UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Quarter ended September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File No. 000-49723
MONEY CENTERS OF AMERICA, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 23-2929364
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(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
700 SOUTH HENDERSON ROAD, SUITE 325, KING OF PRUSSIA, PA 19406
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(Address of Principal Executive Offices)
(610) 354-8888
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
------- -------
As of November 12, 2004, the issuer had issued and outstanding
23,117,126 shares of its common stock, par value $0.001 per share.
MONEY CENTERS OF AMERICA, INC.
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
INDEX TO FORM 10-QSB
PAGE
NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at
September 30, 2004 (unaudited) ........................... 1
Consolidated Statements of Operations for the
Three and Six Months Ended
September 30,2004 and 2003 (unaudited) ................... 2
Consolidated Statements of Cash Flows for the
Three and Six Months Ended
September 30, 2004 and 2003 (unaudited) .................. 3
Notes to Financial Statements ............................ 4
Item 2. Management's Discussion and Analysis or Plan or Operation 11
Item 3. Controls and Procedures .................................. 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................ 24
Item 2. Changes in Securities and Use of Proceeds ................ 25
Item 3. Defaults Upon Senior Securities .......................... 25
Item 4. Submission of Matters to a Vote of Security Holders....... 25
Item 5. Other Events ............................................. 25
Item 6. Exhibits and Reports on Form 8-K ......................... 25
Signatures ........................................................ 26
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MONEY CENTERS OF AMERICA, INC.
BALANCE SHEET
SEPTEMBER 30, 2004
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 1,210,100
Restricted cash .............................................. 2,204,557
Accounts receivable .......................................... 888,862
Loans receivable ............................................. 58,000
Prepaid expenses and other current assets .................... 429,912
------------
Total current assets ....................................... 4,791,431
Property and equipment, net ..................................... 378,761
Intangible assets, net .......................................... 5,138,607
Deferred financing costs ........................................ 108,455
------------
$ 10,417,254
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ............................................. $ 992,708
Accrued expenses ............................................. 170,212
Current portion of capital lease ............................. 18,369
Loans payable ................................................ 2,000,000
Notes payable ................................................ 160,000
Note payable, related party .................................. 201,154
Lines of credit .............................................. 6,175,878
Due to officer ............................................... 314,512
Commissions payable .......................................... 1,023,556
Dividends payable ............................................ 23,875
------------
Total current liabilities .................................. 11,080,264
Long-term liabilities:
Capital lease ................................................... 32,327
------------
Stockholders' Deficit:
Preferred stock; $.001 par value, 5,000,000 shares authorized
1,351,640 shares issued and outstanding .................... 1,351
Common stock; $.004 par value, 50,000,000 shares authorized
5,524,393 shares issued and outstanding .................... 22,097
Additional paid-in capital ................................... 10,913,190
Accumulated deficit .......................................... (11,631,975)
------------
Total stockholders' deficit ................................ (695,337)
------------
$ 10,417,254
============
The accompanying notes are an integral part of
these financial statements.
1
MONEY CENTERS OF AMERICA, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues ................................... $ 4,767,853 $ 1,748,992 $ 9,382,410 $ 3,076,080
Operating expenses ......................... 4,040,955 1,492,746 7,882,187 2,524,748
----------- ----------- ----------- -----------
Gross profit ............................... 726,898 256,246 1,500,223 551,332
Selling, general and administrative expenses 568,326 246,055 1,119,203 444,170
Depreciation and amortization .............. 454,282 47,558 778,715 83,284
----------- ----------- ----------- -----------
Operating loss ............................. (295,710) (37,367) (397,695) 23,878
Other income (expenses):
Interest expense, net ...................... (488,029) (64,967) (1,010,056) (88,516)
Other income ............................... - 3,263 170 3,263
----------- ----------- ----------- -----------
(488,029) (61,704) (1,009,886) (85,253)
----------- ----------- ----------- -----------
Net loss ................................... (783,739) (99,071) (1,407,581) (61,375)
=========== =========== =========== ===========
Net loss per common share basic and diluted $ (0.14) $ (0.03) $ (0.26) $ (0.02)
=========== =========== =========== ===========
Weighted Average Common Shares Outstanding
-Basic and Diluted ........... 5,524,530 3,433,438 5,314,387 3,323,214
=========== =========== =========== ===========
The accompanying notes are an integral part of
these financial statements.
2
MONEY CENTERS OF AMERICA, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
September 30,
-------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
Net loss ......................................... $(1,407,581) $ (61,375)
Adjustments used to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization ................ 778,715 83,284
Gain on disposal of assets ................... - (3,263)
Increase in:
Accounts payable .......................... 336,408 15,823
Accrued expenses .......................... 59,103 2,785
Commissions payable ....................... 690,357 211,172
(Increase) decrease in:
Prepaid expenses and other current assets (238,467) (21,100)
Accounts receivable ....................... 5,356 (542,761)
Loans receivable........................... - 181,312
----------- -----------
Net cash provided (used) by operating activities .... 223,891 (134,123)
Cash flows from investing activities:
Proceeds from disposal of assets.................. - 22,760
Purchases of property and equipment .............. (32,924) (212,231)
Purchase of intangible assets .................... (35,000) (10,552)
Purchase of deferred financing.................... - (77,245)
----------- -----------
Net cash used by investing activities ............... (67,924) (277,268)
Cash flows from financing activities:
Increase in restricted cash ...................... (1,261,336) (432,270)
Net change in line of credit ..................... 3,737,760 677,792
Capital lease obligation ......................... - 148,437
Payments on capital lease obligations ............ (9,684) (77,834)
Increase in loans payable ........................ - 26,687
Advances to officer .............................. - (17,927)
Advances from officer ............................ - 100,000
Proceeds from notes payable ...................... 210,000 -
Payments on notes payable ........................ (1,858,500) -
Decrease in loans receivable ..................... 5,000 -
Dividends ........................................ (1,125) (47,500)
----------- -----------
Net cash provided by financing activities ........... 822,115 377,385
NET INCREASE (DECREASE) IN CASH ..................... 978,082 (34,006)
CASH, beginning of period ........................... 232,018 1,363,450
----------- -----------
CASH, end of period ................................. $ 1,210,100 $ 1,329,444
=========== ===========
Supplemental disclosures:
Cash paid during the period for interest ......... $ 1,010,056 $ 88,516
=========== ===========
The accompanying notes are an integral part of
these financial statements.
3
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
iGames Entertainment, Inc. (the "Company" or "iGames") was originally
incorporated in the State of Florida on May 9, 2001 under the name Alladin
Software, Inc. On June 25, 2001, the Company changed its name to iGames
Entertainment, Inc. On July 10, 2001, iGames Entertainment, Inc. was
incorporated in Nevada, and iGames Entertainment, Inc., a Florida corporation,
became a wholly-owned subsidiary.
On January 2, 2004, pursuant to an Amended and Restated Agreement and Plan of
Merger (the "Merger Agreement") by and among Money Centers of America, Inc.
(Money Centers), Christopher M. Wolfington, 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 Money Centers and Money
Centers, 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 Money Centers 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 Money Centers were tendered to
iGames and iGames issued to the Money Centers 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 is entitled to ten votes in
all matters submitted to a vote of iGames shareholders and is convertible at the
option of the holders into ten shares of common stock at any time after the date
on which iGames amends its articles of incorporation to increase the number of
authorized shares of its common stock to at least 125,000,000.
Money Centers is a single source provider of cash access services to the gaming
industry. Money Centers has combined state-of-the-art technology with
personalized customer services to deliver the best in ATM, Credit Card Advance,
POS Debit, Check Cashing Services, CreditPlus outsourced marker services, and
merchant card processing. The Company believes that the acquisition of Money
Centers 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. The combined companies will gain wider exposure
within the casino and gaming industry.
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, a provider of cash access services based in Los Angeles,
California. The purchase price of this transaction was $6,000,000, $2,000,000 of
which was paid in cash at closing, $1,850,000 of which was paid in cash on April
12, 2004, and $2,000,000 of which was paid by issuance of 1,470,589 shares of
iGames common stock on April 12, 2004.
4
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION (CONTINUED)
The Stock Purchase Agreement provides for adjustment of the purchase price in
the event that certain of Available Money's customer contracts do not renew or
that the former stockholders of Available Money do not provide iGames with
assistance in obtaining renewals of such contracts. We are withholding payment
of the remaining $150,000 of the purchase price in accordance with these
provisions of the Stock Purchase Agreement. We have also made additional
adjustments to the purchase price. See Note 13.
The primary assets acquired as a result of this transaction are Available
Money's contracts to provide automatic teller machines to 18 customers, 15 of
which are traditional casino operations. The former stockholders of Available
Money retained the right to receive all payments subsequent to the closing date
that relate to services provided by Available Money through December 31, 2003
and are jointly and severally liable for all costs and expenses incurred by
Available Money relating to services rendered on or before December 31, 2003.
2. UNAUDITED INTERIM INFORMATION
The accompanying unaudited 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 financial statements for the interim
periods are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and operating results for the
periods presented. These financial statements should be read in conjunction with
the financial statements and related footnotes for the fiscal year ended March
31, 2004 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 September 30, 2004 are not necessarily indicative of the
results for the full fiscal year ending March 31, 2005.
3. RECLASSIFICATION
Certain prior period 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.
5
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. NOTES PAYABLE
Notes payable at September 30, 2004 consisted of the following:
2004
----------
On March 1, 2002, the Company issued a convertible promissory note to
an individual in the principal amount of $100,000. From July 2003
through September 2004, the Company repaid $90,000 of this debt. The
remaining principal balance of this note of $10,000 continues to bear
interest at 10% per annum and is due upon demand. .................... $10,000
The Company borrowed $2,000,000 from Chex Services, Inc. to pay the
first $2,000,000 to the former owners of Available Money. The loan
bears interest at a rate of 15% per annum from January 6, 2004 until
February 1, 2004 (25 days). In addition, in lieu of interest, the
lender is entitled to receive payment of 50% of the operating income
of Available Money. To date, the operating income of Available Money
has been immaterial. The loan is currently in litigation, see note 12. 2,000,000
This represents the remaining $150,000 of the Available Money purchase
price. As stated in Note 1, this amount is being withheld from
Helene Reagan and Samuel Freshman in accordance with the agreement
provisions regarding the extensions of various contracts. ............ 150,000
On September 10, 2004, the Company borrowed $210,000 from a family
member of an officer of the Company to pay an advance on commissions
to a new casino. This note is shown net of a discount $8,846 for the
value of various warrants issued in conjunction with the loan. The
discount of $8,846 is amortized over 17 months and begins 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 Money
Centers of America, Inc. commences operations at Angel of the Winds
Casino (the "Gaming Establishment"), and continuing on the 1st day of
each month thereafter through April 30, 2005. Per the contract between
MCA and Angel of the Winds Casino, this note's interest is deductible
from the commission that MCA pays the Casino on a monthly basis. ..... 201,154
----------
$2,361,154
==========
5. LINES OF CREDIT:
On April 12, 2004, we entered into a term note in the principal amount of
$2,050,000 payable to Mercantile Capital. The note with Mercantile bears
interest at 17% and is payable over a 24 month period.
6
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. STOCKHOLDERS' DEFICIT
We incurred $6,000,000 of debt associated with our acquisition of Available
Money. $2,000,000 of this indebtedness was paid by tender of an aggregate of
1,470,590 shares of our common stock to the previous shareholders of Available
Money. The terms of the Stock Purchase Agreement allow for certain purchase
price adjustments associated with this indebtedness that may lower the actual
amount we are required to pay. The actual amount paid will not be determined
until certain events outlined in the Stock Purchase Agreement have materialized.
As of the date of this report, we have withheld $150,000 of the purchase price
set forth in the Stock Purchase Agreement due to non-renewal of certain
Available Money contracts and claims against Available Money for reimbursement
of expenses that they are obligated to pay pursuant to the Stock Purchase
Agreement, see notes 12 and 13.
Pursuant to the terms of a common stock offering with registration rights, the
Company has accrued penalties in the amount of 55,000 shares. The Company has
valued these shares at $38,385.
Stock option and warrant activity for the six months ended September 30, 2004 is
summarized as follows:
Number of Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding at March 31, 2004 ............. 7,269,064 $ .95
Granted ............................... 112,500 .54
Exercised ............................. - -
Canceled .............................. - -
--------- -----
Outstanding at September 30, 2004 ......... 7,381,564 $ .94
========= =====
The following table summarizes the Company's stock options and warrants
outstanding at September 30, 2004:
Options and
Warrants Outstanding
------------------------------------------
Weighted Weighted
Average Average
Range of Remaining Exercise
Exercise Price Number Life Price
-------------- --------- --------- --------
$2.40 - 4.00 237,500 4.00 $ 3.24
4.00-6.00 1,286,564 2.25 5.00
8.00 125,000 9.75 8.00
.01 5,620,000 9.75 .01
.70 62,500 10.00 .70
.33 25,000 5.00 .33
.33 25,000 1.42 .33
---------
7,381,564
=========
7
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. STOCKHOLDERS' DEFICIT (CONTINUED)
All outstanding options and warrants are exercisable at September 30, 2004.
Compensation expense, net income or earnings per share would not have changed
had the Company applied SFAS No. 123 instead of APB No. 25.
7. COMMITMENTS
a. LEASE COMMITMENTS
In conjunction 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 $42,000 per month.
The Company is party to a three year lease agreement pursuant to which it
rents office space in Pennsylvania at a monthly rent of $2,200. The first
three months of this lease will only require payment of monthly operating
expenses. This lease commences when the landlord has completed refitting
the space. The lease has not yet commenced because the landlord has not
yet finished the refit of the office.
The Company's total rent expense under operating leases was approximately
$275,751 and $6,616 for the six months ended September 30, 2004 and 2003,
respectively.
8. CONCENTRATION OF CREDIT RISK
The Company maintains cash in bank accounts which exceed federally insured
limits. At September 30, 2004, the Company had deposits in excess of federally
insured amounts aggregating approximately $5,930,000 at various financial
institutions. The Company believes it has its cash deposits at high quality
financial institutions. 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.
For the six months ended September 30, 2004, 27% of total revenues were derived
from operations at one casino. No other customer represented more than ten
percent of our total revenues for the six months ended 2004.
9. DUE TO OFFICER
Amounts due to officer are evidenced by notes in the aggregate amounts of
$338,600 that bears interest at a rate of 10% per annum, payable monthly, and
are due on demand. This consists of $100,000 loaned to the Company by the
officer in fiscal year 2004. This amount also includes a monies due the officer
in the amount of $6,771 from 2002, sales commissions due the officer in the
amount of $21,029 from 2001, sales commissions due the officer in the amount of
$5,000 from fiscal year 2003 and the officer's fiscal year 2004 bonus per his
employment agreement in the amount of $205,800. Payments in the amount of
$24,088 paid to the officer have been netted to this note. The officer has been
paid $20,278 in interest on this note during the six months ended September 30,
2004.
10. INTEREST EXPENSE
Included in interest expense are monies owed to a vendor for interest charges.
The interest is based on the amount of restricted cash in our ATM machines and
network and is calculated on a daily basis. The balance of this restricted cash
at September 30, 2004 was approximately $5,900,000.
8
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has an accumulated deficit
of $11,631,975 as of September 30, 2004 and had net losses for the six months
ended September 30, 2004 and a negative working capital of $6,288,833. 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. LITIGATION
On March 24, 2004, we filed a complaint in United States District Court for the
District of Delaware against Equitex, Inc. and its wholly-owned subsidiary, Chex
Services, Inc. d/b/a Fastfunds ("Chex"). In the complaint, we allege that
Equitex and Chex committed numerous breaches of the terms of the November 3,
2003 Stock Purchase Agreement pursuant to which we were to have acquired Chex
from Equitex, including (i) false representations and warranties related to
terminated Chex casino contracts and over $600,000 in bad debts, (ii) material
misrepresentations in SEC filings, (iii) entering into a material financing
transaction in violation of the covenant not to enter into transactions outside
the ordinary course of business, and (iv) failure to proceed in good faith
toward closing, including notifying iGames that Equitex could not close on the
transaction as structured. These breaches entitle us to terminate the Stock
Purchase Agreement and receive a $1,000,000 termination fee and reimbursement of
our transaction costs (estimated at over $750,000) from Equitex and Chex. Our
complaint also states that Chex wrongfully and tortiously declared a default
under the $2,000,000 promissory note that we issued to Chex in connection with
our acquisition of Available Money, and that Equitex and Chex tortiously
interfered with our relationship with our senior lender. We seek to recover the
$1,000,000 termination fee and transaction costs together with significant
damages that resulted from the defendants' breaches and tortuous conduct.
On March 23, 2004, Equitex filed an action in Delaware state court concerning
the same Stock Purchase Agreement at issue in the Delaware federal action that
we filed, alleging that Equitex was entitled to terminate the Stock Purchase
Agreement and receive a $1,000,000 termination fee and reimbursement of
transaction costs. We removed this action to the Delaware federal district
court. We are vigorously defending this action and believe that Equitex's and
Chex's claims are unfounded. We have filed a counterclaim that restates the
claims made in the federal action that we filed. We expect that the two Delaware
federal actions will be combined into a single case.
On March 15, 2004, Chex filed a complaint in the District Court of the State of
Minnesota for the County of Hennepin against us alleging that we defaulted on
interest payments on a $2,000,000 promissory note evidencing our obligation to
repay a loan that Chex extended to us in connection with our acquisition of
Available Money (the "Minnesota Complaint"). The Minnesota Complaint seeks
payment of The principal balance of the loan and accrued interest thereon. Chex
initially alleged that we are liable to them for a penalty fee of $1,000,000 as
the result of the alleged termination by Equitex of the November 3, 2003 Stock
Purchase Agreement, but have since waived their claims to the penalty fee. We
subsequently removed the Minnesota Complaint to the United States District Court
for the District of Minnesota. On June 23, 2004, the United States District
Court for the District of Minnesota transferred this action to the United States
District Court for the District of Delaware. This case and the two Delaware
federal court actions described above have since been consolidated by the United
States District Court for the District of Delaware. On November 12, 2004, the
Delaware District Court judge denied Chex's motion for summary judgment for sums
allegedly due on the $2,000,000 promissory note on the basis that the facts
surrounding the alleged default on the note and the termination of the Stock
Purchase Agreement were substantially interrelated and that resolution of the
issues raised by Chex's motion would have to await trial. We are vigorously
defending this action, which is still in the pleadings stage, and believe that
Chex's claims lack merit.
9
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. LITIGATION (CONTINUED)
On July 15, 2004, the former stockholders of Available Money, Inc. filed a
lawsuit in the United States District Court for the District of Delaware against
us and Christopher M. Wolfington, our Chief Executive Officer. The complaint
arises out of our purchase of the capital stock of Available Money, Inc.
pursuant to the Stock Purchase Agreement and alleges that we failed to make
required payments of the purchase price set forth in the Stock Purchase
Agreement. In addition, the former stockholders of Available Money also filed a
Motion for a Standstill Order/Temporary Restraining Order that the court denied
without a hearing. As we have paid or tendered to the former Available Money
stockholders all consideration now due to them under the Stock Purchase
Agreement, we believe that this lawsuit is frivolous. Accordingly, we believe
that the suit was filed for inappropriate purposes and will vigorously defend
against this action and seek sanctions for filing of a frivolous suit. We also
anticipate filing counterclaims against Howard Regen, Helene Regen and Samuel K.
Freshman seeking substantial reduction in the purchase price and other damages
and remedies based on fraud and misrepresentations by them in connection with
the transaction.
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.
13. SUBSEQUENT EVENTS
One of Available Money's casino customers terminated its contract with Available
Money effective November 1, 2004. This customer has communicated to us that this
termination was not due to service or compliance issues but was the result of a
contract concession to its lender, who also provides cash access services.
Pursuant to the Stock Purchase Agreement dated January 6, 2004 between the
Company and the former stockholders of Available Money, the Company is entitled
to a significant purchase price adjustment as a result of this contract
termination and has cancelled an aggregate of 826,128 shares of its common stock
that it issued to the former stockholders of Available Money in order to effect
this purchase price adjustment. At this time, we do not believe that the
termination of this contract will have a material adverse effect on our
revenues, net income or cash flow from operations.
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.
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 presently have a fiscal year that ends on December 31. We intend to
retain our December 31 fiscal year and to file an Annual Report on Form 10-KSB
covering the transition period. Our common stock is now quoted on the
Over-the-Counter Bulletin Board under the symbol "MCAM."
Money Centers began full service operation at a new casino on October 28, 2004.
10
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
THIS QUARTERLY REPORT ON FORM 10-QSB INCLUDES FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 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 OUR ANNUAL REPORT ON FORM
10-KSB FILED ON JULY 13, 2004. THE FOLLOWING DISCUSSION SHOULD BE READ IN
CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO
INCLUDED ELSEWHERE IN THIS REPORT.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of the results of operations, financial
condition and liquidity should be read in conjunction with our financial
statements and notes thereto for the fiscal year ended March 31, 2004 appearing
in our most recent annual report on Form 10-KSB as filed with the Securities and
Exchange Commission on July 13, 2004.
HISTORY
iGames was incorporated in the State of Florida on May 9, 2001 under
the name Alladin Software, Inc. On June 25, 2001, it changed its name to iGames
Entertainment, Inc. On July 10, 2001, iGames Entertainment, Inc. was
incorporated in Nevada, and iGames Entertainment, Inc., a Florida corporation,
became a wholly-owned subsidiary. On January 2, 2004, iGames 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 the stock of
Available Money, the operator of free-standing ATM machines in casinos. The
business operations of Available Money were combined with our business
operations.
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. We do not present pro forma
information as the merger is a recapitalization and not a business combination.
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.
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.
11
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 presently have a fiscal year that ends on December 31. We intend to
retain our December 31 fiscal year and to file an Annual Report on Form 10-KSB
covering the transition period. Our common stock is now quoted on the
Over-the-Counter Bulletin Board under the symbol "MCAM."
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.
From October 1999 until 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. As a result of
the acquisition of Available Money and our continued growth, we currently
provide services in 33 locations across the United States.
CURRENT OVERVIEW
The acquisition of Available Money was completed in January 2004. We
are continuing to aggressively pursue our integration of this acquisition into
our business and to complete the conversion of all of processing of the
Available Money cash services business over to the systems we utilize. These
conversions are timely and expensive, as they include the purchase of new ATM
hardware.
We have also executed a plan to restructure our management team in an
effort to streamline our operations and reduce our selling, general and
administrative expenses. We believe that the changes resulting from this
restructuring plan will save us approximately an additional $440,000 more per
year than we had originally anticipated. We began realizing these savings in
September 2004. Additionally, in September 2004, we closed our Florida office.
In addition, in the fourth quarter of 2004, we are signing new and more
beneficial contracts with our credit card processors and our vault cash
providers. We anticipate that these new contracts will lower our operating
expenses beginning in 2005.
We are confident that we have sufficient capacity to handle additional
customer accounts at our present level of staffing and using our current systems
and infrastructure. In fact, we have begun operations at two new full service
casino locations. One contract began in September 2004 and the other began in
October 2004. We will begin recognizing revenues from these new contracts during
the fourth quarter of 2004 with no additional general and administrative
expenses required to be incurred to service these contracts. While our interest
expense has been higher than we anticipated, we are close to finalizing the
re-financing of our lines of credit to reduce the interest rates we pay on our
lines of credit, which will lower our expenses and contribute to our
profitability.
12
We seek to avoid litigation and to minimize our exposure to potential
claims arising in the normal course of our business and as a result of our
acquisitions. Despite these efforts, we have been named as a defendant in
several legal proceedings described in Part II, Item 1. Legal Proceedings
beginning on page 24 of this report. We are confident that it is in our best
interests to defend these claims and to pursue counterclaims where we believe
that we are likely to obtain a favorable result. During the six months ended
September 30, 2004, we have incurred approximately $270,000 in legal fees
related to these legal proceedings and anticipate incurring a substantial amount
of additional legal fees related to these legal proceedings throughout 2004 and
2005.
We generate 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. This is why the gaming
industry, which is recognized for its high transaction volume, is such a
lucrative market. 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 virtually eliminating
trade accounts receivable.
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
recognized cash flow margins that were unmatched 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 70% 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 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. 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.
13
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. Instead of
outsourcing the cash services operations, we have begun to offer 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, the user
agreements are for a longer period of time and we do 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.
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.
14
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 Credit Plus 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 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.
Organic growth through sales by internal salespeople is usually the
most efficient and profitable growth strategy in the cash services business.
Much of our historical growth has occurred in this manner. We realize that
recognizing industry trends is no assurance of success. We have also
complimented our internal sales strategy by creating relationships with
independent sales organizations that have established relationships with gaming
operators nationwide. Although our sales commissions will be higher at gaming
establishments entered through this sales channel, we will not be burdened with
the up-front salary, travel and entertainment costs associated with the
traditional internal sales approach. We continue to view strategic acquisitions
as part of our business plan to obtain the critical mass we believe is necessary
to compete effectively in our industry.
This parallel strategy of sales, acquisitions and product development
is capital intensive and presents substantial risk. There is no guarantee that
we will be able to manage all three strategies effectively.
We believe that it is necessary to increase our working capital
position so that we can capitalize on the profitable trends in the industry
while maintaining and servicing our current customer base. A major risk to our
business is that we utilize working capital for future 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.
15
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 check is subsequently honored by the bank, we recognize the amount of the
check as a negative bad debt. This conservative accounting policy may at times
overstate the impact of bad checks on our financial results, and adoption of a
different accounting policy could have a material impact on our reported
results.
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 in accordance with Statement of Financial Accounting
Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS ("FAS 144"). 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.
Stock Based Compensation. We account for stock based compensation
utilizing Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), which encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. We have chosen to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations.
Accordingly, compensation cost for stock options is measured as the
excess, if any, of the estimated fair market value of our stock at the date of
the grant over the amount an employee must pay to acquire the stock. We have
adopted the "disclosure only" alternative described in SFAS 123 and SFAS 148
(See New Accounting Pronouncements), which require pro forma disclosures of net
income and earnings per share as if the fair value method of accounting had been
applied.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004 VS. THREE MONTHS ENDED SEPTEMBER 30, 2003
Three Months Three Months
Ended September Ended September
30, 2004 ($) 30, 2003 ($) Change ($)
--------------- --------------- ----------
Net Income (Loss) ........... (783,739) (99,071) (684,668)
Revenues .................... 4,767,853 1,748,992 3,018,861
Operating Expenses .......... 4,040,955 1,492,746 2,548,209
Selling, General and
Administrative Expenses .... 568,326 246,055 322,271
Depreciation and Amortization 454,282 47,558 406,724
Other Income (Expenses) ..... (488,029) (61,704) (426,325)
Our net loss increased during the three months ended September 30, 2004
due to non-recurring expenses related to the integration of the acquisition of
Available Money into our business, higher interest expenses related to our
increased sales volume and high legal expenses related to legal proceedings that
we anticipate may continue throughout 2004 and 2005.
Our revenues increased by approximately 173% during the three months
ended September 30, 2004 as compared to the three months ended September 30,
2003. Our same store revenues increased by 14% during the three months ended
16
September 30, 2004 as compared to the three months ended September 30, 2003. In
addition, we experienced increased transaction volume. In calendar year 2003,
our POS system facilitated 892,915 transactions (75% increase over calendar year
2002) totaling $140,536,954 (44% increase over calendar year 2002) generating
over $5.5 million in revenue (63% increase over calendar year 2002). Assuming no
additional customer sales, for calendar year 2004 we are on pace to facilitate
over 7.0 million transactions totaling over $750,000,000. During the three
months ended September 30, 2004, our POS system facilitated 1,779,949
transactions (481% increase over the three months ended September 30, 2003)
totaling $190,338,645 (300% increase over the three months ended September 30,
2003) generating over $4.7 million in revenues (173% increase over the three
months ended September 30, 2003). Our results of operations and revenue growth
exceeded expectations though our number of new accounts was lower than
anticipated. However, in early 2004, we were successful in launching two major
products that will contribute to our future success; CreditPlus and our Cash
Services Host Program, both of which are continuing to generate new revenues and
profits for us.
Our operating expenses increased during the three months ended
September 30, 2004 due to the transaction processing expenses and casino
commissions related to the increase in our transaction volume. In addition, some
of the new casino contracts provided for higher casino commissions than under
our existing contracts. Also, based on our higher level of operations, we had 51
operations employees at September 30, 2004 as compared to 43 operations
employees at September 30, 2003, which resulted in additional compensation and
benefits expenses.
Our selling, general and administrative expenses increased during the
three months ended September 30, 2004 primarily due to $150,000 in legal fees
related to pending legal proceedings. Other factors contributing to the increase
in selling, general and administrative expenses include additional travel
expenses of approximately $16,000 related to the set-up of two new casino
locations and additional management compensation of approximately $94,000. The
additional management compensation is offset by a reduction of dividend
distributions of $25,000. In addition, accounting fees have increased by
approximately $16,000 and insurance has increased by approximately $9,000 due to
the purchase of directors' and officers' insurance, which we did not have during
the three months ended September 30, 2003 as we were a private company during
that period.
Our depreciation and amortization expenses increased during the three
months ended September 30, 2004 due to our higher level of fixed and intangible
assets that we purchased to support our increased level of operations.
Our other expenses increased during the three months ended September
30, 2004 mostly due to a $423,062 increase in interest expense. This increase
was due to us having $6,175,878 of our lines of credit used at September 30,
2004 at an average interest rate of 15.1% as opposed to $976,161 of our lines of
credit used at September 30, 2003 at an average interest rate of 11.2%. These
additional draws on our lines of credit were necessary to satisfy our increased
transaction volume and to make the second cash payment of purchase price to the
former stockholders of Available Money. We are in the process of evaluating our
options to re-finance our existing lines of credit at a lower rate of interest.
We have been continuing our efforts and are on schedule to re-finance our vault
cash for all of our operations. We anticipate that new agreements will be
executed during the fourth quarter of 2004, allowing us to begin realizing
potential reductions in interest expense during the first quarter of 2005.
SIX MONTHS ENDED SEPTEMBER 30, 2004 VS. SIX MONTHS ENDED SEPTEMBER 30, 2003
Six Months Six Months
Ended September Ended September
30, 2004 ($) 30, 2003 ($) Change ($)
--------------- --------------- ----------
Net Income (Loss) ........... (1,407,581) (61,375) (1,346,206)
Revenues .................... 9,382,410 3,076,080 6,306,330
Operating Expenses .......... 7,882,187 2,524,748 5,357,439
Selling, General and
Administrative Expenses .... 1,119,203 444,170 675,033
Depreciation and Amortization 778,715 83,284 695,431
Other Income (Expenses) ..... (1,009,886) (85,253) (924,633)
17
Our net loss increased during the six months ended September 30, 2004
due to non-recurring expenses related to the integration of the acquisition of
Available Money into our business, higher interest expenses related to our
increased sales volume and high legal expenses related to legal proceedings that
we anticipate may continue throughout 2004 and 2005.
Our revenues increased by approximately 205% during the six months
ended September 30, 2004 as compared to the six months ended September 30, 2003.
Our same store revenues increased by 31% during the six months ended September
30, 2004 as compared to the six months ended September 30, 2003. In addition, we
experienced increased transaction volume. In calendar year 2003, our POS system
facilitated 892,915 transactions (75% increase over calendar year 2002) totaling
$140,536,954 (44% increase over calendar year 2002) generating over $5.5 million
in revenue (63% increase over calendar year 2002). Assuming no additional
customer sales, for calendar year 2004 we are on pace to facilitate over 7.0
million transactions totaling over $750,000,000. During the six months ended
September 30, 2004, our POS system facilitated 3,507,332 transactions (63%
increase over the six months ended September 30, 2003) totaling $373,655,828
(358% increase over the six months ended September 30, 2003) generating over
$9.3 million in revenues (205% increase over the six months ended September 30,
2003). Our results of operations and revenue growth exceeded expectations though
our number of new accounts was lower than anticipated. However, in early 2004,
we were successful in launching two major products that will contribute to our
future success; CreditPlus and our Cash Services Host Program, both of which are
continuing to generate new revenues and profits for us.
Our operating expenses increased during the six months ended September
30, 2004 due to the transaction processing expenses and casino commissions
related to the increase in our transaction volume. In addition, some of the new
casino contracts provided for higher casino commissions than under our existing
contracts. Also, based on our higher level of operations, we had 51 operations
employees at September 30, 2004 as compared to 43 operations employees at
September 30, 2003, which resulted in additional compensation and benefits
expenses.
Our selling, general and administrative expenses increased during the
six months ended September 30, 2004 primarily due to $270,000 in legal fees
related to pending legal proceedings. Other factors contributing to the increase
in selling, general and administrative expenses include additional travel
expenses of approximately $34,000 related to the set-up of two new casino
locations and additional management compensation of approximately $192,000. The
additional management compensation is offset by a reduction of dividend
distributions of $47,500. In addition, accounting fees have increased by
approximately $19,000 and insurance has increased by approximately $9,000 due to
the purchase of directors' and officers' insurance, which we did not have during
the six months ended September 30, 2003 as we were a private company during that
period.
Our depreciation and amortization expenses increased during the six
months ended September 30, 2004 due to our higher level of fixed and intangible
assets that we purchased to support our increased level of operations.
Our other expenses increased during the six months ended September 30,
2004 mostly due to a $921,540 increase in interest expense. This increase was
due to us having $6,175,878 of our lines of credit used at September 30, 2004 at
an average interest rate of 15.1% as opposed to $976,161 of our lines of credit
used at September 30, 2003 at an average interest rate of 11.2%. We have been
continuing our efforts and are on schedule to re-finance our vault cash for all
of our operations. We anticipate that new agreements will be executed during the
fourth quarter of 2004, allowing us to begin realizing potential reductions in
interest expense during the first quarter of 2005.
OFF-BALANCE SHEET ARRANGEMENTS
There were no off-balance sheet arrangements during the fiscal quarter
ended September 30, 2004 that have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to our investors.
18
CHANGES IN FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Six Months Six Months
Ended Ended
September 30, September 30,
2004 ($) 2003 ($) Change ($)
------------- ------------- ----------
Net Cash Provided by
Operating Activities ....... 223,891 (134,123) 358,014
Net Cash Used by
Investing Activities ....... (67,924) (277,268) 209,344
Net Cash Provided (Used)
by Financing Activities .... 822,115 377,385 444,730
Net cash provided by operating activities increased during the six
months ended September 30, 2004 primarily due to increased depreciation and
amortization and a significant increase in accounts payable, accrued expenses
and commissions payable, offset by our significant net loss and increases in
prepaid expenses.
Net cash used by investing activities decreased during the six months
ended September 30, 2004 due to a significant decline in the amount of tangible
and intangible assets purchased and the amount of deferred financing costs.
Net cash provided by financing activities increased during the six
months of September 30, 2004 due to increases in our lines of credit and
advances from officers offset by decreases in notes payable and an increase in
the amount of restricted cash.
Our available cash equivalent balance at September 30, 2004 was
approximately $1,210,000. From inception through March 31, 2003, we raised an
aggregate of approximately $2,500,000 in capital through the sale of our equity
securities. In addition, we issued two 10% convertible promissory notes in the
aggregate principal amount of $250,000 to one investor. In October 2002, this
investor converted a $150,000 note into 300,000 shares of our common stock, and
from July 2003 through December 2003, we repaid an additional $90,000 of this
debt. We intend to repay the remaining principal balance of this note of $10,000
in 2005.
In January 2004, iGames completed its merger with us and its
acquisition of Available Money. We and Available Money each have established
operations. In addition, we have an existing vault cash line of credit of
$3,000,000. All of this line of credit is available to fund our vault cash
needs. We must obtain the consent of the lender to use any of this line to fund
our other operating expenses. We believe that these sources of cash flow will be
sufficient to fund our operations for at least the next twelve months.
A significant portion of our existing indebtedness is associated with
our line of credit of $3,000,000 with Mercantile Capital, L.P., which we use to
provide vault cash for our 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, due to the
magnitude of our transaction volume, a significant amount of cash is required to
fund our operations. 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
has a maturity date of May 31, 2005. Our obligation to repay this loan is
secured by a first priority lien on all of our assets.
19
iGames incurred $6,000,000 of debt associated with its acquisition of
Available Money. $2,000,000 of this indebtedness was paid by tender of an
aggregate of 1,470,590 shares of our common stock to the previous shareholders
of Available Money. The terms of the Stock Purchase Agreement allow for certain
purchase price adjustments associated with this indebtedness that may lower the
actual amount we are required to pay. The actual amount paid will not be
determined until certain events outlined in the Stock Purchase Agreement have
materialized. As of the date of this report, we have withheld $150,000 of the
purchase price set forth in the Stock Purchase Agreement due to non-renewal of
certain Available Money contracts and claims against Available Money for
reimbursement of expenses that they are obligated to pay pursuant to the Stock
Purchase Agreement. One of Available Money's casino customers terminated its
contract with Available Money effective November 1, 2004. This customer has
communicated to us that this termination was not due to service or compliance
issues but as the result of as a contract concession to its lender, who also
provides cash access services. Pursuant to the Stock Purchase Agreement, we are
entitled to a substantial reduction in the purchase price paid to the former
stockholders of Available Money and have cancelled an aggregate of 826,128
shares of our common stock that we issued to the former stockholders of
Available Money in order to effect this purchase price adjustment. We do not
believe that the termination of this contract will have a material adverse
effect on our revenues, net income or cash flow from operations. In addition, we
have been notified by another Available Money casino customer that it intends to
terminate its contract with Available Money effective December 1, 2004. While we
have submitted a bid to continue servicing this customer, there can be no
assurance that this bid will be accepted. We believe that we will be entitled to
an additional reduction in the purchase price paid pursuant to the Stock
Purchase Agreement if this contract is terminated as scheduled. We do not
believe that the termination of this contract will have a material adverse
effect on our revenues, net income or cash flow from operations.
An additional $2,000,000 of this indebtedness is a loan provided by
Chex Services, Inc. We have filed suit against Chex Services regarding certain
breaches to the term note evidencing our obligation to repay this loan and
breaches to a Stock Purchase Agreement entered into by the parties in November
2003. It is our position that the damages we suffered as a result of the
breaches by Chex Services, Inc. exceed the principal amount of this loan. We
will continue to record this note as a liability until a judgment is rendered in
the lawsuit.
The final $2,000,000 of this indebtedness is a bridge loan provided by
Mercantile Capital, L.P. This bridge loan accrues interest at an annual rate of
17% and has a maturity date of May 1, 2005. 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 2004 or early 2005. We paid a facility fee of $41,000 in
connection with this loan.
On September 10, 2004, we borrowed $210,000 from an affiliate 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.
20
Though 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 converting out all of the former
Available Money ATMs that are presently processed by Fifth Third Bank and
replacing them with new ATMs, which we will process through our own systems. As
part of this process, we will replace all of the ATMs at the locations that
Available Money presently provides ATM service. We anticipate entering into a
capital lease agreement in order to acquire the 91 ATM's and related equipment
necessary to complete this conversion in 2004 and early 2005. We anticipate that
this capital lease agreement will require us to incur an upfront charge of
approximately $435,000 and monthly rental expense of approximately $21,000 over
the remaining 59 months of the lease term. As we plan to process all
transactions at these ATMs, we will recognize all fees generated as revenues. If
we did not convert these ATM's and allowed their transactions to be processed by
a third party, then we would only be permitted to record the fees net of
processing costs as revenues.
Our goal is to change the way our customers view cash access services
through transforming the way casinos find, serve and retain their customers. We
will strive to make our customers the best they can be by continuing to grow and
improve everything we do. We require significant capital to meet these
objectives. Our capital requirements are as follows:
o Equipment: Each new account requires hardware at the location level and
some additions to network infrastructure at our central server farm.
o Vault Cash: All contracts in which we provide full service money
centers and ATM accounts for which we are responsible for cash
replenishment require vault cash. Vault cash is the money necessary to
fund the float that exists when we pay money to patrons but have yet to
be reimbursed from the Debit, Credit Card Cash Advance, or ATM networks
for executing the transactions.
o Acquisition Financing: We presently have little to no cash for use in
completing additional acquisitions. To the extent that we cannot
complete acquisitions through the use of our equity securities, we will
need to obtain additional indebtedness or seller financing in order to
complete such acquisitions.
o Working Capital: We will require substantial working capital to pay the
costs associated with our expanding employee base and to service our
growing base of customers.
21
o Technology Development: We will continue to incur development costs
related to the design and development of our new products and related
technology. We presently do not have an internal staff of engineers or
software development experts and are presently outsourcing this
function.
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. We presently have a liability
for dividends payable of $23,875 related to prior declared dividends that have
not yet been paid.
Due to our accumulated deficit of $10,224,394 as of March 31, 2004, our
net losses and cash used in operations of $6,634,586 and $158,948, respectively,
for the year ended March 31, 2004, our independent auditors have raised
substantial doubt about our ability to continue as a going concern. At September
30, 2004, our accumulated deficit was $11,631,975. During the six months ended
September 30, 2004, our net losses were $1,407,581. However, net cash provided
by operating activities was $223,891. 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 in 2004, 2005
or at any time in the future.
ITEM 3 - CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of September 30, 2004 (the "Evaluation Date"), and,
based on their evaluation, our chief executive officer and chief financial
officer have concluded that these controls and procedures were effective as of
the Evaluation Date. There were no significant changes in our internal controls
or in other factors that could significantly affect these controls during the
quarter ended September 30, 2004.
Disclosure controls and procedures (as defined in the Exchange Act
Rules 13a-14(c) and 15d-14(c)) are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act are recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in our reports filed under the Exchange Act is accumulated and
communicated to management to allow timely decisions regarding required
disclosure.
Our chief executive officer and chief financial officer have also
indicated that there were no significant changes in our internal controls or
other factors that could significantly affect such controls subsequent to the
date of their evaluation, and there were no corrective actions with regard to
significant deficiencies and material weaknesses.
22
Our management, including our chief executive officer and our chief
financial officer, does not expect that our disclosure controls or our internal
controls will prevent all error and fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. In addition, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people or by management override of the control. The design of any systems of
controls also is based in part upon certain assumptions about the likelihood of
future events, and their can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Over time,
control may become inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate. Because of these
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
23
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On March 24, 2004, we filed a complaint in United States District Court
for the District of Delaware against Equitex, Inc. and its wholly-owned
subsidiary, Chex Services, Inc. d/b/a Fastfunds ("Chex"). In the complaint, we
allege that Equitex and Chex committed numerous breaches of the terms of the
November 3, 2003 Stock Purchase Agreement pursuant to which we were to have
acquired Chex from Equitex, including (i) false representations and warranties
related to terminated Chex casino contracts and over $600,000 in bad debts, (ii)
material misrepresentations in SEC filings, (iii) entering into a material
financing transaction in violation of the covenant not to enter into
transactions outside the ordinary course of business, and (iv) failure to
proceed in good faith toward closing, including notifying iGames that Equitex
could not close on the transaction as structured. These breaches entitled us to
terminate the Stock Purchase Agreement and receive a $1,000,000 termination fee
and reimbursement of our transaction costs (estimated at over $750,000) from
Equitex and Chex. Our complaint also states that Chex wrongfully and tortiously
declared a default under the $2,000,000 promissory note that we issued to Chex
in connection with our acquisition of Available Money, and that Equitex and Chex
tortiously interfered with our relationship with our senior lender. We seek to
recover the $1,000,000 termination fee and transaction costs together with
significant damages that resulted from the defendants' breaches and tortuous
conduct.
On March 23, 2004, Equitex filed an action in Delaware state court
concerning the same Stock Purchase Agreement at issue in the Delaware federal
action that we filed, alleging that Equitex was entitled to terminate the Stock
Purchase Agreement and receive a $1,000,000 termination fee and reimbursement of
transaction costs. We removed this action to the Delaware federal district
court. We are vigorously defending this action and believe that Equitex's and
Chex's claims are unfounded. We have filed a counterclaim that restates the
claims made in the federal action that we filed.
On March 15, 2004, Chex filed a complaint in the District Court of the
State of Minnesota for the County of Hennepin against us alleging that we
defaulted on interest payments on a $2,000,000 promissory note evidencing our
obligation to repay a loan that Chex extended to us in connection with our
acquisition of Available Money (the "Minnesota Complaint"). The Minnesota
Complaint seeks payment of the principal balance of the loan and accrued
interest thereon. Chex initially alleged that we are liable to them for a
penalty fee of $1,000,000 as the result of the alleged termination by Equitex of
the November 3, 2003 Stock Purchase Agreement, but have since waived their
claims to the penalty fee. We subsequently removed the Minnesota Complaint to
the United States District Court for the District of Minnesota. On June 23,
2004, the United States District Court for the District of Minnesota transferred
this action to the United States District Court for the District of Delaware.
This case and the two Delaware federal court actions described above have since
been consolidated by the United States District Court for the District of
Delaware. On November 12, 2004, the Delaware District Court judge denied Chex's
motion for summary judgment for sums allegedly due on the $2,000,000 promissory
note on the basis that the facts surrounding the alleged default on the note and
the termination of the Stock Purchase Agreement were substantially interrelated
and that resolution of the issues raised by Chex's motion would have to await
trial. We are vigorously defending this action, which is still in the pleadings
stage, and believe that Chex's claims lack merit.
On July 15, 2004, the former stockholders of Available Money, Inc.
filed a lawsuit in the United States District Court for the District of Delaware
against us and Christopher M. Wolfington, our Chief Executive Officer. The
complaint arises out of our purchase of the capital stock of Available Money,
Inc. pursuant to the Stock Purchase Agreement and alleges that we failed to make
required payments of the purchase price set forth in the Stock Purchase
Agreement. In addition, the former stockholders of Available Money also filed a
Motion for a Standstill Order/Temporary Restraining Order that the court denied
without a hearing. As we have paid or tendered to the former Available Money
stockholders all consideration now due to them under the Stock Purchase
Agreement, we believe that this lawsuit is frivolous. Accordingly, we believe
that the suit was filed for inappropriate purposes and will vigorously defend
against this action and seek sanctions for filing of a frivolous suit. We also
anticipate filing counterclaims against Helene Regen and Samuel K. Freshman and
a third party complaint against Howard Regen seeking substantial reduction in
the purchase price and other damages and remedies based on fraud and
misrepresentations by them in connection with the transaction.
24
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.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 10, 2004, we issued a 10% term note in the principal
amount of $210,000 and warrants to purchase 50,000 shares of our common stock at
an exercise price of $.33 per share to one accredited investor. These securities
were issued pursuant to Section 4(2) of the Securities Act.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 10, 2004, two of our stockholders who collectively held
approximately 66% of the aggregate voting power of our capital stock approved by
written consent both the Agreement and Plan of Merger between us and iGames
dated August 10, 2004 and the iGames Amended and Restated 2003 Stock Incentive
Plan. An Information Statement was furnished to stockholders on or about
September 22, 2004 informing them of these actions.
ITEM 5 - OTHER EVENTS
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-B
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 3.2 of our
Current Report on Form 8-K filed on October 19, 2004).
3.1 Money Centers of America, Inc. Amended and Restated
Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 of our Current Report on Form 8-K filed on October
19, 2004).
3.2 Money Centers of America, Inc. Amended and Restated By-laws
(incorporated by reference to Exhibit 3.2 of our Current
Report on Form 8-K filed on October 19, 2004).
31.1 Certification dated November 15, 2004 pursuant to Exchange Act
Rule 13a-14(a) or 15d-14(a) of the Principal Executive Officer
and Principal financial Officer as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, by Christopher M.
Wolfington, Chief Executive Officer and Chief Financial
Officer.
32.1 Certification dated November 15, 2004 pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, made by Christopher M. Wolfington,
Chief Executive Officer and Chief Financial Officer.
(b) Reports on Form 8-K
On July 16, 2004, we filed a Current Report on Form 8-K reporting that
we had issued a press release announcing the filing of our Annual Report on Form
10-KSB and certain of our financial results for fiscal year 2004.
25
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereto
duly authorized.
IGAMES ENTERTAINMENT, INC.
Date: November 15, 2004 By: /s/ Christopher M. Wolfington
-----------------------------
Christopher M. Wolfington
Chief Executive Officer and
Chief Financial Officer
(principal financial officer and
principal accounting officer)
26