As filed with the Securities and Exchange Commission on ___________, 2006
Registration Statement No. __________________
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MONEY CENTERS OF AMERICA, INC.
(Name of small business issuer in its charter)
Delaware 6099 23-2929364
-------- ---- ----------
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification
No.)
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700 South Henderson Road, Suite 325, King of Prussia, PA 19406
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(610) 354-8888
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(Address and Telephone Number of Principal Executive Offices and Principal
Place of Business)
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Christopher M. Wolfington, Chief Executive Officer
Money Centers of America, Inc.
700 South Henderson Road, Suite 325
King of Prussia, PA 19406
(610) 354-8888
(Name, Address and Telephone Number of Agent for Service)
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Copies of all communications, including all communications sent to the agent
for service, should be sent to:
Lawrence D. Rovin, Esq.
Klehr, Harrison, Harvey, Branzburg & Ellers LLP
260 South Broad Street
Philadelphia, PA 19102
(215) 568-6060
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Approximate date of proposed sale to the public: From time to time after
the effective date of the registration statement until such time as all of the
shares of common stock registered hereunder have been sold.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. |_|
CALCULATION OF REGISTRATION FEE
====================================================================================================================
Proposed Maximum Proposed
Title of Each Class Amount to be Offering Price Maximum Aggregate Amount of
of Securities Being Registered Registered Per Share((1) ) Offering Price (1) Registration Fee
--------------------------------------------------------------------------------------------------------------------
Shares of Common Stock........ 9,334,086 $0.21 $1,960,158 $209.74
shares
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Total......................... 9,334,086 $0.21 $1,960,158 $209.74
shares
====================================================================================================================
The registrant hereby amends the registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that the registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
(1) Estimated solely for the purposes of calculating the registration fee. The
proposed Maximum Aggregate Offering Price was calculated pursuant to Rule 457(c)
under the Securities Act of 1933, as amended, on the basis of the average of the
bid and ask prices on October 13, 2006 as reported on the NASD Over-the-Counter
Bulletin Board.
SUBJECT TO COMPLETION. DATED , 2006.
-------------------------------
PROSPECTUS
Money Centers of America, Inc.
9,334,086 Shares of Common Stock
An aggregate of 9,334,086 shares of common stock of Money Centers of
America, Inc. covered by this prospectus are being offered and sold from time to
time by certain of our stockholders hereinafter referred to as the selling
stockholders. All of these shares are being registered for resale only. We will
not receive any of the proceeds from the sale of the shares by the selling
stockholders. The shares of our common stock that we are registering by this
prospectus will be offered for sale by the selling stockholders, from time to
time, at prevailing market prices or in negotiated transactions.
Our common stock is eligible for quotation on the Over-the-Counter Bulletin
Board and is quoted under the Symbol "MCAM."
The selling stockholders may be deemed underwriters within the meaning of
the Securities Act of 1933 in connection with such sales.
These securities are speculative and involve a high degree of risk. For a
discussion of certain important factors that should be considered by prospective
investors, see "Risk Factors" beginning on page 3.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed on the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The information in this prospectus is not complete and may be changed.
These securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
The date of this prospectus is , 2006
-----------------------------
TABLE OF CONTENTS
Page
Summary......................................................................3
Risk Factors.................................................................3
Business.....................................................................9
Legal Proceedings...........................................................18
Cautionary Statement For Forward-Looking Statements.........................18
Management's Discussion and Analysis or Plan of Operations..................19
Directors, Executive Officers, Promoters and Control Persons................30
Executive Compensation......................................................32
Security Ownership Of Certain Beneficial Owners And Management and
Related Stockholder Matters.................................................34
Selling Holders.............................................................36
Plan of Distribution........................................................37
Use of Proceeds.............................................................39
Certain Relationships and Related Party Transactions........................39
Description of Securities...................................................40
Disclosure of Commission Position on Indemnification for Securities
Act Liabilities.............................................................42
Market for Common Equity and Related Shareholder Matters....................42
Experts.....................................................................44
Legal Matters...............................................................44
Where You Can Find More Information.........................................44
SUMMARY
This summary highlights important information included in this
prospectus. Because it is a summary, it does not contain all of the information
you should consider before making an investment decision. You should read the
entire prospectus carefully, including the section titled "Risk Factors"
beginning on page 3.
Business
We are a single source provider of cash access services, the
ONSwitch(TM) transaction management system and the Omni Network to the gaming
industry. We have combined state-of-the-art technology with personalized
customer services to deliver high quality ATM, Credit Card Advance, POS Debit,
Check Cashing Services, CreditPlus outsourced marker services, and merchant card
processing. As suppliers to the gaming industry have consolidated service
offerings, we will meet the growing trend towards single source providers of
products and services to casinos and other gaming facilities worldwide. This
trend supports our business plan to identify fragmented segments of the market
to capitalize on merger and acquisition targets of synergistic companies that
support our business model.
Our core business of providing single source full service cash access
services in the gaming industry is the source of our revenue and profits in
2006. We have also launched several new services in the last 2 years, such as
our ONSwitch(TM) Transaction Management System, CreditPlus, Cash Services Host
Program, and the Omni Network(TM) that have helped to differentiate our product
offering in the marketplace.
We launched our ONSwitch(TM) Transaction Management System in January
2006 and we began to offer ONSwitch(TM) to our customers as a "turn-key"
solution that they can use to process and facilitate their own transactions
without using a vendor. ONSwitch(TM) allows a gaming operator to leverage
existing infrastructure to internalize the delivery and operation of cash access
services, retail merchant card processing, automated ticket redemption, and
player's club redemptions.
With ONSwitch(TM), we will generate revenues from licensing fees and
ongoing support fees rather than providing cash access services ourselves.
Although our recurring revenues from a particular casino will be substantially
reduced, we will no longer incur the costs associated with on-site personnel and
equipment and interest expense on the substantial working capital required for
vault cash to support our current services. This will enable us to support a
much larger customer base. For a more complete description of ONSwitch(TM), see
"Business - Products - ONSwitch(TM) Transaction Management System" on page 19.
We have a team of experienced executives in the financial services and
gaming industries who have identified an opportunity to capitalize on the need
for an experienced, aggressive, service oriented company to provide a full range
of funds transfer services to the gaming and retail markets.
We currently have contracts to provide some or all of the cash access
services in 31 locations across the United States and the Caribbean.
Our offices are located at 700 South Henderson Road, Suite 325, King of
Prussia, PA 19406. Our telephone number is (610) 354-8888.
The Offering
Shares offered by the selling stockholders 9,334,086.
Includes 170,000 shares issuable upon the exercise of
warrants.
Common stock outstanding 30,162,353 shares.
Use of proceeds The selling
stockholders will
receive the net
proceeds from the
sale of the shares
offered by this
prospectus.
We will receive
none of the
proceeds from the
sale of shares
offered by this
prospectus.
1
Description of Selling Stockholders
In this prospectus we are registering the resale of up to 9,334,086
shares of our common stock by 29 of our stockholders, including 27 investors who
purchased shares of our common or warrants exercisable for shares of our common
stock in private placement offerings.
Summary Consolidated Financial
and Operating Data
The following table sets forth summary consolidated historical
financial data for the fiscal years ended December 31, 2005 and December 31,
2004 (audited) and the six months ended June 30, 2006 and June 30, 2005
(unaudited). You should read this information in conjunction with "Management's
Discussion and Analysis or Plan of Operations" as well as the consolidated
financial statements and their related notes included elsewhere in this
prospectus.
-------------------------------------- -- ---------------------------------
Years Ended December 31 Six Months Ended June 30
------------------ -- ---------------- -- ------------- - -----------------
2005 2004 2006 2005
------------------ ---------------- -- ------------- - -----------------
Statement of Income Data:
Revenues $ 19,409,238 $ 16,252,270 $ 6,899,453 $ 10,810,853
Cost of revenues 15,801,366 13,912,356 5,540,019 8,801,522
------------------ ---------------- -- ------------- - -----------------
Gross Profit 3,607,872 2,339,914 1,359,434 2,009,331
Selling, general and administrative 2,238,904 2,642,341 1,108,632 1,319,546
expenses
Noncash Compensation 91,225 7,674,491 32,650 76,400
Depreciation and Amortization 941,079 1,615,803 160,338 338,725
------------------ ---------------- -- ------------- - -----------------
Income (loss) from operations 336,664 (10,141,484) 57,814 274,660
Interest expense, net (1,997,438) (1,700,439) (1,141,976) (969,739)
Other income (expense), net (5,393) 170 19,152 -
Net loss $ (1,666,167) $ (11,841,753) $ (1,065,010) $ (695,079)
------------------ ---------------- -- ------------- - -----------------
Net loss per share - basic $ (0.07) $ (1.33) $ (0.04) $ (0.03)
Net loss per share - diluted $ (0.07) $ (1.33) $ (0.04) $ (0.03)
December 31, 2005 June 30, 2006
---------------------- --------------------
Balance Sheet Data:
Working Capital $ (6,896,428) $ (8,002,755)
Total assets 8,886,425 6,019,029
Total liabilities 13,922,012 12,077,575
Stockholders' deficit (5,035,587) (6,019,029)
2
RISK FACTORS
You should carefully consider the risks described below, together with
all of the other information included in or incorporated by reference in this
prospectus, before making an investment decision. We believe that the risks and
uncertainties described below are the material risks that we face. If any of the
following risks actually occur, our business, financial condition or results of
operations could be materially and adversely affected. In that case, the trading
price of our common stock could decline and you may lose all or part of your
investment.
Our vault cash funding facility has expired and we will be unable to
operate our business unless it is renewed or replaced.
In order to operate our business we require substantial funds (referred
to as "vault cash") to finance the float, or money in transit, that exists
between the time we advance funds to customers and the time we are reimbursed.
We currently obtain vault cash from a $7,000,000 credit facility with Mercantile
Capital, L.P. This facility expired May 31, 2006 and, although Mercantile
Capital has continued to provide us with vault cash on the same terms since that
date, it could decide to cease doing so, and demand repayment of the outstanding
balance, at any time. Although we have had discussions with Mercantile Capital
regarding the terms of a renewal of this facility, we can give no assurance that
the facility will be renewed. If it is not renewed, and if we are unable to
obtain replacement financing in a timely manner, we will be forced to cease
operations until we obtain replacement financing.
We have approximately $9,900,000 in indebtedness and approximately
$2,200,000 in accounts payable, commissions payable and accrued expenses. If we
are unable to satisfy these obligations, then our business will be adversely
effected.
As of June 30, 2006, we had indebtedness in the aggregate principal
amount of approximately $9,900,000 and accounts payable and accrued expenses of
approximately $2,200,000. Though our operating profits are sufficient to meet
our current obligations under our credit facilities, if we become unable to
satisfy these obligations, then our business will be adversely affected. Certain
of these obligations are secured by security interests in substantially all of
our assets granted to the lender. Accordingly, if we are unable to satisfy these
obligations, then our lender may sell our assets to satisfy the amounts due
under these loans. Any such action would have an adverse effect on our business.
Our independent auditors have raised substantial doubt about our
ability to continue as a going concern.
Due to our accumulated deficit of $16,477,119 as of December 31, 2005,
and our net loss of $1,666,167 for the year ended December 31, 2005, our
independent auditors have raised substantial doubt about our ability to continue
as a going concern. While we believe that our present plan of operations will be
profitable and will generate positive cash flow, we may not generate net income
or positive cash flow in 2006 or at any time in the future.
We have had a history of losses and may experience continued losses in
the foreseeable future.
For the year ended December 31, 2005 we experienced a net loss of
$1,666,167 and for the year ended December 31, 2004, we experienced a net loss
of $11,841,753. Due to the costs associated with our planned continued expansion
of our business, we expect to incur losses for the year ending December 31,
2006. If we are unable to increase revenues from existing and new contracts
while controlling costs, our losses may be greater than we anticipate and we may
have insufficient capital to meet our obligations.
3
Our business is concentrated in the gaming industry.
Our business currently is concentrated in the casino gaming industry,
and our plan of operation contemplates that we will continue to focus on
operations in casinos and other gaming locations. Accordingly, a decline in the
popularity of gaming or the rate of expansion of the gaming industry, changes in
laws or regulations affecting casinos and related operations or the occurrence
of other adverse changes in the gaming industry, would have a material adverse
effect on operations.
Most of our agreements with casinos are of a short duration and may not
be renewed.
Our agreements with casino operators typically have initial terms of
one to five years, with renewal clauses. It is likely that one or more of our
casino customers will elect not to renew their contracts. We rely principally on
our relationships with the casino operators, rather than on the terms of our
contracts, for the continued operation of our funds transfer services. However,
if our contracts expire and customers do not elect to renew them, and we have
not entered into sufficient contracts with new customers to replace the lost
revenues, then our revenues will be adversely affected.
Our contracts with Indian tribes are subject to claims of sovereign
immunity.
We have entered into agreements with Indian tribes. Indian tribes in
the United States generally enjoy sovereign immunity from lawsuits, similar to
that of the United States government. The law regarding sovereign immunity is
unsettled. Though some of our contracts provide for a limited waiver of immunity
for the enforcement of our contractual rights, if any Indian tribe defaults on
our agreements and successfully asserts its right of sovereign immunity, our
ability to recover our investment, or to originate and sell future Indian gaming
transactions, could be materially adversely affected.
We derive a significant portion of our revenues from one customer and
the loss of that customer could have a significant adverse effect on our
financial results.
The Company is dependent on one customer for a significant portion of
its revenue and gross profit. For the year ended December 31, 2005, we derived
16.6% of our revenues from this customer. The loss of this customer would result
in an immediate material reduction in our revenues and gross profit.
We face collection risks in cashing checks presented by casino patrons.
Like all companies engaged in the funds transfer business, we face
certain collection risks, especially with respect to check cashing services. We
attempt to minimize collection risks by utilizing disciplined procedures in
processing transactions. Nevertheless, our operations would be adversely
affected by any material increase in aggregate collection losses. Though we have
been effective in managing our credit risk in the past, it is possible that we
might incur significant losses with respect to our check cashing services in the
future and such losses could have a material, adverse effect on our financial
condition.
We are subject to licensing requirements and other regulations.
We are subject to licensing requirements and other regulations in many
states and by Native American tribal entities. Regulators have significant
discretion to deny or revoke licenses. If we are unable to obtain a license
required to do business in a certain state or with a certain Native American
tribe, or if such a license is revoked, there would be significant negative
consequences, including possible similar action by other regulatory entities. In
addition, government laws and regulations may include limitations on fees
charged to consumers for cash access services (although no such limitations
currently exist). Changes in laws and regulations could have a material, adverse
effect on our operations.
4
The exercise of stock options and warrants at prices below the market
price of our common stock could cause a decrease or create a ceiling on the
market price of our common stock.
We have issued and outstanding stock options and warrants exercisable
for 3,130,000 shares of our common stock at prices below our current market
price, with an average exercise price of $0.01 per share. The existence of these
options may have a depressing effect on the market price of our common stock,
and the exercise of these options, if accompanied by a sale of the shares of
common stock issued on exercise, may result in a decrease in the market price of
our common stock.
Our success depends on market acceptance of our products and services.
We believe that our ability to increase revenues, cash flow and
profitability will depend, in part, upon continued market acceptance of our
products and services, particularly our credit card cash advance products, POS
Debit, CreditPlus, ATM and check cashing products. We cannot predict whether
market acceptance of our existing products and services will continue or that
our new products and services will receive any acceptance from the marketplace.
Changes in market conditions in the gaming industry and in the financial
condition of casino operators, such as consolidation within the industry or
other factors, could limit or decrease market acceptance of our products and
services. Most of our business is based on one to five year agreements with
casino operators. We have been successful in renewing these agreements and in
attracting new customers. However, insufficient market acceptance of our
products and services could have a material, adverse effect on our business,
financial condition and results of operations.
Our success will be largely dependent upon our key executive officers
and other key personnel.
Our success will be largely dependent upon the continued employment of
our key executive officers and, particularly, our continued employment of
Christopher M. Wolfington. The loss of Mr. Wolfington's services would have a
material adverse effect on our operation. Although Mr. Wolfington has entered
into an employment agreement with us, and owns approximately 56.6% of our issued
and outstanding common stock, it is possible that Mr. Wolfington would not
continue his employment with us. In addition, we do not presently maintain
insurance on Mr. Wolfington's life. Although we believe that we would be able to
locate a suitable replacement for Mr. Wolfington if his services were lost, we
may not be able to do so. In addition, our future operating results will
substantially depend upon our ability to attract and retain highly qualified
management, financial, technical and administrative personnel. Competition for
highly talented personnel is intense and can lead to increased compensation
expenses. We may not be able to attract and retain the personnel necessary for
the development of our business.
We will be in competition with companies that are larger, more
established and better capitalized than we are.
The cash access services industry is highly competitive, rapidly
evolving and subject to constant change. Our principal competitors in the
credit/debit card cash advance area are Global Cash Access Holdings, Inc.,
Global Payments, Inc., Fidelity National Information Services, Inc. and Cash
Systems, Inc. Some of our competitors have:
o greater financial, technical, personnel, promotional and marketing resources;
o longer operating histories;
o greater name recognition; and
o larger consumer bases than us.
5
We believe that existing competitors are likely to continue to expand
their products and service offerings. Moreover, because there are few,
substantial barriers to entry, we expect that new competitors are likely to
enter the cash access services market and attempt to market financial products
and services similar to our products and services, which would result in greater
competition. We may not be able to compete successfully with these new or
existing competitors.
Shares of our common stock lack a significant trading market.
Shares of our common stock are not eligible for trading on any national
or regional exchange. Our common stock is eligible for trading in the
over-the-counter market on the Over-The-Counter Bulletin Board. This market
tends to be highly illiquid. There are currently no plans, proposals,
arrangements or understandings with any person with regard to the development of
a trading market in our common stock. An active trading market in our common
stock may not develop, or if such a market develops, may not be sustained. In
addition, there is a greater chance for market volatility for securities that
trade on the Over-The-Counter Bulletin Board as opposed to securities that trade
on a national exchange or quotation system. This volatility may be caused by a
variety of factors, including the lack of readily available quotations, the
absence of consistent administrative supervision of "bid" and "ask" quotations
and generally lower trading volume.
Ownership of our stock by one person means that our other shareholders
have no effective ability to elect directors or otherwise influence management.
One person controls a majority of our capital stock. Christopher M.
Wolfington owns approximately 56.6% of our issued and outstanding capital stock.
As a result, Mr. Wolfington has the ability to control substantially all matters
submitted to our shareholders for approval (including the election and removal
of directors and any merger, consolidation or sale of all or substantially all
of our assets), to elect himself as Chairman, Chief Executive Officer and
Treasurer and to control our management and affairs. This concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control, or impeding a merger, consolidation, takeover or other business.
Our shares of common stock are subject to penny stock regulation.
Holders of shares of our common stock may have difficulty selling those
shares because our common stock will probably be subject to the penny stock
rules. Shares of our common stock are subject to rules adopted by the Securities
and Exchange Commission that regulate broker-dealer practices in connection with
transactions in "penny stocks." Penny stocks are generally equity securities
with a price of less than $5.00 which are not registered on certain national
securities exchanges or quoted on the NASDAQ system, provided that current price
and volume information with respect to transactions in those securities is
provided by the exchange or system. The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
those rules, to deliver a standardized risk disclosure document prepared by the
Securities and Exchange Commission, which contains the following:
o a description of the nature and level of risk in the market for penny
stocks in both public offerings and secondary trading;
o a description of the broker's or dealer's duties to the customer and of the
rights and remedies available to the customer with respect to violation to
such duties or other requirements of securities laws;
o a brief, clear, narrative description of a dealer market, including "bid"
and "ask" prices for penny stocks and the significance of the spread
between the "bid" and "ask" price;
o a toll-free telephone number for inquiries on disciplinary actions;
o definitions of significant terms in the disclosure document or in the
conduct of trading in penny stocks; and o such other information and is in
such form (including language, type, size and format), as the Securities
and Exchange Commission shall require by rule or regulation.
6
Prior to effecting any transaction in penny stock, the broker-dealer
also must provide the customer with the following:
o the bid and offer quotations for the penny stock;
o the compensation of the broker-dealer and its salesperson in the
transaction;
o the number of shares to which such bid and ask prices apply, or other
comparable information relating to the depth and liquidity of the
market for such stock; and
o monthly account statements showing the market value of each penny stock
held in the customer's account.
In addition, the penny stock rules require that, prior to a transaction
in a penny stock not otherwise exempt from those rules, the broker-dealer must
make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written acknowledgment
of the receipt of a risk disclosure statement, a written agreement to
transactions involving penny stocks, and a signed and dated copy of a written
suitability statement. These disclosure requirements may have the effect of
reducing the trading activity in the secondary market for a stock that becomes
subject to the penny stock rules.
A provision in our Amended and Restated Certificate of Incorporation
requires 5% holders of our common stock to consent to background checks by state
and Native American regulators and statutory provisions to which we are subject
may have the effect of deterring potential acquisition proposals.
Many of the regulatory authorities that approve our licensing and many
of the Indian tribes with which we may do business perform background checks on
our directors, officers and principal shareholders. As a consequence, our
Amended and Restated Certificate of Incorporation provides that a person may not
hold 5% or more of our securities without first agreeing to:
o consent to a background investigation,
o provide a financial statement, and
o respond to questions from gaming regulators and/or Indian tribes.
Stockholders holding less than 5% of our outstanding securities could
also be subject to the same requirements. Such requirements could discourage
acquisition of large blocks of our securities, could depress the trading price
of our common stock and could possibly deter any potential purchaser of our
company.
Our directors may be subject to investigation and review by gaming
regulators in jurisdictions where we are licensed or have applied for a license.
Such investigation and review of our directors may have an anti-takeover effect.
7
We do not intend to pay cash dividends on our shares of common stock.
The future payment of dividends will be at the discretion of our Board
of Directors and will depend on our future earnings, financial requirements and
other similarly unpredictable factors. For the foreseeable future, we anticipate
that any earnings that may be generated from our operations will be retained by
us to finance and develop our business and that dividends will not be paid to
stockholders. Accordingly, the only income that our stockholders may receive
will be derived from the growth of our stock price, if any.
8
BUSINESS
General
Money Centers of America, Inc. is a corporation existing under the laws
of the State of Delaware. The company's original Certificate of Incorporation
was filed on October 10, 1997 and a Restated Certificate of Incorporation was
filed on August 20, 2004.
We are a single source provider of cash access services and transaction
management systems to the gaming industry. Our core competencies are the
facilitation, processing, and execution of ATM, Credit Card Advance, POS Debit,
Check Cashing, stored value, marker, and merchant card services in the Gaming
Industry. As the suppliers to the gaming industry have consolidated service
offerings, we will meet the growing trend towards single source providers of
products and services to casinos and other gaming facilities worldwide. This
trend supports our business plan to offer a full range of cash access services
as well as to identify merger and acquisition candidates with discrete product
offerings that complement our existing offerings and will further support our
business model.
We intend to become a leading innovator in cash access and transaction
management services for the gaming industry. Our business model is specifically
focused on providing our full suite of cash access services through two distinct
deployment channels: 1) the traditional outsourced solution whereby the casino
operator contracts out all cash access services whereby we provide a complete
package of hardware, software and processing services to our customers, and 2)
the licensing of our ONSwitch(TM) Transaction Management System through
licensing agreements pursuant to which we sell an enterprise software
application that allows casinos to internalize the operation of these services
which includes providing their own hardware, service and maintenance.
We have identified the gaming industry as a niche segment within the
funds transfer industry that has significant growth opportunities. We are
confident that our full service and technology license deployment strategy
positions us to meet the needs of any gaming facility or jurisdiction in the
United States.
We currently have contracts to provide some or all of the cash access
services in 31 locations across the United States and the Caribbean. Our
locations are in the states of California (15 locations), Florida (4 locations),
Nevada (3 locations), New York (2 locations), Caribbean (2 locations) and 1
location each in Colorado, Illinois, New Mexico, Wisconsin and Washington.
History
Prior to March 2001, we were a development company focusing on the
completion of a Point of Sale ("POS") transaction management system for the
gaming industry. In March 2001, we commenced operations with the launch of the
POS system at the Paragon Casino in Marksville, LA.
On January 2, 2004, iGames Entertainment, Inc. acquired us pursuant to
our merger with and into a wholly-owned subsidiary of iGames formed for that
purpose. In addition, on January 6, 2004, iGames acquired Available Money, Inc.,
an operator of free-standing ATM machines in casinos. The business operations of
Available Money were combined with our business operations. As a result of the
acquisition of Available Money and our continued growth, we currently provide
services in 31 locations across the United States and the Caribbean.
Our acquisition by iGames was accounted for as a reverse acquisition.
Although iGames was the legal acquirer in the merger, we were the accounting
acquirer since our shareholders acquired a majority ownership interest in
iGames. Consequently, our historical financial information is reflected in the
financial statements prior to January 2004. All significant intercompany
transactions and balances have been eliminated.
On October 15, 2004, pursuant to an Agreement and Plan of Merger dated
as of August 10, 2004 (the "Merger Agreement") by and between iGames and us,
iGames was merged with and into us. Pursuant to the Merger Agreement, the holder
of each share of iGames' common stock received one share of our common stock,
and each holder of shares of iGames' Series A Convertible Preferred Stock
received 11.5 shares of our common stock. Options and warrants to purchase
iGames' common stock, other than warrants issued as part of the merger
consideration in iGames' January 2004 acquisition of us (the "Merger Warrants"),
are deemed options and warrants to purchase the same number of shares of our
common stock with no change in exercise price. The Merger Warrants were
cancelled in exchange for 1.15 shares of our common stock for each share of
common stock purchasable thereunder.
9
As a result of this merger, iGames ceased to exist as a corporation and
we succeeded to the registration of iGames under Section 12(g) of the Securities
Exchange Act of 1934, as amended (the "Act"), pursuant to the provisions of Rule
12g-3(a) promulgated under the Act. iGames was registered, and filed reports,
under the Act with the Securities and Exchange Commission (the "Commission") in
accordance with Section 12(g) of the Act.
In addition, as a result of this merger, our Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws govern the rights
of our stockholders. We have also assumed administration of the iGames' Amended
and Restated 2003 Stock Incentive Plan. iGames had a fiscal year that ended on
March 31. We have a fiscal year that ends on December 31. We have retained our
December 31 fiscal year.
Products
We have developed four primary products: credit/debit card cash
advance, CreditPlus Credit Services, Automatic Teller Machines ("ATMs") and
check cashing solutions. These products are the primary means by which casinos
make cash available to gaming customers. We believe that we have a distinct
advantage in the cash access industry because we offer all four of these
products, and each of our seven current full service casino customers utilizes
all four products although we offer them separately as well. We anticipate that
a majority of future casino customers will contract for all services. Currently,
we provide these services on a direct, full service basis using our hardware,
software and personnel. In addition to our core products, we commenced offering
customers our proprietary ONSwitch(TM) transaction management system in January
2006. With ONSwitch(TM), casinos can license our software systems and use their
own hardware, personnel and capital to provide the cash access services to its
customers. We do not have any current customers using this system.
ONSwitch(TM) Transaction Management System
ONSwitch(TM) is a turnkey software solution that enables casino
operators to insource cash access operations such as ATM, cash advance, POS
debit, retail merchant card processing, automated ticket redemption, and
player's club redemptions. Historically, casino operators have engaged third
party processors such as us to handle cash access operations, with the goal of
driving more cash to the gaming floor. These third party providers would install
the equipment, evaluate credit transactions, and provide the cash to casino
patrons who were seeking to tap available sources of cash.
Now, with ONSwitch(TM), casino operators have an extremely
cost-effective solution to eliminate the middleman, capture the profits from
cash access operations, and gain control of the customer experience.
ONSwitch(TM) couples Mosaic Software's Postilion electronic funds
transaction software platform with proprietary software for the gaming industry.
Postilion is at the forefront of next-generation payment processing software,
driving payments for some of the largest financial services companies in the
world through ATMs, POS terminals, phones, and Internet access points. We have
the exclusive right to resell Postilion software within the gaming industry.
We will generate revenues from licensing fees, transaction fees and
ongoing support, training and consulting fees rather than providing cash access
services. Although our revenues from a particular casino will be substantially
reduced, we will no longer incur the costs associated with on-site personnel and
equipment and interest expense on the substantial working capital required to
support our current services. This will enable us to support a much larger
customer base. We began marketing ONSwitch(TM) in January 2006. Although to date
none of our existing customers have decided to convert to the ONSwitch(TM)
transaction management system, we have provided them with the right to do so and
believe that the ability to convert will provide us with a marketing competitive
advantage with prospective customers.
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In addition, with ONSwitch(TM) we will have the opportunity to create
an additional revenue stream through the financing of our licensing fees. Some
casinos will want to finance the ONSwitch(TM) license fee; which will give us
the opportunity to derive additional revenues from finance charges on the
deferred license fee payments.
We believe that the economics of our business are too compelling for
gaming operators not to consider internalizing cash access operations in order
to generate additional revenue and profits, especially when these operations are
virtually identical to a gaming operator's core competencies. Substantially all
gaming facilities provide ATM services, credit card cash advances, debit, and/or
check cashing services to their customers.
Since launch, we have experienced a shorter sales cycle and have gained
access to larger potential customers. For example, most of the national publicly
traded gaming companies would not typically meet with one of our sales team.
Since the launch of ONSwitch(TM), we have had several of these gaming entities
call us.
We feel that ONSwitch(TM) can change the industry. For years cash
access companies have concealed the simplicity of the business to casino
operators. Currently, casinos and cash access companies share in the profits.
Unfortunately this lends itself to contracts being shorter in nature and
continued pricing pressure for providing essentially a commodity service. With
the proper technology, the casino can make more money by providing the services
itself. We will provide them with that technology. In addition to the financial
rewards of ONSwitch(TM) to casino operators, there is also the reward of owning
your own cash access and the things you can do once you own it. Casinos can then
directly control their customers experience through ONSwitch(TM).
ONSwitch(TM) can also do merchant card processing. In addition to the
casino saving on not having to pay its processors for transactions in hotels,
gas stations and gift shops, the casino can gain another revenue item by
requiring that all the retail outlets in the facility use the casino as a
merchant card processor in their stores.
We have 6 or so strong ONSwitch(TM) leads and we believe that we will
sign letters of intent shortly. One of California's largest casinos has stated
it will purchase the ONSwitch(TM) after a test period. We are currently working
with their IT department on various upgrades and will test this shortly. It has
taken longer than expected, but we feel this and another California casino will
sign letters if intent shortly.
ONSwitch(TM) has benefits for our internal operations as well. We will
lower our processing cost internally from 5.5 cents to 1.5 cents per
transaction. Based on our current level of business, this will save us over
$500,000 per year.
Credit/Debit Card Cash Advance.
In March 2001, we introduced our first credit/debit card cash advance
("CCCA") product. Our CCCA products allow casino patrons to obtain cash from
their credit card, or checking account in the case of debit transactions,
through the use of our software and equipment. Our CCCA product accounted for
99,449 transactions and $2,398,500 in revenues (13% of total revenues) for the
year ended December 31, 2005 and 43,284 transactions and $1,093,469 in revenues
(16% of total revenues) for the six months ended June 30, 2006.
In order to initiate a transaction, gaming patrons visit one of our
ATMs or kiosks located on the casino floor. Each kiosk houses a point-of-sale
terminal ("POS") equipped with our software. The ATM or kiosk terminal will
prompt the customer to swipe his/her credit or debit card and enter the dollar
amount requested. The terminal will then dial our centralized processing center
that electronically contacts the appropriate bank for an authorization or
disapproval. If authorized, the terminal will direct the customer to a casino
cage. Once at the cage, the customer will present his/her credit/debit card and
driver's license. A cage cashier will swipe the credit/debit card in one of our
terminals, which communicates with our central servers. After finding the
kiosk-approved transaction, a printer attached to the cage terminal will
generate a company check. The cashier will give the customer cash in the amount
requested after he/she endorses the system-generated check. The check is then
deposited by the casino into its account for payment from one of our bank
accounts and we debit the customer's credit/debit card. This transaction can be
accomplished without the gaming customer using a personal identification number.
For credit/debit card advances, customers pay a service charge typically between
6% and 9% of the amount advanced.
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The CCCA product is distinguished from standard ATM transactions,
described below, in that either a credit or debit card can be used to initiate
the transaction, and in that no PIN number is required and the maximum
withdrawal limits typically imposed on ATM transactions are not applicable as
the CCCA transaction is initiated at our booth and is processed as a typical POS
transaction instead of as an ATM transaction.
We believe that we have several competitive advantages over competing
providers of CCCA services. First, our casino clients are able to access player
tracking and other valuable information from our website on a daily basis. This
information is collected when a customer uses our CCCA product. Competing
systems offer limited reporting, which typically is only available via hard copy
weeks after the month has ended. Our reporting is Internet-based and allows
customers to custom design a system to meet their reporting requirements. In
addition, customers have access to their information twenty-four hours a day,
seven days a week. Unique features of our PC-based systems are color,
touch-screen monitors, integration of all products in one interface, signature
capture technology and transaction prompting.
ATMs
Automated Teller Machines or "ATMs" are a growth market spurred on by
the development of less expensive "dial-up" automatic teller machines and the
opportunity to charge users transaction surcharges of up to $5.00 per
disbursement. We have access to all major bank networks and equipment suppliers.
Due to the highly fragmented nature of the ATM business, this service is highly
competitive, which has eroded margins and revenue growth potential. We are
currently providing gateway services to a wide range of national, regional and
international debit, credit and EBT networks. Additional links are being
established, including direct connections to national merchants as well as third
party, authorization and EBT providers. In addition to providing ATMs in casinos
in conjunction with our other services, we have contracts to provide
freestanding ATMs to 9 customers and we currently operate 28 ATMs at those
locations (of which 16 ATMs are not in casinos). Our casino-based ATMs do not
effectively compete with ATMs offered by banks and other financial institutions
as we are the only ATM providers in our casinos and casino patrons typically
will not leave the casino premises for cash if ATM facilities are on the
premises. ATM activities accounted for 4,019,686 transactions and $10,371,757 in
revenues (53.5% of total revenues) for the year ended December 31, 2005 and
1,351,072 transactions and $3,470,605 in revenues (50.9% of total revenues) for
the six months ended June 30, 2006.
Transactions at our ATM machines are processed by GenPass Technologies,
a full-service ATM processing company that provides services to over 24,000 ATMs
nationwide. All ATM transactions are processed using Genpass' network and
Genpass provides all reporting, recordkeeping and related services. In addition,
Genpass provides all cash management and vault cash needed for our non-casino
ATMs. Genpass receives a per-transaction fee and charges us a fee for vault cash
equal to Genpass' cost of funds, currently the prime rate less 5/8%, on vault
cash used at non-casino ATMs. Genpass is one of several national ATM processors,
and although we currently are dependent on Genpass for this service we believe
that alternate providers are available on substantially similar economic terms.
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Check Cashing
Check cashing services are provided at all of our casino operations.
When a casino patron requests check cashing at one of our service desks, we
initiate a check verification process using identification procedures and
software systems. Each transaction also provides additional data for our
customer database, which can be used in assessing the creditworthiness of the
particular customer. The system and software permit information to be gathered
and reported in an efficient and timely manner. We have designed and implemented
a credit rating system that utilizes this customer database to determine whether
a casino customer's check should be cashed. Check cashing involves the risk that
some cashed checks will be uncollectible because of insufficient funds, stop
payment orders, closed accounts or fraud. We assume 100% of the credit risk from
check cashing operations. This risk of collection is greater in new locations
where the amount of data in our database is smaller. Unlike all other companies
providing check services, we do not use a credit scoring system, as a credit
scoring system will decline many checks that we believe are acceptable risks.
Currently, we only guarantee checks that are cashed in one of our full service
money centers, where our employees are facilitating the transaction.
A second option for check cashing services is a check guarantee and
check verification process in which the casino uses POS terminals to scan the
customer's check and request remote authorization. We have formed an alliance
with a third party provider to offer this service option to our customers. We
intend to either acquire a company operating in this segment of the industry or
to build a proprietary system to offer this service to our customers. Under this
option, which is not yet in operation in any of the casinos we serve, we retain
100% of the credit risk.
A third option is for a casino to license our proprietary check-cashing
software and manage its own check cashing services. For a monthly licensing fee,
we will install and support our proprietary Windows-based check-cashing software
and train casino personnel regarding its proper use. This software can either
stand-alone or integrate with our credit card advance system. This is the same
software that we use in our full service money centers. This program streamlines
the process from check approval through collection of bad checks. Casinos will
have access to our national database that will provide check credit histories
for customers in casinos nationwide. Since most casinos wish to manage this
process internally, we believe that there is significant revenue opportunity for
this product. Under this option, which is not yet in operation in any of the
casinos we serve, the casino would assume 100% of the credit risk.
Check cashing activities accounted for 353,553 transactions and
$3,197,228 in revenues (11.7% of total revenues) for the year ended December 31,
2005 and 162,477 transactions and $1,479,389 in revenues (21.7% of total
revenues) for the six months ended June 30, 2006. We incurred aggregate net
losses from bad checks of $801,313 and $179,316, respectively, representing
0.84% and 0.42%, respectively, of the aggregate $94,553,802 and $42,813,583 in
check-cashing transactions processed for those periods.
CreditPlus Credit Services
Casinos in traditional gaming markets, like Las Vegas and Atlantic
City, rely on credit issuance for up to 40% of their revenues. These casinos
issue credit internally and rely on specialized credit reporting in their risk
management decisions. Prior to the launch of our CreditPlus product there was
only one company providing the specialized credit reporting that the gaming
industry relies on for its credit decisions.
Until recently, casinos in the $15 billion dollar a year Indian gaming
market had little or no ability to utilize credit issuance in their operations.
Under the state law compacts governing their operations, the majority of Indian
casinos are prohibited from offering credit to customers. Further, the capital
requirements necessary to develop the internal ability to offer credit on a
prudent basis prevented smaller properties from developing the capability. The
absence of a third party credit issuer capable of facilitating these
transactions compounded the problem. As non-Indian casinos extend credit
directly, there was no market need for a third-party credit provider, and
therefore no providers of this service. The other provider of specialized credit
reporting did not itself provide credit services.
Our CreditPlus platform allows players in Indian casinos to receive
credit for the first time and, based on an average transaction fee of 10%,
CreditPlus positions us to be at the forefront of what we estimate to be a $2
billion market. Currently we have a strong market position in providing credit
guarantee and credit management services to this highly profitable market.
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The CreditPlus product has three distinct elements: Credit Reporting,
Credit Management and Credit Guarantee.
Credit Reporting. We have developed a proprietary
database of credit reporting information, based on prior transaction
history with casino patrons.
Credit Management. Like our check cashing management software,
CreditPlus can be used to streamline the credit process from approval through
collection of bad debt. Casinos will have access to the CreditPlus system that
will provide check and credit histories for casino and retail patrons. Since
many casinos wish to manage this process internally, we believe there is
significant revenue opportunity with this product.
Credit Guarantee. Casino and retail customers can also access
cash through CreditPlus credit guarantee. The customer will fill out a
CreditPlus application. We then go through a check verification and credit
underwriting process similar to that used in check cashing to determine whether
to extend credit. Upon approval, the CreditPlus system will generate a marker
for an amount up to the credit line that we approved. Each marker is effectively
a check drawn on the customer's checking account that we agree to hold for up to
30 days. Most markers are repaid prior to the end of the holding period. Fees
are based on state regulations and the amount of time that we hold the marker.
In many cases, the customer will return to our location prior to our deposit of
the marker and request that a new holding period be established in exchange for
an additional fee. These transactions are approved and facilitated at our full
service money centers and shortly will be available through the casino cage via
an approval code transmitted through the CreditPlus system. We assume 100% of
the credit risk from the issuance of the marker.
CreditPlus accounted for 1,901 transactions and $114,583 in revenues
(0.62% of total revenues) for the year ended December 31, 2005 and 650
transactions and $39,097 in revenues (0.57% of total revenues) for the six
months ended June 30, 2006. We incurred aggregate net losses from nonpayment of
advances of $27,079 and $11,000, respectively, representing 2.6% and 3.3%,
respectively, of the aggregate $1,026,063 and $328,390 in transactions processed
in those periods. CreditPlus is in place at 2 casinos.
In addition to our four core services, we have developed our "Cash
Services Host Program." Under the program, we have specially trained and
equipped employees, known to the casino and identifiable as our Cash Services
Hosts, deployed on the casino floor. The Cash Services Hosts are available to
casino customers to provide cash access services at the gaming table or slot
machine, thus eliminating the need for the customer to leave the gaming table or
slot machine to obtain funds. This is viewed as an amenity by the customer and
increases the gaming activity thereby enhancing the casino's revenues. By making
our services more accessible to the customer, it increases our transaction
activity and revenues. The Cash Services Host Program was operating at 1 casino
and was introduced in 3 additional casinos in 2005. The Cash Services Host
Program accounted for approximately $512,000 in revenues (2.6% of total
revenues) for the year ended December 31, 2005 and $225,281 in revenues (3.2% of
total revenues) for the six months ended June 30, 2006.
Omni Network
In January 2006 we also introduced the Omni Network, a free, shared
credit data and responsible gaming network for the gaming industry. We built the
Omni Network with the idea that credit and responsible gaming data belongs to
the gaming operators and is necessary for the protection of consumers and the
integrity of gaming operations.
The Omni Network is comprised of real-time credit and responsible
gaming data garnered from a transaction database that spans the entire United
States and soon the Caribbean and South America. Free access to this
comprehensive database empowers casino operators to make their own informed
decisions about extending credit to casino patrons.
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Membership in the Omni Network is free to casino operators in the
United States, the Caribbean and South America. The database will initially be
populated by Money Centers of America from its casino cash access operations.
Additional subscribers will contribute their own data to further build out the
credit and transaction history of casino patrons.
Business Objectives
Our business strategy is to focus on continuing to aggressively market
our services in the casino industry, while seeking to develop additional
proprietary technology to manage and execute the funds transfer transactions
that are a part of our core business while providing us with a competitive
advantage in the markets that we serve. This will enable us to maximize market
penetration, realize significant profit margins and compete effectively with
larger competitors. Due to ownership changes, personnel changes and antiquated
systems, the niche markets in the funds transfer industry that we have
identified have seen a substantial turnover in management, expertise and
industry direction. We believe that these markets are ripe for a state of the
art funds transfer system that will position us as the leader in the industry.
We have identified the following applications that we believe create
immediate value and will provide us with a competitive advantage in our core
markets.
o Integrated PC based POS transaction management system.
o Web or VPN based credit reporting system specific to the transactions
executed in Money Centers' core markets. o ONSwitch(TM) and the Omni
Network.
o Ticket Redemption Machines (TRM).
o Multi-purpose kiosks.
With few exceptions, our competition is operating on systems that are
outdated with few value-added capabilities. Our development personnel can
develop customized applications that will result in us being more competitive in
the marketplace and experiencing higher profit margins from new accounts
The Casino Gaming Market
Casino gaming in the United States has expanded significantly in recent
years. Once found only in Nevada and New Jersey, casino gaming has been
legalized in numerous states, including land-based casinos on Indian lands and
elsewhere, on riverboats and dockside casinos, and at horse racing venues. The
growth in gaming has resulted from legalization of gaming in additional
jurisdictions and the opening of new casinos in existing markets, as well as
from an overall increase in gaming activity.
Though the geographic expansion of casino gaming has slowed, we
anticipate continued growth as states struggle to fill large revenue gaps in
their state budgets. We also anticipate continued growth in the Indian Gaming
market as tribes are more successful at negotiating more stable and long-term
compacts with their respective state governments. The expansion of casino gaming
has generated a corresponding demand for ancillary services, including cash
access services in casinos. Third parties provide cash access services to most
casinos pursuant to contracts with the casino operator. We believe that the
principal objective of casino operators in providing or arranging for such
services is to promote gaming activity by making funds available to casino
customers on a convenient basis. In some cases, however, the casino operator may
view such services as a potential profit center separate from the gaming
operations.
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Our business currently is concentrated in the casino industry and it
contemplates that its operations will continue to be focused on operations in
casinos and other gaming locations. Accordingly, a decline in the popularity of
gaming, a reduction in the rate of expansion of casino gaming, changes in laws
or regulations affecting casinos and related operations, or other adverse
changes in the gaming industry would have a material adverse effect on our
operations. We will continue our business plan to identify market segments
outside of gaming to diversify our revenue base while maintaining our operating
margins. Until this objective is achieved, there will always be a risk that our
current revenue is highly dependent on the success of the gaming industry.
Increased competition has prompted casino operators to seek innovative
ways to attract patrons and increase the frequency of return visits. We believe
that efficient and confidential access to cash for casino patrons contributes to
increased gaming volume. Credit/debit card cash advances, markers, check cashing
and ATMs are the three primary methods used by casinos to provide their patrons
with quick and efficient access to cash. Virtually all casinos in the United
States currently offer at least one of these services on their premises. While
some casino operators provide such services themselves, most casinos' cash
access services are provided by third parties pursuant to contracts with the
casino operators. We are unique in that we provide multiple options for the
delivery of these services. We offer systems that are run from the casino's
cage, systems that we operate with our employees out of leased space in the
casino, and we offer host programs where our employees facilitate transactions
remotely from the slot machine or gaming table.
Customer Profile
Every gaming facility provides ATM, credit card cash advance, debit,
and/or check cashing services to their customers. Services are typically
outsourced pursuant to an exclusive agreement with a supplier for an average of
two to five years. Each year approximately 400 accounts totaling over $500
million in revenue are up for bid.
Our 31 locations include six full service deployments at Indian casinos
and one full service deployment at a non-Indian casino. The remainder are
ATM-only locations (six casinos and 19 retail locations). In addition, we have
signed two additional full service casino contracts, two stand alone locations
with some but not all of our products and one additional ATM-only casino
contract, all with commencement scheduled in the fourth quarter of 2006. Our
customers represent a blend of the type and size of gaming operations in the
U.S., including traditional markets like Las Vegas, Indian reservations, and
smaller markets like Colorado and Missouri.
Our full service locations all reside within the Indian Gaming segment
of the industry. Two are in California, with one each in New Mexico, Washington
and Wisconsin. Our stand-alone ATM customers are located in Colorado, Nevada,
New York, and California. One of our full service customers represented
approximately 16.6% of our revenue for the year ended December 31, 2005.
There are no boundaries when identifying potential casino customers. In
the near future, we will focus our marketing efforts on Native American Markets,
Las Vegas, Atlantic City, the Caribbean and South America and riverboats.
We operate our cash access services pursuant to agreements with the
operators of the host casinos or approved resellers. Such agreements typically
have initial terms of one to five years, with renewal clauses. In most of the
agreements, either party may cancel the agreement with cause if the breach is
not cured within thirty days. We rely principally on our relationship with the
casino operators rather than on the terms of our contracts for the continued
operation of our cash access services. While there can be no assurance that the
agreements will be renewed after their initial terms, we believe that our
relationships with the casinos in which we operate are good.
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Government Regulation
Many states and Tribal entities require companies engaged in the
business of providing cash access services or transmitting funds to obtain
licenses from the appropriate regulating bodies. Certain states require
companies to post bonds or other collateral to secure their obligations to their
customers in those states. State and Tribal agencies have extensive discretion
to deny or revoke licenses. We have obtained the necessary licenses and bonds to
do business with the casinos where we currently operate, and will be subject to
similar licensing requirements as we expand our operations into other
jurisdictions.
As part of our application for licenses and permits, members of our
board of directors, our officers, key employees and stockholders holding five
percent or more of our stock must submit to a personal background check. This
process can be time consuming and intrusive. If an individual is unwilling to
provide this background information or is unsatisfactory to a licensing
authority, we must have a mechanism for making the necessary changes in
management or stock ownership before beginning the application process. While
there can be no assurance that we will be able to do so, we anticipate that we
will be able to obtain and maintain the licenses necessary for the conduct of
our business.
Many suppliers to Native American casinos are subject to the rules and
regulations of the local tribal gaming commission. These gaming commissions have
authority to regulate all aspects of casino operations, including vendor
selection. Some gaming commissions require vendors to obtain licenses and may
exercise extensive discretion to deny or revoke licenses. We have obtained the
necessary licenses or approvals from the appropriate tribal gaming commissions
where we operate. While there can be no assurance that we will be able to do so,
we anticipate that we will be able to obtain and maintain the licenses and
approvals necessary for the conduct of our business.
Our business may also be affected by state and federal regulations
governing the gaming industry in general. Changes in the approach to regulation
of casino gaming could affect the number of new gaming establishments in which
it may provide cash access services.
Competition
We have focused to a large extent on providing cash access services to
the gaming industry. In the cash access services market, we compete primarily
with Global Cash Access, Inc., Fidelity National Information Services, Inc.'s
("FIS") Game Financial Corporation subsidiary, Global Payments Inc.'s Cash & Win
service and Cash Systems, Inc. Competition is based largely on price (i.e., fees
paid to the casino from cash access service revenues), as well as on breadth of
services provided, quality of service to casino customers and value-added
features such as customer information provided to the casino. It is possible
that new competitors may engage in cash access services, some of which may have
greater financial resources. If we face significant competition, we may have a
material adverse effect on our business, financial condition and results of
operations. We cannot predict whether we will be able to compete successfully
against current and future competitors.
Our competitors are primarily specialized gaming cash access companies.
Global Cash Access and Cash Systems, Inc. are stand alone businesses like us.
Although Global Cash Access has the largest market share, much larger companies
such as Certegy, Global Payments, and US Bank have entered the market through
acquisitions and subsidiary operations. These companies have significant access
to capital and development resources that are superior to ours. However, we
believe that their large size also will make it more difficult for these
companies to adapt quickly to swift changes in market conditions and customized
customer demands.
Global Cash Access historically has been the dominant market presence,
with an estimated 66% market share. FIS was a relatively small player within the
gaming industry until its February 2006 acquisition of Certegy, Inc., which had
purchased Game Financial Corporation in March 2004. We estimate that FIS has a
15% market share.
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In addition to Global Cash Access and Certegy, we face competition from
Global Payments and Cash Systems. Global Payments is a mid-sized merchant
processor, with a gaming business called "Cash & Win" that we estimate has a 7%
market share. Global Payments has completed a number of international
acquisitions outside the gaming industry in the past two years that we believe
will garner most of management's focus. Cash Systems, with an estimated 8%
market share, is focused on gaming on Indian Reservations. We estimate our own
market share at 2%.
We do not view financial institutions that offer ATM services at or
near casinos as effective competitors because they do not have the scope of
products necessary for a full service cash access money center. Local and
national banks can provide ATM services, but they lack credit card, marker, and
check cashing products.
Employees
We currently have 45 full time employees, of which 34 employees are
engaged in operations, four in sales, two in information technology, and five in
finance, administration and management functions.
None of our employees are covered by a collective bargaining agreement,
and we believe that we have a good relationship with our employees.
Description of Property
Our corporate headquarters is located at 700 South Henderson Road,
Suite 325, King of Prussia, Pennsylvania 19406 and occupies approximately 1,800
square feet of office space. These offices are located in a building owned by
affiliates of our chief executive officer. Although historically this space was
provided at no cost, we have entered into a lease that will require us to begin
making market rate lease payments for the use of this office space and our
future rent for this office space will be approximately $2,800 per month. We
also have an equipment staging and technology office located in Golden Valley,
Minnesota. The current lease obligation for the Minnesota office is
approximately $738 per month. We believe that our current facilities are
adequate to conduct our business operations for the foreseeable future. If these
premises were no longer available to us, we believe that we could find other
suitable premises without any material adverse impact on our operations.
LEGAL PROCEEDINGS
On or about October 14, 2004, Lake Street Gaming, LLC ("Lake Street")
filed a Complaint against iGames Entertainment, Inc. and Money Centers of
America, Inc. ("MCA") (collectively referred to hereinafter as "iGames") in the
United States District Court for the Eastern District of Pennsylvania, alleging
that iGames breached an Asset Purchase Agreement ("APA") that the parties
executed on or about February 14, 2003. By virtue of the APA, Lake Street sold
to iGames all of Lake Street's right, title and interest in a casino game called
"Table Slots." Lake Street alleges that it is entitled to additional
compensation for the game that exceeds what was agreed to. We are vigorously
defending this action.
In addition, we are, from time to time during the normal course of our
business operations, subject to various litigation claims and legal disputes. We
do not believe that the ultimate disposition of any of these matters will have a
material adverse effect on our consolidated financial position, results of
operations or liquidity.
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based
these forward-looking statements on our current expectations and projections
about future events. These forward-looking statements are subject to known and
unknown risks, uncertainties and assumptions about us that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "would," "expect," "plan," anticipate," believe,"
estimate," continue," or the negative of such terms or other similar
expressions. Factors that might cause or contribute to such a discrepancy
include, but are not limited to, those included in this prospectus under the
heading "Risk Factors." The following discussion should be read in conjunction
with our Consolidated Financial Statements and related Notes thereto included
elsewhere in this prospectus.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion and analysis of the results of operations,
financial condition and liquidity should be read in conjunction with our
consolidated financial statements and notes thereto appearing elsewhere in this
Memorandum. These statements have been prepared in accordance with accounting
principles generally accepted in the United States. These principles require us
to make certain estimates, judgments and assumptions that affect the reported
amount of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and related liabilities. On a going forward basis, we evaluate
our estimates based on historical experience and various other assumptions that
are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
History
We are a single source provider of cash access services, the
ONSwitch(TM) transaction management system and the Omni Network to the gaming
industry. We combine advanced technology with personalized customer services to
deliver ATM, Credit Card Advance, POS Debit, Check Cashing Services, CreditPlus
outsourced marker services, and merchant card processing.
Our business model is to be an innovator and industry leader in cash
access and financial management services for the gaming industry. Within the
funds transfer and processing industries there exists niche markets that are
capable of generating substantial operating margins without the requirement to
process billions of dollars in transactions that is the norm for the industry.
We believe there is significant value to having a proprietary position in each
phase of the transaction process in the niche markets where management has a
proven track record. The gaming industry is an example of such a market and is
currently where we derive the majority of our revenues. We have identified other
markets with similar opportunities, however we have not executed any plans to
exploit these markets at this time.
Current Overview
Our core business of providing single source full service cash access
services in the gaming industry is the source of our revenue and profits in
2006. We have also launched several new services in the last 2 years, such as
our ONSwitch(TM) Transaction Management System, CreditPlus, Cash Services Host
Program, and the Omni Network(TM) that have helped to differentiate our product
offering in the marketplace.
Our core business generates revenues from transaction fees associated
with each unique service we provide, including ATMs, credit card advances, POS
Debit, check cashing, markers and various other financial instruments. We
receive our fees from either the casino operator or the consumer who is
requesting access to their funds. The pricing of each transaction type is
determined by evaluating risk and costs associated with the transaction in
question. Accordingly, our transaction fees have a profit component built into
them. Furthermore, reimbursement for electronic transactions are guaranteed by
the credit or debit networks and associations that process the transactions as
long as procedures are followed, thereby reducing the period of time that trade
accounts receivable are outstanding to several days.
19
Companies providing cash access services to the gaming industry face
some unique challenges and opportunities in the next ten years. Many companies
in the industry have merged, been acquired or have recapitalized in order to
capitalize on the trends identified in the gaming industry.
Historically, providers of cash access services to the gaming industry
had cash flow margins that were generally higher than those experienced in the
funds transfer and processing industries. Growing competition and the maturing
of the market has resulted in a decline in these margins as companies have begun
marketing their services based on price rather than innovation or value added
services. This trend is highlighted by the number of companies that promote
revenue growth and an increased account base but experience little increase in
net income. This trend is magnified by the fact that the largest participant in
the industry has close to 65% market share and has begun to forgo margin in
order to retain business. Companies that can adapt to the changing market and
can create innovative products and services stand at the forefront of a new wave
in revenue and profit growth.
Substantially all gaming facilities provide ATM services, credit card
cash advances, debit, and/or check cashing services to their customers. Services
are typically outsourced and provided on an exclusive basis for an average of
two to five years. Each year, approximately 400 accounts totaling $300 million
in revenue are put out to bid. Currently there are five major companies,
including us, that have proprietary systems to compete for this business.
Although this market has matured from a pricing perspective, the demand for the
services from the end user is still strong.
Like most maturing markets, the companies that succeed are those that
are capable of reinventing themselves and the markets they serve. We believe
that smaller gaming properties will always look to have cash access services
provided in the traditional manner. However, there are several major trends
occurring in the gaming industry that will have a major impact on our industry
and will determine which companies emerge as industry leaders:
1. Consolidation of major casino companies that will put pressure on other
major casino companies to follow suit and will put pressure on smaller
casino companies to focus on service and value added amenities in order
to compete.
The trend towards consolidation of the major gaming companies has
continued and will make it difficult to continue to offer our services in the
traditional manner. The economics are too compelling for the gaming operators
not to consider internalizing these operations in order to generate additional
revenue and profits to service the debt associated with the consolidation. Our
preparation has continued to position us to capitalize on this trend. We have
prepared for this change and have already begun to offer our systems and
services through the issuance of Technology and Use Agreements for our
ONSwitch(TM) Transaction Management System. Instead of outsourcing the cash
services operations, ONSwitch(TM) offers turn-key processing capabilities for
internal use by the casino. This means casinos will license our technology so
they can operate and maintain their own cash access services, including the
addition of their merchant card processing. Our size makes us uniquely capable
of adapting to this change. Though the license agreements do not have the same
revenue potential as a traditional cash services contract, the net income
derived from these agreements is higher and the user agreements are for a longer
period of time. For instance, the standard outsourced contract is from one to
three years in length, while we offer ONSwitch(TM) only under five to ten year
licenses. It is in the casino's interest to license ONSwitch(TM) for the longer
period of time as well. Also, we will not have the same capital expenditures or
vault cash requirements that we experience in performing traditional cash access
services. Furthermore, our larger competitors have spent years trying to conceal
the economic benefits of this type of offering because their large
infrastructure is designed to only support an outsourced solution.
20
2. Ticket In-Ticket Out technology growth exceeding expectations.
The first major casino company to remove coins from the casino floor
was Caesars Palace in Atlantic City, NJ. Since then, slot machine manufacturers
have developed a technology that prints and accepts bar-coded tickets at the
slot machine instead of accepting or dispensing coins. It was originally
anticipated that it would take 10-15 years for the industry to fully adopt this
technology. It appears it may only take half this amount of time. This presents
a problem to casino operators. They now have tens of thousands of bar-coded
tickets a day that need to be redeemed for cash. This has paved the way for
self-service ticket redemption technology so customers do not have to go to the
casino cage in order to redeem their tickets. The initial ticket redemption
machines placed in service have proven to be too big and too expensive. Most
casino operators have to wait until budget season to appropriate the necessary
funds in order to even consider the acquisition of the required equipment. We
believe this functionality will ultimately reside on the ATM machine thus
eliminating the requirement to purchase new equipment and eliminating the need
to remove a slot machine to make room for a stand-alone ticket redemption
device. We are developing technology that will allow ticket-redemption
functionality on our cash access devices. There is still the problem of security
with the bar-coded ticket, which is as good as cash. Many casino operators will
refuse to allow vendors to handle the tickets for security and fraud concerns.
This is an additional economic benefit of our plan to have the casino operator
internalize their cash access services because only the casino's personnel will
handle the tickets in the situations where they are licensing our services.
3. Execution of long-term and stable compacts for Indian Casinos in
numerous state jurisdictions has made traditional capital more readily
available paving the way for a new wave of expansion and the resulting
need for new sources of revenue and customer amenities.
Recent shortfalls in state budgets have brought the tribal and state
governments together to execute long-term compacts that meet the financial needs
of both parties. In recent years, California, Arizona, New Mexico and Wisconsin
are just a few examples of this development. The added financial stability for
Indian casinos has made traditional capital more readily available to tribes,
leading many tribes to undertake expansion of casino facilities and operations.
In order to support this expansion, Indian casino operators will seek
new sources of revenues and new amenities to attract and retain more quality
customers. One of the most critical customer amenities in casino operations is
the availability of credit. Traditional gaming markets, such as Las Vegas and
Atlantic City, rely on credit issuance for up to 40% of their revenues. These
markets issue credit internally and rely on specialized credit reporting in
their risk management decisions. Significant capital investment in technology is
required for these transactions to be executed efficiently. However, within the
$15 billion dollar Indian Gaming market there are virtually no credit services
currently available. Approximately 26 of 29 states that have approved Indian
Gaming do not allow the Tribes or their respective casinos to issue credit. The
lack of credit play is also due to the lack of a third party credit issuer that
is capable of facilitating the transactions. Our CreditPlus platform allows
Indian casinos to issue credit to players, providing Indian casinos with a guest
amenity that is already widely accepted in traditional jurisdictions. Our
ability to convert this market opportunity into revenue is largely dependent on
the success of our sales efforts in educating casinos in the Indian Gaming
market regarding the advantages of CreditPlus and its compliance with the
regulatory requirements.
Our Cash Services Host Program is uniquely aimed at capitalizing on the
need for new profitable guest amenities. Where most guest amenities require
additional expenses, this service helps the casino operator generate more
revenues. This service allows customers to facilitate cash access transactions
from the slot machine or gaming table. Our hosts are available to bring the
transaction to the guest, which is viewed as a valuable customer amenity, while
driving more money to the gaming floor for the casino operator.
The acquisition of Available Money continues to provide challenges for
management in terms of the longer than expected conversion of this portfolio to
our processing platform and the renegotiation or termination of nonprofitable
contracts. We have been successful in renegotiating several of the Available
Money contracts to increase the fees that we can charge under those contracts,
the benefits of which we began to recognize in September 2005. Certain other
contracts that were not profitable and that we were unable to renegotiate have
been terminated. Although this has resulted in decreased revenue, it has had a
positive effect on cash flow and net income.
21
We launched our ONSwitch(TM) Transaction Management System in January
2006 and we began to offer ONSwitch(TM) to our customers as a "turn-key"
solution that they can use to process and facilitate their own transactions
without using a vendor. ONSwitch(TM) allows a gaming operator to leverage
existing infrastructure to internalize the delivery and operation of cash access
services, retail merchant card processing, automated ticket redemption, and
player's club redemptions.
With ONSwitch(TM), we will generate revenues from licensing fees and
ongoing support fees rather than providing cash access services ourselves.
Although our recurring revenues from a particular casino will be substantially
reduced, we will no longer incur the costs associated with on-site personnel and
equipment and interest expense on the substantial working capital required for
vault cash to support our current services. This will enable us to support a
much larger customer base.
We believe that the economics of our business are too compelling for
gaming operators not to consider internalizing cash access operations in order
to generate additional revenue and profits, especially when these operations are
virtually identical to a gaming operator's core competencies. Substantially all
gaming facilities provide ATM services, credit card cash advances, debit, and/or
check cashing services to their customers.
In January 2006 we also made a conscious effort to increase our sales
team, both inside sales and independent sales and step up our marketing in
conjunction with the marketing of ONSwitch(TM) and the Omni Network(TM). The
positive effects of this effort are beginning to bear fruit. We have signed six
new contracts since April of 2006 and we have increased our sales pipeline by
400%. Our increased investment in sales and marketing in the first six months
was approximately $100,000. 84% of this increase was related to trade show
expenses to launch our new products. Although we think this was a wise
investment, with the loss of our contract at the Sycuan Casino (discussed
below), management has been forced to spend less in trade shows and marketing.
Management believes we can be just as effective with such an decrease in the
tradeshow budget as we have illustrated with the recently signed contracts. We
feel that the most important piece of our increased sales activity is our added
sales personnel.
Two of the six new contracts were in the Caribbean, a totally new
market for us that we feel we can take advantage of. Now that we have gained
entry into this emerging market, we feel that we can be the cash access solution
for over a number of the casinos in this market in the next 2 years.
In April 2006 we were notified that our contract with the Sycuan Casino
would not be renewed at its May 2006 expiration. We did not lose this contract
based on service or diversity of products, but rather due to very aggressive
pricing by a competitor. We feel that our competitor irresponsibly bid for the
business and will either lose money or provide poor customer service and less
money to the casino floor. This contract represented approximately 27.3% of our
gross revenues and 12.7% of our gross profit for the year ended December 31,
2005. Although we had hoped to retain this customer, we recognized that our
contract might not be renewed and made appropriate cost reduction plans. We have
been able to offset most if not all of the lost cash flow by curtailing
expenses, deferring certain software development, reduction in nonsales
personnel, repositioning employees, deferring certain planned investor relations
activities, and reducing trade show expenses. In addition, management is working
to get the 10 newly signed contracts installed and generating revenue as soon as
possible. We anticipate that the cost reductions and new contract revenue will
improve our cash flow significantly.
None of the personnel reductions have been in sales. We feel our sales
team has proven themselves with 10 new contracts signed since April 2006 and 2
contract extensions. In addition, our sales pipeline is as full as it has ever
been As a result of these efforts and the extremely positive reception of
ONSwitch(TM) and the Omni Network, we are confident that we will execute one or
more letters of intent for ONSwitch(TM) shortly. ONSwitchTM is currently being
tested by a large casino that is not a current customer. Our current cost of
capital remains high as we were initially delayed in our efforts to recapitalize
our balance sheet due to our focused efforts to deploy ONSwitch(TM) on schedule
and our new sales and marketing of ONSwitch(TM). Management has completed most
of cost reductions after the loss of Sycuan. Management is now simultaneously
focused on installing our newly signed contracts and the recapitalization of our
balance sheet; a major priority for the remainder of 2006. The success of this
recapitalization will reduce the interest we pay on our lines of credit, which
will lower our expenses and contribute to our profitability. We are also
attempting to move to a more long-term lender, so our debt will not all be short
term in nature. The ability to continue our growth will be largely dependent on
our ability to identify and secure capital at reasonable rates, although our new
customers have all agreed to finance their vault cash needed at their casinos.
22
Our current cost of capital remains high as we have delayed our efforts
to recapitalize our balance sheet due to our focused efforts to deploy
ONSwitch(TM) on schedule and our new sales and marketing of ONSwitch(TM). Now
that these have been accomplished, we consider recapitalization of our balance
sheet a major priority for the remainder of 2006. The success of this
recapitalization will reduce the interest rates we pay on our lines of credit,
which will lower our expenses and contribute to our profitability. The ability
to continue our growth will be largely dependent on our ability to identify and
secure capital at reasonable rates. As part of this effort, we are in the
process of renegotiating our vault cash funding facility.
We believe that it is necessary to increase our working capital
position so that we can capitalize on the profitable trends in the industry,
expansion into the Caribbean and South America while maintaining and servicing
our current customer base and integrating acquired operations such as Available
Money. Without sufficient working capital, we would be forced to utilize working
capital to support revenue growth at the expense of executing on our integration
and conversion plans. This would result in substantially higher operating costs
without the assurance of additional revenues to support such costs.
Critical Accounting Policies
In presenting our financial statements in conformity with accounting
principles generally accepted in the United States, we are required to make
estimates and assumptions that affect the amounts reported therein. Several of
the estimates and assumptions we are required to make relate to matters that are
inherently uncertain as they pertain to future events. However, events that are
outside of our control cannot be predicted and, as such, they cannot be
contemplated in evaluating such estimates and assumptions. If there is a
significant unfavorable change to current conditions, it will likely result in a
material adverse impact to our consolidated results of operations, financial
position and in liquidity. We believe that the estimates and assumptions we used
when preparing our financial statements were the most appropriate at that time.
Presented below are those accounting policies that we believe require subjective
and complex judgments that could potentially affect reported results.
Revenue Recognition. In general, we record revenue when persuasive
evidence of an arrangement exists, services have been rendered or product
delivery has occurred, the sales price to the customer is fixed or determinable,
and collectability is reasonably assured. The following policies reflect
specific criteria for the various revenue streams of the Company:
ATM's and Credit Cards: Fees earned from ATM and credit card advances
are recorded on the date of transaction.
Check Cashing: Revenue is recorded from the fees on check cashing
services on the date the check is cashed. If a customer's check is
returned by the bank on which it is drawn, the full amount of the check
is charged as bad debt loss. The check is subsequently resubmitted to
the bank for payment. If the bank honors I, the amount of the check is
recognized as negative bad debt expense.
Check Cashing Bad Debt. The principal source of bad debts that we
experience are due to checks presented by casino patrons that are ultimately
returned by the drawer's bank for insufficient funds. We account for these check
cashing bad debts on a cash basis. Fees charged for check cashing are recorded
as income on the date the check is cashed. If a check is returned by the bank on
which it is drawn, we charge the full amount of the check as a bad debt loss. If
the bank subsequently honors the check, we recognize the amount of the check as
a negative bad debt. Based on the quick turnaround of the check being returned
by the bank on which it is drawn and our resubmission to the bank for payment,
we feel this method approximates the allowance method, which is a Generally
Accepted Accounting Principle.
23
Goodwill and Long-Lived Intangible Assets. The carrying value of
goodwill as well as other long-lived intangible assets such as contracts with
casinos is reviewed if the facts and circumstances suggest that they may be
impaired. With respect to contract rights in particular, which have defined
terms, this will result in an annual adjustment based on the remaining term of
the contract. If this review indicates that the assets will not be recoverable,
as determined based on our discounted estimated cash flows over the remaining
amortization period, then the carrying values of the assets are reduced to their
estimated fair values. Effective January 1, 2002, we adopted Statement of
Financial Accounting Standards No. 142, "Goodwill And Other Intangible Assets"
which eliminates amortization of goodwill and certain other intangible assets
and requires annual testing for impairment. The calculation of fair value
includes a number of estimates and assumptions, including projections of future
income and cash flows, the identification of appropriate market multiples and
the choice of an appropriate discount rate. In our experience, forecasts of cash
flows based on historical results are relatively dependable. We use the
remaining contract term for estimating contract periods, which may vary from
actual experience due to early termination that cannot be forecast. We use our
current cost of funds, which is a variable rate, as the discount rate. Use of a
higher discount rate would have the effect of reducing the calculated fair
value, while use of a lower rate would increase the calculated fair value. In
connection with the acquisition of Available Money (our only acquired reporting
unit), goodwill was allocated based on the excess of the final purchase price
over the value of the acquired contract rights, determined as described above.
Stock Based Compensation. We previously accounted for stock-based
compensation issued to our employees using the intrinsic value method.
Accordingly, compensation cost for stock options issued was measured as the
excess, if any, of the fair value of our common stock at the date of grant over
the exercise price of the options.
Results of Operations
Six Months Ended June 30, 2006 (Unaudited) vs. Six Months Ended June 30, 2005
(Unaudited)
Six Months Ended Six Months Ended
June 30, 2006 ($) June 30, 2005 ($) Change ($)
Net Income (Loss) (1,065,010) (695,079) (369,930)
Revenues 6,899,453 10,810,853 (3,911,400)
Cost of services 5,540,018 8,801,522 (3,261,504)
Commissions & Rents Paid 3,311,938 5,595,340 (2,283,402)
Wages & Benefits 1,176,903 1,033,608 143,295
Processing Fee & Service Charges 688,868 929,143 (240,275)
Bad Debts 61,939 491,387 (429,448)
ATM Lease Fees & Maintenance 105,215 340,134 (234,919)
Cash Replenishment Services 43,188 266,512 (223,324)
Other 151,967 145,398 6,569
Gross Profit 1,359,435 2,009,331 (649,896)
Selling, General and Administrative Expenses 1,108,632 1,319,546 (210,914)
Contributions 13,500 3,700 9,800
Management Compensation 347,500 170,769 176,731
Marketing 38,103 17,405 20,698
Professional Fees 163,538 607,036 (443,498)
Seminars 10,597 - 10,597
Trade Show & Sponsorships 114,072 29,440 84,632
Travel 130,364 143,169 (12,805)
Other 290,958 348,027 (57,069)
Noncash Compensation 32,650 76,400 (43,750)
Depreciation and amortization 160,338 338,725 (178,387)
Interest expense, net (1,013,600) (966,927) 46,673
Other income (expenses) (109,224) (2,812) (106,412)
24
Our net loss increased by approximately $370,000 during the six months
ended June 30, 2006 primarily due to a decrease in revenue from the loss of the
Sycuan contract in May of this year and the Valley View contract in 2005. This
loss in revenue resulted in a decrease in gross profit of approximately
$650,000. However we still have a better gross profit percentage for the six
months ended June 30, 2006 as compared to same period last year primarily due to
a significant reduction in bad debt expense due to better adherence to our check
cashing and collection polices and the conscious canceling of unprofitable
contracts. We offset this loss in gross profit with a reduction in legal and
professional fees of approximately $440,000.
Our revenues as a whole decreased by approximately 36% during the six
months ended June 30, 2006 as compared to the six months ended June 30, 2005.
The Money Centers portfolio (consisting primarily of full-service casino
contracts) decreased 15% or approximately $1 million, We lost approximately
$660,000 in revenues from the loss of the Sycuan contract which de-installed in
May 9, 2006 and approximately $845,000 from the loss of the Valley View contract
in 2005, while the remaining Money Centers casinos had increased same store
sales of 15%, from same period last year. While the Available Money portfolio
(consisting of ATM contracts) decreased 72% or $2.9 million. This reflected a
conscious effort to terminate unprofitable contracts from the Available Money
portfolio as demonstrated by the fact that gross profit increased. Our cost of
services decreased as a percentage of revenues from 81.4% to 80%, primarily due
to a significant reduction in bad debt expense due to better adherence to our
check cashing and collection policies.
Our selling, general and administrative expenses decreased by
approximately $210,000 during the six months ended June 30, 2006 primarily due
to decreased legal and accounting expenses reflecting the settlement of
litigation in 2005 and less use of outside accountants, offset by increases in
management compensation, due to having a CFO for the entire second quarter in
2006 and payment to our CEO of the full guaranteed bonus under his employment
agreement and by increases in our trade show and marketing of new products, and
sponsorship of various tribal activities. Our depreciation and amortization
expenses decreased during the six months ended June 30, 2006 primarily due to
the elimination of amortization that otherwise would have been realized on
contracts that terminated in 2005.
Our interest expense increased by approximately $47,000 during the six
months ended June 30, 2006. Lower borrowing levels resulting from the
termination of unprofitable contracts were offset by approximately $140,000 of
non-cash interest expense related to certain bridge loans we took out in the
latter part of 2005 and the effect of higher interest rates. Our interest rate
is variable and has increased approximately 200 basis points in the last year.
Other income (expenses) decreased by approximately $106,000 primarily
because of approximately $130,000 in expenses related to the closing down of our
operations at the Sycuan Casino offset by approximately $19,000 received that
related to the 2005 settlement of the Available Money lawsuit.
25
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements during the six months
ended June 30, 2006 that have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to our investors.
Changes in Financial Position, Liquidity and Capital Resources
Six Months Six Months
Ended June 30, Ended June 30,
2006 ($) 2005($)
(Unaudited) (Unaudited) Change ($)
------------------- ---------------- ----------------
Net Cash Provided by (Used in) Operating (692,706) 607,316 (1,300,002)
Activities
Net Cash Used in Investing Activities (127,079) (705,762) (578,683)
Net Cash Provided by (Used in) Financing (2,075,578) 835,890 (2,911,468)
Activities
Net cash used in operations decreased by approximately $1,300,000,
primarily due to a increase in our net loss combined with payment of our
accounts and commissions payable. Net cash used in investing activities
decreased due to the fact we have financed our new ATM purchases in the first
six months of 2006.
Net cash used in investing activities decreased by approximately
$578,000 due to the fact that we did not have any new property installations in
the first quarter of 2006 and we decreased our expenditures in software
development.
Net cash used by financing activities increased during the six months
ended June 30, 2006 primarily due to reductions in the outstanding balance of
our vault cash facility because we require less vault cash after the expiration
of the Sycuan contract, combined with the fact we did not raise any capital in
2006.
Year Ended December 31, 2005 vs. Year Ended December 31, 2004
Year Ended Year Ended
December 31, December 31,
2005 ($) 2004 ($) Change ($)
Net Income (Loss) $(1,666,167) $(11,841,753) $10,175,586
Revenues 19,409,238 16,252,270 3,156,969
Cost of services 15,801,366 13,912,356 1,889,010
Commissions &Rents Paid 9,790,374 8,719,908 1,070,466
Wages & Benefits 2,284,970 1,993,056 291,914
Processing Fee & Service Charges 1,999,123 1,517,877 481,246
Bad Debts 723,850 572,433 151,417
ATM Lease Fees & Maintenance 489,379 569,486 (80,107)
Cash Replenishment Services 369,909 418,249 (48,340)
Other 143,761 121,347 22,414
Gross Profit 3,607,782 2,339,914 1,267,868
Selling, General and Administrative Expenses 2,238,904 2,642,341 (403,437)
Management Compensation 473,918 622,074 (148,156)
Professional Fees 800,826 1,113,325 (312,499)
Travel 275,583 227,864 47,719
Other 688,576 679,078 9,498
Noncash Compensation 91,225 7,674,491 (7,583,266)
Depreciation and amortization 941,079 1,615,803 (674,724)
Interest expense, net (1,997,438) (1,700,439) 296,999
Other income (expenses) $(5,393) $(548,593) $(543,200)
26
Our net loss decreased by approximately $10 million during the year
ended December 31, 2005 primarily due to a decrease in noncash compensation of
approximately $7.6 million reflecting one-time charges for noncash compensation
during 2004 (related to the issuance of options to purchase 2,945,000 shares of
our common stock to employees under our stock option plan) that were not
repeated in 2005, an increase in gross profit of approximately $1.3 million due
to our success in lowering various costs of services, and a decrease in
depreciation and amortization of approximately $675,000 due to reduced
amortization of casino contracts reflecting the termination of certain contracts
in 2004. Other expenses decreased due to the fact that there were no impairments
of intangible assets or write-offs of obsolete inventory in 2005 compared to
$418,000 in 2004.
Our revenues increased by approximately 19.4% during the year ended
December 31, 2005 as compared to the year ended December 31, 2004. Approximately
$420,000 of this increase represented increased volume under contracts in place
at the beginning of 2004 and $1,510,000 represented a full year's revenue from
contracts obtained in 2004. $3,225,000 represented revenues from one new
contract in 2005. Approximately $2,000,000 of the increase in revenue was due to
the recognition in our financial statements of gross revenues rather than net
revenues from the Available Money portfolio in 2005 following a change of ATM
processors. Under the previous agreement, our revenues represented the net
amount payable to us from the processor. Under our current agreement, we
recognize all revenues and expenses from the operation of the ATMs, resulting in
an increase in both revenues and cost of services. These increases were offset
by the loss of approximately $3,400,000 in revenues due to cancellations and
non-renewals from our Available Money portfolio and approximately $515,000 in
revenues from the Valley View Casino. Our cost of services increased during the
year ended December 31, 2005 primarily due to an increase in commissions and
rents paid to casinos in the Money Centers portfolio of approximately $2 million
primarily attributable to a new contracts and having a full year of contracts
that came on in the fourth quarter 2004. This was offset by a decrease of
approximately $1 million in commissions and rents paid to the Available Money
portfolio primarily attributable to the intentional loss of non profitable
contracts. In addition, approximately $2,075,000 of various other expenses
increased due to the recognition in our financial statements of all costs of
services from the Available Money portfolio in 2005 following a change in ATM
processors, offset by approximately $1.1 million reduction in cost of services
from the intentional loss of non profitable contracts.
Our selling, general and administrative expenses decreased slightly
during the year ended December 31, 2005 primarily due to decreased legal
expenses related to pending litigation and reduced management compensation due
to the amendment of the CEO's employment agreement for 2005. Otherwise the
remaining selling, general and administrative expenses have remained relatively
the same as compared to the year ended December 31, 2004. The Company has
settled our two major lawsuits and has experienced a significant decrease in
legal expenses beginning in the middle of the third quarter of 2005. Our
depreciation and amortization expenses decreased during the year ended December
31, 2005 primarily due to the elimination of amortization that otherwise would
have been realized on contracts that terminated in 2004.
Our interest expense increased $296,999 during the year ended December
31, 2005 mostly due to an increase in the use of capital for our new full
service casinos and increased variable interest rates on our credit facilities
that have increased our cost of capital.
27
Our other expenses decreased during the year ended December 31, 2005
due to the fact that we had one time write offs in 2004 in the amount of
$548,000 for loss on impairment of intangibles and obsolete inventory.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements during the fiscal year
ended December 31, 2005 that have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to our investors.
Changes in Financial Position, Liquidity and Capital Resources
Year Ended Year Ended
December 31, December 31,
2005 ($) 2004 ($) Change ($)
Net Cash Provided by (Used in) Operating $ 111,270 $ (902,217) $ 1,013,487
Activities
Net Cash Used in Investing Activities (683,039) (4,239,374) (3,556,335)
Net Cash Provided by Financing Activities $ 2,215,944 $ 7,690,312 $ (5,474,368)
Net cash provided by operations increased by $1,013,487, primarily due
to collections in our accounts receivable and a decrease in net loss.
Cash used in investing activities decreased during the year ended
December 31, 2005 due to the fact that we did not make any acquisitions in 2005
and acquired Available Money in 2004. We have used cash in 2005 to purchase some
of the Available Money ATM's and to complete the ONSwitch(TM) Transaction
Management System.
Net cash provided by financing activities decreased during the year
ended December 31, 2005 primarily because we had no need for acquisition
financing.
A significant portion of our existing indebtedness is associated with
our vault cash line of credit of $7,000,000 with Mercantile Capital, L.P., which
we use to provide vault cash for our casino operations. Vault cash is not
working capital but rather the money necessary to fund the float, or money in
transit, that exists when customers utilize our services but we have yet to be
reimbursed from the Debit, Credit Card Cash Advance, or ATM networks for
executing the transactions. Although these funds are generally reimbursed within
24-48 hours, a significant amount of cash is required to fund our operations due
to the magnitude of our transaction volume. Our vault cash loan accrues interest
at the base commercial lending rate of Wilmington Trust Company of Pennsylvania
plus 10.75% per annum on the outstanding principal balance, with a minimum rate
of 15% per annum, and had a maturity date of May 31, 2006. Although this loan
has not been formally renewed, we are in discussions with Mercantile regarding
the terms of a renewal and Mercantile has continued to finance our vault cash on
the current terms. Our obligation to repay this loan is secured by a first
priority lien on all of our assets. The outstanding balance on our vault cash
line of credit fluctuates significantly from day to day based on activity and
collections, especially over weekends. Vault cash for our ATM operations at
locations where we do not provide full cash access services (primarily Available
Money customers) is provided by our ATM processing provider under the terms of
the ATM processing agreement, at a cost equal to the ATM processor's cost of
funds, which currently is the Prime Rate.
We incurred $3,850,000 of debt associated with the acquisition of
Available Money. $2,000,000 of this indebtedness is a loan provided by Chex
Services, Inc. As a result of the settlement of our lawsuit with Equitex, Inc.
and Chex Services, Inc. related to our terminated acquisition of Chex Services,
Equitex and Chex Services agreed to cancel our outstanding $2,000,000 principal
liability as well as any liability for accrued but unpaid interest under that
promissory note and we agreed to pay Chex $500,000 within 60 days of July 21,
2005. We paid this amount in September 2005. In part in order to fund the
payment to Chex Services, Inc., in September and October 2005 we borrowed
$800,000 from individuals, including the uncle and brother of our Chief
Executive Officer, pursuant to convertible notes that bear interest at 10% per
annum and mature in September and October of 2006. Many of the Notes are
convertible into shares of our common stock at an exercise price equal to 85% of
the trading price at the time of exercise, with a floor of $.45 per share. We
are confident we will repay these bridge loans before their maturity.
28
The final $1,850,000 of this indebtedness is part of a $2,050,000
bridge loan provided by Mercantile Capital, L.P. This bridge loan was accruing
interest until June 30, 2005 when it was converted into a 5 year amortizing loan
subject to annual renewal at the lender's discretion. Our obligation to repay
this loan is secured by a first priority lien on all of our assets. We intend to
refinance this obligation in 2006 and are making every effort to do so. We paid
a facility fee of $41,000 in connection with this loan.
On September 10, 2004, we borrowed $210,000 from the father of our
chief executive officer to pay an advance on commissions to a new casino
customer. This loan bears interest at 10% per annum, which is payable monthly.
The principal amount of this loan is repayable in monthly payments payable on
the 1st day of each month commencing with the second month following the month
in which we commence operations at Angel of the Winds Casino, and continuing on
the 1st day of each month thereafter, provided that, upon any merger of our
company, sale of substantially all of our assets or change in majority ownership
of our voting capital stock, the lender has the right to accelerate this loan
and demand repayment of all outstanding principal and all unpaid accrued
interest thereon. We currently are making $5,000 principal payments per month.
The current balance outstanding is $45,000. In addition, we issued the lender
warrants to purchase 50,000 shares of our common stock at an exercise price of
$.33 per share.
Although we anticipate our operating profits will be sufficient to meet
our current obligations under our credit facilities, if we become unable to
satisfy these obligations, then our business may be adversely affected as
Mercantile Capital will have the right to sell our assets to satisfy any
outstanding indebtedness under our line of credit loan or our term loan that we
are unable to repay.
We also have a substantial amount of accounts payable and accrued
expenses. To the extent that we are unable to satisfy these obligations as they
come due, we risk the loss of services from our vendors and possible lawsuits
seeking collection of amounts due. In addition, we have an existing obligation
to redeem 37,500 shares of our common stock from an existing stockholder at an
aggregate price of $41,250. This obligation arose in connection with iGames'
purchase of certain gaming software products for 75,000 shares of our common
stock. In order to complete this transaction under these terms, our former
management granted this stockholder the option to have 37,500 shares of his
stock redeemed. This stockholder has elected to exercise this redemption option.
We are also in the process of replacing all of the former Available
Money ATMs with new ATMs that will be processed on more favorable economic
terms. We have entered into a capital lease agreement to acquire 71 ATMs and
related equipment necessary to complete this conversion. We have reduced the
number of ATM's we will acquire to 33. We have converted approximately 25 of
these ATM's to our processing platform to date. The remaining capital lease
agreement will require us to incur an upfront charge of approximately $50,000
and monthly rental expense of approximately $1,500 over the remaining 59 months
of the lease term. We are actively seeking various sources of growth capital and
strategic partnerships that will assist us in achieving our business objectives.
We are also exploring various potential financing options and other sources of
working capital. There is no assurance that we will succeed in finding
additional sources of capital on favorable terms or at all. To the extent that
we cannot find additional sources of capital, we may be delayed in fully
implementing our business plan.
29
We are actively seeking various sources of growth capital and strategic
partnerships that will assist us in achieving our business objectives. We are
also exploring various potential financing options and other sources of working
capital. There is no assurance that we will succeed in finding additional
sources of capital on favorable terms or at all. To the extent that we cannot
find additional sources of capital, we may be delayed in fully implementing our
business plan.
We do not pay and do not intend to pay dividends on our common stock.
We believe it to be in the best interest of our stockholders to invest all
available cash in the expansion of our business.
Due to our accumulated deficit of $16,477,197 as of December 31, 2005
and our net losses and cash provided by operations of $1,666,167 and $111,270,
respectively, for the year ended December 31, 2005, our independent auditors
have raised substantial doubt about our ability to continue as a going concern.
While we believe that our present plan of operations will be profitable and will
generate positive cash flow, there is no assurance that we will generate net
income or positive cash flow for 2006 or at any time in the future.
30
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth the names, ages and positions of our
directors and executive officers and executive officers.
Name Age Current Position(s) with Company
Christopher M. Wolfington 41 Chairman of the Board of Directors,
Chief Executive Officer and President
Jason P. Walsh 28 Vice President-Finance, Chief Financial
Officer, Secretary and Treasurer
Jeremy Stein 38 Director
Barry R. Bekkedam 39 Director
Wayne A. DiMarco 40 Director
Jonathan P. Robinson 41 Director
All directors serve until their successors are duly elected and
qualified. Vacancies in the Board of Directors are filled by majority vote of
the remaining directors. The executive officers are elected by, and serve at the
discretion of, the Board of Directors.
A brief description of the business experience during the past five
years of our directors, our executive officers and our key employees is as
follows:
Christopher M. Wolfington - Chairman, Chief Executive Officer and
President. Mr. Wolfington has been in the financial services industry for
approximately 16 years. He has been the Chairman of Money Centers since its
inception. From 1991 to 1994 he was a partner in The Stanley Laman Group, a firm
providing investment, insurance, mergers, acquisition, and planning services to
companies nationwide. From 1995 to 1998 he was President of Casino Money
Centers, a subsidiary of CRW Financial, Inc. Mr. Wolfington received a Bachelor
of Arts degree in Communications and Business from the University of Scranton.
Jason P. Walsh - Vice President-Finance, Chief Financial Officer, Secretary
and Treasurer. Mr. Walsh became our Chief Financial Officer, Secretary and
Treasurer in June 2005. From 1997 until June 2005 he was a certified public
accountant with Robert J. Kratz & Company. Mr. Walsh received a Bachelors of
Science degree in Accounting from Drexel University, and is a Pennsylvania
Certified Public Accountant.
Jeremy Stein - Mr. Stein served as President and Chief Executive Officer
and a director of iGames from June 2002 until January 2004, and as Secretary and
a director of iGames since January 2004. Mr. Stein has also served as the Chief
Executive Officer of IntuiCode, LLC, a software development company, since 2000
and as a senior software engineer with Mikohn Gaming Corporation, where he
worked until 2001. Prior thereto, he was a senior software engineer and director
of Progressive Games, Inc. from 1995 to 1998 and the Chief Technical Officer of
Emerald System, Inc. from 1993 to 1995. Mr. Stein studied computer science at
Virginia Tech. See "Related Party Transactions."
Barry Bekkedam - Director. Mr. Bekkedam served as a member of iGames' board
of directors from January 2004 through October 2004 and as a member of our board
of directors since October 2004. Mr. Bekkedam is the chairman of the board of
directors and chief executive officer of Ballamor Capital Management, Inc., an
investment advisory firm located in Wayne, Pennsylvania that he founded in 1997.
Ballamor Capital Management, Inc. is an objective investment advisory firm that
provides consultative services to families and individuals of wealth. Mr.
Bekkedam received a Bachelors of Science in Accounting from the College of
Commerce and Finance at Villanova University.
Wayne DiMarco - Director. Mr. DiMarco served as a member of iGames' board
of directors from January 2004 through October 2004 and as a member of our board
of directors since October 2004. Mr. DiMarco is the president of P. DiMarco &
Co., Inc., a privately owned highway and heavy construction site development
company based in King of Prussia, Pennsylvania. Mr. DiMarco received a Bachelors
of Science in Civil Engineering from Lehigh University.
Jonathan P. Robinson - Director. Mr. Robinson has served as a member of our
board of directors since January 2005. Mr. Robinson has been Chief Financial
Officer of O'Neill Properties Group, a Mid-Atlantic real estate development
company, since 2002. He was Chief Financial Officer of Airclick, Inc. from 2000
to 2002. Prior thereto, Mr. Robinson was Chief Financial Officer of Safeguard
International, a $300 million cross-Atlantic private equity fund, focused on
later-stage leveraged buyouts and private equity investments, from 1999 to 2000.
From 1993 to 1998, Mr. Robinson was Chief Financial Officer of CRW Financial,
Inc. Mr. Robinson received a B.S. degree from Bloomsburg University in 1986.
There are no family relationships among any of our directors or
executive officers.
31
EXECUTIVE COMPENSATION
The following table sets forth compensation paid or accrued during the
years ended December 31, 2005 and 2004 to our Chief Executive Officer and the
most highly compensated executive officers whose total annual salary and bonus
exceeded $100,000 during such fiscal year (collectively, the "Named
Executives").
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
--------------------------------------- ------------------
Fiscal Year
Ended Other Annual Number of Shares All Other
Name and Principal Position 12/31 Salary Bonus Compensation or Options Compensation
----------------------------- ---------- -------------- ------------- --------------- -------------------- ----------------
Christopher M. Wolfington, 2005 $350,000(2) $83,371(6) $0 0 $54,180(7)
Chairman, Chief Executive
Officer, President (1)
2004 $350,000(2) $431,995(3) $0 2,635,000(4) $47,628(5)
T. Scott Kruse, Director of 2005 $118,000 $0 $0 25,000 $0
Business Management
(1) Mr. Wolfington was appointed our President and Chief Executive Officer on
January 2, 2004, effective upon the consummation of our acquisition of
Money Centers of America, Inc.
(2) Pursuant to his employment agreement, Mr. Wolfington began receiving an
annual salary of $350,000 on January 2, 2004.
(3) This consists of Mr. Wolfington's signing bonus of $200,000 and annual
bonus of $175,000 for the year ended December 31, 2004. These bonuses were
not paid as of December 31, 2004. They were added to the officer payable on
January 1, 2005. Also includes $56,995 in sales commissions.
32
(4) Pursuant to his employment agreement Mr. Wolfington received options to
purchase 2,635,000 shares of our Common Stock.
(5) Includes life insurance premiums and automobile expenses.
(6) Mr. Wolfington's employment agreement was amended to state that the
guaranteed bonus for 2005 was only 12.5% of salary or $43,750. This amount
also includes sales commissions in the amount of $39,621.
(7) Includes life insurance premiums and automobile expenses.
Option Grants For the Year Ended December 31, 2005
Pursuant to his employment agreement, Jason Walsh accrued grants of
options to purchase an aggregate of 200,000 shares of our common stock. Each of
these options has an exercise price of $0.42 per share. Options vested
immediately with respect to 50,000 shares, after one year with respect to 50,000
shares and after two years with respect to the remainder.
Option Values at December 31, 2005
The following table sets forth information concerning year-end option
values for 2005 for the executive officers named in our Summary Compensation
Table above. The value of unexercised in-the-money options is calculated based
on the closing bid price of our common stock on December 31, 2005 of $.37.
Fiscal Year End Option Values
Value of Unexercised
Number of Unexercised Options In-the-Money Options
at Fiscal Year End at Fiscal Year End
------------------------------------------------------------------------------- --------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
Christopher M. Wolfington 2,635,000(1) 0 $948,600(3) $0
T. Scott Kruse 125,000(1) 0 36,000(3) $0
-----------------------------------------------------------------------------------------------------------------------------------
(1) Consists of options to purchase 2,635,000 shares of our common stock at an
exercise price of $.01 per share.
(2) Consists of options to purchase 100,000 shares of our common stock at an
exercise price of $.01 per share and options to purchase 25,000 shares of
our common stock at an exercise price of $.33 per share.
(3) Based on a closing sales price of $.37 per share on December 31, 2005.
Long Term Incentive Plans
We currently do not have any long-term incentive plans.
Compensation of Directors
Our directors who are also employees do not receive any additional
consideration for serving on our board of directors. Our outside directors, who
are not employees, receive $2,500 for each meeting of the board of directors or
any committee thereof that they attend. In addition, our outside directors
receive an initial grant of 25,000 shares of restricted stock that vest in
accordance with a schedule determined by our chief executive officer and annual
grants of options to purchase 25,000 shares of our common stock at an exercise
price equal to the closing sales price of our common stock on the date of grant.
No grants or options were issued to the board members in 2004. The company has
issued these grants and options in 2005 for 2004.
33
Employment Agreements
In January 2004, we entered into a five-year employment agreement with
Christopher M. Wolfington, our Chairman, President and Chief Executive Officer.
In addition to an annual salary of $350,000 per year (subject to annual
increases at the discretion of the Board of Directors) (the "Base Salary"), Mr.
Wolfington's employment agreement provides for a $200,000 signing bonus, a
guaranteed bonus equal to 50% of his Base Salary in any calendar year (the
"Guaranteed Bonus") and a discretionary incentive bonus of up to 50% of his Base
Salary in any calendar year pursuant to a bonus program to be adopted by the
Board of Directors (the "Incentive Bonus"). Pursuant to his employment
agreement, Mr. Wolfington is entitled to fringe benefits including participation
in retirement plans, life insurance, hospitalization, major medical, paid
vacation, a leased automobile and expense reimbursement. In addition, Mr.
Wolfington received options to purchase 760,000 shares of our common stock at an
exercise price of $.01, which are immediately vested and options to purchase
1,875,000 shares our common stock at an exercise price of $.01, which have
vested due to the issuance of a commitment letter by Mercantile Capital, L.P. to
refinance our vault cash and working capital financing. In the event there is a
change of control after which Mr. Wolfington is asked to relocate his principal
business location more than 35 miles, his duties are significantly reduced from
the duties he had immediately prior to the change of control or there is a
material reduction in his Base Salary in effect immediately prior to the change
of control and, as a result of any of the foregoing, Mr. Wolfington resigns his
employment hereunder within one year after the date of the change of control,
then Mr. Wolfington shall be entitled to receive as severance payments, his
Guaranteed Bonus, his Base Salary and his insurance benefits for a period equal
to the greater of the initial term of the agreement or 24 months from the date
of the termination or cessation of Mr. Wolfington's employment. For purposes of
Mr. Wolfington's employment agreement, a change of control occurs if we sell all
or substantially all of our assets or if shares of our capital stock
representing more than 50% of the votes which all stockholders are entitled to
cast are acquired, by purchase, merger, reorganization or otherwise) by any
person or group of affiliated persons not an affiliate of iGames at the time of
such acquisition. Effective March 20, 2006, Mr. Wolfington's employment
agreement was amended to reduce his guaranteed bonus for 2005 from 50% of his
salary to 12.5% of his salary.
In June 2005, we entered into an employment agreement with Jason P.
Walsh, our Vice-President-Finance, Chief Financial Officer, Secretary and
Treasurer. The term of the agreement expires December 31, 2006, with automatic
annual renewals thereafter unless either party gives notice of non-renewal at
least thirty days prior to automatic renewal. Mr. Walsh's minimum annual salary
is $120,000. In addition, Mr. Walsh was granted options to purchase 200,000
shares of the Company's common stock with an exercise price of $.42 per share,
of which 50,000 vested immediately, 50,000 vest in one year and the remainder
vest in two years. Mr. Walsh will receive annual bonus compensation of up to
$50,000 per year based upon the Company's achievement of specified growth and
performance milestones. In the event Mr. Walsh's employment is terminated prior
to the then-current expiration date by the Company without good cause, as
defined in the employment agreement, or Mr. Walsh elects early termination with
good reason, as defined in the employment agreement, Mr. Walsh will receive 100%
of his annual salary in effect as of the date of such termination for a period
of (i) the greater of four months or through the end of the initial year of the
term of the Employment Agreement; or (ii) the greater of six months or through
the end of the initial year of the term of the Employment Agreement if such
termination occurs within twelve months following a change in control, as
defined in the employment agreement. In addition, Mr. Walsh would be entitled to
payment of accrued but unused vacation time through the termination date and a
fraction of any performance bonus otherwise payable to him, and all unvested
stock options held by Mr. Walsh would automatically vest. On October 20, 2005,
Mr. Walsh's employment agreement was amended to increase his annual salary to
$145,000 and decrease his maximum annual bonus compensation to $25,000.
Repricing of Options
We have not adjusted or amended the exercise price of any stock
options.
34
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Information as to ownership of Common Stock by Officers, Directors and owners of
5% or more of our Common Stock
The following table sets forth certain information with respect to
beneficial ownership of our common stock as of December 31, 2005 by:
o each person known to us to be the beneficial owner of more than 5% of
our common stock;
o each of our directors;
o each of our executive officers; and
o all of our executive officers and directors as a group.
Unless otherwise specified, we believe that all persons listed in the table
possess sole voting and investment power with respect to all shares of our
common stock beneficially owned by them. As of January 31, 2006, 25,206,978
shares of our common stock were issued and outstanding.
Amount and Nature of
Name of Beneficial Owner (1) Position Beneficial Ownership (1) Percentage of Class
-------------------------------- ---------------- -------------------------------- ------------------------
Christopher M. Wolfington President, Chief 19,697,703(2) 60.1%
Executive Officer,
700 South Henderson Road, Chairman of the
Ste. 325 Board
King of Prussia, PA 19406
Jason P. Walsh Chief Financial 82,500(3) *
700 South Henderson Road Officer, Secretary
Ste. 325 & Treasurer
King of Prussia, PA 19406
Jeremy Stein Director 372,500(4) 1.2%
301 Yamato Road, Suite 2199
Boca Raton, FL 33431
Wayne DiMarco Director 95,000(5) *
131 East Church Road
King of Prussia, PA 19406
Barry Bekkedam Director 98,000(6) *
1200 Liberty Ridge Drive
Suite 340
Wayne, PA 19087
Jonathan Robinson Director 75,000(7) *
700 S. Henderson Road
King of Prussia, PA 19406
All Executive Officers and --------------------------- ------------------------
Directors as a group (4 persons) 20,412,603 61.7%
* Less than 1%
35
(1) Beneficial ownership has been determined in accordance with Rule 13d-3
under the Securities Exchange Act of 1934. All shares are beneficially
owned and sole voting and investment power is held by the persons named,
except as otherwise noted.
(2) Includes currently exercisable options to purchase 2,635,000 shares of
Common Stock, and 3,108,772 shares of Common Stock owned by the
Christopher M. Wolfington Grantor Retained Annuity Trust. Does not
include 621,759 shares of Common Stock held by the Christopher M.
Wolfington Irrevocable Trust as Mr. Wolfington is not the beneficial
owner of these shares of Common Stock.
(3) Includes currently exercisable options to purchase 50,000 shares of
common stock and warrants to purchase 12,500 shares of common stock.
(4) Includes currently exercisable options to purchase 312,500 shares of
Common Stock.
(5) Includes currently exercisable options to purchase 70,000 shares of
Common Stock.
(6) Includes currently exercisable options to purchase 50,000 shares of
Common Stock.
(7) Includes currently exercisable options to purchase 50,000 shares of
Common Stock.
SELLING HOLDERS
The following table sets forth the names of the selling stockholders,
the number of shares of our common stock, to our knowledge, beneficially owned
by each selling stockholder as of January 31, 2006 and the number of shares of
our common stock which may be offered for sale pursuant to this prospectus by
the selling stockholders.
The number of shares set forth in this table represents an estimate of
the number of shares of our common stock to be offered for resale by the selling
stockholders. The selling stockholders either own:
o shares of our common stock and common stock purchase warrants that they
purchased from us in a private placement, or
o shares of our common stock that they received pursuant to our
redomestication merger.
The selling stockholders named below may offer these shares from time
to time. The selling stockholders are, however, under no obligation to sell all
or any portion of these shares of our common stock. In addition, the selling
stockholders are not obligated to sell such shares of our common stock
immediately under this prospectus. Since the selling stockholders may sell all
or part of the shares of common stock offered in this prospectus, we cannot
estimate the number of shares of our common stock that will be held by the
selling stockholders upon termination of this offering.
Except as otherwise noted below, none of the selling stockholders is an
officer or director of our company and none of the selling stockholders has had
any material relationship with our company, affiliates or predecessors within
the last three years.
36
Percentage Ownership(1)
Number of ----------------------------
Number of Shares of Shares of
Common Stock Before Common Stock Number of Shares Before After
Name Offering After Offering Being Sold Offering Offering
--------------------------------- -------------------- ----------------- ----------------- ----------- --------------
2003 GRAT of Christopher M. 3,108,772 0 3,108,772 10.3% 0%
Wolfington(2)
J. Eustace Wolfington 415,157 0 415,157 1.4% 0%
Sean J. Wolfington 392,157 0 392,157 1.3% 0%
Whitehorse Capital Partners, 200,000 0 200,000 * 0%
L.P.
David E. and Mary J. 80,000 0 80,000 * 0%
Dickerson, Trustees
Gabriel Ferrer 1,000,000 0 1,000,000 3.3% 0%
Michael J. Wolfe 1,000,000 0 1,000,000 3.3% 0%
Bomoseen Associates, LP 1,000,000 0 1,000,000 3.3% 0%
Adam Runyan 220,000 0 220,000 * 0%
Thomas Baldacchino 200,000 0 200,000 * 0%
Samuel DeMaio 200,000 0 200,000 * 0%
Norman Getz 200,000 0 200,000 * 0%
Patrick Larbuisson 200,000 0 200,000 * 0%
Thomas Smith 200,000 0 200,000 * 0%
Gerald Jones 200,000 0 200,000 * 0%
Michael and Amy Bernath 100,000 0 100,000 * 0%
Zachary Gomes 100,000 0 100,000 * 0%
Jeffrey and Shell MacNeil 100,000 0 100,000 * 0%
Glenn Rose 90,000 0 90,000 * 0%
Jeremy Stein 60,000 0 60,000 * 0%
Stephen Deblasio 50,000 0 50,000 * 0%
Stanley Merdinger 25,000 0 25,000 * 0%
Barry R. Bekkedam 23,000 0 23,000 * 0%
Harry J. Wolfington 62,500 (3) 0 62,500 * 0%
Jason P. Walsh 32,500 (4) 0 32,500 * 0%
Gilbert Welsford 25,000 0 25,000 * 0%
David Van Horn 25,000 (3) 0 25,000 * 0%
Steven Lloyd 12,500 (3) 0 12,500 * 0%
Joseph Jaquinto 12,500 (3) 0 12,500 * 0%
---------------------------------- ---------------------
* Less then one percent (1%)
(1) Calculated based on 30,162,353 shares of our common stock issued and
outstanding as of September 30, 2006.
(2) Mr. Wolfington is our Chairman, Chief Executive Officer and President.
(3) Represents shares issuable on the exercise of warrants.
(4) Includes 12,500 shares issuable on the exercise of warrants.
37
PLAN OF DISTRIBUTION
As of the date of this prospectus, the selling stockholders have not
determined how they will distribute the shares of our common stock that they or
their respective pledgees, donees, transferees or other successors in interest
are offering for resale. Accordingly, such shares may be sold from time to time
in one or more of the following transactions:
o block transactions;
o transactions on the over-the-counter electronic bulletin board or on
such other market on which our common stock may from time to time be
trading;
o privately negotiated transactions;
o through the writing of options on the shares;
o short sales; or
o any combination of these transactions.
The sale price to the public in these transactions may be:
o the market price prevailing at the time of sale;
o a price related to the prevailing market price;
o negotiated prices; or
o such other price as the selling stockholders determine from time to
time.
In the event that we permit or cause this registration statement to
lapse, the selling stockholders may sell shares of our common stock pursuant to
Rule 144 promulgated under the Securities Act of 1933.
The selling stockholders or their respective pledgees, donees,
transferees or other successors in interest, may also sell these shares of our
common stock directly to market makers acting as principals and/or
broker-dealers acting as agents for themselves or their customers. These
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the selling stockholders and/or the purchasers of these shares
of our common stock for whom such broker-dealers may act as agents or to whom
they sell as principal or both. As to a particular broker-dealer, this
compensation might be in excess of customary commissions. Market makers and
block purchasers purchasing these shares of our common stock will do so for
their own account and at their own risk. It is possible that a selling
stockholder will attempt to sell shares of our common stock in block
transactions to market makers or other purchasers at a price per share that may
be below the prevailing market price of our common stock.
Alternatively, the selling stockholders may sell all or any part of the
shares of our common stock offered hereby through an underwriter. We have no
obligation to obtain or assist the selling stockholders in obtaining a
commitment in connection with the sale of shares of our common stock covered by
this prospectus. We have been informed by the selling stockholders that there
are no existing arrangements between them and any other stockholders, broker,
dealer, underwriter or agent relating to the distribution of the shares offered
by this prospectus. If the selling stockholders enter into an agreement, after
effectiveness of this registration statement, to sell their shares to a
broker-dealer as principal and the broker-dealer is acting as an underwriter,
then we will file a post-effective amendment to the registration statement
identifying the broker-dealer, providing the required information on the plan of
distribution and will revise the disclosures in the registration statement, and
will file the broker-dealer agreement as an exhibit to the registration
statement.
38
The selling stockholders will act independently of us in making
decisions with respect to the form, timing, manner and size of each sale. The
selling stockholders shall have the sole and absolute discretion not to accept
any purchase offer or make any sale of these shares of our common stock if they
deem the purchase price to be unsatisfactory at any particular time. There can
be no assurance that all or any of these shares of our common stock offered
hereby will be issued to, or sold by, the selling stockholders.
Upon effecting the sale of any of these shares of our common stock
offered pursuant to this prospectus, the selling stockholders and any brokers,
dealers or agents, hereby, may be deemed "underwriters" as that term is defined
under the Securities Act of 1933 or the Securities Exchange Act of 1934, or the
rules and regulations thereunder. Any profits realized by the selling
stockholders and the compensation of any broker-dealer may be deemed to be
underwriting discounts and commissions. We have been advised that none of the
selling stockholders are broker-dealers or affiliates of broker-dealers.
The selling stockholders and any other persons participating in the
sale or distribution of these shares of our common stock will be subject to
applicable provisions of the Securities Exchange Act of 1934 and the rules and
regulations promulgated thereunder including, without limitation, Regulation M.
These provisions may restrict activities of, and limit the timing of purchases
and sales of any of these shares of our common stock by, the selling
stockholders. Furthermore, pursuant to Regulation M, persons engaged in a
distribution of securities are prohibited from simultaneously engaging in market
making and other activities with respect to such securities for a specified
period of time prior to the commencement of such distributions, subject to
specified exceptions or exemptions. All of the foregoing may affect the
marketability of the shares offered in this prospectus.
We are and will continue to be subject to the penny stock rules.
Broker-dealer practices in connection with transactions in "penny stocks" are
regulated by certain rules adopted by the Securities and Exchange Commission.
Penny stocks generally are equity securities with a price of less than $5.00
(other than securities registered on certain national securities exchanges or
listed on the NASDAQ stock market provided that current price and volume
information with respect to transactions in such securities is provided by the
exchange or system). The rules require that a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, deliver a
standardized risk disclosure document that provides information about penny
stocks and the risks in the penny stock market. The broker-dealer must also
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in connection with the
transaction and monthly account statements showing the market value of each
penny stock held in the customer's account. In addition, the rules generally
require that prior to a transaction in a penny stock, the broker-dealer must
make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written agreement to
the transaction. These disclosure requirements may have the effect of reducing
the liquidity of penny stocks.
We will assume no obligation or responsibility whatsoever to determine
a method of disposition for our shares of common stock offered by the selling
stockholders or to otherwise include such shares within the confines of any
registered offering other than the registration statement of which this
prospectus is a part.
We have no obligation to assist or cooperate with the selling
stockholders in the offering or disposition of our shares of common stock
covered by this prospectus other than with respect to the filing of this
prospectus and the filing of any amendments hereto pursuant to our agreement
with the selling stockholders. We have no agreement with the selling
stockholders or any other person requiring us to indemnify or hold harmless the
holders of our shares of common stock covered by this prospectus.
We will pay substantially all of the expenses incident to the
registration and offering of our common stock pursuant to this prospectus, other
than commissions or discounts of underwriters, broker-dealers or agents.
39
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of our
common stock being offered for sale by the selling stockholders pursuant to this
prospectus.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On September 1, 2004, we engaged IntuiCode, LLC to provide product
development services to us under a one-year agreement calling for aggregate
payments to IntuiCode of $35,000 per month, or $420,000 in the aggregate, and
options to purchase 150,000 shares of our common stock. We paid IntuiCode
approximately $175,000 during the year ended December 31, 2004, and
approximately $300,000 during the nine months ended September 30, 2005. In
October 2005, we entered into a Technology Support Agreement with IntuiCode for
ongoing product development and support services for the period from September
1, 2005 through December 31, 2005 for consideration of $15,000 per month plus
the issuance of warrants for each such month to purchase 15,000 shares of our
common stock at then-current market prices. Commencing January 1, 2006,
IntuiCode is providing services on a monthly basis for cash compensation
determined on a project-by-project basis. We paid IntuiCode approximately
$60,000 during the six months ended June 30, 2006. Jeremy Stein, a member of our
board of directors, holds approximately 1.5% of our stock (including shares
subject to currently-exercisable options) is also the Chief Executive Officer
and the holder of approximately 43% of the outstanding membership interests of
IntuiCode. We believe the terms of IntuiCode's engagement are at least as fair
as those that we could have obtained from unrelated third parties in arms-length
negotiations. In addition, during the year ended December 31, 2004, we extended
short-term loans in the aggregate principal amount of $63,000 to IntuiCode.
These loans have been repaid.
Although we believe that IntuiCode is highly qualified to provide these
services, we believe that other software developers are available to provide
similar services should IntuiCode no longer be able or willing to do so.
On September 10, 2004, we borrowed $210,000 from the father of our
chief executive officer to pay an advance on commissions to a new casino
customer. This loan bears interest at 10% per annum, which is payable monthly
beginning October 1, 2004. The principal amount of this loan is repayable in
monthly payments payable on the 1st day of each month commencing with the second
month following the month in which we commence operations at Angel of the Winds
Casino, and continuing on the 1st day of each month thereafter through April 30,
2005, provided that, upon any merger of our company, sale of substantially all
of our assets or change in majority ownership of our voting capital stock, the
lender has the right to accelerate this loan and demand repayment of all
outstanding principal and all unpaid accrued interest thereon. The amount of the
principal payment due in any month is equal to the amount of lease fee advances
that we receive from this casino customer during that month. In addition, we
issued the lender warrants to purchase 50,000 shares of our common stock at an
exercise price of $.33 per share. In the event that the principal amount of this
loan plus all accrued interest thereon is paid in full on or before March 1,
2006, then we shall have the right to cancel warrants to purchase 25,000 shares.
In October 2004, we issued options to purchase 100,000 shares of common
stock at an exercise price of $0.35 per share to Jeremy Stein in full settlement
of all obligations under his employment agreement.
In December 2004, we issued options to purchase an aggregate of 150,000
shares of common stock at an exercise price of $0.01 per share to two
consultants at IntuiCode. Jeremy Stein received 60,000 of these options.
From September to December 2005 we borrowed $725,000 from seven
individuals, including our Chief Financial Officer ($25,000) and our Chief
Executive Officer's uncle and brother ($250,000 each). These loans bear interest
at 10% per annum with terms of nine months. Warrants to purchase an aggregate of
112,500 shares of our common stock at an exercise price of $0.01 per share were
issued to our Chief Financial Officer (12,500 shares) and four unaffiliated
lenders (100,000 shares).
From March to May 2006 we borrowed $75,000 from our Chief Executive
Officer's father. These loans bear interest at 10% per annum with terms of nine
months. Warrants to purchase an aggregate of 37,500 shares of our common stock
at an exercise price of $0.01 per share were issued to the lender.
40
DESCRIPTION OF SECURITIES
Our authorized capital stock currently consists of 170,000,000 shares,
of which 150,000,000 shares are common stock, with a par value of $0.001 per
share, and 20,000,000 shares are "blank check" preferred stock, with a par value
of $0.001 per share.
As of the date of this prospectus, there are 30,162,353 issued and
outstanding shares of our common stock, and no issued and outstanding shares of
our Preferred Stock. All outstanding shares of capital stock are duly
authorized, validly issued, fully paid, and non-assessable. No material
potential liabilities are anticipated to be imposed on shareholders under state
statutes.
Common Stock.
Each holder of our common stock is entitled to one vote for each share
owned of record on all matters voted upon by our stockholders.
Our common stock has no cumulative voting rights, preemption rights,
and no redemption, sinking fund, or conversion privileges. Since the holders of
our common stock do not have cumulative voting rights, holders of more than 50%
of our total outstanding common shares can elect all of our directors, and
holders of the remaining shares, by themselves, cannot elect any of our
directors.
Holders of our common stock are entitled to receive dividends if, as,
and when declared by our board of directors out of funds legally available for
such purpose.
Upon the dissolution, liquidation or winding up of our company, the
holders of our common stock are entitled to share equally and ratably our net
assets, if any, available to such holders after distributions to holders of our
preferred stock.
Blank Check Preferred Stock.
Our board of directors has the authority, without further stockholder
approval, to issue up to 20,000,000 shares of preferred stock in one or more
series and to fix the designations, rights, preferences, privileges and
restrictions of these shares, including dividend rights, conversion rights,
voting rights, terms of redemption and liquidation preferences. These shares of
preferred stock may have rights senior to our common stock. The issuance of
preferred stock could decrease the amount of earnings and assets available for
distribution to the holders of common stock or could adversely affect the rights
and powers, including voting rights, of the holders of our common stock.
Transfer Agent and Registrar.
Florida Atlantic Stock Transfer, Inc., 7130 N. Nob Hill Road,
Tamarac, Florida 33321-1841 is our transfer agent and the registrar for our
common stock. Our transfer agent's telephone number is (954) 726-6320.
Possible Anti-Takeover Effects of Authorized but Unissued Stock.
Our authorized but unissued capital stock consists of 126,033,336
shares of common stock and 20,000,000 shares of blank check preferred stock. One
effect of the existence of authorized but unissued capital stock may be to
enable our board of directors to render more difficult or to discourage an
attempt to obtain control of us by means of a merger, tender offer, proxy
contest, or otherwise, and thereby to protect the continuity of our management.
If, in the due exercise of its fiduciary obligations, for example, the board of
directors were to determine that a takeover proposal was not in our best
interests, such shares could be issued by our board of directors without
stockholder approval in one or more private placements or other transactions
that might prevent, or render more difficult or costly, completion of the
takeover transaction by diluting the voting or other rights of the proposed
acquirer or insurgent stockholder or stockholder group, by creating a
substantial voting block in institutional or other hands that might undertake to
support the position of the incumbent board of directors, by effecting an
acquisition that might complicate or preclude the takeover, or otherwise.
41
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our Amended and Restated Certificate of Incorporation provides that all
of our directors, officers, employees and agents shall be entitled to be
indemnified to the fullest extent permitted by Section 145 of the Delaware
General Corporation Law.
Paragraph B of Article Seventh of our amended and restated certificate
of incorporation provides:
"The Corporation, to the full extent permitted by Section 145 of the
GCL, as amended from time to time, shall have the power to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
Corporation) by reason of the fact that he is or was a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorney's fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner reasonably believed to be in or not opposed to the best interests of
the Corporation, and, with respect to any criminal action or proceedings, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, upon a plea of nolo contendere or equivalent, shall not, of itself,
create a presumption that the person did not act in good faith and in a manner
which he reasonably believed to be in or not opposed to the best interests of
the Corporation, and with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful."
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers, and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment of expenses incurred or paid by a director,
officer or controlling person in a successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to
the court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock is currently quoted on the Over-The-Counter Bulletin
Board under the symbol "MCAM.OB."
Market Information
Our shares of common stock were first quoted on the Over-The-Counter
Bulletin Board on October 14, 2002. The following table presents the high and
low bid prices per share of our common stock as quoted for the years ended
December 31, 2005 and December 31, 2004, and for the period from January 1, 2006
to the date of this Prospectus, which information was provided by NASDAQ Trading
and Market Services.
42
Year ending December 31, 2006
Quarter ended: High Bid Low Bid
December 31, 2006(1) 0.29 0.14
September 30, 2006 0.38 0.22
June 30, 2006 0.43 0.25
March 31, 2006 0.37 0.17
(1) Through October 10, 2006
---------------------------------
Year ended December 31, 2005
Quarter ended: High Bid Low Bid
March 31, 2005 1.15 0.51
June 30, 2005 0.55 0.30
September 30, 2005 0.67 0.34
December 31, 2005 0.45 0.25
---------------------------------
Year ended December 31, 2004
Quarter ended: High Bid Low Bid
March 31, 2004 1.80 0.56
June 30, 2004 0.75 0.30
September 30, 2004 0.52 0.30
December 31, 2004 0.65 0.26
---------------------------------
The above quotations reflect inter-dealer prices, without retail
mark-up, markdown or commission and may not reflect actual transactions. On
October 10, 2006, the closing bid price for our common stock was $0.28 per
share.
43
Holders
As of September 30, 2006, we had 71 stockholders of record of our
common stock. Such number of record holders was derived from the records
maintained by our transfer agent, Florida Atlantic Stock Transfer.
Dividends
To date, we have not declared or paid any cash dividends and do not
intend to do so for the foreseeable future. Prior to our acquisition by iGames
in January 2004, we paid dividends to our shareholders. In 2003, these dividends
were approximately $94,900. In January 2004, prior to the acquisition, these
dividends were approximately $270,010. In the future we intend to retain all
earnings, if any, to finance the continued development of our business. Any
future payment of dividends will be determined solely in the discretion of our
Board of Directors.
Securities Authorized for Issuance Under Equity Compensation Plans
------------------------------------------ --------------------- ------------------------ ----------------------------
Number of Weighted average Number of securities
securities to be exercise price of remaining available for
issued upon outstanding options, future issuance under
exercise of warrants and rights equity compensation plans
outstanding
options, warrants
and rights
------------------------------------------ --------------------- ------------------------ ----------------------------
Equity compensation plans approved by 3,602,500 $0.19 0
security holders
------------------------------------------ --------------------- ------------------------ ----------------------------
Equity compensation plans not approved 0 N/A 0
by security holders
------------------------------------------ --------------------- ------------------------ ----------------------------
Total 3,602,500 $0.19 0
------------------------------------------ --------------------- ------------------------ ----------------------------
There were no other securities authorized for issuance under equity
compensation plans at December 31, 2005.
EXPERTS
The consolidated financial statements of Money Centers of America, Inc.
as of December 31, 2004 and for the fiscal year ended December 31, 2004 have
been included herein and in the registration statement in reliance upon the
report of Sherb & Co., LLP independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
LEGAL MATTERS
Certain legal matters, including the legality of the issuance of the
shares of common stock offered herein, are being passed upon for us by our
counsel, Klehr, Harrison, Harvey, Branzburg & Ellers LLP, Philadelphia,
Pennsylvania.
WHERE YOU CAN FIND MORE INFORMATION
We are required to comply with the reporting requirements of the
Exchange Act of 1934. Accordingly, we are required to file quarterly and annual
reports and other information with the Securities and Exchange Commission.
44
We have filed with the Securities and Exchange Commission a
registration statement on Form SB-2 to register the securities offered by this
prospectus. The prospectus is part of the registration statement, and, as
permitted by the Securities and Exchange Commission's rules, does not contain
all of the information in the registration statement. For future information
about us and the securities offered under this prospectus, you may refer to the
registration statement and to the exhibits and schedules filed as a part of the
registration statement. You can review the registration statement and its
exhibits at the public reference facility maintained by the Securities and
Exchange Commission at 100 F Street N.E., Washington, D.C. 20549. Please call
the Securities and Exchange Commission at 1-800-SEC-0330 for further information
on the public reference room. The registration statement is also available
electronically on the World Wide Web at http://www.sec.gov.
45
MONEY CENTERS OF AMERICA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report for Years ended December 31, 2005
and December 31, 2004.....................................................F-2
Consolidated Balance Sheet as of December 31, 2005........................F-3
Consolidated Statements of Operations for the fiscal years ended
December 31, 2005 and December 31, 2004...................................F-4
Consolidated Statements of Stockholders' Deficit for the fiscal
years ended December 31, 2005 and December 31, 2004.......................F-5
Consolidated Statements of Cash Flows for the fiscal years ended
December 31, 2005 and December 31, 2004...................................F-6
Notes to Consolidated Financial Statements................................F-7
Consolidated Balance Sheet as of June 30, 2006 (unaudited) ...............F-37
Consolidated Statements of Operations (unaudited) for the six
months ended June 30, 2006 and June 30, 2005 .............................F-38
Consolidated Statements of Cash Flows (unaudited) for the six
months ended June 30, 2006 and June 30, 2005 .............................F-39
Notes to Consolidated Financial Statements (unaudited)....................F-40
F-1
Independent Auditors' Report
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Money Centers of America, Inc.
We have audited the accompanying consolidated balance sheet of Money Centers of
America, Inc. and Subsidiary as of December 31, 2005 and the related
consolidated statements of operations, changes in stockholders' deficit and cash
flows for the years ended December 31, 2005 and 2004. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Money Centers of
America, Inc. and Subsidiary as of December 31, 2005 and the results of their
operations and their cash flows for the years ended December 31, 2005 and 2004,
in conformity with accounting principles generally accepted in the United States
of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 14 to
the financial statements, the Company has suffered recurring losses from
operations, has net cash used in operations, a net working capital deficit, a
stockholders' deficit and an accumulated deficit that raises substantial doubt
about its ability to continue as a going concern. Management's plan in regard to
these matters is also described in Note 14. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Sherb & Co, LLP
Certified Public Accountants
Boca Raton, Florida
April 13, 2006
F-2
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2005
ASSETS
Current assets:
Cash and cash equivalents $1,987,401
Restricted cash 4,277,447
Accounts receivable 342,742
Prepaid expenses and other current assets 241,264
------------------
Total current assets 6,848,854
Property and equipment, net 643,195
Other assets
Intangible assets, net 945,007
Goodwill 203,124
Deferred financing costs 65,348
Deposits 180,897
------------------
Total other assets 1,394,376
------------------
$8,886,425
==================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $1,019,193
Accrued interest 116,961
Accrued expenses 229,351
Current portion of capital lease 105,825
Notes payable, net of debt discount 240,069
Notes payable - related parties, net of debt discount 587,403
Lines of credit 10,000,424
Due to officer 326,580
Commissions payable 1,119,476
------------------
Total current liabilities 13,745,282
Long-term liabilities:
Capital lease, net of current portion 176,730
------------------
Total long-term liabilities 176,730
Stockholders' Deficit:
Preferred stock; $.001 par value, 20,000,000 shares authorized
0 shares issued and outstanding -
Common stock; $.01 par value, 150,000,000 shares authorized
25,206,978 shares issued and outstanding 252,069
Additional paid-in capital 11,189,541
Accumulated deficit (16,477,197)
------------------
Total stockholders' deficit (5,035,587)
------------------
$8,886,425
==================
The accompanying notes are an integral part of these consolidated financial statements.
F-3
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED
DECEMBER 31,
-------------------------------------------------------
2005 2004
-------------------------------------------------------
Revenues $ 19,409,238 $ 16,252,270
Cost of revenues 15,801,366 13,912,356
-------------------------------------------------------
Gross profit 3,607,872 2,339,914
Selling, general and administrative expenses 2,238,904 2,642,341
Noncash Compensation 91,225 7,674,491
Loss on impairment of intangibles - (417,880)
Loss on obsolete inventory - (130,883)
Depreciation and amortization 941,079 1,615,803
-------------------------------------------------------
Operating income (loss) 336,664 (10,141,484)
Other income (expenses):
Interest income 18,130 6,032
Interest expense (1,947,283) (1,704,910)
Noncash interest expense (68,285) (1,561)
-------------------------------------------------------
Total Interest expense, net (1,997,438) (1,700,439)
-------------------------------------------------------
Other income 1,650 170
Other expenses (7,043) -
-------------------------------------------------------
Total other income (expenses) (5,393) 170
-------------------------------------------------------
Net loss $ (1,666,167) $ (11,841,753)
=======================================================
Net loss per common share basic $ (0.07) $ (1.33)
=======================================================
Net loss per common share diluted $ (0.07) $ (1.33)
=======================================================
Weighted Average Common Shares Outstanding
-Basic 25,179,895 8,912,513
=======================================================
-Diluted 25,179,895 8,912,513
=======================================================
The accompanying notes are an integral part of these consolidated financial statements.
F-4
MONEY CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Series A Preferred
Stock Common Stock
($.001 par value) ($.01 par value)
----------------------------------------
Additional Total
Paid-In Accumulated Deferred Stockholders'
Shares Amount Shares Amount Capital Deficit Compensation Deficit
-------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 - $ - 3,966,291 $ 15,865 $1,978,579 $(1,665,667) $ (6,250) $ (322,527)
Preferred Stock in connection
with reverse acquisition 1,351,640 1,351 - - (1,351) - - -
Issuance of common stock for
services - - 25,000 100 29,900 - - 30,000
Issuance of options to
employees and consultants - - - - 5,304,418 - - 5,304,418
Exercise of stock options - - 62,500 250 24,750 - - 25,000
S corporation distributions - - - - - (270,010) - (270,010)
Issuance of shares for payment
on Available Money, Inc. - - 1,470,589 5,882 1,994,118 - - 2,000,000
Note Discount on 25,000
warrants issued - - - - 8,846 - - 8,846
Pursuant to original merger
agreement Series A Preferred
Stockholders, received 10
shares MCAM per preferred share (1,351,640) (1,351) 13,516,400 54,066 (52,715) - - -
Conversion of beneficial
interest dividend - preferred
stockholder's received 11.5
shares instead of 10 2,027,460 8,109 1,025,492 (1,033,600) - 1
Common stock issued for
canceled warrants 4,370,013 17,481 2,271,020 - - 2,288,501
Canceled shares in connection with
Available Money, Inc.
purchase - - (1,470,589) (5,882) (1,994,118) - - (2,000,000)
Amortization of deferred
compensation - - - - - - 6,250 6,250
Change in par value - - - 143,806 (143,806) - - -
Net loss - - (11,841,753) - (11,841,753)
Balance, December 31, 2004 - - 23,967,664 239,676 10,445,133 (14,811,030) - (4,126,221)
Issuance of common stock for
services - - 75,000 750 57,000 - - 57,750
Sale of common stock, net of
offering costs of $22,500 - - 984,314 9,843 469,657 - - 479,500
Exercise of stock options and
warrants - - 180,000 1,800 - - - 1,800
Beneficial conversion feature
for 112,500 warrants - - - - 190,337 - - 190,337
Issuance of 60,000 warrants to
consultants for services - - - - 27,414 - - 27,414
Net Loss - - - - - (1,666,167) - (1,666,167)
----------------------------------------------------------------------------------------------
Balance, December 31, 2005 - $ - 25,206,978 $252,069 $11,189,541 $(16,477,197) $ - $(5,035,587)
==============================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
F-5
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
Years Ended
December 31,
--------------------------------
2005 2004
--------------------------------
Cash flows from operating activities:
Net loss $ (1,666,167) $(11,841,753)
Adjustments used to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 941,079 1,615,803
Amortization of debt discount 68,313 1,561
Inventory write-down - 130,883
Loss on impairment of intangibles - 417,880
Issuance of common stock for services 57,750 -
Issuance of stock options for services - 4,877,050
Issuance of warrants for services 27,414 2,760,426
Changes in operating assets and liabilities:
Increase (decrease) in:
Accounts payable (45,219) 822,288
Accrued interest 34,071 -
Accrued expenses 54,187 47,785
Commissions payable 197,144 1,009,211
(Increase) decrease in:
Prepaid expenses and other current assets 34,074 39,146
Accounts receivable 465,424 (782,498)
Proceeds from refundable deposit 43,200 -
Deposits (100,000) -
--------------------------------
Net cash provided (used) by operating activities 111,270 (902,217)
Cash flows from investing activities:
Cash received in acquisition - 27,398
Purchases of property and equipment (171,338) (157,391)
Cash paid for acquisition and intangible assets (496,176) (4,109,381)
Cash paid for loan cost on convertible debt (15,525) -
--------------------------------
Net cash used by investing activities (683,039) (4,239,374)
Cash flows from financing activities:
Net change in lines of credit 1,919,869 5,501,523
Capital lease obligation - 95,722
Payments on capital lease obligations (105,515) (18,356)
Proceeds (Repayments) in loans payable (500,000) 2,000,000
Advances (to) from officer (164,575) 192,280
Proceeds from notes payable 25,000 183,443
Payments on notes payable (140,135) -
Proceeds from issuance of convertible promissory notes 700,000 -
Decrease (increase) in loans receivable - (43,000)
Increase in dividends payable - 23,710
Sale of common stock, net of $22,500 of offering
costs 479,500 -
Exercise of stock options and warrants 1,800 25,000
Dividends - (270,010)
--------------------------------
Net cash provided by financing activities 2,215,944 7,690,312
NET INCREASE IN CASH 1,644,175 2,548,721
CASH, beginning of year 4,620,673 2,071,952
--------------------------------
CASH, end of year $ 6,264,848 $ 4,620,673
================================
Supplemental disclosures:
Cash paid during the period for interest $ 1,947,283 $ 1,700,439
================================
Non-cash transactions affecting investing and
financing activities:
Acquisition of software $ 43,000 $ -
================================
Acquisition of equipment under capital lease $ 246,388 $ -
================================
Exchange for reduction in note payable due to
litigation $ 150,000 $ -
================================
Exchange for reduction in loan payable due to
litigation $ 1,500,000 $ -
================================
Reduction of loan payable officer in exchange for
related accrual $ 175,000 $ -
================================
Record beneficial conversion feature for
convertible debt and Detachable warrants $ 190,337 $ -
================================
Settlement with vendor $ 170,000 $ -
The accompanying notes are an integral part of these consolidated financial statements.
F-6
MONEY CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization
Money Centers of America Inc. (the "Company" or "MCA"), a Delaware
corporation, was incorporated in October 1997. The Company is a single source
provider of cash access services, ONSwitch(TM) Transaction Management System,
and the Omni Network. The Company has combined advanced technology with
personalized customer services to deliver ATM, Credit Card Advance, POS Debit,
Check Cashing Services, CreditPlus (outsourced marker services), cash access
host program, customer data sharing and merchant card processing.
On January 2, 2004, pursuant to an Amended and Restated Agreement and
Plan of Merger (the "Merger Agreement") by and among the Company, Christopher M.
Wolfington, iGames Entertainment, Inc., a Nevada corporation ("iGames"), Michele
Friedman, Jeremy Stein and Money Centers Acquisition, Inc., a wholly-owned
subsidiary of iGames, Money Centers Acquisition, Inc. was merged with and into
the Company and the Company, as the surviving corporation, became a wholly-owned
subsidiary of iGames (the "Merger"). For accounting purposes, the transaction
was treated as a recapitalization and accounted for as a reverse acquisition.
Therefore, the financial statements reported herein and accompanying notes
thereto reflect the assets, liabilities and operations of the Company as if it
had been the reporting entity since inception. In connection with the Merger,
all of the issued and outstanding shares of capital stock of the Company were
tendered to iGames and iGames issued to the Company stockholders an aggregate of
1,351,640 shares of iGames Series A Convertible Preferred Stock, $.001 par value
per share, and warrants to purchase an aggregate of 2,500,000 shares of iGames
common stock, par value $.004 per share, at an exercise price of $.01 per share.
Each share of Series A Convertible Preferred Stock was entitled to ten votes in
all matters submitted to a vote of iGames shareholders and was convertible at
the option of the holders into ten shares of common stock at any time after the
date on which iGames amended its articles of incorporation to increase the
number of authorized shares of its common stock to at least 125,000,000. In
October 2004 iGames was merged into the Company, and each share of Series A
Convertible Preferred Stock was exchanged for 11.5 shares of the Company's
common stock. In October of 2004 the holder of the Series A Convertible
Preferred Stock received 11.5 shares of the Company's common stock, which
conversion rate was amended by the Board of Directors. The increase of 1.5
common shares per share of preferred totaling 2,027,460 of the Company's common
stock was valued at $1,033,601 treated as a dividend and recorded as an increase
in accumulated deficit.
Pursuant to the terms of a Stock Purchase Agreement between iGames,
Helene Regen and Samuel Freshman dated January 6, 2004 (the "Stock Purchase
Agreement"), iGames acquired all of the issued and outstanding shares of capital
stock of Available Money, Inc. (AM)(Wholly owned subsidiary), a provider of ATM
cash access services based in Los Angeles, California. The purchase price of
this transaction was $3,850,000, $2,000,000 of which was paid in cash at closing
and $1,850,000 of which was paid in cash on April 12, 2004. $2,100,000 of the
purchase price was assigned to contract rights. Acquired contract rights are
considered to have a finite life, pursuant to SFAS 142, to be amortized over the
period the asset is expected to contribute to future cash flows. MCA expects the
period to be 1 to 4 years. The contract rights will also be subject to periodic
impairment tests.
Note 2 - Basis of Presentation and Significant Accounting Policies
(A) Basis of Presentation
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America ("US
GAAP"). The consolidated financial statements include the accounts of the
Company and its subsidiary. All material intercompany balances and transactions
have been eliminated. The Company and its subsidiary have fiscal years ending on
December 31.
F-7
(B) Principles of Consolidation
The Company consolidates its wholly owned subsidiary. All significant
intercompany accounts and transactions have been eliminated in consolidation.
(C) Use of Estimates
In preparing financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and revenues and expenses during the periods presented.
Actual results may differ from these estimates.
Significant estimates during 2005 and 2004 include depreciable lives on
equipment, the valuation of stock options granted for services, the value of
warrants issued in connection with debt related financing, valuation of
intangible assets not having finite lives and the valuation allowance for
deferred tax assets since the Company had continuing operating losses.
(D) Cash and Cash Equivalents and Compensating Balances
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with an original maturity date of three months or less
to be cash equivalents.
The Company minimizes its credit risk associated with cash by
periodically evaluating the credit quality of its primary financial institution.
The balance at times may exceed federally insured limits. At December 31, 2005,
the balance exceeded the federally insured limit by $148,105. In addition, the
Company maintains a significant amount of cash at each of the casinos.
Management believes that the Company has controls in place to safeguard these
on-hand amounts, and that no significant credit risk exists with respect to
cash.
Additionally, the Company had $30,000 maintained under a compensating
balance agreement. The $30,000 is retained due to potential dishonorment of bad
checks that are unforeseen. There is an informal agreement between our bank and
our lender that requires this compensating balance agreement.
F-8
Note 2 - Basis of Presentation and Significant Accounting Policies, continued
(E) Restricted Cash
Restricted cash is the balance of cash that is in the Company's bank
accounts and network that is used as collateral for our asset based lender (See
Note 5). The Company does not have access to this cash unless there is an amount
over and above the required amount of collateral. In order to pay operating
expenses, the Company requests that the asset based lender transfer funds into
the Company's unrestricted cash accounts. The restricted cash balance at
December 31, 2005 was $4,277,447.
(F) Accounts Receivable
Accounts receivable arise primarily from ATM, credit card advances and
check cashing services provided at casino locations. Concentration of credit
risk related to ATM and credit card advances are limited to the processors who
remit the cash advanced back to the Company along with the Company's allocable
share of fees earned. The Company believes these processors are financially
stable and no significant credit risk exists with respect to accounts receivable
arising from credit card advances. Accordingly, no allowance was considered
necessary at December 31, 2005 and 2004.
(G) Equipment
Equipment is stated at cost, less accumulated depreciation.
Expenditures for maintenance and repairs are charged to expense as incurred.
Equipment consists primarily of cash access devices and computer equipment.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which ranges from three to seven years.
(H) Long Lived Assets
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell the asset. There were no impairment charges taken during the years
ended December 31, 2005 and 2004.
F-9
Note 2 - Basis of Presentation and Significant Accounting Policies, continued
(I) Goodwill, Intangibles and Related Impairment
Based on the discounted estimated cash flows of the Company over the
remaining amortization period, the Company's carrying values of the assets would
be reduced to their estimated fair values. Goodwill is assumed to have an
indefinite life pursuant to statement of Financial Accounting Standards No. SFAS
142, "Goodwill and Other Intangible Assets" and accordingly is not amortized but
subject to periodic impairment tests. Acquired contract rights are considered to
have a finite life, pursuant to SFAS 142, to be amortized over the period the
asset is expected to contribute to future cash flows. The Company expects the
period to be 1 to 4 years. The contract rights will also be subject to periodic
impairment tests. In accordance with SFAS No. 142, the Company is required to
evaluate the carrying value of its intangible assets (goodwill) subsequent to
their acquisition.
(J) Internal Use Software and Website Development Costs
The Company has adopted the provisions of AICPA Statement of Position
("SOP") 98-1, "Accounting for the Costs of Software Developed or Obtained for
Internal Use," and Emerging Issues Task Force ("EITF") Consensus #00-2.
"Accounting for Website Development Costs." The type of costs incurred by the
Company in developing its internal use software and Website include, but are not
limited to payroll-related costs (e.g. fringe benefits) for employees who devote
time to the internal use computer software or Website project, consulting fees,
the price of computer software purchased from third parties and travel expenses
incurred by employees or consultants in their duties directly associated with
developing the software. These costs are either expensed or capitalized
depending on the type of cost and the stage of development of the software and
Website.
The Company makes ongoing evaluations of the recoverability of its
capitalized internal use software and Web site by comparing the amount
capitalized for each module or component of software to their estimated net
realizable values. If such evaluations indicate that the unamortized costs
exceed the net realizable values, the Company writes off the amount by which the
unamortized costs exceed the net realizable values. At December 31, 2005 and
2004, no such write-offs were required.
At December 31, 2005, the net book value of capitalized software was
$885,403. Amortization expense for the years ended December 31, 2005 and 2004
was $7,897 and $7,209, respectively.
(K) Deferred Financing Costs
Deferred financing costs are capitalized and amortized over the term of
the related debt. At December 31, 2005, the gross amount of deferred financing
costs was $ 176,283 and related accumulated amortization was $ 110,935. At
December 31, 2005 the company reflects in the accompanying consolidated balance
sheet net deferred financing costs of $65,348. Amortization of deferred
financing costs was $47,501 and $44,282 at December 31, 2005 and 2004,
respectively.
Note 2 - Basis of Presentation and Significant Accounting Policies, continued
(L) Derivative Liabilities
In order to determine whether the Company has derivative liabilities, the
Company reviewed SFAS No. 133, SFAS No. 150, EITF No. 00-19 and EITF No. 05-02,
"The Meaning of Convertible Debt Instrument in Issue No. 00-19."
Pursuant to the terms of the Company outstanding convertible debt and
the associated detachable freestanding warrants, management determined that no
instruments should be classified as a derivative liability. Additionally, there
are no other issued and outstanding instruments which require the application of
the aforementioned accounting guidance.
F-10
(M) Revenue Recognition
The Company follows the guidance of the Securities and Exchange
Commission's Staff Accounting Bulletin No. 104 for revenue recognition. In
general, the Company records revenue when persuasive evidence of an arrangement
exists, services have been rendered or product delivery has occurred, the sales
price to the customer is fixed or determinable, and collectability is reasonably
assured. The following policies reflect specific criteria for the various
revenues streams of the Company:
(1) ATM's and Credit Cards
Fees earned from ATM and credit card advances are recorded on the date
of transaction.
(2) Check Cashing
Revenue is recorded from fees on check cashing services on the date the
check is cashed. If a customer's check is returned by the bank on which it is
drawn, the full amount of the check is charged as bad debt loss. The check is
subsequently resubmitted to the bank for payment. If the bank honors it, the
amount of the check is recognized as a negative bad debt expense. Based on the
quick turnaround of the check being returned by the bank on which it is drawn
and the resubmission to the bank for payment, the Company feels this method
approximates the allowance method, which is a Generally Accepted Accounting
Principle. Based upon past history no allowance was considered necessary at
December 31, 2005 and 2004, respectively.
(N) Cost of Revenues The cost of revenues primarily includes
commissions paid, non management wages, employee benefits, bad debts, rents paid
to contract lessors, transaction processing costs, cash replenishment fees,
non-capitalizable operating lease fees for ATM's and repairs and maintenance of
ATM's.
F-11
Note 2 - Basis of Presentation and Significant Accounting Policies, continued
(O) Advertising
In accordance with Accounting Standards Executive Committee Statement
of Position 93-7, ("SOP 93-7") costs incurred for producing and communicating
advertising of the Company, are charged to operations as incurred. Advertising
expense for the years ended December 31, 2005 and 2004 were $44,744 and $28,381,
respectively.
(P) Income Taxes
The Company accounts for income taxes under the Financial Accounting
Standards No. 109 "Accounting for Income Taxes" ("Statement 109"). Under
Statement 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period, which includes the enactment date.
(Q) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires disclosures of information about
the fair value of certain financial instruments for which it is practicable to
estimate the value. For purpose of this disclosure, the fair value of a
financial instrument is the amount at which the instrument could be exchanged in
a current transaction between willing parties, other than in a forced sale or
liquidation.
The carrying amounts of the Company's short-term financial instruments,
including accounts receivable, accounts payable and accrued expenses,
commissions payable, notes payable, convertible notes payable, net of debt
discount, line of credit and due to related party approximate fair value due to
the relatively short period to maturity for these instruments.
(R) Earnings per Share
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share," basic earnings per share is computed by dividing the net
income (loss) less preferred dividends for the period by the weighted average
number of shares outstanding. Diluted earnings per share is computed by dividing
net income (loss) less preferred dividends by the weighted average number of
shares outstanding including the effect of share equivalents. Common share
equivalents consist of shares issuable upon the exercise of certain common stock
purchase warrants, stock options, and convertible preferred stock. The Company
has excluded these common share equivalents from its computation of earnings per
share due to their antidilutive
F-12
Note 2 - Basis of Presentation and Significant Accounting Policies, continued
effect as the Company has reflected a net loss at December 31, 2005 and
2004, respectively. Accordingly, the basic and diluted EPS are the same.
At December 31, 2005 and 2004 there were 6,671,111 and 5,240,688 shares
of issuable common stock underlying the options, warrants and convertible debt
securities, respectively.
The following table summarizes all common stock equivalents outstanding
at December 31, 2005 and 2004, respectively.
2005 2004
---- ----
Common stock options 3,602,500 3,161,250
Common stock warrants 1,457,500 2,079,438
Convertible notes payable 1,611,111 --
------------- -------------
Total Common Stock Equivalents 6,671,111 5,240,688
=========== =============
(S) Stock Based Compensation
The Company accounts for stock options issued to employees in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Such
compensation amounts, if any, are amortized over the respective vesting periods
of the option grant. The Company adopted the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for
Stock-Based Compensation -Transition and Disclosure," which permits entities to
provide pro forma net income (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants as if the fair-valued based method
defined in SFAS No. 123 had been applied. The Company accounts for stock options
and stock issued to non-employees for goods or services in accordance with the
fair value method of SFAS 123.
During 2005 and 2004, the Company granted 477,500 and 2,967,500
options, respectively to employees that were accounted for pursuant to APB No.
25.
During 2005 and 2004, the Company granted 172,500 and 490,000 options,
respectively to non-employees that were accounted for pursuant to SFAS No. 123.
In connection with stock option exercises/conversions, the Company's
Board of Directors approves all such issuances at the time when the investor
completes the proper paperwork and makes a formal notification exercise.
See detailed discussion of stock based compensation in Note 9.
F-13
Note 2 - Basis of Presentation and Significant Accounting Policies, continued
(T) Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board issued
Statement No. 151 (SFAS 151), "Inventory Costs," an amendment of ARB No. 43,
Chapter 4. SFAS 151 clarifies that abnormal amounts of idle facility expense,
freight, handling costs and wasted materials should be recognized as current
period charges. In addition, SFAS 151 requires that allocation of fixed
production overhead to inventory be based on the normal capacity of the
production facilities. SFAS 151 is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The Company currently believes that
the adoption of SFAS 151 will not have a material impact on its financial
position, results of operations and cash flows.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment," which replaces SFAS No. 123 and supersedes APB Opinion No. 25. Under
SFAS No. 123(R), companies are required to measure the compensation costs of
share-based compensation arrangements based on the grant-date fair value and
recognize the costs in the financial statements over the period during which
employees are required to provide services. Share-based compensation
arrangements include stock options, restricted share plans, performance-based
awards, share appreciation rights and employee share purchase plans. In March
2005 the SEC issued Staff Accounting Bulletin No. 107, or "SAB 107." SAB 107
expresses views of the staff regarding the interaction between SFAS No. 123(R)
and certain SEC rules and regulations and provides the staff's views regarding
the valuation of share-based payment arrangements for public companies. SFAS No.
123(R) permits public companies to adopt its requirements using one of two
methods. On April 14, 2005, the U.S. Securities and Exchange Commission adopted
a new rule amending the compliance dates for SFAS 123R. Companies may elect to
apply this statement either prospectively, or on a modified version of
retrospective application under which financial statements for prior periods are
adjusted on a basis consistent with the pro forma disclosures required for those
periods under SFAS 123. The Company is currently evaluating which transitional
provision and fair value methodology it will follow. The Company expects that
any expense associated with the adoption of the provisions of SFAS 123R will
have a material impact on its results of operations. We are evaluating the
requirements of SFAS No. 123(R) and SAB 107 to assess what impact its adoption
will have on our financial position, results of operations and cash flows.
Effective January 1, 2006, the Company has fully adopted the provisions of SFAS
No. 123R and related interpretations as provided by SAB 107.
In May 2005, the Financial Accounting Standard Board ("FASB") issued
Statement No. 154, "Accounting Changes and Error Corrections, a replacement of
APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements" (SFAS 154). SFAS 154 changes
the requirements for the accounting for, and reporting of, a change in
accounting principle. Previously, most voluntary changes in accounting
principles were required to be recognized by way of a cumulative effect
adjustment within net income during the period of the change. SFAS 154 requires
retrospective application to prior periods' financial statements, unless it is
impracticable to determine either the period-specific effects or
Note 2 - Basis of Presentation and Significant Accounting Policies, continued
the cumulative effect of the change. SFAS 154 is effective for
accounting changes made in fiscal years beginning after December 15, 2005;
however, the Statement does not change the transition provisions of any existing
accounting pronouncements. We do not believe adoption of SFAS 154 will have a
material effect on our financial position, results of operations or cash flows.
In June 2005, the Emerging Issues Task Force ("EITF") issued EITF 05-2,
"The Meaning of Conventional Convertible Debt Instrument in Issue No. 00-19."
EITF 05-2 retained the definition of a conventional convertible debt instrument
as set forth in EITF 00-19, and which is used in determining certain exemptions
to the accounting treatments prescribed under SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities." EITF 05-2 also clarified that
certain contingencies related to the exercise of a conversion option would not
be outside the definition of "conventional" and determined that convertible
preferred stock with a mandatory redemption date would also qualify for similar
exemptions if the economic characteristics of the preferred stock are more akin
to debt than equity. EITF 05-2 is effective for new instruments entered into and
instruments modified in periods beginning after June 29, 2005. We adopted the
provisions of EITF 05-2 on July 1, 2005, which did not have a material effect on
our financial statements.
F-14
In July 2005, the FASB issued FASB Staff Position ("FSP") 150-5,
"Accounting Under SFAS 150 for Freestanding Warrants and Other Similar
Instruments on Redeemable Shares." FSP 150-5 clarifies that warrants on shares
that are redeemable or puttable immediately upon exercise and warrants on shares
that are redeemable or puttable in the future qualify as liabilities under SFAS
150, regardless of the redemption feature or redemption price. The FSP is
effective for the first reporting period beginning after June 30, 2005, with
resulting changes to prior period statements reported as the cumulative effect
of an accounting change in accordance with the transition provisions of SFAS
150. We adopted the provisions of FSP 150-5 on July 1, 2005, which did not have
a material effect on our financial statements.
In July 2005, the FASB issued EITF 05-6, "Determining the Amortization
period for Leasehold Improvements Purchased After Lease Inception or Acquired in
a Business Combination," which addressed the amortization period for leasehold
improvements made on operating leases acquired significantly after the beginning
of the lease. The EITF is effective for leasehold improvements made in periods
beginning after June 29, 2005. We adopted the provisions of EITF 05-6 on July 1,
2005, which did not have a material impact to the Company's financial position,
results of operations and cash flows.
(U) Reclassifications
Certain amounts previously reported for 2004 have been reclassified to
conform with the classifications used in 2005. Such reclassifications had no
effect on the reported net loss.
F-15
Note 3 - Equipment
The major classes of property and equipment at December 31, 2005 are as follows:
Classification Estimated Life
------------------------ ---------------
Equipment 5 years $1,242,650
Furniture 5-7 years 101,578
----------
1,344,228
Less: accumulated depreciation (701,033)
----------
Equipment, net $643,195
==========
Depreciation expense for property and equipment for the years ended
December 31, 2005 and 2004 was $227,041 and $168,873 respectively.
Of the totals presented above, capitalized equipment under capital
leases had a gross carrying value of $490,188 and accumulated depreciation of
$130,710 at December 31, 2005. (See Note 6) The equipment under capital lease
serves as collateral for the related lease obligation.
Note 4 - Acquisition, Intangible Assets and Goodwill
On January 6, 2004, iGames acquired the capital stock of Available
Money, Inc. ("Available Money") a provider of ATM cash access services, which
materially represents the entire year of operations. This expanded our casino
ATM business but it also propelled the Company into non-casino related ATM
businesses, such as strip malls. The acquisition was accounted for under the
purchase method of accounting and the results of operations of Available Money
are included in the operations of the Company from January 6, 2004. The purchase
price was $6,000,000. The initial goodwill recorded on this purchase was
approximately $3,800,000. The remaining $2,100,000 was assigned to contract
rights based on the discounted projected cash flow from the contracts through
their expiration dates, using a 15% discount rate. The carrying value of
intangible assets and goodwill are reviewed if the facts and circumstances
suggest that they may be impaired.
During 2004, certain of the Available Money contracts were not renewed
and the Company has canceled 1,470,589 shares of stock issued to the former
Available Money shareholders, representing a $2,000,002 reduction in the
purchase price, the Company has accordingly lowered the goodwill recorded on the
purchase by $2,000,002, to approximately $1,831,000. As part of the settlement
with the former owners of AM the purchase price was reduced by $150,000 and the
Company reduced goodwill by $150,000 in March of 2005. As a result of the July
2005 settlements of litigation with Equitex, Inc. and Chex Services, Inc. (see
Note 10 (4)) goodwill was reduced by $1,500,000 to approximately $200,000. The
$1,500,000 reduction was offset against a corresponding reduction in loans
payable.
F-16
Note 4 - Acquisition, Intangible Assets and Goodwill, continued
Intangible assets and Goodwill at December 31, 2005 are as follows:
(a) Intangible assets
Classification Estimated Life
-------------------- ----------------------
Software 15 years $ 9,928
Software development costs 5-7 years 900,039
Website development costs 3 years 24,000
Contract rights 1-3 years 2,100,306
Other 3 years 5,108
-------------
3,039,381
Less: accumulated depreciation (2,094,374)
-------------
Equipment, net $ 945,007
=============
Amortization expense, for intangible assets, for the years ended
December 31, 2005 and 2004 was $666,537 and $1,402,649 respectively.
Goodwill
Estimated Life 2005
------------------------ ----------------------
Goodwill Indefinite $203,124
Goodwill is reviewed for impairment periodically. There were no
impairment charges taken for goodwill during the years ended December 31, 2005
and 2004, respectively.
F-17
Note 4 - Acquisition, Intangible Assets and Goodwill, continued
The following table represents the balance of intangible assets over
the next 5 years and thereafter:
Intangible assets
subject to
amortization Total 2006 2007 2008 2009 2010 Thereafter
------------ ----- ---- ---- ---- ---- ---- ----------
Gross capitalized
amount $3,039,380 $3,039,380 $3,039,380 $3,039,380 $3,039,380 $3,039,380 $3,039,380
Accumulated
amortization (2,070,373) (2,187,583) (2,294,560) (2,382,985) (2,471,410) (2,559,835) (3,039,390)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Intangibles, net $ 945,007 $ 851,797 $ 744,820 $ 656,395 $ 567,970 $ 479,545 $ --
========= ========= ========= ========= ========= ========= =======
Amortization
expense $ 666,537 $ 93,210 $ 106,977 $ 88,425 $ 88,425 $ 88,425 $ 479,545
--------- -------- --------- -------- -------- -------- ---------
Note 5 - Convertible Notes Payable, net of debt discount and Notes Payable
(A) Convertible Notes Payable, net of debt discount
During 2005, the Company borrowed an aggregate $700,000 from seven
separate individuals in the form of convertible promissory notes. Of the total
borrowings, $525,000 was received from related parties. These related parties
included family relatives of the Company's President and CEO totaling $500,000
and the Company's CFO for $25,000. In connection with the issuance of these
convertible promissory notes, the Company issued warrants to purchase an
aggregate 350,000 shares of its common stock at an exercise price of $0.01.
Pursuant to the terms of the convertible debt, the notes bear interest
at 10% with default interest at 25%. All notes are unsecured and due nine months
from issuance. The maturity dates occur during the period from June 2006 to
September 2006. The debt is convertible at the option of the holder equivalent
to an amount that is 85% of the average mean of the closing bid and ask prices
for the 10 days immediately preceding the conversion by the holder. The
conversion terms also contain a feature whereby the conversion price cannot go
below a floor amount of $0.45 ("floor"). As a result of the established floor
price on these convertible debt instruments, the Company has determined that it
has enough authorized and unissued shares to settle all potential conversions
related to these debt instruments as well any other outstanding equity
instruments that are convertible. These convertible debt instruments are not
considered derivative liabilities.
F-18
Note 5 - Convertible Notes Payable, net of debt discount and Notes Payable,
continued
Rather, pursuant to the literature in APB No. 14, EITF No. 98-5 and EITF
No. 00-27, these instruments are considered convertible debt that requires an
allocation of proceeds between the convertible debt and related warrants.
Management used the following weighted average assumptions on the date
of issue when determining the fair value of the freestanding warrants issued in
connection with the convertible debt:
Expected dividend yield 0%
Expected volatility 175.48% - 176.68%
Risk free interest rate 4.25%
Expected life of option 2 years
Based on the required allocation of proceeds, the Company recorded an
aggregate debt discount totaling $184,013 which is being amortized to interest
expense over the lives of the related convertible promissory notes. The
corresponding credit was to additional paid-in capital. During 2005, the Company
recognized $61,366 as amortization of debt discount as a component of interest
expense.
At December 31, 2005, the Company had the following outstanding
convertible notes payable:
Convertible notes payable $ 175,000
Convertible notes payable - related party 525,000
-------
Total convertible notes payable 700,000
Less debt discount (122,647)
=========
Convertible notes payable, net of debt discount $ 577,353
=========
At December 31, 2005, the Company had the following outstanding accrued
interest payable for all convertible and non-convertible debt instruments:
Convertible notes payable -
accrued interest $ 3,376
Convertible notes payable -
related party - accrued interest 14,034
Interest accrued on Notes Payable
and Lines of Credit 96,956
Interest accrued on non convertible
related note (see Note 5(B)) 2,595
-----------
Total accrued interest payable, Convertible notes $116,961
===========
F-19
Note 5 - Convertible Notes Payable, net of debt discount and Notes Payable,
continued
(B) Notes Payable, net of debt discount
During 2005, the Company recorded an aggregate $195,000 from two
separate individuals in the form of promissory notes. Pursuant to the terms of
the notes, the notes bore interest ranging from 10% - 19.75% with default
interest of 25%. The $170,000 note is collateralized by all assets of the
company via an intercreditor agreement. The $25,000 is uncollaterized. The
maturity dates occur during the period from September 2006 and May 2007.
Of the total, $170,000 was issued to a former customer in exchange for
a mutual release and settlement of a disputed $286,043 in commissions. The
Company recorded an offset to commissions expense for $116,043. The note bears
interest at 19.75% per annum. All accrued interest from November 1, 2004 through
and including November 1, 2005 was payable on November 1, 2005. Continuing on
the first day of each month thereafter to and including May 1, 2007 payments of
principal and interest in the amount of $10,989. At December 31, 2005, the
Company has repaid $8,191 in principal, leaving a remaining balance of $161,809.
In December 2005 the Company borrowed $25,000 and issued a $25,000
promissory note, the Company recorded a debt discount of $6,324, related to the
12,500 warrants issued in connection with this note. At December 31, 2005, the
Company recorded amortization of debt discount totaling $703 as a component of
interest expense. The remaining $5,621 is being amortized over the life of the
promissory note.
On September 10, 2004, the Company borrowed $210,000 from a family
member of our chief executive officer to pay an advance on commissions to a
casino. This note is shown net of a discount of $8,846 for the value of warrants
issued in conjunction with the loan along with the corresponding amortization of
the note discount of $7,805. The discount of $8,846 is amortized over 17 months
beginning October 1, 2004. The note bears interest at 10% per annum and is
payable monthly, beginning October 1, 2004. The principal amount of this note is
repayable in monthly payments payable on the 1st day of each month commencing
with the second month following the month in which the Company commences
operations at the casino. As additional consideration for extending the
principal amount of this loan to the Company, the Company has issued warrants to
purchase 50,000 of the Company's common stock at an exercise price of .33 per
share. In the event that the principal amount of this note plus all accrued
interest thereon was paid in full on or before March 31, 2006, 25,000 warrants
would be canceled. On September 10, 2004, the company recorded 25,000 warrants
at its fair value of $8,846 as additional interest expense and in March 2006 the
Company will record the remaining 25,000 warrants also as additional interest
expense as this note has been extended. During 2005, the Company repaid this
related party $131,943 in connection with this promissory note issued during
2004.
During 2005, the Company reflected aggregate principal repayments of
$140,135 for all non-convertible promissory notes.
F-20
Note 5 - Convertible Notes Payable, net of debt discount and Notes Payable,
continued
At December 31, 2005, the Company had the following outstanding notes
payable:
Notes payable $186,809
Notes payable - related party 70,000
------
Total notes payable 256,809
Less debt discount (5,621)
-------
Note payable, net of debt discount $251,188
========
Note 6 - Capital Leases
On February 1, 2005 the Company entered into a new capital lease for 6
ATM machines at the Sandia Casino. The capitalized cost of the ATM machines is
$105,938. The terms of this lease require an approximately $30,000 down payment
90 days from installation with the remaining balance of approximately $75,000
will be financed over 59 months, at 8.211% for $1,500 per month. This note is
collateralized by the equipment.
Between June 15, 2005 and July 31, 2005 the Company entered into a new
capital lease for 5 ATM machines at the Tropicana Casino in Las Vegas. The
approximate capitalized cost of the ATM machines is $88,400. The terms of this
lease require an approximately $25,000 down payment 90 days from installation
with the remaining balance of approximately $63,000 financed over 59 months, at
8.211% for approximately $1,330 per month. This note is collateralized by the
equipment.
In 2005 the Company entered into a new capital lease for 1 ATM machine
at a software development office located in Boca Raton, Florida. The capitalized
cost of the ATM machine is $18,000. The terms of this lease require an
approximately $5,000 down payment 90 days from installation with the remaining
balance of approximately $13,000 financed over 59 months, at 8.211% for $266 per
month. This note is collateralized by the equipment.
On July 16, 2005 the Company entered into a new capital lease for 2 ATM
machines at Jerry's Nugget Casino in Las Vegas. The capitalized cost of the ATM
machines is $34,500. The terms of this lease require an approximately $10,000
down payment 90 days from installation with the remaining balance of
approximately $24,500 financed over 59 months, at 8.211% for $530 per month.
This note is collateralized by the equipment.
F-21
Note 6 - Capital Leases, continued
Capital lease obligations at December 31, 2005 consisted of the following:
Obligation under capital lease, imputed interest rate at $ 35,553
12.78%; due May 2007; collateralized by equipment
Obligation under capital lease, imputed interest rate at 32,988
8.21%; due December 2009; collateralized by equipment
Obligation under capital lease, imputed interest rate at 32,988
8.21%; due December 2009; collateralized by equipment
Obligation under capital lease, imputed interest rate at 69,081
7.95%; due March 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 8.3%; 11,411
due March 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 34,111
11.63%; due July 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 66,423
9.74%; due July 2010; collateralized by equipment
Less: current maturities (105,825)
---------
Long term obligation, net of current portion $ 176,730
=========
Future minimum lease payments for equipment acquired under capital
leases at December 31, 2005 are as follows:
2006 $ 137,031
2007 69,944
2008 60,027
2009 56,185
2010 13,731
------
Total minimum lease payments 336,918
Less amount representing interest 54,363
------
Present value of net minimum lease 282,555
Less current portion 105,825
-------
$ 176,730
F-22
Note 7 - Lines of Credit
Lines of credit at December 31, 2005 consisted of the following:
Line of credit, maximum availability of $7,000,000, maturity date June 30, 2006. Subject to
various restrictive covenants, interest is payable monthly at 18% per annum, borrowings are
collateralized by restricted cash, all the assets of the Company, 250,000 shares of common
stock, and guaranteed by the principal shareholder of the Company. The Company is required
to pay a monthly facility fee equal to 1/12% of the highest balance of the line during the
month. At December 31, 2005, the Company had recorded related accrued interest payable of
$58,225 in connection with this line of credit. $4,277,447
Line of credit, interest is payable monthly at 9% per annum, the line is unsecured and due on
demand. This line has been established with one of our casino customers. 478,000
Lines of credit, non-interest bearing, the lines are unsecured and due on demand. These
lines have been established with two of our casino customers. 2,233,267
Line of credit, the line is unsecured and due on demand. The Company pays a fixed stated
amount of interest totaling $1,000 per month. The payments are recorded and charged to
interest expense. This line has been established with one of our casino customers. At
December 31, 2005, the Company had recorded related accrued interest payable of $1,000 in
connection with this line of credit. 507,026
On April 12, 2004, the Company borrowed $2,050,000 from an asset-based lender to make the
second Available Money payment. From April 12, 2004 until June 30, 2005 all interest was
accrued and added to the principal balance. The Company has received a one-year extension,
with renewal subject to the lender's discretion. This extension expires June 30, 2006. The
note bears interest at 18% per annum. This note is amortized over 5 years at $68,428 per
month. At December 31, 2005, the Company had recorded related accrued interest payable of
$37,635 in connection with this line of credit. The note is guaranteed by the majority
shareholder of the Company and also collateralized by all the assets of the Company. 2,504,684
---------
$10,000,424
==============
F-23
Lines of Credit
Note 8 - Due to Officer
During 2005, the Company issued a note to its CEO totaling $175,000.
The note was issued in payment of the CEO's 2004 guaranteed bonus. This loan and
other notes to our CEO bear interest at 10%, are unsecured and due on demand.
The outstanding principal and related accrued interest balance at December 31,
2005 was $326,580. Of the total, $2,000 represented accrued interest payable.
Note 9 - Stockholders' Deficit
Year Ended December 31, 2005
(A) Common Stock Issuances
(1) Cash
In January 2005, the Company raised $479,500, net of offering costs of
$22,500, from the sale of 984,314 shares of common stock at the price
of $0.51 per share. Offering costs have been recorded as a reduction of
additional paid-in capital.
(2) Services
In January 2005, the Company issued 75,000 shares of common stock to
its board of directors for services rendered. The Company valued the
shares at the fair value on the date of issuance which was $.77 per
share based on the quoted closing trading price and recorded non-cash
compensation of $57,750.
(3) Exercise of Options/Warrants
During the year 2005, the Company's former chief executive officer, an
affiliate, and an employee exercised an aggregate 180,000 options and
warrants at $.01 per share. The Company received proceeds of $1,800
from the transaction and issued 180,000 shares.
F-24
Note 9 - Stockholders' Deficit, continued
(B) Accrued Penalty Shares
At December 31, 2005, pursuant to the terms of a prior common stock
offering with registration rights, the Company has accrued penalties in the
amount of 135,000 shares. The Company has valued these shares at $78,798 based
on the quoted closing trading price every two weeks when the penalty accrues.
The fair value of the penalty has been recorded as a component of accrued
expenses. In February 2006, the Company's Form SB-2 was declared effective.
Pursuant to the terms of the original agreement once a registration statement
had been declared effective, accrual of penalty shares is no longer required. As
of February 2006, the penalty shares have ceased accruing.
(C) Stock Options
The Company follows fair value accounting and the related provisions of
APB No. 25 for employees and SFAS No. 123 for all share based payment awards to
its non-employees. The fair value of each option or warrant granted is estimated
on the date of grant using the Black-Scholes option pricing model. The following
is a summary of all stock options and warrants activity with employees and
non-employees during 2005:
(1) Option Grants - Employees
During 2005, the Company granted an aggregate 477,500 stock options to
employees. The grants had exercise prices ranging from $0.33 to $0.77
per share. Of the total, 225,000 options had specific vesting
provisions. 200,000 options vest ratable over a two year period and the
remaining 25,000 options vest 50% in June 2006 and 50% in December
2006. These options had expiration dates ranging from 3 years to 10
years from the date of issuance.
(2) Options/ Warrants Exercised - Employees
In February 2005, the Company's former chief executive officer and an
affiliate exercised 150,000 warrants at $.01 per share. The Company
received proceeds of $1,500 from the transaction and issued 150,000
shares of common stock.
In June 2005, an employee exercised 30,000 options at $.01 per share.
The Company received proceeds of $300 from the transaction and issued
30,000 shares of common stock.
(3) Option Forfeitures - Employees
In August 2005, 6,250 shares of a previous employee's option with an
exercise price of $.40 expired.
F-25
Note 9 - Stockholders' Deficit, continued
(4) Weighted Average Assumptions for 2005 Option Grants - Employees
Exercise prices on grant dates $0.01 - $0.77
Expected dividend yield 0%
Expected Volatility 150% - 205%
Risk free interest rates 3% - 4%
Expected lives of options 2-10 years
Employee stock option activity for the years ended December 31, 2005
and 2004 are summarized as follows:
Number of Weighted Average
Shares Exercise Price
Outstanding at December 31, 2003 193,750 $ 2.11
Granted 2,967,500 .02
Exercised -- --
Canceled/Expired -- --
-------------- --------------
Outstanding at December 31, 2004 3,161,250 $ .15
Granted 477,500 .49
Exercised (30,000) (.01)
Canceled/Expired (6,250) (.40)
-------------- --------------
Outstanding at December 31, 2005 3,602,500 $ .19
Weighted Average Fair Value of 2005 Grants .19
--------------
The following table summarizes the Company's employee stock options outstanding
at December 31, 2005:
Options Outstanding
Range of Weighted Average Remaining Weighted Average
Exercise Price Number Life Exercise Price
-------------- ------ ---- --------------
.01 2,875,500 8.01 - 8.06 .01
.33 127,500 2.00 - 2.96 .27
.42 200,000 8.46 .42
.70 - .77 212,500 8.34 - 9.05 .75
2.00 - 2.28 187,500 7.50 - 7.84 2.11
-------------------
3,602,500
===================
At December 31, 2005 3,452,500 stock options are exercisable with a weighted
average exercise price for $.18.
F-26
Note 9 - Stockholders' Deficit, continued
The exercise prices of all options granted by the Company equal the
market price at the dates of the grant. Had compensation cost for the stock
option plan been determined based on the fair value of the options at the grant
dates consistent with the valuation method of SFAS No. 123, "Accounting for
Stock Based Compensation," the Company's net loss and loss per share would have
been changed to the pro forma amounts indicated below for the year ended
December 31, 2005.
Twelve Months Ended Twelve Months Ended
December 31, 2005 December 31, 2004
Net loss reported $(1,666,167) $(11,841,753)
Add: total stock based compensation
expense determined under fair value based
method, net of related tax effect (49,675) --
----------------------- --------------------
Pro forma net loss $(1,715,842) $(11,841,753)
Basic loss per share
As Reported $(.07) $(1.33)
Proforma $(.07) $(1.33)
The above pro forma disclosures may not be representative of the
effects on reported net earnings for future years as options vest over several
years and the Company may continue to grant options to employees.
(D) Warrants
On July 21, 2005, as part of a settlement agreement, the Company agreed
to deliver to FastFunds Financial, Inc., Chex Services, Inc.'s corporate parent,
a contingent warrant to purchase up to 500,000 shares of our common stock at a
purchase price of $0.50 per share. The warrant is not exercisable until the
Company achieves $1,000,000 in net income during a fiscal year. This warrant has
a term of ten years and expires upon a change in control of the Company.
F-27
Note 9 - Stockholders' Deficit, continued
From September, 2005 to December 2005, pursuant to the terms of a
software development agreement the Company issued 60,000 warrants to purchase
common stock to a consultant at an exercise prices ranging from $.40 to $.51 per
share, as consideration for services rendered.
In September, 2005, the Company borrowed an aggregate $600,000 from
three individuals, including the uncle and the brother of its Chief Executive
Officer evidenced by convertible notes. The Company issued to one of the lenders
warrants to purchase 50,000 shares of our common stock at an exercise price of
$.01 per share. (See Note 5(A))
In October 2005, 644,438 warrants with an exercise price of $4.00
expired.
In October, 2005, the Company borrowed an aggregate $100,000 from three
individuals, including the Chief Financial Officer evidenced by convertible
notes. The Company issued to the lenders warrants to purchase 50,000 shares of
our common stock at an exercise price of $.01 per share. (See Note 5(A))
In December, 2005, the Company borrowed $25,000 from an individual
evidenced by a promissory note. The Company issued the lender warrants to
purchase 12,500 shares of our common stock at an exercise price of $.01 per
share. The Company recorded a debt discount in the amount of $6,324 and as of
December 31, 2005 has amortized $703 of this debt discount. (See Note 5(B))
Warrant activity for the period ended December 31, 2005 is summarized
as follows:
Number of Weighted Average
Shares Exercise Price
Outstanding at December 31, 2003 5,389,438 $ 4.19
Granted 490,000 .10
Exercised -- --
Canceled (3,800,000) .01
----------- -----------
Outstanding at December 31, 2004 2,079,438 $ 3.13
Granted 172,500 .41
Exercised (150,000) .01
Canceled (644,438) 4.00
----------- -----------
Outstanding at December 31, 2005 1,457,500 $ 2.72
=========== ===========
F-28
Warrants Outstanding
Range of Weighted Average Remaining Weighted Average
Exercise Price Number Life Exercise Price
.01 327,500 6.73 - 8.06 .01
.33 - .35 125,000 3.70 - 8.80 .35
.40 - .44 30,000 9.76 .42
.47 - .51 30,000 9.67 - 9.76 .49
1.00 75,000 2.50 1.00
2.40 112,500 2.82 - 7.25 2.40
4.00 - 6.00 757,500 1.25 - 2.50 4.68
-----------------
1,457,500
=================
All outstanding warrants are exercisable at December 31, 2005.
Year Ended December 31, 2004
In December 2003 the Company affected a 1- for- 4 reverse stock split.
As a result, the Common stock par value was increased to $ .004 per share. All
amounts shown have been restated to account for this split.
In August 2004, with the approval of the Board of Directors, the
Company increased its authorized number of common stock issuable from 50,000,000
to 150,000,000 shares $.004 par value per share. Additionally, the Company is
now authorized to issue 20,000,000 shares of preferred stock $.001 par value per
share.
On January 2, 2004, iGames issued 1,351,640 shares of its Series A
Preferred Stock and warrants to purchase 2,500,000 shares of its common stock to
the stockholders of Money Centers of America, Inc. pursuant to an Agreement and
Plan of Merger dated November 26, 2003, in a transaction exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) thereof
and Rule 506 thereunder. These shares of Series A Convertible Preferred Stock
were converted in October 2004 and each holder received 11.5 shares of the
company's common stock.
In accordance with the reverse merger accounting and the
recapitalization of the Company, iGames' accumulated deficit as of the date of
the reverse merger on January 2, 2004 has been restated as paid-in capital.
F-29
Note 9 - Stockholders' Deficit, continued
Additionally, in January 2004, the Company issued 25,000 shares of our
common stock to a consultant for services rendered. The Company valued these
shares at the fair value on the date of issuance and recorded consulting expense
of $30,000 or $1.20 per share. All of these shares were issued pursuant to
Section 4(2) of the Securities Act.
On September 10, 2004, the Company borrowed $210,000 from an affiliate
of our chief executive officer to pay an advance on commissions to a new casino
customer. In connection with this note, the Company issued the lender warrants
to purchase 50,000 shares of our common stock at an exercise price of $.33 per
share. In the event that the principal amount of this loan plus all accrued
interest thereon is paid in full on or before March 1, 2006, then the Company
shall have the right to cancel warrants to purchase 25,000 shares. The Company
has valued these warrants at $8,846 or $0.37 per option options utilizing the
Black-Scholes options pricing model using the following assumptions: risk free
interest rate of 3.0%, volatility of 151.07%, an estimated life of five years,
and dividend yield of 0%.
In October of 2004 the holder of the Series A Convertible Preferred
Stock received 11.5 shares of the Company's common stock, which conversion rate
was amended by the Board of Directors. The increase of 1.5 common shares per
share of preferred totaling 2,027,460 of the Company's common stock was valued
at $1,033,601 treated as a dividend and recorded as an increase in accumulated
deficit.
In August 2004 the Company issued 4,370,000 shares as part of the
iGames merger to holders of preferred stock and warrants of iGames in excess of
the respective conversion rates as consideration for certain rights given up by
the holders. The shares were valued at the fair value on the date of issuance of
$2,288,500.
During the year ended December 31, 2004, the Company issued capital
distributions relating to its previous status as an S Corporation of $270,010.
$2,000,000 of the Available Money purchase price was paid by tender of
an aggregate of 1,470,589 shares of common stock to the previous shareholders of
Available Money. All of these shares of common stock were cancelled prior to
December 31, 2004 pursuant to the terms of the Available Money Stock Purchase
Agreement.
In December 2004, the Company granted options to purchase 150,000
shares of its common stock at an exercise price of $.01 per share to the owners
of a software development company as partial consideration for software
development services. The Company valued these options at $81,000 or $.54 per
share. These shares were issued pursuant to Section 4(2) of the Securities Act.
F-30
Note 9 - Stockholders' Deficit, continued
In January 2004, the Company issued options to purchase 2,695,000
shares of our common stock to Christopher M. Wolfington and options to purchase
an aggregate of 590,000 shares of our common stock to 21 of our employees and
consultants under our stock option plan. The securities were issued in
transactions exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof.
On September 10, 2004, the Company borrowed $210,000 from a family
member of our chief executive officer to pay an advance on commissions to an
unrelated third party. Pursuant to this note the family member was issued 25,000
warrants to purchase our common stock at .33 per share.
In October 2004, the Company granted options to purchase 100,000 shares
of its common stock at an exercise price of $.35 per share to its former
president in connection with the termination of his employment agreement. These
securities were issued pursuant to Section 4(2) of the Securities Act. The
former president is currently a director.
Note 10 - Commitments and Contingencies
(1) Operating Leases
In connection with converting all of the Available Money ATM's, the
Company now pays rent to various mall properties where it has ATM
machines. These monthly rents average $45,000 per month.
The Company is party to a 39-month lease agreement pursuant to which it
rents office space in Pennsylvania at a monthly rent of $2,635. This
lease expires February 2008.
The Company's total rent expense under operating leases was $556,686
and $422,772 for the years ended December 31, 2005 and 2004,
respectively.
Estimated rent expense under non-cancelable operating leases over the
next five years is as follows:
2006 $ 369,197
2007 263,642
2008 236,242
2009 230,972
2010 155,485
-------
Total $1,255,538
F-31
Note 10 - Commitments and Contingencies, continued
(2) Casino Contracts
The Company operates at a number of Native American owned gaming
establishments under contracts requiring the Company to pay a rental
fee to operate at the respective gaming locations.
Typically, the fees are earned by the gaming establishment over the
life of the contract based on one of the following scenarios:
(A) A dollar amount, as defined by the contract, per
transaction volume processed by the Company.
(B) A percentage of the Company's profits at the
respective location.
As of December 31, 2005 the Company has recorded $943,321 of accrued
commissions on casino contracts.
Pursuant to the contracts, the Native American owned casinos have not
waived their sovereign immunity.
(3) Employment Agreements
(A) CEO
(1) Employment Agreement
In January 2004, the Company entered into a five-year
employment agreement with our Chairman, President and
Chief Executive Officer. In addition to an annual
salary of $350,000 per year (subject to annual
increases at the discretion of the Board of
Directors) (the "Base Salary"), the employment
agreement provides for a $200,000 signing bonus, a
guaranteed bonus equal to 50% of his Base Salary in
any calendar year (the "Guaranteed Bonus") and a
discretionary incentive bonus of up to 50% of his
Base Salary in any calendar year pursuant to a bonus
program to be adopted by the Board of Directors (the
"Incentive Bonus"). Pursuant to his employment
agreement, the officer is entitled to fringe benefits
including participation in retirement plans, life
insurance, hospitalization, major medical, paid
vacation, a leased automobile and expense
reimbursement. At December 31, 2005, the Company had
accrued $43,750 for salary. Effective March, 2006 the
Company amended the executive's agreement to reduce
his guaranteed bonus for 2005 from 50% of his salary
to 12.5% of his salary.
F-32
Note 10 - Commitments and Contingencies, continued
(2) Commissions Payable
The company pays sales commission to sales
persons closing various contracts. The CEO was paid
$39,621 in sales commission for 2005.
(B) CFO
The Company entered into an agreement with its Vice
President of Finance and Chief Financial Officer (CFO) dated
June 14, 2005 (the "Employment Agreement") The employment term
commences on June 14, 2005 and continues until the close of
business on December 31, 2006, with automatic annual renewals
thereafter unless either party gives notice of non-renewal at
least thirty days prior to automatic renewal. The officer's
annual salary during the term of employment under the
Employment Agreement shall be no less than $120,000. In
addition, the officer was granted options to purchase 200,000
shares of the Company's common stock with an exercise price of
$.42 per share under the Company's Amended and Restated 2003
Stock Incentive Plan, pursuant to an Award Agreement for
Non-Qualified Stock Option dated June 14, 2005 entered into
between the Company and the officer. The options have a term
of ten years and are exercisable as follows: (a) 50,000 shall
be exercisable immediately on the date of grant; (b) 50,000
shall be exercisable on June 1, 2006; and (c) 100,000 shall be
exercisable on June 1, 2007. On October 20, 2005, the CFO's
employment agreement was amended to increase his annual salary
to $145,000 and decrease his maximum annual bonus compensation
to $25,000.
(4) Litigation
On or about October 14, 2004, Lake Street Gaming, LLC ("Lake Street")
filed a Complaint against iGames Entertainment, Inc. and Money Centers
of America, Inc. ("MCA") (collectively referred to hereinafter as
"iGames") in the United States District Court for the Eastern District
of Pennsylvania, alleging that iGames breached an Asset Purchase
Agreement ("APA") that the parties executed on or about February 14,
2003. The suit also raises claims for fraudulent misrepresentation and
intentional interference with contractual relations. By virtue of the
APA, Lake Street sold to iGames all of Lake Street's right, title and
interest in a casino game called "Table Slots." Lake Street alleges
that it is entitled to additional compensation for the game that
exceeds what was agreed to. We are vigorously defending this action.
F-33
Note 10 - Commitments and Contingencies, continued
Effective July 21, 2005, the Company entered into a Settlement
Agreement and Mutual Release (the "Settlement Agreement") with Chex Services,
Inc.("Chex"), the wholly owned operating subsidiary of FastFunds Financial
Corporation and Equitex, Inc. ("Equitex"), pursuant to which the parties agreed
to resolve all pending litigation between them and release all claims related to
such litigation. The subject litigation is described in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2004. No party to the
Settlement Agreement admitted any wrongdoing or liability related to the
litigation. The litigation was dismissed with prejudice on July 22, 2005.
Under the Settlement Agreement, Equitex and Chex agreed to cancel the
Company's outstanding $2,000,000 principal liability under a $2,000,000
promissory note from the Company to Chex, dated January 6, 2004, as well as any
liability for accrued but unpaid interest under that promissory note. The
Company agreed to pay Chex $500,000 within 60 days of July 21, 2005. This amount
was paid in September 2005. In addition, the Company, agreed to deliver to
FastFunds Financial Corporation a ten year warrant to purchase up to 500,000
shares of the Company's common stock at a purchase price of $0.50 per share. The
warrant is not exercisable until the Company achieves $1,000,000 in net income
during a fiscal year.
In addition, the Company is from time to time during the normal course
of its business operations, subject to various litigation claims and legal
disputes. The Company does not believe that the ultimate disposition of any of
these matters will have a material adverse effect on its consolidated financial
position, results of operations or liquidity.
Note 11 - Customer Concentrations
For the year ended December 31, 2005, approximately 44 % of total
revenues were derived from operations at two full service casinos. No other
customers represented more than ten percent of the Company's total revenues for
the year ended December 31, 2005.
(See subsequent events.)
For the year ended December 31, 2004, approximately 40% of total
revenues were derived from operations at 2 casinos. No other customers
represented more than ten percent of our total revenues for the year ended
December 31, 2004.
Note 12 - Cash Rental Program and Related Interest Expense
Included in interest expense are monies owed to an unrelated vendor for
interest charges. The interest is based on the amount of cash in the Company's
Available Money ATM machines and network and is calculated on a daily basis. The
balance of this cash funded by the bank in the Company's ATM machines at
December 31, 2005 was approximately $11.8 million. The interest rate on the
$11.8 million is prime plus zero. Effectively the company rents this cash. The
Company does not reflect this cash as an asset or the loan as a liability on its
balance sheet at year end. Interest expense from this cash was $544,321 for
2005.
F-34
Note 13 - Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets (liabilities) are as follows:
December 31
Deferred tax assets: 2005 2004
---- ----
Net operating loss carryforwards $2,198,000 $1,807,000
Accrued expenses 251,000 182,000
Depreciation and amortization 57,000 57,000
----------- ------------
Less valuation on allowance (2,506,000) (2,046,000)
----------- ------------
Net deferred tax assets $ - $ -
=========== ============
The reconciliation of the income tax computed at the U.S. federal
statutory rate to income tax expense for the periods ended December 31, 2005 and
2004:
December 31
2005 2004
---- ----
Tax benefit at federal statutory rate (34%) $620,000 $ 4,005,000
Non-deductible stock compensation (85,000) (2,609,000)
Non-deductible expenses (75,000) (390,000)
Net operating losses related to mergers 0 824,000
----------- -----------
Change in valuation allowance (460,000) (1,830,000)
Net income tax benefit $ - $ -
========== ===========
FASB No. 109 requires a valuation allowance to reduce the deferred tax
assets reported if, based on weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a full valuation allowance at December 31, 2005 is necessary to
reduce the deferred tax assets to the amount that will more likely than not be
realized. At December 31, 2005, the Company has available net operating loss
carryforwards of approximately $6,465,000, which expire in the year 2021-2025.
$2,425,000 of the Net Operating Losses are subject to the limitations under
Section 382 of the Internal Revenue Code relating to changes in ownership in the
amount of $231,000 annually as calculated under code Section 382 of the Internal
Revenue Code.
F-35
Note 14 - Going Concern
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has a working capital
deficit of $6,896,428, a stockholders' deficit of $5,035,587 and an accumulated
deficit of $16,477,197 at December 31, 2005. The Company also reflected a net
loss of $1,666,167 and net cash provided by operations of $111,270, for the year
ended December 31, 2005. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
Management is in the process of implementing its business plan.
Additionally, management is actively seeking additional sources of capital, but
no assurance can be made that capital will be available on reasonable terms.
Management believes the actions it is taking allow the Company to continue as a
going concern. The financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.
Note 15 - Subsequent Events
In February 2006, an employee exercised 70,000 options at $.01 per
share. The Company received proceeds of $700 from the transaction and issued
70,000 shares.
In February 2006, a consultant exercised 5,000 warrants at $.01 per
share. The Company received proceeds of $50 from the transaction and issued
5,000 shares.
In March 2006, the Company issued two promissory notes in the amount of
$50,000. The notes bear interest at 10% per annum and all principal and interest
is due at maturity December 2006 or earlier at the option of the holder upon a
Change in Control. In the event that a Note is not repaid in full within ninety
(90) days following the maturity date, additional interest is due and payable in
an amount equal to twenty-five percent (25%) of the unpaid amount. Thereafter,
additional interest accrues each sixty (60) days in an amount equal to
twenty-five percent (25%) of the unpaid amount.
In April 2006, an employee exercised 25,000 options at $.01 per share.
The Company received proceeds of $250 from the transaction and issued 25,000
shares.
In April 2006, the Company was given notice that a casino customer will
not renew its contract which ends May 6, 2006. The Customer accounted for
approximately $5.3 million in revenue and approximately $460,000 in gross profit
for 2005.
F-36
MONEY CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
F-39
PHIL1 691768-2
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 2006
UNAUDITED
ASSETS
Current assets:
Restricted cash $3,369,485
Accounts receivable 132,588
Prepaid expenses and other current assets 217,149
-------------------
Total current assets 3,719,222
Property and equipment, net 834,672
Other assets
Intangible assets, net 1,038,023
Goodwill 203,124
Deferred financing costs 40,512
Deposits 183,476
-------------------
Total other assets 1,465,135
-------------------
$6,019,029
===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $750,265
Accrued interest 158,355
Accrued expenses 331,109
Current portion of capital lease 179,500
Convertible notes payable, net of debt discount 700,000
Notes payable, net of debt discount 241,855
Lines of credit 8,091,076
Due to officer 250,024
Commissions payable 1,019,793
-------------------
Total current liabilities 11,721,977
Long-term liabilities:
Capital lease, net of current portion 355,598
-------------------
Total long-term liabilities 355,598
TOTAL LIABILITIES 12,077,575
Stockholders' Deficit:
Preferred stock; $.001 par value, 20,000,000
shares authorized
0 shares issued and outstanding -
Common stock; $.01 par value, 150,000,000 shares
authorized
_______________ shares issued and outstanding 253,311
Additional paid-in capital 11,230,155
Accumulated deficit (17,542,012)
-------------------
Total stockholders' deficit (6,058,546)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $6,019,029
===================
The accompanying notes are an integral part of these consolidated financial
statements.
F37
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
SIX MONTHS ENDED
JUNE 30,
--------------------------------------------------------
2006 2005
--------------------------------------------------------
Revenues $ 6,899,453 $ 10,810,853
Cost of revenues 5,540,019 8,801,522
--------------------------------------------------------
Gross profit 1,359,434 2,009,331
Selling, general and administrative expenses 1,108,632 1,319,546
Noncash Compensation 32,650 76,400
Depreciation and amortization 160,338 338,725
--------------------------------------------------------
Operating income (loss) 57,814 274,660
Other income (expenses):
Interest income 8,233 1,650
Interest expense (881,988) (966,927)
Noncash interest expense (139,845) --
Other expenses (128,376) (4,462)
--------------------------------------------------------
Total Interest expense, net (1,141,976) (969,739)
--------------------------------------------------------
Other income 19,152 --
--------------------------------------------------------
Total other income 19,152 --
--------------------------------------------------------
Net income (loss) $ (1,065,010) $ (695,079)
========================================================
Net income (loss) per common share basic $ (0.04) $ (0.03)
========================================================
Net income (loss) per common share diluted $ (0.04) $ (0.03)
========================================================
Weighted Average Common Shares Outstanding
-Basic 25,283,079 25,157,808
========================================================
-Diluted 25,283,079 25,157,808
========================================================
The accompanying notes are an integral part of these consolidated financial statements.
F-38
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
--------------------------------
2006 2005
--------------------------------
Cash flows from operating activities:
Net loss $ (1,065,010) $(695,079)
Adjustments used to reconcile net loss to net cash
Used by operating activities:
Depreciation and amortization 160,338 338,725
Amortization of debt discount 131,585 -
Issuance of warrants for services 3,241 -
Issuance of common stock for services 3,938 -
Changes in operating assets and liabilities:
Increase (decrease) in:
Accounts payable (268,928) 407,276
Accrued interest 41,394 -
Accrued expenses 145,508 28,743
Commissions payable (99,683) 262,625
(Increase) decrease in:
Prepaid expenses and other current assets 24,115 34,609
Accounts receivable 210,154 172,667
Proceeds from refundable deposit 43,200 -
Deposits (2,579) -
--------------------------------
Net cash provided (used) by operating activities (692,706) 607,316
Cash flows from investing activities:
Purchases of property and equipment (9,579) (325,871)
Cash paid for acquisition and intangible assets (117,500) (379,891)
--------------------------------
Net cash used by investing activities (127,079) (705,762)
Cash flows from financing activities:
Net change in lines of credit (1,909,153) 304,237
Capital lease obligation - 183,026
Payments on capital lease obligations (105,515) (18,356)
Advances to officer (120,306) (38,690)
Proceeds from notes payable 75,000 -
Payments on notes payable (81,879) (103,821)
Decrease in loans receivable - 30,000
Sale of common stock, net of $22,500 of offering
costs - 479,500
Exercise of stock options and warrants 1,150 1,800
--------------------------------
Net cash provided by financing activities (2,075,578) 835,890
NET INCREASE (DECREASE) IN CASH (2,895,363 737,444
CASH, beginning of period 6,264,848 4,260,673
--------------------------------
CASH, end of period $ 3,369,485 $ 5,358,117
================================
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 881,988 $ 966,927
================================
Cash paid during the period for taxes $ - $ -
================================
Supplemental disclosure of non-cash investing and
financing activities:
Acquisition of equipment under capital lease $ 292,915 $ -
================================
Reduction of loan payable officer in exchange for
related accrual $ 43,7500 $ -
================================
Record beneficial conversion feature for
convertible debt and freestanding warrants $ 10,305 $ -
The accompanying notes are an integral part of these consolidated financial statements.
F-39
MONEY CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Money Centers of America Inc. (the "Company" or "MCA"), a Delaware corporation,
was incorporated in October 1997. The Company is a single source provider of
cash access services, OnSwitchTM Transaction Management System, and the Omni
Network TM. The Company has combined advanced technology with personalized
customer services to deliver ATM, Credit Card Advance, POS Debit, Check Cashing
Services, CreditPlus (outsourced marker services), cash access host program,
customer data sharing and merchant card processing.
(A) Basis of Presentation
The unaudited consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America ("US
GAAP"). The unaudited consolidated financial statements include the accounts of
the Company and its subsidiaries. All material intercompany balances and
transactions have been eliminated. The Company and its subsidiaries have fiscal
years ending on December 31.
(B) Principles of Consolidation
The Company consolidates its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
(C) Use of Estimates
In preparing financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the periods presented. Actual
results may differ from these estimates.
Significant estimates during 2006 and 2005 include depreciable lives on
equipment, the valuation of stock options granted for services, the value of
warrants issued in connection with debt related financing, valuation of
intangible assets not having finite lives and the valuation allowance for
deferred tax assets since the Company had continuing operating losses.
(D) Reclassification
Certain prior periods balances have been reclassified to conform to the current
period's financial statement presentation. These reclassifications had no impact
on previously reported results of operations or stockholders' deficit.
(E) Cash and Cash Equivalents and Compensating Balances
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with an original maturity date of three months or less to be
cash equivalents.
The Company minimizes its credit risk associated with cash by periodically
evaluating the credit quality of its primary financial institution. The balance
at times may exceed federally insured limits. At June 30, 2006, the balance did
not exceed the federally insured limits. In addition, the Company maintains a
significant amount of cash at each of the casinos. Management believes that the
Company has controls in place to safeguard these on-hand amounts, and that no
significant credit risk exists with respect to cash.
Additionally, the Company had $20,000 maintained under a compensating balance
agreement. The $20,000 is retained due to potential dishonorment of bad checks
that are unforeseen. There is an informal agreement between our bank and our
lender that requires this compensating balance agreement.
(F) Restricted Cash
Restricted cash is the balance of cash that is in the Company's bank accounts
and network that is used as collateral for our asset based lender (See Note 6).
The Company does not have access to this cash unless there is an amount over and
above the required amount of collateral. In order to pay operating expenses, the
Company requests that the asset based lender transfer funds into the Company's
unrestricted cash accounts. The restricted cash balance at June 30, 2006 was
$3,369,485.
F-40
(G) Accounts Receivable
Accounts receivable arise primarily from ATM, credit card advances and check
cashing services provided at casino locations. Concentration of credit risk
related to ATM and credit card advances are limited to the processors who remit
the cash advanced back to the Company along with the Company's allocable share
of fees earned. The Company believes these processors are financially stable and
no significant credit risk exists with respect to accounts receivable arising
from credit card advances. Accordingly, no allowance was considered necessary at
June 30, 2006 and 2005.
(H) Equipment
Equipment is stated at cost, less accumulated depreciation. Expenditures for
maintenance and repairs are charged to expense as incurred. Equipment consists
primarily of cash access devices and computer equipment. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, which ranges from three to seven years.
(I) Long Lived Assets
The Company accounts for long-lived assets in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell the asset. There were no impairment charges taken during the
periods ended June 30, 2006 and 2005.
(J) Goodwill, Intangibles and Related Impairment
Based on the discounted estimated cash flows of the Company over the remaining
amortization period, the Company's carrying values of the assets would be
reduced to their estimated fair values. Goodwill is assumed to have an
indefinite life pursuant to statement of Financial Accounting Standards No. SFAS
142, "Goodwill and Other Intangible Assets" and accordingly is not amortized but
subject to periodic impairment tests. Acquired contract rights are considered to
have a finite life, pursuant to SFAS 142, to be amortized over the period the
asset is expected to contribute to future cash flows. The Company expects the
period to be 1 to 4 years. The contract rights will also be subject to periodic
impairment tests. In accordance with SFAS No. 142, the Company is required to
evaluate the carrying value of its intangible assets (goodwill) subsequent to
their acquisition.
(K) Internal Use Software and Website Development Costs
The Company has adopted the provisions of AICPA Statement of Position ("SOP")
98-1, "Accounting for the Costs of Software Developed or Obtained for Internal
Use", and Emerging Issues Task Force ("EITF") Consensus #00-2. "Accounting for
Website Development Costs." The type of costs incurred by the Company in
developing its internal use software and Website include, but are not limited to
payroll-related costs (e.g. fringe benefits) for employees who devote time to
the internal use computer software or Website project, consulting fees, the
price of computer software purchased from third parties and travel expenses
incurred by employees or consultants in their duties directly associated with
developing the software. These costs are either expensed or capitalized
depending on the type of cost and the stage of development of the software and
Website.
The Company makes ongoing evaluations of the recoverability of its capitalized
internal use software and Web site by comparing the amount capitalized for each
module or component of software to their estimated net realizable values. If
such evaluations indicate that the unamortized costs exceed the net realizable
values, the Company writes off the amount by which the unamortized costs exceed
the net realizable values. At June 30, 2006 and 2005, no such write-offs were
required.
At June 30, 2006, the net book value of capitalized software was $998,987.
Amortization expense for the periods ended June 30, 2006 and 2005 was $3,916 and
$3,916, respectively.
F-41
(L) Deferred Financing Costs
Deferred financing costs are capitalized and amortized over the term of the
related debt. At June 30, 2006, the gross amount of deferred financing costs was
$ 176,283 and related accumulated amortization was $ 135,771. At June 30, 2006
the company reflects in the accompanying consolidated balance sheet net deferred
financing costs of $40,512. Amortization of deferred financing costs was $24,836
and $21,959 at June 30, 2006 and 2005, respectively.
(M) Derivative Liabilities
In order to determine whether the Company has derivative liabilities, the
Company reviewed SFAS No. 133, SFAS No. 150, EITF No. 00-19 and EITF No. 05-02,
"The Meaning of Convertible Debt Instrument in Issue No. 00-19".
Pursuant to the terms of the Company's outstanding convertible debt and the
associated detachable freestanding warrants, management determined that no
instruments should be classified as a derivative liability. Additionally, there
are no other issued and outstanding instruments that require the application of
the aforementioned accounting guidance.
(N) Revenue Recognition
The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin No. 104 for revenue recognition. In general, the
Company records revenue when persuasive evidence of an arrangement exists,
services have been rendered or product delivery has occurred, the sales price to
the customer is fixed or determinable, and collectability is reasonably assured.
The following policies reflect specific criteria for the various revenues
streams of the Company:
(1) ATM's and Credit Cards
Fees earned from ATM and credit card advances are recorded on
the date of transaction.
(2) check Cashing
Revenue is recorded from fees on check cashing services on the
date the check is cashed. If a customer's check is returned by
the bank on which it is drawn, the full amount of the check is
charged as bad debt loss. The check is subsequently
resubmitted to the bank for payment. If the bank honors it,
the amount of the check is recognized as a negative bad debt
expense. Based on the quick turnaround of the check being
returned by the bank on which it is drawn and the resubmission
to the bank for payment, the Company feels this method
approximates the allowance method, which is a Generally
Accepted Accounting Principle. Based upon past history no
allowance was considered necessary at June 30, 2006 and 2005,
respectively.
(O) Cost of Revenues
The cost of revenues primarily includes commissions paid, non management wages,
employee benefits, bad debts, rents paid to contract lessors, transaction
processing costs, cash replenishment fees, non-capitalizable operating lease
fees for ATM's and repairs and maintenance of ATM's.
(P) Advertising
In accordance with Accounting Standards Executive Committee Statement of
Position 93-7, ("SOP 93-7") costs incurred for producing and communicating
advertising of the Company, are charged to operations as incurred. Advertising
expense for the periods ended June 30, 2006 and 2005 were $38,103 and $17,405,
respectively.
(Q) Income Taxes
The Company accounts for income taxes under the Financial Accounting Standards
No. 109 "Accounting for Income Taxes" ("Statement 109"). Under Statement 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period, which includes the enactment date.
F-42
(R) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosures of information about the
fair value of certain financial instruments for which it is practicable to
estimate the value. For purpose of this disclosure, the fair value of a
financial instrument is the amount at which the instrument could be exchanged in
a current transaction between willing parties, other than in a forced sale or
liquidation.
The carrying amounts of the Company's short-term financial instruments,
including accounts receivable, accounts payable and accrued expenses,
commissions payable, notes payable, convertible notes payable, net of debt
discount, line of credit and due to related party approximate fair value due to
the relatively short period to maturity for these instruments.
(S) Earnings per Share
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share," basic earnings per share is computed by dividing the net
income (loss) less preferred dividends for the period by the weighted average
number of shares outstanding. Diluted earnings per share is computed by dividing
net income (loss) less preferred dividends by the weighted average number of
shares outstanding including the effect of share equivalents. Common share
equivalents consist of shares issuable upon the exercise of certain common stock
purchase warrants, stock options, and convertible preferred stock. The Company
has excluded these common share equivalents from its computation of earnings per
share due to their antidilutive effect as the Company has reflected a net loss
at June 30, 2006 and 2005, respectively. Accordingly, the basic and diluted EPS
are the same.
At June 30, 2006 and 2005 there were 6,588,056 and 5,410,688 shares of issuable
common stock underlying the options, warrants and convertible debt securities,
respectively.
The following table summarizes all common stock equivalents outstanding at June
30, 2006 and 2005, respectively.
2006 2005
Common stock options 3,492,500 3,331,250
Common stock warrants 1,540,000 2,079,438
Convertible notes payable 1,555,556 --
------------------- ----------------
Total Common Stock Equivalents 6,588,056 5,410,688
=================== ================
(T) Stock Based Compensation
We previously accounted for stock-based compensation issued to our employees
using the intrinsic value method. Accordingly, compensation cost for stock
options issued was measured as the excess, if any, of the fair value of our
common stock at the date of grant over the exercise price of the options. The
pro forma net loss per share amounts are presented as if the fair value method
had been used during the six months ended June 30, 2005 in accordance with the
Company's adoption of SFAS 123(R) effective January 1, 2006.
For purposes of the following disclosures during the transition period of
adoption of SFAS 123(R), the weighted-average fair value of options has been
estimated on the date of grant using the Black-Scholes options-pricing model
with the following weighted-average assumptions used for grants for the six
months ended June 30, 2006: expected dividend yield of 0%; expected volatility
of 150%; risk-free interest rate of 4%; and an expected term of 7 to 10 years
for options and warrants granted. Had the compensation cost for the quarter
ended June 30, 2005 been determined based on the fair value at the grant, our
net income (loss) and basic and diluted earnings (loss) per share would have
been reduced to the pro forma amount for that period indicated below. For the
quarter ending June 30, 2006, the net income and earnings per share reflect the
actual deduction for option expense as compensation. Compensation recorded for
stock options is a non-cash expense item.
F-43
Six Months Ended
June 30
2006 2005
---- ----
Net income (loss) - as reported $ (1,064,010) $ (695,079)
Less: stock-based employee compensation determined under the -- (136,355)
fair value method
Add: stock-based employee compensation determined under the -- --
intrinsic value method (APB #25)
Net income (loss) (1,065,010) (831,434)
================ ==============
Basic and Diluted earnings (loss) per share-as reported $ (0.04) $ (0.03)
Basic and Diluted earnings (loss) per share-pro forma $ (0.04) $ (0.03)
2. UNAUDITED INTERIM INFORMATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial statements and pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC"). The accompanying unaudited consolidated
financial statements for the interim periods reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the unaudited consolidated financial
position, operating results and cash flows for the periods presented. These
unaudited consolidated financial statements should be read in conjunction with
the financial statements and related footnotes for the year ended December 31,
2005 and notes thereto contained in the annual report on Form 10-KSB as filed
with the Securities and Exchange Commission. The results of operations for the
six months ended June 30, 2006 are not necessarily indicative of the results for
the full year ending December 31, 2006.
3. CONVERTIBLE NOTES PAYABLE, NET OF DEBT DISCOUNT AND NOTES PAYABLE
(A) Convertible Notes Payable, net of debt discount
At June 30, 2006, the Company had the following outstanding convertible
notes payable:
Convertible notes payable $175,000
Convertible notes payable - related party 525,000
---------------
Total convertible notes payable 700,000
Less: debt discount 0
---------------
Convertible notes payable, net of discount 6,588,056
===============
F-44
At June 30, 2006, the Company had the following outstanding accrued
interest payable for all convertible and non-convertible debt
instruments:
Convertible notes payable - accrued interest $8,551
Convertible notes payable - related party - accrued interest 41,605
Interest accrued on Notes Payable and Lines of Credit 95,009
Interest accrued on non convertible related note (see Note 5(B)) 13,190
------------
Total accrued interest payable $158,355
============
In March 2006, the Company granted 25,000 warrants to a related party lender
pursuant to a promissory note requiring the issuance of such warrants provided
the original principal and interest was not paid in full by March 1, 2006. The
payment represents additional interest as consideration for extending the note.
Based upon the following factors used to determine the fair value of these
warrants, the Company attributed a fair value to these warrants of $9,300 and
recorded them as non cash interest.
(B) Notes Payable, net of debt discount
In March 2006 the Company borrowed an aggregate $50,000 evidenced by two
separate $25,000 promissory notes. The Company recorded a debt discount of
$6,682 related to the beneficial conversion feature attributed to the 25,000
warrants issued in connection with these notes. At March 31, 2006, the Company
recorded amortization of debt discount for these notes totaling $742 as a
component of interest expense. The remaining $5,940 of debt discount is being
amortized over the life of the promissory note.
In May 2006 The Company borrowed, from a related party, an aggregate $25,000
evidenced by a promissory note. The Company recorded a debt discount of $3,623
related to the beneficial conversion feature attributed to the 12,500 warrants
issued in connection with this note. At June 30, 2006, the Company recorded
amortization of debt discount for these notes totaling $684 as a component of
interest expense. The remaining $2,939 of debt discount is being amortized over
the life of the promissory note.
The following Weighted Average Assumptions reflect all 2006 Option/Warrant
Grants
Exercise price on grant date $0.01 - $0.33
Expected dividend yield 0%
Expected Volatility 150% - 200%
Risk free interest rate 4%
Expected life of option 7-10 years
During 2006, the Company reflected aggregate principal repayments of $81,897 for
all non-convertible promissory notes.
At June 30, 2006, the Company had the following outstanding notes payable:
Notes payable $184,912
Notes payable - related party 65,000
----------------
Total notes payable 249,912
================
Less: debt discount (8,057)
----------------
Note payable, net of debt discount $241,855
================
F-45
4. CAPITAL LEASES
In February 2006, the Company entered into a new capital lease for 4 ATM
machines at a Casino in California. The capitalized cost of the ATM machines is
$63,685. The terms of this lease require an approximately $19,000 down payment
90 days from installation with the remaining balance of approximately $44,685
financed over 59 months, at 15.15% for $949 per month. This note is
collateralized by the equipment.
In February 2006, the Company entered into a new capital lease for 1 additional
ATM machine at a Casino in New Mexico. The capitalized cost of the ATM machine
is $15,894. The terms of this lease require an approximately $5,000 down payment
90 days from installation with the remaining balance of approximately $10,894
financed over 59 months, at 14.53% for $237 per month. This note is
collateralized by the equipment.
In April 2006, the Company entered into a new capital lease for 4 additional ATM
machines at a Casino in Wisconsin. The capitalized cost of the ATM machines is
$63,574. The terms of this lease require an approximately $19,000 down payment
90 days from installation with the remaining $44,574 financed over 59 months, at
8.61% for $928 per month. This note is collateralized by the equipment.
In April 2006, the Company entered into a new capital lease for 2 ATM machines
at a Casino in California. The capitalized cost of the ATM machines is $39,644.
The terms of this lease require an approximately $12,000 down payment 90 days
from installation with the remaining $27,644 financed over 59 months, at 8.61%
for $579 per month. This note is collateralized by the equipment.
In April 2006, the Company entered into a new capital lease for 4 additional ATM
machines at a Casino in Colorado. The capitalized cost of the ATM machines is
$77,129. The terms of this lease require an approximately $23,000 down payment
90 days from installation with the remaining $54,129 financed over 59 months, at
8.61% for $1,126 per month. This note is collateralized by the equipment.
In April 2006, the Company entered into a new capital lease for 2 ATM machines
at retail locations in New York. The capitalized cost of the ATM machine is
$32,986. The terms of this lease require an approximately $10,000 down payment
90 days from installation with the remaining $22,986 financed over 59 months, at
8.61% for $482 per month. This note is collateralized by the equipment.
Capital lease obligations at June 30, 2006 consisted of the following:
Obligation under capital lease, imputed interest rate at $ 27,358
12.78%; due May 2007; collateralized by equipment
Obligation under capital lease, imputed interest rate at 30,237
8.21%; due December 2009; collateralized by equipment
Obligation under capital lease, imputed interest rate at 30,237
8.21%; due December 2009; collateralized by equipment
Obligation under capital lease, imputed interest rate at 63,669
7.95%; due March 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 8.3%; 11,411
due March 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 22,163
11.63%; due July 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 57,111
9.74%; due July 2010; collateralized by equipment
F-46
Obligation under capital lease, imputed interest rate at 15,894
14.53%; due March 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 63,685
15.15%; due March 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 63,574
8.61%; due April 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 39,644
8.61%; due April 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 77,129
8.61%; due March 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 32,986
8.61%; due March 2011; collateralized by equipment
Less: current maturities (179,500)
---------
Long term obligation, net of current portion $ 355,597
=========
5. DUE TO OFFICER
During 2006, the Company issued a note to its CEO totaling $43,750. The note was
issued in payment of the CEO's 2005 guaranteed bonus. This loan and other notes
to our CEO bear interest at 10%, are unsecured and due on demand. The
outstanding principal and related accrued interest balance at June 30, 2006 was
$250,024. Of the total, $2,650 represented accrued interest payable.
6. LINES OF CREDIT
Lines of credit at June 30, 2006 consisted of the following:
Line of credit, maximum availability of $7,000,000, maturity date May 31, 2006. $ 4,812,813
Subject to various restrictive covenants, interest is payable monthly at Prime
plus 10.75% per annum, borrowings are collateralized by restricted cash, all the
assets of the Company, 250,000 shares of common stock, and guaranteed by the
principal shareholder of the Company. The Company is required to pay a monthly
facility fee equal to 1/12% of the highest balance of the line during the
month. At June 30, 2006, the Company had recorded related accrued interest
payable of $60,945 in connection with this line of credit.
Line of credit, interest is payable monthly at 9% per annum, the line is 328,000
unsecured and due on demand. This line has been established with one of our
casino customers.
Line of credit, non-interest bearing, unsecured and due on demand. This line 495,313
has been established with one of our casino customers.
Line of credit, unsecured and due on demand. The Company pays a fixed stated 187,200
amount of interest totaling $1,000 per month. The payments are recorded and
charged to interest expense. This line has been established with one of our
casino customers. At June 30, 2006, the Company had recorded related accrued
interest payable of $1,000 in connection with this line of credit.
On April 12, 2004, the Company borrowed $2,050,000 from an asset-based lender to 2,267,750
make the second payment for the Available Money acquisition. From April 12, 2004
until June 30, 2005 all interest was accrued and added to the principal
balance. The Company has received a one year extension, with renewal subject to
the lender's discretion. This extension expired May 31, 2006. Although this loan
has not been formally renewed, we are in discussions with the lender regarding
the terms of a renewal and the lender has continued to finance our vault cash on
the current terms. The note bears interest at 17% per annum. This note is
amortized over 5 years at $68,428 per month. At June 30, 2006, the Company had
recorded related accrued interest payable of $33,064 in connection with this
line of credit. The note is guaranteed by the majority shareholder of the
Company and also collateralized by all the assets of the Company.
----------------
$ 8,091,076
================
F-47
7. STOCKHOLDERS' DEFICIT
Six Months Ended June 30, 2006
(A) Common Stock Issuances
(1) Cash
None
(2) Services
In February 2006, the Company issued 9,158 shares of common
stock to employees for services rendered. The Company valued
the shares at the fair value on the date of issuance that was
$.43 per share based on the quoted closing trading price and
recorded non-cash compensation expense of $3,938.
(3) Exercise of Options/Warrants
In February 2006, an employee and a consultant exercised an
aggregate 75,000 options and warrants at $.01 per share. The
Company received proceeds of $750 from the transaction and
issued 75,000 shares.
(B) Accrued Penalty Shares
At June 30, 2006, pursuant to the terms of a prior common stock offering with
registration rights, the Company has accrued penalties in the amount of 142,500
shares. The Company has valued these shares at $81,048 based on the quoted
closing trading price every two weeks when the penalty accrues. The fair value
of the penalty has been recorded as a component of accrued expenses. In February
2006, the Company's Form SB-2 was declared effective. Pursuant to the terms of
the original agreement once a registration statement had been declared
effective, accrual of penalty shares is no longer required. As of February 2006,
the penalty shares have ceased accruing.
F-48
(C) Stock Options
The Company follows SFAS No. 123(R) for all share based payment awards. The fair
value of each option or warrant granted is estimated on the date of grant using
the Black-Scholes option pricing model. The following is a summary of all stock
option and warrant activity with employees and non-employees during 2006:
(1) Option Grants - Employees
In May, 2006, 12,500 options at an exercise price of $0.33 per
share issued to an employee vested according to their stock
option agreement. The Company valued these shares at $4,266
and accordingly booked a noncash compensation expense in the
same amount.
In June 2006 50,000 options at an exercise price of $0.42 per
share issued to the Company's Chief Financial Officer vested
according to the executives employment agreement. The Company
valued these shares at $18,955 and accordingly booked a
noncash compensation expense in the same amount.
(2) Options/ Warrants Exercised - Employees
In February 2006, a consultant exercised 5,000 warrants at
$.01 per share. The Company received proceeds of $50 from the
transaction and issued 5,000 shares of common stock.
In February 2006, an employee exercised 70,000 options at $.01
per share. The Company received proceeds of $700 from the
transaction and issued 70,000 shares of common stock.
In April 2006, an employee exercised 15,000 options at $.01
per share, The Company received proceeds of $150 from the
transaction and issued 15,000 shares of common stock.
In April 2006, an employee exercised 25,000 options at $.01
per share, The Company received proceeds of $250 from the
transaction and issued 25,000 shares of common stock.
(3) Option Forfeitures - Employees
None
(4) Weighted Average Assumptions for 2006 Option Grants -
Employees
None
Employee stock option activity for the six months ended June 30, 2006 and 2005
are summarized as follows:
Number of Weighted
Average
Shares Exercise Price
Outstanding at December 31, 2004 3,161,250 $ .15
Granted 477,500 .49
Exercised (30,000) .01
Canceled/Expired .40
(6,250)
---------------- -----------------
Outstanding at December 31, 2005 3,602,500 $ .19
Granted -- --
Exercised (110,000) .01
Canceled/Expired -- --
---------------- -----------------
Outstanding at June 30, 2006 3,492,500 $ .20
================ =================
F-49
The following table summarizes the Company's employee stock options outstanding
at June 30, 2006:
Options Outstanding
Range of Weighted Average Remaining Weighted Average
Exercise Price Number Life Exercise Price
-------------- ------ ---- ----------------
.01 2,765,500 7.52 - 7.57 .01
.33 127,500 1.50 - 2.47 .30
.42 200,000 7.96 .42
.70 - .77 212,500 7.84 - 8.56 .75
2.00 - 2.28 187,500 6.92 - 7.35 2.11
------------ ----------------
3,492,500 .20
============ ================
At June 30, 2006 3,492,500 stock options are exercisable with a weighted average
exercise price of $.20.
(D) Warrants
(1) Warrant Grants - Consultants
In May 2006, the Company issued 20,000 warrants to purchase
the Company's stock at an exercise price of $0.33 per share to
a consultant for services rendered. According to the issuance
10,000 warrants vested June 29, 2006 and the remaining 10,000
warrants will vest August 28, 2006. The Company valued the
10,000 vested shares at $3,241 and accordingly booked a
noncash compensation expense in the same amount.
Also in May 2006, the company issued 12,500 warrants to
purchase the Company's stock at $0.01 to a lender as described
in Note 3 (B).
Warrant activity for the period ended June 30, 2006 is summarized as
follows:
Number of Weighted Average
Shares Exercise Price
Outstanding at December 31, 2004 2,079,438 $ 3.13
Granted 172,500 .41
Exercised (150,000) .01
Canceled (644,438) 4.00
----------------- -----------------
Outstanding at December 31, 2005 1,457,500 $2.72
----------------- -----------------
Granted 87,500 .14
Exercised (5,000) .01
Canceled -- --
----------------- -----------------
Outstanding at June 30, 2006 1,540,000 $2.58
================= =================
F-50
Warrants Outstanding
Range of Weighted Average Remaining Weighted Average
Exercise Price Number Life Exercise Price
.01 365,000 6.24 - 7.57 .01
.33 - .35 170,000 3.20 - 8.31 .32
.40 15,000 9.26 .40
.44 15,000 9.26 .44
.47 - .51 30,000 9.18 - 9.26 .49
1.00 75,000 2.00 1.00
2.40 112,500 2.33 - 6.76 2.40
4.00 - 6.00 757,500 .75 - 2.00 4.68
------------------
1,540,000
==================
All outstanding warrants are exercisable at June 30, 2006.
8. COMMITMENTS AND CONTINGENCIES
(1) Operating Leases
In connection with converting all of the Available Money
ATM's, the Company now pays rent to various mall properties
where it has ATM machines. These monthly rents average $36,000
per month.
The Company is party to a 39-month lease agreement pursuant to
which it rents office space in Pennsylvania at a monthly rent
of $2,635. This Lease expires February 2008.
The Company's total rent expense under operating leases was
$238,823 and $270,337 for the six months ended June 30, 2006
and 2005, respectively.
(2) Casino Contracts
The Company operates at a number of Native American owned
gaming establishments under contracts requiring the Company to
pay a rental fee to operate at the respective gaming
locations.
Typically, the fees are earned by the gaming establishment
over the life of the contract based on one of the following
scenarios:
(A) A dollar amount, as defined by the contract, per
transaction volume processed by the Company.
(B) A percentage of the Company's profits at the respective
location.
As of June 30, 2006 the Company has recorded $782,210 of
accrued commissions on casino contracts.
Pursuant to the contracts, the Native American owned casinos
have not waived their sovereign immunity.
F-51
(3) Employment Agreements
(A) CEO
(1) Employment Agreement
In January 2004, the Company entered into a
five-year employment agreement with it's
Chairman, President and Chief Executive
Officer. In addition to an annual salary of
$350,000 per year (subject to annual
increases at the discretion of the Board of
Directors) (the "Base Salary"), the
employment agreement provides for a $200,000
signing bonus, a guaranteed bonus equal to
50% of his Base Salary in any calendar year
(the "Guaranteed Bonus") and a discretionary
incentive bonus of up to 50% of his Base
Salary in any calendar year pursuant to a
bonus program to be adopted by the Board of
Directors (the "Incentive Bonus"). Pursuant
to his employment agreement, the officer is
entitled to fringe benefits including
participation in retirement plans, life
insurance, hospitalization, major medical,
paid vacation, a leased automobile and
expense reimbursement. Effective March,
2006, the Company amended the executive's
agreement to reduce his guaranteed bonus for
2005 from 50% of his salary to 12.5% of his
salary. At June 30, 2006, the Company had
accrued $87,500 for bonus.
(2) Commissions Payable
The Company pays sales commissions to sales
persons closing various contracts. The CEO
was paid $18,960 in sales commissions for
the first six months of 2006.
(B) CFO
The Company entered into an agreement with its Vice
President of Finance and Chief Financial Officer
(CFO) dated June 14, 2005 (the "Employment
Agreement"). The employment term commenced on June
14, 2005 and continues until the close of business on
December 31, 2006, with automatic annual renewals
thereafter unless either party gives notice of
non-renewal at least thirty days prior to automatic
renewal. The officer's annual salary during the term
of employment under the Employment Agreement shall be
no less than $120,000. In addition, the officer was
granted options to purchase 200,000 shares of the
Company's common stock with an exercise price of $.42
per share under the Company's Amended and Restated
2003 Stock Incentive Plan, pursuant to an Award
Agreement for Non-Qualified Stock Option dated June
14, 2005 entered into between the Company and the
officer. The options have a term of ten years and are
exercisable as follows: (a) 50,000 shall be
exercisable immediately on the date of grant; (b)
50,000 shall be exercisable on June 1, 2006; and (c)
100,000 shall be exercisable on June 1, 2007. On
October 20, 2005, the CFO's employment agreement was
amended to increase his annual salary to $145,000 and
decrease his maximum annual bonus compensation to
$25,000. At June 30, 2006, the Company had accrued
$12,500 for bonus.
(4) Litigation
On or about October 14, 2004, Lake Street Gaming, LLC ("Lake
Street") filed a Complaint against iGames Entertainment, Inc.
and Money Centers of America, Inc. ("MCA") (collectively
referred to hereinafter as "iGames") in the United States
District Court for the Eastern District of Pennsylvania,
alleging that iGames breached an Asset Purchase Agreement
("APA") that the parties executed on or about February 14,
2003. By virtue of the APA, Lake Street sold to iGames all of
Lake Street's right, title and interest in a casino game
called "Table Slots." Lake Street alleges that it is entitled
to additional compensation for the game that exceeds what was
agreed to. We are vigorously defending this action and believe
that Lake Street's claims for additional compensation and
damages lack merit.
9. CUSTOMER CONCENTRATIONS
For the six months ended June 30, 2006, approximately 55% of total revenues were
derived from operations at two full service casinos. No other customers
represented more than ten percent of our total revenues for the six months ended
June 30, 2006.
F-52
In May 2006, the Company ceased operations with the Sycuan Casino, a casino
customer that did not renew its contract that ended May 6, 2006. The Sycuan
Casino accounted for approximately $5.3 million in revenue and approximately
$460,000 in gross profit for the year ended December 31, 2005.
In the second quarter of 2006 the Sycuan Casino generated $597,242 in revenue
and $128,921 in net loss for operations. The net loss included $128,376 related
to the closing down of our operations at the Sycuan Casino.
10. CASH RENTAL PROGRAM AND RELATED INTEREST EXPENSE
Included in interest expense are monies owed to an unrelated vendor for interest
charges. The interest is based on the amount of cash in the Company's Available
Money ATM machines and network and is calculated on a daily basis. The balance
of this cash funded by the bank in the Company's ATM machines at June 30, 2006
was approximately $6 million. The interest rate on the $6 million is prime plus
zero. Effectively the Company rents this cash. The Company does not reflect this
cash as an asset or the loan as a liability on its balance sheet at June 30,
2006. Interest expense from this cash was $145,105 for the six months ended June
30, 2006.
11. GOING CONCERN
The accompanying unaudited consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has a
working capital deficit of $8,002,755, a stockholders' deficit of $6,058,546 and
an accumulated deficit of $17,542,012 at June 30, 2006. The Company also
reflected a net loss of $1,065,010 and net cash used in operations of $692,706,
for the six months ended June 30, 2006. These conditions raise substantial doubt
about the Company's ability to continue as a going concern.
Management is in the process of implementing its business plan. Additionally,
management is actively seeking additional sources of capital, but no assurance
can be made that capital will be available on reasonable terms. Management
believes the actions it is taking allow the Company to continue as a going
concern. The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
12. SUBSEQUENT EVENTS
None.
F-53
PHIL1 691768-2
Until ________ [DATE], 2006 [90 days from the date of this prospectus], all
dealers that effect transaction in these securities, whether or not participants
in this offering, may be required to deliver a prospectus. This is in addition
to the dealers' obligations to deliver a prospectus when acting as underwriters
and with respect to unsold allotments or subscriptions.
No dealer, salesman or any other person MONEY CENTERS OF AMERICA, INC.
has been authorized to give any
information or to make any 9,334,086 SHARES OF
representations other than those COMMON STOCK
contained in this prospectus in
connection with the offer made by this
prospectus and, if given or made, such
information or representations must not
be relied upon as having been
authorized by Money Centers of
America, Inc. This prospectus does not _____________
constitute an offer to sell or solicitation
of an offer to buy any securities in any PROSPECTUS
jurisdiction in which such offer or
solicitation is not authorized, or in ______________
which the person making such offer or
solicitation is not qualified to do so, or
to any person to whom it is unlawful to
make such offer or solicitation. Neither
the delivery of this prospectus nor any
sale made hereunder shall, under any
circumstances, create any implication ________, 2006
that there has been no change in the
affairs of Money Centers of America,
Inc. or that information contained
herein is correct as of any time
subsequent to the date hereof.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The Money Centers certificate of incorporation provides that all
directors, officers, employees and agents of the registrant shall be entitled to
be indemnified by Money Centers to the fullest extent permitted by Section 145
of the Delaware General Corporation Law.
Section 145 of the Delaware General Corporation Law concerning
indemnification of officers, directors, employees and agents is set forth below.
"Section 145. Indemnification of officers, directors, employees and
agents; insurance.
(a) A corporation shall have power to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that the
person's conduct was unlawful.
(b) A corporation shall have power to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
the person in connection with the defense or settlement of such action or suit
if the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
(c) To the extent that a present or former director or officer of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, such person shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the present or
former director, officer, employee or agent is proper in the circumstances
because the person has met the applicable standard of conduct set forth in
subsections (a) and (b) of this section. Such determination shall be made, with
respect to a person who is a director or officer at the time of such
determination, (1) by a majority vote of the directors who are not parties to
such action, suit or proceeding, even though less than a quorum, or (2) by a
committee of such directors designated by majority vote of such directors, even
though less than a quorum, or (3) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion, or (4)
by the stockholders.
II-1
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that such person is not entitled to be
indemnified by the corporation as authorized in this section. Such expenses
(including attorneys' fees) incurred by former directors and officers or other
employees and agents may be so paid upon such terms and conditions, if any, as
the corporation deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office.
(g) A corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of such
person's status as such, whether or not the corporation would have the power to
indemnify such person against such liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under this section with respect to the resulting or surviving
corporation as such person would have with respect to such constituent
corporation if its separate existence had continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner such person
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
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(k) The Court of Chancery is hereby vested with exclusive jurisdiction
to hear and determine all actions for advancement of expenses or indemnification
brought under this section or under any bylaw, agreement, vote of stockholders
or disinterested directors, or otherwise. The Court of Chancery may summarily
determine a corporation's obligation to advance expenses (including attorneys'
fees)."
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers, and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment of expenses incurred or paid by a director,
officer or controlling person in a successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to
the court of appropriate jurisdiction the question whether such indemnification
by us is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
Paragraph B of Article Seventh of our amended and restated certificate
of incorporation provides:
"The Corporation, to the full extent permitted by Section 145 of the
GCL, as amended from time to time, shall have the power to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
Corporation) by reason of the fact that he is or was a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorney's fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner reasonably believed to be in or not opposed to the best interests of
the Corporation, and, with respect to any criminal action or proceedings, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, upon a plea of nolo contendere or equivalent, shall not, of itself,
create a presumption that the person did not act in good faith and in a manner
which he reasonably believed to be in or not opposed to the best interests of
the Corporation, and with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful."
Item 25. Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses payable by us in
connection with the offer and sale of the shares of our common stock being
registered by this registration statement. All amounts are estimates except for
the SEC registration fee:
Item Amount Payable by the Company
SEC Registration Fee 207
Printing and Engraving Expenses 1,000
Legal Fees and Expenses 15,000
Accounting Fees and Expenses 5,000
Blue Sky Fees and Expenses 1,000
Miscellaneous Expenses 2,793
------------
Total 25,000
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Item 26. Recent Sales of Unregistered Securities.
Recent Sales of Unregistered Securities and Use of Proceeds
The following is a summary of transactions during the preceding three
years involving sales of our securities that were not registered under the
Securities Act of 1933. All share figures reflect the 1-for-4 reverse stock
split that occurred on December 11, 2003.
In October 2003, we sold 25,000 units consisting of one share of our
common stock and two warrants to purchase a share of our common stock at an
exercise price of $0.60 per share. The purchase price of these units was $.25
per unit and we received gross proceeds from this stock sale of $25,000. The
units, shares of common stock and warrants were sold pursuant to Section 4(2) of
the Securities Act.
In October 2003, we issued 81,750 shares of our common stock to three
consultants for services rendered. We valued the shares at a contemporaneous
sales price on the date of issuance and recorded consulting expense of $147,690
or between $1.80, and $1.88 per share. These shares were issued pursuant to
Section 4(2) of the Securities Act.
In October 2003, pursuant to the terms of an asset purchase agreement,
the Company purchased the Random X 21 product by issuing 75,000 restricted
shares of common stock at the fair market value of $135,000 to the seller as
payment of 50% of the purchase price. This agreement was rescinded after the
merger and the change in our business direction. These shares were issued
pursuant to Section 4(2) of the Securities Act.
Also, in October 2003, we issued 4,542 shares of our common stock to
employees. We valued the shares at a contemporaneous sales price on the date of
issuance and recorded salary expense of $8,175 or $1.80 per share, respectively.
These shares were issued pursuant to Section 4(2) of the Securities Act.
In November 2003, in order to secure the performance of the Company's
obligations under a new line of credit, the Company granted the lender a
continuing lien on and security interest in 250,000 newly issued shares of its
common stock. These shares were issued pursuant to Section 4(2) of the
Securities Act.
Also, in November 2003, we granted options to purchase 62,500 shares of
our common stock at an exercise price of $2.00 per share to its former chief
executive officer pursuant to the terms of his employment agreement. These
shares were issued pursuant to Section 4(2) of the Securities Act.
In December 2003, we issued 25,000 shares of our common stock to a
consultant for services rendered. We valued the shares at the market price on
the date of issuance and recorded consulting expense of $37,000 or $1.48 per
share. These shares were issued pursuant to Section 4(2) of the Securities Act.
Additionally, in December 2003, we issued 5,000 shares of our common
stock to a consultant for services rendered. The Company valued the shares at
the market price on the date of issuance and recorded consulting expense of
$6,600 or $1.32 per share. These shares were issued pursuant to Section 4(2) of
the Securities Act.
On January 2, 2004, we issued 1,351,640 shares of our Series A
Preferred Stock and warrants to purchase 3,800,000 shares of our common stock to
the stockholders and warrant holders of Money Centers of America, Inc. pursuant
to an Agreement and Plan of Merger dated November 26, 2003, in a transaction
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) thereof and Rule 506 thereunder.
In January 2004, we issued options to purchase 2,635,000 shares of our
common stock to Christopher M. Wolfington and options to purchase an aggregate
of 485,000 shares of our common stock to 16 of our employees and consultants
under our stock option plan. The securities were issued in transactions exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) thereof.
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Additionally, in January 2004, we issued 25,000 shares of our common
stock to a consultant for services rendered. We valued these shares at the
market price on the date of issuance and recorded consulting expense of $30,000
or $1.20 per share. All of these shares were issued pursuant to Section 4(2) of
the Securities Act.
In May 2004, we issued 62,500 shares of restricted common stock to one
of our executive employees, pursuant to the terms of the executive's employment
contract. The company valued those shares at $.70 per share, the fair market
value on the date of the grant.
$2,000,000 of the Available Money purchase price was paid by tender of
an aggregate of 1,470,590 shares of common stock to the previous shareholders of
Available Money in April 2004. The terms of the Stock Purchase Agreement allow
for certain purchase price adjustments. As a result, all of these shares of
common stock were cancelled prior to December 31, 2004.
On September 10, 2004, the Company borrowed $210,000 from an affiliate
of our chief executive officer to pay an advance on commissions to a new casino
customer. In connection with this note, the Company issued the lender warrants
to purchase 50,000 shares of our common stock at an exercise price of $.33 per
share. In the event that the principal amount of this loan plus all accrued
interest thereon is paid in full on or before March 1, 2006, then the Company
shall have the right to cancel warrants to purchase 25,000 shares.
In October 2004, the Company granted options to purchase 100,000 shares
of its common stock at an exercise price of $.35 per share to its former
president in connection with the termination of his employment agreement. These
securities were issued pursuant to Section 4(2) of the Securities Act.
In December 2004, the Company granted options to purchase 150,000
shares of its common stock at an exercise price of $.01 per share to the owners
of a software development company as partial consideration for software
development services The company valued these options at $81,000 or $.54 per
share. These shares were issued pursuant to Section 4(2) of the Securities Act.
Pursuant to the Merger Agreement between the company and iGames, the
holders of each share of iGames' common stock received one share of the
company's common stock, and each holder of shares of iGames' Series A
Convertible Preferred Stock received 11.5 shares of the company's common stock.
Options and warrants to purchase iGames' common stock, other than warrants
issued as part of the merger consideration in iGames' acquisition of the company
(the "Merger Warrants"), were deemed options and warrants to purchase the same
number of shares of the company's common stock with no change in exercise price.
The Merger Warrants were canceled in exchange for 1.15 shares of the company's
common stock for each share of common stock purchasable thereunder.
Pursuant to the terms of a common stock offering with registration
rights, the company has accrued penalties in the amount of 70,000 shares. The
company has valued these shares at $45,323.
In January 2005, we sold 984,314 shares of our common stock at $0.51
per share to three investors. These shares were sold pursuant to Rule 506 of
Regulation D.
From September to December 2005 we borrowed $725,000 from seven
individuals, including our Chief Financial Officer ($25,000) and our Chief
Executive Officer's uncle and brother ($250,000 each). These loans bear interest
at 10% per annum with terms of nine months. Warrants to purchase an aggregate of
112,500 shares of our common stock at an exercise price of $0.01 per share were
issued to our Chief Financial Officer (12,500 shares) and four unaffiliated
lenders (100,000 shares).
From March to May 2006 we borrowed $75,000 from our Chief Executive
Officer's father. These loans bear interest at 10% per annum with terms of nine
months. Warrants to purchase an aggregate of 37,500 shares of our common stock
at an exercise price of $0.01 per share were issued to the lender.
II-5
In August 2006 we sold 4,800,000 shares of our common stock at $0.25
per share to 14 investors. These shares were sold pursuant to Rule 506 of
Regulation D.
Item 27. Exhibits.
(a) The following Exhibits are filed as part of this report.
Exhibit Number Description
2 Agreement and Plan of Merger dated as of August 10, 2004
by and between iGames Entertainment, Inc. and Money Centers
of America, Inc. (incorporated by reference to Exhibit 2 of
Current Report on Form 8-K12g-5 filed on October 19, 2004).
3.1 Amended and Restated Certificate of Incorporation of Money
Centers of America, Inc. (incorporated by reference to
Exhibit 3.1 of the Current Report on Form 8-K12g-3 filed on
October 19, 2004).
3.2 Amended and Restated By-laws of Money Center of America,
Inc. (incorporated by reference to Exhibit 3.2 of the
Current Report on Form 8-K12g-3 filed on October 19, 2004).
5 Opinion of Klehr, Harrison, Harvey, Branzburg & Ellers, LLP
as to the legality of the shares of common stock being
registered (to be filed by amendment).
10.1 Amended and Restated 2003 Stock Incentive Plan of iGames
Entertainment, Inc. (incorporated by reference to Exhibit
10.1 to the Annual Report on Form 10-KSB filed on July 13,
2004).
10.2 Employment Agreement dated as of January 2, 2004 by and
between iGames Entertainment, Inc. and Christopher M.
Wolfington (incorporated by reference to Exhibit 10.6 to
the Annual Report on Form 10-KSB filed on July 13, 2004).
10.3 Amendment to Employment Agreement dated as of March 20, 2006
by and between Money Centers of America, Inc. and Christopher
M. Wolfington (incorporate by reference to Exhibit 10.3 to
the Quarterly Report on Form 10-QSB for the fiscal quarter
ended March 31, 2006 filed on May 22, 2006).
10.4 Employment Agreement dated as of June 14, 2005 by and
between Money Centers of America, Inc. and Jason P. Walsh
(incorporated by reference to the Current Report on Form
8-K filed on June 14, 2005).
10.5 Amendment to Employment Agreement dated as of October 20,
2005 by and between Money Centers of America, Inc. and Jason
P. Walsh (incorporated by reference to Exhibit 10.5 to the
Quarterly Report on Form 10-QSB for the fiscal quarter ended
March 31, 2006 filed on May 22, 2006).
10.6 Loan and Security Agreement by and between iGames
Entertainment, Inc. and Mercantile Capital, L.P. dated
November 26, 2003 (incorporated by reference to Exhibit 10.1
to the Quarterly Report on Form 10-QSB for the fiscal quarter
ended December 31, 2003 filed on February 17, 2004).
10.7 Demand Note payable to the order of Mercantile Capital, L.P.
in the principal amount of $250,000 dated November 26, 2003
(incorporated by reference to Exhibit 10.2 to the Quarterly
Report on Form 10-QSB for the fiscal quarter ended December
31, 2003 filed on February 17, 2004).
21 Subsidiaries of Money Centers of America, Inc.
23.1 Consent of Sherb & Co. dated ___________, 2006.
23.2 Consent of Klehr, Harrison, Harvey, Branzburg & Ellers LLP as
to the legality of the shares of common stock being
registered (included in Exhibit 5).
II-6
Item 28. Undertakings.
(a) We shall undertake to:
(1) File, during any period in which we offer or sell
securities, a post-effective amendment to this registration statement
to:
(i) Include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events
which, individually or together, represent a
fundamental change in the information in the
registration statement (or the most recent
post-effective amendment thereof); and
(iii) Include any material information with respect
to the plan of distribution not previously disclosed
in the registration statement or any material change
to such information in the registration statement.
(2) For determining liability under the Securities Act of
1933, treat each post-effective amendment as a new registration
statement of the securities offered, and the offering of the securities
at that time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at then end of
the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of our company pursuant to any provisions contained in our Articles of
Incorporation, By-Laws, or otherwise, we have been advised that in the opinion
of the Security and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by us of expenses incurred or paid by a
director, officer or controlling person of our company in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, we will,
unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
indemnification by us is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
(c) We further undertake that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-7
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of King of
Prussia, Pennsylvania on Date: __________, 2006.
Money Centers of America, Inc.
By: /s/ Christopher M. Wolfington
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Christopher M. Wolfington as his true and
lawful attorney-in-fact, with full power of substation and resubstitution for
him and in his name, place and stead, in any and all capacities to sign any and
all amendments including post-effective amendments to this registration
statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorney-in-fact or his substitute, each
acting alone, may lawfully do or cause to be done by virtue thereof.
In accordance with the Securities Act of 1933, this registration
statement was signed by the following persons in the capacities and on the dates
indicated.
Date: October 23, 2006 /s/ Christopher M. Wolfington
----------------------------------------------
Christopher M. Wolfington
Chief Executive Officer and Director
Date: October 23, 2006 /s/ Jason P. Walsh
----------------------------------------------
Jason P. Walsh
Chief Financial Officer (principal financial
officer and principal accounting officer)
Date: October 23, 2006 /s/ Jeremy Stein
----------------------------------------------
Jeremy Stein
Director
Date: October 23, 2006 /s/ Jonathan Robinson
----------------------------------------------
Jonathan Robinson
Director
II-8