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, 2003
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
incorporation or organization) Identification number)
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, 2003
-------------------------------- ------------------------------
Common Stock, $.001 par value 97,315,953
TABLE OF CONTENTS
Heading Part I. FINANCIAL INFORMATION Page
- ------- ----------------------------- ----
Item 1 Financial Statement ............................................. 2
Consolidated Balance Sheet at March 31, 2003 (Unaudited) ........ 3
Consolidated Statement of Operations-Three Months Ended
March 31, 2003 and 2002 (Unaudited) ............................. 4
Consolidated Statement of Cash Flows-Three Months Ended
March 31, 2003 and 2002 (Unaudited) ............................. 5
Notes to Consolidated Financial Statements (Unaudited) .......... 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operation ........................................ 9
Controls and Procedures ......................................... 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
Certifications .................................................. 13
PART I
Item 1. Financial Statements
The following unaudited financial Statements for the three-month period
ended March 31, 2003, have been prepared by Online Gaming Systems, Ltd.
(the "Company") and Subsidiary.
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARY
Financial Statements
March 31, 2003
Page 2 of 15
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET (UNAUDITED)
AS OF March 31, 2003
March 31, December 31,
2003 2002
------------ ------------
Assets: (Unaudited)
Current Assets:
Cash $ 52,742 $ 8,916
Other Current Assets 41,837 21,321
------------ ------------
Total Current Assets 94,579 30,237
Property and Equipment-Net 27,340 55,023
Other Assets
Deposit -- 18,016
Intangible Assets-Net 314,750 323,565
------------ ------------
Total Assets $ 436,669 $ 426,841
============ ============
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable and Accrued Expenses $ 288,734 $ 366,903
Cash Overdraft -- 18,989
Advances Related Party 146,675 187,653
Accrued Interest-Related Party 1,521,687 1,323,878
Convertible Notes Payable-Related Party 5,474,907 5,074,907
Total Current Liabilities 7,432,003 6,972,330
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 200,000,000 Shares, Issued- 96,415,953 Shares 96,416 96,416
Additional Paid-in Capital 18,710,976 18,710,976
Treasury Stock, 811,767 Common Shares-At Cost (1,730,485) (1,730,485)
Accumulated (Deficit) (24,072,241) (23,622,396)
------------ ------------
Total Stockholders' (Deficit) (6,995,334) (6,545,489)
------------ ------------
Total Liabilities and Stockholders' (Deficit) $ 436,669 $ 426,841
============ ============
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
Page 3 of 15
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months ended
March 31,
-----------------------------
2003 2002
------------ ------------
Revenue $ 28,036 $ 64,974
Operating Expenses:
General and Administrative 233,901 803,356
Depreciation and Amortization 46,171 86,409
------------ ------------
Total Operating Expenses 280,072 889,765
------------ ------------
[Loss] from Operations (252,036) (824,791)
------------ ------------
Other [Expenses] Income:
Interest Expense-Related Party (197,809) (112,047)
Interest Expense -- (11,618)
Other Income [Expense] -- 1,796
------------ ------------
Other [Expenses] Income - Net (197,809) (121,869)
------------ ------------
[Loss] from Operations Before
Income Tax [Benefit] Expense (449,845) (946,660)
Income Tax [Benefit] Expense -- --
------------ ------------
Net [Loss] (449,845) (946,660)
Basic Net [Loss]
Per Share of Common Stock $ -- $ (0.01)
Weighted Average Shares of Common
Stock Outstanding-Basic 96,415,953 95,040,042
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
Page 4 of 15
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
March 31,
-----------------------------
2003 2002
------------ ------------
Operating Activities:
[Loss] from Operations $ (449,845) $ (946,660)
Adjustments to Reconcile Net [Loss] Income to
Net Cash [Used for] Operating Activities:
Depreciation and Amortization 46,171 86,409
Changes in Assets and Liabilities:
[Increase] Decrease in:
Prepaid Expenses
Other Assets (2,500) 4,349
Increase [Decrease] in:
Accounts Payable and Accrued Expenses (54,442) (17,191)
Accrued Interest - Related Party 197,809 112,047
------------ ------------
Net Cash - Operating Activities: (262,807) (761,046)
------------ ------------
Investing Activities:
Purchase of Property, Equipment, and Capitalized Software (33,400) (47,000)
------------ ------------
Net Cash - Investing Activities (33,400) (47,000)
------------ ------------
Financing Activities:
Proceeds from Issuance of Common Stock -- 39,349
Cash Overdraft (18,989) --
Increase (Decrease) in Loan Payable to Officer -- (34,680)
Proceeds from Note Payable -- 25,000
Proceeds from Convertible Note Payable - Related Party 400,000 750,000
Advances - Related Party (40,978) --
Repayments of Lease Payable -- (6,607)
------------ ------------
Net Cash - Financing Activities 340,033 773,062
------------ ------------
[Decrease] Increase in Cash and Cash Equivalents 43,826 (34,984)
Cash and Cash Equivalents - Beginning of Period 8,916 123,097
------------ ------------
Cash and Cash Equivalents - End of Period $ 52,742 $ 88,113
============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ -- $ 11,618
Taxes $ -- $ --
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
Page 5 of 15
ONLINE GAMIING SYSTEMS, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2003
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, 2003, are not necessarily indicative of the results of
operations to be reported for the full year ending December 31, 2003.
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, 2002.
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, 2003:
Customer A-Software Support 100%
Note 3 - Convertible Notes Payable - Related Party
-----------------------------------------
At March 31, 2003, the Company had a $5,474,907 convertible note
payable balance due Hosken Consolidated Investments ["HCI"]. 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 at 12% annually by December 31, 2003.
Upon failure of the Company to pay the principal balance by the
maturity date, interest on the principal balance will become subject
to interest at 15% per annum. The notes payable are secured by
substantially all assets of the Company. The Company recorded
interest expense of $ 197,809 and $112,047 for the three months ended
March 31, 2003 and March 31, 2002 respectively. As of March 31, 2003
the Company has accrued $1,521,687 in interest related to the
convertible debt borrowing.
During the quarter ended March 31, 2003, the Company had advances of
$400,000 from HCI in the form of convertible notes payable. Terms of
the conversion feature provide for the principal balance to be
converted into shares of the Company's common stock at a rate equal
to the fair value per share at the date of conversion.
Page 6 of 15
Note 4 - Capital Stock
-------------
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. In August
2002, the Company issued another 30,000 shares of its common stock in
exchange for $1,500.
In 2002 a total of 241,251 shares of the Company's common stock were
issued to a previous customer in satisfaction of an investment made
in the Company.
During fiscal 2002, the Chief Financial Officer of the Company
purchased 350,0000 shares of the Company's common stock at $.06 per
share.
In connection with a settlement in fiscal 2002, the Company issued
541,667 shares of common stock with a fair market value of $0.06 per
shares as consideration for rent in arrears on its corporate office
space. Additionally, the Company issued 25,000 shares of common stock
with a fair market value of $0.06 per share to a consultant for
services rendered.
At the November 2002 shareholders meeting, the shareholders approved
an amendment to the Company's articles of incorporation to increase
the number of shares of common stock which the Company is authorized
to issue from 100,000,000 to 200,000,000.
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. For each period presented, all outstanding options and
warrants were anti-dilutive for earning per share calculations.
Page 7 of 15
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 "eSlot" product, which is licensed to Gamecast
Live, a subsidiary of Station Casinos. In exchange for a 22.5 percent
interest in the joint venture, the Company contributed certain
assets, including intellectual property and services. Station Casinos
is in the gaming and entertainment business and owns 75 percent of
Your Move, Inc.
During 2002 Your Move, Inc. elected to curtail further development
and marketing efforts pending resolution of Nevada and federal
regulatory issues.
UnoDosTres.com
--------------
During the third quarter of 2001, the Company executed a Marketing
and Operations Agreement with UnoDosTres.com (UDT) whereby it was
granted exclusive rights to market up to three Internet casinos on
the UDT site. UDT agreed to provide up to $155 million of bartered
advertising to promote the Internet casinos. The Agreement called for
the first of the Internet casinos to be open not later than September
19, 2002.
Due to delays in completion of certification for the Internet casinos
that the Company expects to be managing for International Gaming &
Entertainment Corporation (IGEC), an affiliate of the Company, the
casino was not open as of September 19, 2002. On September 25, 2002
UDT informed the Company that the Agreement would be terminated and
proposed certain changes to various of the business points of the
original Agreement. On December 3, 2002 the Company executed a new
Co-Branding Agreement with similar benefits and obligations as the
original Agreement, with the primary exception being exclusivity.
Internet Casino Contract-Ahead Investments Limited
--------------------------------------------------
During the fourth quarter of 2001, the Company announced that it
expected to launch the first Internet casino linked to the
UnoDosTres.com Internet Television Network. OGS and affiliates of
Hoskin Consolidated Investment Limited (HCI) have completed an
operating agreement for the casino, whereby HCI will provide the
financing for the casino and be the principal shareholders of IGEC,
the owner of the casino. OGS will provide the management and
marketing for the casino, and contribute certain of its rights
attained through the UnoDosTres agreement. Depending upon the length
of time to complete the licensing process, the Casino is expected to
go live during the second or third quarter of 2003.
Page 8 of 15
Note 7 - Subsequent Events
-----------------
During the second quarter of 2003 the President and Chief Financial
Officer of the Company purchased 100,000 shares of Common Stock at a
price of $.06 per share.
During the second quarter of 2003, 750,000 shares of Common Stock
were issued as partial payment for contract development services.
During the second quarter of 2003, the Company announced that it was
selected by a Japanese operator to develop an Internet Casino System,
the first for the Company for a customer in the Asia region. This
license is the second license for the Company's FIRE product. The two
licenses are expected to provide significant revenue to the Company
during 2003.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------
Result of Operations
--------------------
Three Months Ended March 31, 2003 and 2002
------------------------------------------
Net Revenues. The Company's revenues decreased approximately 57% in
2003 over the same period in 2002. Revenues from operations in the
first quarter 2003 were $28,036 as compared with $64,974 for the same
period in 2002. The decrease in revenue was primarily due to decreases
in fee-paying customers and the completion of special project work
during the early part of 2002.
Operating Expenses. Operating expenses decreased by 68,5% or $609,693
in the first quarter 2003 over the same period in 2002. 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.
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents totaled $52,742 at March 31, 2003. Net cash
used from operations was $262,807 primarily due to a Net Loss for the
three months ended March 31, 2003 of $449,845, a decrease in Accounts
Payable of $54,442 and offset by an increase in accrued interest to a
related party of $197,809.
Page 9 of 15
Net cash used in investing activities for the three months ended March
31, 2003, was $33,400 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, 2003, was $340,033. HCI, the Company's largest stockholder
funded the finance activities.
Management believes that cash generated from new license contracts,
future royalties and 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 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.
Controls and Procedures
-----------------------
(a) Explanation of disclosure controls and procedures. The Company's
chief executive officer and its chief financial officer after
evaluating the effectiveness of the Company's disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14(c) and
15-d-14(c) as of a date within 90 days of the filing date of the
quarterly report (the "Evaluation Date") have concluded that as
of the Evaluation Date, the Company's disclosure controls and
procedures were adequate and effective to ensure that material
information relating to the Company and its consolidated
subsidiary would be made known to them by others within those
entities, particularly during the period in which this quarterly
report was being prepared.
(b) Changes in internal controls. There were no significant changes
in the Company's internal controls or in other factors that could
significantly affect the Company's disclosure controls and
procedures subsequent to the Evaluation Date, nor any significant
deficiencies or material weaknesses in such disclosure controls
and procedures requiring corrective actions. As a result, no
corrective actions were taken.
Page 10 of 15
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARY
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 plus interest. The Company reached resolution
regarding this suit during the second quarter of 2003, and paid $53,571
for full settlement. There were no other new legal proceedings filed or
threatened involving the Company during the three-month period ended
March 31, 2003.
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
(iii) Form 8-K: Offer to purchase Coms21 shares, - May 27,1998
(iv) Form 8-K: Changes to executive management, - March 29, 2002
Page 11 of 15
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, 2003 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 12 of 15
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, J.A. Copelyn, Chief Executive Officer of Online Gaming Systems, Ltd. (the
"Company") do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(a) the Quarterly Report on Form 10-Q of the Company for the
quarterly period ended March 31, 2003, which this certification
accompanies (the "Periodic Report") fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of
1934; and
(b) that information contained in the Periodic Report fairly
presents, in all material respect, the financial condition and
results of operations of the Company.
Date: May 14, 2003 By: /s/ J. A. COPELYN
-------------------------------------
J.A. Copelyn
Chief Executive Officer
Online Gaming Systems, Ltd.
I, Lawrence P. Tombari, Chief Financial Officer of Online Gaming Systems, Ltd.
(the "Company") do hereby certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(a) the Quarterly Report on Form 10-Q of the Company for the
quarterly period ended March 31, 2003, which this certification
accompanies (the "Periodic Report") fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of
1934; and
(b) that information contained in the Periodic Report fairly
presents, in all material respect, the financial condition and
results of operations of the Company.
Date: May 14, 2003 By: /s/ LAWRENCE P. TOMBARI
-------------------------------------
Lawrence P. Tombari
Chief Financial Officer
Online Gaming Systems, Ltd.
Page 13 of 15