UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File Number: 1-31955
CASH SYSTEMS, INC.
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(Name of small business issuer in its charter)
DELAWARE 87-0398535
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3201 WEST COUNTY ROAD 42, SUITE 106, BURNSVILLE, MN 55306
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(Address of principal executive offices, Zip code)
(952) 895-8399
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(Issuer's telephone number)
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
As of May 16, 2005, there were 16,544,184 shares of the Registrant's common
stock, $0.001 par value per share, issued and outstanding.
CASH SYSTEMS, INC.
FORM 10-Q
TABLE OF CONTENTS
Page No.
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PART I. Financial Information
Item 1. Consolidated Financial Statements.
Consolidated Balance Sheets as of March 31, 2005 (Unaudited)
and December 31, 2004 3
Unaudited Consolidated Statements of Operations for the three months
ended March 31, 2005 and 2004 4
Unaudited Consolidated Statements of Cash Flows for the three months
ended March 31, 2005 and 2004 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
PART II. Other Information
Item 1. Legal Proceedings 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
22
Item 6. Exhibits 23
SIGNATURES 23
2
PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
CASH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2005 2004
(unaudited) (audited)
----------- ------------
ASSETS
CURRENT ASSETS
Cash $11,357,021 $13,043,874
Due from related party 258,492 183,560
Current portion of prepaid commissions 346,401 348,601
Current portion of loans receivable 2,213,475 1,849,420
Other receivables 646,868 645,006
Deferred income taxes 532,000 336,000
Settlements due from credit card processor 3,832,388 1,889,856
Other current assets 2,550,193 2,638,759
----------- -----------
Total Current Assets 21,736,838 20,935,076
----------- -----------
PROPERTY AND EQUIPMENT, NET 4,117,008 3,373,170
OTHER ASSETS
Long-term prepaid commissions, net of current portion 438,877 523,827
Long-term loans receivable, net of current portion 255,924 350,835
----------- -----------
Total Other Assets 694,801 874,662
----------- -----------
TOTAL ASSETS $26,548,647 $25,182,908
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Checks issued in excess of cash in bank $2,982,707 $3,331,381
Accounts payable - trade 846,506 436,322
Credit card cash advance fees payable 836,207 655,036
ATM commissions payable 824,639 629,328
Credit card chargebacks payable 80,000 80,000
Check cashing commissions payable 121,622 102,801
Due to related party - 211,846
Other accrued expenses 169,040 197,869
----------- -----------
Total Current Liabilities 5,860,721 5,644,583
----------- -----------
LONG-TERM LIABILITIES
Deferred income taxes 960,000 797,000
----------- -----------
Total Liabilities 6,820,721 6,441,583
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value of $0.001, 50,000,000
shares authorized, 16,462,612 and 16,173,445
shares issued and outstanding 16,463 16,173
Additional paid-in capital 16,246,009 15,497,299
Warrants 1,341,057 1,341,057
Retained earnings 2,124,397 1,886,796
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Total Stockholders' Equity 19,727,926 18,741,325
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $26,548,647 $25,182,908
=========== ===========
See accompanying notes to consolidated financial statements.
3
CASH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
-------------------------------
2005 2004
----------- -----------
Commissions on credit card cash advances, ATMs and
check cashing services $13,650,313 $11,006,634
Operating expenses
Commissions 6,756,472 5,149,219
Processing costs 2,507,603 2,108,215
Check cashing costs 901,299 618,993
Armored carrier services 115,258 104,279
Payroll, benefits and related taxes 1,586,696 1,205,596
Professional fees 241,765 210,875
Compensation expense related to warrants and options 0 44,984
Other 802,355 831,132
Depreciation and amortization 283,232 125,494
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Total Operating Expenses 13,194,680 10,398,787
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Income from Operations 455,633 607,847
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Other income (expense)
Interest expense (108,417) (100,799)
Interest income 39,185 95
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Total Other Income (Expense) (69,232) (100,704)
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Income Before Income Taxes 386,401 507,143
Provision for income taxes 148,800 203,000
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Net income $ 237,601 $ 304,143
=========== ===========
Net income per common share
- Basic $ 0.01 $ 0.02
=========== ===========
Net income per common share
- Diluted $ 0.01 $ $ 0.02
=========== ===========
Weighted average common shares
Outstanding - basic 16,341,469 13,427,102
=========== ===========
Weighted average common shares
Outstanding - diluted 17,137,697 14,758,130
=========== ===========
See accompanying notes to consolidated financial statements.
4
CASH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
-----------------------------
2005 2004
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 237,601 $ 304,143
Adjustments to reconcile net income to cash flows from
operating activities:
Depreciation and amortization 283,232 125,493
Compensation expense related to non-employee stock options -- 44,984
Tax benefit associated with employee stock option exercises 213,000 --
Deferred income taxes (33,000) 43,000
Interest receivable on loans receivable (20,244) --
Changes in operating assets and liabilities:
Related parties receivable (74,932) --
Prepaid commissions 2,200 (49,000)
Other receivable (1,862) (2,775)
Settlements due from credit card processor (1,942,532) --
Other current assets 88,566 191,468
Long-term receivable 350,835 453,295
Long-term prepaid commission 84,950 --
Accounts payable - trade 410,184 3,512,105
Credit card cash advance fees payable 181,171 456,006
ATM commissions payable 195,311 103,010
Check cashing commissions payable 18,821 16,878
Credit card chargebacks payable -- (74,584)
Due to related party (211,846) --
Other accrued expenses (28,829) (22,122)
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Cash flows (used in) provided from operating activities (247,374) 5,101,901
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,027,070) (414,757)
Advances on loans receivable, net (599,735) --
Advances to officer -- (30,300)
----------- -----------
Cash flows used in investing activities (1,626,805) (445,057)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Checks issued in excess of bank balance (348,674) (686,118)
Payments on long-term debt -- (120,672)
Issuance of common stock, net of expenses -- 10,553,637
Exercise of stock options 356,000 --
Exercise of warrants 180,000 --
----------- -----------
Cash flows provided by financing activities 187,326 9,746,847
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,686,853) 14,403,691
Cash and cash equivalents, beginning of period 13,043,874 3,035,747
----------- -----------
Cash and cash equivalents, end of period $11,357,021 $17,439,438
=========== ===========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for financing costs and interest expense,
net of amortization of original issue discount $ 97,047 $ 142,728
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Reclassification of other current assets to proceeds from
issuance of common stock $ -- $ 11,604
=========== ===========
See accompanying notes to consolidated financial statements.
5
CASH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2005
1. BUSINESS AND BASIS OF PRESENTATION
Cash Systems Inc. (the "Company" or "CSI") provides cash access products and
services to the gaming industry. The Company's cash access products and services
allow gaming patrons to access funds through a variety of methods, including
credit card cash advances, point-of-sale debit card cash advances, automated
teller machine ("ATM") withdrawals and check cashing transactions.
The accompanying unaudited consolidated financial statements include the
accounts of CSI and its consolidated subsidiaries: Cash Systems of Canada, Inc.;
Cash Systems Mexico I, LLC; Cash Systems Mexico II, LLC; and Cash Access Mexico,
S. de R.L. de C.V. None of the subsidiaries of the Company have current business
activity, but have been established in anticipation of future business
operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated balance sheet as of March 31,
2005, the consolidated statements of operations for the three-month periods
ended March 31, 2005 and 2004, and the consolidated statements of cash flows for
the three-month periods ended March 31, 2005 and 2004 have been prepared by us,
without audit. All significant intercompany transactions and balances have been
eliminated in consolidation.
Basis of Presentation -- The consolidated financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the information
presented not misleading. In the opinion of management, all adjustments (which
include normal recurring adjustments) necessary for a fair presentation of
results for the interim period have been made. The results for the three months
ended March 31, 2005 are not necessarily indicative of results to be expected
for the full fiscal year.
These unaudited consolidated financial statements should be read in conjunction
with the annual consolidated financial statements and notes thereto included
within the Company's Annual Report on Form 10KSB for the fiscal year ended
December 31, 2004, previously filed with the Securities and Exchange Commission.
ATM Funding Agreement -- The Company obtains some of the cash required to
operate its ATMs through an ATM Funding Agreement described in Note 3. Under the
terms of this agreement, neither the cash utilized within the ATMs nor the
receivables generated for the amount of cash dispensed through transactions on
the ATMs are owned or controlled by CSI. Therefore, these amounts have been
excluded from the unaudited consolidated balance sheets.
Income Taxes -- Differences between accounting rules and tax laws cause
differences between the bases of certain assets and liabilities for financial
reporting purposes and tax purposes. The tax effects of these differences, to
the extent they are temporary, are recorded as deferred tax assets and
liabilities under Statement of Financial Accounting Standards (SFAS) 109.
Temporary differences relate primarily to depreciation and accrued expenses not
currently deductible.
Internally Developed Software -- Statement of Position 98-1 (SOP 98-1),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" requires the capitalization of direct costs incurred in connection
with developing or obtaining software for internal use, including external
direct costs of materials and services and payroll and payroll related costs for
employees who are directly associated with and devote time to an internal use
software development project. During the three months ended March 31, 2005 and
2004, the Company capitalized $515,310 and $251,507 of costs related to the
implementation of SOP 98-1, respectively. These costs are amortized over the
estimated useful lives of three to five years using the straight-line method
upon being placed in service. Amortization expense related to software costs was
$62,181 and $13,722 for the three months ended March 31, 2005 and 2004,
respectively.
Cash Concentrations -- Bank balances exceeded federally insured levels during
the three months ended March 31, 2005 and 2004 and exceeded federally insured
levels at March 31, 2005 and December 31, 2004. Generally, these balances may be
redeemed upon demand and therefore bear minimal risk. There were no short-term
investments as of March 31, 2005 and December 31, 2004.
6
Use of Estimates -- The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
amounts reported in the unaudited consolidated financial statements and
accompanying notes. Significant estimates incorporated in the unaudited
consolidated financial statements include the estimated useful lives for
depreciable and amortizable assets, estimated cash flows in assessing the
recoverability of long-lived assets, and estimated liabilities for chargebacks,
litigation, claims and assessments. Actual results could differ from these
estimates.
Recently Issued Accounting Standards -- In December 2004, the FASB issued
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payments (FAS 123(R)), which is a revision of SFAS No.123 and supersedes Opinion
25. FAS 123(R) requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the income statement based on
their fair values. Pro forma disclosure is no longer an alternative. FAS 123(R)
is effective at the beginning of the first annual period beginning after
December 15, 2005. We expect to adopt FAS 123 (R) on January 1, 2006. The
adoption of FAS 123(R)'s fair value method is expected to have an impact on our
results of operations of approximately $1,100,000, net of tax, in fiscal 2006
though it will have no impact on our overall financial position.
Loans Receivable -- The Company has advanced funds relating to strategic
investments or advances of funds relating to service contracts. Some of the
advances were reviewed with and approved by the Company's board of directors,
while other transactions were initiated and authorized by management. The loans
bear interest at negotiated rates with negotiated terms. The collectibility of
individual loans is reviewed throughout the life of the loan and a reserve, if
required, would be recorded for the loan. Management believes that the loans
receivable recorded on the consolidated financial statements as presented are
properly stated.
Prepaid Commissions -- The Company has advanced commissions relating to service
contracts. The advances were initiated and authorized by management. The prepaid
commissions are tied to the service contracts and are amortized or deducted
against commissions earned by those contracts over the term of the contracts. In
the event that the contracts are terminated early, which is not anticipated, the
prepaid commission would be returned to the Company. The collectibility of
individual prepaid commissions is reviewed throughout the life of the contract
and a reserve, if required, would be recorded for the commission. Management
believes that the prepaid commissions recorded on the consolidated financial
statements as presented are properly stated.
Settlements due from credit card processor -- In the credit/debit card cash
advance transactions provided by CSI, the gaming establishment is reimbursed for
the cash disbursed to gaming patrons through a check issued by the Company. CSI
receives reimbursement from the patron's credit/debit card issuer for the
transaction in an amount equal to the check issued to the patron plus the cash
advance fee charged to the patron. Any reimbursements not received in the normal
course of business and requiring additional administrative follow-up are
included within the settlement receivables on the unaudited consolidated balance
sheets. As part of the settlement process, the Company receives authorization of
the credit card cash advance transactions which are no longer guaranteed after
90 days. There is a risk that the Company may be required to have the credit
card processor reauthorize the credit card cash advance transactions in order to
collect previously authorized amounts. Based upon the Company's relationship
with its credit card processors, and the subsequent receipt of balances
outstanding as of December 31, 2004, the Company believes that no reserve is
required against the balance outstanding of $3,832,388 as of March 31, 2005.
Revenue Recognition -- The Company's revenue recognition policy is significant
because the amount and timing of revenue is a key component of the Company's
results of operations. The Company follows the guidance of Staff Accounting
Bulletin No. 104 ("SAB 104"), which requires that a strict series of criteria
are met in order to recognize revenue related to services provided. If these
criteria are not met, the associated revenue is deferred until the criteria are
met. Credit card cash advance fees, ATM fees and check cashing commissions are
reported as commission income on the statement of operations. We recognize
commission revenue when evidence of a transaction exists, services have been
rendered, our price is fixed or determinable and collectibility is reasonably
assured. We evaluate our commissions revenue streams for proper timing of
revenue recognition.
Cash advance revenue is comprised of upfront patron transaction fees assessed at
the time the transaction is initiated and a percentage of the face amount of the
cash advance. Cash advance revenue is recognized at the point that a negotiable
check instrument is generated by the casino cashier or cash cage operation.
ATM fees are comprised of upfront patron transaction fees or surcharges assessed
at the time the transactions are initiated. Upfront patron transaction fees are
recognized when a transaction is authorized. The Company provides cash through
wire transfers to certain casinos for ATMs and records a receivable from the
casinos.
7
Check services revenue is generally contractually based upon a percentage of the
face amount of total checks warranted. Check services revenue is recognized on a
monthly basis. The Company records a receivable for all guaranteed checks
returned for insufficient funds.
The Company has determined that the accounting policies for income recognition
described above are in accordance with the Financial Accounting Standards Board
Emerging Issues Task Force ("EITF") Issue No. 99-19, "Reporting Revenue Gross as
a Principal versus Net as an Agent".
Segment Reporting -- A business segment is a distinguishable component of an
enterprise that is engaged in providing an individual product or service or a
group of related products or services and that is subject to risks and returns
that are different from those of other business segments. Revenues from
customers are from a similar customer base, mainly at casinos. Management
believes that the Company meets the criteria for aggregating its operating
segments into a single reporting segment.
Reclassifications -- Certain reclassifications have been made in the prior
period unaudited consolidated financial statements to conform to the
presentation used at and for the period ended March 31, 2005. These
reclassifications had no effect on the Company's consolidated net income.
Stock-Based Compensation -- SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), provides for the use of a fair value based method of
accounting for employee stock compensation. However, SFAS 123 also allows an
entity to continue to measure compensation cost for stock options granted to
employees using the intrinsic value method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), which only requires charges to compensation expense for
the excess, if any, of the fair value of the underlying stock at the date a
stock option is granted (or at an appropriate subsequent measurement date) over
the amount the employee must pay to acquire the stock, if such amounts differ
materially from historical amounts. The Company has elected to continue to
account for employee stock options using the intrinsic value method under APB
25. By making that election, it is required by SFAS 123 and SFAS 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure" to provide
pro forma disclosures of net income and earnings per share as if a fair value
based method of accounting had been applied.
Had compensation costs been determined in accordance with the fair value method
prescribed by SFAS No. 123 for all options issued to employees and amortized
over the vesting period, the Company's net income applicable to common shares
and net income per common share (basic and diluted) for plan options would have
been decreased to the pro forma amounts indicated below.
Three Months Ended
March 31,
-------------------------
2005 2004
---------- ----------
Net income (loss):
As reported $ 237,601 $ 304,143
Pro forma ($ 300,788) ($ 396,856)
Basic earnings (loss) per common share:
As reported $ 0.01 $ 0.02
Pro forma ($ 0.02) ($ 0.03)
Diluted earnings (loss) per common share:
As reported $ 0.01 $ 0.02
Pro forma ($ 0.02) ($ 0.03)
Stock based compensation:
As reported --- ---
Pro forma $ 538,389 $ 700,999
In determining the compensation cost of the options granted during the three
months ended March 31, 2005 and 2004, as specified by SFAS No. 123, the fair
value of each option grant has been estimated on the date of grant using the
Black Scholes pricing model and the weighted average assumptions used in these
8
calculations are summarized as follows:
Three Months Ended
March 31,
2005 2004
--------------- ---------
Risk-fee interest rate 4.0% 4.0%
Expected life of options granted 6.5 years 6.5 years
Expected volatility 63.03% to 65.39% 103.6%
Expected dividend yield 0% 0%
Net Income Per Common Share -- Basic net income per common share is computed by
dividing net income by the weighted average number of shares of common stock
outstanding during the period. Diluted net income per common share is computed
using the treasury stock method to compute the weighted average common stock
outstanding assuming the conversion of potential dilutive common shares.
The following table presents a reconciliation of the denominators used in the
computation of net income per common share - basic, and net income per common
share - diluted, for the three months ended March 31, 2005 and 2004:
Three Months Ended
March 31,
------------------------
2005 2004
---------- ----------
Weighted shares of common stock
outstanding - basic 16,341,469 13,427,102
Weighted shares of common stock
assumed upon exercise of stock
options and warrants 796,228 1,331,028
---------- ----------
Weighted shares of common stock
outstanding - diluted 17,137,697 14,758,130
========== ==========
3. ATM FUNDING AGREEMENT
Fidelity Bank Agreement -- In February 2000, the Company entered into an
agreement with Fidelity Bank to provide the funding for cash inside its
automatic teller machines. The agreement requires the Company to pay fees, on
the balance of the funds provided, equal to the bank's prime rate of interest
plus 2% (7.75% at March 31, 2005) or 10%, whichever is greater. At both March
31, 2005 and December 31, 2004, the rate was 10%. The Company at no time has
access to the funds provided and the financial institution is the sole owner of
the funds prior to the withdrawal by cardholders from the ATMs. No such amounts
are recorded as liabilities on the consolidated financial statements of the
Company. However, the Company does assume the risk of loss and agrees to
reimburse the financial institution for any loss occurring from the point in
time at which the funds leave the bank. The Company must provide armored carrier
services and bear the cost of such services. The Company obtains insurance
coverage for the funds provided. The armored carrier company carries the usual
bond insurance coverage on its employees. Employees of the Company do not have
access to the funds in the cash machines.
As a result of a cash shortage in our ATMs that we discovered in 2001, the
Company issued a note payable to Fidelity Bank in the approximate amount of
$412,000 to reimburse Fidelity Bank for the shortage. The note was paid in full
April 2004.
Site Funded ATMs -- The Company operates ATMs at certain customer locations
where the customer provides the cash required for ATM operational needs. As of
March 31, 2005 and December 31, 2004, the Company operated 60 and 55 ATMs,
respectively, that were site funded.
4. OTHER CURRENT ASSETS
Other current assets consisted of the following at March 31, 2005 and December
31, 2004:
MARCH 31, 2005 DECEMBER 31, 2004
-------------- -----------------
Receivable from casinos $ 469,751 $ 521,048
Income taxes receivable 894,138 862,937
Prepaid expenses 174,242 161,636
Receivable for check guarantees 598,625 695,229
Holdback reserve from credit card
processor - 255,778
Other receivables 413,437 142,131
------------ ----------
Total other current assets $ 2,550,193 $2,638,759
============ ==========
9
Receivable for check guarantees -- The Company has an agreement with a vendor
for the guarantee of approximately 95% of the funds to be paid on personal
checks cashed at the various casino locations. The Company records a receivable
for all guaranteed checks returned for insufficient funds and recognizes the
revenue associated with these checks as there is no further obligation from the
Company. The Company has recorded a receivable for the checks that were returned
for insufficient funds. The Company first attempts to collect on these checks
internally before transferring the collection efforts over to the same third
party guarantor for collection. In addition to the third party guaranteed
transactions, the Company was self-guaranteeing the remaining 5% of funds paid
on personal checks cashed at various casino locations. At December 31, 2004, the
Company established an allowance for uncollectible accounts relating to the
self-guaranteed checks in the amount of $70,000. Effective December 31, 2004,
the Company discontinued self-guaranteeing personal checks and contracted all
guarantees through the outside vendor. No additional reserve is required as of
March 31, 2005.
Holdback reserve from credit card processor -- The Company recorded a receivable
for money due from one of its former credit card processors that the processor
had held in reserve for final processing of transactions for the Company. The
Company received payment for the holdback reserve during the three months ended
March 31, 2005.
5. LOANS RECEIVABLE
During September 2004, the Company advanced $375,000 and an additional $200,000
in March 2005 to a possible acquisition candidate. In addition, the parent of
the acquisition candidate is a co-maker of the loan receivable. This loan
receivable bears interest at 6% and is collateralized by substantially all of
the assets of the acquisition candidate and 51% of the stock of that company.
The loan receivable had an original maturity date of February 15, 2005, which
was extended by the Company under written agreement to September 30, 2005.
During August 2004, the Company sold machines to a customer and entered into a
loan receivable with the customer for $242,000. This loan receivable bears
interest at 8%, is collateralized by the machines, and is due May 2006.
During December 2004, the Company entered into an unsecured loan receivable with
a casino operator in advance of a service contract in the amount of $232,000.
This loan receivable bears interest at 5% with monthly payments beginning April
2005 with a maturity of September 2007. The advance was originally a prepaid
commission until the underlying contract was cancelled and the prepaid
commission was then converted to a note receivable. At the end of March 2005,
the note was assumed by a former executive of the Company in exchange for an
outstanding commitment by the Company relating to the overpayment for stock
options exercised by the former executive during fiscal year 2004. As of the
March 31, 2005, the loan receivable was no longer outstanding.
During December 2004, the Company advanced $1,000,000 to a casino developer on a
collateralized basis under a loan receivable. This loan receivable bears
interest at 8% and is collateralized by substantially all of the assets of the
developer. The loan receivable had an original maturity date of March 1, 2005,
which was extended by the Company under written agreement to April 30, 2005, and
subsequently to May 31, 2005.
During the first quarter of 2005, the Company entered into an unsecured,
non-interest bearing loan for approximately $403,000 with a customer for the
purchase and installation of automated teller machines. Twenty five percent of
the loan was re-paid (approximately $101,000 in April 2005) upon placement of
the order for the ATM's, an additional twenty five percent of the loan is due
upon installation of the last ATM at the ATM sites, and the remaining balance is
due during the 36 month period following the final installation.
During 2004, the Company advanced approximately $390,000 to sales agents in the
form of unsecured loans receivable bearing interest ranging from 5% to 10% due
through December 2006. At March 31, 2005 and December 31, 2004, the remaining
balance was approximately $259,000 and $334,961, respectively.
Total outstanding loans receivable at March 31, 2005 and December 31, 2004 was
$2,469,399 and $2,200,255, respectively, which includes interest receivable of
$68,783 and $16,294, respectively.
10
6. CHECKS ISSUED IN EXCESS OF CASH IN BANK
The Company's credit card cash advance and check cashing business results in
timing differences between funds availability and funding commitments. These
timing differences result in operating deficits in select bank accounts, which
do not have a right of offset, which have been classified as a liability at the
end of the reporting period.
7. COMMITMENTS AND CONTINGENCIES
Legal Proceedings -- The Company is involved in legal actions in the ordinary
course of business. During 2001, the Company and Fidelity Bank, jointly, filed
suit in Minnesota against an insurance company and Dunbar Armored, Inc., a
former vendor, for approximately $412,000 related to a cash shortage from the
Company's automatic teller machines attributable to armored car services.
Subsequent to filing the suit, the Company paid Fidelity Bank its share of the
loss and proceeded forward with the claims against Dunbar. The Company has
recorded the receivable related to the cash shortage and legal fees pertaining
to the suit. The Company's claims against the insurance company were
subsequently dismissed. However, following a June 2003 jury trial in which the
Company was awarded damages for each of its claims, the Hennepin County District
Court entered a judgment in favor of the Company in the amount of $379,583,
which comprises the Company's demand of $412,186 less Dunbar Armored's
counterclaim of $32,603. In November 2003, the court awarded the Company
$207,345 in attorney's fees, costs and disbursements and pre-judgment interest.
Defendant Dunbar subsequently filed an appeal, which was rejected in February
2005. The Company received a partial payment of $588,230 in April 2005 of the
receivable of $646,868 at March 31, 2005. Although recovery of the remaining
receivable of $58,638 for additional legal fees is not certain, based on
representations from the Company's legal counsel, the Company believes it is
likely and, as such, has not recorded any allowance against this amount at March
31, 2005.
The Company is also involved in other legal actions in the ordinary course of
its business. Although the outcome of any such legal action cannot be predicted,
management believes that there are no pending legal proceedings against or
involving the Company for which the outcome is likely to have a material adverse
effect on the Company's consolidated financial position, results of operations
or cash flows.
Letter of Credit -- The Company maintains a $250,000 letter of credit with a
lending institution to secure performance under a regulatory application. To
secure this letter of credit, the Company is required to maintain a cash
position with the issuing lending institution in an amount equal to the letter
of credit. The letter of credit expires June 1, 2005 and will not be renewed by
the Company.
8. RELATED PARTY TRANSACTIONS
During fiscal year 2004, the Company advanced $30,300 to a former officer of the
Company. The advance was non-interest bearing, unsecured and due on demand and
was repaid in full in April 2004. No balances are due from officers at March 31,
2005.
The Company established a liability in the amount of $211,846 at December 31,
2004 relating to an overpayment upon the exercise of stock options by the former
Chief Executive Officer of the Company, net of the costs incurred by the Company
in assisting him in a private sale of his equity position. At the end of March
2005, the former executive assumed a loan receivable from the Company (see note
5) in exchange for a portion of this obligation of the Company. As of the March
31, 2005, the net due from this former executive was $74,932.
Through December 31, 2004, the Company was party to an agreement with
Progressive Management Solutions, Inc. ("Progressive"). Progressive is
wholly-owned by Mr. Roscoe Holmes who, subsequent to the date of the agreement,
became Vice President of the Company. Under the agreement the Company granted
Progressive the exclusive right to use equipment and services acquired from the
Company to provide cash advance services to the Caribbean, Bahamas, Puerto Rico
and other countries and U.S. territories off the eastern U.S. seaboard. In
exchange for these rights, the Company received a 0.5% fee for all transactions
processed by Progressive. The Company paid Progressive $0 and $101,481 for the
three months ended March 31, 2005 and 2004, respectively, in connection with
this agreement. These payments were net of the 0.5% fee received by the Company.
Also as of March 31, 2005, Progressive owed the Company $183,560 for processing
for services provided by the Company. Based upon its relationship with
Progressive, the Company does not believe that a reserve is required against the
amount owed as of March 31, 2005. The Company believes the terms of its
arrangement with Progressive were comparable to those that would be offered to
an independent third party. The agreement terminated at December 31, 2004 and
Mr. Holmes resigned his position as Vice President and became a regional
independent sales representative to the Company.
11
9. EQUITY TRANSACTIONS
During the three months ended March 31, 2005, a total of 88,000 five-year
warrants having an exercise price of $1.50 were exercised on a "cashless" or
"net exercise" basis (based on the average market price of the Company's common
stock prior to exercise) resulting in the issuance of 73,167 shares.
During the three months ended March 31, 2005, 85,000 five-year warrants were
exercised for cash of $180,000 at a weighted average exercise price of $2.12 per
share.
During the three months ended March 31, 2005, 131,000 options were exercised for
cash of $356,000 at a weighted average exercise price of $2.72.
In January 2005, the Company's Board of Directors authorized the repurchase of
up to 1,000,000 shares of our common stock. During the first three months of
2005, the Company did not repurchase any equity securities.
10. INCOME TAXES
At March 31, 2005, the federal and state net operating loss carryforwards were
$1,000,000 and $700,000, respectively. The Company recorded a provision for
income taxes of $148,800 and $203,000 for the three months ended March 31, 2005
and 2004, respectively.
11. DEFERRED INCOME TAXES
The Company's deferred income tax assets and liabilities are recognized for the
difference between the financial statement and income tax reporting basis of the
assets and liabilities based upon currently enacted rates and laws. These
differences include depreciation, amortization and accrued liabilities. The
Company's deferred tax asset as of March 31, 2005 and December 31, 2004 was
$532,000 and $336,000, respectively. The deferred tax liability as of March 31,
2005 and December 31, 2004 was $960,000 and $797,000 respectively.
During the first quarter of 2005, the Company recorded a tax benefit of $213,000
which relates to compensation expense from the exercise of stock options for tax
purposes in excess of amounts recognized for financial reporting purposes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. All statements included in this Quarterly Report, other than statements
that are purely historical, are forward-looking statements. Words such as
"anticipate," "expect," "intend," "plan," "believe," "seek," "estimate," and
similar expressions also identify forward-looking statements. Forward-looking
statements in this Quarterly Report include, without limitation: our plans with
respect to the development of products and services and our plans to obtain
regulatory approvals with respect to such products and services; our estimates
of the useful lives for depreciable and amortizable assets, our estimates of
cash flows in assessing the recoverability of long-lived assets, and estimated
liabilities for chargebacks, litigation, claims and assessments; our expectation
that we will be able to pass increased interchange and processing costs on to
our customers through increased surcharges or reduced commissions; our expected
provision for taxes for future periods; our expectation that our cash advance
business will grow; our belief that our cash flows from operations, will be
adequate to continue our operations and meet our working capital and capital
expenditure needs for the next twelve months; the possibility of seeking
additional financing through bank borrowings or debt or equity financings, if
necessary; our anticipation that we will not sever relations with our technology
partners; our belief that revenues from our top customers will continue to be a
substantial percentage of our revenue in the future; our belief that we will
face and resolve compliance issues with the card associations without a material
adverse effect on or operations; and our expectation of engaging in joint
development projects in the future.
Our expectations, beliefs, objectives, anticipations, intentions and strategies
regarding the future, including, without limitation, those concerning expected
operating results, revenues and earnings are not guarantees of future
performance and are subject to risks and uncertainties that could cause actual
results to differ materially from results contemplated by the forward-looking
statements including, but not limited to: the failure of the Company to develop
products or services that achieve market acceptance or regulatory approval; our
failure to accurately evaluate the assumptions underlying our estimates of the
useful lives for depreciable and amortizable assets, our estimates of cash flows
in assessing the recoverability of long-lived assets, and estimated liabilities
12
for chargebacks, litigation, claims and assessments; competitive forces or
unexpectedly high increases in interchange and processing costs that preclude
us from passing such costs on to our customers through increased surcharges or
reduced commissions; unanticipated changes to applicable tax rates or laws or
changes in our tax position; regulatory forces, competitive forces or market
contraction that affects our cash advance business; failure to accurately
estimate our future cash flows from operations, our inability to satisfy
conditions to borrower additional funds, if required or unanticipated operating
capital needs that cause our cash flows from operations and possible borrowing
facilities to be insufficient to provide sufficient capital to continue our
operations; our failure to accurately estimate our operating cash flows and our
failure to accurately predict our working capital and capital expenditure
needs; our inability to obtain additional financing through bank borrowings or
debt or equity financings at all or on terms that are favorable to us;
competitive pressures that prevent us from commanding higher prices for our
cash access services than other providers; actions taken by our technology
partners or the failure of our technology partners to service our needs, which
results in our decision to sever our relationships them; our failure to renew
our contracts with our top customers; changes in the rules and regulations of
the card associations that require the discontinuation of or material changes
to our products or services; and our inability to identify or form joint
ventures with partners that result in products that are commercially successful.
The forward-looking statements in this Quarterly Report on Form 10-Q are subject
to additional risks and uncertainties set forth under the heading "Risk Factors"
in this Item 2 of Part I, and are based on information available to us on the
date hereof. We assume no obligation to update any forward-looking statements.
Readers are cautioned not to place undue reliance on forward-looking statements,
which speak only as of the date of this Quarterly Report on Form 10-Q. Readers
should also consult the Company's other filings with the Securities and Exchange
Commission (SEC), including our Forms 10-KSB and Forms 8-K.
OVERVIEW
Cash Systems provides credit/debit card cash advance, ATM and check cashing
solutions (collectively, "Cash Access Services") to the casino industry. These
products are the primary means by which casinos make cash available to gaming
customers. During the first quarter 2005, we processed approximately $500
million in ATM and cash advance transactions. Cash Systems also provides casino
clients with ancillary services such as on-line reporting, which enhances their
ability to monitor player activity and market to customers. Presently, our Cash
Access Services are utilized at over 160 gaming and retail locations nationwide.
Cash Systems provides its customers with a wide array of ATM services. First, it
offers a turn-key solution where we provide ATMs, cash necessary to operate the
ATMs, transaction processing and ATM maintenance. In that case, Cash Systems'
customer would have very little involvement with operation of the ATMs. Some of
these turn-key functions, such as transaction processing and maintenance, are
performed by third parties. The second option would include Cash Systems
performing one or a combination of the above services. For example, it is common
for a customer to provide its own ATMs and ATM cash, while Cash Systems provides
transaction processing and maintenance. Cash Systems has developed an "All-In-1
ATM" which allows casino patrons to initiate a credit or debit card transaction
at an ATM. This convenient feature provides casino patrons greater access to
cash which leads to more cash in play at casinos.
Our credit/debit card cash advance products allow casino patrons to obtain cash
from their credit card or checking account (for debit transactions) through the
use of our software and equipment. With the Company's traditional cash advance
system, gaming patrons visit a Cash Systems kiosk located on the casino floor
which houses a point-of-sale ("POS") terminal equipped with our software. The
kiosk terminal will prompt the customer to swipe his/her credit or debit card
and enter the dollar amount requested. The terminal will then dial the
appropriate bank for an authorization or disapproval. If authorized, the
terminal will direct the customer to a casino cage. Once at the cage, the
customer will present his/her credit/debit card and driver's license. A cage
cashier will swipe the credit/debit card and driver's license in a Company
terminal which communicates with the kiosk terminals. After finding the
kiosk-approved transaction, the cage terminal will provide the cashier with two
options in order to obtain the customer's address, driver's license and
telephone number, which must be imprinted on each check. The first option is to
swipe the customer's driver's license if it contains a magnetic strip. The
second option is to manually enter the information into the terminal. After one
of these options is selected, a printer attached to the cage terminal will
generate a Cash Systems' check. The cashier will give the customer cash in the
amount requested, less fees, after he/she signs the Cash Systems' check. Our
check is then deposited by the casino into its account for payment from a
Company account and our processor debits the customer's credit card. This
transaction can be accomplished without the gaming customer using a personal
identification number ("PIN"). For credit card advances, customers pay a service
charge typically between 6%-7%.
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We also offer two check cashing solutions to the gaming industry. First, we
provide casinos with full service check cashing. With full service check
cashing, we are given space within a casino to operate a check cashing business.
Our employees manage the booth, our cash is used to cash checks, and we retain
customer fees from check cashing. There are approximately 60 casinos utilizing
the services of a full service check cashing vendor. Under the second option, we
provide check guarantee services with the assistance of third party providers.
Cash Systems continually seeks to develop new technology that will make cash
advance transactions more convenient for customers. For example, the Company has
created a wireless cash advance system that allows casino patrons to complete a
transaction from remote areas of the casino, such as a slot machine or gaming
table.
During fiscal year 2004, the Company entered into several strategic alliances
which include Certegy, TDN Money Systems and Progressive Gaming International.
These alliances have allowed the Company to expand its product offerings and
enter into markets not previously serviced by the Company. In the first quarter
of fiscal year 2005, the Company, under the direction of the new Chief Executive
Officer, continued to look for additional partnerships and alliances as we move
ahead as part of our overall growth strategy.
Effective January 1, 2005, the Company hired Michael Rumbolz as its new Chief
Executive Officer and Chairman of the Board and David Clifford as its new Chief
Financial Officer. Christopher Larson, one of our original founders, has taken
on the role of the Company's Chief Operating Officer. The Company believes that
this reorganization has better positioned the Company to build on its previous
success.
QUARTER ENDED MARCH 31, 2005 COMPARED TO MARCH 31, 2004
Revenues for the quarter ended March 31, 2005 were $13,650,313 compared to
$11,006,634 for the same period in 2004. The 24% increase in 2005 revenues is
due to the continued expansion of products and services to additional gaming
operations. During the period March 31, 2004 to March 31, 2005, 22 additional
gaming operations were added. Our ability to expand and win business
relationships is based on the Company's focus on technology and superior
service. The Company expects to be successful in its bids to win new contracts
and to expand offerings under existing contracts.
Operating expenses for the quarter ended March 31, 2005 were $13,194,680
compared to $10,398,787 for 2004. The 27% increase in operating expenses was
primarily due to the increased commissions, credit card processing costs and
payroll costs as a direct result of an increase in revenues. As a percentage of
revenues, operating expenses were 97% of revenues for the quarter ended March
31, 2005 compared to 94% of revenues for 2004. The 3% increase as a percentage
of revenues was primarily due to a higher commission rate paid on revenues to
secure expanded market penetration. The Company believes that the volume of
business generated by new contracts will contribute favorably to the Company's
profitability as the contacts and relationships with new casinos mature. The
Company expects to be able to reduce its operating costs in the future as a
percentage of revenues through the expansion of product offerings and technology
applications which will make the overall operations more cost effective.
Income before income taxes was $386,401 and $507,143 for the quarter ended March
31, 2005 and 2004, respectively. This $120,742 reduction represents a 24%
reduction year over year. On a fully diluted basis, after-tax net income of
$237,601 for first quarter of fiscal year 2005 was 2% of sales or $0.01 per
diluted common share, as compared to net income of $304,143 which was 3% of
sales or $0.02 per diluted common share for the same prior fiscal year period.
LIQUIDITY AND CAPITAL RESOURCES
Cash was $11,357,021 at March 31, 2005, representing a decrease of 13% from the
cash of $13,043,874 at December 31, 2004. Although we have no material
commitments for capital expenditures, we anticipate continued expenditures for
software development and capital expenditures to be consistent with fiscal year
2004 and expect to spend for fiscal year 2005 approximately $2,000,000, which is
consistent with our anticipated growth in operations, infrastructure and
personnel. As of March 31, 2005, we have funded our operations and satisfied
capital expenditure requirements primarily through the use of operating revenues
and private placements proceeds.
The Company anticipates that the cost of compliance with Sarbanes-Oxley sections
302 and 404 will be a material use of operating funds during the coming fiscal
year. The cost of compliance is estimated to be $800,000 to $1,000,000. These
expenditures will be recorded as period expenses as incurred. In addition, the
Company will be upgrading its accounting system, with an estimated cost of
$150,000, during the fiscal year 2005 to provide for expanded management
reporting and to accommodate the anticipated growth in operations over the
coming years.
14
We anticipate that we will continue to experience growth in our income and
expenses for the foreseeable future and that our operating expenses will be a
material use of cash resources. We believe that the existing sources of
liquidity and the results of our operations will provide cash to fund operations
for at least the next 12 months.
The Company may consider the utilization of debt or additional equity funding
for strategic acquisitions. However, there can be no assurance that debt or
additional equity funding will be available on terms acceptable to us or on any
terms whatsoever.
OFF-BALANCE SHEET ARRANGEMENTS
We obtain currency to meet the normal operating requirements of our ATMs
pursuant to various funding arrangements.
Fidelity Bank Agreement -- In February 2000, the Company entered into an
agreement with Fidelity Bank to provide the funding for cash inside the
Company's ATMs. The agreement requires the Company to pay fees, on the balance
of the funds provided, equal to the bank's prime rate of interest plus 2% (7.75%
at March 31, 2005) or 10%, whichever is greater. At both March 31, 2005 and
December 31, 2004, the rate was 10%. The Company at no time has access to the
funds provided and the financial institution is the sole owner of the funds
prior to the withdrawal by cardholders from the ATMs. No such amounts are
recorded as liabilities on the consolidated financial statements of the Company.
However, the Company does assume the risk of loss and agrees to reimburse the
financial institution for any loss occurring from the point in time at which the
funds leave the bank. The Company must provide armored carrier services and bear
the cost of such services. The Company obtains insurance coverage for the funds
provided. The armored carrier company carries the usual bond insurance coverage
on its employees. Employees of the Company do not have access to the funds in
the ATMs.
As a result of a cash shortage in our ATMs that we discovered in 2001 the
Company issued a note payable to Fidelity Bank in the approximate amount of
$412,000 to reimburse Fidelity Bank for the shortage. The note was paid in full
April 2004.
Site Funded ATMs -- The Company operates ATMs at certain customer locations
where the customer provides the cash required for ATM operational needs. As of
March 31, 2005 and December 31, 2004, the Company operated 60 and 55 ATMs,
respectively, that were site funded.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis is based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these consolidated
financial statements requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the consolidated
financial statements, the reported amounts of revenues and expenses during the
reporting period, and related disclosures of contingent assets and liabilities
for the periods indicated. The notes to the consolidated financial statements
contained herein describe our significant accounting policies used in the
preparation of the consolidated financial statements. On an on-going basis, we
evaluate our estimates, including, but not limited to, those related to our
allowance for doubtful accounts, collectibility of loans receivable, the lives
and continued usefulness of property and equipment and software and
contingencies. Due to uncertainties, however, it is at least reasonably possible
that management's estimates will change during the next year, which cannot be
estimated. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results could differ from these estimates under different assumptions or
conditions.
RISK FACTORS
Set forth below and elsewhere in this Quarterly Report on Form 10-Q, are risks
and uncertainties that could cause actual results to differ materially from the
results contemplated by the forward-looking statements contained in this
Quarterly Report.
Competition in the market for cash access products and services is intense, and
if we are unable to compete effectively, we could face price reductions and
decreased demand for our services.
15
Some of our current and potential competitors have a number of significant
advantages over us, including:
- commission structures that are more beneficial to gaming
establishments than ours;
- longer operating histories;
- pre-existing relationships with potential customers; and
- significantly greater financial, marketing and other resources,
which allow them to respond more quickly to new or changing
opportunities.
In addition, some of our potential competitors have greater name recognition and
marketing power.
Furthermore, some of our current competitors have established, and in the future
potential competitors may establish, cooperative relationships with each other
or with third parties or adopt aggressive pricing policies to gain market share.
As a result of the intense competition in this industry, we could encounter
significant pricing pressures and lose customers. These pricing pressures could
result in significantly lower average service charges for our cash access
services or higher commissions payable to gaming establishments. We may not be
able to offset the effects of any service charge reductions with an increase in
the number of customers, cost reductions or otherwise. In addition, the gaming
industry is always subject to market consolidation, which could result in
increased pricing pressure and additional competition. We believe that the
breadth of our offerings, our differentiating technology and the ease of use of
our services allow us to provide greater overall value to our customers and
therefore to command competitive prices for our cash access services. To the
extent that competitive pressures in the future force us to reduce our pricing
to establish or maintain relationships with gaming establishments, our revenues
could decline.
THE CASH ACCESS INDUSTRY IS SUBJECT TO CHANGE, AND WE MUST KEEP PACE WITH THE
CHANGES TO SUCCESSFULLY COMPETE.
The demand for our products and services is affected by changing technology,
evolving industry standards and the introduction of new products and services.
Cash access services are based on existing financial services and payment
methods, which are also continually evolving. Our future success will depend, in
part, upon our ability to successfully develop and introduce new cash access
services based on emerging financial services and payment methods, which may,
for example, be based on stored value cards, Internet-based payment methods or
the use of portable consumer devices such as personal digital assistants and
cellular telephones, and to enhance our existing products and services on a
timely basis to respond to changes in patron preferences and industry standards.
We cannot be sure that the products, services or technologies that we choose to
develop will achieve market acceptance or obtain any necessary regulatory
approval or that products, services or technologies that we choose not to
develop will not threaten our market position. If we are unable, for
technological or other reasons, to develop new products or services, enhance or
sell existing products or services in a timely and cost-effective manner in
response to technological or market changes, our business, financial condition
and results of operations may be materially adversely affected.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WE MAY LOSE A VALUABLE
COMPETITIVE ADVANTAGE OR BE FORCED TO INCUR COSTLY LITIGATION TO PROTECT OUR
RIGHTS.
We utilize technology in operating our business, and our success depends on
developing and protecting our intellectual property. We rely on copyright,
patent, trademark and trade secret laws, as well as the terms of license
agreements with third parties, to protect our intellectual property. We also
rely on other confidentiality and contractual agreements and arrangements with
our employees, affiliates, business partners and customers to establish and
protect our intellectual property and similar proprietary rights. We do not hold
any issued patents, but we have six patent applications pending. At the same
time, our products may not be patentable in their entirety or at all. For
example, although we currently have six inventions that are the subject of
patent applications pending in the United States Patent and Trademark Office, we
can provide no assurance that these applications will become issued patents. If
they do not become issued patents, our competitors would not be prevented from
using these inventions.
We also license various technology and intellectual property rights from third
parties. We rely heavily on the maintenance and protection of these technology
and intellectual property rights. If our licensors or business partners fail to
protect their intellectual property rights in material that we license, the
value of our licenses may diminish significantly. It is possible that third
parties may copy or otherwise obtain and use our information and proprietary
technology without authorization or otherwise infringe on our intellectual
16
property rights. In addition, we may not be able to deter current and former
employees, consultants, and other parties from breaching confidentiality
agreements and misappropriating proprietary information. If we are unable to
adequately protect our technology or our exclusively licensed rights, or if we
are unable to continue to obtain or maintain licenses for technology from third
parties, it could have a material adverse effect on the value of our
intellectual property, similar proprietary rights, our reputation, or our
results of operations.
In the future, we may have to rely on litigation to enforce our intellectual
property rights and contractual rights. In addition, although we do not believe
that our products or services infringe upon the intellectual property rights of
third parties, we may face claims of infringement that could interfere with our
ability to use technology or other intellectual property rights that are
material to our business operations. If litigation that we initiate is
unsuccessful, we may not be able to protect the value of some of our
intellectual property. In the event a claim of infringement against us is
successful, we may be required to pay royalties or license fees to continue to
use technology or other intellectual property rights that we had been using or
we may be unable to obtain necessary licenses from third parties at a reasonable
cost or within a reasonable time. Any litigation of this type, whether
successful or unsuccessful, could result in substantial costs to us and
diversions of our resources. Although we believe that our intellectual property
rights are sufficient to allow us to conduct our business without incurring
liability to third parties, our products and services may infringe on the
intellectual property rights of third parties and our intellectual property
rights may not have the value we believe them to have.
We have formed relationships with and rely heavily on the services and
technology of a number of third-party and affiliated companies and consultants
to operate our systems and ensure the integrity of our technology. Although we
do not anticipate severing relations with any of these parties, any of these
providers may cease providing these services or technology in an efficient,
cost-effective manner, or altogether, or be unable to adequately expand their
services to meet our needs. In the event of an interruption in, or the cessation
of, services or technology by an existing third-party or affiliated provider, we
may not be able to make alternative arrangements for the supply of the services
or technology that are critical to the operation of our business and this could
have a material adverse effect on our business.
OUR PRODUCTS AND SERVICES ARE COMPLEX, DEPEND ON A MYRIAD OF COMPLEX NETWORKS
AND TECHNOLOGIES AND MAY BE SUBJECT TO SOFTWARE OR HARDWARE ERRORS OR FAILURES
THAT COULD LEAD TO AN INCREASE IN OUR COSTS, REDUCE OUR NET REVENUES OR DAMAGE
OUR REPUTATION.
Our products and services, and the networks and third-party services upon which
our products and services are based, are complex and may contain undetected
errors or may suffer unexpected failures. The computer networks that we rely
upon in providing our products and services are vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions, which could lead to
interruptions, delays, loss of data, public release of confidential data or the
inability to complete patron transactions. The occurrence of these errors or
failures, disruptions or unauthorized access could adversely affect our sales to
customers, diminish the use of our cash access products and services by patrons,
cause us to incur significant repair costs, result in our liability, divert the
attention of our development personnel from product development efforts, and
cause us to lose credibility with current or prospective customers or patrons.
BECAUSE OF OUR DEPENDENCE ON A FEW PROVIDERS, OR IN SOME CASES ONE PROVIDER, FOR
SOME OF THE FINANCIAL SERVICES WE OFFER TO PATRONS, THE LOSS OF A PROVIDER COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS OR OUR FINANCIAL PERFORMANCE.
The loss of our sponsorship by Harris Bank (Cornerstone) into the Visa U.S.A.
and MasterCard International card associations could have a material adverse
effect on our business. We cannot provide cash access services involving Visa
cards and MasterCard cards without sponsorship into the Visa U.S.A. and
MasterCard International card associations.
BECAUSE OF OUR DEPENDENCE ON CERTAIN CUSTOMERS, THE LOSS OF A TOP CUSTOMER COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR REVENUES AND PROFITABILITY.
The loss or financial hardship experienced by, or a substantial decrease in
revenues from, any one of our top customers could have a material adverse effect
on our business, financial condition and results of operations. Consolidation
among operators of gaming establishments may also result in the loss of a top
customer to the extent that customers of ours are acquired by our competitors'
customers. In addition, our contracts are generally exclusive contracts with
three to five year terms. Any failure to renew our significant contracts, or a
large number of our contracts, could have a material adverse effect on our
business, financial condition and results of operations.
17
ECONOMIC DOWNTURNS, A DECLINE IN THE POPULARITY OF GAMING OR CHANGES IN THE
DEMOGRAPHIC PROFILE OF GAMING PATRONS COULD REDUCE THE NUMBER OF PATRONS THAT
USE OUR SERVICES OR THE AMOUNTS OF CASH THAT THEY ACCESS USING OUR SERVICES.
The strength and profitability of our business depends on consumer demand for
gaming. During periods of economic contraction, our revenues may decrease while
some of our costs remain fixed, resulting in decreased earnings. This is because
the gaming activities in connection with which we provide our cash access
services are discretionary leisure activity expenditures and participation in
leisure activities may decline during economic downturns because consumers have
less disposable income. Even an uncertain economic outlook may adversely affect
consumer spending in gaming operations, as consumers spend less in anticipation
of a potential economic downturn. Reductions in tourism could also have a
material adverse effect on our business, financial condition and results of
operations.
Changes in consumer preferences or discretionary consumer spending could harm
our business. Gaming competes with other leisure activities as a form of
consumer entertainment, and may lose relative popularity as new leisure
activities arise or as other existing leisure activities become more popular.
The popularity of gaming is also influenced by the social acceptance of gaming,
which is dictated by prevailing social mores. To the extent that the popularity
of gaming declines as a result of either of these factors, the demand for our
cash access services may decline and our business may be harmed.
Aside from the general popularity of gaming, the demographic profile of gaming
patrons changes over time. The gaming habits and use of cash access services
varies with the demographic profile of gaming patrons. To the extent that the
demographic profile of gaming patrons either narrows or migrates towards patrons
who use cash access services less frequently or for lesser amounts of cash, the
demand for our cash access services may decline and our business may be harmed.
AN UNEXPECTEDLY HIGH LEVEL OF CHARGEBACKS COULD ADVERSELY AFFECT OUR BUSINESS.
When patrons use our cash access services, we either dispense cash or produce a
negotiable instrument that can be endorsed and exchanged for cash. If a
completed cash access transaction is subsequently disputed by a cardholder or
accountholder and if we are unsuccessful in establishing the validity of the
transaction, the transaction becomes a chargeback and we may not be able to
collect payment for such transaction. We are always subject to the risk of
chargebacks, which we manage by employing detailed transaction completion
procedures designed to detect and prevent fraudulent transactions. If, in the
future, we incur an unexpectedly high level of chargebacks, we may suffer a
material adverse effect to our business, financial condition or results of
operation.
WE ARE SUBJECT TO EXTENSIVE RULES AND REGULATIONS OF MASTERCARD INTERNATIONAL
AND VISA U.S.A., WHICH MAY HARM OUR BUSINESS.
A significant portion of our cash access services are processed as transactions
subject to the extensive rules and regulations of the two leading card
associations, MasterCard International and Visa U.S.A. From time to time, we
receive correspondence from the card associations regarding our compliance with
their rules and regulations. In the ordinary course of our business, we engage
in discussions with our sponsoring bank and/or the card associations regarding
our compliance with their rules and regulations. The rules and regulations do
not expressly address some of the contexts and settings in which we process cash
access transactions, or do so in a manner subject to varying interpretations.
From time to time we also face technical compliance issues, e.g. the format of
data submission files. We expect to continue to face and resolve issues such as
these in the ordinary course of business, which we do not believe will result in
a material adverse impact on our operations. The card associations modify their
rules and regulations from time to time. In the event that the card associations
or our sponsoring bank determine that the manner in which we process certain
card transactions is not in compliance with existing rules and regulations, or
if the card associations adopt new rules or regulations that prohibit or
restrict the manner in which we process certain card transactions, we may be
forced to modify the manner in which we operate which may increase our costs, or
cease processing certain types of cash access transactions altogether, either of
which could have a material negative impact on our business.
CHANGES IN INTERCHANGE RATES MAY AFFECT OUR COSTS OF REVENUES.
We pay credit card associations interchange fees for services they provide in
settling transactions routed through their networks. In addition, we pay fees to
participate in various ATM or debit networks. The amounts of these interchange
fees are fixed by the card associations and networks in their sole discretion,
and are subject to increase in their discretion from time to time. Many of our
contracts enable us to pass through to our customers the amount of
18
any increase in interchange or processing fees, but competitive pressures might
prevent us from doing so. To the extent that we are unable to pass through to
our customers the amount of any increase in interchange or processing fees, our
costs of revenues would increase and our net income would decrease, assuming no
change in transaction volumes. Any such decrease in net income could have a
material adverse effect on our financial condition and results of operations.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL GAMING REGULATION, WHICH MAY HARM OUR
BUSINESS.
We are subject to a variety of regulations in the jurisdictions in which we
operate. Regulatory authorities at the federal, state and local levels have
broad powers with respect to the licensing of gaming-related activities and may
revoke, suspend, condition or limit our licenses, impose substantial fines and
take other actions, any one of which could have a material adverse effect on our
business, financial condition and results of operations. We cannot assure you
that any new gaming license or related approval that may be required in the
future will be granted, or that our existing licenses will not be revoked,
suspended or limited or will be renewed. If additional gaming-related
regulations are adopted in a jurisdiction in which we operate, such regulations
could impose restrictions or costs that could have a material adverse effect on
our business. From time to time, various proposals are introduced in the
legislatures of some of the jurisdictions in which we have existing or planned
operations that, if enacted, could adversely affect the tax, regulatory,
operational or other aspects of the gaming industry and our company. Legislation
of this type may be enacted in the future.
Members of our management team and the beneficial owners of equity interests in
our Company must also be approved by certain state regulatory authorities. If
state regulatory authorities were to find a person occupying any such position
unsuitable, we would be required to sever our relationship with that person.
Certain public issuances of securities and certain other transactions by us also
require the approval of certain regulatory authorities.
In addition, certain new products and services that we may develop cannot be
offered in the absence of regulatory approval of the product or licensing of us,
or both. For example, our cashless gaming product must have approval and cannot
be used at any location until we receive approval from the appropriate authority
in such location. These approvals could require that we and our officers,
directors or ultimate beneficial owners obtain a license or be found suitable
and that the product be approved after testing and review. We cannot assure you
that we will obtain any such approvals in the future.
In most jurisdictions in which we do business, we must obtain a non-gaming
supplier's or vendor's license, qualification or approval. The obtaining of
these licenses, qualifications or approvals and the regulations imposed on
non-gaming suppliers and vendors are typically less stringent than for
gaming-related suppliers and vendors. In some jurisdictions in which we do
business, we must obtain a gaming-related supplier's or vendor's license,
qualification or approval. If we must obtain a gaming-related supplier's or
vendor's license, qualification or approval because of the introduction of new
products (such as products related to cashless gaming) or because of a change in
the laws or regulations, or interpretation thereof, our business could be
materially adversely affected. This increased regulation over our business could
include, but is not limited to: requiring the licensure or finding of
suitability of any equity owner, officer, director or key employee of the
Company; the termination or disassociation with any equity owner, officer,
director or key employee that fails to file an application or to obtain a
license or finding of suitability; the submission of detailed financial and
operating reports; submission of reports of material loans, leases and
financing; and, requiring regulatory approval of certain commercial transactions
such as the transfer or pledge of equity interests in the Company.
MANY OF THE FINANCIAL SERVICES THAT WE PROVIDE ARE SUBJECT TO EXTENSIVE RULES
AND REGULATIONS, WHICH MAY HARM OUR BUSINESS.
All of our cash access services and customer relationship marketing products and
services are subject to the privacy provisions of state and federal law,
including the Gramm-Leach-Bliley Act. Our POS debit card transactions and ATM
withdrawal services are subject to the Electronic Fund Transfer Act. Our ATM
services are subject to the applicable state banking regulations in each
jurisdiction in which we operate ATMs. The cash access services we provide are
subject to certain recordkeeping and reporting obligations under the Bank
Secrecy Act. In jurisdictions in which we serve as a check casher, we are
subject to the applicable state licensing requirements and regulations governing
check cashing activities and deferred deposit service providers.
If any regulatory authority determines that the manner in which we provide
certain cash access services is not in compliance with existing rules and
regulations, or the regulatory authorities adopt new rules or regulations that
prohibit or restrict the manner in which we provide cash access services, we may
19
be forced to modify the manner in which we operate, or cease processing certain
types of cash access transactions altogether or pay substantial penalties and
fines. In addition, we could be subject to private litigation as a result of
these circumstances. Any such actions could have a material adverse effect on
our business, financial condition and results of operations.
IF CONSUMER PRIVACY LAWS CHANGE, OR IF WE ARE REQUIRED TO CHANGE OUR BUSINESS
PRACTICES, THE VALUE OF OUR CUSTOMER RELATIONSHIP MARKETING PRODUCTS AND
SERVICES MAY BE HAMPERED.
Our cash access business depends on our ability to collect and use certain
non-public personal information relating to patrons who use our products and
services and the transactions they consummate using our products and services.
We are required by applicable privacy legislation to safeguard and protect the
privacy of such information, to make certain disclosures to patrons regarding
our privacy and information sharing policies and, in some cases, to provide
patrons an opportunity to "opt out" of the use of their information for certain
purposes. We cannot assure you that regulators reviewing our policies and
practices would not require us to modify our practices in a material or
immaterial manner or impose fines or other penalties if they believe that our
policies and practices do not meet the necessary standard. To the extent that
our cash access products and services have in the past failed or now or in the
future fail to comply with applicable law, our privacy policies or the notices
that we provide to patrons, we may become subject to actions by a regulatory
authority or patrons which cause us to pay monetary penalties or require us to
modify the manner in which we provide customer relationship marketing services,
Historically, the vast majority of patrons do not exercise their right to "opt
out". To the extent that patrons exercise this right, our ability to leverage
existing and future databases of information would be curtailed. Consumer and
data privacy laws are evolving, and to the extent that such laws are broadened
in their application or narrow the types of information that may be collected or
used for marketing or certain other purposes or require patrons to "opt-in" to
the use of their information for certain purposes, the value of our customer
relationship marketing products and services may be hampered.
OUR JOINT DEVELOPMENT ACTIVITIES MAY RESULT IN PRODUCTS THAT ARE NOT
COMMERCIALLY SUCCESSFUL OR THAT ARE NOT AVAILABLE IN A TIMELY FASHION.
We have engaged in joint development projects with third parties in the past and
we expect to continue doing so in the future. Joint development can magnify
several risks for us, including the loss of control over development of aspects
of the jointly developed products and over the timing of product availability.
Accordingly, we face increased risk that joint development activities will
result in products that are not commercially successful or that are not
available in a timely fashion.
In addition to joint development activities, from time to time we consider
acquiring additional technologies, products and intellectual property. We
periodically enter into discussions with third parties regarding such potential
acquisitions. We cannot assure you that we will enter into any such acquisition
agreements in the near future or at all. We have no present understanding or
agreements with respect to any acquisitions.
WE DEPEND ON OUR KEY PERSONNEL.
We are highly dependent on the involvement of Michael Rumbolz, our Chief
Executive Officer, David Clifford, our Chief Financial Officer, Christopher
Larson, our Chief Operating Officer, and other members of our senior management
team. Other than Mr. Rumbolz and Mr. Clifford, none of our executive officers
have employment agreements with us. The loss of Mr. Rumbolz or other members of
our senior management team would have a material adverse effect on our business.
Our success depends to a significant degree upon the performance and continued
service of key managers involved in the development and marketing of our
products and services to gaming establishments. Our future success depends upon
our ability to attract, train and retain such personnel. We may need to increase
the number of key managers as we further develop our products and services and
as we penetrate other geographic markets. Our ability to enter into contracts
with gaming establishments depends in large part on the relationships that our
key managers have formed with management-level personnel of gaming
establishments. Competition for individuals with such relationships is intense,
and we cannot be certain that we will be successful in recruiting and retaining
such personnel. In addition, employees may leave our company and subsequently
compete with us. Our sales efforts are particularly hampered by the defection of
personnel with long-standing relationships with management-level personnel of
gaming establishments.
Other than Michael Rumbolz, our Chief Executive Officer, David Clifford, our
Chief Financial Officer, Zev Kaplin, our in-house legal counsel and Craig Potts,
former executive officer, our employees do not sign non-compete agreements.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have assessed our vulnerability to certain market risks, including interest
rate risk associated with financial instruments included in cash and cash
equivalents. Due to the short-term nature of these investments we have
determined that the risks associated with interest rate fluctuations related to
these financial instruments do not pose a material risk to us.
ITEM 4. CONTROLS AND PROCEDURES
During the course of their audit of our consolidated financial statements for
2004, and during their review of our unaudited quarterly consolidated financial
statements for the quarter ended March 31, 2005, our independent registered
public accounting firm, Virchow, Krause & Company, LLP (Virchow Krause), advised
management and the Audit Committee of our Board of Directors that they had
identified deficiencies in internal controls. The deficiencies are considered to
be a "material weakness" as defined under standards established by the American
Institute of Certified Public Accountants. The material weaknesses relate to the
lack of segregation of duties and financial oversight controls, which in
aggregate created an ineffective control environment. On March 23, 2005, Virchow
Krause also communicated to our Audit Committee reportable conditions related to
(A) the lack of a formal journal entry approval process, and (B) the lack of
access controls to our accounting system.
During the performance of the review for the quarter ended March 31, 2005,
Virchow Krause and the Company identified additional cut-off and control
weaknesses relating to timely processing and collection of settlements due from
credit card processors. The deficiencies are considered to be a "material
weakness". If not corrected, these cut-off and control weaknesses could result
in a material adjustment to future consolidated financial statements of the
Company. At the quarter end, no estimate could be made as to the impact, if any,
resulting from the identified cut-off and control weaknesses.
Prior to the identification of the deficiencies indicated at year end, we had
already undertaken, or are in the process of undertaking, a number of steps to
establish a proper control environment, including:
- contracting with outside SEC consultants to assist in the
preparation of year-end and quarter-end analysis and financial
statement preparation oversight;
- hiring a new Chief Financial Officer effective January 1, 2005;
- investing in internal reporting systems;
- investing in accounting and reporting systems;
- implementing plans to hire additional accounting staff; and
- in the process of formalizing our internal controls and procedures
in accordance with the Securities and Exchange Commission's rules on
implementing the internal controls reporting requirements included
in Section 404 of the Sarbanes-Oxley Act of 2002.
As a result of the deficiencies identified during the quarterly review, we are
in the process of developing operating procedures to reduce the likelihood of a
recurrence of the situation, and we are establishing additional internal review
procedures to validate prior transactions and to determine the impact, if any,
on the consolidated financial statements of the Company as result of any
findings. Based on its past experience, the Company has been able to fully
collect all prior balances due from credit card processors through the
cooperation of those processors. The Company expects to receive full cooperation
from the credit card processors to collect the currently identified prior
balances due. Some risk exists in the form of expired authorizations for the
prior balances due, however, based on its prior experience, the Company believes
that the risk associated with expired authorizations is small and does not
require a reserve estimate at this time.
We have discussed our corrective actions and future plans with our Audit
Committee and Virchow Krause and, as of the date of this Quarterly Report on
Form 10-Q, we believe the actions outlined above will correct the deficiencies
in internal controls that are considered to be a material weakness. Further, our
management, including our Chief Executive Officer and Chief Financial Officer,
have conducted an evaluation of the effectiveness of disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by this Quarterly Report on Form 10-Q. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that the disclosure controls and procedures did not provide reasonable
assurance of effectiveness as of the quarter ended March 31, 2005 because of the
material weaknesses identified above.
21
We are currently in the process of reviewing and formalizing our internal
controls and procedures for financial reporting in accordance with the
Securities and Exchange Commission's rules implementing the internal control
reporting requirements included in Section 404 of the Sarbanes-Oxley Act of 2002
("Section 404"). Changes have been and will be made to our internal controls
over financial reporting as a result of these efforts. We are dedicating
significant resources, including senior management time and effort, and
incurring substantial costs in connection with our ongoing Section 404
assessment. The evaluation of our internal controls will be conducted under the
direction of our senior management in consultation with an independent third
party consulting firm. We expect to assess our controls and procedures on a
regular basis. We will continue to work to improve our controls and procedures
and to educate and train our employees on our existing controls and procedures
in connection with our efforts to maintain an effective controls infrastructure
at our Company. Despite our efforts related to our Section 404 assessment, we,
however, cannot provide any assurance that we will timely complete the
evaluation of our internal controls or that, even if we do complete the
evaluation of our internal controls, we do so in time to permit our independent
registered public accounting firm to test our controls and timely complete their
attestation procedures of our controls in a manner that will allow us to comply
with applicable Securities and Exchange Commission rules and regulations by the
filing deadline for our Annual Report on Form 10-K for 2005.
In addition, there can be no assurances that our disclosure controls and
procedures will detect or uncover all failure of persons with the Company to
report material information otherwise required to be set forth in the reports
that we file with the Securities and Exchange Commission.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in legal actions in the ordinary course of business.
During 2001, the Company and Fidelity Bank, jointly, filed suit in Minnesota
against an insurance company and Dunbar Armored, Inc., a former vendor, for
approximately $412,000 related to a cash shortage from the Company's automatic
teller machines attributable to armored car services. Subsequent to filing the
suit, the Company paid Fidelity Bank its share of the loss and proceeded forward
with the claims against Dunbar. The Company has recorded the receivable related
to the cash shortage and legal fees pertaining to the suit. The Company's claims
against the insurance company were subsequently dismissed. However, following a
June 2003 jury trial in which the Company was awarded damages for each of its
claims, the Hennepin County District Court entered a judgment in favor of the
Company in the amount of $379,583, which comprises the Company's demand of
$412,186 less Dunbar Armored's counterclaim of $32,603. In November 2003, the
court awarded the Company $207,345 in attorney's fees, costs and disbursements
and pre-judgment interest. Defendant Dunbar subsequently filed an appeal, which
was rejected in February 2005. The Company received a partial payment of
$588,230 in April 2005 of the receivable of $646,868 at March 31, 2005. Although
recovery of the remaining receivable of $58,638 for additional legal fees is not
certain, based on representations from the Company's legal counsel, the Company
believes it is likely and, as such, has not recorded any allowance against this
amount at March 31, 2005.
The Company is also involved in other legal actions in the ordinary course of
its business. Although the outcome of any such legal action cannot be predicted,
management believes that there are no pending legal proceedings against or
involving the Company for which the outcome is likely to have a material adverse
effect on the Company's consolidated financial position, results of operations
or cash flows.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
During the three months ended March 31, 2005, a total of 88,000 five-year
warrants having an exercise price of $1.50 were exercised on a "cashless" or
"net exercise" basis (based on the average market price of the Company's common
stock prior to exercise) resulting in the issuance of 73,167 shares. The Company
relied upon Section 4(2) of the Securities Act for an exemption for transactions
not involving a public offering.
During the three months ended March 31, 2005, 85,000 five-year warrants were
exercised for cash of $180,000 at a weighted average exercise price of $2.12 per
share. The Company relied upon Section 4(2) of the Securities Act for an
exemption for transactions not involving a public offering.
22
Issuer Repurchases of Equity Securities
We did not repurchase any equity securities of Cash Systems, Inc. during the
three months ended March 31, 2005. In January 2005, our Board of Directors
authorized the repurchase of up to 1,000,000 shares of our common stock as part
of the Company's overall strategy to prudently allocate resources to enhance
shareholder value.
ITEM 6. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the Registrants -- incorporated by
reference to Exhibit 2.1 to the Registrant's Registration Statement on Form 8-A filed on January
6, 2004
3.2 Amended and Restated Bylaws of the Registrant -- incorporated by reference to Exhibit 3 to the
Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002
10.1 2005 Equity Incentive Plan - incorporated by reference to the Registrant's Proxy Statement filed
May 2, 2005**
31.1* Principal Executive Officer Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2* Principal Financial Officer Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1* Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2* Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
=============
* filed herewith
** management contract or compensatory plan
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CASH SYSTEMS, INC.
DATE: May 23, 2005 /s/ Michael D. Rumbolz
---------------------------
Michael D. Rumbolz
Chief Executive Officer
(principal executive officer)
DATE: May 23, 2005 /s/ David S. Clifford
---------------------------
David S. Clifford
Chief Financial Officer
(principal financial officer)
23
EXHIBIT INDEX
CASH SYSTEMS, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2005
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the Registrants -- incorporated by
reference to Exhibit 2.1 to the Registrant's Registration Statement on Form 8-A filed on January
6, 2004
3.2
Amended and Restated Bylaws of the Registrant -- incorporated by reference to Exhibit 3 to the
Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002
10.1 2005 Equity Incentive Plan - incorporated by reference to the Registrant's Proxy Statement filed
May 2, 2005**
31.1* Principal Executive Officer Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2* Principal Financial Officer Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1* Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2* Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
=============
* filed herewith
** management contract or compensatory plan
24