U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO __________________
Commission File No. 0-10519
BGI, INC.
(Name of Small Business Issuer in its Charter)
OKLAHOMA 73-1092118
(State or Other Jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
13581 Pond Springs Rd. Suite 105
Austin, Texas 78729
(Address of Principal Executive Offices) (Zip Code)
(512) 335-0065
(Issuer's Telephone Number, Including Area Code)
Securities Registered under Section 12(b) of the Exchange Act: None.
Securities Registered under Section 12(g) of the Exchange Act: Common Stock.
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
THERE WERE 9,812,528 SHARES OF COMMON STOCK, $.001 PAR VALUE, OUTSTANDING AS OF
NOVEMBER 14, 2002.
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 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 14
SIGNATURES 15
CERTIFICATION OF PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER 16
BGI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS SEPTEMBER 30, DECEMBER 31,
------
2002 2001
(UNAUDITED) (AUDITED)
---------------------- ---------------------
Current assets:
Cash and cash equivalents $ 131,126 $ 521,894
Accounts receivable - trade, net 61,048 263,227
Inventories - 14,700
Prepaid expenses and deferred charge 252,350 3,208
Deferred tax asset - 253,210
---------------------- ---------------------
Total current assets 444,524 1,056,239
Property and equipment, net 456,751 691,515
Other assets:
6,618 4,118
Deposits
Deferred charge 216,333 -
---------------------- ---------------------
Total assets $ 1,124,226 $ 1,751,872
====================== =====================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable - trade $ 176,363 $ 407,658
Income taxes payable - 286,723
Accrued expenses 51,184 68,002
Accrued litigation 704,391 1,951,671
expense
Current maturities of long-term debt 483,438 110,325
Current maturities of lease obligations 2,160 1,839
---------------------- ---------------------
Total current liabilities 1,417,536 2,826,218
Long-term debt, net of current maturities 4,236 7,586
Long-term portion of lease obligations 1,906 3,652
---------------------- ---------------------
Total liabilities 1,423,678 2,837,456
---------------------- ---------------------
Stockholders' equity:
Preferred stock, non-voting; $.001 par; 10,000,000
shares authorized; no shares issued and outstanding - -
Common stock, $.001 par; 70,000,000 shares authorized;
9,812,528 and 9,775,165 issued and outstanding 9,812 9,775
Additional paid-in capital 1,151,428 1,086,253
Retained deficit (1,460,692) (2,181,612)
---------------------- ---------------------
Total stockholders' deficit (299,452) (1,085,584)
Total liabilities and stockholders' deficit $ 1,124,226 $ 1,751,872
====================== =====================
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL STATEMENTS.
1
BGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
------------------ -- ------------------ ------------------ -- ----------------
September 30 September 30 September 30 September 30
2002 2001 2002 2001
------------------ ------------------ ------------------ ----------------
Revenue:
Machine Rental $ 572,708 $ 1,456,850 $ 2,206,444 $ 2,130,795
Phone Cards 24,227 19,530 144,351 452,565
Bingo - 6,000 19,592 99,089
------------------ ------------------ ------------------ ----------------
Total revenue 596,935 1,482,380 2,370,387 2,682,449
------------------ ------------------ ------------------ ----------------
Cost of revenue:
Machine Rental 105,094 100,625 433,668 165,602
Phone Cards 16,820 82,184 52,616 421,180
Bingo - 3,000 - 43,748
Machine Depreciation 87,034 53,730 256,704 182,726
------------------ ------------------ ------------------ ----------------
Total cost of revenue 208,948 239,539 742,988 813,256
------------------ ------------------ ------------------ ----------------
Gross Profit 387,987 1,242,841 1,627,399 1,869,193
General & Administrative 259,808 578,638 926,000 1,073,841
Depreciation & Amortization 8,879 14,528 26,803 89,389
------------------ ------------------ ------------------ ----------------
Operating income 119,300 649,675 674,596 705,963
Gain on sale of fixed assets 8,200 - 16,400 46,163
Interest expense (627) (26,837) (3,589) (101,982)
------------------ ------------------ ------------------ ----------------
Net income before taxes 126,873 622,838 687,407 650,144
------------------ ------------------ ------------------ ----------------
Income Tax Benefit:
Current - - - -
Deferred 42,923 - 33,513 -
------------------ ------------------ ------------------ ----------------
Total Income Tax Benefit 42,923 - 33,513 -
------------------ ------------------ ------------------ ----------------
Net income after taxes $ 169,796 $ 622,838 $ 720,920 $ 650,144
================== ================== ================== ================
Basic income per common share $ .02 $ .06 $ .07 $ .07
================== ================== ================== ================
Diluted income per common share
$ .02 $ .06 $ .07 $ .07
================== ================== ================== ================
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
(UNAUDITED)
2002 2001
---------------- ----------------
Operating activities:
Net Income $ 720,920 $ 650,144
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 283,507 264,031
Provision for bad debts 103,999 14,095
Options issued for services 41,791 -
Gain on the sale of fixed assets (16,400) (46,262)
Common stock issued for services 20,144 132,913
Deferred financing cost (71,160) 34,484
Changes in current assets and liabilities:
Accounts receivable - trade 98,180 21,760
Inventory 14,700 69,670
Prepaid expenses and deferred charge 6,525 14,099
Deferred tax asset 324,370 -
Accounts payable and accrued liabilities (248,114) 49,651
Income taxes payable (286,723) -
Accrued litigation expense (1,042,480) -
---------------- ----------------
Net cash provided (used) by operating activities (50,741) 1,204,585
---------------- ----------------
Investing activities:
Purchase of property and equipment (257,143) (726,064)
Increase (decrease) in other assets (2,500) 1,973
Proceeds from sale of equipment 20,000 82,612
---------------- ----------------
Cash used by investing activities (239,643) (641,479)
---------------- ----------------
Financing activities:
Payments on long-term debt (101,614) (171,562)
Payments on long-term leases (2,046) (193,058)
Issuance of Common Stock 3,276 -
---------------- ----------------
Cash used by financing activities (100,384) (364,620)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents (390,768) 198,486
Cash and cash equivalents at beginning of period 521,894 58,124
---------------- ----------------
Cash and cash equivalents at end of period $ 131,126 $ 256,610
================ ================
Supplemental disclosures of cash flow information:
Interest paid $ 3,589 $ 101,982
================ ================
Taxes paid $ - $ -
================ ================
Cash flow from non-cash transfer activities:
Purchases of fixed assets with long-term debt $ - $ 44,982
================ ================
Note payable exchanged for deferred charge $ 472,000 $ -
================ ================
Impairment of fixed assets offset against accrued litigation expense $ 204,800 $ -
================ ================
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL STATEMENTS.
3
BGI, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND BASIS OF PRESENTATION:
BGI, Inc., formerly Bingo & Gaming International, Inc., was formed in 1981 and
was dormant from 1984 through November 1994. The Company's main business is
leasing equipment and providing services used in charity fundraising. The
Company's primary product - the Charity Station sweepstakes machine - uses a
sweepstakes game as an incentive to help non-profit organizations raise funds.
The Company also sells phone cards with a sweepstakes incentive and leases
facilities and equipment to charity bingo operations.
PREPARATION OF INTERIM FINANCIAL STATEMENTS
The consolidated financial statements have been prepared by BGI, Inc. (the
"Company") pursuant to the rules and regulations of the 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 2001 Annual Report on Form 10-KSB.
GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplates continuation of the Company as a going concern. The
multiple seizures of the Company's Charity Station sweepstakes machines and
related litigation (see note 3) has caused many of the Company's charity
customers to discontinue the operation of Charity Station machines due to the
uncertain legal environment. This has caused a substantial decrease in the
Company's revenue. Also, the litigation has caused a significant increase in the
Company's legal expenses. Further, substantially all of the Company's cash
balance was seized in January 2002 by Texas state regulators.
There can be no assurance that the Company will be able to generate enough cash
to pay the legal fees necessary to defend itself from the litigation and fund
operations or that additional litigation or seizure activity will not further
impair the Company's ability to continue as a going concern.
In view of these matters, realization of a major portion of the assets in the
accompanying consolidated balance sheet is dependent upon continued operations
of the Company, which in turn may be dependent on the Company's ability to
defend and prevail in the pending litigation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant inter-company accounts and transactions have
been eliminated in consolidation.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company evaluates the collectability of its accounts receivable based on its
knowledge of a customer's inability to meet its financial obligations and
records a specific allowance based on what it believes will be collected.
INVENTORIES
Inventories, which consist of phone cards and paper are valued at the lower of
cost or market using the first-in, first-out method.
4
BGI, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
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 is recognized monthly based on contracted lease
payments.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior-year amounts are reclassified to conform to current-year
presentation.
STOCK BASED COMPENSATION
The Company accounts for its employee stock-based award plans in accordance with
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations, under which compensation expense is
recorded to the extent that the market price of the underlying stock at the
grant date exceeds the exercise price.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("Statement
144"). Statement 144 supersedes Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. Statement
144 also amends ARB No. 51, Consolidated Financial Statements, to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary. Adoption of Statement 144 had no impact on the financial position of
the Company or its results of operations.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No.
5
BGI, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
13, and Technical Corrections ("Statement 145"). Statement 145 rescinds FASB
Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an
amendment of that Statement, and FASB Statement No. 64, Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements. Statement 145 also rescinds FASB
Statement No. 44, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. Statement 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. Early
adoption of Statement 145 is encouraged and may be as of the beginning of the
fiscal year or as of the beginning of the interim period in which the statement
issued. The Company has elected to early adopt this statement effective January
1, 2002. Management does not believe adoption of this statement materially
impacted the Company's financial position or results of operations.
Effective July 1, 2002, the Company adopted Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets ("Statement 142"). Statement 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets and supersedes APB Opinion No. 17, Intangible Assets,
Statement 142 requires that goodwill and certain intangibles no longer be
amortized, but instead be tested for impairment at least annually. Adoption of
Statement 142 had no impact on the financial position of the Company or its
results of operations.
On July 1, 2002, the Company adopted Financial Accounting Standards No. 143,
Accounting for asset Retirement Obligations ("Statement 143"). Statement 143
amends FASB Statement No. 19, Financial Accounting and Reporting by Oil and Gas
Producing Companies. Statement 143 requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. Adoption of Statement 143 had no impact on the financial
position of the Company or its results of operations.
NOTE 2 - RELATED PARTY TRANSACTIONS
The Company's former Chairman and several employees made investments in entities
that manage Charity Station locations for the Company's charity customers.
Although the Company does not contract directly with the Charity Station
managers, the charities whose locations were managed by the entities in which
the investments were made paid the same or higher rent to the Company as
charities who used unaffiliated managers.
Effective December 31, 2001, the Board of Directors has determined that
officers, directors, and employees are not permitted to invest in additional
entities that operate the Charity Station locations.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
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.
6
BGI, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
NOTE 3 - COMMITMENTS AND CONTINGENCIES - CONTINUED
Bexar County
In October 2001, eight of the Company's Charity Station machines were seized
from a location in Converse, Texas by an investigator with the Texas Lottery
Commission alleging that the machines were illegal "8 liner" video gambling
devices. In late December 2001 and January 2002, the Texas Lottery Commission
and the Bexar County District Attorney's office seized three of the Company's
bank accounts with balances totaling $985,435 as well as the bank accounts of
several officers and directors of the Company. Although no criminal charges have
been filed, Bexar County has filed civil forfeiture claims based upon alleged
violations of certain laws relating to organized crime, money laundering and
state securities fraud.
This matter was settled in October 2002. Bexar County released $420,478 of the
seized funds which are currently being held in escrow pending the resolution of
a U.S. Securities and Exchange Commission investigation of matters related to
the Company. 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.
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 claims.
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.
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. As a result, the Company recorded a $3,661,245 charge in 2001 related
to legal fees, cash seizures, and impairment of equipment. During the nine
months ended September 30, 2002, the related accrued litigation expense was
reduced by $209,720 related to asset impairment, $660,401 related to cash seized
in January and $377,159 related to legal fees paid during the nine-month period.
As of September 30, 2002, $704,391 remains in the balance sheet as an accrued
litigation expense.
7
BGI, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
NOTE 3 - COMMITMENTS AND CONTINGENCIES - CONTINUED
Other Commitments and Contingencies
In July 2001, the Company entered into a series of agreements with a management
company to provide financial, investor relations and general management
services. In consideration for these services, the Company also entered into a
warrant agreement and issued warrants to purchase 250,000 shares of common stock
at $.40 per share. The agreement provided for the Company to issue warrants for
an additional 1,750,000 shares of common stock at $.40 per share if the
Company's common stock attained certain price levels. The Company recorded
$88,963 as compensation expense related to the 250,000 warrants issued in 2001.
The Company terminated these agreements in October 2001. In August, 2002, the
Company agreed to pay the management company $35,000 and warrants to purchase an
additional 250,000 shares at $.40 per share to settle all claims regarding the
agreements. The Company recorded $69,006 of compensation expenses related to
this settlement.
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 liability and deferred charge related to
the placement fee. The deferred charge will be amortized over the 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 has been advised that the U.S. Securities and Exchange Commission
has 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. As a result of
this investigation, in October 2002, the Company was advised by staff members of
the Division of Enforcement of the Fort Worth District Office of the U.S.
Securities and Exchange Commission that they intend to recommend to the
Commission that a civil action alleging violations of the antifraud provisions
of the Securities Exchange Act of 1934 be commenced against the Company. The
Company intends to discuss with the staff the staff's intended recommendations
before they are sent to the Commission. The Commission must approve any charges
before they can be brought against the Company. The Company is unable at this
time to assess the impact that the recommended civil action may have on the
Company.
The Company leases its executive offices on a month-to-month basis.
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 and nine
months ended September 30, 2002 and 2001, 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:
8
BGI, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
NOTE 3 - COMMITMENTS AND CONTINGENCIES - CONTINUED
Three Months Ended Sep 30, Nine Months Ended Sep 30,
-------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Weighted average number of common shares
used in basic earnings per share 9,812,528 9,685,165 9,794,375 9,555,452
Effect of dilutive securities:
Stock Options 283,807 590,264 406,106 360,550
Warrants 40,373 79,400 235,977 16,472
---------------- -------------- -------------- -------------
Weighted average number of common shares
and dilutive potential common stock used in
diluted earnings per share 10,136,708 10,354,829 10,436,458 9,932,474
================ ============== ============== =============
For the three months ending September 30, 2002, and 2001, respectively,
1,010,000 and 497,000 options and warrants were excluded from weighted average
shares outstanding because they were antidilutive.
For the nine months ending September 30, 2002, and 2001, respectively, 652,000
and 1,017,000 options and warrants were excluded from weighted average shares
outstanding because they were antidilutive.
In August 2002, the Company adopted the 2002 Nonstatutory 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 and nine months ended September 30,
2002, there were 1,050,000 options issued under the plan.
During the quarter and nine months ended September 30, 2002, the Company issued
150,000 options under the 1999 Incentive Stock Option Plan.
NOTE 5 - SEGMENT REPORTING
The Company's operations are divided into operating segments using individual's
products or services. The Company has three operating segments. The Charity
Station segment leases equipment to charities and provides services for use in
fundraising. The phone card segment sells prepaid phone cards which permit
customers to enter a free promotional sweepstakes offering cash prizes. The
charity bingo facility segment operates as a lessor of charity bingo facilities.
Each operating segment uses the same accounting principles as reported in Note1,
Summary of Significant Accounting Policies, and the Company evaluates the
performance of each segment using before-tax income or loss from continuing
operations. The segment information for revenues and cost of revenues has been
reported on the statement of operations.
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 (see Note
1 of the Notes to the Consolidated Financial Statements).
Results Of Operations
Three Months Ended September 30, 2002
Compared with the Three Months Ended September 30, 2001
Total revenues for the quarter ended September 30, 2002, were $596,935 as
compared to $1,482,380 for the quarter ended September 30, 2001. Machine rental
revenue dropped 61% from $1,456,850 in the 2001 quarter to $572,708 in the 2002
quarter as many of the Charity Station machines that were purchased and put in
service in 2001 have been seized by Texas regulatory authorities or taken out of
service because many of the Company's charity customers have elected to
discontinue operation due to the uncertain regulatory climate. Additionally, in
some locations, 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 279 Charity Station machines leased at September 30, 2002 compared
to 353 leased at September 30, 2001. Phone card revenue increased by 24% for the
quarter ended September 30, 2002, as compared to the quarter ended September 30,
2001. 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 $6,000 in
the 2001 quarter to $0 in the 2002 quarter. The decrease resulted from the
Company's decision not to renew its bingo facility leases.
Gross profit was $387,987, or 65% of total revenue, for the quarter ended
September 30, 2002, as compared to $1,242,841 or 84% of total revenue, for the
quarter ended September 30, 2001. The decrease in gross profit as a percentage
of revenue is due to lower margins on Charity Station machine rental in the 2002
period. Several of the Company's higher margin 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 September 30, 2002,
were $259,808 as compared to $578,638 for the quarter ended September 30, 2001.
Most of the decrease, $257,000, is due to the elimination of consulting expense
related to a series of agreements with a management company to provide the
Company with financial, investor relations, and general management services.
These agreements were terminated in October 2001 and the Company performed these
functions in house during the 2002 quarter. The remaining decrease relates to
several positions that were eliminated in 2002 due to the Company's regulatory
problems.
Interest expense for the quarter ended September 30, 2002 was $627 as compared
to $26,837 for the quarter ended September 30, 2001. Interest expense decreased
because the Company paid off most of its debt and capital lease obligations in
the late 2001 and early 2002.
The Company generated net income of $169,796 for the quarter ended September 30,
2002, as compared to a net income of $622,838 for the quarter ended September
30, 2001, for the reasons explained above.
Nine Months Ended September 30, 2002
Compared with the Nine Months Ended September 30, 2001.
Total revenues for the nine months ended September 30, 2002, were $2,370,387 as
compared to $2,682,449 for the nine months ended September 30, 2001. Machine
rental revenue grew from $2,130,795 in the 2001 period to $2,206,444 in the 2002
period due to the greater number of Charity Station machines operating in the
early part of 2002. Over 40% of the revenue for the nine months ended September
30, 2002, was generated in the month of January, prior to the curtailment of
much of the Company's revenue generating activities due to the seizure of cash
and Charity Station machines by certain Texas regulatory authorities. Phone card
revenue decreased by 68% for the nine months ended September 30, 2002, as
compared to the nine months ended September 30, 2001, as the Company still had a
significant number of phone card machines operating during the 2001 period.
During the 2002 period, the Company sold phone cards primarily to customers who
own their own machines as essentially all of the Company's phone card machines
had been converted to Charity Station machines. Bingo revenue decreased from
$99,089 in the 2001 period to $19,592 in the 2002 period. The decrease resulted
from the Company's decision not to renew its bingo facility leases.
Gross profit was $1,627,399 or 69% of total revenue, for the nine months ended
September 30, 2002, as compared to $1,869,193 or 70% of total revenue, for the
nine months ended September 30, 2001. The decrease in gross profit as a
percentage of revenue is due to lower margins on Charity Station machine rental
in the 2002 period. Several of the Company's higher margin 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.
General and administrative expenses for the nine months ended September 30, 2002
were $926,000 as compared to $1,073,841 for the nine months ended September 30,
2001. In the 2001 period, the Company incurred $315,000 in consulting expense
related to a series of agreements with a management company to provide the
Company with financial, investor relations and general management services.
These agreements were terminated in October 2001, and the Company performed
these functions in house during the 2002 period. This decrease is partially
offset by increased legal expense related to the efforts to educate various
local regulatory authorities where the Company's machines are located on the
legal basis for their operation in order to help reduce the risk of further
seizures.
Interest expense for the nine months ended September 30, 2002 was $3,589 as
compared to $101,982 for the nine months ended September 30, 2001. Interest
expense decreased because the Company paid off most of its debt and capital
lease obligations in the late 2001 and early 2002.
The Company generated net income of $720,920 for the nine months ended September
30, 2002 as compared to net income of $650,144 for the nine months ended
September 30, 2001for the reasons explained above.
11
LIQUIDITY
As of September 30, 2002, the Company had a cash balance of $131,126, a $390,768
decrease from December 31, 2001. Certain regulatory authorities in the State of
Texas seized two of the Company's bank accounts totaling $660,401 in January
2002 and one bank account totaling $325,034 in December 2001. Due to the
seizures by certain regulators of both the Company's cash and machines and the
subsequent curtailment of almost all revenue generating activities using the
Company's machines, there can be no assurances that its current operations can
be sustained using cash from operations. The funding of operations and the cost
of the ongoing litigation may require the Company to obtain additional
financing. The Company has no bank lines of credit or other sources of
additional financing and there can be no assurances that the Company will be
able to obtain any such funding on terms acceptable to it, or at all.
Cash used by operating activities was $50,741 for the nine months ended
September 30, 2002. Net income of $720,920 was more than offset by the
$1,042,480 decrease in the litigation reserve due to the cash seizure of
$660,401and legal fees paid during the nine months of $377,159. During the nine
months ended September 30, 2001, cash provided by operating activities was
$1,204,585.
During the nine months ended September 30, 2002, the Company used $239,643 in
funds for investing activities which consisted almost exclusively of a January
purchase of Charity Station machines for use in the Company's operations. This
compares to cash used by investing activities of $641,479 during the
corresponding period of 2001 which is related to the purchase of new machines.
The Company used $100,384 for financing activities during the nine months ended
September 30, 2002 related to the pay-off of various notes. This compares to
cash used in financing activities of $364,620 during the corresponding period of
2001 which are related to payments on various notes and equipment leases.
ITEM 3. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation was
carried out by 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. Based on that evaluation, the CEO/ CFO has concluded
that the Company's disclosure controls and procedures are effective to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Subsequent to the date of
the evaluation, there were 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 is subject to a variety of regulatory actions by regulatory
authorities in several jurisdictions. The following is a summary of those
actions:
In October 2001, twenty-five of the Company's Charity Station machines were
seized from a location in McAllen, Texas by investigators with the Hildalgo
County District Attorney's Office. The investigators alleged that the machines
were "8 liner" video gambling devices. The machines were returned to the Company
in January 2002 in exchange for an agreed judgment that made no admissions as to
guilt or liability and a payment of $20,000.
In October 2001, eight of the Company's Charity Station machines were seized
from a location in Converse, Texas by an investigator with the Texas Lottery
Commission alleging that the machines were illegal "8 liner" video gambling
devices. In late December 2001 and January 2002, the Texas Lottery Commission
and the Bexar County District Attorney's office seized three of the Company's
bank accounts with balances totaling $985,435 as well as the bank accounts of
several officers and directors of the Company. Although no criminal charges have
been filed, Bexar County has filed three separate civil 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
12
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 are
currently 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 January 2002, the Company became aware that the Forth Worth Police Department
had seized twenty of its machines in November 2001 as illegal "8 liner" video
gambling devices. No civil or criminal proceedings have been initiated against
the Company.
In January 2002, the Laredo police department seized a total of seventy-two
machines at two locations as illegal "8 liner" video gambling devices. The
machines were returned to the Company in October 2002 in exchange for an agreed
judgment that made no admission as to guilt or liability and a payment of
$57,600.
In January 2002, the Company received a request for information from the
Securities and Exchange Commission regarding Charity Station machine purchases
and placement as well as information on the trading activity of certain of the
Companies officers and directors. The Company has complied with the request.
The Company has been advised that the U.S. Securities and Exchange Commission
has 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. As a result of
this investigation, in October 2002, the Company was advised by staff members of
the Division of Enforcement of the Fort Worth District Office of the U.S.
Securities and Exchange Commission that they intend to recommend to the
Commission that a civil action alleging violations of the antifraud provisions
of the Securities Exchange Act of 1934 be commenced against the Company. The
Company intends to discuss with the staff the staff's intended recommendations
before they are sent to the Commission. The Commission must approve any charges
before they can be brought against the Company. The Company is unable at this
time to assess the impact that the recommended civil action may have on the
Company.
In April 2002, the El Paso Police Department seized sixty-nine of the Company's
Charity Station machines at two locations in El Paso, Texas. No civil or
criminal proceedings have been initiated against the Company. 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 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.
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, 2002, the Company issued to employees
from its stock option plans options to purchase an aggregate of 800,000 shares
of the Company's common stock and issued
13
directors options to purchase an aggregate of 300,000 shares of common stock .
The options have a ten-year term and an exercise price of $0.22 per share. The
options were issued to employees as a performance incentive and to directors as
compensation for their service as such pursuant to an exemption from
registration under Section 2 (3) and/or 4(2) of the Securities Act of 1933.
The Company also issued options and warrants to purchase an aggregate of 400,000
shares of common stock to consultants with exercise prices of $0.21 and $0.22
per share and terms between 2 and 10 years in connection with services rendered.
The Company also issued 250,000 warrants with an exercise price of $0.40 per
share and a term of approximately 4 years to an entity in connection with the
settlement of a contractual dispute. These options and warrants were issued in
private transactions pursuant to an 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
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit
99.1 Certification of CEO/CFO
(b) Reports in Form 8-K
No reports on Form 8-K were filed in the quarter ended March 31,
2002.
14
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 18, 2002 By: /s/ William Schwartz
------------------------ -------------------------
William Schwartz
Chief Executive Officer and
Chief Financial Officer
15
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.;
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 we 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: November 18, 2002
/s/ William Schwartz
--------------------
William Schwartz,
Chief Executive Officer
and Chief Financial Officer
16
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 September 30, 2002 (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
November 18, 2002
18