2000, HCI funded the Company $2,335,000 in the form of convertible notes. These notes bear an interest rate of 12 percent, have a maturity date of December 31, 2000 and are collateralized by substantially all of the assets of the Company . At December 31, 2000 the company had not repaid the outstanding principal balance and interest and was in technical default of the note payable agreement. HCI has informed the Company that it plans to convert the notes into equity at a future date, at a price to be determined. During the first quarter of 2001, HCI advanced the Company $1,303,042 in convertible notes and funds, and has stated its intent on continuing the funding of the Company through the balance of the year. During the second quarter of 2001, HCI advanced the company $ 990,000 in convertible notes and in the third quarter of 2001, HCI advanced the company $ 1,245,000. Subsequent to the third quarter of 2001, HCI and affiliates have advanced the Company about $250,000 in convertible notes. Page 7 of 17 ONLINE GAMIING SYSTEMS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (continued) (Unaudited) September 30, 2001 Note 4 - Capital Stock ------------- During fiscal 2000, the Company issued 375,000 shares of its common stock in connection for consulting services rendered in obtaining and negotiating convertible debt financing. The value of the 375,000 shares was based on the market value per common share of approximately $2.00 at the date of issuance. Accordingly, the Company recorded an expense of $750,000 for the year ended December 31, 2000 associated with these consulting services. In February 2000, the Company issued 100,000 shares of its common stock in exchange for a $150,000 investment [fair value of common stock at date of issuance] from an individual investor. In March 2000, the Company issued 100,000 shares of its common stock in connection with a $100,000 borrowing obtained from a customer of the Company. The fair value of the common stock issued was approximately $100,000. In April 2000, the Company issued 25,000 shares of its common stock in exchange for consulting services which has been recorded as a $ 25,000 expense in fiscal 2000. In the first quarter 2001 the Company issued 500,000 shares of its common stock to the Shaar fund to repurchase outstanding preferred stock. During the second quarter of 2001, the Company issued 225,000 shares of common stock in satisfaction of indebtedness to Wayne Newton, who was previously employed as a promotional consultant by the Company. During the second quarter of 2001 HCI converted its 9,000 shares of preferred to common stock, under formula as provided in the Convertible Preferred Stock Sales Agreement. The preferred stock converted to 18,610,422 of common stock, which was issued to affiliates of HCI. HCI and its affiliates own 21,799,857 shares, or about 64 percent of the outstanding stock of the Company. The Company has now retired all of its preferred stock. During the third quarter of 2001, executive management personnel purchased a total of 291,666 shares of common stock from the Company at a price of $.06 per share. Page 8 of 17 ONLINE GAMIING SYSTEMS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (continued) (Unaudited) September 30, 2001 Note 5 - Per Share Data -------------- Per share basic 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 common stock outstanding during the period and the effect of all dilutive potential common shares outstanding. The computation of diluted earnings per share does not assume conversion, exercise or contingent issuance of securities that would have an antidilutive effect on earnings per share. Note 6 - Business Agreements ------------------- 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. This agreement was terminated during 2000. On March 30, 2001 the Company executed a formal agreement with Australian On-Line Casino Ltd. (AOC) and Casino Australia On-Line Pty Ltd (CAO), its subsidiary for the licensing and distribution of our products. AOC holds an online casino and bookmaking license from the Australian Territory of Norfolk Island. AOC is seeking to establish itself as a global marketer and supplier of Internet gaming services. Generally, the Company granted to AOC an exclusive license to distribute our software products in the Asia Pacific region, and non-exclusive rights to distribute other products. To retain this exclusivity in this territory, AOC must meet minimum sales thresholds, at recommended sales prices approved by us. We obtained certain non-exclusive rights to distribute new products that CAO creates. The agreement calls for $250,000 in cash, plus ongoing royalties associated with sales revenue, service revenue and hosting revenue. Additionally, the Company will receive an option for 5,000,000 shares of AOC stock. AOC is planning a 50,000,000 share offering to raise $10,000,000 (Australian). The transaction is subject to a number of conditions, including the successful public offering of AOC, and the certification of our ICE software by the appropriate Australian authority. The transaction is expected to be completed during the third or fourth quarter of this year. Page 9 of 17 ONLINE GAMIING SYSTEMS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (continued) (Unaudited) September 30, 2001 Note 6 - Business Agreements (continued) ------------------------------- During the second quarter of 2001 the Company announced its joint venture with Station Casinos, Inc., formed to develop the technology for the remote play "eSlot" product which is licensed to Gamecast Live, a Station Casinos subsidiary. In exchange for a 22.5 percent interest in the joint venture, the Company is contributing certain assets, including intellectual property and services. During the third quarter of 2001, the Company announced its Marketing and Operations Agreement with UnoDosTres.com to develop and operate up to three online casinos on the popular Internet Television Network targeting the Latin American marketplace. The agreement calls for OGS to develop and operate, on an exclusive basis, up to three online casinos (a Play for Fun and two live casinos) on the Internet Television Network. UnoDosTres (UDT) will contribute up to $155 million of bartered television and radio advertising for the promotion and marketing of the casinos, via its consortium of media and broadcasting partners throughout the United States, Latin Ameican and the Iberian Peninsula. The casinos will adhere to strict restrictions regarding age of eligible gamblers, and prohibition of wagers from residents of or placed from the United States, or any jurisdiction that prohibits such activities. UDT will receive a portion of the net revenue generated from the gaming sites. Note 7 - Subsequent Events ----------------- During the fourth quarter of 2001, executive management personnel purchased a total of 166,667 shares of common stock from the Company at a price of $.06 per share. Note 8 - New Accounting Pronouncements ----------------------------- In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Intangible Assets ("SFAS No. 142"). SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be Page 10 of 17 accounted for using the purchase method of accounting and prohibits the use of the pooling-of-interests method for such transactions. SFAS No. 142 applies to all goodwill and intangible assets acquired in a business combination. Under the new standard, all goodwill, including goodwill acquired before initial application of the standard, should not be amortized but should be tested for impairment at least annually at the reporting level, as defined in the standard. Intangible assets other than goodwill should be amortized over their useful lives and reviewed for impairment in accordance with SFAS no. 121. The new standard is effective for fiscal years beginning after December 15, 2001. The Company must adopt this standard on January 1, 2002. As of July 31, 2001, the Company had no unamortized goodwill. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "accounting for the Impairment or Disposal of Long-lived Assets". SFAS 144 superceded Statement of Financial Accounting Standards No. 121, "accounting for the Impairment of Long-lived Assets and Assets to be Disposed of" and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transaction". SFAS 144 also amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The provision of SFAS 144 will be effective for fiscal years beginning after December 15, 2001. The Company has not yet determined the effect SFAS 144 will have on its financial position or results of operations in future periods. 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 30, 2001 and 2000 ---------------------------------------------- Net Revenues. The Company's revenues decreased approximately 35% in 2001 compared to the same period in 2000. Revenues from operations in the third quarter 2001 were $196,798 as compared with $303,942 for the same period in 2000. The decrease in revenues was the result of fewer sales of its products during the quarter, and the installment nature of the sales. The majority of the revenue for the quarter emanated from sales of our gaming devices and related services. We believe that the market for our products is evolving to established land-based gaming operators, many of whom are waiting for the legal and regulatory environment to become more clear. Additionally, the legislation passed by the government of Australia on new casino licenses may have also Page 11 of 17 adversely impacted sales of our products. The legislation forbids Australian citizens from Internet casino gambling, although operators may run Internet casinos in the country. Operating Expenses. Operating expenses decreased by 8% or $95,411 in the third quarter 2001 over the same period in 2000. The decrease was largely due to the Company streamlining costs and reducing overhead. Other Expenses. Other expenses were $183,374 in the third quarter of 2001, a decrease of $81,626, or about 31% compared to the same period in 2000. Included in other expenses are refunds to customers for prior year sales for $182,500. Management believes that these refunds are the last of a series of refunds made to customers for obligations of the Company not satisfactorily fulfilled. Other Expense includes a settlement of a prior year disputed debt for $30,000, which is offset by a gain of $38,679 in lieu of a final settlement of a Note Payable. Nine Months Ended September 30, 2001 and 2000 --------------------------------------------- Net Revenues. The Company's revenues decreased approximately 70% in 2001 over the same period in 2000. Revenues from operations for the nine months ended September 30, 2001 were $693,937, as compared with $2,231,027 for the same period in 2000. The decrease in revenues was attributable to a significant decrease in sales of our software products. Most of the revenue during the first nine months of 2001 emanated from recurring software royalty fees, and the initial order for our gaming devices. During the first nine months of 2000, most of the revenue emanated from the sales of our software products. The moratorium imposed on new Internet casinos in Australia during 2000 partially accounted for the decrease in sales. We believe that future revenue will likely emanate more from traditional land-based gaming operators who are entering the Internet Gaming business, as opposed to the Internet gaming companies who have been the major customers over the past few years. Many of the land-based operators appear to be taking a cautious approach upon entering the Internet gaming market, waiting for the legal and regulatory framework to become apparent. Accordingly, we expect fewer sales of our software products for the foreseeable future, but to more significant customers demand robust, managed solutions. Operating Expenses. Operating expenses decreased by 12% or $427,755 for the nine months ended September 30, 2001 over the same period in 2000. The decrease was largely due to cost cutting efforts, decreased support staffing and the Company relocating and consolidating certain of its operations to Las Vegas during the third quarter of 2000. These decreases were partially offset by additional resources allocated to further development of our software products. Other Expense. Included in other expense is a settlement of a $200,000 prior debt. During the second quarter of 2001, the Company issued 225,000 shares of common stock in exchange for cancellation of the debt. Also included in other expenses are refunds to Page 12 of 17 customers for prior year sales for $ 182,500. Management believes that these refunds are the last of a series of refunds already made to customers for obligations of the Company not satisfactorily fulfilled. These other expenses were partially offset by settlements made with long outstanding Accounts Payables. Liquidity and Capital Resources ------------------------------- Cash and cash equivalents totaled $34,566 at September 30, 2001. Net cash used from operations was $3,218,385 primarily due to a Net Loss for the nine months ended September 30, 2001 of $3,284,993. Net cash used in investing activities for the nine months ended September 30,2001, was $205,548 for the purchase of patents and licenses and payments made for the further development of the Company's software. Net cash provided from financing activities for the nine months ended September 30, 2001, was $3,425,570. HCI, the Company's largest stockholder funded the finance Company operations with the issuance of approximately $3,500,000 in convertible debt. Management believes that cash generated from future operations and continuing participation of HCI will be sufficient to satisfy the Company's current anticipated cash requirements. Forward-Looking Statements -------------------------- The matters discussed in Management's Discussion and Analysis and throughout this report that are forward-looking statements are based on current management expectations that involve risk and uncertainties. Potential risks and uncertainties include, without limitation; the impact of economic conditions generally and in the industry for Internet gaming products and services; dependence on key customers; continued competitive and pricing pressures in the industry; open-sourcing of products; rapid product improvement and technological change; capital and financing availability; and other risks set forth herein. Page 13 of 17 ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES PART II Item 1. Legal Proceedings During the second quarter of 2001, the Company engaged in mediation proceedings with Home Broadband Network, Inc. During 1998, we acquired the assets of Axxsys International in exchange for 200,000 shares of stock. Axxsys and its affiliates filed suit subsequently against Atlantic International Entertainment seeking injunctive relief based on numerous allegations, the essence of which was that the 200,000 shares of Atlantic stock was not adequate consideration for the transfer of the Axxsys assets. Axxsys now does business as Home Broadband Network. The Company was formerly Atlantic International Entertainment. The mediation effort was not successful, and a non-jury trial is expected to be scheduled sometime during the fourth quarter of this year. The Company has sued a former employee (Cobrero) for failure to perform duties and for inducing the Company to pay him for software he did not deliver. The employee has counter sued, seeking approximately $30,000 in medical expenses, with the Company failing to provide "COBRA" notice. This case will be scheduled for a non-jury trial during the first quarter of 2002. During the second quarter of 2001 a former employee (Iamunno) threatened to bring suit against the Company for repayment of loans totaling about $134,000, as provided for in his termination letter with the Company. The petitioner also asserts he is owed monies regarding a previous acquisition made by the Company. The Company has counter-demanded set-off expenses, and damages related to his conduct during and after his employment with the Company. The arbitration is scheduled for November 29, 2001. 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. Page 14 of 17 Item 6. Exhibits and Reports on Form 8-K (a) Not applicable (b) Form 8-K - July 7, 1999 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 13, 2001 By: /s/ GARY RAMOS ------------------------------------ (Signature) Gary Ramos President / Chief Executive Officer By: /s/ LAWRENCE P. TOMBARI ------------------------------------ (Signature) Lawrence P. Tombari Chief Financial Officer Page 15 of 17 -----END PRIVACY-ENHANCED MESSAGE-----