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 June 30, 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 August 14, 2002
- --------------------------------- ---------------------------------
Common Stock, $.001 par value 95,635,953
TABLE OF CONTENTS
Heading Part I. FINANCIAL INFORMATION Page
- ------- ----------------------------- ----
Item 1 Financial Statements............................................ 2
Consolidated Balance Sheet-June 30, 2002 (Unaudited)............ 3
Consolidated Statement of Operations-Six Months Ended
June 30, 2002 (Unaudited)....................................... 4
Consolidated Statement of Operations-Three Months Ended
June 30, 2002(Unaudited)........................................ 5
Consolidated Statement of Cash Flows-Six Months Ended
June 30, 2002 (Unaudited)....................................... 6
Notes to Consolidated Financial Statements
(Unaudited)..................................................... 7-10
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operation.............................. 11-12
Part II. OTHER INFORMATION
--------------------------
Item 1 Legal Proceedings............................................... 13
Item 2 Change in Securities............................................ 13
Item 3 Defaults Upon Senior Securities................................. 13
Item 4 Submission of Matters to a Vote of Securities Holders........... 13
Item 5 Other Information............................................... 13
Item 6 Exhibits and Reports on Form 8-K................................ 13
Signatures...................................................... 14
PART 1
Item 1. Financial Statements
The following unaudited financial Statements for the six-month
periods ended June 30, 2002 and 2001 have been prepared by Online
Gaming Systems, Ltd. (the "Company") and Subsidiary.
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARY
Financial Statements
June 30, 2002
Page 2 of 14
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, December 31,
2002 2001
------------ ------------
Assets:
Current Assets:
Cash $ 40,376 $ 123,097
Note Receivable 125,000 --
Other Current Assets 17,244 22,918
------------ ------------
Total Current Assets 182,620 146,015
Property and Equipment-Net 102,951 214,393
Other Assets
Intangible Assets-Net 331,179 319,333
------------ ------------
Total Assets $ 616,750 $ 679,741
------------ ------------
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable and Accrued Expenses $ 260,301 $ 379,125
Notes Payable-Officers -- 34,680
Accrued Interest-Related Party 1,038,192 804,098
Note Payable 45,000 22,500
Capital Lease Obligations 11,478 34,874
------------ ------------
Total Current Liabilities 1,354,971 1,275,277
Convertible Notes Payable-Related Party 4,384,907 3,734,907
------------ ------------
Total Liabilities 5,739,878 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 and outstanding-
95,635,953 Shares at June 30, 2002 95,635 94,546
Additional Paid-in Capital 18,904,164 18,615,665
Treasury Stock, 811,767 Common Shares-At Cost (1,730,485) (1,730,485)
Accumulated (Deficit) (22,392,442) (21,310,169)
------------ ------------
Total Stockholders' (Deficit) (5,123,128) (4,330,443)
------------ ------------
Total Liabilities and Stockholders' (Deficit) $ 616,750 $ 679,741
------------ ------------
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
Page 3 of 14
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
Six Months Ended June 30,
2002 2001
------------ ------------
Revenue
- Related Party $ 250,000 $ --
- Other 290,233 497,138
------------ ------------
Total Revenue $ 540,233 $ 497,138
Cost of Sales -- 17,141
------------ ------------
Gross Profit 540,233 479,997
------------ ------------
Operating Expenses:
General and Administrative 1,192,958 1,882,724
Depreciation and Amortization 174,095 125,735
------------ ------------
Total Operating Expenses 1,367,053 2,008,459
------------ ------------
[Loss] from Operations (826,820) (1,528,462)
------------ ------------
Other [Expenses] Income:
Interest Expense-Related Party (254,608) (269,500)
Interest Expense (2,643) (17,482)
Settlement of debt -- (200,000)
Other Income [Expense] 1,796 (358)
------------ ------------
Other [Expenses] Income - Net (255,455) (487,340)
------------ ------------
[Loss] from Operations Before
Income Tax [Benefit] Expense (1,082,275) (2,015,802)
Income Tax [Benefit] Expense -- --
------------ ------------
Net [Loss] (1,082,275) (2,015,802)
Preferred Stock Dividend in Arrears -- 22,500
------------ ------------
Net Income [Loss] Available to
Common Stockholders $ (1,082,275) $ (2,038,302)
------------ ------------
Basic and Diluted Net [Loss]
Per Share of Common Stock $ (.01) $ (.12)
Weighted Average Shares of Common
Stock Outstanding-Basic and Diluted 95,231,370 16,811,076
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements.
Page 4 of 14
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30,2002
(UNAUDITED)
Three Months Ended June 30,
2002 2001
------------ ------------
Revenue
-Related Party $ 250,000 $ --
-Other 225,259 272,033
------------ ------------
Total Revenue $ 475,259 $ 272,033
Cost of Sales -- 8,084
------------ ------------
Gross Profit 475,259 263,949
------------ ------------
Operating Expenses:
General and Administrative 389,601 1,140,288
Depreciation and Amortization 87,686 65,753
------------ ------------
Total Operating Expenses 477,287 1,206,041
------------ ------------
[Loss] from Operations (2,028) (942,092)
------------ ------------
Other [Expenses] Income:
Interest Expense-Related Party (131,547) (143,500)
Interest Expense (2,039) (12,687)
Settlement of debt (200,000)
Other Income [Expense] -- (78,500)
------------ ------------
Other [Expenses] Income - Net (133,586) (434,687)
------------ ------------
[Loss] from Operations Before
Income Tax [Benefit] Expense (135,614) (1,376,779)
Income Tax [Benefit] Expense -- --
------------ ------------
Net [Loss] (135,614) (1,376,779)
Preferred Stock Dividend in Arrears -- 11,250
------------ ------------
Net [Loss] Available to
Common Stockholders $ (135,614) $ (1,388,029)
------------ ------------
Basic and Diluted Net [Loss]
Per Share of Common Stock $ (0.00) $ (.07)
Weighted Average Shares of Common
Stock Outstanding-Basic and Diluted 95,635,953 18,666,227
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements.
Page 5 of 14
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
2002 2001
----------- -----------
Operating Activities:
[Loss] from Operations $(1,082,275) $(2,015,802)
Adjustments to Reconcile Net [Loss] Income to
Net Cash [Used for] Operating Activities:
Depreciation and Amortization 174,095 125,735
Issuance of Common Stock for cancellation of indebtedness 200,000
Changes in Assets and Liabilities:
[Increase] Decrease in:
Note Receivable (125,000)
Other Assets 5,674 (11,846)
Increase [Decrease] in:
Accounts Payable and Accrued Expenses (118,823) (745,127)
Accrued Interest - Related Party 234,094 269,500
----------- -----------
Net Cash - Operating Activities: (912,235) (2,177,540)
----------- -----------
Investing Activities:
Purchase of Patents and Licenses -- (125,000)
Purchase of Property, Equipment, and Capitalized Software (74,500) --
----------- -----------
Net Cash - Investing Activities (74,500) (125,000)
----------- -----------
Financing Activities:
Proceeds from Issuance of Common Stock 4,910 --
Proceeds from Sale of Treasury Stock -- 14,062
Increase (Decrease) in Loan Payable to Officer -- 83,754
Proceeds from Note Payable 25,000 125,000
Proceeds from Convertible Note Payable - Related Party 1,150,000 2,293,642
Repayment of Convertible Note Payable - Related Party (250,000) --
Repayments of Note Payable (2,500) (182,500)
Repayments of Capital Lease Payable (23,396) (58,467)
----------- -----------
Net Cash - Financing Activities 904,014 2,275,491
----------- -----------
[Decrease] Increase in Cash and Cash Equivalents (82,721) (27,049)
Cash and Cash Equivalents - Beginning of Period 123,097 32,929
----------- -----------
Cash and Cash Equivalents - End of Period $ 40,376 $ 5,880
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 23,157 $ 17,482
Taxes -- --
Supplemental Disclosure of Non-cash Financing Activities:
The Company sold the software license to a related party for $250,000, and
offset convertible debt in the amount of $250,000 due the related party. The
total amount of $250,000 was credited to additional paid in capital.
The Company issued 561,766 shares of common stock of the Company at $.06 per
share to a former CEO& President of the company in exchange for cancellation of
an amount owed.
During the six month period ended June 30, 2001 the Company issued 225,000
shares of common stock to a former consultant in exchange for cancellation of
indebtedness. Accordingly non-cash expense of $200,000 was recognized.
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
Page 6 of 14
ONLINE GAMIING SYSTEMS, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2002
(Unaudited)
Note 1 - Basis of Preparation
--------------------
The accompanying unaudited consolidated financial statements of
Online Gaming Systems, Ltd and Subsidiary (the " Company") have been
prepared in accordance with Regulation S-B promulgated by the
Securities and Exchange Commission and do not include all of the
information and footnotes required by generally accepted accounting
principles in the United States for complete financial statements.
In the opinion of management, these interim financial statements
include all adjustments necessary in order to make the financial
statements not misleading. The results of operations for such
interim period are not necessary indicative of results of operations
for a full year. The unaudited financial statements should be read
in conjunction with the audited financial statements and notes
thereto of the Company and management's discussion and analysis of
financial condition and results of operations included in the Annual
Report on Form 10-KSB for the year ended December 31, 2001.
Note 2 - Significant Accounting Policies
-------------------------------
The accounting policies followed by the Company are set forth in
Note 2 to the Company's financial statements in the December 31,
2001 Form 10-KSB.
Note 3 - 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 4 - 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 six-month period ending June 30,
2002:
Customer A-related party 46%
Customer B 16%
Page 7 of 14
Note 5 - Convertible Notes Payable - Related Party
-----------------------------------------
At June 30, 2002, the Company had a $4,384,907 convertible note
payable balance due Hosken Consolidated Investments ["HCI"]. As of
June 30, 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 June 30, 2002 the
Company has accrued $1,038,192 in interest related to the
convertible debt borrowing. During the six-month periods ended June
30, 2002 and 2001 the Company repaid HCI approximately $20,514 and
$16,046 in accrued interest respectively.
During the first quarter of 2002, HCI advanced the Company $750,000
in convertible notes and funds.
During the second quarter of 2002, HCI advanced the Company $400,000
in convertible notes and funds.
During the second quarter of 2002 the Company sold the software
license of its ICE product for a fee of $250,000 to International
Gaming & Entertainment Ltd. ("IGEC") and provided management
services in connection with developing an Internet casino and
securing requisite licensing for an additional fee of $250,000.
Ahead Investments ("AI") is the majority shareholder of IGEC. AI is
a wholly owned subsidiary of HCI and majority stockholder of the
Company. Per the agreement IGEC exercised its right to pay for the
license fee and management services by offsetting $500,000 of
convertible debt due AI. The Company recorded the total amount of
$250,000 of the sale of the software license as additional paid in
capital.
See Note 6 for additional business agreements.
Note 6 - Capital Stock
-------------
During the first quarter 2002, the Chief Financial Officer of the
Company purchased 166,667 shares of the Company's common stock, at
$.06 per share.
Page 8 of 14
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.
In the second quarter of 2002, 241,251 shares of the Company's
common stock were issued to a previous customer in satisfaction of
an investment made in the Company.
Note 7 - Business Agreements
-------------------
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 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.
Page 9 of 14
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.
Note 7 - New Authoritative Accounting Pronouncements
-------------------------------------------
On August 15, 2001, the FASB issued SFAS No.143, "Accounting for
Asset Retirement Obligations ["SFAS No.143"]. SFAS No.143 requires
that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of
the long-lived asset. SFAS No.143 will be effective for financial
statements issued for fiscal years beginning after June 15, 2002. An
entity shall recognize the cumulative effect of adoption of SFAS
No.143 as a change in accounting principle. The Company is not
currently affected by this Statement's requirements.
On April 30, 2002, the Financial Accounting Standards Board (FASB)
issued Statement No.145, Rescission of FASB Statements No.4, 44 and
64,Amendment of FASB Statement No. 13 and Technical Corrections. The
Statement updates, clarifies and simplifies existing accounting
pronouncements.
Statement 145 rescinds Statement 4, which required all gains and
losses from extinguishments of debt to be aggregated and, if
material, classified as an extraordinary item, net of related income
tax effect. As result, the criteria in Opinion 30 will now be used
to classify those gains and losses. Statement 64 and amended
Statement 4, is no longer necessary because Statement 4 has been
rescinded.
Statement 44 was issued to establish accounting requirements for the
effects of transition to the provisions of the Motor Carrier Act of
1980. Because the transition has been completed, Statement 44 is no
longer necessary. Statement 145 amends Statement 13 to require that
certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. This amendment is consistent with the
FASB's goal of requiring similar accounting treatment for
transactions that have similar economic effects. This Statement also
makes technical corrections to
Page 10 of 14
exiting pronouncements. While those corrections are not substantive
in nature, in some instances, they may change accounting practice.
The Company is not currently affected by this Statement's
requirements.
Item 2. Management's Discussion and Analysis of Financial Condition and
------------------------------------------------------------------
Results of Operations
---------------------
Six Months Ended June 30, 2002 and 2001
---------------------------------------
Net Revenues. The Company's revenues increased approximately 8.5% in
2002 over the same period in 2001. Revenues from operations for the
six-month ended June 30, 2002 were $540,233 as compared with
$497,138 for the same period in 2001. The increase in revenue was
primarily due to an increase in sales of our software products and
consulting services performed to a related party of $250,000. This
was partially offset by decreases in fee-paying customers emanating
from a general industry slowdown apparent since the third quarter of
2001. 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 decreased by 32% or $641,406
for the six-month period ended June 30, 2002 over the same period in
2001. The decrease was largely due to downsizing of employees,
resulting in reduced payroll costs and reducing certain operating
expenses. We focused our business on Internet gaming software, and
significantly reduced our involvement in the hardware portion of our
business. Accordingly, we experienced relatively significant
severance and related charges during the past six months.
Three Months Ended June 30, 2002 and 2001
-----------------------------------------
Net Revenues. The Company's revenues increased approximately 74.6%
in 2002 over the same period in 2001. Revenues from operations for
the three-month ended June 30, 2002 were $475,259 as compared with
$272,033 for the same period in 2001. The increase in revenue was
primarily due to consulting fees of $250,000 performed to a related
party, and licensing of software product. This was partially offset
by decreases in fee-paying customers emanating from a general
industry slowdown apparent since the third quarter of 2001.
Operating Expenses. Operating expenses decreased by 60% or $728,754
for the three-month period ended June 30, 2002 over the same period
in 2001. The decrease was largely due to downsizing of employees,
resulting in reduced payroll costs and reducing certain operating
expenses.
Page 11 of 14
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents totaled $40,376 at June 30, 2002. Net cash
used from operations was $912,235 primarily due to a Net Loss for
the six months ended June 30, 2002 of $1,082,274, a reduction in
Accounts Payable and accrued expenses of $143,823 and an increase in
a Note Receivable of $125,000. This was offset by an increase in
accrued interest to a related party of $234,09 and non-cash
depreciation and amortization of $174,905.
Net cash used in investing activities for the six months ended June
30, 2002, was $74,500 for payments made for the further development
of the Company's software.
Net cash provided from financing activities for the six months ended
June 30, 2002, was $904,014. HCI, the Company's largest stockholder
advanced $1,150,000 of which $250,000 was offset for payment for a
software license.
Our ability to meet our future obligations in relation to the
orderly payment of our recurring obligations on a current basis is
totally dependent on our ability to attain a profitable level of
operations, and receive required working capital advances from our
shareholders. Failure to obtain sufficient funding from HCI could
adversely affect 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 12 of 14
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARY
JUNE 30, 2002
PART II
Item 1. Legal Proceedings
During the second quarter of 2002, RCS Financial Services, Ltd filed
suit against the Company for repayment of a loan, alleging a
remaining balance of $47,500. The Company is currently investigating
the matter, and has retained counsel to defend the claim. There were
no other new legal proceedings filed or threatened involving the
Company during the six-month period ended June 30, 2002.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) None
(b) Reports on Form 8-K
Form 8-K: Changes to executive management, - March 29, 2002
Page 13 of 14
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: August 14, 2002 By: /s/ J.A. Copelyn
----------------------------------
(Signature)
J.A. Copelyn
Chairman of the Board / Chief
Executive Officer
By: /s/ Lawrence P. Tombari
----------------------------------
(Signature)
Lawrence P. Tombari
President/Chief Financial Officer
Page 14 of 14