UNITED STATES
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, 2003
[ ] 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 as spcified in its Charter)
OKLAHOMA 73-1092118
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13581 Pond Springs Rd. Suite 105
Austin, Texas 78729
(Address of Principal Executive Offices)
(512) 335-0065
(Issuer's Telephone Number)
- ------------------------------------------------------------------------------
(former name, former address and former fiscal year if changed since last
report)
THERE WERE 9,812,528 SHARES OF COMMON STOCK, $.001 PAR VALUE, OUTSTANDING AS OF
May 15, 2003.
Transitional Small Business Issuer Format Yes No X
------- -----
TABLE OF CONTENTS
PAGE
NUMBER
PART I:
ITEM 1. UNAUDITED FINANCIAL STATEMENTS 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 10
ITEM 3. CONTROLS AND PROCEDURES 12
PART II:
ITEM 1. LEGAL PROCEEDINGS 12
ITEM 2. CHANGES IN SECURITIES 13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
ITEM 5. OTHER INFORMATION 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
CERTIFICATION OF PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER 15
BGI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS MARCH 31, DECEMBER 31,
2003 2002
(UNAUDITED) (AUDITED)
-------------- -------------
Current assets:
Cash and cash $ $ 326,177
equivalents 484,291
Accounts receivable - trade, net of allowance of
$129,320 and $121,837,
respectively 70,600 41,432
Prepaid expenses and deferred charge 348,687 245,343
Prepaid income tax, including deferred tax assets
of $168,313 196,400 -
-------------- -------------*
Total current assets 1,099,978 612,952
-------------- -------------
Property and equipment, net 296,688 371,772
-------------- -------------
Other assets:
Deposits 6,618 6,618
Deferred charge 98,333 157,333
-------------- -------------
Total other assets 104,951 163,951
-------------- -------------
Total assets $ 1,501,617 $ 1,148,675
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable - trade $ 51,367 $ 97,702
Income taxes payable - 24,848
Accrued expenses 17,959 39,574
Accrued litigation/impairment loss 378,250 550,283
Current maturities of long-term debt 458,374 470,589
Current maturities of lease obligations 2,358 2,232
-------------- -------------
Total current liabilities 908,308 1,185,228
Long-term debt, net of current maturities 686 -
Long-term portion of lease obligations - 1,337
-------------- -------------
Total liabilities 908,994 1,186,565
-------------- -------------
Stockholders' equity (deficit):
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;
9,812,528 issued and outstanding 9,812 9,812
Additional paid-in capital 1,196,794 1,154,352
Retained deficit (613,983) (1,202,054)
-------------- -------------
Total stockholders' equity (deficit) 592,623 (37,890)
-------------- -------------
Total liabilities and stockholders' equity (deficit) $ 1,501,617 $ 1,148,675
============== =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS.
1
BGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
Three Months Ended
-------------------------------------------
March 31, March 31,
2003 2002
----------------- ---------------------
Revenue:
Charity Station $ 645,108 $ 1,048,695
Phone cards 32,578 81,953
Bingo - 9,797
------------- ------------------
Total revenue 677,686 1,140,445
------------- ------------------
Cost of revenue:
Charity Station 178,346 245,402
Phone cards 26,577 21,143
Machine depreciation 57,442 84,043
------------- ------------------
Total cost of revenue 262,365 350,588
------------- ------------------
Gross Profit 415,321 789,857
------------- ------------------
Expenses (income):
General & administrative 302,302 264,887
Depreciation & amortization 8,433 8,963
Litigation costs/asset impairment (508,773) -
------------- ------------------
Total expenses (income) (198,038) 273,850
------------- ------------------
Operating income 613,359 516,007
Interest expense 536 1,951
------------- ------------------
Net income before income taxes 612,823 514,056
------------- ------------------
Income tax expense
Current 193,065 135,075
Deferred (168,313) (119,287)
------------- ------------------
Total income tax expense 24,752 15,788
------------- ------------------
Net income $ 588,071 $ 498,268
============= ==================
Basic income per common share
$ .06 $ .05
============= ==================
Diluted income per common share
$ .06 $ .05
============= ==================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS.
2
BGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
2003 2002
---------------- ----------------
Operating activities:
Net income $ 588,071 $ 498,268
Adjustments to reconcile net income to net cash
From operating activities:
Depreciation and amortization 65,875 93,006
Provision for bad debts 7,392 89,000
Options issued for services 10,451 -
Changes in current assets and liabilities:
Accounts receivable - trade (36,561) 135,538
Inventory - 14,700
Prepaid expenses and deferred (12,352) 3,208
charge
Prepaid income tax (196,400) -
Accounts payable and accrued liabilities (67,951) (107,676)
Deferred income tax payable - (119,287)
Income taxes payable (24,848) 135,075
Accrued litigation expense (156,374) (883,761)
---------------- ----------------
Net cash provided (used) by operating 177,303 (141,929)
activities
---------------- ----------------
Investing activities:
Purchase of property and equipment (6,450) (253,290)
Increase (decrease) in other assets - (2,499)
---------------- ----------------
Cash used by investing activities (6,450) (255,789)
---------------- ----------------
Financing activities:
Payments on long-term debt (12,214) (96,955)
Payments on long-term leases (525) (422)
Issuance of common stock - 1,776
---------------- ----------------
Cash used by financing activities (12,739) (95,601)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 158,114 (493,319)
Cash and cash equivalents at beginning of period 326,177 521,894
---------------- ----------------
Cash and cash equivalents at end of period $ 484,291 $ 28,575
================ ================
Supplemental disclosures of cash flow information:
Interest paid $ 536 $ 1,951
================ ================
Taxes paid $ 246,000 $ -
================ ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS.
3
BGI, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business and basis of presentation:
BGI, Inc. (the Company), formerly Bingo & Gaming International, Inc. (BGI), 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 in the past
leased 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 U.S. 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 2002 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.
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 BGI, Inc. 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.
4
BGI, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Property, equipment and depreciation and amortization:
Property and equipment are stated at cost, net of accumulated depreciation and
amortization. For financial 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 was 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:
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities", which
requires among other items, that liabilities for the costs associated with exit
or disposal activities be recognized when the liabilities are incurred, rather
than when an entity commits to an exit plan. SFAS No. 146 is effective for exit
or disposal activities initiated after December 31, 2002. The effect of adoption
of SFAS No. 146 is dependent on the Company's activities subsequent to adoption.
5
BGI, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN46"), "
Consolidation of Variable Interest Entities", which requires that companies that
control another entity through interests other than voting interest should
consolidate the controlled entity. FIN 46 applies to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. The related disclosure
requirements are effective immediately. Management does not believe the adoption
of FIN 46 will have any impact on the Company's financial position or results of
operations.
NOTE 2 - RELATED PARTY TRANSACTIONS
Several non-officer employees maintain 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 and are subject to the
same policies including those relating to collection of receivables 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
Litigation
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 were
filed, Bexar County filed civil forfeiture claims based upon alleged violations
of certain laws relating to organized crime, money laundering and state
securities fraud.
This matter was settled in October 2002. Bexar County released $420,478 of the
seized funds which were being held in escrow pending the resolution of a U.S.
Securities and Exchange Commission investigation of matters related to the
Company. These funds were released in March 2003 and are recorded as a credit to
litigation costs/asset impairment on the Statement on Income for the three
months ended March 31, 2003. Under the terms of the settlement agreement with
Bexar County, the Company also agreed not to operate any Charity Stations or
similar sweepstakes machines in Bexar County until such time as there is a
definitive court ruling or legislation confirming that such activities are
legal. This settlement does not constitute an admission of guilt, fraud or any
wrongdoing on the part of the Company.
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.
6
BGI, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
NOTE 3 - COMMITMENT AND CONTINGENCIES - CONTINUED
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. The machines were returned to the Company in October 2002 in
exchange for an agreed judgment that made no admission to guilt of liability and
a payment of $57,600. The Company agreed to remove the machines from the State
of Texas.
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. Although no criminal
charges have been filed, El Paso County filed two civil forfeiture claims which
are pending.
Rio Grande City
In June 2002, the Rio Grande City Police Department seized thirty-three of the
Company's Charity Station machines that were leased to the Veterans of Foreign
Wars in Rio Grande City, Texas. The machines were returned to the Company in
October 2002 in exchange for an agreed judgment that made no admission to guilt
of liability and a payment of $27,200.
SEC Investigation
In 2002, the U.S. Securities and Exchange Commission commenced a formal
investigation relating to, among other things, certain information contained in
certain of the Company's press releases and trading activities in the Company's
common stock by certain individuals. On March 18, 2003, pursuant to the
Company's offer of settlement, the Securities and Exchange Commission issued an
order directing the Company to cease and desist from committing or causing any
violation, and any future violation, of the anti-fraud and periodic reporting
provisions of the Securities Exchange Act of 1934. The Company agreed to the
entry of the order without admitting or denying the SEC's findings which related
to actions taken under the direction of the Company's former management. The SEC
did not impose a monetary penalty on the Company.
South Houston
In December 2002, the South Houston Police Department seized 71 of the Company's
Charity Station machines that were leased to the Veterans of Foreign Wars. No
civil or criminal charges have been filed against the Company.
An unfavorable ruling in any of the ongoing 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.
The Company has recorded the following accrual and impairments related to the
litigation:
Accrued Litigation/Impairment Loss Balance December 31, 2002 $ 550,283
----------
Incurred Loss During the Quarter Ended March 31, 2003
Legal Fees (73,213)
Write Off Assets (15,659)
Re-evaluation of Reserve Amount (83,161)
----------
Total (172,033)
----------
Accrued Litigation/Impairment Loss Balance March 31, 2003 $ 378,250
==========
7
BGI, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
NOTE 3 - COMMITMENT AND CONTINGENCIES - CONTINUED
Other Commitments and Contingencies
In September 2002, the Company entered into an agreement with it's machine
supplier to convert 100 of the Company's Charity Station machines to pull-tab
dispensing and validating machines and 8-liner machines and place them in Native
American gaming facilities in Alabama and Oklahoma. The Company is not
responsible for placing, maintaining or collecting the revenue on the machines.
As part of the agreement the Company will pay the machine supplier a placement
fee of $472,000. The Company recorded a note payable and deferred charge related
to the placement fee. The deferred charge will be amortized over the two-year
length of the agreement. The Company will pay the machine supplier 75% of the
revenue it generates from the machines until such time as the placement fee is
completely paid.
The Company leases its general offices. During the year ended December 31, 2001,
the leases for general offices expired and are leased month to month. The lease
for the Company's former bingo facility expired in May 2002.
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 three months
ended March 31, 2003 and 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,
2003 2002
---- ----
Weighted average number of common shares
used in basic earnings per share 9,812,528 9,779,218
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 9,812,528 10,454,692
============ =============
For the three months ending March 31, 2003, and 2002, respectively, 2,769,000
and 575,000 options and warrants were excluded from weighted average shares
outstanding because they were antidilutive.
In August 2002, the Company adopted the 2002 Non-statutory Stock Option Plan
providing for the issuance of up to 1,500,000 options for the purchase of the
Company's common stock.
During the quarter ended March 31, 2003, the Company issued no new options.
NOTE 5 - SEGMENT REPORTING
The Company's operations are divided into operating segments using individual
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. Each
operating segment uses the same accounting principles as reported in Note 1,
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 have been
reported on the statement of operations.
BGI, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
NOTE 6 - SUBSEQUENT EVENTS
In April, 2003, the Texas Supreme Court announced a ruling placing significant
additional restrictions on the operation of 8-liners in the State of Texas.
Although the Company believes its machines are used to conduct a bona-fide
promotional sweepstakes and therefore are not regulated by the laws relating to
8-liners, many times regulatory authorities do not distinguish the difference
between the Company's machines and 8-liners. The decision resulted in a shutdown
of a number of locations in Texas where the Company's Charity Station machines
had been operating. The Company currently has 132 machines operating in the
State of Texas. Based on preliminary negotiations with various local regulatory
authorities, the Company does not anticipate any further shutdowns as a result
of the court decision. However, there can be no assurances that further
shutdowns will not occur.
9
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.
Results Of Operations
Three Months Ended March 31, 2003
Compared with the Three Months Ended March 31, 2002
Total revenues for the quarter ended March 31, 2003, were $677,686 as compared
to $1,140,445 for the quarter ended March 31, 2002. Machine rental revenue
dropped 38% from $1,048,695 in the 2002 quarter to $645,108 in the 2003 quarter
as many of the Charity Station machines that were purchased and put in service
in 2002 have been seized by Texas regulatory authorities or taken out of service
because many of the Company's charity customers have elected to discontinue
using the Company's Charity Station machines due to the uncertain regulatory
climate. Additionally, in some locations where the Company's Charity Station
machines are operating, the Company's charity customers are electing to pay
sweepstakes prizes in gift certificates instead of cash in order to comply with
the wishes of local regulatory authorities. In these locations, machine rental
fees are considerably less than those locations that pay out cash. The Company
had approximately 234 Charity Station machines leased and operating at March 31,
2003 compared to 201 leased at March 31, 2002. The Company had 132 Charity
Station machines leased and operating at May 14, 2003. Phone card revenue
decreased by 60% for the quarter ended March 31, 2003, as compared to the
quarter ended March 31, 2002. The Company sells phone cards primarily to
customers who own their own machines as essentially all of the Company's phone
card machines have been converted to Charity Station machines. Bingo revenue
decreased from $9,797 in the 2002 quarter to $0 in the 2003 quarter. The
decrease resulted from the Company's decision not to renew its bingo facility
leases.
Gross profit was $415,321 or 61% of total revenue, for the quarter ended March
31, 2003, as compared to $789,857 or 69% of total revenue, for the quarter ended
March 31, 2002. The decrease in gross profit as a percentage of revenue is due
to lower margins on Charity Station machine rental in the 2003 period. Several
of the Company's higher volume locations were either shut down by regulatory
authorities or closed voluntarily by the Company's charity customers due to the
uncertain regulatory environment. Additionally, several of the Company's charity
customers have been producing less revenue because they have elected to pay
sweepstakes prizes in gift certificates in order to comply with the wishes of
local authorities.
10
General and administrative expenses for the quarter ended March 31, 2003, were
$302,302 as compared to $264,887 for the quarter ended March 31, 2002. The
increase is primarily related to the rehiring of several employee positions that
were eliminated in layoffs during the first quarter of 2002 due to the Company's
regulatory problems. Additionally, there has been an increase in legal expenses
related to the efforts to educate local authorities on the legal basis of
operating the machines in an effort to help reduce the risk of further seizures.
The Company generated net income of $588,071 for the quarter ended March 31,
2003, as compared to a net income of $498,268 for the quarter ended March 31,
2002, for the reasons explained above.
Liquidity
As of March 31, 2003, the Company had a cash balance of $484,291, a $158,114
increase from December 31, 2002. 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 by certain regulators of both the Company's cash and machines and the
subsequent curtailment of most 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.
In April, 2003, the Texas Supreme Court announced a ruling placing significant
additional restrictions on the operation of 8-liners in the State of Texas.
Although the Company believes its machines are used to conduct a bona-fide
promotional sweepstakes and therefore are not regulated by the laws relating to
8-liners, many times regulatory authorities do not distinguish the difference
between the Company's machines and 8-liners. The decision resulted in a shutdown
of a number of locations where the Company's Charity Station machines were
operating which has resulted in a decline in the Company's revenues which has
adversely affected the Company's liquidity. The Company currently has 132
Charity Station machines operating in the State of Texas. Based on preliminary
negotiations with various local regulatory authorities, the Company does not
anticipate any further shutdowns as a result of the court decision. However,
there can be no assurances that further shutdowns will not occur.
In September 2002, the Company entered into an agreement with it's machine
supplier to convert 100 of the Company's Charity Station machines to pull-tab
dispensing and validating machines and 8-liner machines and place them in Native
American gaming facilities in Alabama and Oklahoma. As part of the agreement the
Company will pay the machine supplier a placement fee of $472,000. The Company
recorded a note payable related to the placement fee. The Company will pay the
machine supplier 75% of the revenue it generates from the machines until such
time as the placement fee is completely paid. Subsequent to the repayment of the
note, the Company will receive 100% of the revenue generated by the machines.
The note is non-interest bearing, matures September 2004 and is collateralized
only by the 100 machines with no other recourse.
Cash provided by operating activities was $177,303 for the quarter ended March
31, 2003. Net income and other cash sources were offset by an estimated tax
payment of $246,000. Also the Company used $67,951 in reducing accounts payable
that consisted primarily of invoices related to past equipment purchases. The
cash used in operating activities in the quarter ended March 31, 2002 was
$141,929. Net income of 514,056 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, 2003, the Company used $6,450 for investing
activities related to the purchase of a trailer. This compares to $255,789 in
funds for investing activities during the corresponding period of 2002 which
consisted almost exclusively of a January 2002 purchase of 50 Charity Station
machines for use in the Company's operations.
The Company used $12,739 for financing activities during the quarter ended March
31, 2003 related to the existing lease payment and the supplier note described
above. This compares to cash used in financing activities of $95,601 during the
quarter ended March 31, 2002 which are related to payments on various notes and
equipment leases that were subsequently paid off.
11
ITEM 3. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, an evaluation was
carried out (the "Controls Evaluation"), under the supervision and with the
participation of Company's management, including its Chief Executive Officer
("CEO") who is also the Chief Financial Officer ("CFO"), of the effectiveness of
the Company's "disclosure controls and procedures" (as defined in Section 13a-14
( c) and 15d-14 ( c) of the Securities Exchange Act of 1934 ("Disclosure
Controls")). Based upon that evaluation, the CEO/ CFO has concluded that the
Disclosure Controls are effective to ensure that the information required to be
disclosed by the Company in reports it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported as required
by the rules and forms of the Securities Exchange Commission.
The CEO/ CFO notes that, since the date of the Controls Evaluation to the date
of this report, there have been no significant changes in the Company's internal
controls or in other factors that could significantly affect the internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company has been 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 in which the Company made no
admissions as to guilt or liability and the Company made 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 individuals who at the time were officers and directors of the Company.
Although no criminal charges were filed, Bexar County filed three separate civil
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.
All the above referenced Dallas County and Bexar County cases were settled in
October 2002. Bexar County released $420,478 of the seized funds which were
being held in escrow pending the resolution of a U.S. Securities and Exchange
Commission investigation noted below. Under the terms of the settlement the
Company also agreed not to operate any Charity Stations or similar sweepstakes
machines in Bexar County until such time as there is a definitive court ruling
or legislation confirming that such activities are legal. This settlement does
not constitute an admission of guilt, fraud or any wrongdoing on the part of the
Company in the matter.
In January 2002, the Company became aware that the Forth Worth Police Department
had seized twenty of its machines and the cash in the machines in November 2001
as illegal "8 liner" video gambling devices. No civil or criminal proceedings
have been initiated against the Company.
12
In January 2002, the Laredo Police Department seized a total of seventy-two
machines at two locations and the cash in the machines as illegal "8 liner"
video gambling devices. The machines were returned to the Company in October
2002 in exchange for an agreed judgment. The Company made no admission as to
guilt or liability and the payment of $57,600.
In 2002, the U.S. Securities and Exchange Commission commenced a formal
investigation relating to, among other things, certain information contained in
certain of the Company's press releases and trading activities in the Company's
common stock by certain individuals. On March 18, 2003, pursuant to the
Company's offer of settlement, the Securities and Exchange Commission issued an
order directing the Company to cease and desist from committing or causing any
violation, and any future violation, of the anti-fraud and periodic reporting
provisions of the Securities Exchange Act of 1934. The Company agreed to the
entry of the order without admitting or denying the SEC's findings which related
to actions taken under the direction of the Company's former management. The SEC
did not to impose a monetary penalty on the Company.
In April 2002, the El Paso Police Department seized sixty-nine of the Company's
Charity Station machines and the cash in the machines at two locations in El
Paso, Texas. Although no criminal charges have been filed, El Paso County filed
two civil forfeiture suits. On August 12, 2002, Cause No. 20023139 State of
Texas vs. 35 Gambling Devices and $12,102.58 in U.S. Currency was filed in the
168th Judicial District Court, El Paso County, Texas. On August 12, 2002, Cause
No. 20023140 State of Texas vs. 34 Gambling Devices and $5,819.50 in U.S.
Currency was filed in the 168th Judicial District Court, El Paso County, Texas.
In June 2002, the Rio Grande City Police Department seized thirty-three of the
Company's Charity Station machines and the cash in the machines that were leased
to the Veterans of Foreign Wars in Rio Grand City, Texas. The machines were
returned to the Company in October 2002 in exchange for an agreed judgment that
made no admission to guilt or liability and a payment of $27,200.
In December 2002, the South Houston Police Department seized as illegal "8
liner" video gambling devices 71 of the Company's Charity Station machines and
the cash in the machines that were leased to the Veterans of Foreign Wars. No
civil or criminal proceedings have been initiated against the Company.
An unfavorable outcome in any of the ongoing 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) Exhibit
99.1 Certification pursuant to 18 U.S.C Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports in Form 8-K
No reports on Form 8-K were filed in the quarter ended March
31, 2003.
13
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 15, 2003 By: /s/ William Schwartz
-------------- -----------------------
William Schwartz
Chief Executive Officer and
Chief Financial Officer
14
Certification of Principal Executive and Financial Officer
I, William Schwartz the Chief Executive Officer and Chief Financial Officer of
BGI, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of BGI, Inc. for the
period ending March 31, 2003;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ William Schwartz
---------------------
William Schwartz
Chief Executive Officer
and Chief Financial Officer
15
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U. S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of BGI, Inc. (the "Company") on Form
10-QSB for the period ended March 31, 2003 (the "Report"), I, William Schwartz
as Chief Executive and Chief Financial Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ William Schwartz
--------------------
William Schwartz
Chief Executive
Officer and Chief
Financial Officer
May 15, 2003
A signed original of this written
statement required by Section 906 has been
provided to BGI, Inc. and will be retained by
BGI, Inc. and furnished to the Securities
and Exchange Commission upon request.
16