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 SEPTEMBER 30, 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)
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 9,022,528 SHARES OF COMMON STOCK, $.001 PAR VALUE, OUTSTANDING AS OF
November 14, 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 13
PART II:
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 2. CHANGES IN SECURITIES 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 15
14
BGI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------ SEPTEMBER 30, DECEMBER 31,
2003 2002
(UNAUDITED) (AUDITED)
------------- -------------
Current assets:
Cash and cash equivalents $ 370,652 $ 326,177
Accounts receivable - trade, net of allowance of
$134,546 and $121,837, respectively 7,396 41,432
Prepaid expenses and deferred charge 307,288 245,343
Prepaid income tax 151,746 -
------------- -------------
Total current assets 837,082 612,952
------------- -------------
Property and equipment, net 239,049 371,772
------------- -------------
Other assets:
6,618 6,618
Deposits
Deferred charge - 157,333
------------- -------------
Total other assets 6,618 163,951
------------- -------------
Total assets $ 1,082,749 $ 1,148,675
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable - trade $ 87,430 $ 97,702
Income taxes payable - 24,848
Accrued expenses 33,811 39,574
Accrued litigation/impairment loss 289,832 550,283
Current maturities of long-term debt 392,410 470,589
Current maturities of lease obligations 1,857 2,232
------------- -------------
Total current liabilities 805,340 1,185,228
Long-term portion of lease obligations - 1,337
------------- -------------
Total liabilities 805,340 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 1,202,199 1,154,352
Retained deficit (934,602) (1,202,054)
------------- -------------
Total stockholders' equity (deficit) 277,409 (37,890)
------------- -------------
Total liabilities and stockholders' equity $ 1,082,749 $ 1,148,675
(deficit) ============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
FINANCIAL STATEMENTS.
1
BGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
Three Months Ended Nine Months Ended
-------------------------------------- ------------------------------------
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
--------------- ---------------- ---------------- ----------------
Revenue:
Machine rental $ 213,210 $ 572,708 $ 1,162,081 $ 2,206,444
Phone cards 17,304 24,227 75,263 144,351
Bingo - - - 19,592
--------------- ---------------- ---------------- ----------------
Total revenue 230,514 596,935 1,237,344 2,370,387
--------------- ---------------- ---------------- ----------------
Cost of revenue:
Machine rental 144,591 105,094 453,547 433,668
Phone cards 12,420 16,820 51,052 52,616
Bingo - - - -
Machine depreciation 13,490 87,034 106,148 256,704
--------------- ---------------- ---------------- ----------------
Total cost of revenue 170,501 208,948 610,747 742,98
--------------- ---------------- ---------------- ----------------
Gross profit 60,013 387,987 626,597 1,627,399
--------------- ---------------- ---------------- ----------------
Expenses:
General and administrative expenses 207,081 259,808 779,224 926,000
Depreciation & amortization 6,675 8,879 23,366 26,803
Litigation costs/asset impairment
(recovery) - - (508,773) -
--------------- ---------------- ---------------- ----------------
Total expenses 213,756 268,687 293,817 652,803
--------------- ---------------- ---------------- ----------------
Operating income (loss) (153,743) 119,300 332,780 674,596
Gain on sale of fixed assets - 8,200 5,156 16,400
Interest expense (280) (627) (1,078) (3,589)
--------------- ---------------- ---------------- ----------------
Income (loss) before income tax (154,023) 126,873 336,858 687,407
--------------- ---------------- ---------------- ----------------
Income tax (expense) benefit:
Current 88,194 - (69,406) -
Deferred - 42,923 - 33,513
--------------- ---------------- ---------------- ----------------
Total income tax (expense) benefit 88,194 42,923 (69,406) 33,513
--------------- ---------------- ---------------- ----------------
Net income (loss) $ (65,829) $ 169,796 $ 267,452 $ 720,920
=============== ================ ================ ================
Basic income (loss) per common share $ (.01) $ .02 $ .03 $ .07
=============== ================ ================ ================
Diluted income (loss) per common share $ (.01) $ .02 $ .03 $ .07
=============== ================ ================ ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
FINANCIAL STATEMENTS.
2
BGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
------------ ------------
Operating activities:
Net income $ 267,452 720,920
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 129,515 283,507
Provision for bad debts 12,709 103,999
Options issued for services 27,148 41,791
Deferred financing costs - (71,160)
Common stock issued for services - 20,144
Gain on disposal of property (5,156) (16,400)
Changes in current assets and liabilities:
Accounts receivable - trade 21,328 98,180
Inventory charge - 14,700
Prepaid expenses and deferred 116,086 6,525
Prepaid income tax (151,746) 324,370
Accounts payable and accrued liabilities (16,035) (248,114)
Income taxes payable (24,848) (286,723)
Accrued litigation expense (244,793) (1,042,480)
------------ ------------
Net cash provided (used) by operating activities 131,660 (50,741)
------------ ------------
Investing activities:
Purchase of property and equipment (12,450) (257,143)
Increase (decrease) in other assets - (2,500)
Proceeds from sale of equipment 5,156 20,000
------------ ------------
Net cash used by investing activities (7,294) (239,643)
------------ ------------
Financing activities:
Payments on long-term debt (78,179) (101,614)
Payments on long-term leases (1,712) (2,046)
Issuance of common stock - 3,276
------------ ------------
Net cash used by financing activities (79,891) (100,384)
------------ ------------
Net increase (decrease) in cash and cash equivalents 44,475 (390,768)
Cash and cash equivalents at beginning of period 326,177 521,894
------------ ------------
Cash and cash equivalents at end of period $ 370,652 131,126
============ ============
Supplemental disclosures of cash flow information:
Interest paid $ 1,078 3,589
============ ============
Taxes paid 246,000 -
============ ============
Note payable exchanged for deferred charge $ - 472,000
============ ============
Impairment of fixed assets offset against accrued litigation $ - 204,800
expense ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
FINANCIAL STATEMENTS.
3
BGI, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 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, leases gaming
equipment to Native American casinos 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 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. Additionally, in April 2003, the Texas Supreme
Court announced a ruling placing significant additional restrictions on the
operation of 8-liners. 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 the shut down of a number of locations in Texas where the
Company's Charity Station machines had been operating. This has caused a
substantial decrease in the Company's revenue.
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
NINE MONTHS ENDED SEPTEMBER 30, 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 generally 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 adoption of SFAS
No. 146 has not affected the Company's financial position or results of
operations.
5
BGI, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 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. Adoption of FIN 46 has not had any
impact on the Company's financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," which
establishes standards for how as issuer classifies and measures certain
financial instruments with characteristics of both liability and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances). The requirements
are effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable financial
instruments of nonpublic entities which is effective at the fiscal first period
beginning after December 15, 2003. The Company adopted the provisions of SFAS
No. 150 during the quarter ended September 30, 2003, which did not have any
impact on the financial position or results of operations of the Company.
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. Currently, none of these entities are managing locations for the
Company's charity customers.
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.
6
BGI, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
NOTE 3 - COMMITMENT AND CONTINGENCIES - CONTINUED
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 gain on
the Statement on Income for the nine months ended September 30, 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.
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 cases. The El
Paso cases were settled in July 2003 and the machines were returned to the
Company after the removal of one of the program computer chips. The Company made
no admission as to guilt on liability.
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. A civil
forfeiture was filed against the operators of the machines. The Company has
intervened in this case.
An unfavorable ruling in any of the ongoing proceedings could have a material
adverse effect on the Company's business.
7
BGI, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
NOTE 3 - COMMITMENT AND CONTINGENCIES - CONTINUED
The Company has recorded the following accrual and impairments related to the
litigation:
Accrued Litigation/Impairment Loss Balance June 30, 2003 $ 334,457
Incurred Loss During the Quarter Ended September 30, 2003
Legal Fees 44,625
----------
Accrued Litigation/Impairment Loss Balance September 30, 2003 $ 289,832
==========
Other Commitments and Contingencies
The Company has $244,956 deposited in an account with a bank outside the United
States. Due to a contractual dispute with one of its correspondent banks, the
bank has limited the Company's access to the funds. At this time, the Company
cannot determine when access to the funds will be available.
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 agreed to 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 is a defendant in a lawsuit filed in district court in Travis
County, Texas, alleging that the Company failed to make payments under an
equipment lease agreement and damaged the equipment. The plaintiff is seeking
damages of approximately $113,000 plus interest and legal fees. The Company
believes the plaintiff's cause of action is without merit and that the Company
will prevail in the litigation. Accordingly, the Company has not recorded a
provision for any losses that may result from the case; however, the Company can
make no assurances as to the outcome of the case due to the uncertainties
inherent in any court proceeding.
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 September 30, 2003 and the nine months ended September 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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Weighted average number of common shares used
in basic earnings per share 9,812,528 9,812,528 9,812,528 9,794,375
Effect of dilutive securities:
Stock Options - 283,807 87,974 406,106
Warrants - 40,373 - 235,977
----------- ------------ ---------- -----------
Weighted average number of common shares and
dilutive potential common stock used in diluted
earnings per share 9,812,528 10,136,708 9,900,502 10,436,458
=========== ============ ========== ===========
8
BGI, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
NOTE 4 - EARNINGS PER SHARE - CONTINUED
For the three months ending September 30, 2003, and 2002, respectively,
2,964,000 and 1,010,000 options and warrants were excluded from weighted average
shares outstanding because they were antidilutive.
For the nine months ending September 30, 2003, and 2002, respectively, 2,835,000
and 652,000 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 September 30, 2003, the Company issued 100,000 new
options with an exercise price of $0.10.
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 machine
rental segment leases equipment to charities, provides services for use in
fundraising and leases gaming machines to Native American casinos. 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.
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 September 30, 2003
Compared with the Three Months Ended September 30, 2002
Total revenues for the quarter ended September 30, 2003, were $230,514 as
compared to $596,935 for the quarter ended September 30, 2002. Machine rental
revenue dropped 63% from $572,708 in the 2002 quarter to $213,210 in the 2003
quarter as the uncertain regulatory climate has become more severe due in part
to an unfavorable court ruling related to the operation of 8-liners. 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 had approximately 67 Charity Station machines leased and
operating at September 30, 2003 compared to 279 leased at September 30, 2002.
The Company has 47 Charity Station machines leased and operating at November 14,
2003. There can be no assurances shutdowns will not occur. The Company is in the
process of developing and marketing new game products for use outside Texas.
There can be no assurances that the Company will have or be able to obtain the
capital necessary to successfully develop and market these products. Phone card
revenue decreased by 29% for the quarter ended September 30, 2003, as compared
to the quarter ended September 30, 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. There was
no bingo revenue in the 2002 or 2003 quarter as a result of the Company's
decision not to renew its bingo facility leases.
10
Gross profit was $60,013 or 26% of total revenue, for the quarter ended
September 30, 2003, as compared to $387,987 or 65% of total revenue, for the
quarter ended September 30, 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 closed due to the
uncertain regulatory environment and the Texas Supreme Court decision noted
above. Additionally, the amortization of the deferred charge related to a
machine placement agreement decreased gross profit by $39,334 since that
agreement was in effect for the entire 2003 quarter but only a small portion of
the 2002 quarter. These items were partially offset by a $73,544 increase in
gross profit as a result of lower machine depreciation as a substantial number
of the Company's machines became fully depreciated during the quarter.
General and administrative expenses for the quarter ended September 30, 2003,
were $207,081 as compared to $259,808 for the quarter ended September 30, 2002.
The decrease is related to lower legal expense and other reductions in overhead
due to the decline in the number of the Charity Station machines leased.
Income tax benefit of $88,194 was recorded for the quarter ended September 30,
2003, as compared to income tax benefit of $42,923 for the quarter ended
September 30, 2002. The expense in the current quarter is a result of the
reversal of current taxes accrued in the quarter ended March 31, 2003, when the
Company was profitable, offset by a deferred tax expense of $168,313 related to
the change in the valuation reserve for the deferred tax benefit.
The Company generated a net loss of $65,829 for the quarter ended September 30,
2003, as compared to a net income of $169,796 for the quarter ended September
30, 2002, for the reasons explained above.
Nine Months Ended September 30, 2003
Compared with the Nine Months Ended September 30, 2002
Total revenues for the nine months ended September 30, 2003, were $1,237,344 as
compared to $2,370,387 for the nine months ended September 30, 2002. Machine
rental revenue dropped 47% from $2,206,444 in the 2002 period to $1,162,081 in
the 2003 period as the uncertain regulatory climate has become more severe due
in part to an unfavorable court ruling related to the operation of 8-liners. 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 had approximately 67 Charity Station machines
leased and operating at September 30, 2003 compared to 279 leased at September
30, 2002. The Company has 47 Charity Station machines leased and operating at
November 14, 2003. There can be no assurances further shutdowns will not occur.
The Company is in the process of developing and marketing new game products for
use outside Texas. There can be no assurances that the Company will have or be
able to obtain the capital necessary to successfully develop and market these
products. Phone card revenue decreased by 48% for the nine months ended
September 30, 2003, as compared to the nine months ended September 30, 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 $19,592 in the 2002
period to $0 in the 2003 period. The decrease resulted from the Company's
decision not to renew its bingo facility leases.
Gross profit was $626,597 or 51% of total revenue, for the nine months ended
September 30, 2003, as compared to $1,627,399 or 69% of total revenue, for the
nine months ended September 30, 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 closed
due to the uncertain regulatory environment and the Texas Supreme Court decision
noted above. Additionally, the amoritization of the deferred charge related to a
machine placement agreement decreased gross profit by $157,265 since that
agreement was in effect for the entire 2003 period but only a small portion of
the 2002 period. These decreases were offset by a $150,556 increase in gross
profit as a result of lower machine depreciation as a substantial number of the
Company's machines became fully depreciated during the period as well as $96,666
less bad debt expense.
General and administrative expenses for the nine months ended September 30,
2003, were $779,224 as compared to $926,000 for the nine months ended September
30, 2002. The decrease is related to lower legal expense and other reductions in
overhead due to the decline in the number of Charity Station machines leased.
These reductions were partially offset by increased political consulting expense
as the Texas legislature was in session during the period.
11
Litigation costs/asset impairment expense for the nine months ended September
30, 2003, was a credit of $508,773 as compared to $0 for the nine months ended
September 30, 2002. The credit to litigation costs/asset impairment resulted
from the evaluation and reduction of the accrued litigation reserve due to lower
projected costs related to the Company's defense of its Charity Station
sweepstakes machines program.
Income tax expense of $69,406 was recorded in the nine months ended September
30, 2003, as compared to a benefit of $33,513 for the nine months ended
September 30, 2002. The increase in income tax expense is due to the deduction
of litigation expenses for tax purposes during the period ended June 30, 2002.
The Company generated a net income of $267,452 for the nine months ended
September 30, 2003, as compared to a net income of $720,920 for the nine months
ended September 30, 2002, for the reasons explained above.
Liquidity
As of September 30, 2003, the Company had a cash balance of $370,652, a $44,475
increase from December 31, 2002. As noted above, a Texas Supreme Court ruling
has led to a significant decrease in the Company's revenues, 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 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 collateralized only by the 100 machines and has no other
recourse.
Cash provided by operating activities was $131,660 for the nine months ended
September 30, 2003. Net income and other cash sources were offset by an increase
in prepaid income taxes due to an estimated tax payment and a $244,793 reduction
in accrued litigation expense related to reduction in the reserve. Cash used by
operating activities was $50,741 for the nine months ended September 30, 2002.
Net income for the period ending September 30, 2002, of $720,920 was offset by
the $1,042,480 decrease in the litigation reserve due to the cash seizure of
$660,401 and legal fees paid during the period of $377,159.
During the nine months ended September 30, 2003, the Company used $7,294 for
investing activities. The $6,450 purchase of a trailer and $6000 phone system
were offset by proceeds from the sale of a vehicle of $5,156. This compares to
$239,643 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 $79,891 for financing activities during the nine months ended
September 30, 2003, related primarily to the supplier note described above. This
compares to cash used in financing activities of $100,384 during the nine months
ended September 30, 2002, which are related to payments on various notes and
equipment leases that were subsequently paid.
12
ITEM 3. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the participation
of the Company's management, including the Chief Executive Officer ("CEO") who
also serves as the Chief Financial Officer ("CFO"), of the effectiveness of the
Company's disclosure controls and procedures as of the end of the quarter ended
September 30, 2003. Based on that evaluation, the CEO/CFO has concluded that the
Company's disclosure controls and procedures are effective to provide reasonable
assurance that all information required to be disclosed by the Company in
reports that it files or submits under the Securities and Exchange Act of 1934
is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. In addition,
during the quarter ended September 30, 2003, there were no changes in the
Company's internal controls over financial reporting that have materially
affected or are reasonable likely to materially affect the Company's internal
controls over financial reporting.
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.
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.
13
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 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 in U.S. Currency
was filed in the 168th Judicial District Court, El Paso County, Texas. The above
El Paso cases were settled in July 2003 and the machines were returned to the
Company after the removal of one of the program computer chips. The Company made
no admission as to guilt on liability.
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.
Although no criminal charges have been filed, Harris County filed a civil
forfeiture suit against the operator of the machines. In July 2003, Cause No.
0950790 In The Matter of the Seizure of Gambling Proceeds and Devices was filed
in the 178th Criminal District Court of Harris County, Texas. The Company has
intervened in this case. The case is pending.
The Company is a defendant in a lawsuit filed in district court in Travis
County, Texas, alleging that the Company failed to make payments under an
equipment lease agreement and damaged the equipment. The plaintiff is seeking
damages of approximately $113,000 plus interest and legal fees. The Company
believes the plaintiff's cause of action is without merit and that the Company
will prevail in the litigation. Accordingly, the Company has not recorded a
provision for any losses that may result from the case; however, the Company can
make no assurances as to the outcome of the case due to the uncertainties
inherent in any court proceeding.
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.
During the quarter ended September 30, 2003, the Company granted
options to purchase 100,000 shares of its common stock at $0.10 per share to a
consultant for services rendered to the Company. The options were issued
pursuant to the exemption from registration under Section 4(2) of the Securities
Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
31 Certification of Chief Executive and Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act 2002
32 Certification of Chief Executive and Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-0xley Act of
2002
(b) Reports in Form 8-K
No reports on Form 8-K were filed in the quarter ended September 30, 2003.
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: November 14, 2003 By: /s/ William Schwartz
-----------------------
William Schwartz
Chief Executive Officer and
Chief Financial Officer
15
EXHIBIT 31
CERTIFICATION OF PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER
I, William Schwartz, 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.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small
business issuer and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and;
c) Disclosed in this report any change in the small business
issuer's internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small business issuer's
fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the small business
issuer's internal control over financial reporting; and;
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the small business
issuer's internal control over financial reporting.
Date: November 14, 2003
/s/ William Schwartz
--------------------
William Schwartz
Chief Executive Officer and
Chief Financial Officer
16
EXHIBIT 32
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 September 30, 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
Dated: November 14, 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.
17