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, 1999
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)
200 East Palmetto Park Road, Suite 200, Boca Raton, Florida 33432
(Address of principal executive offices)
Registrant's telephone no., including area code: (561) 393-6685
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 13, 1999
- ------------------------------------- ------------------------------------
Common Stock, $.001 par value 13,874,909
<PAGE>
TABLE OF CONTENTS
Heading Page
PART 1. - FINANCIAL INFORMATION
Item 1. Financial Statements ...............................................2
Consolidated Balance Sheet - September 30, 1999 (Unaudited) ......3-4
Consolidated Statement of Income and Comprehensive
Income (Unaudited) .................................................5
Consolidated Statement of Cash Flows - Nine Months ended
September 30, 1999 (Unaudited) .................................6-7
Notes to Consolidated Financial Statements (Unaudited) ...........8-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .......................................12-13
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....................................14
Signatures .........................................................15
<PAGE>
PART 1
Item 1. Financial Statements
The following unaudited financial Statements for the period ended
September 30, 1999, have been prepared by Online Gaming Systems, Ltd.
(the "Company") and Subsidiaries.
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
Financial Statements
September 30, 1999
2
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
AS OF SEPTEMBER 30, 1999
Assets:
Current Assets:
Investments $ 1,063,237
Notes Receivable 31,000
Notes Receivable - Officer 43,435
Deferred Tax Asset 123,691
Prepaid Expenses 23,965
Due from Related Parties 169,068
Other Current Assets 9,469
-------------
Total Current Assets 1,463,865
Property and Equipment - Net 360,759
-------------
Equipment under Capitalized Lease - Net 134,739
-------------
Software [Net of Accumulated Amortization of $ 1,137,469] 1,295,376
-------------
Intangibles [Net of Accumulated Amortization of $22,500] 427,500
-------------
Other Assets
Other Assets 119,486
Notes Receivable 2,400,000
Investment 297,490
-------------
Total Other Assets 2,816,976
-------------
Total Assets $ 6,499,215
=============
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
3
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
AS OF SEPTEMBER 30, 1999
Liabilities and Stockholders' Equity:
Current Liabilities:
Cash Overdraft $ 42,609
Accounts Payable and Accrued Expenses 1,020,496
Current Portion of Capital Lease Obligations 55,042
Current Portion of Long Term Debt 155,226
-------------
Total Current Liabilities 1,273,373
Capital Lease Obligations 94,456
-------------
Total Liabilities 1,367,829
-------------
Stockholders' Equity:
Convertible Preferred Stock - Par Value $.001 Per Share;
Authorized 10,000,000 Shares, Issued and Outstanding,
5,700 shares [Liquidation Preference $570,000] 57
Common Stock - Par Value $.001 Per Share;
Authorized 100,000,000 Shares, Issued - 13,403,625 Shares 13,403
Additional Paid-in Capital 12,931,249
Treasury Stock, 540,675 Common Shares - At Cost (1,253,990)
Accumulated Comprehensive Loss (1,077,000)
Accumulated [Deficit] (5,082,333)
Deferred Acquisition Costs (400,000)
-------------
Total Stockholders' Equity 5,131,386
-------------
Total Liabilities and Stockholders' Equity $ 6,499,215
==============
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
4
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
1 9 9 9 1 9 9 8 1 9 9 9 1 9 9 8
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue $ 113,575 $ 670,229 $ 612,075 $ 3,174,000
Cost of Sales 195,840 66,158 685,780 381,460
----------- ----------- ----------- ------------
Gross [Loss] Profit (82,265) 604,071 (73,705) 2,792,540
----------- ----------- ----------- -----------
Operating Expenses:
General and Administrative 1,511,898 578,674 4,136,149 1,593,723
Provision for Doubtful Accounts and Notes -- 1,043,611 1,222,155 1,216,573
Depreciation and Amortization 88,968 117,306 224,143 325,307
----------- ----------- ----------- -----------
Total Operating Expenses 1,600,866 1,739,591 5,582,447 3,135,603
----------- ----------- ----------- -----------
[Loss] Income from Operations (1,683,131) (1,135,520) (5,656,152) (343,063)
----------- ----------- ---------- -----------
Other [Expenses] Income:
Interest Income 50 26,344 30,926 60,810
Interest Expense (17,187) (1,238) (39,819) (11,326)
Other Income [Expense] (215,818) 107,272 1,182,579 48,726
----------- ----------- ---------- -----------
Other [Expenses] Income - Net (232,955) 132,378 1,173,686 98,210
----------- ----------- ---------- -----------
[Loss] Income from Continuing Operations Before
Income Tax [Benefit] Expense (1,916,086) (1,003,142) (4,482,466) (244,853)
Income Tax [Benefit] Expense -- (99,095) (123,691) 47,374
------------ ----------- ----------- ------------
[Loss] Income from Continuing Operations (1,916,086) (904,047) (4,358,775) (292,227)
Discontinued Operations:
[Loss] from Operations of Discontinued
Business Segment [Net of Income Tax
[Benefit] of ($30,521) and $(0), for the nine
months ended September 30, 1999 and 1998,
Respectively] -- (31,093) (54,261) (99,947)
------------ ----------- ---------- -----------
Net [Loss] Income (1,916,086) (935,140) (4,413,036) (392,174)
Comprehensive Gain:
Unrealized Holding Gain [Loss]
arising during period (1,033,311) (1,021) (981,142) (52,310)
------------ ----------- ------------ -----------
Total Comprehensive [Loss] Income $ (2,949,397) $ (936,161) $ (5,394,178) $ (444,484)
============ =========== ============ ============
Net [Loss] Income $ (1,916,086) $ (935,140) $ (4,413,036) $ (392,174)
Preferred Stock Dividend in Arrears 7,125 12,500 26,750 20,833
------------ ----------- ------------ ------------
Net [Loss] Income Available to
Common Stockholders $ (1,923,211) $ (947,640) $ (4,439,786) $ (413,007)
------------ - --------- ------------ ------------
[Loss] Income Per Common Share:
Continuing Operations $ (0.15) $ 0.09 $ (0.34) $ 0.04
Basic and Diluted Net [Loss] Income
Per Share of Common Stock $ (0.15) $ 0.09 $ (0.34) $ 0.04
Weighted Average Shares of Common
Stock Outstanding 13,133,795 10,859,657 12,901,162 10,281,365
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
5
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1 9 9 9 1 9 9 8
------- -------
Operating Activities:
<S> <C> <C>
[Loss] Income from Continuing Operations $(4,358,775) $ (292,227)
Adjustments to Reconcile Net [Loss] Income to
Net Cash [Used for] Operating Activities:
Depreciation and Amortization 800,399 325,307
Deferred Tax Asset (123,691) 125,812
Provision for Doubtful Accounts 1,222,155 1,216,573
Loss (Gain) on Sale of Investments 221,637 --
Realized Loss on Carrying Value of Investments -- (49,425)
Gain on Sale of Subsidiary (1,231,750) (8,829)
Issuance of Common Stock for services rendered 140,000
Issuance of Common Stock for Compensation 217,312
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 13,715 (110,261)
Prepaid Expenses (12,708) (7,499)
Notes Receivable 108,211 (110,982)
Other Assets 84,764 (91,782)
Increase [Decrease] in:
Accounts Payable and Accrued Expenses (54,485) 24,967
Income Taxes Payable -- (78,438)
Other Current Liabilities -- (10,457)
Due to Customer -- (20,721)
----------- -----------
Net Cash - Continuing Operations (2,973,216) 912,038
----------- -----------
Discontinued Operations:
[Loss] from Discontinued Operations (54,261) (99,947)
Adjustments to Reconcile Net [Loss] to Net Cash Operations:
Depreciation and Amortization 38,220 107,914
Provision for Doubtful Accounts 18,915 --
Loss on Sale of Assets -- 699
Changes in Net Assets and Liabilities 238,577 (178,354)
----------- -----------
Net Cash - Discontinued Operations 241,451 (169,688)
----------- -----------
Net Cash - Operating Activities - Forward (2,731,765) 742,350
----------- -----------
Investing Activities - Continuing Operations:
Increase in Due from Related Parties (113,828) (28,024)
Purchase of Investments (393,092) (5,283,704)
Purchase of Property, Equipment, and Capitalized Software (71,711) (922,753)
Sale of Investments 3,131,291 177,371
Purchase of Patents and License (450,000) --
----------- -----------
Net Cash - Investing Activities - Continuing Operations -
Forward $ 2,102,660 $(6,057,110)
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
6
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
1 9 9 9 1 9 9 8
------- -------
<S> <C> <C>
Net Cash - Operating Activities - Forwarded $(2,731,765) $ 742,350
----------- -----------
Net Cash - Investing Activities - Continuing Operations -
Forwarded 2,102,660 (6,057,110)
----------- -----------
Investing Activities - Discontinued Operations:
Purchase of Property and Equipment (29,715) (6,317)
Disposition Gain on Sale of Discontinued Operations -- --
----------- -----------
Net Cash Investing Activities - Discontinued Operations (29,715) (6,317)
----------- -----------
Financing Activities - Continuing Operations:
Proceeds from Issuance of Common Stock 105 4,596,681
Proceeds from Issuance of Preferred Stock 570,000 906,850
Purchase of Treasury Stock (975,293) --
[Decrease] Increase in Loan Payable to Shareholder (193,434) (116,841)
Payment of Notes Payable (288,774) (51,609)
Payment of Lease Payable (31,373) (6,548)
Decrease in Loan Receivable (324,286) --
Proceeds from Long Term Debt 344,000 123,500
Proceeds from Notes Receivable 1,445,000
----------- -----------
Net Cash - Financing Activities - Continuing Operations 545,945 5,452,033
----------- -----------
Financing Activities - Discontinued Operations:
Proceeds from Long-Term Debt 50,000 --
Payment of Note Payable (41,500) (4,500)
Payment of Lease Payable (5,769) (33,051)
----------- -----------
Net Cash Financing Activities Discontinued Operations 2,731 (37,551)
----------- -----------
Net Increase [Decrease] in Cash and Cash Equivalents (110,144) 93,405
Cash and Cash Equivalents - Beginning of Years 67,535 (4,046)
----------- -----------
Cash and Cash Equivalents - End of Years $ (42,609) $ 89,359
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 37,295 $ 2,999
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Conversion of Preferred Stock into Common Stock $ 649 $ 39
Purchase of Assets under Capital Lease Financing $ 77,883 $ --
Sale of Subsidiary for Note Receivable $ 2,400,000 $ --
Issuance of Common Stock for Notes Receivable $ 2,000,000
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements
7
<PAGE>
ONLINE GAMIING SYSTEMS, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1999
Note 1 - Basis of Preparation
The accompanying unaudited interim financial statements include all
adjustments (consisting only of those of a normal recurring nature)
necessary for a fair statement of the results for the interim
periods. The results of operations for the nine-month period ended
September 30, 1999, are not necessarily indicative of the results of
operations to be reported for the full year ending December 31,
1999.
Note 2 - Sale of Subsidiary
On March 31, 1999 the Company sold 81% of its interest in its wholly
owned subsidiary, the Eminet Domain, Inc. to Centerline Associates,
Inc., a shareholder of the Company. The sale price was $2,500,000
paid as follows: (i) $10,000 at sale date, (ii) $90,000 in cash
payable at the rate of $14,000 per month commencing on April 15,
1999 and (iii) $2,400,000 by the delivery of a promissory note
collateralized by shares of the Company's stock with interest at the
annual rate of six percent (6%) and payable two years from the
closing date.
The sale resulted in a gain of $1,231,751 which is reflected in
other income. The transaction resulted in the Eminet Domain, Inc
being treated as a discontinued operation
Note 3 - Major Customers
Income fees derived from major customers are tabulated as follow:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Customer A (Software System) 30,000 -- 247,500 --
Customer B (Software System) 37,500 -- 130,000 --
Customer C (Software System) -- -- 60,000 --
Customer D (Software System) -- -- 37,500 --
Customer E (Software System) -- -- 50,000 --
Customer F (Software System) -- 175,000 -- 175,000
Customer G (Software System) -- 450,000 -- 450,000
Customer H (Software System) -- -- -- 250,000
Customer I (Software System) -- -- -- 220,000
Customer J (Software System) -- -- -- 350,000
Customer K (Software System) -- -- -- 675,000
</TABLE>
8
<PAGE>
ONLINE GAMIING SYSTEMS, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)(Continued)
September 30, 1999
Note 4 - Capital Stock
In the second quarter of 1998, the Company sold 1,250,000 shares for
a total of $4,000,000 pursuant to Regulation D to Hosken
Consolidated Industries
Also in the second quarter of 1998, 9,700,000 shares of common stock
were issued to Online Gaming Systems Australia, a wholly owned
subsidiary for use in a proposed takeover of the Australian Company,
Coms21. As the proposed takeover did not take place, the 9,700,000
shares issued were cancelled. However, in the third quarter of 1998,
1,217,647 shares were exchanged for 12,176,470 shares of Coms21 in a
one for ten stock swap.
In the second quarter of 1998, 10,000 shares of 5% Convertible
Preferred Stock, $.001 par value, were issued to the Shaar Fund for
$ 1,000,000.00 Each share is convertible into common stock by virtue
of a formula contained in the Purchase Agreement which is 78% of the
three day average closing bid price for the corporations common
stock for the twenty five (25) trading days prior to the delivery of
the notice of redemption. The amount of such non-cash discounts
which is analogous to a dividend is $ 269,443. Holders of the above
preferred stock are entitled to; (i) quarterly cumulative dividends
at the rate of 5% per annum of the original issue price of the
preferred stock, (ii) a liquidation preference equal to the sum of
$100 for each outstanding share of the preferred stock.
In August 1998, 5,000 shares of the Company's common stock were
issued to a consultant for services performed.
In September 1998, 26,098 shares of the Company's common stock were
issued to adjust the issuance of shares to certain individuals at
the time of the Company's reverse merger in 1996.
During the third and fourth quarter of 1998, 2,740 shares of
convertible preferred stock valued at $274,000 was converted into
147,002 shares of common stock by virtue of a formula contained in
the Purchase Agreement which relates to the average price per share
of common stock within the conversion period.
In October of 1998, the Company entered into a stock purchase
agreement with Axxsys International, [Seller] to purchase the assets
of Axxsys for $400,000. Under the agreement 200,000 shares of the
Company's common stock was delivered and is held in escrow for a
period of 12 months as the purchase price is contingent on average
monthly revenues being achieved.
During the first quarter of 1999, 5,000 shares of convertible
preferred stock valued at $500,000 was converted into 395,823 shares
of common stock by virtue of a formula contained in the purchase
agreement which results to the average price per share of common
stock within the conversion period.
9
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
September 30, 1999
During the second quarter of 1999, 2,260 shares of convertible
preferred stock valued at $226,000 was converted into 253,933 shares
of common stock by virtue of a formula contained in the purchase
agreement which results to the average price per share of common
stock within the conversion period.
In the second quarter of 1999, 5,700 shares of 5% Convertible
Preferred Stock, $.001 par value, were issued to the Shaar Fund for
$570,000 Each share is convertible into common stock by virtue of a
formula contained in the Purchase Agreement which is 78% of the
three day average closing bid price for the corporations common
stock for the twenty five (25) trading days prior to the delivery of
the notice of redemption. The amount of such non-cash discounts
which is analogous to a dividend is $53,451 holders of the above
preferred stock are entitled to; (i) quarterly cumulative dividends
at the rate of 5% per annum of the original issue price of the
preferred stock, (ii) a liquidation preference equal to the sum of
$100 for each outstanding share of the preferred stock.
On April 6, 1999 certain individual employees were issued 110,000
shares of common stock of the company as a signing bonus pertaining
to employment agreements between the company and the individuals.
In the second quarter of 1999, 75,000 shares of the company's common
stock were issued to a consultant for services performed.
On July 1, 1999, the Company's largest institutional stockholder,
Hosken Consolidated Industries, a South African corporation (the
investment company for the Mine Workers Union and South African
Clothing Workers Union), consummated its purchase of approximately
1,100,000 shares of the Company's common stock from Norman J.
Hoskin, the Company's Chairman of the Board of Directors, which
represents substantially all of Mr. Hoskin's holdings in the
Company. Mr. Hoskin has resigned his positions as Chairman and
Secretary/Treasurer and will limit his activities as a consultant to
the Company due to his health. With its purchase, HCI share holdings
increases to 2,361,935 shares or approximately 19% of total shares
outstanding.
In the third quarter of 1999, 52,500 shares of the Common Stock were
issued in lieu of expenses paid on behalf of the Company.
Note 5 - Per Share Data
Per share data are based on the weighted average number of common
shares outstanding during the respective periods. The diluted net
income per share is based upon the options issued and outstanding as
well as the assumed conversion of the Company's issued and
outstanding preferred stock.
10
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
September 30, 1999
Note 6 - Business Agreements
On September 28, 1998, the Company entered into and closed on an
agreement with Cybergames, Inc. for the purchase of several of the
company's licensees and the exchange of the company's accounts
receivable from said licensees. The total purchase price was $
3,147,000 payable $ 227,000 in cash and $2,920,000 in stock of
Cybergames, Inc. (530,000 shares).
On April 6, 1999 the Company signed an agreement to purchase the
patent rights, inventions and know-how of Excel Communications, Inc.
The major product expected to be produced is a multi-function
portable gaming device. In consideration the Company issued seventy
five thousand (75,000) shares of common stock of the Company. The
Company also entered into an agreement to compensate a third party
for termination of an exclusive manufacturing, licensing, marketing
and distribution of the invention with the seller. The third party
received two hundred thousand dollars ($200,000) plus a stock option
to purchase 50,000 shares of the common stock of the company. In
addition, the Company entered into employment agreements with three
of the key employees of Excel Communications, Inc. and granted those
individuals options to purchase Company stock.
In the third quarter of 1999, the Company signed an agreement to
purchase the license to market and distribute a portable hand held
device from Accord Technologies, A South African corporation. The
Company paid two hundred fifty thousand dollars ($250,000) for the
rights to the license.
Note 7 - Change of Name
As of September 24, 1999 the Company changed its name from Atlantic
International Entertainment, Ltd. to Online Gaming Systems, Ltd.
Note 8 - Subsequent Events
On November 8, 1999 the Company entered into an agreement to issue
9,300 shares of 5% Convertible Preferred Stock, $.001 par value to
the Shaar Fund for $930,000. Each share is convertible into Common
Stock by virtue of a formula contained in the purchase agreement
which is 78% of the three day average closing bid price for the
corporation's Common Stock for the twenty-five (25) trading days
prior to the delivery of the notice of redemption.
11
<PAGE>
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, 1999 and 1998
Net Revenues. The Company's revenues decreased approximately 83% in
1999 over the same period in 1998. Revenues from operations in the
first quarter 1999 were $ 113,575, as compared with $ 670,229 for
the same period in 1998. The decrease in revenues was the result of
the company's implementation of its new product line. The investment
in sales and marketing resources have also not yet fully impacted
revenues as anticipated. The Company expects sales and market
efforts to increase revenues going forward.
Cost of Revenues. Cost of revenues increased 196% in 1999 over the
same period in 1998. The increase resulted from the increase in
amortization of capitalized software development costs, which is
reflected in cost of revenues. The Company expects amortization of
development costs to be consistent going forward.
Operating Expenses. Operating expenses increased by 130% or $
904,886 in the third quarter 1999 over the same period in 1998. The
increase was largely due to global expansion efforts, expenses
related to product development and increased support staffing.
Provision for Doubtful Accounts. Provision for doubtful accounts in
the third quarter 1999 were $ 0 as compared with $ 1,043,611 for the
same period in 1998. The decrease resulted from a change in the
recording of revenues from accrual basis to cash basis. The Company
does not anticipate any provisions for doubtful accounts going
forward.
Nine Months Ended September 30, 1999 and 1998
Net Revenues. The Company's revenues decreased approximately 80% in
1999 over the same period in 1998. Revenues from operations for the
nine months ended September 30, 1999 were $ 612,075, as compared
with $ 3,174,000 for the same period in 1998. The decrease in
revenues was the result of the company's implementation of its new
product line. The investment in sales and marketing resources have
also not yet fully impacted revenues as anticipated. The Company
expects sales and market efforts to substantially increase revenues
going forward.
Cost of Revenues. Cost of revenues increased 80% for the nine months
ended September 30, 1999 over the same period in 1998. The increase
resulted from the increase in amortization of capitalized software
development costs, which is reflected in cost of revenues. The
Company expects amortization of development costs to be consistent
going forward.
12
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Result of Operations - Continued
Nine Months Ended September 30, 1999 and 1998
Operating Expenses. Operating expenses increased by 127% or
$2,441,262 for the nine months ended September 30, 1999 over the
same period in 1998. The increase was largely due to global
expansion efforts, expenses related to product development and
increased support staffing.
Provision for Doubtful Accounts. Provision for doubtful accounts for
the nine months ended September 30, 1999 were $ 1,222,155 as
compared with $ 1,216,573 for the same period in 1998. The provision
for doubtful accounts resulted from management taking a conservative
approach in recording its provision for doubtful accounts. The
Company does not anticipate any additional provisions for doubtful
accounts going forward as revenue is now recorded on cash basis.
Other Income. Other income increased by approximately $1,133,853 in
1999 over the same period in 1998. A gain on sale of $1,231,751
resulted from a percentage interest sold of the Company's wholly
owned subsidiary. A $170,000 gain was recognized in a full and final
settlement of a payable. A loss of sale on trading stock for
$221,636 was realized.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities, which consist
primarily of high risk, priced securities totaled $1,020,628 at
September 30, 1999 compared to $6,439,916 at September 30, 1998. The
decrease in cash, cash equivalents and marketable securities was due
primarily by cash used for operations, a unrealized loss of
$1,306,000 on marketable securities and $1,200,000 for the purchase
of treasury stock. Management believes that an agreement signed for
an equity investment into the Company will be sufficient to satisfy
the Company's currently anticipated cash requirements.
13
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
PART II
Item 1. Legal Proceedings
Litigation - On June 9, 1999, the Company was determined to be
liable in a civil action by Kelley & Kelley Advertising, Inc., the
Company's advertising consultant during the Company's initial stage
in 1996. The jury trial, which extended over three days, involved an
October 23, 1996 agreement drafted and executed by a former employee
who was subsequently fired by the Company. The trial concluded in
the jury verdict of approximately $26,000 in compensatory damages
and $350,000 in punitive damages. The jury verdict reflects the
belief that the Company's former employee never intended to provide
additional assignments to Kelley & Kelley. The evidence presented at
trial did show that Kelley & Kelley did receive all of the payments
due under the above agreement but only received one additional
assignment. In addition, the undisputed facts at trial showed that
the Company performed all of its future advertising in-house and did
not engage a firm to replace Kelley & Kelley. Counsel for the
Company has filed motions with the trial court for a directed
verdict (overturning the jury verdict) based on Florida's "Economic
Loss Rule" which precludes tort damages in a breach of contract
case. On August 20, 1999 The Court reduced the punitive damages in
accordance with Florida Statute 768.73 to approximately $105,000.
Counsel for the Company has advised the Company that the verdict is
against the manifest weight of the evidence and the law and if not
reversed by the trial judge, then the Company should be successful
on appeal. The Company will use any and all resources to reverse the
above jury decision and will, if necessary, vigorously prosecute its
appeal rights.
Item 2. Changes in Securities
This Item is not applicable to the Company.
Item 3. Defaults upon Senior Securities
This Item is not applicable to the Company.
Item 4. Submission of Matters to a Vote of Security Holders
This Item is not applicable to the Company.
Item 5. Other Information
This Item is not applicable to the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Form 8-K - July 7, 1999
27 Financial Data Schedule
14
<PAGE>
Online Gaming Systems, Ltd.
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.
Date: November 18, 1999 By: /s/ Richard A. Iamunno
---------------------------------
(Signature)
Richard A. Iamunno, President
And Chief Executive Officer
Date: November 18, 1999 By: /s/ Peter Lawson
---------------------------------
(Signature)
Peter Lawson, Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Online
Gaming Systems, Ltd.'s financial statements as of September 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> (42,609)
<SECURITIES> 1,063,237
<RECEIVABLES> 31,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,463,865
<PP&E> 607,145
<DEPRECIATION> (246,386)
<TOTAL-ASSETS> 6,499,215
<CURRENT-LIABILITIES> 1,273,373
<BONDS> 0
<COMMON> 13,403
0
57
<OTHER-SE> 5,117,928
<TOTAL-LIABILITY-AND-EQUITY> 6,499,215
<SALES> 612,075
<TOTAL-REVENUES> 612,075
<CGS> 685,780
<TOTAL-COSTS> 5,582,447
<OTHER-EXPENSES> (1,173,686)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,819
<INCOME-PRETAX> (4,482,466)
<INCOME-TAX> (123,691)
<INCOME-CONTINUING> (4,358,775)
<DISCONTINUED> (54,261)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,413,036)
<EPS-BASIC> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
