As filed with the Securities and Exchange Commission on February___, 2005
Registration Statement No. __________
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------------------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------------------------------------------------
MONEY CENTERS OF AMERICA, Inc.
(Name of small business issuer in its charter)
Delaware 6099 23-2929364
(State or Other Jurisdiction of (Primary Standard (I.R.S. Employer
Industrial Incorporation or Classification Code Number) Identification No.)
Organization)
--------------------------------------------------------------------
700 South Henderson Road, Suite 325, King of Prussia, PA 19406
--------------------------------------------------------------------------------
(610) 354-8888
--------------------------------------------------------------------
(Address and Telephone Number of Principal Executive Offices
and Principal Place of Business)
--------------------------------------------------------------------
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)
--------------------------------------------------------------------
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
--------------------------------------------------------------------
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........ 6,977,343 shares $0.65 $5,360,428 $533.80
--------------------------------------------------------------------------------------------------------------------
Total......................... 6,977,343 shares $0.65 $5,360,428 $533.80
====================================================================================================================
--------------------------------
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 February 9, 2005 as reported on the NASD Over-the-Counter
Bulletin Board.
SUBJECT TO COMPLETION. DATED , 2005.
-------------------------------
PROSPECTUS
Money Centers of America, Inc.
6,977,343 Shares of Common Stock
An aggregate of 6,977,343 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".
We are obligated to register a total of 25,000 shares of our common
stock standing in the name of the selling stockholders pursuant to the terms of
subscription agreements between certain of the selling stockholders and us. We
are voluntarily registering the remaining shares of our common stock covered by
this prospectus.
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 __.
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 , 2005
-----------------------------
TABLE OF CONTENTS
Page
Summary.....................................................................1
Risk Factors................................................................4
Business....................................................................9
Legal Proceedings..........................................................15
Cautionary Statement For Forward-Looking Statements........................17
Management's Discussion and Analysis or Plan of Operations.................17
Directors, Executive Officers, Promoters and Control Persons...............27
Executive Compensation.....................................................28
Security Ownership Of Certain Beneficial Owners And
Management and Related Stockholder Matters................................31
Selling Holders............................................................32
Plan of Distribution.......................................................34
Use of Proceeds............................................................36
Certain Relationships and Related Party Transactions.......................36
Description of Securities..................................................37
Disclosure of Commission Position on Indemnification
for Securities Act Liabilities............................................38
Market for Common Equity and Related Shareholder Matters...................38
Experts....................................................................40
Legal Matters..............................................................40
Where You Can Find More Information........................................40
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 4.
Business
We are a single source provider of cash access services to the gaming
industry. We have 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. As the top 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.
We intend to become a leading innovator in cash access and financial
management services for the gaming industry. Our business model is specifically
focused on specialty transactions in the cash access segment of the funds
transfer industry. We deploy our services on a full service basis by providing
hardware, software and processing services to our customers. We also deploy our
services through licensing agreements pursuant to which we license to our
customers the right to use our technology and our customers provide 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 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. 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 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 27 locations across the United States
In 2004, our cash access technology facilitated 6,961,351 transactions
totaling $740,391,213.
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 6,977,343.
Common stock outstanding 25,001,978 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 6,977,343
shares of our common stock by 16 of our stockholders that either purchased
shares of our common or warrants exercisable for shares of our common stock in
private placement offerings or received shares of our common stock as a result
of our redomestication merger in October 2004.
Summary Consolidated Financial
and Operating Data
The following table sets forth summary consolidated historical
financial data for the fiscal years ended March 31, 2004 and March 31, 2003 and
for the six-month periods ended September 30, 2004 and September 30, 2003. 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.
Fiscal Year Ended Six Months Ended
--------------------------------------- --------------------------------------
March 31, March 31, September 30, September 30,
2004 2003 2004 2003
------------------ -------------------- ------------------ -------------------
(Unaudited) (Unaudited)
Statement of Income Data:
Revenues $ 6,980,574 $ 3,211,256 $ 9,382,410 $ 3,076,080
Operating Expenses 6,407,069 2,440,295 7,882,187 2,524,748
------------------ -------------------- ------------------ -------------------
Gross Profit 573,505 770,961 1,500,223 551,332
Selling, general and
administrative expenses 6,398,542 796,807 1,119,203 444,170
Depreciation and
Amortization - - - - - - 778,715 83,284
------------------ -------------------- ------------------ -------------------
(5,825,037) (25,846) (397,695) 23,878
Income (loss) from
operations
Other income (expense), net (809,549) 476,882 (1,009,886) (85,253)
Net income (loss) $ (6,634,586) $ 451,036 $ (1,407,581) $ (61,375)
------------------ -------------------- ------------------ -------------------
Net income (loss) per
share -- basic and diluted $ (1.77) $ 0.14 $ (0.26) $ (0.02)
2
September 30
2004
---------------------------
Balance Sheet Data:
Working Capital $ (6,288,833)
Total assets 10,417,254
Total liabilities 11,112,591
Stockholders' deficit (695,337)
3
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. The risks and
uncertainties set forth below, however, are not the only risks that we face.
Additional risks and uncertainties not presently known to us, or that we
currently deem immaterial, may also impair our business operations. 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.
Significant expansion of our operations may require additional
expenses, and these efforts may strain our management, financial and operational
resources.
If we cannot effectively manage our growth, then our ability to provide
services will suffer. Our reputation and our ability to attract, retain and
serve our customers depend upon the reliable performance of our products and
ATMs, as well as our infrastructure and systems. We anticipate that we will
expand our operations significantly in the near future, and further expansion
will be required to address the anticipated growth in our user base and to
capitalize on market opportunities. To manage the expected growth of our
operations and personnel, we will need to improve our existing systems and
implement new systems, procedures and controls. In addition, we will need to
expand, train and manage an increasing employee base. We will also need to
expand our finance, administrative and operations staff. Though historically we
have managed our growth effectively, there is no guarantee we will be able to
effectively manage our growth in the future. If we are unable to manage growth
effectively or if we experience disruption during our expansion, then our
business will suffer and our financial condition and results of operations will
be seriously affected. In addition, though we are in the process of renewing our
existing lines of credit, we will require additional financing in order to
execute our expansion plans. Additional financing may not be available to us, or
if available, then it may not be available upon terms and conditions acceptable
to us. If adequate funds are not available, then we may be required to delay,
reduce or eliminate our expansion plans.
We have approximately $8,335,878 in indebtedness and approximately
$2,186,476 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 September 30, 2004, we had indebtedness in the aggregate
principal amount of approximately $8,335,878 and accounts payable, commissions
payable and accrued expenses of approximately $2,186,476. 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 $10,224,394 as of March 31, 2004, our
net losses and cash used in operations of $6,634,586 and $128,948, respectively,
for the year ended March 31, 2004, our independent auditors have raised
substantial doubt about our ability to continue as a going concern. 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 2005 or at any time in the future.
4
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. There can be no assurance that our
contracts will be renewed. 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, 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 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, we cannot predict
whether we will incur significant losses with respect to our check cashing
services in the future or whether such losses would 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.
The exercise of stock options 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.
The exercise of issued and outstanding stock options into 3,125,000
shares of our common stock at an estimated average exercise price of $.01 per
share, will be below the market price of our common stock. 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.
5
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.
We might expand through acquisitions, which may cause dilution of our
common stock and additional debt and expenses.
Any acquisitions of other companies may result in potentially dilutive
issuances of our equity securities and the incurrence of additional debt. We
plan to seek acquisitions and joint ventures that will complement our services,
broaden our consumer base and improve our operating efficiencies. Acquisitions
involve numerous additional risks, including difficulties in the assimilation of
the operations, services, products and personnel of acquired companies, which
could result in charges to earnings or otherwise adversely affect our operating
results. There can be no assurance that acquisition or joint venture
opportunities will be available, that we will have access to the capital
required to finance potential acquisitions, that we will continue to acquire
businesses or that any acquired businesses will be profitable.
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 71.2% of our issued
and outstanding common stock, there is no assurance that Mr. Wolfington will
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
cannot assure you that we would 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 cannot assure you that we will 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, LLC, Cash & Win and
Game Financial Corporation, Cash Systems, Inc. and FastFunds Financial Corp.
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.
6
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 cannot be certain that we will 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. There can be no assurance that an active
trading market in our common stock will develop, or if such a market develops,
that it will 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.
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.
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.
7
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.
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
We are a single source provider of cash access services to the gaming
industry. We have 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. As the top 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 financial
management services for the gaming industry. Our business model is specifically
focused on specialty transactions in the cash access segment of the funds
transfer industry. We provide a complete package of hardware, software and
processing services to our customers. We also offer a transaction management
system through licensing agreements pursuant to which we license to our
customers the right to use our technology and our customers provide 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 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. 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 27 locations across the United States
In 2004, we facilitated 6,961,351 transactions totaling $740,391,213.
Products
We have developed four primary products: credit/debit card cash
advance, CreditPlus Credit Services, Automatic Teller Machines ("ATM's") 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
services. Currently we provide these services on a direct, full-service basis
using our hardware, software and personnel. We have commenced offering our
customers a transaction management system under which the casino licenses our
software systems and uses its own hardware, personnel and capital to provide the
cash access services to its customers.
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.
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
9
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 card. This transaction can be
accomplished without the gaming customer using a personal identification number.
For credit card advances, customers pay a service charge typically between 6%
and 9% of the amount advanced.
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
conjunction with other services, we have contracts to provide free-standing ATMs
to 20 customers and we currently operate 71 ATMs at those locations.
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 for 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. 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.
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.
10
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. Significant capital investment in technology is required
for these credit transactions to be executed efficiently. Prior to the launch of
our Credit Plus product there was only one company providing the specialized
credit reporting that the gaming industry relies on for their 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.
Our Credit Plus 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.
The Credit Plus product has three distinct elements: Credit Reporting,
Credit Management and Credit Guarantee.
Credit Reporting. CreditPlus provides access to credit
reporting for casino transactions.
Credit Management. Like our check cashing management software,
Credit Plus 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. 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.
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.
11
Business Objectives
Our business strategy is to focus in the following three areas to
maximize growth and return on investment for our business:
1. Technology Development: Develop 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 and
realize significant profit margins.
2. Mergers/Acquisitions: To identify and acquire companies for acquisition
that either have a strategic and financial fit to our long-term business
model, leverage our technology, or provide immediate market dominance.
3. Sales: We will continue to successfully and aggressively market our
services in the casino and retail markets.
Technology Development. 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 Proprietary Transaction Gateway.
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.
Due to the growing variety of transactions that we are able to
facilitate, we have identified the opportunity to create a proprietary
transaction gateway for our services. This gateway will allow us to initiate,
execute and control all transactions executed through our installed customer
base. This strategy allows for faster integration and installation of new
accounts whether obtained through sales or acquisitions. Furthermore, as we
execute our acquisition strategy, the gateway will provide a seamless
integration of acquired components of the transaction process.
Development of the gateway has also enabled us to offer our casino
customers a transaction management system that they can license from us in order
to process and facilitate their own transactions without using a vendor. This
has advantages for both the casino, which can control the cash access services
and generate incremental revenues, and for us as we can support a much larger
customer base within the need for substantial capital expenditures, on-site
personnel and the additional working capital needed to fund transactions
12
Mergers/Acquisitions. We believe that we can accelerate penetration
into the markets we serve, while leveraging our management and technology,
through strategic acquisitions. Our primary targets will be those companies
that:
o Produce high margins in a niche segment of the funds transfer
industry;
o Have a sustainable value proposition independent of the synergies
with our company;
o Provide services similar to those that we provide to our
customers;
o Execute similar POS transactions in different market segments; or
o Utilize third party POS transaction management systems for their
transaction processing.
We believe that this strategy will be beneficial to us because:
o Focusing on companies with historically high margins is
consistent with our business plan.
o The acquisition of competing companies gives us the ability to
immediately "up sell" our CreditPlus and other products resulting
in new revenue and greater profits from acquired accounts.
o We can maximize our return on investment on technology
development strategy by leveraging our technology into new
segments of the funds transfer industry.
o By eliminating the third party POS system and installing our
newly developed system, we can immediately and significantly
increase cash flow, while obtaining a critical mass of new
locations.
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.
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.
13
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
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, other commercial properties 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.
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.
14
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, LLC, Cash & Win, Game Financial Corporation, Cash
Systems, Inc. and FastFunds Financial Corp. 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.
Employees
We currently have 62 full time employees, of which 56 employees are
engaged in operations, two in sales and marketing, and four 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 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.
15
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 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
anticipate filing counterclaims against Helene Regen and Samuel K. Freshman
seeking a substantial reduction in the purchase price and other damages and
remedies based on fraud and misrepresentations by them in connection with the
transaction. We recently filed a separate action against Howard Regen which also
seeks a substantial reduction in the purchase price and other damages and
remedies based on fraud and misrepresentations by him in connection with the
transaction. In the action against Howard Regen, we filed a motion for temporary
restraining order and for injunctive relief at the same time we filed the
complaint. Howard Regen immediately entered into a Consent Order which gave us
the immediate relief we were seeking. The court has scheduled a bench trial on
our request for injunctive relief which will take place on March 11, 2005.
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. This matter is still in the pleadings stage and iGames has
moved to dismiss the plaintiff's claims for fraudulent misrepresentation and
intentional interference with contractual relations, as well as to strike all
claims for punitive damages. We are vigorously defending this action and believe
that Lake Street's claims lack merit.
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.
16
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
This prospectus 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 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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
prospectus. 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 were formed as a Delaware corporation in 1999. 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.
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 27 locations across the United States.
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 was 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.
17
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 presently have a fiscal year that ends on December 31. We have
retained our December 31 fiscal year and intend 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.
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 processing of the Available
Money cash services business over to the systems we utilize. We anticipate that
the conversion process will be completed by April 2005.
We have also restructured our management team and closed our Florida
office to streamline our operations and reduce our selling, general and
administrative expenses. We began realizing these reductions in September 2004.
In addition, commencing in the fourth quarter of 2004, we are negotiating more
favorable contracts with our credit card processors and our vault cash providers
for the former Available Money operations. 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 using our current systems and infrastructure. We commenced
operations at three new full service casino locations, in September 2004,
October 2004 and February 2005, with no increase in general and administrative
expenses. While our interest expense has been higher than we anticipated, we are
in the process of arranging 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.
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 the section of this prospectus entitled
Legal Proceedings beginning on page [29]. 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.
18
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. 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.
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 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 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 a transaction
management system. 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.
19
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 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.
20
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 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.
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. 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.
21
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
Six Months Ended September 30, 2004 vs. Six Months Ended September 30, 2003
Six Months Ended Six Months Ended
September 30, September 30,
2004 ($) 2003 ($) Change ($)
------------------ ---------------- -----------
Net (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), net (1,009,886) (85,253) (924,633)
Our net loss increased during the six months ended September 30, 2004
due to non-recurring expenses related to the integration of the Available Money
business 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 was offset by a reduction of dividend
distributions of $47,500. In addition, accounting fees increased by
approximately $19,000 and insurance 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.
22
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 $976,161 of our lines of credit
used at September 30, 2003 at an average interest rate of 11.2%. We have been
continuing our efforts and are on schedule to re-finance our vault cash for all
of our operations. We anticipate that new agreements will be executed during the
fourth quarter of 2004, allowing us to begin realizing potential reductions in
interest expense during the first quarter of 2005.
Fiscal Year Ended March 31, 2004 ("Fiscal 2004") vs. Fiscal Year Ended March 31,
2003 ("Fiscal 2003")
Fiscal 2004 ($) Fiscal 2003 ($) Change $
--------------- --------------- -----------
Net Income (Loss) (6,634,586) 451,036 (7,085,622)
Revenues 6,980,574 3,211,256 3,769,318
Operating Expenses 6,407,069 2,440,295 3,966,774
Selling, General and Administrative Expenses 6,398,542 796,807 5,601,735
Other Income (Expenses) (809,549) 476,882 (1,286,431)
Our net loss increased in Fiscal 2004 due to approximately $5,560,000
in non-cash compensation expenses incurred as a result of issuing options to
purchase 3,120,000 shares of our common stock at a below market exercise price
to employees and consultants, an approximate $418,000 loss on impairment of
intangible assets and an approximate $131,000 write-off of obsolete inventory,
both of which were incurred as a result of our decision to focus on our cash
access services business and to cease pursuing our former plan of operations. We
also experienced additional general and administrative expenses of approximately
$650,000 related to our acquisition of Available Money, our merger with Money
Centers and our terminated acquisition of Chex Services, Inc.
Our revenues increased in Fiscal 2004 due to Money Centers' addition of
the Sycuan Casino as a customer, which resulted in approximately $4,000,000 in
additional revenues, and the acquisition of Available Money at the beginning of
the fourth quarter of fiscal 2004, adding 91 ATM's at 18 locations throughout
the United States. In addition, Money Centers experienced increased transaction
volume. We were successful in launching two major products that are essential to
our future success; CreditPlus and our Cash Services Host Program, both of which
are currently generating new revenues and profits.
Our operating expenses increased in Fiscal 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 38 operations employees at the end of Fiscal
2004 as compared to 23 operations employees at the end of Fiscal 2003, which
resulted in additional compensation and benefits expenses and non-cash
compensation expense due to the grant of 270,000 options to these employees at
below market exercise prices.
Our selling, general and administrative expenses increased in Fiscal
2004 due to non-cash compensation expenses incurred as a result of issuing
options to purchase 2,850,000 shares of our common stock at a below market
exercise price to employees and consultants. The issuance of these securities
was necessary in order to ensure the retention of our management team, the
retention of Money Centers' key employees and the recruitment of our independent
directors. We also experienced additional general and administrative expenses of
approximately $650,000 for legal fees, accounting and auditing fees, travel and
other expenses related to our acquisition of Available Money, our merger with
Money Centers and our unsuccessful effort to acquire Chex Services, Inc.
23
Our other expenses increased due to an approximate $418,000 loss on
impairment of intangible assets and an approximate $131,000 write-off of
obsolete inventory, both of which were incurred as a result of our decision to
focus on our cash access services business and to cease pursuing our former plan
of operations. In addition, we incurred additional interest expense due to
higher interest rates charged by our senior lender and a larger amount of cash
advanced under our vault cash lines of credit to provide the cash necessary to
service our additional transaction volume. In Fiscal 2003, our other income was
due to a gain on forgiveness of indebtedness. A similar gain did not occur in
Fiscal 2004.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements during the fiscal quarter
ended September 30, 2004 that have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to our investors.
Changes in Financial Position, Liquidity and Capital Resources
Six Months Six Months
Ended Ended
September 30, September 30,
2004 ($) 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 ended 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 and was approximately $100,115 at December 31, 2004.
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.
A significant portion of our existing indebtedness is associated with
our vault cash 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,
24
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 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. The
outstanding balance on our vault cash line of credit fluctuates significantly
from day to day based on activity and collections, especially over weekends. On
peak days, the outstanding amount frequently is in excess of $3,000,000.
However, our lender has indicated that it is willing to fund overadvances. We
are in the process of negotiating with several parties for new vault cash
facilities that we expect will include higher borrowing limits and reduced
interest expense.
Vault cash for our ATM operations at locations where we do not provide
full cash access services (primarily former Available Money customers) is
provided by our ATM processing provider under the terms of the ATM processing
agreement, for an interest rate equal to the ATM processor's cost of funds,
which currently is Prime minus 5/8%.
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, based on the renewal rates of contracts
scheduled to expire or otherwise terminable in 2004. Due to the nonrenewal of a
significant number of these contracts, as of the date of this prospectus, we
have (i) withheld $150,000 of the purchase price set forth in the Stock Purchase
Agreement, (ii) cancelled all 1,470,590 shares issued to the former shareholders
of Available Money, and (iii) demanded repayment of approximately $2,112,000 of
the purchase price already paid to them in cash, as well as approximately
$135,000 for reimbursement of expenses that they are obligated to pay pursuant
to the Stock Purchase Agreement. While we have submitted bids to continue
servicing some of these customers, there are other bidders and there can be no
assurance that these bids will be accepted. While the termination of these
contracts will adversely affect Available Money's revenues in 2005, we believe
that we have or will locate a sufficient number of new customers to offset on a
consolidated basis the decreases caused by these contract cancellations.
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 early 2005. We paid a facility fee of $41,000 in connection
with this loan.
On December 1, 2003, we obtained a $250,000 line of credit from
Mercantile Capital, L.P., due on demand. This debt bears interest at the prime
rate of interest plus 10%, floating, provided that the minimum rate on this loan
is 14.5% per annum. In addition, Mercantile receives a collateral management fee
equal to one percent of the principal balance of the loan per month. This loan
is secured by 250,000 shares of the Company's common stock.
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,
25
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.
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 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 ATM's and
related equipment necessary to complete this conversion. This capital lease
agreement will require us to incur an upfront charge of approximately $350,000
and monthly rental expense of approximately $21,000 over the remaining 59 months
of the lease term.
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 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.
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 have
outsourced this function to IntuiCode, LLC, a company operated by
Jeremy Stein, a member of our board of directors.
26
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.
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 of our major operating
subsidiaries as of November 30, 2004.
Name Age Current Position(s) with
Company
------------------------- --- -------------------------
Christopher M. Wolfington 39 Chairman of the Board of
Directors, Chief
Executive Officer and
President
Jeremy Stein 37 Director
Barry R. Bekkedam 37 Director
Wayne A. DiMarco 39 Director
Jonathan P. Robinson 40 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.
27
A brief description of the business experience during the past five
years of our director, our executive officers and our key employees is as
follows:
Christopher M. Wolfington - Chairman, Chief Executive Officer,
President and Treasurer. 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.
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 Office 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.
EXECUTIVE COMPENSATION
The following table sets forth compensation paid or accrued during
Fiscal 2004 and Fiscal 2003 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").
28
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
------------------------------------------- ---------------
Fiscal
Year Ended Number of
Other Annual Shares or
Name and Principal Position March 31 Salary Bonus Compensation Options
------------------------------------ ----------- ------------- ------------ -------------- ---------------
Christopher M. Wolfington, Chairman, 2004 $ 90,429 $ 200,000 $ 14,051 2,635,000 (2)
Chief Executive Officer, President
(1)
Jeremy Stein, President (3) 2004 $ 115,750 $ 8,000(4) $ 0 125,000(5)
2003 $ 50,000(6) $ 0 $ 0 62,500(7)
--------------
(1) Mr. Wolfington was appointed Chairman, Chief Executive Officer and
President of iGames on January 2, 2004, effective upon the consummation
of its acquisition of Money Centers of America, Inc. Prior to that date,
he was President of Money Centers of America, Inc. All compensation
figures are for the period commencing January 2, 2004.
(2) Pursuant to his employment agreement Mr. Wolfington received options
to purchase 2,635,000 shares of Common Stock.
(3) Mr. Stein served as Chief Executive Officer, President and a director
of iGames from April 31, 2002 until January 2, 2004, and as Secretary,
Treasurer and a director thereafter.
(4) This bonus was not paid as of March 31, 2004 and was recorded as an
accrued expense at that time.
(5) Pursuant to his employment agreement Mr. Stein received options to
purchase 62,500 shares of iGames' common stock at an exercise price
of $2.04 per share and options to purchase 62,500 shares of iGames'
common stock at an exercise price of $2.00 per share in Fiscal 2004.
(6) Mr. Stein began taking salary as of November 1, 2002 at the rate of
$120,000 per annum.
(7) Pursuant to his employment agreement Mr. Stein received a grant of
62,500 shares of iGames' common stock on the effective date of his
employment agreement.
Option Grants For the Fiscal Year Ended March 31, 2004
Pursuant to his employment agreement, Mr. Wolfington received grants of
options to purchase an aggregate of 2,635,000 shares of iGames' common stock in
Fiscal 2004. Each of these options has an exercise price of $.01 per share and
is exercisable for a period of ten years from the date of grant. These grants
represent approximately 90.6% of the options granted to iGames' employees in
Fiscal 2004.
29
Pursuant to his employment agreement, in Fiscal 2004 Mr. Stein received
grants of options to purchase 62,500 shares of iGames' common stock at an
exercise price of $2.04 per share and options to purchase 62,500 shares of
iGames' common stock at an exercise price of $2.00 per share. These grants
represent approximately 4.3% of the options granted to our employees in Fiscal
2004.
The following table sets forth information concerning year-end option
values for Fiscal 2004 for the executive officers named in our Summary
Compensation Table above.
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 $1,449,250(2) $0
Jeremy Stein 125,000(3) 0 $0(2) $0
--------------
(1) Consists of options to purchase 2,635,000 shares of iGames' common stock at
an exercise price of $.01 per share.
(2) Based on a closing sales price of $.56 per share on March 31, 2004.
(3) Consists of options to purchase 62,500 shares of iGames' common stock at an
exercise price of $2.04 per share and 62,500 shares of our common stock at
an exercise price of $2.00 per share.
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 will
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.
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 2,635,000 shares of our common stock at
an exercise price of $.01, which are immediately vested. In addition, pursuant
30
to his employment agreement, we agreed during Fiscal 2005 to grant Mr.
Wolfington options to purchase an aggregate of 3,530,780 shares of our common
stock, which shall vest upon our achievement of certain cash flow objectives to
be defined by the Board of Directors. 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.
Repricing of Options
We have not adjusted or amended the exercise price of any stock options.
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 February 4, 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 February 4, 2005, 25,001,978
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 19,689,603 (2) 71.2%
700 South Henderson Road, Executive Officer,
Ste. 325 Chairman of the
King of Prussia, PA 19406 Board
Jeremy Stein Director 347,500 (3) 1.1%
301 Yamato Road, Suite 2199
Boca Raton, FL 33431
31
Wayne DiMarco Director 70,000 (4) *
131 East Church Road
King of Prussia, PA 19406
Barry Bekkedam Director 48,000 *
1200 Liberty Ridge Drive
Suite 340
Wayne, PA 19087
Jonathan Robinson (5) Director 50,000 *
[Address]
------------------- ------------------------ -------------------
All Executive Officers and
Directors as a group (4 persons) 20,205,103 72.1%
------------------- ------------------------ -------------------
* Less than 1%
(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 347,500 shares of
Common Stock.
(4) Includes currently exercisable options to purchase 20,000 shares of
Common Stock.
(5) Includes currently exercisable options to purchase 25,000 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 December 30, 2004 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.
32
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.
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 12.4% 0%
Wolfington (2)
Kevin McDonald 1,141,748 0 1,141,748 4.6% 0%
Lane Missamore 905,000 0 905,000 3.6% 0%
2003 Irrevocable Trust of 621,759 0 621,759 2.5% 0%
Christopher M. Wolfington (2)
J. Eustace Wolfington 415,157 0 415,157 1.7% 0%
Sean J. Wolfington 392,157 0 392,157 1.6% 0%
Whitehorse Capital Partners, 200,000 0 200,000 * 0%
L.P.
Debra Rand Revocable Trust 50,000 0 50,000 * 0%
Stanley Merdinger 25,000 0 25,000 * 0%
Barry R. Bekkedam 23,000 0 23,000 * 0%
J. Brian O'Neill 23,000 0 23,000 * 0%
Harry J. and Carol Ann 23,000 0 23,000 * 0%
Wolfington
James Danielewicz 23,000 0 23,000 * 0%
Jason P. Walsh 20,000 0 20,000 * 0%
Joy Danielewicz 5,750 0 5,750 * 0%
----------------------------------
* Less then one percent (1%)
(1) Calculated based on 25,001,978 shares of our common stock issued and
outstanding as of February 4, 2005.
(2) Mr. Wolfington is our Chairman and Chief Executive Officer.
33
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.
34
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.
35
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
Effective September 1, 2004, we engaged IntuiCode, LLC to provide
product development services to us related to our Transaction Management System
and other software, including the development and maintenance of our website
pursuant to the terms of a Software Development Agreement. Jeremy Stein, a
member of our board of directors, is also the Chief Executive Officer and the
holder of a significant minority percentage of the outstanding membership
interests of IntuiCode. The term of this agreement is one year. As compensation
for the services provided hereunder, we are obligated to pay Intuicode a fee of
$35,000 per month. 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.
Pursuant to prior engagements by iGames, during the fiscal year ended
March 31, 2003, we paid IntuiCode approximately $88,250, and during the fiscal
year ended March 31, 2004 we paid IntuiCode approximately $117,000 plus
reimbursement of $7,154 in expenses. We acquired the rights to the Protector(TM)
from IntuiCode, and paid aggregate royalties to IntuiCode of approximately
$40,965 for the year ended March 31, 2003 and $82,581 for the year ended March
31, 2004. Prior to the end of the year ended March 31, 2004, we reconveyed the
rights to the Protector(TM) to 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 March 31, 2004, we extended short-term loans in the aggregate
principal amount of $63,000 to IntuiCode. These loans are due on demand. As of
December 31, 2004, $20,000 of these loans have been repaid through credits of
the fee due under the September 1, 2004 Software Development Agreement.
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.
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.
36
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 23,967,664 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
37
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.
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, 2003 and December 31, 2004, and for the period from January 1, 2005
to the date of this Prospectus, which information was provided by NASDAQ Trading
and Market Services. All amounts have been retroactively adjusted to reflect a
1-for-4 reverse stock split that occurred on December 11, 2003.
38
Year ending December 31, 2005
-----------------------------------------------------------------------------------------
Quarter ended: High Bid Low Bid
----------------- ------------------
March 31, 2005(1) 1.08 .54
-----------------------------------------------------------------------------------------
Year ended December 31, 2004
-----------------------------------------------------------------------------------------
Quarter ended: High Bid Low Bid
----------------- ------------------
March 31, 2004 1.80 .56
June 30, 2004 .37 .35
September 30, 2004 .40 .37
December 31, 2004 .70 .65
Year ended December 31, 2003
-----------------------------------------------------------------------------------------
Quarter ended: High Bid Low Bid
----------------- ------------------
March 31, 2003 5.20 2.80
June 30, 2003 3.72 1.80
September 30, 2003 3.04 1.60
December 31, 2003 1.60 .27
(1) Through February 4, 2005.
The above quotations reflect inter-dealer prices, without retail
mark-up, markdown or commission and may not reflect actual transactions. On
February 4, 2005, the closing bid price for our common stock was $0.___ per
share.
Holders
As of February 4, 2005, we had 48 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.
39
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 merger with Money
Centers of America, Inc., Money Centers of America, Inc. paid dividends to its
shareholders. In 2003, these dividends were approximately $200,000. We currently
have a liability for declared but unpaid dividends of $25,000 that occurred
prior to closing of the Money Centers of America, Inc. merger. 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
security holders
0 $0.00 0
------------------------------------------ --------------------- ------------------------ ----------------------------
Equity compensation plans not approved
by security holders
7,269,064 $1.05 6,817,500
------------------------------------------ --------------------- ------------------------ ----------------------------
Total
7,269,064 $1.05 6,817,500
------------------------------------------ --------------------- ------------------------ ----------------------------
There were no other securities authorized for issuance under equity compensation
plans at March 31, 2004.
EXPERTS
The consolidated financial statements of Money Centers of America, Inc.
(i) as of March 31, 2004 and for the fiscal years ended March 31, 2004 and March
31, 2003 and (ii) as of September 30, 2004 and for each of the six month periods
ended September 30, 2004 and September 30, 2003, 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.
40
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 Judiciary Plaza, Room 1024, 450 Fifth Street, N.W.,
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.
41
MONEY CENTERS OF AMERICA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report.................................. F-2
Consolidated Balance Sheet as of March 31, 2004............... F-3
Consolidated Statements of Operations for the fiscal
years ended March 31, 2004 and March 31, 2003................ F-4
Consolidated Statements of Changes in Stockholders'
Equity for the fiscal years ended March 31, 2004 and
March 31, 2003............................................... F-5
Consolidated Statements of Cash Flows for the fiscal
years ended March 31, 2004 and March 31, 2003................ F-6
Notes to Consolidated Financial Statements.................... F-8
Consolidated Balance Sheet as of
September 30, 2004 (unaudited)............................... F-23
Consolidated Statements of Operations (unaudited) for the six
months ended September 30, 2004 and September 30, 2003 ...... F-24
Consolidated Statements of Cash Flows (unaudited) for the six
months ended September 30, 2004 and September 30, 2003....... F-25
Notes to Consolidated Financial Statements (unaudited)........ F-26
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
iGames Entertainment, Inc.
We have audited the accompanying consolidated balance sheet of iGames
Entertainment, Inc. and its subsidiaries as of March 31, 2004, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the years ended March 31, 2004 and 2003. 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 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 iGames Entertainment,
Inc. as of March 31, 2004, and the results of its operations and its cash flows
for the years ended March 31, 2004 and 2003, 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 11 to
the financial statements, the Company has an accumulated deficit of $10,224,394
as of March 31, 2004 and had net losses and cash used in operations of
$6,634,586 and $158,948, respectively, for the year ended March 31, 2004. This
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regards to these matters are also described in Note 11.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/Sherb & Co., LLP
Certified Public Accountants
New York, New York
June 23, 2004
F-2
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2004
ASSETS
Current assets:
Cash and cash $ 232,018
Restricted cash 943,241
Accounts receivable 894,218
Loan receivable - related party 63,000
Prepaid expenses and other current assets 191,445
------------
Total current assets 2,323,922
Property and equipment, net 425,221
Goodwill 3,831,104
Intangible assets, net 1,949,693
Deferred financing costs 130,596
------------
$ 8,660,536
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 656,300
Accrued expenses 325,621
Current portion of capital lease 17,055
Loans payable 2,000,000
Notes payable 2,883,083
Lines of credit 773,859
Due to officer 100,000
Commissions payable 358,299
------------
Total current liabilities 7,114,217
Long-term liabilities:
Capital lease, net of current portion 43,325
Notes payable, net of current portion 1,135,417
Lines of credit, net of current portion 1,664,179
-----------
Total long-term liabilities 2,842,921
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
4,053,804 shares issued and outstanding 16,215
Additional paid-in capital 8,910,226
Accumulated deficit (10,224,394)
------------
Total stockholders' deficit (1,296,602)
------------
$ 8,660,536
============
The accompanying notes are an integral part of these financial statements.
F-3
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED
MARCH 31,
----------------------------
2004 2003
------------- ------------
Revenues $ 6,980,574 $ 3,211,256
Operating expenses 6,407,069 2,440,295
------------- ------------
Gross Profit 573,505 770,961
Selling, general and administrative expenses 6,398,542 796,807
------------- ------------
Loss from operations (5,825,037) (25,846)
Other income (expenses):
Gain on forgiveness of debt - 494,470
Interest expense, net (264,049) (17,588)
Inventory write-down (130,883) -
Loss on impairment of intangibles (417,880) -
Gain on disposal of property and equipment 3,263 -
------------- ------------
(809,549) 476,882
------------- ------------
Net income (loss) $ (6,634,586) $ 451,036
============= ============
Net income (loss) per common share basic and diluted $ (1.77) $ 0.14
============= ============
Weighted Average Common Shares Outstanding
-Basic and Diluted 3,746,273 3,176,250
============= ============
The accompanying notes are an integral part of these financial statements.
F-4
iGAMES ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(UNAUDITED)
Series A
Preferred Stock Common Stock
($.001 par value) ($.004 par value) Additional Total
----------------- ------------------ Paid-In Accumulated Deferred Stockholders'
Shares Amount Shares Amount Capital Defict Compensation Deficit
--------- ------- ---------- ------- ---------- ------------- ------------ -------------
Balance, March 31, 2002 - $ - 2,057,500 $8,230 $ - $ (3,742,881) $ - $ (3,734,651)
Sale of common stock and warrants, net
of offering costs - - 633,750 2,535 1,098,015 - - 1,100,550
Issuance of common stock for services - - 337,500 1,350 1,005,650 - (62,500) 944,500
Issuance of options for services - - - - 41,330 - - 41,330
Conversion of note payable - - 75,000 300 149,700 - - 150,000
Cancelation of shares - - (2,500) (10) 10 - - -
S corporation distributions - - - - - (126,791) - (126,791)
Stock issued for intangible asset - - 75,000 300 329,700 - - 330,000
Net income - - - - - 480,274 - 480,274
--------- ------ ---------- ------- ---------- ------------- ------------ -------------
Balance, March 31, 2003 - - 3,176,250 12,705 2,624,405 (3,389,398) (62,500) (814,788)
Preferred stock issued in connection
with reverse acquisition 1,351,640 - - (1,351) - - -
Issuance of common stock for services - - 333,804 1,335 643,429 - - 644,764
Issuance of common shares for
intangible asset - - 75,000 300 134,700 - - 135,000
Issuance of shares as collateral for
line of credit - - 250,000 1,000 (1,000) -
Issuance of options to employees and
consultants - - - - 5,223,418 - - 5,223,418
Exercise of stock options - - 68,750 275 27,225 - - 27,500
S corporation distributions - - - - - (200,410) - (200,410)
Sale of common stock, net of offering
costs - - 150,000 600 259,400 - - 260,000
Amortization of deferred compensation - - - - - - 62,500 62,500
Net loss - - - - - (6,634,586) - (6,634,586)
--------- ------- ---------- ------- ---------- -------------- ----------- -------------
Balance, March 31, 2004 1,351,640 $1,351 4,053,804 $16,215 $8,910,226 $ (10,224,394) $ - $ (1,296,602)
========== ======= ========== ======= ========== ============== =========== =============
The accompanying notes are an integral part of these financial statements.
F-5
iGAMES ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
-----------------------------
2004 2003
------------- -------------
Cash flows from operating activities:
Net income (loss) $ (6,634,586) $ 451,036
Adjustments used to reconcile net income
(loss) to net cash
provided by (used in) operating activities:
Gain on forgiveness of debt - (494,470)
Gain on disposal of property and equipment (3,263) -
Inventory write-down 130,833 -
Loss on impairment of intangibles 417,880 -
Issuance of options to employees and
consultants 5,229,668 -
Common stock issued for services 30,000
Depreciation and amortization 384,442 108,751
(Increase) decrease in:
Accounts receivable (399,695) 1,117,397
Inventory 1,515 -
Prepaid expenses and other current asset (24,856) (6,157)
Other assets 66,955 -
Increase (decrease) in:
Accounts payable 214,291 (32,693)
Accrued expenses 193,399 (344,111)
Commissions payable 264,469 (7,663)
------------- -------------
Net cash provided by (used in) operating activities (128,948) 792,090
------------- -------------
Cash flows from investing activities:
Cash received in acquisition 66,000 -
Increase in loans receivable - related party (63,000) -
Purchases of property and equipment (171,988) (25,991)
Purchase of intangible assets (49,556) (35,828)
------------- -------------
Net cash used in investing activities (218,544) (61,819)
------------- -------------
Cash flows from financing activities:
Change in restricted cash 492,853 (267,930)
Change in bank overdraft - (5,641)
Net change in line of credit 1,505,526 557,236
Capital lease obligation 148,437 -
Payments on capital lease obligations (88,057)
S corporation distributions (200,410) (126,721)
Advances to officer (28,932) -
Exercise of stock options 25,000 -
Decrease in loans payable (1,295,051) (739,474)
Deferred financing cost (57,211) (70,386)
------------- -------------
Net cash provided by (used in) financing activities 502,155 (652,916)
------------- -------------
Net Increase in cash 154,663 77,355
Cash and cash equivalents, beginning of year 77,355 -
------------- -------------
Cash and cash equivalents, end of year $ 232,018 $ 77,355
============= =============
The accompanying notes are an integral part of these financial statements.
F-6
iGAMES ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Supplemental disclosures:
Cash paid during the year for taxes $ - $ -
============= =============
Cash paid during the year for interest $ 264,049 $ 17,588
============= =============
Noncash investing and financing activities:
Issuance of notes payable for acquisition $ 6,000,000 $ -
============= =============
Issuance of Series A preferred stock for
acquisition $ 1,351 $ -
============= =============
Acquisition details:
Fair market value of assets acquired $ 203,247 $ -
============= =============
Liabilities assumed $ 143,756 $ -
============= =============
The accompanying notes are an integral part of these financial statements.
F-7
iGAMES ENTERTAINMENT, 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.
The holders of our Series A Preferred Stock have redemption rights that, if
exercised, would require us to redeem our issued and outstanding shares of
Series A Preferred Stock and 2,500,000 issued and outstanding stock purchase
warrants in exchange for the issued and outstanding common stock of Money
Centers of America, Inc.
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, $2,000,000 of which was paid in cash on April
12, 2004, and $2,000,000 of which is due by issuance of 1,470,589 shares of
iGames common stock or, in cash at the election of iGames on the earlier of (i)
the closing of iGames' acquisition of Chex Services, Inc., (ii) the termination
of that proposed transaction or (iii) June 30, 2004 or, in cash at the election
of iGames, see note 14.
F-8
iGAMES ENTERTAINMENT, 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.
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 retain 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. CASH AND CASH EQUIVALENTS
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.
b. 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
subsidiaries. All material intercompany balances and transactions have been
eliminated.
c. RECEIVABLES AND REVENUE RECOGNITION
i. ATM AND CREDIT CARD RECEIVABLES
Fees earned from ATM and credit card advances are recorded on the
date of transaction.
Accounts receivable arise primarily from ATM, credit card advances
and check cashing services provided at casino locations.
Concentrations 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. No allowance was
considered necessary at March 31, 2004 and 2003.
ii. 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 a
bad debt loss. The check is subsequently resubmitted to the bank for
payment. If it is honored by the bank, the amount of the check is
recognized as a negative bad debt. Based upon past history no
allowance was considered necessary at March 31, 2004.
F-9
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
d. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of cash and cash equivalents, accounts, loans and credit card
receivables, notes, accounts payable and accrued expenses approximate their
carrying amounts because of the short maturities of these instruments.
e. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is calculated by use
of straight-line methods over the estimated useful lives of the assets.
f. ACQUISITION, GOODWILL AND IMPAIRMENT OF LONG-LIVED ASSETS
On January 6, 2004, the Company closed on the acquisition of the issued and
outstanding capital stock of Available Money, Inc. ("Available Money"). The
acquisition was accounted for under the purchase method of accounting, 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 carrying
value of goodwill as well as other long-lived assets is reviewed if the facts
and circumstances suggest that they may be impaired. If this review indicates
that the assets will not be recoverable, as determined 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 in accordance with Statement of Financial Accounting Standards No. 144,
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS ("FAS 144").
Management evaluates this balance on an ongoing basis and has determined that
there has been no subsequent impairment and that the balance of approximately
$3,800,000 at March 31, 2004 is a fair estimate.
g. INCOME TAXES
The Company accounts for income taxes under the liability method in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" under this method, deferred income tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse
h. USE OF ESTIMATES
Preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the balance sheets and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
i. DEFERRED FINANCING COSTS
Deferred financing costs are amortized over the term of the related debt.
F-10
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
j. ADVERTISING
The Company's policy is to expense advertising costs as the costs are incurred.
k. 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.
l. EARNINGS PER SHARE
The Company has adopted SFAS, No. 128, "Earnings per Share". Basic earnings
(loss) per share is computed by dividing net income (loss) available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflects the per share amount that would
have resulted if dilutive common stock had been converted to common stock, as
prescribed by SFAS No. 128.
3. PROPERTY AND EQUIPMENT
The major classes of property and equipment at March 31, 2004 are as follows:
Estimated Life 2004
-------------- ---------------
Equipment 5 years $ 714,570
Furniture 5 - 7 years 60,022
---------------
774,592
Less accumulated depreciation
(349,371)
---------------
$ 425,221
===============
Depreciation expense for property and equipment for the years ended March 31,
2004 and 2003 was $139,700 and $95,079 respectively.
F-11
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTY AND EQUIPMENT (CONTINUED)
The amounts above include equipment under capital leases with a gross carrying
value of $148,437 and accumulated depreciation of $25,936 at March 31, 2004.
4. INTANGIBLE ASSETS AND GOODWILL
Intangible assets at March 31, 2004 are as follows:
Estimated
Life 2004
---- ---------------
Software 10 years $ 9,928
Software development costs 5 years 36,175
Website development costs 3 years 24,000
Contract rights 1-3 years 2,100,306
Goodwill indefinite 3,831,104
Other 3 years 1,627
---------------
6,003,140
Less accumulated amortization (222,343)
---------------
$ 5,780,797
===============
During the year ended March 31, 2004, the Company recognized an impairment loss
on intangible assets of $417,880. The Company made a decision not to pursue
marketing its "slot anti-cheating device" and its casino table game. This
resulted in the write-off the corresponding licenses, trademarks and patents.
Amortization expense, for intangible assets, for the years ended March 31, 2004
and 2003 was $244,742 and $13,672 respectively. Estimated amortization expense
over the next five years is as follows:
Year Amount
---- ------
2005 $ 872,836
2006 573,245
2007 418,575
2008 78,573
2009 1,314
Remaining 5,150
F-12
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. NOTES PAYABLE
Notes payable at March 31, 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
December 2003, the Company repaid $81,500 of this debt. The remaining
principal balance of this note of $18,500 continues to bear interest at 10%
per annum and is due upon demand. $18,500
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 is
non-interest bearing and currently in litigation, see note 14.
2,000,000
This represents the second payment due to the former owners of Available
Money. On April 12, 2004 the Company borrowed $2,000,000 from Mercantile
Capital to satisfy this obligation. The note with Mercantile bears interest
at 17% and is payable monthly over a 24 month period. This note is a bridge
loan.
2,000,000
This represents the final payment due to the former owners of Available
Money. This obligation is payable by issuance of 1,470,589 shares of iGames
common stock or, in cash at the election of iGames on the earlier of (i)
the closing of iGames' acquisition of Chex Services, Inc., (ii) the
termination of that proposed transaction or (iii) June 30, 2004. The
obligation is currently in litigation, see note 14.
2,000,000
---------------
$ 6,018,500
===============
6. CAPITAL LEASE
Capital lease obligation at March 31, 2004 consisted of the following:
2004
---------------
Obligation under capital lease, imputed interest rate at 12.78%; due in May
2007; collateralized by equipment $ 60,380
Less current maturities
(17,055)
---------------
$ 43,325
===============
F-13
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. CAPITAL LEASE (CONTINUED)
Future minimum lease payments for equipment acquired under capital leases at
March 31, 2004 are as follows:
2004 $ 23,796
2005 23,796
2006 23,796
2007 1,983
-------------
Total minimum lease payments 73,371
Less amount representing interest
12,991
--------------
Present value of net minimum lease 60,380
Less current portion 17,055
--------------
$ 43,325
==============
F-14
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LINES OF CREDIT:
Lines of credit at March 31, 2004 consisted of the following:
2004
------------------
Line of credit, maximum availability of $1,800,000. In October 2003, the line
of credit was amended increasing the maximum availability to $3,000,000,
through May 2005; subject to various restrictive covenants, interest is
payable monthly at 15% per annum, borrowings are collateralized by restricted
cash and guaranteed by a shareholder of the Company. The line of credit is
also collateralized by all the assets of the Company, in the case that the
restricted cash is not sufficient to collateralize the
outstanding balance on the line of credit. $ 1,664,179
Line of credit, interest is payable monthly at 9% per annum, the line is
unsecured and due on demand. 153,000
Line of credit, non-interest bearing, the line is unsecured and due on
demand.
202,279
On April 4, 2002, the Company entered into a $150,000 one-year renewable line
of credit with a bank, that bears interest at 6% per annum, with interest
payable monthly. This debt is collateralized by a $150,000 restricted
certificate of deposit that matured on April 4, 2004 and accrues interest at
1.65% per annum. This debt was paid in full on April 4, 2004.
149,992
On October 1, 2003, Jeremy Stein, our former chief executive officer,
extended a loan to the Company in the principal amount of $25,000. Mr. Stein
received the funds to provide this loan from a $25,000 revolving line of
credit with American Express. The terms of this loan are the same terms as
his line of credit with American Express. This debt bears interest at 8.49%
per annum, with interest payable monthly.
On December 1, 2003, the Company entered into a $250,000 line of credit, due 23,768
on demand with an asset based lender. This debt bears interest at the prime
rate of interest plus 10%, floating with daily resets, for the actual number
of days that the loan remains outstanding, provided that the minimum rate on
this loan is 14.5% per annum. The Company is obligated to pay the lender a
collateral management fee equal to one percent of the principal balance of
the loan for each month that the loan is outstanding. In order to secure
the performance of the Company's obligations under this loan, the Company
granted the lender a continuing lien on and security interest in and to
250,000 newly issued shares of the Company's common stock. In addition,
upon an event of default under the loan, the Company is obligated to
register the resale of these pledged shares of common stock. Upon payment
in full of all amounts due under the loan, the lender is obligated to
deliver all stock certificates evidencing the ownership of these shares to
the Company for cancellation. 244,820
------------------
$ 2,438,038
==================
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' DEFICIT
In April 2002, with the approval of the Board of Directors, the Company
increased its authorized number of common stock issuable from 10,000,000 to
50,000,000 shares $.001 par value per share. Additionally, the Company is now
authorized to issue 5,000,000 of preferred stock $.001 par value per share.
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 2002, the Company issued 25,000 options to acquire shares of the
Company's common stock to a consultant; such options are exercisable at $0.40
per share and expire threes years from the grant date. The Company valued these
options utilizing the Black-Scholes options pricing model using the following
assumptions: risk free interest rate of 4.25%, volatility of 0%, an estimated
life of three years, and dividend yield of 0%. The Company recognized $41,330 in
noncash compensation relating to the issuance of these options. These options
were subsequently canceled in April 2003, and 25,000 shares of common stock were
issued for services which were valued at the fair market value of $71,000.
In August 2002, the Company issued 6,250 options to acquire shares of the
Company's common stock to an employee; such options are exercisable at $0.40 per
share and expire three years from the date of the grant. The Company has valued
these options at $10,333 or $0.41 per option options utilizing the Black-Scholes
options pricing model using the following assumptions: risk free interest rate
of 4.25%, volatility of 0%, an estimated life of three years, and dividend yield
of 0%.
In September 2002, the Company sold 375,000 units consisting of one share of its
common stock and one warrant to purchase a share of common stock (exercisable at
$4.00) for $2.00 per unit. The Company received proceeds from this stock sale of
$652,500, which is net of offering costs paid of $97,500.
In October 2002, a note of $150,000 was converted into 75,000 shares of the
Company's common stock (see Note 5).
In October 2002, the Company issued 37,500 shares of its restricted common stock
to a director of the Company, who provided both financial and marketing
consulting services. Such shares were valued at the fair market value on the
date of the grant. The Company recorded $172,500 in noncash compensation.
In October 2002, 2,500 shares of the Company's previously issued shares were
cancelled.
During the year ended March 31, 2003, the Company issued 300,000 shares to
employees and consultants for services rendered. Accordingly, the Company has
recorded $772,000 ($0.50-$1.30 per share), net of deferred compensation of
$62,500, in compensation to reflect the issuance of these shares.
In February 2003, the Company issued 75,000 shares of its common stock for the
patent right to its Table Slots product. The shares were valued at the
approximate fair market value on the date of the agreement (see Note 4).
In March 2003, the Company sold 1,030,000 units consisting of one quarter of a
share of its common stock and one warrant to purchase one quarter of a share of
common stock (exercisable at $1.50) for $0.50 per unit. The Company received
proceeds from this stock sale of $448,050, which is net of offering costs paid
of $66,950.
F-16
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' DEFICIT (CONTINUED)
Additionally, the Company issued 1,250 shares of its common stock as part of the
offering costs of this capital raise.
During the year ended March 31, 2003, Money Centers, issued capital
distributions relating to its status as an S Corporation of $126,791.
In June 2003, the Company sold 500,000 units consisting of one quarter of a
share of its common stock and a warrant to purchase one quarter of a share of
common stock (exercisable at $1.00) for $.50 per unit. The Company received
proceeds from this stock sale of $235,000, which is net of offering costs paid
of $15,000.
In June 2003, the Company issued 80,000 shares of its restricted common stock to
consultants for services rendered. The Company valued these shares at a range
between $1.81 and $2.84 per share, the fair market value at the date of grant
and recorded noncash compensation expense of $144,800.
In July 2003, the Company issued 62,500 shares of its restricted common stock to
its Chief Executive Officer, pursuant to the terms of this executive's
employment contract. The Company valued these shares at $2.28 per share the fair
market value on the date of the grant.
In July 2003, the Company issued 25,000 shares of its restricted common stock to
a consultant for services provided. The Company valued these shares at $2.28 per
share the fair market value on the date of the grant. This amount relating to
the sale of the Company's securities has been recorded as an offering cost and
charged against additional paid-in capital.
In July 2003, the Company issued 6,250 shares for the exercise of stock options
with an exercise price of $0.40 and received gross proceeds of $2,500.
In October 2003, the Company sold 100,000 units to a single accredited investor
consisting of one quarter of a share of our common stock and a warrant to
purchase one half of a share of common stock (exercisable at $1.20) for $0.25
per unit. The Company received proceeds from this stock sale of $25,000. None of
the foregoing warrants have been exercised as of the date hereof.
In October 2003, the Company issued 81,750 shares of its common stock to three
consultants for services rendered. The Company valued the shares at the fair
market value on the date of issuance and recorded consulting expense of
$147,690, or between $1.80 and $1.88 per share.
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 to the seller as payment of 50% of the purchase price. The Company
valued the shares at the fair market value on the date of issuance and recorded
an intangible asset of $135,000 or $1.80 per share. The remaining 50% of the
purchase price consisting of 75,000 restricted shares of common stock will only
be granted when the Company has placed at least 150 units of this table game
within casinos under standard licensing/leasing agreements. Management
determined that, as of December 31, 2003, a write-down of the intangible asset
was necessary as the Company's projection of future cash flows indicated an
impairment of $110,000. This amount is included in the Statement of Operations
under the caption (Loss on Impairment of Intangible Asset).
Also, in October 2003, the Company issued 4,542 shares of its common stock to
employees. The Company valued the shares at the fair market value on the date of
issuance and recorded salary expense of $8,175 or
F-17
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' DEFICIT (CONTINUED)
$1.80 per share, respectively.
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.
In December 2003, the Company issued 30,000 shares of its common stock to two
consultants for services rendered. The Company valued these shares at fair
market value of $43,600 or $1.45 per share.
In accordance with the reverse merger accounting and the recapitalization of the
Company all expense amounts pertaining to iGames, prior to the reverse merger on
January 2, 2004, have been restated as paid-in capital.
On January 2, 2004, the Company issued 2,500,000 warrants to acquire shares of
the Company's common stock and the company issued 1,351,640 shares of Series A
Preferred Stock to the former stockholders of Money Centers of America, Inc. in
connection with the merger; such warrants are exercisable at $0.01 per share and
expire ten years from the grant date.
On January 2, 2004, the Company issued 2,635,000 options to acquire shares of
the Company's common stock to Christopher Wolfington; such options are
exercisable at $0.01 per share and expire ten years from the date of the grant.
The Company has valued these options at $4,453,150 or $1.70 per option utilizing
the intrinsic value pricing model.
On January 12, 2004, one option holder exercised his right to purchase 62,500 at
.40 per share. The company received gross proceeds in the amount of $25,000.
On January 21, 2004, the Company issued 270,000 options to acquire shares of the
Company's common stock to various employees; such options are exercisable at
$0.01 per share and expire ten years from the date of the grant. The Company has
valued these options at $423,900 or $1.57 per option utilizing the intrinsic
value pricing model.
On January 21, 2004, the Company issued 220,000 options to acquire shares of the
Company's common stock to consultants; such options are exercisable at $0.01 per
share and expire ten years from the grant date. The Company valued these options
utilizing the Black-Scholes options pricing model using the following
assumptions: risk free interest rate of 3.5%, volatility of 89.24%, an estimated
life of ten years, and dividend yield of 0%. The Company recognized $346,368 in
noncash compensation relating to the issuance of these options.
On January 30, 2004, the Company issued 25,000 shares of its common stock to a
consultant for service rendered. The Company valued the shares at the fair
market value on the date of issuance and recorded consulting expense of $30,000,
or $1.20 per share.
During the year ended March 31, 2004, Money Centers, issued capital
distributions relating to its status as an S Corporation of $200,410.
Pursuant to the terms of a common stock offering with registration rights, the
company has accrued penalties in the amount of 22,500 shares. The Company has
valued these shares at $24,035.
F-18
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' DEFICIT (CONTINUED)
Stock option and warrant activity for the year ended March 31, 2004 is
summarized as follows:
Number of Weighted Average
Shares Exercise Price
---------- ----------------
Outstanding at March 31, 2003 1,355,314 $ 4.32
Granted 5,982,500 .31
Exercised (68,750) (0.40)
Canceled - -
---------- ----------------
Outstanding at March 31, 2004 7,269,064 $ 1.05
========== ================
The following table summarizes the Company's stock options and warrants
outstanding at March 31, 2004:
Options and
Warrants Outstanding
-------------------------------------------------
Weighted Weighted
Average Average
Range of Remaining Exercise
Exercise Price Number Life Price
-------------- --------- ------------ ---------------
$2.40 - 4.00 237,500 4.25 $ 3.24
4.00-6.00 1,286,564 2.50 5.00
8.00 125,000 10.00 8.00
.01 5,620,000 10.00 .01
---------
7,269,064
All outstanding options and warrants are exercisable at March 31, 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.
9. 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:
--------------------------------- --- ------------------------------------------
March 31,
--------------------------------- --- ------------------------------------------
2004 2003
--------------------------------- --- -------------- ---- ----------------------
Deferred tax assets:
--------------------------------- --- -------------- ---- ----------------------
Net operating loss carryforwards $ 1,090,000 $ 640,000
--------------------------------- --- -------------- ---- ----------------------
Less valuation allowance (1,090,000) (640,000)
--------------------------------- --- -------------- ---- ----------------------
Net deferred tax assets $ - $ -
--------------------------------- --- ============== ---- ======================
F-19
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES (CONTINUED)
The net change in the valuation allowance during the year ended March 31, 2004
was an increase of $450,000.
The reconciliation of the income tax computed at the U.S. federal statutory rate
to income tax expense for the period ended March 31, 2004 and 2003:
-------------------------------------------- --- -------------------------------
March 31,
-------------------------------------------- --- ----------- --- ---------------
2004 2003
-------------------------------------------- --- ----------- --- ---------------
Tax benefit at federal statutory rate (34%) $ 2,256,000 $ 792,000
-------------------------------------------- --- ----------- --- ---------------
Nondeductible stock compensation (1,796,000) (335,000)
-------------------------------------------- --- ----------- --- ---------------
Non-deductible expenses (10,000)
-------------------------------------------- --- ----------- --- ---------------
Change in valuation allowance (450,000) (457,000)
-------------------------------------------- --- ----------- --- ---------------
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 March 31, 2004 and 2003 is
necessary to reduce the deferred tax assets to the amount that will more likely
than not be realized. At March 31, 2004, the Company has available net operating
loss carryforwards of approximately $3,200,000, which expire in the year 2023.
Certain amounts would be subject to the limitations under Section 382 of the
Internal Revenue Code relating to changes in ownership.
10. COMMITMENTS
a. LEASE COMMITMENTS
The Company leases office space in Minnesota on a month to month basis for
$738 per month.
The Company leases office space in Florida on a month to month basis for
$3,450 per month.
The Company leases office space in Nevada on a month to month basis for
$1,325 per month.
The Company's total rent expense under operating leases was approximately
$66,200 and $9,000 for the years ended March 31, 2004 and 2003, respectively.
b. CASINO CONTRACTS
MCA 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:
F-20
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMITMENTS (CONTINUED)
- A dollar amount, as defined by the contract, per transaction
volume processed by MCA.
- A percentage of MCA's profits at the respective location.
As of March 31, 2004 the Company has recorded $333,299 of accrued
commissions on casino contracts.
Pursuant to the contracts, the Native American owned casinos have not
waived their sovereign immunity.
11. CONCENTRATION OF CREDIT RISK
The Company maintains cash in bank accounts which exceed federally insured
limits. At March 31, 2004, the Company had deposits in excess of federally
insured amounts aggregating approximately $1,100,000 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 year ended March 31, 2004, 57 % of total revenues were derived from
operations at 1 casino.
12. DUE TO OFFICER
Amounts due to officer bear an interest rate of 10% per annum, payable monthly
and due on demand.
13. 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 $10,224,394 as of March 31, 2004 and had net losses and cash used in
operations of $6,634,586 and $128,948 respectively, for the year ended March 31,
2004. 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.
14. 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, entitling us to terminate the Stock Purchase Agreement and receive
a $1,000,000 termination fee and reimbursement of our transaction costs from
Equitex and Chex, that Chex wrongfully and tortiously declared a default under
F-21
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. LITIGATION (CONTINUED)
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 complaint seeks payment of the
principal balance of the loan and accrued interest thereon. Chex further 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.
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. We anticipate that
this action will be consolidated with the other actions listed above that are
pending in to the United States District Court for the District of Delaware. We
are vigorously defending this action, which is still in the pleadings stage, and
believe that Chex's claims lack merit.
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.
F-22
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.
F-23
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 income (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.
F-24
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 loss to net cash
provided (used) by operating activities:
Depreciation and amortization 778,815 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 690,257 211,172
(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.
F-25
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, see note 13.
F-26
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.
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 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.
F-27
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). Thereafter in lieu of interest the lender is entitled to 50% of the 2,000,000
operating income of Available Money. To date the operating income of
Available Money has been immaterial. This note is currently in litigation,
see note 11.
This represents the remaining $150,000 of the Available Money Purchase. As
stated in Note 1 this amount is being withheld from Helene Reagan and
150,000 Samuel Freshman in accordance with the agreement provisions
regarding the extensions of various contracts.
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 201,154
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.
---------------
$ 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.
F-28
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 note 11 and note 12.
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 3.75 $ 3.24
4.00-6.00 1,286,564 2.00 5.00
8.00 125,000 9.50 8.00
.01 5,620,000 9.50 .01
.70 62,500 9.75 .70
.33 25,000 5.00 .33
.33 25,000 1.42 .33
-------------------------------------------------
7,381,564
=========
F-29
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.
F-30
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INTEREST EXPENSE
Included in the 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.
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 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.
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
F-31
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. LITIGATION (CONTINUED)
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. 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 which represents 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.
On Friday, November 12, 2004, the Honorable Kent A. Jordan of the United States
District Court for the District of Delaware heard oral argument on a motion for
summary judgment that was recently filed by Chex Services, Inc. The motion
sought a judgment for sums allegedly due on the January 6, 2004 Term Loan Note
between iGames Entertainment, Inc. and Chex Services, Inc. Judge Jordan denied
the motion and determined that the issues raised by Chex's motion would have to
await trial.
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.
F-32
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SUBSEQUENT EVENTS (CONTINUED)
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.
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."
Money Centers began full service operation at a new casino on October 28, 2004.
F-33
Until ________ [DATE], 2005 [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 6,977,343 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 ________, 2005
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.
II-1
(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.
(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.
II-2
(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 $ 4,433.26
Printing and Engraving Expense 10,000.00
Transfer Agent's Fee 3,000.00
Legal Fees and Expenses 25,000.00
Accounting Fees and Expenses 7,000.00
Blue Sky Fees and Expenses 5,000.00
Miscellaneous Expenses 5,566.74
-----------
Total $60,000.00
===========
II-3
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.
On March 1, 2002, we sold for $100,000 to a single investor a 10%
convertible promissory note due September 1, 2002 in the principal amount of
$100,000 pursuant to the exemption afforded by Section 4(2) of the Securities
Act. The note is convertible into unregistered shares of common stock and common
stock purchase warrants.
In August 2002, we issued options to acquire 25,000 shares of our
common stock to a consultant; such options are exercisable at $0.40 per share
and expire three years from the grant date. We recognized $41,330 in non-cash
compensation relating to the issuance of these options. Subsequently, in April
2003, we agreed with the consultant to cancel these options and to issue 25,000
shares of common stock as compensation for the services provided. These shares
were valued at $71,000.
In August 2002, we issued options to acquire 6,250 shares of our common
stock to an employee; such options are exercisable at $0.40 per share and expire
three years from the date of the grant. We valued these options at $10,333 or
approximately $1.65 per option.
In September 2002, we sold 375,000 units consisting of one share of its
common stock and one warrant to purchase a share of common stock (exercisable at
$4.00) for $2.00 per unit to seven investors. We received proceeds from this
stock sale of $652,500, which is net of offering costs paid of $97,500. None of
the foregoing warrants have been exercised as of the date hereof.
In October 2002, a note of $150,000 was converted into 75,000 shares of
our common stock.
In October 2002, we issued 37,500 shares of its restricted common stock
to one of our directors who provided both financial and marketing consulting
services. Such shares were valued at the fair market value on the date of the
grant. We recorded $172,500 in noncash compensation.
In October 2002, 2,500 shares of our previously issued shares were
cancelled.
During the year ended March 31, 2003, we issued 300,000 shares of our
common stock to employees and consultants for services rendered. Accordingly, we
have recorded $772,000 ($2.00-$5.20 per share), net of deferred compensation of
$62,500, in compensation to reflect the issuance of these shares.
In February 2003, we issued 75,000 shares of our common stock for the
patent right to our Table Slots product. The shares were valued at the
approximate fair market value on the date of the agreement.
In March 2003, we sold 1,030,000 units consisting of one quarter of a
share of our common stock and a warrant to purchase one quarter of a share of
common stock (exercisable at $1.50) for $0.50 per unit to eight accredited
investors. We received proceeds from this stock sale of $448,050, which is net
of offering costs paid of $66,950. Additionally, we issued 1,250 shares of its
common stock as part of the offering costs of this capital raise. None of the
foregoing warrants have been exercised as of the date hereof.
In May 2003, we granted options to purchase 62,500 shares of our common
stock at an exercise price of $2.04 per share to our 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.
II-4
In June 2003, we sold 500,000 units to a single investor consisting of
one quarter of a share of our common stock and a warrant to purchase one quarter
of a share of common stock (exercisable at $1.00) for $0.50 per unit. We
received proceeds from this stock sale of $235,000, which is net of offering
costs paid of $15,000. None of the foregoing warrants have been exercised as of
the date hereof.
In June 2003, we issued 80,000 shares of our restricted common stock to
consultants for services rendered. We valued these shares at $2.84 per share and
recorded noncash compensation expense of $144,800. The amortization of deferred
compensation resulted in a noncash compensation expense of $18,750 for the
quarter June 30, 2003.
In July 2003, we issued 62,500 shares of restricted common stock to our
chief executive officer pursuant to the terms of his employment agreement. We
valued these shares at $2.28 per share, the fair market value of our common
stock on the date of grant.
In October 2003, we sold 100,000 units to a single accredited investor
consisting of one quarter of a share of our common stock and a warrant to
purchase one half of a share of common stock (exercisable at $1.20) for $0.25
per unit. We received proceeds from this stock sale of $25,000. None of the
foregoing warrants have been exercised as of the date hereof.
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,
we purchased the Random X 21 product by issuing 75,000 restricted shares of
common stock to the seller as payment of 50% of the purchase price. The
remaining 50% of the purchase price consisting of 75,000 restricted shares of
common stock will only be granted when the Company has placed at least 150 units
of this table game within casinos under standard licensing/leasing agreements.
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 issued options to purchase 62,500 shares of
our common stock at an exercise price of $2.00 per share to our 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 a contemporaneous
sales 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.
II-5
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 a
contemporaneous sales 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 2,500,000 shares of our 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.
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 490,000 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.
Additionally, in January 2004, we issued 25,000 shares of our common
stock to a consultant for services rendered. We valued these shares at a
contemporaneous sales 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 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.
Item 27. Exhibits, Financial Statements and Reports on Form 8-K
(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
10.5 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 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).
II-6
10.4 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).
10.5 Amended and Restated Agreement and Plan of Merger By and
Among Money Centers of America, Inc., Christopher M.
Wolfington, iGames Entertainment, Inc., Michele Friedman,
Jeremy Stein and Money Centers Acquisition, Inc., dated as of
December 23, 2003 (incorporated by reference to Exhibit 2.1
of Current Report on Form 8-K filed on January 20, 2004).
10.6 Stock Purchase Agreement For the Acquisition of Available
Money, Inc. By iGames Entertainment, Inc., from Helene Regen
and Samuel Freshman dated January 6, 2004 (incorporated by
reference to Exhibit 1.1 of Current Report on Form 8-K filed
on January 21, 2004).
10.7 Term Loan Note in the principal amount of $4,000,000 dated
January 6, 2004 issued to Chex Services, Inc. incorporated by
reference to Exhibit 10.7 to the Annual Report on Form 10-KSB
filed on July 13, 2004).
10.8 Software Development Agreement effective September 1, 2004
by and between Money Centers of America, Inc. and
Intuicode LLC.
21 Subsidiaries of Money Centers of America, Inc.
23.1 Consent of Sherb & Co.
23.2 Consent of Klehr, Harrison, Harvey, Branzburg & Ellers LLP as
to the legality of the shares of common stock being
registered (to be filed by amendment).
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.
II-7
(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-8
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 February __, 2005.
Money Centers of America, Inc.
By: /s/ Christopher M. Wolfington
--------------------------------------
Chief Executive Officer and Chief Financial
Officer (principal financial officer and
principal accounting 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: February 14, 2005 /s/ Christopher M. Wolfington
----------------------------------------------
Christopher M. Wolfington
Chief Executive Officer and
Chief Financial Officer
(principal financial officer and
principal accounting officer)
Date: February 14, 2005 /s/ Jeremy Stein
----------------------------------------------
Jeremy Stein
Director
Date: February 14, 2005 /s/ Wayne DiMarco
----------------------------------------------
Wayne DiMarco
Director
Date: February 14, 2005 /s/ Jonathan Robinson
-----------------------------------------------
Director
II-9