U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO __________
Commission File No. 0-10519
BGI, INC.
(Name of Small Business Issuer in its Charter)
OKLAHOMA 73-1092118
(State or Other Jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
13581 Pond Springs Rd. Suite 105
Austin, Texas 78729
(Address of Principal Executive Offices) (Zip Code)
(512) 335-0065
(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.
Check whether the Issuer (1) 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
--- ---
THERE WERE 9,779,965 SHARES OF COMMON STOCK, $.001 PAR VALUE, OUTSTANDING AS OF
MAY 15, 2002.
Transitional Small Business Issuer Format Yes No X
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TABLE OF CONTENTS
PAGE
NUMBER
PART I:
ITEM 1. UNAUDITED FINANCIAL STATEMENTS 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 9
PART II:
ITEM 1. LEGAL PROCEEDINGS 10
ITEM 2. CHANGES IN SECURITIES 11
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11
ITEM 5. OTHER INFORMATION 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
BGI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS MARCH 31, DECEMBER 31,
2002 2001
(UNAUDITED) (AUDITED)
------------- --------------
Current assets:
Cash and cash equivalents equivalents $ 28,575 $ 521,894
Accounts receivable - trade, net 38,689 263,227
Inventories - 14,700
Prepaid expenses - 3,208
Deferred tax asset 372,497 253,210
------------- --------------
Total current assets 439,761 1,056,239
Property and equipment, net 646,999 691,515
Other assets:
Deposits 6,617 4,118
------------- --------------
Total assets $ 1,093,377 $ 1,751,872
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 316,734 $ 407,658
Income taxes payable 421,798 286,723
Accrued expenses 51,250 68,002
Accrued litigation expense 863,110 1,951,671
Current maturities of long-term debt 10,812 110,325
Current maturities of lease obligations 1,962 1,839
------------------ ----------------
Total current liabilities 1,665,666 2,826,218
Long-term debt, net of current maturities 10,144 7,586
Long-term portion of lease obligations 3,107 3,652
------------------ ----------------
Total liabilities 1,678,917 2,837,456
------------------ ----------------
Stockholders' equity:
Preferred stock, non-voting; $.001 par; 10,000,000
shares authorized; no shares issued and outstanding - -
Common stock, $.001 par; 70,000,000 shares authorized;
9,779,965 and 9,775,165 issued and outstanding 9,780 9,775
Additional paid-in capital 1,088,024 1,086,253
Retained earnings (deficit) (1,683,344) (2,181,612)
------------------ ----------------
Total stockholders' equity (deficit) (585,540) (1,085,584)
------------------ ----------------
Total liabilities and stockholders'equity $ 1,093,377 $ 1,751,872
================== ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
1
BGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31
(UNAUDITED)
2002 2001
------------- ----------------
Revenue:
Charity Station $ 1,048,695 $ 74,557
Phone Cards 81,953 331,502
Bingo 9,797 64,855
------------- ----------------
Total revenue 1,140,445 470,914
------------- ----------------
Cost of revenue:
Charity Station 245,402 5,022
Phone Cards 21,143 247,099
Bingo - 39,040
Machine 84,043 64,498
Depreciation
------------- ----------------
Total cost of revenue 350,588 355,659
------------- ----------------
Gross Profit 789,857 115,255
General & Administrative 264,887 253,939
Depreciation & Amortization 8,963 16,231
------------- ----------------
Operating income (loss) 516,007 (154,915)
Gain on sale of fixed assets - (41,569)
Interest expense 1,951 31,310
------------- ----------------
Net income (loss) before 514,056 (144,656)
taxes
------------- ----------------
Income Tax Expense:
Current 135,075 -
Deferred (119,287) -
------------- ----------------
Total Income Tax Expense 15,788 -
------------- ----------------
Net income (loss) after taxes $ 498,268 $ (144,656)
============= ================
Basic income (loss) per common share $ .05 $ (.02)
============= ================
Diluted income (loss) per common share $ .05 $ (.02)
============= ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
2
BGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31
(UNAUDITED)
2002 2001
----------- ---------
Operating activities:
Net Income/(loss) $ 498,268 $ (144,656)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization 93,006 115,232
Provision for bad debts 89,000 14,095
Gain on the sale of fixed assets - (41,569)
Common stock issued for services - 21,627
Deferred financing cost charged to interest - 9,484
Changes in current assets and liabilities:
Decrease in accounts receivable - trade 135,538 21,044
Decrease in inventories 14,700 46,865
Decrease in prepaid expenses asset 3,208 5,732
Increase in deferred tax (119,287)
Decrease in accounts payable and accrued liabilities (107,676) (59,909)
Increase in income taxes payable 135,075 -
Decrease in accrued litigation expense (883,761) -
----------- -----------
Net cash used by operating activities (141,929) (12,055)
----------- -----------
Investing activities:
Purchase of property and equipment (253,290) (11,976)
Increase (decrease) in other assets (2,499) 4,900
Proceeds from sale of equipment - 45,000
----------- -----------
Cash provided (used) by investing activities (255,789) 37,924
----------- -----------
Financing activities:
Payments on long-term debt (96,955) (19,607)
Payments on long-term leases (422) (20,774)
Issuance of Common Stock 1,776 -
----------- -----------
Cash provided (used) by financing activities (95,601) (40,381)
----------- -----------
Net increase (decrease) in cash and cash equivalents (493,319) (14,512)
Cash and cash equivalents at beginning of period 521,894 58,124
----------- -----------
Cash and cash equivalents at end of period $ 28,575 $ 43,612
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid $ 1,951 $ 31,305
=========== ===========
Taxes paid $ - $ 2,288
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
BGI, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND BASIS OF PRESENTATION:
BGI, Inc., formerly Bingo & Gaming International, Inc., was formed in 1981 and
was dormant from 1984 through November 1994. The Company's main business is
leasing equipment and providing services used in charity fundraising. The
Company's primary product - the Charity Station sweepstakes machine - uses a
sweepstakes game as an incentive to help non-profit organizations raise funds.
The Company also sells phone cards with a sweepstakes incentive and leases
facilities and equipment to charity bingo operations.
PREPARATION OF INTERIM FINANCIAL STATEMENTS
The consolidated financial statements have been prepared by BGI, Inc. (the
"Company") pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") and, in the opinion of management, include all adjustments
(consisting of normal recurring accruals and adjustments necessary for adoption
of new accounting standards) necessary to present fairly the results of the
interim periods shown. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such SEC rules and regulations. Management
believes that the disclosures made are adequate to make the information
presented not misleading. Due to seasonality and other factors, the results for
the interim periods are not necessarily indicative of results for the full year.
The financial statements contained herein should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
2001 Annual Report on Form 10-KSB.
GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplates continuation of the Company as a going concern. The
multiple seizures of the Company's Charity Station sweepstakes machines and
related litigation (see note 3) has caused many of the Company's charity
customers to discontinue the operation of Charity Station machines due to the
uncertain legal environment. This has caused a substantial decrease in the
Company's revenue. Also the litigation has caused a significant increase in the
Company's legal expenses. Further, substantially all of the Company's cash
balance was seized in January 2002.
There can be no assurance that the Company will be able to generate enough cash
to pay the legal fees necessary to defend itself from the litigation and fund
operations or that additional litigation or seizure activity will not further
impair the Company's ability to continue as a going concern.
In view of these matters, realization of a major portion of the assets in the
accompanying consolidated balance sheet is dependent upon continued operations
of the Company, which in turn may be dependent on the Company's ability to
defend and prevail in the pending litigation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant inter-company accounts and transactions have
been eliminated in consolidation.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company evaluates the collectability of its accounts receivable based on its
knowledge of a customer's inability to meet its financial obligations and
records a specific allowance based on what it believes will be collected.
INVENTORIES
Inventories, which consist of phone cards and paper are valued at the lower of
cost or market using the first-in, first-out method.
PROPERTY, EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost, net of accumulated depreciation and
amortization. For financial
4
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
statement purposes, depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is computed using the straight-line
method over the shorter of the term of the related lease or the useful life of
the leasehold improvements. Accelerated depreciation methods are used for tax
purposes.
TAXES ON INCOME
The Company accounts for income taxes under the asset and liability approach
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than possible enactments of changes in the tax laws or rates. The Company
provides a valuation allowance against its deferred tax assets to the extent
that management estimates that "more likely than not" such deferred tax assets
will not be realized.
REVENUE RECOGNITION
Machine rental revenue is based on a percentage of revenue generated from the
machines less sweepstakes prizes and is recognized as the revenue is generated.
Machine rental revenue is billed weekly.
Phone card sales are recognized when the phone cards are delivered to the
customer. Phone cards are shipped COD.
Revenue on bingo hall leases is recognized monthly based on contracted lease
payments.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
RECLASSIFICATIONS
Certain prior-year amounts are reclassified to conform to current-year
presentation.
STOCK BASED COMPENSATION
The Company accounts for its employee stock-based award plans in accordance with
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations, under which compensation expense is
recorded to the extent that the market price of the underlying stock at the
grant date exceeds the exercise price.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("Statement
144"). Statement 144 supersedes Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. Statement
144 also amends ARB No. 51, Consolidated Financial Statements, to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary. Adoption of Statement 144 had no impact on the financial position of
the Company or its results of operations.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections
("Statement 145"). Statement 145 rescinds FASB Statement No. 4, Reporting Gains
and Losses from Extinguishment of Debt, and an amendment of that Statement, and
FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. Statement 145 also rescinds FASB Statement No. 44, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. Statement 145 also
5
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Early adoption of Statement 145 is encouraged and may be as of the
beginning of the fiscal year or as of the beginning of the interim period in
which the statement issued. The Company has elected to early adopt this
statement effective January 1, 2002. Management does not believe adoption of
this statement materially impacted the Company's financial position or results
of operations.
NOTE 2 - RELATED PARTY TRANSACTIONS
The Company's Chairman and several employees made investments in entities that
manage Charity Station locations for the Company's charity customers. Although
the Company does not contract directly with the Charity Station managers, the
charities whose locations were managed by the entities in which the investments
were made paid the same or higher rent to the Company as charities who used
unaffiliated managers.
Effective December 31, 2001, the Board of Directors has determined that
officers, directors, and employees are not permitted to invest in additional
entities that operate the Charity Station locations.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
The Company has experienced several seizures of its Charity Station sweepstakes
machines by regulatory authorities in several jurisdictions. The following is a
summary of those actions:
McAllen
In October 2001, twenty-five of the Company's Charity Station machines were
seized from a location in
McAllen, Texas by investigators with the Hildalgo County District Attorney's
Office. The investigators alleged that the machines were "8 liner" video
gambling devices. The machines were returned to the Company in January 2002 in
exchange for an agreed judgment that made no admissions as to liability and a
payment by the Company of $20,000.
Bexar County
In October 2001, eight of the Company's Charity Station machines were seized
from a location in Converse, Texas by an investigator with the Texas Lottery
Commission alleging that the machines were illegal "8 liner" video gambling
devices. In late December 2001 and January 2002, the Texas Lottery Commission
and the Bexar County District Attorney's office seized three of the Company's
bank accounts with balances totaling $985,435 as well as the bank accounts of
several officers and directors of the Company. Although no criminal charges have
been filed, Bexar County has filed civil forfeiture claims based upon alleged
violations of certain laws relating to organized crime, money laundering and
state securities fraud.
Fort Worth
In January 2002, the Company became aware that the Forth Worth Police Department
had seized twenty of its Charity Station sweepstakes machines in November 2001
as illegal "8 liner" video gambling devices. No civil or criminal proceedings
have been initiated against the Company.
Laredo
In January 2002, the Laredo police department seized a total of seventy-two
Charity Station sweepstakes machines at two locations as illegal "8 liner" video
gambling devices. No civil or criminal proceedings have been initiated against
the Company.
El Paso
In April 2002, the El Paso Police Department seized sixty-nine of the Company's
Charity Station machines at two locations in El Paso. No civil or criminal
proceedings have been initiated against the Company.
6
NOTE 3 - COMMITMENTS AND CONTINGENCIES - CONTINUED
An unfavorable ruling in any of these proceedings could have a material adverse
effect on the Company's business.
Due to the uncertain outcome of the litigation against the Company, the
financial statements have been prepared assuming the Company will not prevail
and the Company's charitable sweepstakes fundraising program is deemed to be
illegal. As a result, the Company recorded a $3,661,245 charge in 2001 related
to legal fees, cash seizures, and impairment of equipment. During the quarter
ended March 31, 2002, the related accrued litigation expense was reduced by the
following amounts: $660,401 related to cash seized in January, $209,720 related
to asset impairment, and $218,440 related to legal fees paid during the quarter.
As of March 31, 2002, $863,110 remains in Accrued Litigation Expense.
In July 2001, the Company entered into a series of agreements with a management
company to provide financial, investor relations and general management
services. In consideration for these services, the Company also entered into a
warrant agreement and issued warrants to purchase 250,000 shares of common stock
at $.40 per share. The agreement provided for warrants for an additional
1,750,000 shares of common stock at $.40 per share if the Company's stock
attained certain price levels. The Company has recorded $88,963 as compensation
expense related to the 250,000 warrants issued. The Company terminated these
agreements in October 2001 and does not believe any cash or stock compensation
is due under the agreements. No action has been taken against the Company
related to the termination of the contracts. If a claim was to be made, although
the Company believes it will prevail, no assurances to that affect can be given.
In addition, in the event a claim is brought against the Company, the cost of
defending against the claim could be substantial.
The Company leases its general offices and a bingo facility. During the year
ended December 31, 2001, the leases for general offices expired and are leased
month to month. The lease for the bingo facility will expire in May 2002. The
tenant of the Company's bingo facility prepaid the rent through the May 2002
expiration date. Deferred rent at March 31, 2002 is $9,796.
NOTE 4 - EARNINGS PER SHARE
Basic income or loss per common share is computed based on the weighted average
number of common shares outstanding during each period. For the quarter ended
March 31, 2002, diluted income or loss per common share is computed based on the
weighted average number of common shares outstanding, after giving effect to the
potential issuance of Common Stock on the exercise of options and warrants and
the impact of assumed conversions. The following table provides a reconciliation
between basic and diluted shares outstanding:
Three Months Ended March 31,
2002 2001
---- ----
Weighted average number of common shares
used in basic earnings per 9,779,218 9,218,150
share
Effect of dilutive securities:
Stock Options 524,353 -
Warrants 151,121 -
---------------- -------------
Weighted average number of common shares
and dilutive potential common stock used in
diluted earnings per share 10,454,692 9,218,150
================ =============
1,591,000 and 843,000 options and warrants were excluded from weighted average
shares outstanding for the three months ended March 31, 2002 and 2001,
respectively, because they are anti-dilutive.
7
NOTE 5 - SEGMENT REPORTING
The Company's operations are divided into operating segments using individual's
products or services. The Company has three operating segments. The Charity
Station segment leases equipment to charities and provides services for use in
fundraising. The phone card segment sells prepaid phone cards which permit
customers to enter a free promotional sweepstakes offering cash prizes. The
charity bingo facility segment operates as a lessor of charity bingo facilities.
Each operating segment uses the same accounting principles as reported in Note1,
Summary of Significant Accounting Policies, and the Company evaluates the
performance of each segment using before-tax income or loss from continuing
operations. The segment information for revenues and cost of revenues has been
reported on the statement of operations.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Risks Regarding Forward Looking Statements
This report contains various "forward-looking statements" within the meaning of
federal and state securities laws, including those identified or predicated by
the words "believes," "anticipates," "likely," "expects," "plans," or similar
expressions. Such statements are subject to a number of known and unknown risks
and uncertainties that could cause the actual results to differ materially from
any results contained or implied by any forward-looking statement made. Such
factors include, but are not limited to, those described under "Risk Factors" in
the Company's annual report on Form 10-KSB. Given these uncertainties, investors
are cautioned not to place undue reliance upon such statements which speak only
as of the date they were made.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including, but not limited to, those estimates related to its
allowance for doubtful accounts, inventories, asset impairments, income taxes,
litigation reserves, commitments and contingencies, and stock-based
compensation. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities.
Actual results may differ from these estimates under different assumptions or
conditions. The Company believes the accounting policies set forth in Note 1 of
the Notes to the Consolidated Financial Statements are those policies that are
most important to the presentation of its financial statements and such policies
may require subjective and complex judgments on the part of management (see Note
1 of the Notes to the Consolidated Financial Statements).
Results Of Operations
QUARTER ENDED MARCH 31, 2002
COMPARED WITH QUARTER ENDED MARCH 31, 2001
Total revenues for the quarter ended March 31, 2002, were $1,140,445 as compared
to $470,914 for the quarter ended March 31, 2001. This 142% increase was the
result of the introduction of the Company's Charity Station sweepstakes-based
fundraising program in 2001. In an effort to focus on the Charity Station line
of business, the Company converted all phone card machines to Charity Station
machines during 2001. Phone card revenues for the first quarter of 2002 of
$81,953 represent the sale of phone cards to owners of phone card machines and
account for only 7.2% of total revenue. Over 80% of the revenue for the quarter
ended March 31, 2002 was generated in the month of January, prior to the
curtailment of almost all of the Company's revenue generating activities due to
the seizure of cash and Charity Station machines by certain Texas regulatory
authorities. Revenue generated in February and March 2002 was $183,071.
Gross profit was $789,857, or 69.3% of total revenue, for the quarter ended
March 31, 2002 as compared to $115,255, or 24.5% of total revenue, for the
quarter ended March 31, 2001. The improved gross profit percentage is a result
of the higher margins of the Charity Station machines as compared to phone card
sales and bingo hall leasing. Gross profit is not comparable year to year
because phone card machines require the Company to purchase phone cards to stock
the machine. The Charity Station machines are used to solicit charitable
contributions, and charities pay rent based on the amount of funds raised;
therefore, there is no product cost to the Company.
9
General and administrative expenses for the quarter ended March 31, 2002 were
$264,887 as compared to $253,939 for the quarter ended March 31, 2001. As a
percentage of revenue, general and administrative expenses dropped from 53.9% to
23.2% as a result of better scaling of general and administrative expenses over
a larger revenue base. Additionally, in February 2002 the Company terminated
over half of its employees and reduced salaries for the remaining employees by
50% as a result of the cash seizures referred to above.
The Company generated net income of $498,268 for the quarter ended March 31,
2002 as compared to a net loss of $144,656 for the quarter ended March 31,
2001for the reasons explained above.
LIQUIDITY
As of March 31, 2002, the Company had a cash balance of $28,575, a $493,319
decrease from December 31, 2001. Certain regulatory authorities in the State of
Texas seized two of the Company's bank accounts totaling $660,401 in January
2002 and one bank account totaling $325,034 in December 2001. Due to the
seizures and the subsequent curtailment of almost all revenue generating
activities using the Company's machines, there can be no assurances that its
current operations can be sustained using cash from operations. The funding of
operations and the cost of the ongoing litigation may require the Company to
obtain additional financing. The Company has no bank lines of credit or other
sources of additional financing and there can be no assurances that the Company
will be able to obtain any such funding on terms acceptable to it, or at all.
Cash used by operating activities was $141,929 for the quarter ended March 31,
2002. Net income of $498,268 was more than offset by the decrease in the
litigation reserve due to the cash seizure and legal fees paid during the
quarter. During the quarter ended March 31, 2001 cash used by operating
activities was $12,055.
During the three months ended March 31, 2002, the Company used $255,789 in funds
for investing activities which consisted almost exclusively of purchases of
Charity Station machines for use in the Company's fundraising programs. This
compares to cash provided by investing activities of $37,924 during the
corresponding period of 2001 which was related to the sale of a bingo hall lease
and the related equipment.
The Company used $95,601 for financing activities during the three months ended
March 31, 2002 related to the pay-off of various notes. This compares to cash
used in financing activities of $40,381 during the corresponding period of 2001
which was related to payments on various notes and equipment leases.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
------------------
The Company is subject to a variety of regulatory actions by regulatory
authorities in several jurisdictions. The following is a summary of those
actions:
In October 2001, twenty-five of the Company's Charity Station machines were
seized from a location in McAllen, Texas by investigators with the Hildalgo
County District Attorney's Office. The investigators alleged that the machines
were "8 liner" video gambling devices. The machines were returned to the Company
in January 2002 in exchange for an agreed judgment that made no admissions as to
liability and a payment of $20,000.
In October 2001, eight of the Company's Charity Station machines were seized
from a location in Converse, Texas by an investigator with the Texas Lottery
Commission alleging that the machines were illegal "8 liner" video gambling
devices. In late December 2001 and January 2002, the Texas Lottery Commission
and the Bexar County District Attorney's office seized three of the Company's
bank accounts with balances totaling $985,435 as well as the bank accounts of
several officers and directors of the Company. Although no criminal charges have
been filed, Bexar County has filed three separate civil
10
forfeiture claims alleging organized crime, money laundering and state
securities fraud. On January 25, 2002, Cause No. 2002 CI 00715 State of Texas
vs. Three Hundred Twenty Five Thousand Thirty Four Dollars and Eighty Seven
Cents ($325,034.87) United States Currency was filed in the 45th Judicial
District Court; Bexar County Texas. On April 1, 2002 Cause No. 2002 CI 03172;
State of Texas vs. Thirty One Thousand Forty One Dollars and Thirty-Five Cents
($31,041.35) United States Currency was filed in the 225th Judicial District
Court, Bexar County, Texas. On February 8, 2002 Cause No. 02-01277; State of
Texas vs. Six Hundred Ninety Thousand Five Hundred Eighty Five Dollars and
Thirty Two Cents ($690,585.32) United States Currency was filed in the I -162nd
Judicial District Court, Dallas County, Texas.
In January 2002, the Company became aware that the Forth Worth Police Department
had seized twenty of its machines in November 2001 as illegal "8 liner" video
gambling devices. No civil or criminal proceedings have been initiated against
the Company.
In January 2002, the Laredo police department seized a total of seventy-two
machines at two locations as illegal "8 liner" video gambling devices. No civil
or criminal proceedings have been initiated against the Company.
In January 2002, the Company received a request for information from the
Securities and Exchange Commission regarding Charity Station machine purchases
and placement as well as information on the trading activity of certain of the
Companies officers and directors. The Company has complied with the request.
In April 2002, the El Paso Police Department seized sixty-nine of the Company's
Charity Station machines at two locations in El Paso, Texas. No civil or
criminal proceedings have been initiated against the Company.
An unfavorable outcome in any of these regulatory matters could have a material
adverse effect on the Company's business.
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.\
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.\
(a) EXHIBITS
None
(b) Reports in Form 8-K
No reports on Form 8-K were filed in the quarter ended March 31,
2002.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: May 20, 2002 By: /s/ Reid Funderburk
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Reid Funderburk
Interim Chief Executive Officer
Date: May 20, 2002 By: /s/ William Schwartz
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William Schwartz
Chief Financial Officer
12