UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Amendment No. 1)
/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 / /
<PAGE>
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 / /
-2-
<PAGE>
Explanatory Note
This Amendment No. 1 on Form 10-KSB/A (this "Amendment") is being filed
in order to amend Item 8 of Part II of the Registrant's Annual Report on Form
10-K filed with the Securities and Exchange Commission on April 14, 2000. The
purpose of this Amendment is to correct the disclosure arising from a
miscommunication.
Part II Item 8. Financial Statements and Supplementary Data.
--------------- --------------------------------------------
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheet as of December 31, 1999.........................F-2....F-3
Consolidated Statements of Operations and Comprehensive Income for the
years ended December 31, 1999 and 1998.....................................F-4....F-5
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1999 and 1998.....................................F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998.................................................F-7....F-8
Notes to Consolidated Financial Statements ................................F-9 ...F-21
</TABLE>
-3-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
(Deleted)
F-1
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 (UNAUDITED).
Assets:
Current Assets:
Investments $ 1,060,196
Deferred Tax Asset 123,691
Prepaid Expenses 13,750
Due from Related Parties 56,068
Other Current Assets 27,263
-------------
Total Current Assets 1,280,968
Property and Equipment - Net 358,958
------------
Equipment under Capitalized Lease - Net 226,654
------------
Other Assets:
Other Assets 531,712
Investments 2,500,000
------------
Total Other Assets 3,031,712
------------
Total Assets $ 4,898,292
============
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-2
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 (UNAUDITED).
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity:
Current Liabilities:
<S> <C>
Cash Overdraft $ 173,875
Accounts Payable and Accrued Expenses 822,493
Current Portion of Long-Term Debt 124,618
Current Portion of Capital Lease Obligations 94,003
---------------
Total Current Liabilities 1,214,989
Capital Lease Obligations 139,620
Total Liabilities 1,354,609
Stockholders' Equity:
Convertible Preferred Stock - Par Value $.001 Per Share;
Authorized 10,000,000 Shares, Issued and Outstanding,
130,300 shares [Liquidation Preference $13,030,000] 130
Common Stock - Par Value $.001 Per Share;
Authorized 100,000,000 Shares, Issued - 13,614,052 Shares 13,614
Additional Paid-in Capital 14,363,965
Treasury Stock, 968,767 Common Shares - At Cost (1,744,547)
Accumulated Other Comprehensive [Loss] (1,077,000)
Accumulated [Deficit] (7,612,479)
Deferred Acquisition Costs (400,000)
Total Stockholders' Equity 3,543,683
Total Liabilities and Stockholders' Equity $ 4,898,292
===============
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-3
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
<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] Income 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 [Expense] 949,419 538,387
Asset Impairment (1,300,742) --
--------------------- ---------------------
Other [Expenses] Income - Net (375,010) 608,711
---------------------- ---------------------
[Loss] Income from Continuing Operations Before
Income Tax [Benefit] Expense (7,012,612) (1,793,082)
Income Tax [Benefit] Expense (123,691) (460,682)
--------------------- ----------------------
[Loss] Income from Continuing Operations (6,888,921) (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] Income (6,943,182) (1,703,848)
--------------------- ----------------------
Other Comprehensive Loss:
Unrealized Holding Loss arising during period (981,142) (104,611)
Less: Reclassification Adjustment for Loss Included in Net Income -- 51,516
--------------------- ---------------------
Total Other Comprehensive [Loss] Income $ (7,924,324) $ (1,756,943)
===================== ======================
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-4
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Years ended
December 31,
1 9 9 9 1 9 9 8
------- -------
<S> <C> <C>
Net [Loss] Income $ (6,943,182) $ (1,703,848)
Deduct: Imputed Non-cash Preferred Stock Dividend -- 269,443
Preferred Stock Dividend in Arrears 34,525 33,333
--------------------- ---------------------
Net [Loss] Income Available to Common Stockholders $ (6,977,707) $ (2,006,624)
===================== ======================
[Loss] Income Per Common Share:
Continuing Operations $ (.55) $ (.15)
Discontinued Operations -- (.04)
Disposal of Discontinued Subsidiary -- --
--------------------- ---------------------
Basic and Diluted Net [Loss] Income Per Share of Common Stock $ (.55) $ (.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-5
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in
--------------- ------------ -------
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <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 -- -- -- -- --
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
Purchase of Treasury Stock -- -- -- -- --
Conversion of Preferred Stock (27,260) (27) 861,122 860 (833)
Subsidiary Divested -- -- -- -- --
Sale of Preferred Stock 150,300 150 -- -- 1,502,850
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 130,300 $ 130 13,614,052 $ 13,614 $ 14,363,965
======== =========== ========== ============= ==============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Deferred Total
Treasury Stock Comprehensive Accumulated Acquisition Subscription Shareholders'
-------------- ------------- ----------- ----------- ------------ -------------
Shares Amount [Loss] [Deficit] Costs Receivable Equity
------ ------ ---- --------- ----- ---------- ------
<S> <C> <C> <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 (145,500) (278,697) -- -- -- -- (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 (145,500) $ (278,697) $ (95,858) $(1,143,405) (400,000) $ (1,445,000) $ 8,978,618
Purchase of Treasury Stock (823,267) (1,465,850) -- -- -- -- (1,465,850)
Conversion of Preferred Stock -- -- -- -- -- -- --
Subsidiary Divested -- -- -- 474,108 -- -- 474,108
Sale of Preferred Stock -- -- -- -- -- -- 1,503,000
Sale of Common Stock -- -- -- -- -- 1,445,000 1,445,000
Unrealized Holding Gain (Loss) on
Marketable Securities -- -- (981,142) -- -- -- (981,142)
Forgiveness of Debt - Related Party -- -- -- -- -- -- (324,286)
Issuance of Common Stock -- -- -- -- -- -- 857,417
Loss From Continuing Operations -- -- -- (6,888,921) -- -- (6,888,921)
Loss From Discontinued Operations -- -- -- (54,261) -- -- (54,261)
----------- ------------- ------------ ---------- --------- ------------- -------------
Balance - December 31, 1999 (968,767) $ (1,744,547) $(1,077,000) $(6,977,707) (400,000) $ -- $ 3,543,683
============ ============= ============ ========== ========= ============== =============
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-6
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Years ended
December 31,
1 9 9 9 1 9 9 8
------- -------
Operating Activities:
<S> <C> <C>
[Loss] Income from Continuing Operations $ (6,888,921) $ (1,332,400)
Adjustments to Reconcile Net [Loss] Income to
Net Cash [Used for] Operating Activities:
Depreciation and Amortization 864,502 473,209
Deferred Tax Asset (123,691) 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 -- 51,516
Loss on Sale of Investments 221,637 --
Asset Impairment 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 70,832 (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 (4,409,237) (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 (4,167,786) (745,484)
----------------------- ---------------------
Investing Activities - Continuing Operations:
[Decrease] in Due from Related Parties (828) (5,385)
Purchase of Investments (393,092) (6,451,459)
Purchase of Patents & 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 $ 2,482,207 $ (6,452,956)
</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 (UNAUDITED)
<TABLE>
<CAPTION>
Years ended
December 31,
1 9 9 9 1 9 9 8
------- -------
<S> <C> <C>
Net Cash - Operating Activities - Forwarded $ (4,167,786) $ (745,484)
--------------------- ---------------------
Net Cash - Investing Activities - Continuing Operations -
Forwarded 2,482,207 (6,452,956)
--------------------- ----------------------
Investing Activities - Discontinued Operations:
Purchase of Property and Equipment (29,715) (6,419)
---------------------- ----------------------
Net Cash Investing Activities - Discontinued Operations (29,715) (6,419)
---------------------- ----------------------
Financing Activities - Continuing Operations:
Proceeds from Issuance of Common Stock 500,389 6,597,047
Proceeds from Issuance of Preferred Stock 1,502,714 906,850
Increase (Decrease) of Treasury Stock (1,465,850) (278,697)
[Decrease] Increase in Loan Payable to Officer (150,000) (16,636)
Proceeds from Long-Term Debt 344,000 153,100
Payment from Notes Receivable 1,445,000 --
Payment of Notes Payable (319,382) (84,660)
Payment of Lease Payable (61,432) (11,286)
Decrease in Loan Receivable (324,286) --
--------------------- ---------------------
Net Cash - Financing Activities - Continuing Operations 1,471,153 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 Increase [Decrease] in Cash and Cash Equivalents (241,410) 56,275
Cash and Cash Equivalents - Beginning of Years 67,535 11,260
--------------------- ---------------------
Cash and Cash Equivalents - End of Years $ (173,875) $ 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 $ 2,400,000 $ --
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-8
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
[1] Organization
Nature of Business - The Company is located in Southern Florida and develops,
sells and services interactive products which are offered and operated via the
Internet and World Wide Web.
[2] Summary of Significant Accounting Policies
Principles of Consolidation - The Consolidated financial statements include the
accounts of the Company and its subsidiaries. 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 computer software licensing agreements is
recognized when products are delivered and accepted by the customer and payment
has been received.
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 debt and equity securities at
the time of purchase and reevaluates such determination at each balance sheet
date. Equity securities, and debt 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 unrealized
holding gains and losses, net of tax, reported in a separate component of
shareholders' equity until realized. Trading securities are carried at fair
value with any unrealized gains or losses included in earnings.
Held to maturity securities are carried at amortized cost. Marketable debt and
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 Note 5].
F-9
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
[2] Summary of Significant Accounting Policies [Continued]
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. Securities that could potentially dilute earnings per share in the
future are disclosed in Notes 12 and 17.
F-10
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
[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.
Asset Impairment - Certain long-term assets of the Company are reviewed when
changes in circumstances require as to whether their carrying value has become
impaired, pursuant to guidance established in Statement of Financial Accounting
Standards ["SFAS"] No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long Lived Assets to be Disposed Of." Management considers assets to be
impaired if the carrying value exceeds the future projected cash flows from
related operations [undiscounted and without interest charges]. If impairment is
deemed to exist, the assets will be written down to fair value discounted cash
flows from related operations. Management also reevaluates the periods of
amortization to determine whether subsequent events and circumstances warrant
revised estimates of useful lives. Costs related to the conceptual formulation
and design of licensed programs are expensed as research and development. Costs
incurred subsequent to establishment of technological feasibility to produce the
finished product are capitalized. Quarterly reviews are performed to ensure that
unamortized program costs remain recoverable from cash flows. Management
estimated a significant decline in future cash flows generated from software
costs capitalized by the Company. Accordingly, in the fourth quarter of fiscal
1999, the Company recorded a charge of $1,300,742 or $.10 per basic and diluted
common share, for the write-off of all remaining capitalized software
development costs. Amortization expense related to software, prior to
impairment, amounted to $662,589 and $84,144 for the years ended December 31,
1999 and 1998, respectively.
Impairment -
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.
Reclassification - Certain prior year amounts have been reclassified to conform
to current year's financial statement presentation.
F-11
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
[3] Significant Risks and Uncertainties
[A] Concentrations of Credit Risk - Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
and cash equivalents and trade accounts and notes receivable occurring from its
normal business activities. 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 on accounts and notes receivable is limited.
The Company performs ongoing credit evaluations of its customers but does not
require collateral on accounts and notes receivable or other financial
instruments. The Company maintains allowances for potential credit losses.
[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.
<TABLE>
<CAPTION>
Revenues
Year Ended
December 31,
Customers 1 9 9 9 1 9 9 8
--------- ------- -------
<S> <C> <C>
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
====================== =====================
</TABLE>
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.
F-12
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
[4] Investments in Equity Securities
The Company has investment securities available for sale with of a cost of
$2,137,000 and a fair value at December 31, 1999 of $1,060,000.
Gross proceeds from the sale of available for sale securities was $872,362, and
$853,856 and gross realized loss was $226,305 and $51,516 for the years ended
December 31, 1999 and 1998, respectively.
[5] Other Comprehensive Loss
Unrealized holding loss on investments net of income tax benefit of $-0- is as
follows:
1 9 9 9
Beginning Balance $ (98,585)
Current Year - Other Comprehensive Loss (981,142)
--------------------
Total $ (1,077,000)
----- ====================
[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 was $112,206
and $87,069, respectively.
Other Assets - Included in other assets is an investment at cost in a Limited
Liability Corporation for $100,000. The Company produces films and is currently
in the process of preparing the negative print of the film for theatrical
release. As at December 31, 1999, there is no income to date. Also included in
other assets is 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 is currently valued at $2,500,000.
[7] 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 held in an escrow account for a period of 12 months.
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-13
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
[8] 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, totaling $54,869, is included in
depreciation expense.
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-14
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
[9] 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 cash and
cash equivalents, short-term notes receivable, related party and 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.
The long-term notes receivable approximate fair value as all non-interest
bearing notes have been discounted to their present value.
[10] 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] [See Note 18].
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-15
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
[10] 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.
In the second quarter of 1999, 75,000 shares of the company's common stock were
issued to a consultant for services performed.
On July 1, 1999, the Company's largest institutional stockholder, Hosken
Consolidated Industries, a South African corporation (the investment company for
the Mine Workers Union and South African Clothing Workers Union), consummated
its purchase of approximately 1,100,000 shares of the Company's common stock
from Norman J. Hoskin, the Company's Chairman of the Board of Directors, which
represents substantially all of Mr. Hoskin's holdings in the Company. Mr. Hoskin
has resigned his positions as Chairman and Secretary/Treasurer and will limit
his activities as a consultant to the Company due to his health. With its
purchase, HCI share holdings increases to 2,361,935 shares or approximately 19%
of total shares outstanding.
In the third quarter of 1999, 52,500 shares of the Common Stock were issued in
lieu of expenses paid on behalf of the Company.
In the fourth quarter of 1999, 9,300 shares of 5% Convertible Preferred Stock,
$.001 par value, were issued to the Shaar Fund for $930,000 Each share is
convertible into common stock by virtue of a formula contained in the Purchase
Agreement which is 78% of the three day average closing bid price for the
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.
F-16
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
[11] 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 to be Disposed Of $ 1,351,272
---------------------------- ============
Assets are shown at their expected net realizable values and liabilities are
shown at their face amounts. Net assets to be disposed of at their expected net
realizable values, have been separately classified in the accompanying balance
sheet at December 31, 1998.
[12] Related Party Transactions
The Company has a receivable due from an affiliated company, whose shareholders
are also shareholders of the Company. The balance of the receivable at December
31, 1999 is $56,068. During the year ended December 31, 1999, there were no
additional advances or repayments. The original advance accrued interest at a
rate of 6% per annum and is due on demand.
[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 123,691 --
State -- --
--------- -------------
Total Deferred 123,691 --
--------- -------------
Tax Expense [Benefit] - Continuing
Operations $(123,691) $ (460,682)
---------------------------------- ========= ============
F-17
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
[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 (34%) (10%)
------- -----
Effective Rate 2.0% 26.0%
-------------- ====== =====
The major components of deferred income tax assets and liabilities at December
31, 1999 is as follows:
Deferred Tax Assets [Liability] - Current:
Net Operating Loss Carryforward $2,663,930
Depreciation (10,000)
Unrealized Losses 330,000
Valuation Allowance (2,860,239)
-----------
Deferred Tax Asset $ 123,691
------------------ ===========
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 $2,675,637 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 expire 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 net
income and net cash flows. No bonuses have been accrued at December 31, 1999,
due to net losses and negative cash flow.
[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.
F-18
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
[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>
Exercisable
Outstanding Stock Options Stock Options
Remaining Weighted-Average Weighted-Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
--------------- ------ ---------------- -------------- ------ --------------
<S> <C> <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-19
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
[15] Incentive Stock Option Plan [Continued]
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vested restrictions and are fully
transferable. 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 used in
determining pro forma amounts is estimated at $4.00 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 4years 5 years
Expected Volatility 162.1% 153.0%
Expected Dividends --% --%
The pro forma amounts are indicated below:
Years ended
December 31,
------------
1 9 9 8 1 9 9 7
------- -------
Net [Loss] Income - Continuing Operations:
As Reported $(6,888,921) $(1,332,400)
Pro Forma $(7,950,643) $(4,246,891)
Basic Net Income [Loss] Per Share of Common Stock - Continuing Operations:
As Reported $ (.55) $ (.15)
Pro Forma $ (.63) $ (.39)
Diluted Net Income [Loss] Per Share of Common Stock - Continuing Operations:
As Reported $ (.55) $ (.15)
Pro Forma $ (.63) $ (.39)
[16] Other Income [Expense]
Included in other income [expense] is a gain on the sale of a former subsidiary
for $1,231,750.
[17] New Authoritative Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ["FASB"] issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and how it is designated, for example, gains or losses related to changes in the
fair value of
F-20
<PAGE>
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
[17] New Authoritative Accounting Pronouncements - Continued
a derivative not designated as a hedging instrument is recognized in earnings in
the period of the change, while certain types of hedges may be initially
reported as a component of other comprehensive income [outside earnings] until
the consummation of the underlying transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods. The
Company does not currently have any derivative instruments and is not currently
engaged in any hedging activities.
On March 31, 1999, the FASB released a proposal for public comment that would
resolve certain practice issues raised when accounting for stock options. Since
the issuance of APB Opinion 25, "Accounting for Stock Issued to Employees,"
questions have surfaced about its application and differing practices have
developed. The FASB's broad reconsideration of the stock compensation issue
culminated in the issuance of SFAS No. 123, "Accounting for Stock-Based
Compensation," in 1995. SFAS No. 123 permits the continued application of APB
Opinion 25 for employees. However, questions remain about the proper application
of APB Opinion 25 in a number of circumstances. The FASB's proposed
Interpretation would clarify how to apply APB Opinion 25 in certain situations.
The proposed Interpretation includes the following conclusions:
Once an option is repriced, that option must be accounted for as a variable plan
from the time it is repriced to the time it is exercised. Consequently, the
final measurement of compensation expense would occur at the date of exercise.
Employees would be defined as they are under common law for purposes of applying
APB Opinion 25.
APB Opinion 25 does not apply to outside directors because, by definition, an
outside director cannot be an employee. Accordingly, the cost of issuing stock
options to outside board members will have to be determined on a fair value
basis in accordance with SFAS No. 123, and recorded as an expense in the period
of the grant [the service period could be prospective, however].
Since APB Opinion 25 was issued in 1972, the terms of many "section 423" tax
plans have changed from those in existence at the time. Many of those plans now
provide that employees can purchase an employer's stock at the lesser of 85
percent of the stock price at the date of grant or 85 percent of the price at
the date of exercise. This provision is referred to as a "look-back" option. The
FASB decided that plans with a look-back option do not, in and of themselves,
create a compensatory plan.
A subsidiary may account for parent company stock issued to its employees under
APB Opinion 25 in their separately issued financial statements, provided the
subsidiary is part of the parent's consolidated financial statements.
The FASB's proposed Interpretation would be effective upon issuance, which is
expected in September 1999, but generally would cover plan grants and
modifications that occur after December 15, 1998.
. . . . . . . . . .
F-21
<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: May 31, 2000 /s/ Peter Lawson
---------------------------------------
Peter Lawson
Chief Financial Officer
