10QSB 1 ogs10q0302.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 March 31, 2002 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 May 14, 2002 --------------------------------- ------------------------------- Common Stock, $.001 par value 95,394,702 TABLE OF CONTENTS
Heading Part I. FINANCIAL INFORMATION Page ------- ----------------------------- ---- Item 1 Financial Statements ..................................................... 2 Consolidated Balance Sheet-March 31, 2002 (Unaudited) .................... 3 Consolidated Statement of Operations-Three Months Ended March 31, 2002 (Unaudited) .............................................................. 4 Consolidated Statement of Cash Flows-Three Months Ended March 31, 2002 (Unaudited) .............................................................. 5 Notes to Consolidated Financial Statements (Unaudited) ................... 6-9 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operation ................................................................ 9-10 Part II. OTHER INFORMATION -------------------------- Item 1 Legal Proceedings ........................................................ 11 Item 2 Change in Securities ..................................................... 11 Item 3 Defaults Upon Senior Securities .......................................... 11 Item 4 Submission of Matters to a Vote of Securities Holders .................... 11 Item 5 Other Information ........................................................ 11 Item 6 Exhibits and Reports on Form 8-K ......................................... 11 Signatures ............................................................... 12
i PART 1 Item 1. Financial Statements The following unaudited financial Statements for the three-month period ended March 31, 2002, have been prepared by Online Gaming Systems, Ltd. (the "Company") and Subsidiary. Page 2 of 12 ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARY Financial Statements March 31, 2002 ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET (UNAUDITED)
March 31, 2002 December 31, 2001 ---------------- ----------------- Assets: Current Assets: Cash $ 88,113 $ 123,097 Other Current Assets 18,568 22,918 ---------------- ----------------- Total Current Assets 106,681 146,015 Property and Equipment-Net 158,164 214,393 Other Assets Intangible Assets-Net 336,153 319,333 ---------------- ----------------- Total Assets $ 600,998 $ 679,741 ---------------- ----------------- Liabilities and Stockholders' Equity: Current Liabilities: Accounts Payable and Accrued Expenses $ 361,934 $ 379,125 Notes Payable-Officers -- 34,680 Accrued Interest-Related Party 916,145 804,098 Note Payable 47,500 22,500 Capital Lease Obligations 28,267 34,874 ---------------- ----------------- Total Current Liabilities 1,353,846 1,275,277 Convertible Notes Payable-Related Party 4,484,907 3,734,907 Total Liabilities 5,838,753 5,010,184 Commitments and Contingencies -- -- Stockholders' (Deficit): Convertible Preferred Stock-Par Value $.001 Per Share; Authorized 10,000,000 Shares, None Issued and Outstanding -- -- Common Stock-Par value $.001 Per Share; Authorized 100,000,000 Shares, Issued- 95,394,702 Shares 95,394 94,546 Additional Paid-in Capital 18,654,164 18,615,665 Treasury Stock, 811,767 Common Shares-At Cost (1,730,485) (1,730,485) Accumulated (Deficit) (22,256,828) (21,310,169) ---------------- ----------------- Total Stockholders' (Deficit) (5,237,755) (4,330,443) ---------------- ----------------- Total Liabilities and Stockholders' (Deficit) $ 600,998 $ 679,741 ---------------- -----------------
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements Page 3 of 12 ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months ended March 31, --------------------------------------- 2002 2001 ---------------- ---------------- Revenue $ 64,974 $ 225,105 Cost of Sales -- 9,058 ---------------- ---------------- Gross Profit 64,974 216,047 ---------------- ---------------- Operating Expenses: General and Administrative 803,356 742,435 Depreciation and Amortization 86,409 59,982 ---------------- ---------------- Total Operating Expenses 889,765 802,417 ---------------- ---------------- [Loss] from Operations (824,791) (586,370) ---------------- ---------------- Other [Expenses] Income: Interest Expense-Related Party (112,047) (126,000) Interest Expense (11,618) (4,795) Settlement of debt -- 78,142 Other Income [Expense] 1,796 -- ---------------- ---------------- Other [Expenses] Income - Net (121,869) (52,653) ---------------- ---------------- [Loss] from Operations Before Income Tax [Benefit] Expense (946,660) (639,023) Income Tax [Benefit] Expense -- -- ---------------- ---------------- [Loss] from Operations (946,660) (639,023) ---------------- ---------------- Net [Loss] (946,660) (639,023) Preferred Stock Dividend in Arrears -- 11,250 ---------------- ---------------- Net [Loss] Available to Common Stockholders $ (946,660) $ (650,273) ---------------- ---------------- Basic and Diluted Net [Loss] Per Share of Common Stock $ (0.01) $ (0.04) Weighted Average Shares of Common Stock Outstanding-Basic and Diluted 95,040,042 14,955,925
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements. Page 4 of 12 ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, --------------------------------------- 2002 2001 ---------------- ---------------- Operating Activities: [Loss] from Operations $ (946,660) $ (639,023) Adjustments to Reconcile Net [Loss] Income to Net Cash [Used for] Operating Activities: Depreciation and Amortization 86,409 59,982 Changes in Assets and Liabilities: [Increase] Decrease in: Prepaid Expenses Other Assets 4,349 688 Increase [Decrease] in: Accounts Payable and Accrued Expenses (17,191) (480,336) Accrued Interest - Related Party 112,047 126,000 ---------------- ---------------- Net Cash - Operating Activities: (761,046) (932,689) ---------------- ---------------- Investing Activities: Purchase of Patents and Licenses -- (125,000) Purchase of Property, Equipment, and Capitalized Software (47,000) -- ---------------- ---------------- Net Cash - Investing Activities (47,000) (125,000) ---------------- ---------------- Financing Activities: Proceeds from Issuance of Common Stock 39,349 -- Proceeds from Sale of Treasury Stock -- 14,062 Increase (Decrease) in Loan Payable to Officer (34,680) 65,000 Proceeds from Note Payable 25,000 125,000 Proceeds from Convertible Note Payable - Related Party 750,000 1,303,642 Repayments of Note Payable -- (50,000) Repayments of Lease Payable (6,607) (14,581) ---------------- ---------------- Net Cash - Financing Activities 773,062 1,443,123 ---------------- ---------------- [Decrease] Increase in Cash and Cash Equivalents (34,984) 385,434 Cash and Cash Equivalents - Beginning of Period 123,097 32,929 ---------------- ---------------- Cash and Cash Equivalents - End of Period $ 88,113 $ 418,363 ================ ================ Supplemental Disclosures of Cash Flow Information: Cash paid during the years for: Interest $ 11,618 $ 4,795
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements. Page 5 of 12 ONLINE GAMIING SYSTEMS, LTD. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) March 31, 2002 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 three-month period ended March 31, 2002, are not necessarily indicative of the results of operations to be reported for the full year ending December 31, 2002. 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-KSB for the year ended December 31, 2001. Note 2 - Major Customers --------------- Income fees derived from customers are concentrated amongst numerous customers, with the following contributing more than 10 percent of the Company's revenues during the quarter ending March 31, 2002: Customer A-Software Sale Installment 46% Customer B-Hardware Project 28% Customer C-Software Support Fees 23% Note 3 - Convertible Notes Payable - Related Party ----------------------------------------- At March 31, 2002, the Company had a $4,484,907 convertible note payable balance due Hosken Consolidated Investments ["HCI"]. As of March 31, 2002, subsidiaries of HCI owned approximately 86% of the outstanding shares of the Company's common stock. HCI is a South African investment holding company involved in various technology industries. Terms of the revised loan agreement provide for an extension of the maturity to repay all principal outstanding and related accrued interest by December 31, 2003. The notes payable are secured by substantially all assets of the Company. In November 2001, HCI converted $3,600,000 of convertible debt into 60,000,000 shares of the Company's common stock. As of March 31, 2002 the Company has accrued $916,145 in interest related to the convertible debt borrowing. During the quarter ended March 31, 2002, the Company repaid HCI approximately $11,014 in accrued interest. During the first quarter of 2002, HCI advanced the Company $750,000 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 2002, HCI has advanced the Company $400,000 via convertible notes. Page 6 of 12 Note 4 - Capital Stock ------------- In January 2001, 1,610 shares of the Company's preferred stock was converted into 500,000 shares of the Company's common stock. In March 2001, 9,000 shares of preferred stock owned by HCI were converted into 18,610,422 shares of the Company's common stock. In April 2001, the Company issued 225,000 shares of its common stock as part of a settlement with a former public relations consultant. The value of the shares was approximately $13,500 or $.06 per share, and was charged to operations in fiscal 2001. During fiscal 2001, both the Chief Executive Officer and Chief Financial Officer of the Company purchased 208,334 and 333,333 shares of the Company's common stock, for $.06 per share. During the first quarter 2002, the Chief Financial Officer of the Company purchased 166,667 shares of the Company's common stock, for $.06 per share. During the first quarter 2002, the former Chief Executive Officer of the Company was issued 561,766 shares of the Company's common stock, in settlement of a loan amount due to the former Chief Executive Officer of $34,683. In January 2002, the Company received a purchase money mortgage note from a consultant calling for the purchase of 30,000 shares per month for 12 months at a price of $.05 per share, the closing price on the date when the agreement was negotiated. On January 2, 2002, the Company issued the initial 30,000 shares of its common stock in exchange for $1,500. On February 7, 2002, the Company issued another 90,000 shares of its common stock in exchange for $4,500. 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 anti-dilutive effect on earnings per share. Note 6 - Business Agreements ------------------- Your Move, Inc. --------------- 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 Page 7 of 12 "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. Station Casinos is in the gaming and entertainment business and will owns 75 percent of Your Move, Inc. UnoDosTres.com -------------- 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 Internet casino being developed by Ahead Investments (see below) is the first casino related to this agreement. 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 American 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. Internet Casino Contract-Ahead Investments Limited -------------------------------------------------- In February 2002, the Company entered into a management agreement with Ahead Investments Limited ("AI"), a wholly owned subsidiary of HCI. At December 31, 2001, the agreement entails the creation of a yet unspecified separate entity that will own an Internet casino and be managed by the Company. Ownership of the Company is as follows. AI 88.60% Other 11.40% In addition, the agreement provides an option for certain OGS personnel to purchase an aggregate of an 18.5% ownership of the entity in exchange for a total of $110,000. AI will provide funding for the project, to be about $1,100,000. The agreement provides that AI will purchase from the Company a software license fee of $250,000 plus pay the Company $200,000 for costs related to obtaining an online casino licensing for the new entity. The purchase of the license fee and payment of the online casino licensing fee costs will be financed by the Company. Terms of the financing provisions provide for AI to incur interest at a rate of 10% per annum, with the $250,000 and $200,000 lump sums amounts maturing in December 2003. AI reserves the right to offset the notes Page 8 of 12 payable due them by the Company with the interest and purchase price incurred in connection with the software license purchase and online casino licensing costs. The Company will manage the casino for AI, for a minimum management fee of $600,000 per annum, plus incentive of up to $2,000,000 annually if certain operating thresholds are met. Additionally, OGS will receive $12,500 (increasing to $15,000) per month under a software support and maintenance agreement. In the event the marketing and operations agreement is terminated, AI may exercise a "put option" which requires the Company to purchase from AI and the remaining shareholders all of the shares on the separate company based upon a fair market value per share. The fair market value shall have a minimum value of $1,300,000. The agreement also provides that the Company may exercise a "call option" to require that AI and all remaining shareholders to sell to the Company their respective shares outstanding for a fair value with a minimum value of $1,500,000. The Company may not exercise the call option if AI elects to utilize its put option. Convertible Debt Conversion --------------------------- During the fourth quarter of 2001 Hosken Consolidated Investment Limited announced its intention to convert a portion of its ownership of the Company's convertible debt into common stock of the Company, and to amend certain terms of the remaining notes. Additionally, HCI informed the Company of its intention to provide additional funding of up to $1 million. HCI converted $3.6 million of its convertible debt into 60,000,000 shares of the Company's common stock. The conversion price was set at $.06, the closing price of OGAM common stock on November 27, 2001. Prior to the conversion, HCI owned 18,698,120 shares or about 55 percent of the outstanding common stock of the Company. Pro forma the conversion of the debt, HCI owns 78,698,120 shares or about 83 percent of the common stock of the Company. HCI also agreed amend the terms of its debt, extending the maturity of the remaining notes to December 31, 2003. The previous maturity date on the notes was December 31, 2001 and the Company had been in default on the notes. The Company will no longer be in default on the notes. Note 7 - Subsequent Events ----------------- During the second quarter of 2002, HCI has advanced the Company $400,000 via convertible notes. Page 9 of 12 Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations --------------------- Result of Operations -------------------- Three Months Ended March 31, 2002 and 2001 ------------------------------------------ Net Revenues. The Company's revenues decreased approximately 71% in 2002 over the same period in 2001. Revenues from operations in the first quarter 2002 were $69,474 as compared with $225,105 for the same period in 2001. The decrease in revenue was primarily due to decreases in fee-paying customers emanating from a general industry slowdown apparent since the third quarter of 2001, decreased sales of hardware products and the absence of new sales of our products. We allocated our limited resources to increased product development, as opposed to marketing and sales, to better position the company to benefit from changes occurring in the industry. Operating Expenses. Operating expenses increased by 11% or $87,348 in the first quarter 2002 over the same period in 2001. The increase was largely due to severance charges, as we reduced overhead relative to significant contraction in our Excel Design business, and software development, as we largely completed our new FIRE product during the first quarter, and submitted for beta testing. We expect operating expenses to be substantially lower for the remainder of the year. Liquidity and Capital Resources ------------------------------- Cash and cash equivalents totaled $88,113 at March 31, 2002. Net cash used from operations was $736,046 primarily due to a Net Loss for the three months ended March 31, 2002 of $946,660 and offset by an increase in accrued interest to a related party of $112,047. Net cash used in investing activities for the three months ended March 31, 2002, was $47,000 for payments made for the further development of the Company's software. Net cash provided from financing activities for the three months ended March 31, 2001, was $773,062. HCI, the Company's largest stockholder funded the finance activities. 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. Failure to obtain sufficient funding from HCI could adversely effect the operating ability of the Company. 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 10 of 12 ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARY PART II Item 1. Legal Proceedings During the second quarter of 2001, the Company engaged in mediation proceedings with Home Broadband Network, Inc. On November 8, 1998, we acquired the assets of Axxsys International in exchange for 200,000 shares of stock. Axxsys and its affiliates filed suit on November 17, 1998 against Atlantic 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, Inc. Since Axxsys and its affiliates waited until January, 1999 to serve OGS with the action and since they have an adequate remedy in the form of damages, it is very likely that this suit will not proceed beyond the pleading stage. However, it is anticipated that Axxsys will amend their pleadings to seek damages. Counsel believes that there is no merit to this action. This case is currently not set for trial. The Company has sued a former employee (Cabrero) for failure to perform duties and for inducing the Company to pay him for software he did not deliver. The employee has countersued, 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. Item 2. Changes in Securities This Item is not applicable to the Company. Item 3. Defaults upon Senior Securities This Item is no 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) Not applicable (b) Reports on Form 8-K (i) Form 8-K: Change of independent accountants, - January 30, 1997 (ii) Form 8-K: Acquisition of The Eminet Domain, Inc- March 7, 1997 Page 11 of 12 (iii) Form 8-K: Offer to purchase Coms21 shares, - May 27, 1998 (iv) Form 8-K: Changes to executive management, - March 29, 2002 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: May 14, 2002 By: ----------------------------- (Signature) J.A. Copelyn Chairman of the Board / Chief Executive Officer By: ----------------------------- (Signature) Lawrence P. Tombari President/Chief Financial Officer Page 12 of 12