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Tuesday, March 21, 2006

BGII's unaudited full year report

BGII (website) The main business is leasing equipment and providing services used in sweepstakes. The primary products are the Charity Station sweepstakes machine and the Lucky Strike phone card machine. These "use a sweepstakes game as an incentive to help non-profit organizations raise funds and sell phone cards respectively."

BGII released their unaudited financial results for 2005 on the pink sheets and on their website. I'm not going to go through them in detail because I can see weaknesses that make BGII less compelling than my current investments: mainly the legal issues with their "sweepstakes" machines being a bit too much like gambling machines. That's a thin line which many businesses have been walking for decades. This one seems a bit too far over the line and they've had their machines confiscated in the past (2002?). The issue is covered briefly in Note 5.

14.6 million shares on Dec 31, 2005. 2 million options outstanding and 1.2 million granted in 2005. Assume 20 million totally diluted shares to be safe.

Balance sheet is rock solid and improving. Cash increased from $588K to $1.8 million. Current assets increased from $778K to $2.4 million. Current ratio is well over 4. Total liabilities are only $415K. Net cash is about $1.4 million or 7 cents per totally diluted share.

Revenue doubled in 2005 to $4.9 million. Gross margin is nearly 80%. Fairly normal level of tax. Net margin is over 27%. Earnings are 6.7 cents per totally diluted share.

Cash flows are simple (all three categories) and match earnings fairly closely. Free cash flow is slightly higher than earnings.

Scanning the notes and other stuff:
Allowance for doubtful accounts is zero dollars (was $3K in 2004).
PP&E is mostly furniture and very heavily depreciated.
Operating lease obligations are low.
They bought an equity interest in Bright Serve, LLC for $249K. Provides contractor programs to property insurance companies to control cost and improve customer service.

I figure the stock is worth about $1.20 but would need to be discounted for the probability of legal trouble in the future (and that could be large and probable) and there's the big issue of unaudited results. The stock last sold for 62 cents. I'll pass, especially since my current investments are pretty compelling at this point.

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