U.S SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB/A
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from January 1, 1999 to December 31, 1999
Commission file number 0-27256
ONLINE GAMING SYSTEMS, LTD.
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DELAWARE 13- 3858917
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State or Other Jurisdiction of (I.R.S. Employer Identification No.
Incorporation or Organization)
200 East Palmetto Park Road, Suite 200, Boca Raton, Florida 33432
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(Address of Principal Executive Offices) (Zip Code)
(561) 393-6685
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
None.
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
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(Title of Class)
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act 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 / /
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
State issuer's revenues for its most recent fiscal year: The
issuer's revenues for the fiscal year ended December 31, 1999 were $ 850,950.
The aggregate market value at March 31, 2000 of shares of the
registrant's Common Stock, $.001 par value per share (based upon the closing
price of $ 1.25 per share of such stock on the Nasdaq OTC Bulletin Board on such
date), held by non-affiliates of the Registrant was approximately $18,305,225.
Solely for the purposes of this calculation, shares held by directors and
officers of the Registrant have been excluded. Such exclusion should not be
deemed a determination or an admission by the Registrant that such individuals
are, in fact, affiliates of the Registrant.
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: At April 11, 2000
there were outstanding 14,669,166 shares of the Registrant's Common Stock, $.001
par value.
Transitional Small Business Disclosure Format (check one):
Yes /X/ No / /
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
We are making this statement in order to satisfy the "safe harbor"
provisions contained in the Private Securities Litigation Reform Act of 1995.
This Annual Report, on Form 10-KSB, includes forward-looking statements relating
to the business of the Company. Forward-looking statements contained herein, or
in other statements made by the Company are made based on Management's
expectations and beliefs concerning future events impacting the Company and are
subject to uncertainties and factors relating to the Company's operations and
business environment, all of which are difficult to predict and many of which
are beyond the control of the Company, that could cause actual results of the
Company to differ materially from those matters expressed in or implied by
forward-looking statements. The Company believes that the following factors,
among others, could affect its future performance and cause actual results of
the Company to differ materially from those expressed in, or implied by,
forward-looking statements made by, or on behalf of the, Company; (a) general
economic, business and market conditions; (b) competition; (c) the success of
advertising and promotional efforts; (d) trends within the Internet Gaming; (e)
the existence or absence of adverse publicity; (f) changes in relationships with
the Company's major customers or in the financial condition of those customers;
and (g) the adequacy of the Company's financial resources and the availability
and terms of any additional capital. Such forward-looking statements are based
on assumptions that the Company will continue to design, market and provide
successful new services, that competitive conditions will not change materially,
that demand for the Company's services will continue to grow, that the Company
will retain and add qualified personnel, that the Company's forecasts will
accurately anticipate revenue growth and the costs of producing that growth, and
that there will be no material adverse change in the Company's business. In
light of the significant uncertainties inherent in the forward-looking
information included in this Form 10-KSB, actual results could differ materially
from the forward-looking information contained in this Annual Report on Form
10-KSB.
OVERVIEW
We develop and market interactive products and services in the
gaming entertainment and information technology fields. We were incorporated in
the state of Colorado in October 1939 under the name "Pacific Gold, Inc." to
explore and develop gold and silver ore prospects and to operate mining and
milling facilities. Pacific Gold, Inc. conducted limited mining activities until
operations ceased. After we changed our name to The CEEE Group, we then sought
new business opportunities as a development stage entity.
In 1973 we changed our name to Cine-Chrome Laboratories, Inc. and
operated a film-processing lab in California. From 1984 until June 1994, we did
not conduct any operations, transactions or business activities. In June
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1994, we began acting as a corporate advisory operation which included acting as
a "finder" with respect to U.S. public companies and providing advisory services
concerning corporate structure and raising capital. Beginning in 1996, we have
concentrated our business operations primarily on the manufacturing, marketing
and development of interactive gaming products and services. These products and
services are focused on two major industries; interactive gaming & wagering
products, and information technology services.
Prior to July 16, 1996, we had no operations other than searching
for a business combination. In July 1996, we consummated a share exchange
pursuant to an Exchange of Stock Agreement and Plan of Reorganization with
Atlantic International Capital Ltd., a Delaware corporation and the former
stockholders of Atlantic Capital. As a result, the business of Atlantic Capital
became our business.
On November 22, 1996, we merged with, and into, a wholly owned
Delaware subsidiary, Atlantic International Entertainment, Ltd. We, among other
things:
o changed our state of incorporation to Delaware
o increased our authorized capital stock to 110,000,000 (100,000,000
shares of common stock, $.001 per share (the "common stock") and
10,000,000 shares of preferred stock, $.001 par value per share (the
"Preferred stock");
o Performed a 1 for 3-share exchange.
We acquired the major assets of RAM Associates, Inc. in 1996. The
RAM assets we acquired included
o COMMUNITY CASINO
o REALSPORTS(TM)
These products formed a part of the foundation of our current gaming software
products. Other products acquired from RAM included
o HOTEL HOTLINKS(TM)
o CLUB INTERACTIVE.
In March 1997, we acquired the Internet service provider and
developer, The EmiNet Domain, Inc. Through the EmiNet Domain, Inc. we based our
interactive non-gaming and wagering products and services. The EmiNet Domain,
Inc. offers dial-up Internet business and web hosting development services to
commercial markets. (See page 10 for sale of the Eminet Domain, Inc.)
The Company's executive offices are located at 200 East Palmetto
Park Road, Suite 200, Boca Raton, Florida 33432. The telephone number of the
Company is (561) 393-6685. The Company maintains a home page on the Internet at
http://www.ogsltd.com.
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PRODUCTS AND SERVICES
Interactive Gaming, Wagering, Charitable and Fund Raising Products
Interactive Casino Extension(TM)
The Company's flagship product is ICE (Interactive Casino
Extension). In September of 1998, AIE introduced Version 2.0 which is based on
industry standard Microsoft(R) and Macromedia(R) tools. This version included a
more robust database and accounting back office, the support for junketeers, and
four games which utilized the Microsoft crypto-API random number generator. In
December of 1998, Version 2.1 was shipped which included three new games: Sic-Bo
(a popular Asian game), Baccarat, and Video Keno. Additionally, the ability to
download the Casino graphics to the player's computer was introduced. In March
of 1999, Version 2.2 was released and included: Scratch-Off lottery cards,
increased voice, a new roulette wheel design, and the ability to download a game
at a time beside the earlier ability to download the entire Casino graphics. In
September of 1999, Version 2.3 was released which had redesigned graphics for
the Slot machines, Blackjack, Baccarat, and Roulette table tops; Auto detection
of Shockwave; enhanced Credit Card monitoring, enhanced administrative security
levels, enhanced email capabilities, enhanced deposit reporting.
The pricing for ICE(TM) allows the operator to receive new games for
this product with no additional fee. The fee includes graphic customization of
the Lobby, Game Lobbies, card backs and coins. There is a monthly maintenance
fee, that entitles the operator to worldwide customer service twenty four (24)
hours per day, seven days per week. This includes maintenance updates and a 30
day warranty period. Potential purchasers have a buy-out, option. New games are
made available for a fee depending on the cost of developing the game and the
potential increased revenues to the operator. The maintenance fee is still
required for maintenance updates as long as the release is supported. A third
option was requested several times which consisted of the back office purchase
and games purchased individually. This option also requires a monthly
maintenance fee for support and maintenance updates for the games they
purchased. Hardware costs are excluded from the AIE fees.
WebSports(TM)
The Company licenses webSports to licensed bookmakers. In March
1998, AIE released Version 1.5 and Version 1.6 in the Fall. The release included
support for baseball and the introduction of Tax reporting, to support Australia
and South Africa, along with support for Australian Regulators. AIE has
developed Version 2.0 of webSports, which will be integrated into the ICE
accounting and database back office, taking advantage of the development
completed last year and running in the field since August of 1998. Version 2.0
was introduced with a focus on International Sports Wagering, supporting such
sports as: Cricket, Rugby, Golf, Football and others. The taxation and regulator
items will be included. The product is targeted for July 1999, in time to have
all customers ready for the American Football season.
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WebSports is priced allowing the operator to receive all new Sports and
enhancements to the product, including a customized Lobby. A monthly maintenance
fee is required which provides for twenty-four (24) hours per day seven days a
week worldwide support, maintenance updates and a 30-day warranty period. As an
alternative, a purchase price is available and new sports will be made available
for a fee depending on the potential revenue for the client. The monthly
maintenance fee is required for support and maintenance as long as the release
is supported. Hardware costs are excluded from the AIE fees.
Bingo Blast(TM)
In the late fall of 1998, AIE entered into an agreement with
Cybergames Inc. (CYGA:OTC) where jointly they would provide a fund raising game
for the First Lady of Costa Rica. The site will be called "Bingo of the
Americas" and will provide the U.S Red Cross, and the American Cancer Society,
with revenues. This agreement prompted the development of Bingo Blast was
released and developed to the retail market in the second quarter of 1999. Bingo
Blast is a multi-player, pari-mutual progressive prize game. The design is based
on the ICE platform, lowering development time and cost. Game play is intended
to simulate the actual experience in a Bingo Hall. Each game has a minimum prize
that is increased based on the number of cards purchased and has a progressive
prize that increases until a player calls Bingo in a certain number of balls
called. There are thirty (30) different Bingo patterns, customizable graphics
and one of the first AIE products to introduce rules and customer information in
Spanish and English.
Bingo Blast is priced similar to the ICE(TM) product. A monthly
maintenance fee is required which provides for twenty four (24) hours per day
seven days a week worldwide support, maintenance updates and a 30-day warranty
period. Hardware is not included in the price.
Lotto Magic(TM)
Lotto Magic was designed and started into development in January
1999. The product utilizes the ICE database, accounting back office and the
standard Microsoft tools and crypto-API. The product consists of Lotto whereby a
player selects six numbers from a field of 49 or can select Auto Pick. The dates
and times of drawings are posted on the site. Sales are divided into 4
configurable pools: those who match all 6 numbers, those who match 5 numbers,
those who match 4 numbers. The numbers can be entered after a live drawing, or
can be randomly generated. The product also includes three Instant Scratch
Games: Wheel of fortune (a key number game); High Card (a high score game); and
Match 3 (a three of six money match game). These instant Lottery scratch game
tickets are created from a configurable size pool. Lotto Magic will be available
in April and is already incurring a lot of interest. This product is the first
that AIE will introduce that provides help and rules in Spanish and English.
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Lotto Magic is priced consistent with AIE's other products. Hardware
is not included in the price.
For all AIE products, AIE provides support for credit card
processing through processing vendors such as: Secure Bank, E-Payment Solutions,
Cybersource(R) and Barclays. AIE also offers custom programming for a fee.
Industry Overview
The internet is a global network of computers connecting millions of
individual computers and more than 70,000 business, commercial, government and
academic networks. This interconnectivity allows any one of these computers to
transmit information to any other computer. Management believes that there is
tremendous growth potential for internet products as consumer and business
access becomes easier and more cost efficient. We estimate that there are
already over 50 million Internet users, and the number of users is growing at a
rate of 10% per month.
The commodity pricing of powerful computers and the wealth of
information available on the internet have all contributed to the creation of a
vast market of consumers and business buyers. During the last three years, the
number of Internet service providers ("ISP's") in the United States alone has
grown from roughly zero to over 3,000. Management attributes the influx of ISP's
to several factors which include
o an increasing demand for connection to the internet
o the internet offers significant marketing opportunities for a
variety of products and services
o providing internet connections requires minimum expertise and
start-up costs
The interactive gaming and wagering marketplace has become the next
step in the gaming industry. Revenues from the worldwide gaming market exceeds
$50,000,000,000. We estimate that gaming revenues derived from just internet
gaming revenues will exceed $8,000,000,000 by the year 2000. The integrated
interactive gaming and wagering (network gaming terminals, lotteries, internet,
telephone) revenues will far exceed that amount.
The existing customer base from the established gaming and wagering
marketplace will be where the vast majority of these new revenues are derived.
Building upon the gaming industry's high customer loyalty level, the existing
gaming operators will be able to launch a new generation of gaming and wagering
products to it's player base.
Growth Strategy
Our current plan of operations is to expand its current worldwide
account base by offering a complete interactive gaming & wagering product line.
We will also seek to expand upon current information technology products and
services in the form of international acquisition or mergers into existing
operations. Achieving market acceptance for our services and
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products will require substantial marketing efforts and the expenditure of
significant funds to create awareness and demand.
Marketing
Our sales and marketing efforts over the past year have stepped up
considerably. From a base in Boca Raton at the beginning of the year we opened
sales and marketing efforts in Sydney and Brisbane in Australia, as well as in
London, Las Vegas and South Africa. We have formed two marketing alliances, one
with Anchor Gaming in the United States and the other with John Huxley in the
United Kingdom.
Trademarks and Patents
We currently provide the market place with four products, all under
names that are trade marked: Bingo Blast(TM), Interactive Casino Extensions
(TM), Lotto Magic(TM) and webSports (TM). All software contains copyright
notices identifying the year and confidentiality. We are in the process of
submitting 10 disclosures for patents covering the game engines, money
management and back office architectures and functions.
Competition
All of the major companies operate as service bureaus installing and
running the gaming products on their own servers and charging substantial
service bureau fees of upwards to 40%.
We sell our product to owners and expect them to own and run their
business. We take a minimal royalty and provide all new games and enhancements
for a fee. We also focus our marketing efforts on established gaming entities
such as cruise ships, licensed book makers, respected charitable organizations
and land based casinos and other land based gaming operations. We sell the
ability to expand and retain a current customer base.
Service is provided twenty four hours per day, seven days per week
along with the ability to remotely diagnose and fix all problems and provide
upgrades. A standard business practice is on-site installation and a full week
of training of all personnel at no additional fee.
Employees
As of March 31, 2000, we had twenty eight (28) full-time employees in the
Boca Raton, Florida office and four (4) full-time employees in Australia We may
also employ full-time and part-time consultants on an as-needed basis. We
consider our relationship with our employees to be satisfactory.
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Recent Developments
On April 3, 1998, we entered into a Securities Purchase Agreement
with The Shaar Fund, an Israeli venture fund, for the sale of 5,000 shares of
the Convertible Preferred stock for $500,000. The Agreement also grants the
purchaser the right to purchase up to an additional $2,500,000.00 in Convertible
Preferred stock, at the same price as the initial 5,000 shares, of Convertible
Preferred stock by April 2, 2000. The Convertible Preferred stock is convertible
into our common stock at The Shaar Fund's option. When the Securities Purchase
Agreement was signed, we entered into an agreement with The Shaar Fund to
register all of the shares of the purchased securities and the common stock that
may be issued upon the exercise of the The Shaar Fund's conversion rights. We
filed a registration statement with the Securities and Exchange Commission for
the registration of the shares of the Convertible Preferred stock and the shares
of common stock issuable upon exercise of The Shaar Fund's conversion rights.
The registration statement became effective and we will maintain the
effectiveness of registration statement for the term of the above Agreement.
On April 30, 1998, Hosken Consolidated Investments, Ltd., a South
African corporation, purchased 1,250,000 shares of our common stock at $3.20 per
share. We issued the shares to Hosken Consolidated Industries to fund operations
in South Africa and to obtain additional working capital.
On June 2, 1998 The Shaar Fund advanced $500,000 of the additional
$2,500,000 and received an additional 5,000 shares of Convertible Preferred
stock pursuant to the above agreement. The parties also amended the above
agreement to eliminate the floor amount of $1.50 for the conversion price.
On August 24, 1998, our wholly-owned subsidiary, AIE, Australia,
Ltd. submitted an offer for the acquisition of the stock of an Australian listed
company, Coms21. We offered Coms21 shareholders the equivalent of $.70 AUD per
share in the form of our U.S. shares. We eventually accepted approximately
12,000,000 shares of Coms21, or approximately 10% of Coms21, in exchange for
approximately 1,200,000 shares of our common stock and thereafter withdrew our
offer for the rest of the Coms21 stock.
On March 11, 1999 the Company entered into an agreement to sell its
wholly owned subsidiary, The Eminet Domain, Inc. to Centerline Associates, Inc.
The agreement called for the sale of 81% of its interest in the Eminet Domain,
Inc. for $2,500,000, payable $100,000 in cash and $2,400,000 promissory note
payable two years from closing. The closing date of the transaction was March
31, 1999. However, on December 10, 1999 the parties reformed the agreement to
provide the sale of the Company's entire interest in Eminet Domain in exchange
for $2,500,000 in convertible preferred stock in Atlantic Internet Holdings,
Inc., a Florida holding company which has as one of its subsidiaries, The Eminet
Domain.
On October 31, 1999 the Company entered into a loan agreement with
Hosken Consolidated Investments, Ltd. for the amount of $500,000. This loan is
at call, does not attract an interest rate, and was used for general working
purposes.
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During 1999 the Company laid the infrastructure to allow it to
market on a global basis. Its "go to market" philosophy ensured that Online
Gaming Systems would be represented in the entire major gaming and wagering
jurisdictions in the world. To facilitate this, the Company widened its
marketing area to include the United Kingdom, Europe, Australia, the Asia
Pacific Region and South Africa. The Company also took steps to widen its
product range by acquiring a Las Vegas based manufacturer that has allowed it to
manufacture a complementary product.
A more detailed description of the Company's strategy as follows: -
Acquisition of Excel Design, Inc.
In April 1999 Online Gaming Systems, Ltd. acquired the business of
Excel Design, Inc. Excel has developed a hand held portable and wireless gaming
device. This product gives gaming operators the flexibility to extend play to
secured areas in the sportsbook bar, restaurant pool and bingo areas. The system
runs existing gaming companies programs (e.g. Bally and Sigma) and requires no
bill hopper or coin mechanism. The potential for Online Gaming Systems, Ltd. is
to expand the Excel product in a variety of markets including the Las Vegas
casinos, cruise liners, Australian clubs and South African casinos. Online
Gaming Systems, Ltd. also intends to integrate its existing Internet based
product to extend Excels product line.
In line with the Company's policy of appointing expert sales and
marketing organizations, Anchor Gaming was appointed in September 1999 to sell
and market Excel's products. The product is currently lodged for approval with
the Nevada Gaming Commission. Sales are expected in the fourth quarter 2000.
John Huxley Casino Equipment, Ltd.
In May 1999 Online Gaming Systems, Ltd. entered into an alliance
with the London based John Huxley Casino Equipment, Ltd. Huxley is considered to
be the largest casino equipment manufacturer (other than gaming machines) in the
world and currently services 3000 customers, many with multiple casinos. Huxley
will have exclusive distribution rights for all Online Gaming Systems, Ltd.'s
products in England and Europe and non-exclusive in all other areas except
Australia and the United States.
It is the intention of Online Gaming Systems, Ltd. to add marketing
and technical support staff at Huxley's London offices.
This alliance will allow Online Gaming Systems, Ltd. through Huxley
to access established casino operators throughout the United Kingdom and Europe
in a cost effective and creditable manner.
Online Gaming Systems Australia Pty.
The Australian subsidiary was incorporated in 1998 for the purpose
of launching a take over for the listed Australian company Coms21, Ltd. The
takeover was unsuccessful and aborted in December 1998.
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In July 1999 in line with the Company's strategy of having a
presence in major regulated markets an office was established in Sydney,
Australia. Sydney is the largest capital city in Australia. The Australian
gaming industry is the second largest regulated gaming industry in the world.
Gaming in all forms including horse racing and lotteries turn over in excess of
AUD$100 billion a year and has shown phenomenal growth over the past decade. The
industry employs over 150,000 people and accounts for an average of 12% of the
state and territory government revenues.
Internet gaming is currently legal in three states and three
territories. Australia is looked on by the rest of the world as a leader in the
development of legalizing and regulating Internet gambling. The vast majority of
the Pacific Islands in close proximity to Australia such as Vanuatu, Nauru,
Solomon Islands also issue licenses. Because of this regulated environment
Australia has been able to attract operators from the rest of the world as well
as from within Australia.
Online Gaming Systems Australia achieved its first sportsbook sale
in November 1999 and its first casino sale in December 1999. Since then three
more casino sales and one other sportsbook sale have been announced.
Global Payment Technology Holdings, Ltd. S.A
On November 1, 1999, Online Gaming Systems, Ltd. entered into an
agreement with Hosken Consolidated Investments, Ltd. (subject to South African
Reserve Bank Approval) to acquire a 23.9% equity in South African based Global
Payment Technology Holdings Limited, ("GPT Limited"). GPT Limited currently
markets and distributes authentication and validation equipment to South African
gaming operators. GPT, Limited plans to enter the Interactive gaming market in
South Africa as a distributor of Online Gaming System's product lines.
Internet Industry Overview
The internet had its origins in 1969 as a project of the Advanced
Research Project Agency ("ARPA") of the U.S. Department of Defense. The network
established by ARPA was designed to provide efficient connections between
different types of computers separated by large geographic areas and to function
even if part of the network became inoperative. Historically, academic
institutions and governmental agencies for remote access to host computers and
electronic mail communications used the infrastructure. Accordingly, the U.S.
government historically provided the majority of funding for the infrastructure.
However, as the modern internet developed and became commercial, funding shifted
to the private sector. The number of worldwide internet users continues to
increase significantly. In a recent government study, it was stated that traffic
on the internet doubles every 100 days. Business use is growing faster and as
many as 62 million Americans now have Internet access.
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Improving Performance - There have been significant bandwidth,
communications, and price/performance improvements in communications over the
Internet. These developments make the Internet an increasingly attractive medium
for conducting business, adding convenience, and attracting more users.
High Speed Modems - As the installed personal computer ("PC") base
has grown, it has become increasingly common for those PCs to have a modem
connection. Many new computers now have higher speed, pre-installed modems, as a
K56 Flex, allowing connections to be made even more easily.
Expansion of Local Area Networks and Wide Area Networks - Corporate,
government, and educational local area networks, and wide area networks used by
businesses, are expanding and these installed networks enable multiple users to
be connected to the internet through a single point of contact. Therefore, the
actual number of internet users connected through these networks greatly exceeds
the number of connection points.
Extranet - Businesses can set up a proprietary network or Virtual
Private network using the Internet. A Virtual Private network is a secure and
cost effective means of data communication.
Expectations for Electronic Commerce over the Internet - With the
increased recognition of the Internet's potential, as a medium for marketing and
purchasing, a growing number of companies are initiating or expanding their use
of the Internet for commercial purposes. The United States Department of
Commerce stated that 10 million North Americans made purchases over the Internet
by the end of 1997.
ITEM 2. DESCRIPTION OF PROPERTY.
We lease approximately 5,150 square feet of office space in Boca
Raton, Florida expiring on September 30, 2002 with a monthly rent of
approximately $9,485. We believe that our existing facilities are adequate for
our current needs and that additional facilities in its service area are
available to meet future needs. ITEM 3. LEGAL PROCEEDINGS. The Company is a
party to pending or threatened litigation, both as plaintiff and defendant.
However, the Company believes that said litigation will not materially affect
the Company's operations or financial condition.
a. Kelley and Kelly Advertising - Breach of Contract - This case
arose from a Settlement Agreement entered into by the Company
with its former advertising company. The Company believed that
the work performed by Kelley was not in compliance with
industry standards and terminated the Settlement Agreement.
Kelley sued and the Company settled the claim for $75,000 and
100,000 shares of restricted stock.
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b. Axxsys International - Temporary and Permanent Injunction -
Acquisition of Assets of Axxsys
On November 8, 1998, Atlantic acquired the assets of Axxsys 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.
Since Axxsys and its affiliates waited until January, 1999 to
serve Atlantic 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. Based on the allegations contained in Axxsys' own
complaint it seems clear that Axxsys was not a viable company
and consequently any value assigned to the Atlantic stock will
be in excess of any fair market value for the Axxsys assets.
Counsel believes that there is no merit to this action. This
case is currently not set for trial
c. Cabrero - The Company is suing a former employee for failure to
perform his duties and for inducing the Company to give him
$10,000 for software he never delivered. The Employee has
counter sued because he claims the Company did not give him
"COBRA" notice and he incurred approximately $30,000 in medical
expenses. The Company did provide COBRA notice and the medical
expenses should be the responsibility of the Insurance company.
This case is not currently set for trial.
d. Newton - Mr. Newton was engaged by the Company in 1996 to be
its spokesman. The Company and Mr. Newton signed two identical
non-cancelable contracts, one for 215,000 shares and the other
for 15,000 shares. The Company never used the services of Mr.
Newton and the Company believes that both parties to said
contracts abandoned them. Further it appears that both
contracts were not signed at the same time but that the 15,000
share contract was a novation. In the interest of settlement
the Company has issued and delivered to Mr. Newton 5,000
shares. This case is not currently set for trial. Mr. Newton's
deposition is scheduled for April 14, 2000.
e. Keane - this is a suit for past due services rendered to the
Company. The Company disputes the amount of the outstanding
invoices and the quality of the work performed. This case is
not set for trial
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
On September 24, 1999, the Company held its Annual Meeting of
Shareholders to, among other things, vote on a board of directors. There were
6,965,882 shares voted for the proposal.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since November, 1996, our common stock has traded on the electronic
bulletin board under the trading symbol AIEE. The following table sets forth the
average range of bid and ask quotations for our common stock as reported by the
electronic bulletin board for each full quarterly period within the two most
recent fiscal years and subsequent interim periods.
Fiscal Year Ending December 31, 1998
By Quarter Common Stock
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Quarter Date High Low
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1st March 31, 1998 $4.80 $3.00
2nd June 30,1998 $4.125 $3.625
3rd September 30, 1998 $4.375 $2.990
4th December 31, 1998 $3.00 $1.313
Fiscal Year Ending December 31, 1999
By Quarter Common Stock
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Quarter Date High Low
------- ---- ---- ---
1st March 31, 1999 $3.00 $1.1875
2nd June 30,1999 $3.5625 $1.96875
3rd September 30, 1999 $3.3125 $2.25
4th December 31, 1999 $2.46875 $0.90625
-14-
<PAGE>
Trading transactions in our securities occur in the over-the-counter
electronic bulletin board market. All prices indicated herein are as reported to
us by broker-dealer(s) making a market in our securities. The quotes indicated
above reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
As of December 31, 1999, there were approximately 575 Holders of
Record of our Common Stock, including brokerage firms, clearinghouses, and/or
depository firms holding our securities for their respective clients. The exact
number of beneficial owners of our securities is not known.
The Company has not paid any cash dividends on the Common Stock in
the past and the Board of Directors does not anticipate declaring any cash
dividends on the Common Stock in the foreseeable future. The Company currently
intends to utilize any earnings it may achieve for the development of its
business and working capital purposes.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT
ARE NOT LIMITED TO, THE COMPANY'S EXPANSION INTO NEW MARKETS, COMPETITION,
TECHNOLOGICAL ADVANCES AND AVAILABILITY OF MANAGERIAL PERSONNEL.
OVERVIEW
During 1999, the Company continued its business efforts in
Interactive Gaming & Wagering. Gaming and Wagering continues to grow in terms of
customer base and product line. A market for the gaming and wagering products
has been established whereby the Company has entered into various license
agreements. The Company expects to expand its account base with its existing
product line for the foreseeable future. In late 1999 the Company's products
began to benefit the continued increase in market acceptance of Interactive
gaming products in the segments the Company markets to. The segments include
global land based gaming and wagering operators and Internet media related
company. The Company anticipates a significant increase in sales and revenues in
the coming year.
-15-
<PAGE>
RESULTS OF OPERATIONS
The following is a summary of the Company's financial and operating data:
YEAR ENDED DECEMBER 31,
STATEMENTS OF CONTINUING
OPERATIONS DATA: 1999 1998
------------------------------ ---- ----
Revenue $ 850,950 $ 2,426,230
[Loss} Income from Operations (7,418,680) (2,401,793)
Net [Loss] Income (7,472,941) (1,332,400)
Basic and Diluted Net
[Loss] Income Per Common Share $ (0.59) $ (0.15)
STATEMENT OF CONTINUING
OPERATIONS DATA 1999 1998
----------------------------- ---- ----
Working Capital $(1,011,476) $ 4,667,465
Total Assets 3,970,837 10,406,587
Total Liabilities 1,854,609 1,427,969
Stockholders' Equity 2,116,228 8,978,618
STATEMENTS OF DISCONTINUED
OPERATIONS DATA: 1999 1998
------------------- ---- ----
Revenue $ -- $ 544,057
[Loss] Income from Operations (54,261) (371,448)
Net [Loss] Income (54,261) (371,448)
Basic and Diluted Net [Loss]
Income per Common Share $ -- $ (0.04)
BALANCE SHEET DATA -
DISCONTINUED OPERATIONS: 1999 1998
------------------- ---- ----
Working Capital $ -- $ (65,845)
Total Assets -- 1,546,350
Total Liabilities -- 195,078
Stockholders' Equity -- 1,351,272
OUTLOOK
-16-
<PAGE>
RESULTS OF OPERATIONS
The Company's net loss for 1999 was ($7,418,680)compared to net loss
of ($1,332,400) for 1998. The substantial decrease was due to several factors.
Net revenues for the Company for 1999 compared to 1998 decreased by 65% or
$1,575,280. The decrease in revenues was the result of the development of the
new product version. The Company stopped promotion of the old version and sales
and marketing efforts did not produce anticipated results. The Company intends
to allocate large resources to sales and marketing for 2000 and expects revenues
to substantially increase.
Cost of sales and operating expenses increased by 54% or $2,660,529
in 1999 compared with 1998. The increase was largely due to global expansion
efforts, expenses related to product development, increased support staffing and
amortization of capitalized product development. Cost of revenues is not
directly related to revenues. Provision for doubtful accounts was $1,222,155 and
$1,435,040 for 1999 and 1998 respectfully. Going forward the company does not
anticipate any provision for doubtful accounts as revenues are recorded when
monies are received.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999 the Company had negative working capital of
($1,011,476)compared with $4,667,465 at December 31, 1998. The decrease in
working capital was primarily due to negative cash flow from operations.
Management believes that existing cash, cash equivalents and
marketable securities will be sufficient to satisfy the Company's currently
anticipated cash requirements.
INFLATION
In the opinion of management, inflation has not had a material
adverse effect on its results of operations.
ITEM 7. FINANCIAL STATEMENTS.
[See page F-1.]
ITEM 9. RELATED PARTY TRANSACTIONS.
The Company has a payable due to an affiliated company, whose shareholders
are also shareholders of the Company. The balance of the payable at December 31,
1999 is $500,000. The payable is non-interest bearing and is due on demand.
-17-
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their
positions with the Company are set forth below.
NAME AGE POSITION
---- --- --------
Richard A. Iamunno 42 President, Chief Executive
Officer and Director
Peter H. Lawson 51 Chief Financial Officer and
Chief Operating Officer
John Copelyn 51 Chairman of the Board
Martin V. McCarthy 44 Director
Marcel Golding 40 Director
Jeffrey L. Hurwitz 44 Director
RICHARD A. IAMUNNO has served as a Director, the Chief Executive
Officer and President since its inception on July 16, 1994. Prior to starting
the Company, Mr. Iamunno was President of Ameristar International, an
investment-banking firm that provided European-based companies with merger
assistance into the U.S. public marketplace. Mr. Iamunno's business experience
includes positions as Senior Director of Marketing and Vice President of Western
Union Corporation. Mr. Iamunno is presently a director of Atlantic International
Capital Holdings, Ltd., a Bermuda based investment company and has in the past
served as a Director of Tapistron International, as a Director and officer of
Trinitech Systems, Inc. Mr. Iamunno attended Drake University in Des Moines,
Iowa.
PETER H. LAWSON has served as a Director of Online Gaming Systems,
Ltd. since March 1999. In July 1999, he was appointed Chief Financial Officer
and in January 2000, Chief Operating Officer. He has executive responsibility to
the Australian Operation which was set up in July 1999. He was previously a
Director of an Australian Stock broking operation and has extensive experience
in the areas of corporate finance, mergers, acquisitions, IPO's and capital
raising. He is also a Director of the 100% owned Australian Subsidiary. Mr.
Lawson holds a commerce degree and is a certified practicing accountant. He also
holds a post graduate qualification in finance from the Securities Institute in
Australia.
-18-
<PAGE>
JOHN COPELYN is currently the Chief Executive Officer of the South
African Clothing and Textile Workers Union Investment Group and the Chief
Executive Officer of Hosken Consolidated Investments, Ltd., a company traded on
the Johannesburg Stock Exchange. During 1992-1994, Mr. Copelyn was Chief
Executive Officer of Zenzeleni Clothing. From 1994-1997, Mr. Copelyn served as
an elected member of the democratically elected South African parliament. In
addition, he has held numerous positions with South African trade unions
including serving on the Central Committee of COSATU. Mr. Copelyn is also a
licensed attorney in South Africa. Mr. Copelyn also serves as director for other
gaming and non-gaming companies. He attended both the University of
Witwatersrand and University of South Africa.
MARTIN V. MCCARTHY was appointed a Director of the Company in March
of 1998. Mr. McCarthy was the President and CEO of IDD Enterprises, L.P. The
Company was recently sold to Dow Jones and Company. Mr. McCarthy has been a
pioneer in the online world for almost two decades. He has led organization of
scale that have created, commercialized and deployed leading edge technologies
in the areas of communications, information services and transactions. Prior to
joining IDD in 1988, Mr. McCarthy served as Vice President of Office Message and
Information Services at Western Union and was the youngest corporate officer in
the firm's 130 year history. Mr. McCarthy has an MBA from Harvard University.
MARCEL GOLDING was appointed a Director of the Company in August of
1998. Mr. Golding is Chairman of Hosken Consolidated Investments (HCI) and
Softline Holdings, as well as being a Director of JCI and Global Capital, which
are all listed companies on the Johannesburg Stock Exchange. In addition, he was
the founding chairman of the Mineworkers Investment Company (linked to the
National Union of Mineworkers), one of the two pioneering trade union investment
companies in South Africa. He was elected the first Deputy General Secretary of
the union in 1987 at the age of 26, and was re-elected on three additional
occasions to this post of the Country's largest trade union. From 1994 to 1997
he served as a Member of Parliament, where he chaired the Minerals and Energy
Committee and the Audited Commission, the oversight committee of the office of
the Auditor-General. Mr. Golding holds a post graduate degree from the
University of Cape Town.
JEFFREY L. HURWITZ was appointed a Director of the Company in March
of 1998. Mr. Hurwitz had been the Managing Director of South African based
Clinic Holdings since 1987. While at Clinic Holdings, the Company grew to 26
Hospitals with annual turnover of over $370,000,000. In November 1997 Mr.
Hurwitz left Clinic Holdings under the terms of Agreement of Sale of the
Company. Prior to Clinic Holdings Mr. Hurwitz was employed as a Chartered
Accountant with Deloitte & Touche. Mr. Hurwitz graduated from the University of
Witwatersrand in South Africa with degrees in Commerce and Accounting.
MEETINGS AND COMMITTEES
The Board held four (3) meetings during the year ended December 31,
1999. In addition, from time to time during such year, the members of the
-19-
<PAGE>
Board acted by unanimous written consent. The Company has elected a standing
compensation and audit committees. The entire Board of Directors performs the
typical functions of such committees.
ITEM 10. EXECUTIVE COMPENSATION
The following table provides certain summary information concerning the
compensation earned, by the Company's Chief Executive Officer and its Chairman
for services rendered in all capacities to the Company and its subsidiaries for
each of the last three fiscal years. Such individuals will be hereafter referred
to as the Named Executive Officers. No other executive officer who would have
otherwise been included in such table on the basis of salary and bonus earned
for the 1999 fiscal year has resigned or terminated employment during that
fiscal year.
SUMMARY COMPENSATION TABLE
NAME AND
PRINCIPAL POSITION YEAR SALARY($) BONUS($)
------------------ ---- --------- --------
Richard A. Iamunno 1999 $158,000 --
President and Chief 1998 $144,000 --
Executive Officer 1997 $125,000 --
Peter Lawson 1999 $150,000(AUD) --
Chief Financial Officer
Norman J. Hoskin 1999 $144,000 --
Chairman of the Board/ 1998 $144,000 --
Secretary 1997 $125,000 --
Karen Welch 1999 $100,000 --
Senior Vice President
Operations and
General Manager
Trevor Klein 1999 $100,000 --
Vice President Finance
Stock Options
On January 1, 1997, the Company adopted an Incentive Stock Option
Plan for Employees, Directors, Consultants, and Advisors (the "Plan"). The Plan
will expire December 31, 2006 unless further extended by appropriate action of
the Board of Directors. Employees, directors, consultants and advisors of the
Company, or any of its subsidiary corporations, are eligible for participation
in the Plan. The Plan provides for stock to issued pursuant to options granted
and shall be limited to 250,000 shares of Common Stock, $.001 par value. The
shares have been reserved for issuance in accordance with the terms of the Plan.
The exercise of these options may be for all or any
-20-
<PAGE>
portion of the option and any portion not exercised will remain with the holder
until the expiration of the option period. The options granted in 1998 expire on
December 23, 2003.
The following table contains information concerning the stock option
grants made to each of the named executive officers and employees for fiscal
1998.
Name #Granted in F/Y ($/Sh Exp. Date
Richard Iamunno 50,000 1999 $2.50 07/13/04
100,000 1998 $4.25 04/03/03
50,000 1997 $3.25 04/03/02
Peter Lawson 125,000 1999 $2.50 06/30/07
50,000 1999 $2.50 07/13/04
Karen Welch 50,000 1999 $2.50 12/31/02
Trevor Klein 20,000 1999 $2.50 12/31/02
30,000 1999 $2.25 12/31/02
The Company applies Accounting Principles Board Option No. 25,
Accounting for Stock Issued to Employees, and related interpretations, for stock
options issued to employees in accounting for its stock option plans. The
exercise price of all options issued was the market price at the date of grant.
Accordingly, no compensation expense has been recognized for the Company's
stock-based compensation plans.
BOARD OF DIRECTORS COMPENSATION
The Company does compensate directors who are also executive
officers of the Company for service on the Board of Directors. Directors receive
$1,500 per meeting and are reimbursed for their expenses incurred in attending
meetings of the Board of Directors.
LONG-TERM INCENTIVE AND PENSION PLANS
The Company does not have any long-term incentive or defined benefit
pension plans.
OTHER
No director or executive officer is involved in any material legal
proceeding in which he is a party adverse to the Company or has a material
interest adverse to the Company.
EMPLOYMENT AGREEMENTS
The Company currently has an employment agreement with Mr. Iamunno
pursuant to which they will continue to serve as the Company's President and
Chief Executive Officer. It is anticipated that as compensation for his
-21-
<PAGE>
services, the Company will pay Mr. Iamunno a base salary of $158,400 each per
annum, which shall be subject to annual increases of 10%. The agreement will
expire in the year 2000. Other than the aforementioned agreement, the Company
has not entered into any other employment agreement with any of its officers,
directors, or any other persons and no such agreements are anticipated in the
immediate future.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers and directors, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission (the "Commission"). Officers, directors and greater than ten percent
shareholders are required by the Commission's regulations to furnish the Company
with copies of all Section 16(a) forms they file.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of April 11, 2000, information
regarding the beneficial ownership of the Company's Common Stock by each person
known by the Company to own five percent or more of the outstanding shares, by
each of the directors and officers, and by the directors and officers as a
group. As of April 11, 2000, there were outstanding 14,669,166 shares of the
Common Stock of the Company.
Name and Address of Beneficial Owner(2) Amount of
Beneficial Percent of
Ownership Class
Richard A. Iamunno 1,796,270 12.25%
Marcel Golding 3,189,435* 22.00%
John Copelyn
Martin V. McCarthy 125,000 0.85%
Jeffrey L. Hurwitz N/A N/A
Peter Lawson 20,000 .14%
All Officers and Directors as a Group 5,130,705 35.54%
(5 persons)
*In July, 1999 a subsidiary of HCI acquired the stock of Norman J. Hoskin, the
Company's former Chairman. Both Mr. Golding and Mr. Copelyn are substantial
owners and officers of HCI and consequently, ownership of all of the shares of
HCI or by its subsidiaries have been attributed to both Mr. Golding and Mr.
Copelyn for the purpose of this table.
-22-
<PAGE>
(1) Beneficial ownership has been determined in accordance with Rule
13d-3 of the Securities Exchange Act of 1934. Generally, a person is
deemed to be the beneficial owner of a security if he has the right
to acquire voting or investment power within 30 days.
(2) Unless otherwise indicated, all addresses are at the Company's
office at 200 East Palmetto Park Rd., Suite 200, Boca Raton, Florida
33432.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 10KSB.
(a) Exhibits:
3.1 - Certificate of Incorporation of the Company,
incorporated by reference to Exhibit 3.1 to the
Company's Form 10-KSB for the fiscal year ended December
31, 1996.
3.2 - Bylaws of the Company, incorporated by reference to
Exhibit 3.2 to the Company's Form 10-KSB for the fiscal
year ended December 31, 1996.
4.1 - Specimen Common Stock Certificate, incorporated by
reference to Exhibit 4.1 to the Company's Form 10-KSB
for the fiscal year ended December 31, 1996.
10.1 - Incentive Stock Option Plan for Employees, Directors,
Consultants and Advisers, incorporated by reference to
Exhibit 10.1 to the Company's Form 10-KSB for the fiscal
year ended December 31, 1996.
10.2 - Agreement for Purchase and Sale of Stock dated as of
January 31, 1997 by and between the Company and Eminet
Domain, Inc., incorporated by reference to the Company's
Form 8K dated March 7, 1997.
10.3 - Securities Purchase Agreement dated April 3, 1998 by and
between the Company and The Shaar Fund, which includes
(i)the Certificate of Designations of Convertible
Preferred Stock as Annex I, and (ii)the form of
Registration Rights Agreement as Annex IV. The Company
agrees to furnish the disclosure schedules and other
Annexes, which have been omitted from this filing, to
the Commission upon request.
-23-
<PAGE>
10.4 - Employment Agreement dated as of May 1, 1997 between the
Company and Richard Iamunno.
10.5 - Employment Agreement dated as of May 1, 1997 between the
Company and Norman Hoskin.
10.6 - Stock Purchase Agreement dated March 10, 1999 by and
between Atlantic International Entertainment, Ltd. and
Centerline Associates, Inc.
10.7 - Stock Option and Incentive Plan adopted by Board of
Directors on March 25, 1999.
10.8* - Stock Purchase Agreement dated December 10, 1999 by and
between Atlantic Internet Holdings, Inc.
11.1* - Statement of Computation of Per Share Earnings
21.1* - Subsidiaries of the Company
23.1 - Consent to the incorporation by reference in the
Company's Registration Statement on Form S-8 of the
report of Moore Stephens, P.C. included herein.
23.2* - Consent to the incorporation by reference of the report
of Moore Stephens, P.C. included herein.
27 - Financial Data Schedule.
--------------------------
* Included herein.
(b) Reports on Form 8-K On February 6, 1997, the Company
filed two reports on Form 8-K dated December 19, 1996
and January 30, 1997, respectively. Such reports
disclosed changes in the Company's independent
accountants.
On April 14, 1997, the Company filed with the Commission
a Form 8-K dated March 7, 1997 disclosing the
acquisition of The EmiNet Domain, Inc.
On May 29, 1998 the Company filed with the Commission a
Form 8-K dated May 27, 1998 diclosing the offer to
purchase Coms21 shares.
-24-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the 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.
Dated: August 18, 2000 /s/ Peter Lawso
--------------------------------------
Peter Lawson, Chief Financial Officer
Norman J. Hoskin,
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the Registrant in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ John Copelyn Chairman of the Board August 18, 2000
---------------------------
John Copelyn
/s/ Richard A. Iamunno President, Chief Executive August 18, 2000
--------------------------- Officer and Director
Richard A. Iamunno
/s/ Peter Lawson Chief Financial Officer and August 18, 2000
--------------------------- Chief Operating Officer
Peter Lawson
/s/ Martin V. McCarthy Director August 18, 2000
---------------------------
Martin V. McCarthy
/s/ Marcel Golding Director August 18, 2000
---------------------------
Marcel Golding
/s/ Jeffrey Hurwitz Director August 18, 2000
---------------------------
Jeffrey Hurwitz
-25-
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditor's Report......................................... F-2..
Consolidated Balance Sheet as of December 31, 1999 .................. F-3..F-4
Consolidated Statements of Operations and Comprehensive
[Loss] for theyears ended December 31, 1999 and 1998 ................ F-5..F-6
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1999 and 1998 .............................. F-7..
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998 .......................................... F-8..F-9
Notes to Consolidated Financial Statements .......................... F-10.F-22
. . . . . . . . . . . .
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of
Online Gaming Systems, Ltd. and Subsidiaries
We have audited the accompanying consolidated balance
sheet of Online Gaming Systems, Ltd. and its subsidiaries as of December 31,
1999, and the related consolidated statements of operations and comprehensive
[loss], changes in stockholders' equity, and cash flows for each of the two
years in the period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of Online Gaming Systems, Ltd. and its subsidiaries as of
December 31, 1999, and the consolidated results of their operations and their
cash flows for each of the two years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles.
/s/ MOORE STEPHENS, P.C.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
July 14, 2000
F-2
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999.
Assets:
Current Assets:
Investments $ 662,500
Prepaid Expenses 13,750
Other Current Assets 27,263
----------
Total Current Assets 703,513
----------
Property and Equipment - Net 358,958
----------
Equipment under Capitalized Lease - Net 226,654
----------
Other Assets:
Other Assets 15,462
Patents - Net 166,250
Investments 2,500,000
----------
Total Other Assets 2,681,712
----------
Total Assets $3,970,837
==========
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements.
F-3
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999.
<TABLE>
<CAPTION>
<S> <C>
Liabilities and Stockholders' Equity:
Current Liabilities:
Cash Overdraft $ 173,875
Accounts Payable and Accrued Expenses 822,493
Notes Payable and Advances 624,618
Current Portion of Capital Lease Obligations 94,003
------------
Total Current Liabilities 1,714,989
Capital Lease Obligations 139,620
------------
Total Liabilities 1,854,609
------------
Stockholders' Equity:
Convertible Preferred Stock - Par Value $.001 Per Share;
Authorized 10,000,000 Shares, Issued and Outstanding,
14,050 shares [Liquidation Preference $1,405,000] 14
Common Stock - Par Value $.001 Per Share;
Authorized 100,000,000 Shares, Issued - 13,614,052 Shares 13,614
Additional Paid-in Capital 13,864,081
Treasury Stock, 968,767 Common Shares - At Cost (1,744,547)
Accumulated Other Comprehensive [Loss] (1,474,500)
Accumulated [Deficit] (8,142,434)
Deferred Acquisition Costs (400,000)
------------
Total Stockholders' Equity 2,116,228
------------
Total Liabilities and Stockholders' Equity $ 3,970,837
============
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements.
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE [LOSS]
<TABLE>
<CAPTION>
Years ended
December 31,
1 9 9 9 1 9 9 8
------- -------
<S> <C> <C>
Revenue $ 850,950 2,426,230
Cost of Sales 109,524 792,789
----------- -----------
Gross Profit 741,426 1,633,441
----------- -----------
Operating Expenses:
General and Administrative 5,292,371 2,510,484
Provision for Doubtful Accounts and Notes 1,222,155 1,435,040
Depreciation and Amortization 864,502 89,710
----------- -----------
Total Operating Expenses 7,379,028 4,035,234
----------- -----------
[Loss] from Operations (6,637,602) (2,401,793)
----------- -----------
Other [Expenses] Income:
Interest Income 30,961 81,390
Interest Expense (54,648) (2,211)
Interest Expense - Related Party -- (8,855)
Other Income 949,419 538,387
Other Expense - Related Party (56,068) --
Loss on Investments (350,000) --
Software Write-Off (1,300,742) --
----------- -----------
Other [Expenses] Income - Net (781,078) 608,711
----------- -----------
[Loss] from Continuing Operations Before
Income Tax [Benefit] Expense (7,418,680) (1,793,082)
Income Tax [Benefit] -- (460,682)
----------- -----------
[Loss] from Continuing Operations (7,418,680) (1,332,400)
Discontinued Operations:
[Loss] from Operations of Discontinued Business
Segment [Net of Income Tax [Benefit] of $-0- and $(51,243),
for the years ended December 31, 1999 and 1998, Respectively] (54,261) (321,448)
[Loss] on Disposal of Business Segment, including
Provision of $50,000 for Operating Loss During
Phase Out Period [Net of Income Tax [Benefit] of $-0-] -- (50,000)
----------- -----------
Net [Loss] (7,472,941) (1,703,848)
Other Comprehensive Loss:
Unrealized Holding Loss arising during period (1,378,642) (104,611)
Less: Reclassification Adjustment for Loss Included in Net Income -- (51,516)
----------- -----------
Total Other Comprehensive [Loss] $(8,851,583) $(1,756,943)
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements.
F-5
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE [LOSS]
<TABLE>
<CAPTION>
Years ended
December 31,
1 9 9 9 1 9 9 8
------- -------
<S> <C> <C>
Net [Loss] $ (7,472,941) $ (1,703,848)
Deduct: Imputed Non-cash Preferred Stock Dividend -- 269,443
Preferred Stock Dividend in Arrears 34,525 33,333
------------ ------------
Net [Loss] Available to Common Stockholders $ (7,507,466) $ (2,006,624)
============ ============
[Loss] Per Common Share:
Continuing Operations $ (.59) $ (.15)
Discontinued Operations -- (.04)
Disposal of Discontinued Subsidiary -- --
------------ ------------
Basic and Diluted Net [Loss] Per Share of Common Stock $ (.59) $ (.19)
============ ============
Weighed Average Shares of Common Stock Outstanding 12,632,422 10,771,563
============ ============
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements.
F-6
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Treasury Stock
--------------- ---------------------- Paid-in --------------
Shares Amount Shares Amount Capital Shares Amount
------ ------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1997 -- $ -- 9,590,184 $ 9,590 $ 4,149,906 -- $ --$
Sale of Escrow Common Stock -- -- -- -- 299,900 -- --
Unrealized Holding [Loss]
on Marketable Securities -- -- -- -- -- -- --
Sale of Common Stock -- -- 1,250,000 1,250 3,998,750 -- --
Issuance of Common Stock -- -- 9,700,000 9,700 -- -- --
Cancellation of Common Stock -- -- (9,700,000) (9,700) -- -- --
Sale of Common Stock -- -- 1,217,647 1,217 2,285,921 -- --
Purchase of Treasury Stock -- -- -- -- -- (145,500) (278,697)
Sale of Preferred Stock 10,000 10 -- -- 906,840 -- --
Cancellation of Common Stock -- -- (25,000) (25) 25 -- --
Issuance of Common Stock -- -- 31,106 31 18,720 -- --
Conversion of Preferred Stock (2,740) (3) 147,002 147 (144) -- --
Contingent Acquisition -- -- 200,000 200 399,800 -- --
Imputed non-cash Series A
Convertible Preferred Stock
Dividend -- -- -- -- 269,443 -- --
[Loss] From Continuing
Operations -- -- -- -- -- -- --
[Loss] From Discontinued
Operations -- -- -- -- -- -- --
--------- ----------- ------------- --------- ------------- -------- -------------
Balance - December 31, 1998 7,260 7 12,410,939 12,410 12,329,161 (145,500) (278,697)
Purchase of Treasury Stock -- -- -- -- -- (823,267) (1,465,850)
Conversion of Preferred Stock (9,410) (9) 861,122 860 (851) -- --
Subsidiary Divested -- -- -- -- -- -- --
Sale of Preferred Stock 16,200 16 -- -- 1,002,984 -- --
Sale of Common Stock -- -- -- -- -- -- --
Unrealized Holding Gain (Loss)
on Marketable Securities -- -- -- -- -- -- --
Forgiveness of Debt - Related Party -- -- -- -- (324,286) -- --
Issuance of Common Stock -- -- 341,991 344 857,073 -- --
Loss From Continuing Operations -- -- -- -- -- -- --
Loss From Discontinued Operations -- -- -- -- -- -- --
--------- ----------- ------------- --------- ------------- -------- -------------
Balance - December 31, 1999 14,050 $ 14 13,614,052 $ 13,614 $ 13,864,081 (968,767) $ (1,744,547)
========= ========== ============= ========== ============= ======== =============
</TABLE>
<TABLE>
<CAPTION>
Accumulated Deferred Total
Other -------- -----
Comprehensive Accumulated Acquisition Subscription Shareholders'
------------- ----------- ----------- ------------ -------------
[Loss] [Deficit] Costs Receivable Equity
---- --------- ----- ---------- ------
<S> > <C> <C> <C> <C> <C>
Balance - December 31, 1997 (42,763) $ 829,886 $ -- $ -- $ 4,946,619
Sale of Escrow Common Stock -- -- -- -- 299,900
Unrealized Holding [Loss]
on Marketable Securities (53,095) -- -- -- (53,095)
Sale of Common Stock -- -- -- (1,445,000) 2,555,000
Issuance of Common Stock -- -- -- -- 9,700
Cancellation of Common Stock -- -- -- -- (9,700)
Sale of Common Stock -- -- -- -- 2,287,138
Purchase of Treasury Stock -- -- -- -- (278,697)
Sale of Preferred Stock -- -- -- -- 906,850
Cancellation of Common Stock -- -- -- -- --
Issuance of Common Stock -- -- -- -- 18,751
Conversion of Preferred Stock -- -- -- -- --
Contingent Acquisition -- -- (400,000) -- --
Imputed non-cash Series A
Convertible Preferred Stock
Dividend -- (269,443) -- -- --
[Loss] From Continuing
Operations -- (1,332,400) -- -- (1,332,400)
[Loss] From Discontinued
Operations -- (371,448) -- -- (371,448)
------------- ----------- ----------- ----------- ------------
Balance - December 31, 1998 (95,858) (1,143,405) (400,000) (1,445,000) 8,978,618
Purchase of Treasury Stock -- -- -- -- (1,465,850)
Conversion of Preferred Stock -- -- -- -- --
Subsidiary Divested -- 473,912 -- -- 473,912
Sale of Preferred Stock -- -- -- -- 1,003,000
Sale of Common Stock -- -- -- 1,445,000 1,445,000
Unrealized Holding Gain (Loss)
on Marketable Securities (1,378,642) -- -- -- (1,378,642)
Forgiveness of Debt - Related Party -- -- -- -- (324,286)
Issuance of Common Stock -- -- -- -- 857,417
Loss From Continuing Operations -- (7,418,680) -- -- (7,418,680)
Loss From Discontinued Operations -- (54,261) -- -- (54,261)
------------- ----------- ----------- ------------ ------------
Balance - December 31, 1999 $ (1,474,500) $(8,142,434) $ (400,000) $ -- $ 2,116,228
============= =========== ============ ============= =============
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements.
F-7
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended
December 31,
1 9 9 9 1 9 9 8
------- -------
<S> <C> <C>
Operating Activities:
[Loss] from Continuing Operations $(7,472,941) $(1,332,400)
Adjustments to Reconcile Net [Loss] to
Net Cash [Used for] Operating Activities:
Depreciation and Amortization 864,502 473,209
Deferred Tax Asset -- 176,812
Provision for Doubtful Accounts 1,222,155 1,435,040
Loss on Sale of Assets -- 950
Gain on Sale of Subsidiary (1,231,750) --
Issuance of Common Stock for Services Rendered 140,000 --
Issuance of Common Stock for Compensation 217,312 --
Realized Loss on Carrying Value of Investments 350,000 51,516
Loss on Sale of Investments 221,637 --
Software Write-Off 1,300,742 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 13,715 (93,938)
Prepaid Expenses (2,493) (494)
Notes Receivable 39,211 (747,062)
Other Assets 170,832 (103,199)
Increase [Decrease] in:
Accounts Payable and Accrued Expenses (252,488) 391,033
Income Taxes Payable -- (634,336)
Other Current Liabilities -- (24,917)
Due to Customer -- (20,721)
----------- -----------
Net Cash - Continuing Operations (4,419,566) (428,507)
----------- -----------
Discontinued Operations:
[Loss] from Discontinued Operations (54,261) (371,448)
Adjustments to Reconcile Net [Loss] to Net Cash Operations:
Depreciation and Amortization 38,220 144,748
Provision for Doubtful Accounts 18,915 27,424
Loss on Sale of Assets -- 50
Changes in Net Assets and Liabilities 238,577 (117,751)
----------- -----------
Net Cash - Discontinued Operations 241,451 (316,977)
----------- -----------
Net Cash - Operating Activities - Forward (4,178,115) (745,484)
----------- -----------
Investing Activities - Continuing Operations:
Increase [Decrease] in Due from Related Parties 55,240 (5,385)
Purchase of Investments (393,092) (6,451,459)
Purchase of Patents and Licences (450,000) --
Purchase of Property, Equipment, and Capitalized Software (105,696) (1,241,840)
Sale of Investments 3,431,823 1,245,728
----------- -----------
Net Cash - Investing Activities - Continuing Operations - Forward $ 2,538,275 $(6,452,956)
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
F-8
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended
December 31,
1 9 9 9 1 9 9 8
----------- -----------
<S> <C> <C>
Net Cash - Operating Activities - Forwarded $(4,178,115) $ (745,484)
----------- -----------
Net Cash - Investing Activities - Continuing Operations -
Forwarded 2,538,275 (6,452,956)
----------- -----------
Investing Activities - Discontinued Operations:
Purchase of Property and Equipment (29,715) (6,419)
----------- -----------
Financing Activities - Continuing Operations:
Cash Overdraft 173,875 --
Proceeds from Issuance of Common Stock -- 6,597,047
Proceeds from Issuance of Preferred Stock 1,503,000 906,850
[Purchase] of Treasury Stock (1,465,850) (278,697)
[Decrease] in Loan Payable to Officer (150,000) (16,636)
Proceeds from Long-Term Debt 344,000 153,100
Proceeds from Short-Term Borrowings 500,000 --
Payment from Notes Receivable 1,445,000 --
Payment of Notes Payable (319,279) (84,660)
Payment of Lease Payable (61,432) (11,286)
Decrease in Loan Receivable (370,025) --
----------- -----------
Net Cash - Financing Activities - Continuing Operations 1,599,289 7,265,718
----------- -----------
Financing Activities - Discontinued Operations:
Proceeds from Long-Term Debt 50,000 40,400
Payment of Note Payable (41,500) (6,000)
Payment of Lease Payable (5,769) (38,984)
----------- -----------
Net Cash - Financing Activities - Discontinued Operations 2,731 (4,584)
----------- -----------
Net [Decrease] Increase in Cash and Cash Equivalents (67,535) 56,275
Cash and Cash Equivalents - Beginning of Years 67,535 11,260
----------- -----------
Cash and Cash Equivalents - End of Years $ -- $ 67,535
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 52,231 $ 16,694
Income Taxes $ -- $ --
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Conversion of Preferred Stock into Common Stock $ 649 $ 147
Stock Issued in Exchange for Contingent Acquisition $ -- $ 400,000
Purchase of Assets under Capital Lease Financing $ 192,068 $ 91,401
Sale of Subsidiary for Preferred Stock $ 2,500,000 $ --
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
F-9
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[1] Organization
Nature of Business - Online Gaming Systems, Ltd. [the "Company"] is located in
Southern Florida. The Company primarily develops and markets interactive gaming
products and services through the Internet and World Wide Web. The Company's
created Online Gaming Systems Australia Pty., as a wholly owned subsidiary, to
offer sports book sales in Australia and the Pacific Island region.
In April 1999, the Company acquired Excel Design, Inc. which develops hand held
portable and wireless gaming devices. In December 1999, the Company sold its
interest in Eminet Domain, Inc., a previously wholly owned subsidiary of the
Company.
[2] Summary of Significant Accounting Policies
Principles of Consolidation - The Consolidated financial statements include the
accounts of the Company and its subsidiaries, Online Gaming Systems Australia,
Pty. and Excel Design, Inc. All material intercompany accounts and transactions
have been eliminated.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - The Company considers all highly liquid investments,
with a maturity of three months or less when purchased, to be cash equivalents.
At December 31, 1999, the Company did not have any cash equivalents.
Property and Equipment and Depreciation - Property and equipment are stated at
cost. Depreciation is computed primarily using the straight-line method over the
estimated useful lives of the assets, which range from 5 to 7 years. Leasehold
improvements are amortized using the straight-line method over the lesser of the
term of the related lease or the estimated useful lives of the improvements.
Routine maintenance and repair costs are charged to expense as incurred and
renewals and improvements that extend the useful life of the assets are
capitalized. Upon sale or retirement, the cost and related accumulated
depreciation are eliminated from the respective accounts and any resulting gain
or loss is reported as income or expense.
Revenue Recognition - Revenue from the sales of computer software licensing
agreements are recognized over the term of the agreement.
Investments - The Company accounts for investments in accordance with Statement
of Financial Accounting Standards ["SFAS"] No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Management determines the
appropriate classification of its investments in equity securities at the time
of purchase and reevaluates such determination at each balance sheet date.
Equity securities, which the Company does not have the intent to hold to
maturity, are classified as trading or available for sale. Securities available
for sale are carried at fair value, with any temporary unrealized holding gains
and losses, net of tax, reported in a separate component of shareholders' equity
until realized or deemed to be a loss which is other than temporary. Trading
securities are carried at fair value with any unrealized gains or losses
included in earnings. At December 31, 1999, the Company had no investments
classified at trading.
F-10
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[2] Summary of Significant Accounting Policies [Continued]
Investments [Continued] - Held to maturity securities are carried at amortized
cost. Marketable equity securities available for current operations are
classified in the balance sheet as current assets while securities held for
non-current uses are classified as long-term assets. Realized gains and losses
are calculated utilizing the specific identification method [See Notes 4 and 5].
At December 31, 1999, the Company classified all investments as available for
sale.
Income Taxes - Pursuant to SFAS No. 109, "Accounting for Income Taxes," income
tax expense [or benefit] for the year is the sum of deferred tax expense [or
benefit] and income taxes currently payable [or refundable]. Deferred tax
expense [or benefit] is the change during the year in a company's deferred tax
liabilities and assets. Deferred tax liabilities and assets are determined based
on differences between financial reporting and tax basis of assets and
liabilities, and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Advertising Expenses - The Company expenses advertising costs as incurred. Total
advertising costs charged to expense for the years ended December 31, 1999 and
1998 amounted to approximately $186,575 and $29,000, respectively.
Net Income Per Share - The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards ["SFAS"] No. 128, "Earnings per
Share," which is effective for financial statements issued for periods ending
after December 15, 1997. Accordingly, earnings per share data in the financial
statements for the year ended December 31, 1999 and 1998, have been calculated
in accordance with SFAS No. 128. Potential common shares are included if
dilutive.
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share," and replaces its primary earnings per share with a new basic
earnings per share representing the amount of earnings for the period available
to each share of common stock outstanding during the reporting period. Basic
earnings [loss] per share is computed by dividing income [loss] available to
common stockholders by the weighted average number of common shares outstanding
during the period. SFAS No. 128 also requires a dual presentation of basic and
diluted earnings per share on the face of the statement of operations for all
companies with complex capital structures.
Diluted earnings per share reflects the amount of earnings for the period
available to each share of common stock outstanding during the reporting period,
while giving effect to all dilutive potential common shares that were
outstanding during the period, such as common shares that could result from the
potential exercise or conversion of securities into common stock
The computation of diluted earnings per share does not assume conversion,
exercise, or contingent issuance of securities that would have an antidilutive
effect on per share amounts, [i.e. increasing earnings per share or reducing
loss per share]. The dilutive effect of outstanding options and warrants and
their equivalents are reflected in dilutive earnings per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon exercise of options and warrants in computing
diluted earnings per share. It assumes that any proceeds should be used to
purchase common stock at the average market price during the period. Options and
warrants will have a dilutive effect only when the average market price of the
common stock during the period exceeds the exercise price of the options or
warrants.
F-11
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[2] Summary of Significant Accounting Policies [Continued]
Stock-Based Compensation - The Company follows Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ["APB No. 25"] with
regard to the accounting for its employee stock options. Under APB No. 25,
compensation expense is recognized only when the exercise price of options is
below the market price of the underlying stock on the date of grant.
Accordingly, no compensation expense has been recognized for the Company's
stock-based compensation plan for fiscal year 1999 and 1998. The Company applies
the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" to any
non-employee stock-based compensation and the pro forma disclosure provisions of
SFAS No. 123 to employee stock-based compensation.
Capitalization of Software Development Costs - Research and development costs
incurred in connection with the development of new software are expensed as
incurred during the year. Certain software development costs capitalized in
prior years totaling $1,300,742 were recorded as a period charge during fiscal
1999.
Beneficial Conversion Features - The Company has issued convertible preferred
stock with a beneficial conversion feature. The beneficial conversion feature is
analogous to a dividend and is recognized as a return to the preferred
shareholders over the minimum period in which the preferred shareholders can
realize that return. The resulting discount is allocated from the date of
issuance through the date the security was first convertible.
Patents - Patent costs are incurred in connection with obtaining certain patents
and filing of related patent applications. Patent amortization expense amounted
to $33,750 and $-0- for the years ended December 31, 1999 and 1998,
respectively. Amortization is calculated on a straight-line basis over the
patents estimated useful life.
Reclassification - Certain prior year amounts have been reclassified to conform
to current year's financial statement presentation.
[3] Significant Risks and Uncertainties
[A] Concentrations of Credit Risk - The Company places its cash and cash
equivalents with high credit quality institutions to limit its credit exposure.
At December 31, 1999, the Company did not have any amounts in a financial
institution that is subject to normal credit risk beyond insured amounts. The
Company routinely assesses the credit worthiness of its customers before a sale
takes place and believes its credit risk exposure is limited. The Company
performs ongoing credit evaluations of its customers but does not require
collateral as a condition of service.
F-12
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[3] Significant Risks and Uncertainties [Continued]
[B] Other Concentration - All of the Company's sales from Internet software
licensing is from outside the United States. These sales however are not subject
to currency fluctuations as payment is made in U.S. dollars. In 1999 the Company
had a portion of its revenues from four customers totaling $575,000 which is
approximately 68% of total revenues. The Company had a portion of its revenues
from five customers in 1998 totaling $2,145,000 which is approximately 88% of
total revenues. Sales derived from major customers are tabulated.
Revenues
Year Ended
December 31,
Customers 1 9 9 9 1 9 9 8
--------- ------- -------
Customer A (Software Sales) $ 250,000 $ --
Customer B (Software Sales) 190,000 --
Customer C (Software Sales) 50,000 --
Customer D (Software Sales) 85,000 --
Customer E (Software Sales) -- 675,000
Customer F (Software Sales) -- 220,000
Customer G (Software Sales) -- 350,000
Customer H (Software Sales) -- 450,000
Customer I (Software Sales) -- 450,000
-------------- -------------
Totals $ 575,000 $ 2,145,000
------ ============== =============
Geographic Information
Canada $ -- $ 450,000
Caribbean 575,000 1,695,000
-------------- -------------
Totals $ 575,000 $ 2,145,000
------ ============== =============
The Company purchases software from two vendors. Management believes that there
is no business vulnerability regarding this concentration of purchases from the
vendor as the software is available from other sources.
[4] Investments in Equity Securities
The Company has investment in equity securities classified as available for sale
with an original cost of $2,137,000 having a fair value of $662,500 at December
31, 1999. As of December 31, 1999, the Company has recorded temporary unrealized
losses related to this investment of $1,474,000 as an adjustment to
stockholders' equity [See Note 19].
Investment classified as a non-current asset represents 500,000 shares of
preferred stock of Atlantic Internet Holdings, [the parent company of the
Company's former wholly owned subsidiary], issued to the Company in lieu of the
sale of the wholly owned subsidiary. The preferred stock was valued at its
original cost of $2,500,000 at December 31, 1999 [See Note 19].
Gross proceeds from the sale of available for sale securities was $872,362, and
$853,856 and gross realized loss was $642,001 and $51,516 for the years ended
December 31, 1999 and 1998, respectively.
F-13
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[5] Other Comprehensive Loss
Temporary unrealized holding losses on investments, classified as available for
sale, is as follows at December 31, 1999 [See Notes 2 and 19]:
1 9 9 9
-------
Beginning Balance $ (95,858)
Current Year - Other Comprehensive Loss (1,378,642)
----------------------
Total $ (1,474,500)
----- ======================
[6] Property and Equipment
The following details the composition of property and equipment:
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation Net
---- ------------ ---
<S> <C> <C> <C>
Computer Hardware $ 499,084 $ 238,132 $ 260,952
Equipment, Office Fixtures and Furnishings 111,285 31,110 80,175
Leasehold Improvements 24,763 6,932 17,831
---------------------- ---------------------- ---------------------
Totals $ 635,132 $ 276,174 $ 358,958
------ ====================== ====================== =====================
</TABLE>
Depreciation expense for the years ended December 31, 1999 and 1998 amounted to
$112,206 and $87,069, respectively.
[7] Notes Payable and Advances
As of December 31, 1999, the Company had a $500,000 principal balance
outstanding on a note payable bearing 12% interest per annum. Repayment terms
provide for monthly interest only payments and one single lump sum repayment of
principal on December 31, 2000. If the Company fails to make any payment of
interest or principal, interest will accrue at 15% until all outstanding
principal and interest has been repaid. In August 2000, the Company revised the
note payable agreement to include an additional borrowing of $450,000 while
maintaining the same repayment terms and conditions.
As of December 31, 1999, the Company had advances of $124,618 outstanding in
connection with a trade acceptance draft program.
[8] Deferred Acquisition Costs
In October of 1998, the Company entered into a Stock Purchase Agreement with
Axxsys International, Inc., [Seller] to purchase the assets of Axxsys for
$400,000.00. Under the agreement 200,000 shares of the Company's common stock
was delivered and is being held in an escrow account pending execution.
The purchase price is contingent upon the current customers of the seller
continuing to provide average monthly revenues to the purchaser during the said
12 months of an amount agreed between the parties. In the event this average
monthly revenue is less than the agreed amount then the shares delivered to the
seller shall be reduced by a ratio of the actual monthly average revenues and
the agreed amounts. As the 200,000 shares are released, the cost of the
Company's acquisition will be the fair value of the shares on the date the
contingency is met. Since the Company acquired is a part of discontinued
operations, the cost of the acquisitions will be charged to discontinued
operations.
F-14
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[9] Leases
Capital Leases - The Company is the lessee of office equipment under capital
leases expiring in various years through December 2002. The various leases are
collateralized by the related assets. The assets and liabilities under capital
leases are recorded at the present value of the net future minimum lease
payments. The assets are amortized over their estimated productive lives.
Amortization of assets under capital leases totaled $54,869 and $-0- for the
years ended December 31, 1999 and 1998, respectively.
Following is a summary of property held under capital leases:
Office Equipment $ 281,523
Less: Accumulated Amortization 54,869
------------------
Total $ 226,654
----- ===================
Minimum future lease payments under capital leases for each of the next five
years and in the aggregate are:
2000 $ 123,621
2001 123,621
2002 31,029
2003 --
-------------------------------------------------------------------------------
Net Minimum Lease Payments 278,271
Less: Amount Representing Interest 44,648
-------------------
Present Value of Net Minimum Lease Payments 233,623
Less: Current Portion 94,003
-------------------
Long-Term Portion $ 139,620
----------------- ===================
Operating Leases - The Company leases office space and equipment under operating
leases expiring through September 2002, and has a $10,236 security deposit with
its landlord. The lease grants an option for renewal for an additional 5 years.
Minimum future rental payments under non-cancelable operating leases having
remaining terms in excess of one year as of December 31, 1999.
Year ending Operating
December 31, Leases
2000 $ 120,142
2001 123,384
2002 81,885
2003 --
Thereafter --
--------------------
Total $ 325,411
----- ====================
Rent expense for the years ended December 31, 1999 and 1998 was $141,121 and
$91,690, respectively.
F-15
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[10] Fair Value of Financial Instruments
The Company adopted statement of Financial Accounting Standards ["SFAS'] No.
107, "Disclosure About Fair Value of Financial Instruments" which requires
disclosing fair value to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed herein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement.
In assessing the fair value of financial instruments, the Company used a variety
of methods and assumptions, which were based on estimates of market conditions
and risks existing at that time. For certain instruments, including trade and
notes payables, it was assumed that the carrying amount approximated fair value
for the majority of these instruments because of their short maturities.
[11] 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. The Company received $2,000,000 and a note
receivable in foreign currency for the balance. The note receivable is shown in
the equity section classified as a subscription receivable. Subsequently, the
note has devalued due to foreign currency exchange. A foreign currency loss of
$600,000 is included in other income [expense].
Also in the second quarter of 1998, 9,700,000 shares of common stock were issued
to Atlantic International Entertainment Australia, a wholly owned subsidiary for
use in a proposed takeover of the Australian Company, Coms21. As the proposed
takeover did not happen, the 9,700,000 shares issued were cancelled.
In the second quarter of 1998, 10,000 shares of 5% Convertible Preferred Stock,
$.001 par value, were issued for cash. 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 Series A preferred stock are entitled to;
(i) quarterly cumulative dividends at the rate of 5% per annum of the original
issue price of the Series A preferred stock, (ii) a liquidation preference equal
to the sum of $100 for each outstanding share of Series A preferred stock.
In August 1998, 5,000 shares of the Company's common stock were issued to a
consultant for services performed.
The aggregate amount of arrearages in cumulative preferred dividends is $33,333
and is less than $.01 per share.
In the third quarter of 1998, 1,217,647 shares were exchanged to an Australian
listed company for 12,176,470 shares of the Australian company in a one for ten
stock swap.
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.
F-16
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[11] Capital Stock [Continued]
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.
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. The fair value of the shares
was approximately $154,000 at date of issuance.
In the second quarter of 1999, 75,000 shares of the company's common stock, with
a fair value of approximately $234,375, were issued to a consultant for services
performed.
On July 1, 1999, the Company's largest institutional stockholder, Hosken
Consolidated Investments, a South African corporation acquired approximately
575,000 shares of the Company's common stock from Norman J. Hoskin, the
Company's Chairman of the Board of Directors. Hoskin Consolidated Investments,
Ltd. were also granted an options over the remaining shares of Mr. Hoskin. 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 2,161,935 shares or approximately 16%
of total shares outstanding.
In the third quarter of 1999, 52,500 shares of the common stock, with a fair
value of approximately $105,000, were issued in lieu of expenses paid on behalf
of the Company.
In the fourth quarter of 1999, 10,500 shares of 5% convertible preferred stock,
$.001 par value, were issued to the Shaar Fund for $1,050,000. 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 $105,430. 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 the fourth quarter of 1999, 2,150 shares of convertible preferred stock,
valued at $215,000 was converted into 212,607 shares of common stock.
F-17
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[12] Discontinued Operations
Operating results of EmiNet Domain including net sales of approximately $-0- and
$544,000 are included in discontinued operations in the statement of operations
for the year ended December 31, 1999 and 1998, respectively.
Assets and liabilities to be disposed of consisted of the following at December
31, 1998.
Cash $ 20,640
Accounts Receivable - Net 5,272
Property Plant and Equipment - Net 155,917
Intangible Assets - Net 1,362,264
Other Assets 2,257
----------------------
Total Assets 1,546,350
----------------------
Accounts Payable and Accrued Expenses 91,757
Notes Payable and Lines of Credit 103,321
----------------------
Total Liabilities 195,078
----------------------
Net Assets Disposed Of $ 1,351,272
---------------------- ======================
Assets are shown at their expected net realizable values and liabilities are
shown at their face amounts.
[13] Provision for Income Taxes
Income tax [benefit] expense from continuing operations consists of the
following:
December 31,
------------
1 9 9 9 1 9 9 8
------- -------
Current:
Federal $ -- $(443,371)
State -- (17,311)
-------- ---------
Total Current -- (460,682)
-------- ---------
Deferred:
Federal -- --
State -- --
-------- ---------
Total Deferred -- --
-------- ---------
Tax Expense [Benefit] - Continuing Operations $ -- $(460,682)
--------------------------------------------- ======== =========
F-18
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[13] Provision for Income Taxes [Continued]
Income tax from continuing operations at the federal statutory rate reconciled
to the Company's effective rate is as follows:
December 31,
------------
1 9 9 9 1 9 9 8
------- -------
Federal Statutory Rate 34.0% 34.0%
State Income Taxes 2.0 2.0
Non-Deductible Expenses and Allowances (36.0) (10.0)
----------- ------------
Effective Rate -- % 26.0%
-------------- =========== ============
The major components of deferred income tax assets and liabilities at December
31, 1999 is as follows:
Deferred Tax Assets [Liability]:
Net Operating Loss Carryforward $ 2,663,930
Depreciation (10,000)
Unrealized Losses 330,000
Valuation Allowance (2,983,930)
--------------------
Deferred Tax Asset $ --
------------------ ====================
At December 31, 1999, the Company had approximately $7,500,000 of operating tax
loss carryforwards expiring in 2012.
The Company's valuation allowance increased by approximately $3,000,000 for the
year ended December 31, 1999.
[14] Commitments and Contingencies
[A] Employment Agreements - The Company has an employment agreement with its
CEO, which commenced January 1, 1997 and expires on December 31, 2000. The
aggregate annual commitment for future salaries at December 31, 1999 was
$158,400. Also, included in the agreement is an incentive bonus based upon the
Company obtaining certain net income and net cash flows. No bonuses have been
accrued at December 31, 1999, due to net losses and negative cash flow recorded
for the year ending December 31, 1999.
[B] Litigation - The Company is party to litigation arising from the normal
course of business. In managements' opinion, this litigation will not materially
affect the Company's financial position, results of operations or cash flows.
[C] Distribution Agreement - In May 1999, the Company entered into an alliance
with the London based John Huxley Casino Equipment, Ltd., a casino equipment
manufacturer. Huxley will have exclusive distributions rights for all of the
Company's products in England and Europe and non-exclusive in all other areas
except Australia and the United States.
F-19
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[15] Incentive Stock Option Plan
On January 1, 1997, the Company adopted an Incentive Stock Option Plan for
Employees, Directors, Consultants and Advisors [the "Plan"]. The Plan will
expire December 31, 2006 unless further extended by appropriate action of the
Board of Directors. Employees, directors, consultants and advisors of the
Company, or any of its subsidiary corporations, are eligible for participation
in the Plan. The Plan provides for stock to be issued pursuant to options
granted and shall be limited to 250,000 shares of Common Stock, $.001 par value.
The shares have been reserved for issuance in accordance with the terms of the
Plan. The exercise of these options may be for all or any portion of the option
and any portion not exercised will remain with the holder until the expiration
of the option period. The options expire on December 23, 2002.
The following is a summary of transactions, including the options issued to
employees of the Company.
Weighted-Average
Shares Exercise Price
Outstanding at December 31, 1996 -- $ --
Granted 175,000 3.25
Exercised -- --
Canceled -- --
---------- ---------------
Outstanding at December 31, 1997 175,000 3.25
---------- ---------------
Exercisable at December 31, 1997 175,000 3.25
Granted 788,000 3.94
Exercised -- --
Canceled -- --
---------- ---------------
Outstanding at December 31, 1998 963,000 3.83
---------- ---------------
Exercisable at December 31, 1998 963,000 3.83
Granted 636,000 2.25
Exercised -- --
Canceled -- --
---------- ---------------
Outstanding at December 31, 1999 1,599,000 2.25
-------------------------------- ---------- ---------------
Exercisable at December 31, 1999 1,599,000 2.25
-------------------------------- ---------- ---------------
The following table summarizes information about stock options at December 31,
1999:
<TABLE>
<CAPTION>
Outstanding Stock Options Exercisable
------------------------- Stock Options
Remaining Weighted-Average Weighted-Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
--------------- ------ ---------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$3.25 175,000 4.00 $3.25 175,000 $3.25
$4.13 700,000 4.25 $4.13 700,000 $4.13
$2.50 88,000 4.75 $2.50 88,000 $2.50
$1.29 115,000 4.25 $1.29 115,000 $1.29
$2.50 521,000 4.75 $2.50 521,000 $2.50
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations, for stock options
issued to employees in accounting for its stock option plans. The exercise price
of certain options issued was the market price at the date of grant.
Accordingly, no compensation expense has been recognized for the Company's
stock-based compensation plans for fiscal year 1999 and 1998.
F-20
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[15] Incentive Stock Option Plan [Continued]
The Black-Scholes option valuation model was developed for use in estimating the
fair value of options. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility. The
weighted average fair value of stock options granted to employees is estimated
at $3.00 and $3.70, during 1999 and 1998, respectively.
Pro forma information regarding net loss and net loss per share has been
determined as if the Company had accounted for its employee stock options under
the fair value method prescribed under SFAS No. 123, "Accounting for Stock Based
Compensation." The fair value of these options was estimated at the date of
grant using the Black-Scholes option-pricing model for the pro forma amounts
with the following weighted average assumptions:
December 31,
------------
1 9 9 9 1 9 9 8
------- -------
Risk-Free Interest Rate 5.9 % 5.6 %
Expected Life 4 years 5 years
Expected Volatility 162.1 % 153.0 %
Expected Dividends -- % -- %
The pro forma amounts are indicated below:
Years ended
December 31,
------------
1 9 9 9 1 9 9 8
------- -------
Net [Loss] - Continuing Operations:
As Reported $(7,418,680) $(1,332,400)
Pro Forma $(9,326,680) $(4,246,891)
Basic Net [Loss] Per Share of Common Stock - Continuing Operations:
As Reported $ (.59) $ (.15)
Pro Forma $ (.74) $ (.39)
Diluted Net [Loss] Per Share of Common Stock - Continuing Operations:
As Reported $ (.59) $ (.15)
Pro Forma $ (.74) $ (.39)
[16] Other Income [Expense]
Included in other income [expense] is a gain on the sale of a former subsidiary
for $1,231,750 [See Note 12].
[17] New Authoritative Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ["FASB"] issued SFAS No.
133, "Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards of derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
This statement is effective for all quarters of fiscal years beginning after
June 15, 1999. In July 1999, the FASB issues SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB No. 133," which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company does not
expect the adoption of this standard to have a material effect on the Company's
results of consolidated operations, financial position, or cash flows.
F-21
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[17] New Authoritative Accounting Pronouncements [Continued]
In December 1999, the Securities and Exchange Commission ["SEC"] issued Staff
Accounting Bulletin ["SAB"] 101, "Revenue Recognition in Financial Statements,"
which provides guidance related to revenue recognition based on interpretations
and practices followed by the SEC. SAB 101 was effective the first fiscal
quarter of fiscal years beginning after December 15, 1999 and requires companies
to report any changes in revenue recognition as cumulative change in accounting
principle at the time of implementation in accordance with Accounting Principles
Board Opinion 20, "Accounting Changes." The SEC has issued SAB 101B, "Amendment:
Revenue Recognition in Financial Statements," which delays implementation of SAB
101 until the Company's fourth quarter of 2000. The Company will adopt SAB 101
and is currently in the process of evaluating the impact, if any, SAB 101 will
have on its financial position or results of operations.
[18] Going Concern
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities and commitments in the normal course of business. As reflected in
the consolidated financial statements, the Company has incurred recurring net
losses from operations, an accumulated deficit, and recurring negative cash
flows from operations. These factors raised substantial doubt about the ability
of the Company to continue as a going concern.
Based on management's plans, cash flow projections, and a firm commitment from
an affiliated company and significant stockholder to fund future operations it
appears that the Company will continue to operate on a going concern basis in
the near future [See Note 19].
[19] Subsequent Event
Events occurring after December 31, 1999 have indicated that the temporary
unrealized loss of $1,474,500 on equity securities, classified as available for
sale, represent a decline in value "other than temporary." In subsequent
periods, the Company recognized period changes of $1,474,500 related to the
prior temporary unrealized loss recorded as a component of stockholders' equity
at December 31, 1999. Additionally, further subsequent period charges were
recognized for the remaining fair value of $662,500 in investments disclosed as
a current asset and $1,300,000 related to investments classified as non-current
on the Company's balance sheet at December 31, 1999. Had these factors existed
as of December 31, 1999, the Company's net loss would have increased by
$3,437,000 [$(.27) per share] for the year ended December 31, 1999 [See Notes 4
and 5].
In August 2000, the Company entered into a financing agreement for $1,950,000 to
refinance $950,000 of debt obligations and provide $1,000,000 of cash to fund
general operations. Provisions of the agreement provide for a maturity date of
six months form date of issue and will accrue interest at the rate of 8% per
annum. Principal and interest are due in full upon the maturity date. If the
Company defaults on the payment of interest and principal, the interest rate on
all outstanding balances will increase to 18% per annum. In connection with
obtaining the financing agreement, the Company issued 2,000,000 warrants to the
lender for the purchase of the Company's common stock at an exercise price of
$.50 per share the exercise price on the 2,000,000 warrants will be adjusted to
the lower exercise price. The financing agreement is secured by substantially
all assets of the Company.
. . . . . . . . . .
F-22
