-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WKRXU0H8gxaFp8s2OAPiyi84ARRa8qs4lEP3qfKpnAUj7GfcvYzsk13wRE0ddizK jQmprOwBz3aWvZaQrtTl5w== 0001135745-03-000015.txt : 20030815 0001135745-03-000015.hdr.sgml : 20030815 20030814175846 ACCESSION NUMBER: 0001135745-03-000015 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BGI INC CENTRAL INDEX KEY: 0000355590 STANDARD INDUSTRIAL CLASSIFICATION: LESSORS OF REAL PROPERTY, NEC [6519] IRS NUMBER: 731092118 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-10519 FILM NUMBER: 03849104 BUSINESS ADDRESS: STREET 1: 13581 POND SPRINGS RD STREET 2: SUITE 105 CITY: AUSTIN STATE: TX ZIP: 78279 BUSINESS PHONE: 5124900065 MAIL ADDRESS: STREET 1: 11006 METRIC BOULEVARD STREET 2: STE 350 CITY: AUSTIN STATE: TX ZIP: 78758 FORMER COMPANY: FORMER CONFORMED NAME: BINGO & GAMING INTERNATIONAL INC DATE OF NAME CHANGE: 19951120 FORMER COMPANY: FORMER CONFORMED NAME: PRIMARY DEVELOPMENT CORP /OK/ DATE OF NAME CHANGE: 19941215 FORMER COMPANY: FORMER CONFORMED NAME: O PETRO ENERGY CORP DATE OF NAME CHANGE: 19941215 10QSB 1 bgi10q814.txt BGI 10-QSB 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 JUNE 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) THERE WERE 9,812,528 SHARES OF COMMON STOCK, $.001 PAR VALUE, OUTSTANDING AS OF August 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 BGI, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS JUNE 30, DECEMBER 31, 2003 2002 (UNAUDITED) (AUDITED) ---------- ------------ Current assets: Cash and cash equivalents $ 501,572 $ 326,177 Accounts receivable - trade, net of allowance of $129,320 and $121,837, respectively 19,121 41,432 Prepaid expenses and deferred charge 323,640 245,343 Prepaid income tax 63,552 - ---------- ------------ Total current assets 907,885 612,952 ---------- ------------ Property and equipment, net 253,214 371,772 ---------- ------------ Other assets: 6,618 6,618 Deposits Deferred charge 39,333 157,333 ---------- ------------ Total other assets 45,951 163,951 ---------- ------------ Total assets $ 1,207,050 $ 1,148,675 ========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable - trade $ 55,395 $ 97,702 Income taxes payable - 24,848 Accrued expenses 31,109 39,574 Accrued litigation/impairment loss 334,457 550,283 Current maturities of long-term debt 444,453 470,589 Current maturities of lease obligations 2,487 2,232 ---------- ------------ Total current liabilities 867,901 1,185,228 Long-term portion of lease obligations - 1,337 ---------- ------------ Total liabilities 867,901 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 1,198,111 1,154,352 Retained deficit (868,774) (1,202,054) ------------ ------------- Total stockholders' equity (deficit) 339,149 (37,890) ------------ ------------- Total liabilities and stockholders' equity $ 1,207,050 $ 1,148,675 (deficit) ============ ============= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL STATEMENTS. BGI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED)
Three Months Ended Six Months Ended -------------------------------- -------------------------- June 30, June 30, June 30, June 30, 2003 2002 2003 2002 ------------- ------------- ---------- ------------ Revenue: Machine Rental $ 303,763 585,041 $ 948,871 $ 1,633,736 Phone Cards 25,381 38,170 57,959 120,124 Bingo - 9,797 - 19,592 ------------- ------------- ---------- ------------ Total revenue 329,144 633,008 1,006,830 1,773,452 ------------- ------------- ---------- ------------ Cost of revenue: Machine Rental 130,611 83,172 308,956 328,573 Phone Cards 12,055 14,654 38,632 35,796 Bingo - - - - Machine Depreciation 35,216 85,626 92,658 169,670 ------------- ------------- ---------- ------------ Total cost of revenue 177,882 183,452 440,246 534,039 ------------- ------------- ---------- ------------ Gross profit 151,262 449,556 566,584 1,239,413 ------------- ------------- ---------- ------------ Expenses: General and administrative expenses 269,842 401,306 572,143 666,194 Depreciation & Amortization 8,258 8,961 16,691 17,924 Litigation costs/asset impairment - - (508,773) - ------------- ------------- ---------- ------------ Total expenses 278,100 410,267 80,061 684,118 ------------- ------------- ---------- ------------ Operating income (loss) (126,838) 39,289 486,523 555,295 Gain on sale of fixed assets 5,156 8,200 5,156 8,200 Interest expense (261) (1,012) (798) (2,962) ------------- ------------- ---------- ------------ Income (loss) before income tax (121,943) 46,477 490,881 560,533 ------------- ------------- ---------- ------------ Income tax (expense) benefit Current 35,465 54,505 (157,600) (80,570) Deferred (168,313) (48,127) - 71,160 ------------- ------------- ---------- ------------ Total income tax (expense) benefit (132,848) 6,378 (157,600) (9,410) ------------- ------------- ---------- ------------ Net income (loss) $ (254,791) 52,855 $ 333,281 $ 551,123 ============= ============= ========== ============ Basic income (loss) per common share $ (.03) .01 $ .03 $ .06 ============= ============= ========== ============ Diluted income (loss) per common share $ (.03) .01 $ .03 $ .05 ============= ============= ========== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL STATEMENTS. BGI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED) 2003 2002 ---------- ----------- Operating activities: Net income $ 333,281 551,123 Adjustments to reconcile net income to net cash From operating activities: Depreciation and amortization 109,349 187,594 Provision for bad debts 7,393 103,999 Options issued for services 17,414 - Deferred financing costs - (71,160) Gain on disposal of property (5,156) (8,200) Changes in current assets and liabilities: Accounts receivable - trade 14,917 82,783 Inventory - 14,700 Prepaid expenses and deferred 66,048 (20,151) charge Prepaid income tax (63,552) - Accounts payable and accrued liabilities (50,771) (37,476) Income taxes payable (24,848) 80,570 Accrued litigation expense (200,168) (1,029,198) ---------- ------------ Net cash provided (used) by operating activities 203,907 (145,416) ---------- ------------ Investing activities: Purchase of property and equipment (6,450) (256,942) Increase (decrease) in other assets - (2,499) Proceeds from sale of equipment 5,156 10,000 ---------- ------------ Cash used by investing activities (1,294) (249,441) ---------- ------------ Financing activities: Payments on long-term debt (26,136) (99,541) Payments on long-term leases (1,082) (870) Issuance of common stock 3,276 --------- ------------ Cash used by financing activities (27,218) (97,135) ---------- ------------ Net increase (decrease) in cash and cash equivalents 175,395 (491,992) Cash and cash equivalents at beginning of period 326,177 521,894 ---------- ------------ Cash and cash equivalents at end of period $ 501,572 29,902 ========== ============= Supplemental disclosures of cash flow information: Interest paid $ 261 1,012 ========== ============= Taxes paid $ 246,000 - ========== ============= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL STATEMENTS. BGI, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 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 BGI, Inc. (the "Company") pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") and, in the opinion of management, include all adjustments (consisting of normal recurring accruals and adjustments necessary for adoption of new accounting standards) necessary to present fairly the results of the interim periods shown. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such SEC rules and regulations. Management believes that the disclosures made are adequate to make the information presented not misleading. Due to seasonality and other factors, the results for the interim periods are not necessarily indicative of results for the full year. The financial statements contained herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2002 Annual Report on Form 10-KSB. Going concern: The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. The multiple seizures of the Company's Charity Station sweepstakes machines and related litigation (see note 3) has caused many of the Company's charity customers to discontinue the operation of Charity Station machines due to the uncertain legal environment. 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. BGI, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 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. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements BGI, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2003 AND 2002 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure requirements are effective for fiscal years ending after December 15, 2002. The Company adopted the disclosure provisions for this Form 10-KSB. As the Company will continue to apply APB Opinion No. 25, "Accounting for Stock Issued to Employees", the accounting for stock-based employee compensation will not change as a result of SFAS No. 148. 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 June 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. 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 BGI, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2003 AND 2002 NOTE 3 - COMMITMENT AND CONTINGENCIES - CONTINUED with balances totaling $985,435 as well as the bank accounts of several officers and directors of the Company. Although no criminal charges were filed, Bexar County filed civil forfeiture claims based upon alleged violations of certain laws relating to organized crime, money laundering and state securities fraud. This matter was settled in October 2002. Bexar County released $420,478 of the seized funds which were being held in escrow pending the resolution of a U.S. Securities and Exchange Commission investigation of matters related to the Company. These funds were released in March 2003 and are recorded as a gain on the Statement on Income for the three months ended March 31, 2003. Under the terms of the settlement agreement with Bexar County, the Company also agreed not to operate any Charity Stations or similar sweepstakes machines in Bexar County until such time as there is a definitive court ruling or legislation confirming that such activities are legal. This settlement does not constitute an admission of guilt, fraud or any wrongdoing on the part of the Company. Fort Worth In January 2002, the Company became aware that the Forth Worth Police Department had seized twenty of its Charity Station sweepstakes machines in November 2001 as illegal "8-liner" video gambling devices. No civil or criminal proceedings have been initiated against the Company. 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. BGI, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2003 AND 2002 NOTE 3 - COMMITMENT AND CONTINGENCIES - CONTINUED An unfavorable ruling in any of the ongoing proceedings could have a material adverse effect on the Company's business. The Company has recorded the following accrual and impairments related to the litigation: Accrued Litigation/Impairment Loss Balance March 31, 2003 $ 378,250 Incurred Loss During the Quarter Ended June 30, 2003 Legal Fees (43,793) ------------ Accrued Litigation/Impairment Loss Balance June 30, 2003 $ 334,457 ============ 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 will pay the machine supplier a placement fee of $472,000. The Company recorded a note payable and deferred charge related to the placement fee. The deferred charge will be amortized over the two-year length of the agreement. The Company will pay the machine supplier 75% of the revenue it generates from the machines until such time as the placement fee is completely paid. The Company leases its general offices. During the year ended December 31, 2001, the leases for general offices expired and are leased month to month. The lease for the Company's former bingo facility expired in May 2002. NOTE 4 - EARNINGS PER SHARE Basic income or loss per common share is computed based on the weighted average number of common shares outstanding during each period. For the three months ended March 31, 2003 and 2002, diluted income or loss per common share is computed based on the weighted average number of common shares outstanding, after giving effect to the potential issuance of common stock on the exercise of options and warrants and the impact of assumed conversions. The following table provides a reconciliation between basic and diluted shares outstanding:
Three Months Ended June Six Months Ended June 30, 30, 2003 2002 2003 2002 ---- ---- ---- ---- Weighted average number of common shares used in basic earnings per share 9,812,528 9,790,600 9,812,528 9,785,148 Effect of dilutive securities: Stock Options - 233,871 11,525 379,641 Warrants - - - 99,310 ---------- ----------- ---------- ---------- Weighted average number of common shares and dilutive potential common stock used in diluted ear 9,812,528 10,024,471 9,824,053 10,264,099 ========== =========== ========== ==========
For the three months ending June 30, 2003, and 2002, respectively, 2,864,000 and 906,000 options and warrants were excluded from weighted average shares outstanding because they were antidilutive. BGI, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2003 AND 2002 NOTE 4 - EARNINGS PER SHARE - CONTINUED For the six months ending June 30, 2003, and 2002, respectively, 2,385,000 and 592,000 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 June 30, 2003, the Company issued 95,000 new options with an exercise price of $0.13. 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 June 30, 2003 Compared with the Three Months Ended June 30, 2002 Total revenues for the quarter ended June 30, 2003, were $329,144 as compared to $633,008 for the quarter ended June 30, 2002. Machine rental revenue dropped 48% from $585,041 in the 2002 quarter to $303,763 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 126 Charity Station machines leased and operating at June 30, 2003 compared to 175 leased at June 30, 2002. The Company had 57 Charity Station machines leased and operating at August 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 18% for the quarter ended June 30, 2003, as compared to the quarter ended June 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 $9,797 in the 2002 quarter to $0 in the 2003 quarter. The decrease resulted from the Company's decision not to renew its bingo facility leases. Gross profit was $151,262 or 46% of total revenue, for the quarter ended June 30, 2003, as compared to $449,556 or 71% of total revenue, for the quarter ended June 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. General and administrative expenses for the quarter ended June 30, 2003, were $269,842 as compared to $401,306 for the quarter ended June 30, 2002. The decrease is related to lower legal expense and other reductions in overhead. These reductions were partially offset by increased political consulting expense as the Texas legislature was in session during the quarter. Income tax expense of $132,848 was recorded for the quarter ended June 30, 2003, as compared to income tax benefit of $6,378 for the quarter ended June 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 $254,791 for the quarter ended June 30, 2003, as compared to a net income of $52,855 for the quarter ended June 30, 2002, for the reasons explained above. Six Months Ended June 30, 2003 Compared with the Six Months Ended June 30, 2002 Total revenues for the six months ended June 30, 2003, were $1,006,830 as compared to $1,773,452 for the six months ended June 30, 2002. Machine rental revenue dropped 43% from $1,663,736 in the 2002 period to $948,871 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 126 Charity Station machines leased and operating at June 30, 2003 compared to 175 leased at June 30, 2002. The Company had 57 Charity Station machines leased and operating at August 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 52% for the six months ended June 30, 2003, as compared to the six months ended June 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. 10 Gross profit was $566,584 or 56% of total revenue, for the six months ended June 30, 2003, as compared to $1,239,413 or 70% of total revenue, for the six months ended June 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. General and administrative expenses for the six months ended June 30, 2003, were $572,143 as compared to $666,194 for the six months ended June 30, 2002. The decrease is related to lower legal expense and other reductions in overhead. These reductions were partially offset by increased political consulting expense as the Texas legislature was in session during the period. Litigation costs/asset impairment expense for the six months ended June 30, 2003, was a credit of $508,773 as compared to $0 for the six months ended June 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 $157,600 was recorded in the six months ended June 30, 2003, as compared to $9,410 for the six months ended June 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 $333,281 for the six months ended June 30, 2003, as compared to a net income of $551,123 for the six months ended June 30, 2002, for the reasons explained above. 11 Liquidity As of June 30, 2003, the Company had a cash balance of $501,572, a $175,395 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 $203,907 for the six months ended June 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 $200,168 reduction in accrued litigation expense related to legal fees paid. Also the Company used $50,771 in reducing accounts payable that consisted primarily of invoices related to past parts purchases. Cash used by operating activities was $145,416 for the six months ended June 30, 2002. Net income for the period ending June 30, 2002, of $551,123 was offset by the $1,029,198 decrease in the litigation reserve due to the cash seizure of $660,401 and legal fees paid during the period of $464,877. During the six months ended June 30, 2003, the Company used $1,294 for investing activities as the $6,450 purchase of a trailer was offset by proceeds from the sale of a vehicle of $5,156. This compares to $249,411 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 $27,218 for financing activities during the six months ended June 30, 2003, related primarily to the supplier note described above. This compares to cash used in financing activities of $97,135 during the six months ended June 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 June 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 June 30, 2003, 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 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. In 2002, the U.S. Securities and Exchange Commission commenced a formal investigation relating to, among other things, certain information contained in certain of the Company's press releases and trading activities in the Company's common stock by certain individuals. On March 18, 2003, pursuant to the Company's offer of settlement, the Securities and Exchange Commission issued an order directing the Company to cease and desist from committing or causing any violation, and any future violation, of the anti-fraud and periodic reporting provisions of the Securities Exchange Act of 1934. The Company agreed to the entry of the order without admitting or denying the SEC's findings which related to actions taken under the direction of the Company's former management. The SEC did not to impose a monetary penalty on the Company. In April 2002, the El Paso Police Department seized sixty-nine of the Company's Charity Station machines and the cash in the machines at two locations in El Paso, Texas. Although no criminal charges have been filed, El Paso County filed two civil forfeiture suits. On August 12, 2002, Cause No. 20023139 State of Texas vs. 35 Gambling Devices and $12,102.58 in U.S. Currency was filed in the 168th Judicial District Court, El Paso County, Texas. On August 12, 2002, Cause No. 20023140 State of Texas vs. 34 Gambling Devices and $5,819.50 in U.S. Currency was filed in the 168th Judicial District Court, El Paso County, Texas. 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. No civil or criminal proceedings have been initiated against the Company. An unfavorable outcome in any of the ongoing regulatory matters could have a material adverse effect on the Company's business. 13 ITEM 2. CHANGES IN SECURITIES. None ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 5. OTHER INFORMATION. None 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 June 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: August 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: August 14, 2003 /s/ William Schwartz --------------------- William Schwartz Chief Executive Officer and Chief Financial Officer 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 June 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: August 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. -----END PRIVACY-ENHANCED MESSAGE-----