UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Quarter ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File No. 000-49723
Money Centers of America, Inc.
-------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 23-2929364
----------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
700 South Henderson Road, Suite 325, King of Prussia, PA 19406
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(Address of Principal Executive Offices)
(610) 354-8888
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes ___X___ No _______
As of May 19, 2005, 25,176,978 shares of the registrant's common
stock, par value $0.01 per share, were issued and outstanding.
MONEY CENTERS OF AMERICA, INC.
QUARTERLY PERIOD ENDED MARCH 31, 2005
INDEX TO FORM 10-QSB
PAGE
NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at March 31, 2005 (unaudited) 3
Consolidated Statements of Operations for the Three Months
Ended March 31, 2005 and 2004 (unaudited) 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2005 and 2004 (unaudited) 5
Notes to Financial Statements 6-13
Item 2. Management's Discussion and Analysis or Plan or Operation 14
Item 3. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Events 25
Item 6. Exhibits and Reports on Form 8-K 25-26
Signatures
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
BALANCE SHEET
MARCH 31, 2005
UNAUDITED
ASSETS
Current assets:
Cash and cash equivalents $ 535,264
Restricted cash 4,959,883
Accounts receivable 922,859
Loans receivable 28,000
Prepaid expenses and other current assets 384,246
------------
Total current assets 6,830,252
Property and equipment, net 554,948
Intangible assets, net 1,074,787
Goodwill 1,681,104
Deferred financing costs 86,405
------------
$ 10,227,496
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,347,319
Accrued expenses 173,624
Current portion of capital lease 29,460
Loans payable 2,000,000
Notes payable 188,280
Lines of credit 6,405,454
Payroll liabilities 821
Due to officer 482,590
Commissions payable 1,403,301
------------
Total current liabilities $ 12,030,849
Long-term liabilities:
Capital lease 190,047
Lines of credit, net of current portion 2,333,324
------------
Total long-term liabilities 2,523,371
Stockholders' Deficit:
Preferred stock; $.001 par value, 20,000,000 shares authorized
0 shares issued and outstanding -
Common stock; $.01 par value, 150,000,000 shares authorized
25,176,978 shares issued and outstanding 251,770
Additional paid-in capital 10,971,789
Accumulated deficit (15,550,283)
------------
Total stockholders' deficit (4,326,724)
------------
$ 10,227,496
============
The accompanying notes are an integral part of these financial statements.
-3-
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
UNAUDITED
THREE MONTHS ENDED
MARCH 31,
2005 2004
-------------- --------------
Revenues $ 5,378,591 $ 2,155,661
Operating expenses 4,669,778 1,648,116
-------------- --------------
Gross profit 708,813 507,545
Selling, general and administrative expenses 783,937 949,212
Noncash Compensation 69,850 5,283,703
Depreciation and amortization 181,651 252,676
-------------- --------------
Operating income (loss) (326,625) (5,978,046)
Other income (expenses):
Interest expense, net (505,348) (106,980)
Other income 92,720 -
Other expenses - (548,763)
-------------- --------------
(412,628) (655,743)
-------------- --------------
Net loss $ (739,253) $ (6,633,789)
============== ==============
Net loss per common share basic $ (0.03) $ (1.64)
============== ==============
Net loss per common share diluted $ (0.03) $ (1.64)
============== ==============
Weighted Average Common Shares Outstanding
-Basic 25,126,978 4,053,804
============== ==============
-Diluted 25,126,978 4,053,804
============== ==============
The accompanying notes are an integral part of these financial statements.
-4-
MONEY CENTERS OF AMERICA, INC.
STATEMENTS OF CASH FLOWS
UNAUDITED
Periods Ended
March 31,
2005 2004
-------------- --------------
Cash flows from operating activities:
Net loss $ (739,253) $ (6,633,789)
Adjustments used to reconcile loss to net cash
provided (used) by operating activities:
Depreciation and amortization 181,651 252,676
Interest on note discount 1,561 -
Inventory write-down - 130,833
Loss on impairment of intangibles - 417,880
Issuance of options to employees and consultants 57,750 5,328,850
Common stock issued for services - 30,000
Increase (decrease) in:
Accounts payable 282,907 427,295
Accrued expenses (1,343) 535
Commissions payable 310,969 261,099
Payroll liabilities 821 -
(Increase) decrease in:
Prepaid expenses and other current assets 15,189 131,940
Accounts receivable (114,693) (855,463)
Inventory - 1,515
-------------- --------------
Net cash used in operating activities (4,441) (506,629)
Cash flows from investing activities:
Cash received in acquisition - 27,398
Purchases of property and equipment (148,569) (8,692)
Cash paid for acquisition of intangible assets (105,000) (2,001,567)
-------------- --------------
Net cash used in investing activities (253,569) (1,982,861)
Cash flows from financing activities:
Decrease (increase) in restricted cash (772,107) 882,712
Net change in line of credit 575,163 (147,655)
Capital lease obligation 116,515 -
Payments on capital lease obligations (38,690) (3,936)
Increase (decrease) in loans payable - 2,000,000
Advances to officer (8,565) -
Payments on notes payable (7,939) -
Decrease in loans receivable 15,000 (63,000)
Increase in dividends payable - 25,000
Sale of common stock, net 479,500 -
Exercise of stock options 1,500 25,000
Dividends - (270,010)
-------------- --------------
Net cash provided by financing activities 360,377 2,448,111
NET INCREASE (DECREASE) IN CASH 102,367 (41,379)
CASH, beginning of period 432,897 273,397
-------------- --------------
CASH, end of period $ 535,264 $ 232,018
============== ==============
Supplemental disclosures:
Cash paid during the period for interest $ 505,348 $ 106,980
============== ==============
The accompanying notes are an integral part of these financial statements.
-5-
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Money Centers of America Inc. (the "Company"), a Delaware corporation, was
incorporated in October 1997.
On January 2, 2004, pursuant to an Amended and Restated Agreement and Plan
of Merger (the "Merger Agreement") by and among the Company, Christopher M.
Wolfington, iGames Entertainment, Inc., a Nevada corporation ("iGames"), Michele
Friedman, Jeremy Stein and Money Centers Acquisition, Inc., a wholly-owned
subsidiary of iGames, Money Centers Acquisition, Inc. was merged with and into
the Company and the Company, as the surviving corporation, became a wholly-owned
subsidiary of iGames (the "Merger"). For accounting purposes, the transaction
was treated as a recapitalization and accounted for as a reverse acquisition.
Therefore, the financial statements reported herein and accompanying notes
thereto reflect the assets, liabilities and operations of the Company as if it
had been the reporting entity since inception. In connection with the Merger,
all of the issued and outstanding shares of capital stock of the Company were
tendered to iGames and iGames issued to the Company stockholders an aggregate of
1,351,640 shares of iGames Series A Convertible Preferred Stock, $.001 par value
per share, and warrants to purchase an aggregate of 2,500,000 shares of iGames
common stock, par value $.004 per share, at an exercise price of $.01 per share.
Each share of Series A Convertible Preferred Stock was entitled to ten votes in
all matters submitted to a vote of iGames shareholders and was convertible at
the option of the holders into ten shares of common stock at any time after the
date on which iGames amended its articles of incorporation to increase the
number of authorized shares of its common stock to at least 125,000,000.
The Company is a single source provider of cash access services to the
gaming industry. The Company has combined advanced technology with personalized
customer services to deliver ATM, Credit Card Advance, POS Debit, Check Cashing
Services, CreditPlus outsourced marker services, and merchant card processing.
Pursuant to the terms of a Stock Purchase Agreement between iGames, Helene
Regen and Samuel Freshman dated January 6, 2004 (the "Stock Purchase
Agreement"), iGames acquired all of the issued and outstanding shares of capital
stock of Available Money, Inc., a provider of ATM cash access services based in
Los Angeles, California. The purchase price of this transaction was $3,850,000,
$2,000,000 of which was paid in cash at closing, $1,850,000 of which was paid in
cash on April 12, 2004. (See note 13)
On October 15, 2004 the Company formally changed its name from iGames
Entertainment, Inc. to Money Centers of America, Inc. additionally, management
believed that calendar year reporting was more transparent. Accordingly, on
October 15, 2004 the company changed its Fiscal year from March 31, to December
31.
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 year ended December 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
three months ended March 31, 2005 are not necessarily indicative of the results
for the full year ending December 31, 2005.
-6-
3. LOANS AND NOTES PAYABLE
Notes payable at March 31, 2005 consisted of the following:
2005
------------
The Company borrowed $2,000,000 from Chex Services, Inc.
on January 6, 2004 to pay the first $2,000,000 to the former
owners of Available Money. The loan bore interest at a rate
of 15% per annum from January 6, 2004 until February 1, 2004 $ 2,000,000
(25 days), and at a rate of 10% per annum thereafter. The
Company has not recorded interest, because there are various
significant offsets related to the cancellation of the
Company's acquisition of Chex Services. This note is
currently in litigation, (See Note 13).
On September 10, 2004, the Company borrowed $210,000
from a family member of our chief executive officer to pay
an advance on commissions to the Angel of the Winds casino.
This note is shown net of a discount of $8,846 for the value
of various warrants issued in conjunction with the loan
along with the corresponding amortization of the note
discount of $1,561. The discount of $8,846 is amortized over
17 months beginning October 1, 2004. The note bears interest
at 10% per annum and is payable monthly, beginning October
1, 2004. The principal amount of this note is repayable in
monthly payments payable on the 1st day of each month 188,280
commencing with the second month following the month in
which the Company commences operations at Angel of the Winds
Casino and continuing on the 1st day of each month
thereafter through April 30, 2005. Per the contract between
the Company and Angel of the Winds Casino, this note's
interest is deductible from the commission that the Company
pays the Casino on a monthly basis.
------------
$ 2,188,280
============
4. CAPITAL LEASES
On February 1, 2005 the company entered into a new capital lease for 6 ATM
machines at the Sandia Casino. The capitalized cost of the ATM machines is
$105,938. The terms of this lease require approximately $30,000 down payment 90
days from installation and the remaining balance of approximately $75,000 will
be financed over 59 months, at 8.211% for $1,500 per month This note is
collateralized by the equipment.
5. LINES OF CREDIT
Lines of credit at March 31, 2005 consisted of the following:
-7-
Line of credit, maximum availability of $3,000,000.
Subject to various restrictive covenants, interest is
payable monthly at 16.5% per annum, borrowings are
collateralized by restricted cash and guaranteed by the
majority shareholder of the Company. The line of credit is
also collateralized by all the assets of the Company. The $ 4,959,883
lender has allowed the Company to draw in excess of the
credit limit to fund an increased level of transactions. Due
to the addition of 3 new casinos from September 2004 through
February 2005 the Company requires additional funds for
vault cash at new casino operations. The Company is in the
process of negotiating its renewal terms to seek to increase
the available credit and lower the interest rate.
Line of credit, interest is payable monthly at 9% per 302,500
annum, the line is unsecured and due on demand.
Line of credits, non-interest bearing, the line is 830,507
unsecured and due on demand
On December 1, 2003, the Company entered into a
$250,000 line of credit, due 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 312,564
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 obligation 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.
On April 12, 2004, the Company borrowed $2,050,000 from
an asset-based lender to make the second Available Money
payment. The note bears interest at 17% per annum and is
payable over a 24 month period. The note is guaranteed by 2,333,324
the majority shareholder of the Company and also
collateralized by all the assets of the Company. Unpaid
interest has been added to the balance, increasing the
balance of the note to $2,333,324.
------------
$ 8,738,778
============
6. STOCKHOLDERS' DEFICIT
In January 2005, the Company issued 75,000 shares of common stock to its
board of directors for services rendered. The company valued the shares at the
fair value on the date of the issuance and recorded non-cash compensation of
$57,750.
In January 2005, the Company raised $479,500, net of offering costs of
$22,500, from the sale of 984,314 shares of common stock at $0.51 per share.
Pursuant to the terms of a common stock offering with registration rights,
the company has accrued penalties in the amount of 87,500 shares. The Company
has valued these shares at $57,423.
7. STOCK OPTIONS AND WARRANTS
In January 2005, the Company issued options to purchase 150,000 shares of
our common stock at an exercise price of $.77 per share, the fair market value
at the date of the issuance, to our board of directors pursuant to the terms of
the directors 2004 and 2005 agreements. These options were issued under our
stock option plan in a transaction exempt from the registration requirements of
the Securities Act pursuant to Section 4(2) thereof.
In February 2005, the former chief executive and affiliate exercised
150,000 options at $.01 per share. The company received proceeds of $1,500 from
the transaction.
-8-
Stock option and warrant activity for the period ended March 31, 2005 is
summarized as follows:
Number of Weighted Average
Shares Exercise Price
--------------- --------------------
Outstanding at December 31, 2004 5,240,688 $ 1.33
Granted 150,000 .77
Exercised (150,000) (.01)
Cancelled - -
--------------- --------------------
Outstanding at March 31, 2005 5,240,688 $1.35
--------------- --------------------
The following table summarizes the Company's stock options and warrants
outstanding at March 31, 2005:
Options and
Warrants Outstanding
------------------------
Range of Exercise Weighted Average Weighted Average
Price Number Remaining Life Exercise Price
--------------------- ------------------------ --------------------- ----------------------
.01 3,120,000 8.75-8.90 .01
.33-.40 131,250 .42-9.56 .35
.70-.77 212,500 9-10 .75
1.00 75,000 3.25 1.00
2.00-2.40 300,000 3.58-8.60 2.22
4.00-6.00 1,401,938 .75-3.25 4.37
------------------------
5,240,688
========================
All outstanding options and warrants are exercisable at March 31, 2005.
The exercise prices of all options granted by the Company equal the market
price at the dates of the grant. No compensation expense has been recognized.
Had compensation cost for the stock option plan been determined based on the
fair value of the options at the grant dates consistent with the method of "SFAS
123, "Accounting for Stock Based Compensation", the Company's net loss and loss
per share would have been changed to the pro forma amounts indicated below for
the three months ended March 31, 2005.
THREE MONTHS ENDED
MARCH 31, 2005
-------------------
Net loss as reported $ (739,253)
Add: total stock based consultant
compensation expense determined
under fair value based method, net
of related tax effect (115,380)
-------------------
Pro forma net loss $ (854,633)
===================
Basic loss per share
As reported $ (.03)
===================
Pro forma $ (.03)
===================
The above pro forma disclosures may not be representative of the effects on
reported net earnings for future years as options vest over several years and
the Company may continue to grant options to employees.
The fair value of each option and warrant grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted-
average assumptions used for grants:
2005
----------
Divided yield 0%
Expected volatility range 205%
Risk-free interest rate 3.00%
Expected holding periods 10 Years
-9-
8. COMMITMENTS
a. LEASE COMMITMENTS
The Company leases office space in Minnesota on a month to month basis for
$738 per month.
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 39-month lease agreement pursuant to which it
rents office space in Pennsylvania at a monthly rent of $2,635.
The Company's total rent expense under operating leases was approximately
$10,500 and $17,000 for the three months ended March 31, 2005 and 2004,
respectively.
Estimated rent expense under operating leases over the next five years is
as follows:
Year Amount
------ --------
2005 $40,476
2006 $40,476
2007 $40,476
2008 $40,476
2009 $40,476
b. CASINO CONTRACTS
The Company operates at a number of Native American owned gaming
establishments under contracts requiring the Company to pay a rental fee to
operate at the respective gaming locations.
Typically, the fees are earned by the gaming establishment over the
life of the contract based on one of the following scenarios:
i. A dollar amount, as defined by the contract, per transaction volume
processed by the Company.
ii. A percentage of the Company's profits at the respective location.
As of March 31, 2005 the Company has recorded $1,272,976 of accrued
commissions on casino contracts.
Pursuant to the contracts, the Native American owned casinos have not
waived their sovereign immunity.
c. EMPLOYMENT AGREEMENT
In January 2004, the Company 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
-10-
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.
9. CONCENTRATION OF CREDIT RISK
The Company maintains cash in bank accounts that exceed federally insured
limits. At March 31, 2005, the Company had deposits in excess of federally
insured amounts aggregating approximately $12,500,000 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 three months ended March 31, 2005, approximately 34.3% of total
revenues were derived from operations at 2 casinos. No other customers
represented more than ten percent of our total revenues for the three months
ended March 31, 2005.
10. DUE TO OFFICER
Amounts due to officer are evidenced by notes in the aggregate amount of
$482,590 that bear an interest 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 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, the officer's sign on bonus per his employment agreement in the
amount of $200,000, the officer's 2004 bonus of $175,000 and dividends declared
while an S corporation in the amount of $23,710. Payments in the amount of
$48,920 paid to the officer have been netted to this note. The officer has been
paid $12,310 in interest on this note during the three months ended March 31,
2005.
11. INTEREST EXPENSE
Included in interest expense are monies owed to a vendor for interest
charges. The interest is based on the amount of cash in our Available Money ATM
machines and network and is calculated on a daily basis. The balance of this
cash funded by the bank in our ATM machines at March 31, 2005 was approximately
$16 million. The interest rate on the $16 million is 4.875% per annum.
12. 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 $15,550,283 as of March 31, 2005 and had net losses and cash used in
operations of $739,253 and $4,441 respectively, for the three months ended March
31, 2005. These conditions raise substantial doubt about the Company's ability
to continue as a going concern.
Management is in the process of implementing its business plan.
Additionally, management is actively seeking additional sources of capital, but
no assurance can be made that capital will be available on reasonable terms.
Management believes the actions it is taking allow the Company to continue as a
going concern. The financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.
13. LITIGATION
On March 24, 2004, we filed a complaint in United States District Court for
the District of Delaware against Equitex, Inc. and its wholly-owned subsidiary,
Chex Services, Inc. d/b/a Fastfunds ("Chex"). In the complaint, we allege that
Equitex and Chex committed numerous breaches of the terms of the November 3,
2003 Stock Purchase Agreement pursuant to which we were to have acquired Chex
from Equitex, including (i) false representations and warranties related to
terminated Chex casino contracts and over $600,000 in bad debts, (ii) material
misrepresentations in SEC filings, (iii) entering into a material financing
transaction in violation of the covenant not to enter into transactions outside
the ordinary course of business, and (iv) failure to proceed in good faith
-11-
toward closing, including secretly entering into a reverse merger in violation
of the express terms of the Stock Purchase Agreement. 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 $300,000) from
Equitex and Chex. Our complaint also states that Chex wrongfully and tortuously
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
tortuously interfered with our relationship with our senior lender. We seek to
recover the $1,000,000 termination fee and transaction and collection costs
(which currently exceed $600,000) 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
and had it consolidated with our action. We are vigorously defending this action
and believe that Equitex's and Chex's claims are unfounded. We have filed a
counterclaim that restates the claims made in the federal action that we filed.
On March 15, 2004, Chex filed a complaint in the District Court of the
State of Minnesota for the County of Hennepin against us alleging that we
defaulted on interest payments on a $2,000,000 promissory note evidencing our
obligation to repay a loan that Chex extended to us in connection with our
acquisition of Available Money (the "Minnesota Complaint"). The Minnesota
Complaint seeks payment of the principal balance of the loan and accrued
interest thereon. Chex initially alleged that we are liable to them for a
penalty fee of $1,000,000 as the result of the alleged termination by Equitex of
the November 3, 2003 Stock Purchase Agreement, but have since waived their
claims to the penalty fee. We subsequently removed the Minnesota Complaint to
the United States District Court for the District of Minnesota. On June 23,
2004, the United States District Court for the District of Minnesota transferred
this action to the United States District Court for the District of Delaware.
This case and the two Delaware federal court actions described above have since
been consolidated by the United States District Court for the District of
Delaware. On November 12, 2004, the Delaware District Court judge denied Chex's
motion for summary judgment for sums allegedly due on the $2,000,000 promissory
note on the basis that the facts surrounding the alleged default on the note and
the termination of the Stock Purchase Agreement were substantially interrelated
and that resolution of the issues raised by Chex's motion would have to await
trial. We are vigorously defending this action and believe that Chex's claims
lack merit. Discovery in this matter is complete and all parties have filed
their dispositive motions. Trial is set to begin on August 15, 2005.
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
arose out of our purchase of the capital stock of Available Money, Inc. pursuant
to the Stock Purchase Agreement and alleged 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. We filed a separate action against Howard Regen in the United States
District Court for the District of Delaware which sought 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 also filed a motion for temporary restraining order and
for injunctive relief prohibiting him from soliciting Available Money's
customers or competing with Available Money. Howard Regen immediately entered
into a Consent Order, which gave us the immediate relief we were seeking pending
a bench trial on our motion for more permanent injunctive relief. The court held
the trial and granted our request for injunctive relief on March 11, 2005. On
April 21, 2005, we settled these pending suits. Pursuant to the terms of the
Settlement Agreement, all lawsuits among the parties shall be dismissed with
prejudice, and the parties entered into mutual releases. In addition, the
parties agreed that the final purchase price for Available Money was equal to
the cash amount of $3,850,000 already paid, that no further amounts were due to
the former shareholders and that our previous cancellation of shares of our
common stock issued to them was proper. The former Available Money shareholders
agreed to pay us an aggregate of approximately $178,000 in expenses, legal fees
and court-ordered sanctions and agreed to assign to us certain ATM servicing
contracts. We agreed to release the former Available Money shareholders and
their affiliates from most of the non-competition and right of first refusal
provisions of the original purchase agreement, subject to certain conditions and
limitations.
-12-
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.
19. SUBSEQUENT EVENTS
In the past months, the San Pasqual Band of Mission Indians (the "Tribe"),
operators of the Valley View casino (the "Casino"), have made various attempts
to renegotiate the terms of our contract to provide cash services at the Casino
in order to obtain terms more favorable to the Tribe. In order to resolve these
issues, we and the Tribe agreed on May 20, 2005 to terminate our contract at the
Casino, effective immediately, in exchange for consideration from the Tribe of
approximately $430,000, consisting of a cash payment and forgiveness of
commissions due to the Tribe. This amount, based on the average net income over
the life of the contract (gross profit less interest expense and other expenses
directly attributed to operations at the Casino), represents approximately 16
months' worth of net income from our operations at the Casino.
Additionally, we are currently in negotiation with one of our ATM-only
customers regarding the buy-out of the remaining terms of their agreement.
-13-
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. We have based
these forward-looking statements on our current expectations and projections
about future events. These forward-looking statements are subject to known and
unknown risks, uncertainties and assumptions about us that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "would," "expect," "plan," anticipate," believe,"
estimate," continue," or the negative of such terms or other similar
expressions. Factors that might cause or contribute to such a discrepancy
include, but are not limited to, those included in our Annual Report on Form
10-KSB filed on April 15, 2005. The following discussion should be read in
conjunction with our Consolidated Financial Statements and related Notes thereto
included elsewhere in this report.
Item 2 - Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and related notes appearing elsewhere in this report. This
discussion and analysis contains forward-looking statements that involve risks,
uncertainties, and assumptions. The actual results may differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including but not limited to the risks discussed in this report.
History
We are a single source provider of cash access services to the gaming
industry. We combine advanced technology with personalized customer services to
deliver ATM, Credit Card Advance, POS Debit, Check Cashing Services, CreditPlus
outsourced marker services, and merchant card processing. Our business plan is
to identify fragmented segments of the market to capitalize on merger and
acquisition targets of synergistic companies that support our business model.
We were formed as a Delaware corporation in 1997. Prior to March 2001, we
were a development company focusing on the completion of a Point of Sale ("POS")
transaction management system for the gaming industry. In March 2001, we
commenced operations with the launch of the POS system at the Paragon Casino in
Marksville, LA.
On January 2, 2004, iGames Entertainment, Inc. acquired us pursuant to our
merger with and into a wholly-owned subsidiary of iGames formed for that
purpose. In addition, on January 6, 2004, iGames acquired Available Money, Inc.,
an operator of free-standing ATM machines in casinos. The business operations of
Available Money were combined with our business operations. As a result of the
acquisition of Available Money and our continued growth, we currently provide
services in 26 locations across the United States.
Our acquisition by iGames was treated as a recapitalization and 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
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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.
Our business model is to be an innovator and industry leader in cash access
and financial management services for the gaming industry. Within the funds
transfer and processing industries there exists niche markets that are capable
of generating substantial operating margins without the requirement to process
billions of dollars in transactions that is the norm for the industry. We
believe there is significant value to having a proprietary position in each
phase of the transaction process in the niche markets where management has a
proven track record. The gaming industry is an example of such a market and is
currently where we derive the majority of our revenues. We have identified other
markets with similar opportunities, however we have not executed any plans to
exploit these markets at this time.
Current Overview
Our core business of providing single source full service cash access
services in the gaming industry continues to grow and be the major source of our
revenue and profits in 2005. We have also launched several new services in the
last 18 months, such as CreditPlus, Our Cash Services Host Program, and our
Transaction Management System that have begun to create new revenue and have
helped to differentiate our product offering in the marketplace. The addition of
our new product offerings have assisted us in obtaining three new contracts that
will be a major part of our revenue and cash flow in 2005.
The acquisition of Available Money that was completed in January 2004
continues to provide challenges for management in terms of the legal matters
associated with the transactions and the longer than expected conversion of the
processing of the Available Money cash services business over to the systems we
utilize. We have completed our new ATM processing agreement which has lowered
our operating costs, provided needed capacity for our vault cash needs, and will
help facilitate the completion of the Available Money conversion.
We have also finalized our agreement with Mosaic Software which is a major
component to our Transaction Management System. Our deployment is scheduled for
July 2005. Though we feel confident that The Transaction Management System will
differentiate us from our competitors and create new sources of revenue for the
company, there is no guarantee that the market will accept this new deployment
strategy.
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 recurring general and
administrative expenses. While our interest expense has been higher than we
anticipated, we are in the process of re documenting our current lines of credit
and to identify new lower costs sources to provide for new capacity associated
with our new locations and to reduce the interest rates we pay on our lines of
credit, which will lower our expenses and contribute to our profitability.
Mercantile Capital has been a strong finance partner to the company, however,
the ability to continue our growth is largely dependent on our ability to
identify and secure capital at reasonable rates.
We seek to avoid litigation and to minimize our exposure to potential
claims arising in the normal course of our business and as a result of our
acquisitions. Despite these efforts, we have been named as a defendant in
several legal proceedings, described in Part II, Item 1, Legal Proceedings,
beginning on page 24 of this report. We are confident that it is in our best
interests to defend these claims and to pursue counterclaims where we believe
that we are likely to obtain a favorable result. During the three month period
ended March 31, 2005, we have incurred approximately $265,000 in legal fees
related to these legal proceedings and anticipate incurring a substantial amount
of additional legal fees related to these legal proceedings throughout 2005.
Our core business generates revenues from transaction fees associated with
each unique service we provide, including ATMs, credit card advances, POS Debit,
check cashing, markers and various other financial instruments. We receive our
fees from either the casino operator or the consumer who is requesting access to
their funds. The pricing of each transaction type is determined by evaluating
risk and costs associated with the transaction in question. Accordingly, our
transaction fees have a profit component built into them. Furthermore,
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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.
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.
-16-
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
ability to convert this market opportunity into revenue is largely dependent on
the success of our internal sales. Other barriers within the casino operation
itself may also have a negative impact on our ability to generate revenue from
our CreditPlus product.
Our Cash Services Host Program is uniquely aimed at capitalizing on the
need for new profitable guest amenities. Where most guest amenities require
additional expenses, this service helps the casino operator generate more
revenues. This service allows customers to facilitate cash access transactions
from the slot machine or gaming table. Our hosts are available to bring the
transaction to the guest, which is viewed as a valuable customer amenity, while
driving more money to the gaming floor for the casino operator.
Organic growth through sales by internal salespeople is usually the most
efficient and profitable growth strategy in the cash services business. Much of
our historical growth has occurred in this manner. We realize that recognizing
industry trends is no assurance of success. We have also complimented our
internal sales strategy by creating relationships with independent sales
organizations that have established relationships with gaming operators
nationwide. Although our sales commissions will be higher at gaming
establishments entered through this sales channel, we will not be burdened with
the up-front salary, travel and entertainment costs associated with the
traditional internal sales approach. We continue to view strategic acquisitions
as part of our business plan to obtain the critical mass we believe is necessary
to compete effectively in our industry.
This parallel strategy of sales, acquisitions and product development is
capital intensive and presents substantial risk. There is no guarantee that we
will be able to manage all three strategies effectively.
-17-
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. Based on the quick turnaround of the check being returned
by the bank on which it is drawn and our resubmission to the bank for payment,
we feel this method approximates the allowance method, which is a Generally
Accepted Accounting Principle. 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. Effective January 1, 2002, we adopted Statement of Financial
Accounting Standards No. 142, "Goodwill And Other Intangible Assets" which
eliminates amortization of goodwill and certain other intangible assets and
requires annual testing for impairment. The calculation of fair value includes a
number of estimates and assumptions, including projections of future income and
cash flows, the identification of appropriate market multiples and the choice of
an appropriate discount rate.
STOCK BASED COMPENSATION. We account for stock based compensation utilizing
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. We have chosen to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess,
if any, of the estimated fair market value of our stock at the date of the grant
over the amount an employee must pay to acquire the stock. We have adopted the
"disclosure only" alternative described in SFAS 123 and SFAS 148 (See New
Accounting Pronouncements), which require pro forma disclosures of net income
and earnings per share as if the fair value method of accounting had been
applied.
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Results of Operations
Three Months Ended March 31, 2005 vs. Three Months Ended March 31, 2004
Three Months Three Months
Ended March 31, Ended March 31,
2005 ($) 2004 ($) Change ($)
------------------ ------------------ ------------
Net Income (Loss) (739,253) (6,633,789) 5,894,536
Revenues 5,378,591 2,155,661 3,222,930
Operating Expenses 4,669,778 1,648,116 3,021,662
Gross Profit 708,813 507,545 201,268
Selling, General and Administrative Expenses 783,937 949,212 (165,275)
Noncash Compensation 69,850 5,283,703 (5,213,853)
Depreciation and amortization 181,651 252,676 (71,025)
Other Income (Expenses) 412,628 655,743 (243,115)
Our net loss decreased by $5,894,536 during the three months ended March
31, 2005 due to an increase in gross profit of approximately $200,000 primarily
due to an increase in revenue, a decrease in noncash compensation of
approximately $5,200,000 due to one-time charges for noncash compensation during
2004 that were not repeated in 2005, a decrease in depreciation and amortization
of approximately $70,000 due to reduced amortization of casino contracts
reflecting the termination of certain contracts in 2004 and other expenses
decreased due to a decrease in intangible write off.
Our revenues increased by approximately 149% during the three months ended
March 31, 2005 as compared to the three months ended March 31, 2004.
Approximately $214,000 of this increase represented increased volume under
contracts in place at the beginning of 2004, $1,040,000 represented revenues
from new contracts, and approximately $2,000,000 of the increase in revenue was
due to the recognition in our financial statements of gross revenues rather than
net revenues from the Available Money portfolio in 2005 following a change of
ATM processors. Our operating expenses increased during the three months ended
March 31, 2005 due to a $214,143 increase in bad debt expense primarily
resulting from a $90,000 loss at one casino, a $43,712 increase in cash
compensation expenses due to an increase in operations personnel, and a $155,695
increase in transaction processing expenses as the result of increased
transaction volume. Commissions paid to casinos increased from $772,497 (35.8%
of revenue) in the first quarter of 2004 to $2,814,362 (52.3% of revenue) in the
first quarter of 2005 primarily as the result of higher commission rates under
the Sycuan and Sandia contracts. We believe that the higher commission payments
under the Sycuan and Sandia casino contracts reflect the size and desirability
of the particular business opportunity and are not reflective of a trend.
Commission rates in future contracts and contract renewals may be higher or
lower than current rates. If we are forced to pay higher commissions to other
casino customers, our commission expenses will increase and the impact on
revenues and income will depend on our ability to pass the higher commissions on
to customers in the form of higher transaction fees. In addition, approximately
$750,000 of various other expenses increased due to the recognition in our
financial statements of all operating expenses from the Available Money
portfolio in 2005 following a change in ATM processors. As part of the
integration the company receives the ATM revenue on a monthly basis and pays all
related expenses. Based on our higher level of operations, we had 68 operations
employees at March 31, 2005 as compared to 38 operations employees at March 31,
2004, which resulted in the additional compensation and benefits expenses.
Our selling, general and administrative expenses decreased during the three
months ended March 31, 2005 primarily due to $189,112 decrease in management
compensation. Otherwise the remaining selling, general and administrative
expenses have remained relatively the same as compared to the quarter ended
March 31, 2004. Legal expenses related to ongoing litigation proceedings are
expected to continue in 2005, although one case has settled and settlement
discussions are ongoing in the other case, and therefore it is not possible to
estimate the amount of these expenses or their impact on our future results of
operations and financial condition. Our depreciation and amortization expenses
decreased during the three months ended March 31, 2005 primarily due to the
elimination of amortization that otherwise would have been realized on contracts
that terminated in 2004.
-19-
Our other expenses decreased during the three months ended March 31, 2005
mostly due to a non-recurring loss in the first quarter of 2004 due to
impairment of intangibles and inventory write off of $417,880 and 130,883
respectively, offset by a $379,922 increase in interest expense. This increase
resulted from higher line of credit borrowing levels ($8,738,778 at March 31,
2005 compared to $2,438,038 at March 31, 2004). We paid slightly higher interest
rates (an average interest rate of 16.5% during 2005 compared to an average
interest rate of 15% during 2004). At March 31, 2005 we were paying interest on
approximately $16 million of vault cash for the Available Money business. The
interest rate on this $16 million is 4.875% per annum. We are negotiating to
re-finance our casino vault cash facility. We anticipate completing this in the
second quarter of 2005.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements during the fiscal quarter
ended March 31, 2005 that have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to our investors.
Changes in Financial Position, Liquidity and Capital Resources
Three Months Three Months
Ended March 31, Ended March 31,
2005 ($) 2004 ($) Change ($)
------------------ ----------------- ------------
Net Cash Used in Operating Activities (4,441) (506,629) (502,188)
Net Cash Used in Investing Activities (253,569) (1,982,861) (1,729,292)
Net Cash Provided by Financing Activities 360,377 2,448,111 (2,087,734)
Net cash used in operations decreased by $502,188, primarily due to a
significant decrease in our net loss and as a result of the fact that we
experienced a temporary delay in collections of accounts receivable from the
Available Money portfolio following its acquisition in January 2004.
Net cash used in investing activities decreased during the quarter ended
March 31, 2005 due to the fact that we did not make any acquisitions in the
first quarter of 2005 and acquired Available Money in the first quarter of 2004.
Net cash provided by financing activities decreased during the quarter
March 31, 2005 primarily because we had no need for acquisition financing.
Our available cash equivalent balance at March 31, 2005 was approximately
$535,264 and was approximately $1,300,000 at April 30, 2005. Since our formation
we have raised an aggregate of approximately $3,000,000 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 the remaining balance of this note has been repaid.
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 casino operations. Vault cash is not working
capital but rather the money necessary to fund the float, or money in transit,
that exists when customers utilize our services but we have yet to be reimbursed
from the Debit, Credit Card Cash Advance, or ATM networks for executing the
transactions. Although these funds are generally reimbursed within 24-48 hours,
a significant amount of cash is required to fund our operations due to the
magnitude of our transaction volume. Our vault cash loan accrues interest at the
base commercial lending rate of Wilmington Trust Company of Pennsylvania plus
10.75% per annum on the outstanding principal balance, with a minimum rate of
15% per annum, and has a maturity date of May 31, 2005. We are currently in the
underwriting process of our renewal. The lender is adjusting our line of credit
limit to accommodate our current borrowing needs. We are also negotiating to
have our Available Money Loan merged into this line so we have one line of
credit with the same terms. Our obligation to repay this loan is secured by a
first priority lien on all of our assets. The outstanding balance on our vault
cash line of credit fluctuates significantly from day to day based on activity
and collections, especially over weekends. On peak days, the outstanding amount
frequently is in excess of $3,000,000. However, our lender has funded, and
indicated that it is
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willing to continue to fund, these 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, at
a cost equal to the ATM processor's cost of funds, which currently is Prime
minus 5/8%.
We incurred $3,850,000 of debt associated with the acquisition of Available
Money. $2,000,000 of this indebtedness is a loan provided by Chex Services, Inc.
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, 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,
(iv) failure to proceed in good faith toward closing, including notifying iGames
that Equitex could not close on the transaction as structured, and (v) failure
to provide all funding that Chex committed to provide under the terms of the
term note. It is our position that the amounts due to us from Chex, including a
$1,000,000 termination fee due under the Stock Purchase Agreement, transaction
and collection costs due under the Stock Purchase Agreement, and additional
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 $1,850,000 of this indebtedness is part of a $2,000,000 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, 2006. 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 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,
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.
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In addition, we have an existing obligation to redeem 37,500 shares of our
common stock from an existing stockholder at an aggregate price of $41,250. This
obligation arose in connection with iGames' purchase of certain gaming software
products for 75,000 shares of our common stock. In order to complete this
transaction under these terms, our former management granted this stockholder
the option to have 37,500 shares of his stock redeemed. This stockholder has
elected to exercise this redemption option.
We are also in the process of replacing all of the former Available Money
ATMs with new ATMs that will be processed on more favorable economic terms. We
have entered into a capital lease agreement to acquire 71 ATMs and related
equipment necessary to complete this conversion. 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 by
transforming the way casinos find, serve and retain their customers. We will
strive to assist our customers 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.
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 $23,710 related to prior declared dividends that have
not yet been paid.
Due to our accumulated deficit of $14,811,030 as of December 31, 2004 and
our net losses and cash used in operations of $11,841,753 and $907,217,
respectively, for the year ended December 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.
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Item 3 - Controls and Procedures
Under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of March 31, 2005 (the "Evaluation Date"), and, based
on their evaluation, our chief executive officer and chief financial officer
have concluded that these controls and procedures were effective as of the
Evaluation Date. There were no significant changes in our internal controls or
in other factors that could significantly affect these controls during the
quarter ended March 31, 2005.
Disclosure controls and procedures (as defined in the Exchange Act Rules
13a-14(c) and 15d-14(c)) are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act are recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in our reports filed under the Exchange Act is accumulated and
communicated to management to allow timely decisions regarding required
disclosure.
The Certifying Officers have also indicated that there were no significant
changes in our internal controls or other factors that could significantly
affect such controls subsequent to the date of their evaluation, and there were
no corrective actions with regard to significant deficiencies and material
weaknesses.
Our management, including each of the Certifying Officers, does not expect
that our disclosure controls or our internal controls will prevent all error and
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. In addition, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. The design of any systems of controls also is based in
part upon certain assumptions about the likelihood of future events, and their
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of these inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
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PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On March 24, 2004, we filed a complaint in United States District Court for
the District of Delaware against Equitex, Inc. and its wholly-owned subsidiary,
Chex Services, Inc. d/b/a Fastfunds ("Chex"). In the complaint, we allege that
Equitex and Chex committed numerous breaches of the terms of the November 3,
2003 Stock Purchase Agreement pursuant to which we were to have acquired Chex
from Equitex, including (i) false representations and warranties related to
terminated Chex casino contracts and over $600,000 in bad debts, (ii) material
misrepresentations in SEC filings, (iii) entering into a material financing
transaction in violation of the covenant not to enter into transactions outside
the ordinary course of business, and (iv) failure to proceed in good faith
toward closing, including secretly entering into a reverse merger in violation
of the express terms of the Stock Purchase Agreement. 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 $300,000) 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 and collection costs
(which currently exceed $600,000) 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
and had it consolidated with our action. We are vigorously defending this action
and believe that Equitex's and Chex's claims are unfounded. We have filed a
counterclaim that restates the claims made in the federal action that we filed.
On March 15, 2004, Chex filed a complaint in the District Court of the
State of Minnesota for the County of Hennepin against us alleging that we
defaulted on interest payments on a $2,000,000 promissory note evidencing our
obligation to repay a loan that Chex extended to us in connection with our
acquisition of Available Money (the "Minnesota Complaint"). The Minnesota
Complaint seeks payment of the principal balance of the loan and accrued
interest thereon. Chex initially alleged that we are liable to them for a
penalty fee of $1,000,000 as the result of the alleged termination by Equitex of
the November 3, 2003 Stock Purchase Agreement, but have since waived their
claims to the penalty fee. We subsequently removed the Minnesota Complaint to
the United States District Court for the District of Minnesota. On June 23,
2004, the United States District Court for the District of Minnesota transferred
this action to the United States District Court for the District of Delaware.
This case and the two Delaware federal court actions described above have since
been consolidated by the United States District Court for the District of
Delaware. On November 12, 2004, the Delaware District Court judge denied Chex's
motion for summary judgment for sums allegedly due on the $2,000,000 promissory
note on the basis that the facts surrounding the alleged default on the note and
the termination of the Stock Purchase Agreement were substantially interrelated
and that resolution of the issues raised by Chex's motion would have to await
trial. We are vigorously defending this action and believe that Chex's claims
lack merit. Discovery in this matter is complete and all parties have filed
their dispositive motions. Trial is set to begin on August 15, 2005.
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
arose out of our purchase of the capital stock of Available Money, Inc. pursuant
to the Stock Purchase Agreement and alleged 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. We filed a separate action against Howard Regen in the United States
District Court for the District of Delaware which sought 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 also filed a motion for temporary restraining order and
for injunctive relief prohibiting him from soliciting Available Money's
customers or competing with Available Money. Howard Regen immediately entered
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into a Consent Order, which gave us the immediate relief we were seeking pending
a bench trial on our motion for more permanent injunctive relief. The court held
the trial and granted our request for injunctive relief on March 11, 2005. On
April 21, 2005, we settled these pending suits. Pursuant to the terms of the
Settlement Agreement, all lawsuits among the parties shall be dismissed with
prejudice, and the parties entered into mutual releases. In addition, the
parties agreed that the final purchase price for Available Money was equal to
the cash amount of $3,850,000 already paid, that no further amounts were due to
the former shareholders and that our previous cancellation of shares of our
common stock issued to them was proper. The former Available Money shareholders
agreed to pay us an aggregate of approximately $178,000 in expenses, legal fees
and court-ordered sanctions and agreed to assign to us certain ATM servicing
contracts. We agreed to release the former Available Money shareholders and
their affiliates from most of the non-competition and right of first refusal
provisions of the original purchase agreement, subject to certain conditions and
limitations.
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.
Item 2 - Changes in Securities and Use of Proceeds
Pursuant to the terms of a common stock offering with registration rights,
the Company has accrued penalties in the amount of 87,500 shares. The Company
has valued these shares at $57,423.
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 3 - Defaults Upon Senior Securities
None.
Item 4 - Submissions of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
In the past months, the San Pasqual Band of Mission Indians (the "Tribe"),
operators of the Valley View casino (the "Casino"), have made various attempts
to renegotiate the terms of our contract to provide cash services at the Casino
in order to obtain terms more favorable to the Tribe. In order to resolve these
issues, we and the Tribe agreed on May 20, 2005 to terminate our contract at the
Casino, effective immediately, in exchange for consideration from the Tribe of
approximately $430,000, consisting of a cash payment and forgiveness of
commissions due to the Tribe. This amount, based on the average net income over
the life of the contract (gross profit less interest expense and other expenses
directly attributed to operations at the Casino), represents approximately 16
months' worth of net income from our operations at the Casino.
Additionally, we are currently in negotiation with one of our ATM-only
customers regarding the buy-out of the remaining terms of their agreement.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-B
3.1 Money Centers of America, Inc. Amended and Restated Certificate of
Incorporation (incorporated by reference to Exhibit 3.1 of the Current
Report on Form 8-K filed on October 19, 2004).
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3.2 Money Centers of America, Inc. Amended and Restated Bylaws
(incorporated by reference to Exhibit 3.2 of the Current Report on
Form 8-K filed on October 19, 2004).
4.1 Form of Specimen Stock Certificate (incorporated by reference to
Exhibit 4.1 of Form 10-KSB filed on April 15, 2005).
10.1 Amended and Restated 2003 Stock Incentive Plan (incorporated by
reference to Exhibit 10.2 of 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 10.1 of 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).
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 of 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.
(Incorporated by reference to Exhibit 10.8 to the Registration
Statement on Form SB-2 filed on February 14, 2004 (File No.
333-122819)
14 Code of Ethics (incorporated by reference to Exhibit 14 of Form 10-KSB
filed on July 13, 2004)
31.1 Certification dated May 19, 2005 pursuant to Exchange Act Rule
13a-14(a) or 15d-14(a) of the Principal Executive Officer and
Principal Financial Officer as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, by Christopher M. Wolfington, Chief
Executive Officer and Chief Financial Officer.
32.1 Certification dated May 19, 2005 pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
made by Christopher M. Wolfington, Chief Executive Officer and Chief
Financial Officer.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereto duly
authorized.
MONEY CENTERS OF AMERICA, INC.
Date: May 23, 2005 By: /s/ Christopher M. Wolfington
-------------------------------------
Christopher M. Wolfington
Chief Executive Officer and
Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer