SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
September 14, 2004 (June 7, 2004)
FASTFUNDS FINANCIAL CORPORATION
------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Nevada 0-33053 87-0425514
---------------------------- ---------------------- ----------------------
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification Number)
11100 Wayzata Boulevard, Suite 111
Minnetonka, MN 55305
(Address of Principal Executive Offices, Zip Code)
Registrant's telephone number, including area code: (952) 541-0455
ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS
As described in the Registrant's Current Report on Form 8-K filed with the
Securities and Exchange Commission on June 22, 2004 (the "Initial 8-K"),
FastFunds Financial Corporation ("FFFC") is a holding company operating through
its wholly-owned subsidiary Chex Services, Inc. ("Chex", or the "Company"). As
discussed below, FFFC was previously organized as Seven Ventures, Inc. ("SVI").
Effective June 7, 2004, a wholly-owned subsidiary of SVI merged with and into
Chex with the result that Chex became SVI's wholly-owned operating subsidiary.
In ther merger transaction, Equitex, Inc., a publicly-traded SEC registrant
incorporated in Delaware, ("Equitex") exchanged 100% of its ownership of Chex
for 7,700,000 shares of SVI common stock, representing 93% of SVI's outstanding
common stock.
In addition, Equitex received warrants to purchase 800,000 shares of SVI common
stock at an exercise price of $0.10 per share, expiring five years from the date
of closing. In connection with the merger transaction, a bridge loan was
consummated with an international merchant bank, whereby SVI received $400,000
through the issuance of a convertible promissory note. The promissory note is
convertible into 4,000,000 shares of SVI common stock upon the occurrence of
certain future events. On June 29, 2004, SVI changed its name to FastFunds
Financial Corporation.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
Pursuant to paragraph (a) (4) under Item 7 of Form 8-K, the attached financial
statements were omitted from disclosure contained in the Initial 8-K. Attached
hereto are the audited consolidated financial statements of Chex Services, Inc.
for the years ended December 31, 2003 and 2002.
(b) PRO-FORMA FINANCIAL STATEMENTS
Except as set forth in the paragraph below relating to pro forma per-share
information, a pro-forma statement of operations of FastFunds Financial
Corporation for the year ended December 31, 2003 is not presented, as pro-forma
financial information for the period would be virtually identical to the
historical statement of operations of Chex Services, Inc. for the period.
Pro forma (loss) income per share for the years ended December 31, 2003 and 2002
(considering the retroactive restatement to reflect the new capital structure as
a result of the reverse acquisition) would be $(0.07) and $0.10 per share,
respectively; the pro forma weighted average number of common shares outstanding
would be 7,700,000 for each period.
Pro forma financial information as of and for the six months ended June 30, 2004
is not presented as the information required is included in FastFunds Financial
Corporation's June 30, 2004, Form 10-Q filed on August 23, 2004, which is
incorporated by reference herein.
(c) EXHIBITS
Exhibit Number Exhibit
-------------- -------
99.1 FastFunds Financial Corporation Quarterly Report on Form
10-Q as of and for the six months ended June 30, 2004.
Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
FASTFUNDS FINANCIAL CORPORATION
Date: September 14, 2004 By: /s/ Ijaz Anwar
------------------ ------------------------
Ijaz Anwar
Chief Financial Officer
CHEX SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
CHEX SERVICES, INC. AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 2003 AND 2002
Page
----
Report of Independent Registered Public Accounting Firm 1
Consolidated financial statements:
Consolidated balance sheets 2
Consolidated statements of operations 3
Consolidated statements of stockholder's equity 4
Consolidated statements of cash flows 5-6
Notes to consolidated financial statements 7-29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Chex Services, Inc.
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Chex Services,
Inc. and subsidiary as of December 31, 2003 and 2002, and the related
consolidated statements of operations, stockholder's equity and cash flows for
each of the years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Chex Services, Inc.
and subsidiary as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
April 13, 2004, except for Note 1, as
to which the date is June 14, 2004
1
CHEX SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
2003 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,606,602 $ 8,902,910
Accounts receivable 2,483,698 2,955,409
Prepaid amounts on casino contracts (Note 7) 182,498 189,717
Current portion of notes and interest receivable, including
related parties of $8,700 (2003) and $10,101 (2002) (Note 3) 58,200 10,101
Deferred tax asset (Note 9) 85,000 85,000
Other current assets 117,054 149,044
------------ ------------
Total current assets 10,533,052 12,292,181
------------ ------------
Notes and interest receivable, including related parties of $773,344
(2003) and $621,232 (2002), net of current portion (Note 3) 1,576,117 1,227,823
Other receivables, related parties (Note 8) 219,409 102,331
Property and equipment, net (Note 4) 1,171,856 1,113,814
Deferred tax asset (Note 9) 388,000 450,000
Intangible and other assets, net (Note 5) 3,328,908 4,068,908
Goodwill (Note 5) 5,636,000 5,636,000
------------ ------------
12,320,290 12,598,876
------------ ------------
$ 22,853,342 $ 24,891,057
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Bank overdraft (Note 6) $ 2,497,766
Accounts payable, including related party payable of $200,000
at December 31, 2002 207,078 $ 543,195
Accrued interest and other 269,676 386,792
Accrued payroll and benefits 176,889 360,087
Accrued liabilities on casino contracts (Note 7) 587,099 622,361
Notes and loans payable (Note 6) 10,692,177 13,208,776
Current portion of long-term debt (Note 6) 201,727 251,727
------------ ------------
Total current liabilities 14,632,412 15,372,938
Long-term debt, net of current portion (Note 6) 37,243 240,629
------------ ------------
14,669,655 15,613,567
------------ ------------
Commitments and contingencies (Notes 6 and 7)
Stockholder's equity (Note 10):
Common stock, $.01 par value; 10,000,000 shares
authorized, 2,020,000 shares issued and outstanding 20,200 20,200
Additional paid-in capital 11,739,836 10,238,800
Notes, advances and interest receivable, affiliates (2,111,268) (566,385)
Investment in parent company (611,680) (866,714)
Stock subscription receivable (800,000)
(Accumulated deficit) retained earnings (53,401) 451,589
------------ ------------
Total stockholder's equity 8,183,687 9,277,490
------------ ------------
$ 22,853,342 $ 24,891,057
============ ============
See notes to consolidated financial statements. 2
CHEX SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
------------ ------------
Fee revenue $ 18,100,788 $ 19,580,399
------------ ------------
Location expenses:
Salaries and benefits 4,113,667 4,543,489
Returned checks 495,499 848,414
Fees to casinos 6,300,398 6,189,730
Other 2,164,453 2,111,445
------------ ------------
Total location expenses 13,074,017 13,693,078
------------ ------------
Location gross margin 5,026,771 5,887,321
------------ ------------
Corporate operating expenses 3,415,219 2,696,612
Amortization of intangible assets (Note 5) 740,000 876,755
Provision for (recovery of) losses on related party note receivable (Note 3) (157,800) 61,100
Discount on note receivable, other (Note 3) 256,316
------------ ------------
4,253,735 3,634,467
------------ ------------
Income from operations 773,036 2,252,854
------------ ------------
Other income (expense):
Interest expense (1,312,560) (1,529,438)
Interest income 221,534 118,049
------------ ------------
Total other expense (1,091,026) (1,411,389)
------------ ------------
(Loss) income before income taxes (317,990) 841,465
Deferred tax expense (Note 9) (62,000)
Income tax expense (Note 9) (125,000) (55,000)
------------ ------------
Net (loss) income $ (504,990) $ 786,465
============ ============
See notes to consolidated financial statements. 3
CHEX SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 2003 AND 2002
Notes,
advances
and (Accumulated
Common stock Additional Stock Investment interest deficit) Total
------------------- paid-in subscription in parent receivable, retained stockholder's
Shares Amount capital receivable company affiliates earnings equity
--------- -------- ----------- ------------ ---------- ----------- ---------- -------------
Balances, January 1, 2002 2,020,000 $ 20,200 $10,238,800 $ (334,876) $ 9,924,124
Investment in parent
company $ (866,714) (866,714)
Increase in notes, advances
and interest receivable,
affiliates $ (566,385) (566,385)
Net income 786,465 786,465
--------- -------- ----------- ------------ ---------- ----------- ---------- -------------
Balances, December 31, 2002 2,020,000 20,200 10,238,800 (866,714) (566,385) 451,589 9,277,490
Receipt of parent company
common stock in exchange
for dividends payable (8,884) (8,884)
Sales of parent company
common stock 20,440 115,968 136,408
Contribution of capital
from parent company for
allocated expenses and
reduction of income tax
payable 925,000 925,000
Purchases of parent
company common stock (312,050) (312,050)
Sale of parent company
common stock for cash
and note receivable 555,596 $ (800,000) 460,000 215,596
Increase in notes, advances
and interest receivable,
affiliates (1,544,883) (1,544,883)
Net loss (504,990) (504,990)
--------- -------- ----------- ------------ ---------- ----------- ---------- -------------
Balances, December 31, 2003 2,020,000 $ 20,200 $11,739,836 $ (800,000) $ (611,680) $(2,111,268) $ (53,401) $ 8,183,687
========= ======== =========== ============ ========== =========== ========== =============
See notes to consolidated financial statements. 4
CHEX SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
----------- -----------
Cash flows from operating activities:
Net (loss) income $ (504,990) $ 786,465
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 1,093,480 1,151,838
(Recovery of) provision for losses (157,800) 61,100
Discount on note receivable 256,316
Allocated expenses from parent 390,000
Deferred income taxes 62,000 (535,000)
Decrease (increase) in assets:
Accounts receivable 471,711 1,183,246
Interest and other receivables, related parties (190,072) 308,411
Prepaid amounts on casino contracts 7,219 152,295
Other current assets 31,990 (34,660)
(Decrease) increase in liabilities:
Accounts payable (336,117) 64,812
Accrued interest and other (117,116) 41,438
Accrued payroll and benefits (183,198) 49,995
Accrued liabilities on casino contracts (35,262) 104,556
----------- -----------
Net cash provided by operating activities 788,161 3,334,496
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (411,522) (428,375)
Repayment on notes receivable 380,517 233,852
Advances on notes receivable (811,316) (186,160)
----------- -----------
Net cash used in investing activities (842,321) (380,683)
----------- -----------
Cash flows from financing activities:
Increase in bank overdraft 2,497,766
Net repayments on line of credit (1,000,000) (2,000)
Borrowings on notes and loans payable 1,825,000 1,962,277
Repayments on notes and loans payable (3,341,599) (2,033,461)
Repayments of long-term debt (253,386) (198,364)
Increase in notes, advances and interest receivable, affiliates (1,009,883) (661,385)
Purchase of parent company common stock (312,050) (803,900)
Proceeds from sale of parent common stock 352,004
----------- -----------
Net cash used in financing activities (1,242,148) (1,736,833)
----------- -----------
Continued 5
CHEX SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
----------- -----------
(Decrease) increase in cash and cash equivalents (1,296,308) 1,216,980
Cash and cash equivalents, beginning 8,902,910 7,685,930
----------- -----------
Cash and cash equivalents, ending $ 7,606,602 $ 8,902,910
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,376,324 $ 1,500,888
=========== ===========
Cash paid for income taxes $ 190,000 $ 10,000
=========== ===========
Supplemental disclosure of non-cash investing and financing activities:
Contribution of capital from parent company for reduction of income tax payable $ 535,000
===========
Sale of parent company common stock for note receivable $ 800,000
===========
Receipt of parent company common stock in exchange for dividends payable $ 8,884
===========
Reduction in related party note receivable and recognition of accrual to related
party in consideration for receivable from parent company:
Decrease in note receivable, related party $ 300,000
Increase in note payable, related party 200,000
-----------
Receivable from parent company $ 500,000
===========
Note receivable offset against note payable $ 200,000
===========
Conversion of note payable and accrued interest to common stock of
parent company $ 62,814
===========
Capital lease obligations $ 157,000
===========
See notes to consolidated financial statements. 6
CHEX SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
1. ORGANIZATION AND BASIS OF PRESENTATION, RECENT EVENTS AND MANAGEMENT'S
PLANS:
ORGANIZATION:
Chex Services, Inc. ("Chex", or the "Company"), a Minnesota corporation,
provides financial services, primarily check cashing, automated teller
machine (ATM) access, and credit card advances to customers primarily at
Native American owned casinos and gaming establishments. As of December
31, 2003 and 2002, the Company operates at 44 and 49 establishments,
respectively. As of December 31, 2003, the Company operated in gaming
establishments located in Connecticut, Illinois, Michigan, Minnesota,
Nebraska, New Mexico, North Dakota, South Dakota and Wisconsin.
As discussed below, effective December 1, 2001, Equitex, Inc. ("Equitex",
or the "Parent"), a publicly-traded Delaware corporation, acquired 100%
of the Company's outstanding common stock in a transaction accounted for
as a purchase. The Company is wholly owned by Equitex through December
31, 2003.
In September 2002, the Company formed Collection Solutions, Inc.
("Collection Solutions"), a wholly owned Minnesota corporation, formed
for the purpose of providing collection services for the Company,
customers of the Company, and other entities both within and outside the
gaming industry. Collection Solutions is licensed as a collection agency
in seven states.
ACQUISITION OF THE COMPANY BY EQUITEX AND BASIS OF PRESENTATION:
Effective December 1, 2001, Equitex acquired all of the Company's issued
and outstanding common stock in exchange for 1,992,001 shares of Equitex
common stock valued at $10,119,000 ($5.08 per share). In connection with
the acquisition, and in accordance with Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 54, APPLICATION
OF "PUSH-DOWN" BASIS OF ACCOUNTING IN FINANCIAL STATEMENTS OF
SUBSIDIARIES ACQUIRED BY PURCHASE, the accounts of the successor company
have been adjusted using the push-down basis of accounting to recognize
the allocation of the consideration exchanged for the Company's common
stock to the respective net assets. An allocation of the purchase price
was made to major categories of assets and liabilities, of which
$5,636,000 was allocated to goodwill and $5,000,000 was allocated to
identifiable intangible assets (Note 5).
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, Collection Solutions. All
significant intercompany accounts and transactions have been eliminated
in consolidation.
7
CHEX SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
1. ORGANIZATION AND BASIS OF PRESENTATION, RECENT EVENTS AND MANAGEMENT'S
PLANS (CONTINUED):
RECENT EVENTS AND MANAGEMENT'S PLANS:
RECENT EVENTS:
In November 2003, Equitex and the Company executed a Stock Purchase
Agreement (the "SPA") with iGames Entertainment, Inc. ("iGames"), a
publicly-traded Nevada Corporation. Pursuant to the SPA, Chex was to have
been sold to iGames by Equitex in exchange for 62.5% of iGames' common
stock and other consideration. In March 2004, Equitex and the Company
notified iGames that they were terminating the SPA due to various
material unrelated adverse events that impacted the business of iGames.
In addition, Equitex and the Company declared a default under a term loan
made by Chex to iGames in January 2004 (Note 7).
In January 2004, Chex received a termination notice from Native American
Cash Systems Florida, Inc. ("NACSF"), terminating Chex's December 2001
contract to provide cash access services at five Seminole Tribe casino
properties located throughout Florida. The loss of this contract, which
provided approximately $4,000,000 of Chex's revenue for the year ended
December 31, 2003, resulted in Chex immediately implementing cost savings
measures.
Effective June 7, 2004, Equitex and the Company executed an Agreement and
Plan of Merger (the "Merger Agreement") with Seven Ventures, Inc. ("SVI")
to merge Chex into a wholly-owned subsidiary of SVI (the "Merger
Subsidiary"), whereby the separate corporate existence of the Merger
Subsidiary ceased. Under the terms of the Merger Agreement, Equitex
exchanged 100% of its equity ownership in Chex for 7,700,000 shares of
SVI, representing 93% of SVI's outstanding common stock. In addition,
Equitex received warrants to purchase 800,000 shares of SVI common stock
at an exercise price of $0.10 per share, expiring five years from the
date of closing. As a result, Chex became a wholly-owned subsidiary of
SVI, a publicly-traded shell company. In addition, under the terms of the
Merger Agreement, a bridge loan was consummated with an international
merchant bank, whereby SVI received $400,000 through the issuance of a
convertible promissory note. The promissory note is convertible into
4,000,000 shares ($0.10 per share) of SVI common stock upon the
occurrence of certain future events and bears interest at 5% per annum.
Unless converted, any outstanding balance of principal and interest is
due on April 14, 2007. Upon the execution of an advisory agreement
between Chex and the lender, 25% or $100,000 of the notes are to convert
into 1,000,000 shares of SVI common stock. An additional 25% or $100,000
shall be converted upon an independent director being added to the SVI
Board and delivery to SVI of a list of potential acquisition candidates.
The remaining 50% or $200,000 shall convert to 2,000,000 shares of SVI
common stock upon SVI's execution of a definitive merger acquisition or
agreement of an entity having not less than $10,000,000 in revenue. The
conversion of the note is deemed to be beneficial as the note converts to
common stock of SVI at $0.10 per share (the estimated fair value of SVI's
stock was determined to be $1.00 per share on the date of closing). The
intrinsic value of the beneficial conversion feature is limited to the
amount of the proceeds allocated to the convertible note; therefore the
value of the convertible feature was determined to be $400,000. As the
conversion feature is contingent upon the occurrence of future events, it
will be recorded in earnings when converted.
8
CHEX SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
1. ORGANIZATION AND BASIS OF PRESENTATION, RECENT EVENTS AND MANAGEMENT'S
PLANS (CONTINUED):
MANAGEMENT'S PLANS:
The Company has developed plans and strategies to address its capital and
liquidity needs for the next twelve-month period based on the events
discussed above. Management believes that cash flows from operations will
continue to provide the Company's primary source of operating capital. In
March 2004, Equitex closed on a $5,000,000 convertible promissory note,
which provided the Company with additional working capital. Management
believes that the Company may be able to issue additional debt
instruments in order to raise additional capital if necessary. The
Company also evaluates, on an ongoing basis, potential business
acquisition/restructuring opportunities that become available from time
to time, which management considers in relation to its corporate plans
and strategies.
STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation, defines a fair-value based method of
accounting for stock-based employee compensation plans and transactions
in which an entity issues its equity instruments to acquire goods or
services from non-employees, and encourages but does not require
companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to
account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and guidance provided in SFAS Interpretation
("FIN") No. 44, Accounting for Certain Transactions Involving Stock
Compensation. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.
In May 2003, Equitex issued options to purchase 760,000 shares of its
common stock to employees of Chex for services performed. The options
were issued with an exercise price of $0.68 per share (the market value
of the common stock at the date of the grant).
Had compensation cost for stock-based awards issued to employees been
determined based on the fair values at the grant dates for awards under
the plans consistent with the fair-value based method of accounting
prescribed by SFAS No. 123, the Company's results would have been changed
to the pro-forma amounts indicated below:
9
CHEX SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
1. ORGANIZATION AND BASIS OF PRESENTATION, RECENT EVENTS AND MANAGEMENT'S
PLANS (CONTINUED):
STOCK-BASED COMPENSATION (CONTINUED):
Years ended December 31,
2003 2002
---------- ----------
Net (loss) income $ (504,990) $ 786,465
ADD: Stock-based employee compensation
expense included in reported net income, net
of related tax effects
DEDUCT: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (214,000)
---------- ----------
Pro-forma net (loss) income $ (718,990) $ 786,465
========== ==========
Pro forma (loss) income per share for each of the years ended December 31,
2003 and 2002 (considering the retroactive restatement to reflect the new
capital structure as a result of the reverse acquisition) would be
$(0.09) and $0.10 per share; the pro forma weighted average number of
common shares outstanding would be 7,700,000 for each period. The fair
value of each option granted was estimated on the date of the grant using
the Black-Scholes option pricing model with the following assumptions
used for the grants in the year ended December 31, 2003: dividend yield
of zero; expected volatility of 74%; risk-free interest rate of 1.15%;
and expected term of 2.5 years.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS AND PRESENTATION OF CASH FLOWS:
For the purpose of the statements of cash flows, the Company considers all
highly-liquid investments with a maturity of three-months or less at the
time of purchase to be cash equivalents.
The Company maintains cash in bank accounts, which, at times, may exceed
federally insured limits. At December 31, 2003 and 2002, the Company had
deposits in excess of federally insured amounts aggregating $483,186 and
$2,563,787, respectively, at various financial institutions. The Company
believes it has its cash deposits at high quality financial institutions.
In addition, the Company maintains a significant amount of cash at each
of the casinos. Management believes the Company has controls in place to
safeguard these on-hand amounts, and that no significant credit risk
exists with respect to cash.
10
CHEX SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
RECEIVABLES:
ACCOUNTS RECEIVABLE:
Accounts receivable arise primarily from credit card and ATM advances
provided at casino locations. Concentrations of credit risk related to
credit card and ATM advances are limited to the credit card and ATM
processors who remit the cash advanced back to the Company along with the
Company's allocable share of fees earned. The Company believes these
processors are financially stable and no significant credit risk exists
with respect to accounts receivable arising from ATM and credit card
advances. No allowance was considered necessary on these receivables at
December 31, 2003 and 2002.
NOTES RECEIVABLE:
The Company has made advances to various third parties, as well as
officers, affiliates and employees of the Company under various loan
agreements (Note 3). The advances made to officers were made prior to the
acquisition of Chex by Equitex in December 2001. Typically, the loans are
unsecured or are collateralized by Equitex common stock, including
registered and unregistered shares. The Company's allowance for doubtful
notes receivable is adjusted based on the value of the underlying
collateral. Due to the level of risk associated with this common stock,
it is reasonably possible that changes in the value of the common stock
will occur in the near term and that such changes could materially affect
the value of the collateral underlying the notes. After all attempts to
collect a note receivable have failed, the note receivable is written-off
against the allowance. The allowance for doubtful notes receivable was
$1,053,300 and $1,211,100 as of December 31, 2003 and 2002, respectively.
REVENUE RECOGNITION:
Revenue is recognized from financial services at the time the service is
provided.
Returned checks:
The Company charges operations for potential losses on returned checks in
the period in which the amounts are deemed uncollectible, generally when
such checks are returned. Recoveries on returned checks are credited to
operations in the period when the recovery is received.
In September 2003, checks totaling $606,316 from one customer were cashed
by the Company and were returned as insufficient funds. In March 2004,
the Company received a non-interest bearing promissory note from this
customer. Based on an imputed interest rate of 12%, a discount of
$256,316 was applied to this note which was charged to operating expense
during the fourth quarter of 2003. The Company believes the remaining
balance of $350,000 is collectible, based on collateral pledged in
connection with the note (Note 6).
11
CHEX SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair value of financial instruments has been determined by
the Company using available market information and appropriate
methodologies; however, considerable judgment is required in interpreting
information necessary to develop these estimates. Accordingly, the
Company's estimates of fair values are not necessarily indicative of the
amounts that the Company could realize in a current market exchange.
The fair values of cash and cash equivalents, current non-related party
receivables, and accounts payable approximate their carrying amounts
because of the short maturities of these instruments.
The fair values of notes receivable from non-related parties approximate
their carrying values because of the short maturities of these
instruments. The fair values of receivables from related parties are not
practicable to estimate, based upon the related party nature of the
underlying transactions.
The fair values of notes and loans payable to non-related parties
approximate their carrying values because of the short maturities of
these instruments. The fair values of long-term debt payable to banks
approximates carrying values based on market rates currently available to
the Company.
PROPERTY AND EQUIPMENT:
Property and equipment is stated at cost, and depreciation is provided by
use of accelerated and straight-line methods over the estimated useful
lives of the assets. The cost of leasehold improvements is depreciated
over the estimated useful lives of the assets or the length of the
respective leases, whichever period is shorter. The estimated useful
lives of property, equipment and leaseholds are as follows:
Office equipment and furniture 3 to 7 years
Computer hardware and software 3 to 5 years
Leasehold improvements 7 years
Expenditures for additions and improvements are capitalized, while repairs
and maintenance are expensed as incurred.
INVESTMENT IN EQUITEX COMMON STOCK:
At December 31, 2003 and 2002, the Company has an investment in common
stock of its parent company, Equitex. The Company's investment in Equitex
common stock is accounted for under the cost method and is adjusted only
for other-than-temporary declines in fair value.
12
CHEX SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INVESTMENT IN EQUITEX COMMON STOCK (CONTINUED):
At December 31, 2003 and 2002, the Company has presented its investment in
Equitex common stock as a component of stockholder's equity in a manner
similar to that of treasury stock (Note 10). This presentation is based
upon the Company's consideration of the provisions of Emerging Issues
Task Force ("EITF") Issue No. 98-2, ACCOUNTING BY A SUBSIDIARY OR JOINT
VENTURE FOR AN INVESTMENT IN THE STOCK OF ITS PARENT COMPANY OR JOINT
VENTURE PARTNER. This EITF discusses that in the separate financial
statements of a subsidiary, an investment in the common stock of a parent
whose only significant asset is its investment in the subsidiary is
essentially the same as stock of the subsidiary and should be classified
as a reduction to stockholder's equity.
GOODWILL, INTANGIBLE ASSETS AND AMORTIZATION:
In connection with Equitex's acquisition of Chex and in accordance with SAB
No. 54, goodwill and intangible assets have been "pushed down" to Chex.
Goodwill represents the excess of the purchase price paid by Equitex over
the estimated fair values of the Company's net tangible and identifiable
intangible assets acquired. As discussed below, goodwill and intangible
assets with indefinite lives are not amortized pursuant to recently
issued accounting standards. Identifiable intangible assets with finite
lives are being amortized on a straight-line basis over three to seven
years (Note 5).
The Company applies the provisions of SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS. SFAS No. 142 no longer allows the amortization of
goodwill and intangible assets with indefinite useful lives. SFAS No. 142
requires that these assets be reviewed for impairment at least annually,
or whenever there is an indication of impairment. Intangible assets with
finite lives continue to be amortized over their estimated useful lives
and are reviewed for impairment in accordance with SFAS No. 144,
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, discussed
below.
SFAS No. 142, BUSINESS COMBINATIONS, requires companies to allocate
goodwill to identifiable reporting units, which are then tested for
impairment using a two-step process. The first step requires comparing
the fair value of each reporting unit with its carrying amount, including
goodwill. If the fair value exceeds the carrying amount, goodwill of the
reporting unit is considered not impaired, and the second step of the
impairment test is not necessary. If the fair value of the reporting unit
does not exceed the carrying amount, the second step of the goodwill
impairment test must be performed to measure the amount of impairment
loss, if any. This step requires the allocation of the fair value of the
reporting unit to the reporting unit's assets and liabilities (including
any unrecognized intangible assets) as if the reporting unit had been
acquired in a business combination and the fair value of the reporting
unit was the price paid to acquire the reporting unit. The excess of the
fair value of the reporting unit over its re-evaluated net assets would
be the new basis for the reporting unit's goodwill, and any necessary
goodwill write down to this new value would be recognized as an
impairment expense. A goodwill impairment test is performed annually in
the fourth quarter or upon significant changes in the Company's business
environment.
13
CHEX SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company applies the provisions of SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. Management assesses the carrying value of long-lived assets for
impairment when circumstances indicate such amounts may not be
recoverable from future operations. Generally, assets to be held and used
are considered impaired if the sum of the expected undiscounted future
cash flows is less than the carrying amount of the asset. At December 31,
2003 and 2002, management believes no impairment has occurred.
ADVERTISING:
Advertising costs are expensed as incurred. Total advertising costs were
approximately $386,000 and $241,000 for the years ended December 31, 2003
and 2002, respectively.
INCOME TAXES:
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes. Deferred taxes represent the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes.
COMPREHENSIVE INCOME:
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, establishes requirements for
disclosure of comprehensive income. During the years ended December 31,
2003 and 2002, the Company did not have any components of comprehensive
income to report.
USE OF ESTIMATES:
Preparation of the consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the balance sheets and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
14
CHEX SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
NEW ACCOUNTING PRONOUNCEMENTS:
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. SFAS
No.150 establishes new standards on how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities
and equity. The provisions of SFAS No. 150 are generally effective for
all financial instruments entered into or modified after May 31, 2003,
except for those provisions relating to mandatorily redeemable
non-controlling interests, which have been deferred. The adoption of SFAS
No. 150 did not have a material impact on the financial position or
results operation of the Company. If the deferred provisions of SFAS No.
150 are finalized in their current form, management does not expect
adoption to have a material effect on the financial position or results
of operation of the Company.
In January 2003, the FASB issued SFAS Interpretation No. 46, CONSOLIDATION
OF VARIABLE INTEREST ENTITIES ("FIN 46"), which changes the criteria by
which one company includes another entity in its consolidated financial
statements. FIN 46 requires a variable interest entity ("VIE") to be
consolidated by a company if that company is subject to a majority of the
entity's residual returns or both. In December 2003, the FASB approved a
partial deferral of FIN 46 along with various other amendments. The
effective date for this interpretation has been extended until the first
fiscal period ending after December 15, 2004. However, prior to the
required application of this interpretation, a public entity that is not
a small business issuer shall apply this interpretation to those entities
that are considered to be special purpose entities no later than as of
the end of the first reporting period after December 15, 2003. As the
Company does not currently have an interest in a VIE or special purpose
entity, management does not expect that the adoption of FIN 46 will have
an effect on the financial condition or results of operations of the
Company.
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION TRANSITION AND DISCLOSURE. This statement amends SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, and establishes two
alternative methods of transition from the intrinsic value method to the
fair value method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 requires prominent disclosure about the effects on
reported net income or loss and requires disclosure for these effects in
interim financial information. The provisions for the alternative
transition methods are effective for fiscal years ending after December
15, 2002, and the amended disclosure requirements are effective for
interim periods beginning after December 15, 2002. The Company adopted
the disclosure only provisions of SFAS No. 148 and plans to continue
accounting for stock-based compensation under APB 25.
15
CHEX SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED):
In November 2002, the FASB issued SFAS Interpretation No. 45 ("FIN 45"),
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES,
INCLUDING INDIRECT GUARANTEES AND INDEBTEDNESS OF OTHERS. FIN 45
elaborates on the disclosures to be made by the guarantor in its interim
and annual financial statements about its obligations under certain
guarantees that it has issued. It also requires that a guarantor
recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of this interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, while the provisions of the disclosure requirements
are effective for financial statements of interim or annual reports
ending after December 15, 2002. The adoption of FIN 45 did not have an
effect on the financial condition or results of operations of the
Company, as the Company has not issued any such guarantees.
RECLASSIFICATIONS:
Certain amounts reported in the 2002 consolidated financial statements have
been reclassified to conform to the 2003 presentation.
3. NOTES AND INTEREST RECEIVABLE:
Notes receivable at December 31, 2003 and 2002, consist of the following:
2003 2002
------------ ------------
Notes receivable from estate of a deceased
officer; interest at 6%; principal and
unpaid interest due in November 2004;
collateralized by unregistered shares of
Equitex common stock; a valuation allowance
of $1,053,300 and $1,211,100 has been
recorded against this receivable at
December 31, 2003 and 2002, respectively
[B] $ 1,484,691 $ 1,484,691
Notes receivable from an officer of Chex;
interest at interest rates ranging from
5.75% to 6%; due on demand; collateralized
by unregistered shares of Equitex common
stock [A] 485,936 585,936
16
CHEX SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
3. NOTES AND INTEREST RECEIVABLE (CONTINUED):
2003 2002
------------ ------------
Note receivable from an individual; interest
at 6%, unsecured and due on demand [A] 45,000 45,000
Note receivable from a customer of Chex;
non-interest bearing; principal balance of
$606,316, net of $256,316 discount at
December 31, 2003, based on imputed
interest rate of 12%; discount charged to
operating expense in 2003; monthly payments
of $4,500 beginning May 2004 through
December 2010, at which time the balance is
due in full; collateralized by mortgages on
three parcels of real property in Florida
[B] 350,000
Notes receivable from Equitex 2000, Inc., an
affiliate of Equitex; interest at 10%;
unsecured; due on demand [A] 205,000
Notes receivable from various Company
employees; non-interest bearing, unsecured
and due on demand, or in weekly deductions
from payroll 8,700 10,101
Notes receivable from an Equitex shareholder;
interest at 12%; unsecured, repaid in July
2003 288,000
------------ ------------
2,579,327 2,413,728
Interest receivable [A] 108,290 35,296
Less current maturities (58,200) (10,101)
------------ ------------
Notes receivable, net of current portion,
before valuation allowance 2,629,417 2,438,923
Less valuation allowance (1,053,300) (1,211,100)
------------ ------------
Notes receivable, long-term $ 1,576,117 $ 1,227,823
============ ============
[A] Demand notes receivable and interest receivable aggregating to
$592,002 and $666,232, respectively, at December 31, 2003 and 2002
have been classified as long-term assets, as it is management's
intention not to demand payment within the next year.
[B] The Company is no longer accruing interest on these loans due to
uncertainty as to repayment.
17
CHEX SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
4. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 2003 and 2002 are as follows:
2003 2002
------------ ------------
Furniture and equipment $ 2,402,404 $ 2,001,155
Computer hardware and software 138,661 128,388
Leasehold improvements 52,765 52,765
------------ ------------
2,593,830 2,182,308
Less accumulated depreciation
and amortization (1,421,974) (1,068,494)
------------ ------------
$ 1,171,856 $ 1,113,814
============ ============
Depreciation expense was $353,766 and $275,083, respectively, for the years
ended December 31, 2003 and 2002.
5. GOODWILL, INTANGIBLE AND OTHER ASSETS:
At December 31, 2003 and 2002, goodwill was $5,636,000, none of which is
deductible for tax purposes based on the tax structuring of the Chex
acquisition. Intangible and other assets are as follows:
2003 2002
---------------------------------- --------------------------------
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
amount amortization amount amount amortization amount
---------- ---------- ---------- ---------- ---------- ----------
Casino contracts $4,300,000 $1,349,440 $2,950,560 $4,300,000 $ 749,440 $3,550,560
Non-compete
agreements 350,000 163,300 186,700 350,000 99,300 250,700
Customer lists 250,000 178,600 71,400 250,000 102,600 147,400
Trade names 100,000 100,000 100,000 100,000
---------- ---------- ---------- ---------- ---------- ----------
Total intangible
assets 5,000,000 1,691,340 3,308,660 5,000,000 951,340 4,048,660
Other assets 20,248 20,248 20,248 20,248
---------- ---------- ---------- ---------- ---------- ----------
$5,020,248 $1,691,340 $3,328,908 $5,020,248 $ 951,340 $4,068,908
========== ========== ========== ========== ========== ==========
The carrying amounts of intangible assets at December 31, 2003 and 2002
represent Equitex's allocation of the Chex purchase price, which is based
upon the results of an independent valuation completed during the fourth
quarter of 2002.
18
CHEX SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
5. GOODWILL, INTANGIBLE AND OTHER ASSETS (CONTINUED):
Casino contracts represent the Company's renewable agreements with Native
American owned gaming establishments to operate in those establishments
for initial terms of one to five years. Casino contracts have
historically been renewed by gaming establishments and are amortized
using the straight-line method over seven years. The non-compete
agreements with members of management are amortized using the
straight-line method over five years. Customer lists relate to core
customers that rely on the use of the Company's facilities and are
amortized using the straight-line method over five years. Trade names
consist of the Chex Services and Fast Funds names, which are believed to
be readily identified and known in the marketplace by customers. Trade
names are considered to have an indefinite life and are therefore not
amortized. Other assets primarily represent long-term deposits.
Aggregate amortization expense was $740,000 and $876,755 for the years
ended December 31, 2003 and 2002, respectively. Amortization expense
recorded prior to the final allocation was based on the preliminary
allocation. Estimated amortization expense for each of the five
succeeding years is as follows:
Year Amount
------------ ------------
2004 $ 735,000
2005 664,000
2006 659,000
2007 600,000
2008 551,000
6. NOTES PAYABLE AND LONG-TERM DEBT:
LINE OF CREDIT, NOTES AND LOANS PAYABLE:
Notes payable and long-term debt at December 31, 2003 and 2002, consist of
the following:
2003 2002
------------ ------------
Notes payable to individuals; interest rates
ranging from 9% to 12%; interest and
principal payable monthly and/or quarterly;
the notes are unsecured and mature on
various dates through December 2004; the
notes are subject to repayment with ninety
days notice at the option of the holder [A] $ 10,692,177 $ 11,658,776
19
CHEX SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
6. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED):
LINE OF CREDIT, NOTES AND LOANS PAYABLE (CONTINUED):
2003 2002
------------ ------------
Line of credit, maximum availability of $1
million through November 2003; subject to
various restrictive covenants; interest
payable monthly at prime rate plus .5%
(4.75% at December 31, 2002); borrowings
are collateralized by substantially all
assets of the Company and are guaranteed by
a shareholder of the Company [B] 1,000,000
Notes payable other; interest at 9%; repaid
at various dates throughout 2003 550,000
------------ ------------
$ 10,692,177 $ 13,208,776
============ ============
[A] Subsequent to December 31, 2003, the Company repaid $645,000 of these
notes payable.
[B] At December 31, 2003, the Company has a bank overdraft of $2,497,766
outstanding with the bank. Interest on the overdraft was charged at
4.5%. In March 2004, Chex paid the amount due on the overdraft with
funds received by the Company in a $5 million debt refinancing, as
discussed below.
In March 2004, Equitex closed on $5,000,000 of convertible promissory notes
(the "Notes") with two financial institutions (the "Lenders"). The
proceeds from the Notes were forwarded to Chex. The Notes carry a stated
interest rate of 7% per annum and have a 45-month term. Interest only
payments are due April 2004 through June 2004. Beginning in July 2004,
principal and interest payments will amortize over the remaining 42-month
period. The Notes are senior to all other debt of the Company and are
collateralized by all assets of Chex as defined in the security
agreement. In connection with the closing, Equitex entered into a
$5,000,000 secured promissory note (the "Chex Note") agreement with Chex.
Interest and payment terms of the Chex Note are identical to those set
forth in the Notes.
The Notes are convertible into common stock of Equitex. Equitex has the
right to make any monthly payment of principal and interest in shares of
its common stock. The common stock is to be issued based on 85% of the
average bid price for 20 trading days prior to the payment due date. Any
beneficial conversion features will be recorded in earnings of the
Company (allocated by Equitex) at the time of conversion, as the number
of shares the holder will receive is not known until the triggering event
occurs.
20
CHEX SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
6. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED):
LINE OF CREDIT, NOTES AND LOANS PAYABLE (CONTINUED):
The Lenders also received warrants to acquire up to 800,000 shares of
Equitex's common stock These warrants were valued at $392,400 based upon
the Black-Scholes option-pricing model, and therefore $392,400 of the
total proceeds were allocated to the warrants, resulting in an imputed
interest rate of 7.5%. Equitex allocated the value of these warrants to
Chex; therefore, in March 2004 the Company reduced the carrying value of
the Notes for this amount and is amortizing the discount to interest
expense over the 45-month term of the Note.
In addition, in March 2004, warrants to acquire up to 300,000 shares of
Equitex's common stock were issued to an advisory firm in connection with
the transaction. These warrants were valued at $164,700 based upon the
Black-Scholes option-pricing model. In addition, in March 2004, the
Company paid cash of $320,000 for legal services and finders' fees in
connection with the transaction. Equitex allocated the value of these
warrants to Chex. The cash paid and the values of these warrants were
recorded as deferred loan costs in March 2004 and the Company is
amortizing these costs over the 45-month term of the Notes.
LONG-TERM DEBT:
2003 2002
------------ ------------
Note payable to a bank; interest at prime
plus .25% (4.25% and 4.5% at December 31,
2003 and 2002, respectively); interest
payable monthly and principal payable
quarterly; the note matures in June 2004;
the note is collateralized by substantially
all assets of the Company and is guaranteed
by an officer of the Company; subject to
various restrictive covenants $ 150,000 $ 350,000
Obligations under capital leases; imputed
interest rates ranging from 6.5% to 7%; due
at various dates through October 2005;
collateralized by equipment 88,970 142,356
------------ ------------
238,970 492,356
Less current portion (201,727) (251,727)
------------ ------------
Long-term debt, net of current portion $ 37,243 240,629
============ ============
Aggregate annual maturities of long-term debt are as follows:
Years ending
December 31, Amount
------------ -------------
2004 $ 201,727
2005 37,243
-------------
$ 238,970
=============
21
CHEX SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
7. COMMITMENTS AND CONTINGENCIES (CONTINUED):
OPERATING LEASES:
In April 2001, the Company entered into a non-cancelable operating lease to
lease its corporate facilities through March 2006. Pursuant to the lease,
the Company is required to pay its pro-rata share of taxes and operating
expenses.
In addition, the Company leases office equipment pursuant to a
non-cancelable lease obligation expiring in July 2005.
Future minimum lease payments due under non-cancelable operating leases as
of December 31, 2003, are as follows:
Years ending
December 31, Amount
------------ -------------
2004 $ 82,817
2005 78,811
2006 18,091
-------------
$ 179,719
=============
Rent expense was $142,892 and $139,754 for the years ended December 31,
2003 and 2002, respectively.
SALARY CONTINUATION PLAN:
The Company has a salary continuation plan for two of its employees.
Pursuant to the plan, these two individuals are guaranteed two years of
salary, which totals approximately $236,200 and $236,000 as of December
2003 and 2002, respectively, in the event that the Company is sold or
their employment is terminated.
EMPLOYMENT CONTRACTS:
The Company has entered into three-year employment agreements with seven of
its employees, which expire at various dates through April 2004. Pursuant
to the agreements, if terminated for other than an egregious act, the
employees are to continue to receive annual compensation, including a
guaranteed minimum bonus under one of the contracts, aggregating to
approximately $915,332 at December 31, 2003. The amounts are to be paid
in monthly installments over the duration of the original contract terms.
In 2002, the Company terminated one of its employees under an employment
agreement. In July 2002, the Company and the former employee entered into
a settlement agreement and mutual release, in which the Company paid the
former employee $65,000, which was charged to operating expense in 2002.
22
CHEX SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
7. COMMITMENTS AND CONTINGENCIES (CONTINUED):
CASINO CONTRACTS:
The Company operates at a number of Native American owned gaming
establishments under contracts requiring the Company to pay a rental fee
to operate at the respective gaming locations. Occasionally, these
agreements require the Company to prepay a negotiated amount of such
anticipated fees. Typically, the fees are earned by the gaming
establishment over the life of the contract based on one of the following
scenarios:
o A minimum amount as defined in the contract.
o A dollar amount, as defined by the contract, per transaction volume
processed by the Company.
o A percentage of the Company's profits at the respective location.
o The greater of the monthly amount, dollar amount per transaction volume
or percent of the Company's profits payable at the end of the contract
term.
As of December 31, 2003 and 2002, the Company has recorded $182,498 and
$189,717, respectively, of prepaid amounts on casino contracts and has
recorded $587,099 and $622,361, respectively, of accrued liabilities on
casino contracts. Total fee expense relating to the casino locations was
$6,300,398 and $6,189,730 during 2003 and 2002, respectively.
Pursuant to the contracts, the Native American owned casinos have not
waived their sovereign immunity.
EMPLOYEE BENEFIT PLAN:
In January 2003, the Company adopted a 401(k) retirement plan (the "Plan"),
which covers defined eligible employees of Chex. Eligible employees are
able to contribute a portion of their compensation to the Plan, subject
to an annual Internal Revenue Service deferral limit. Employee
contributions are 100% vested when made. Company contributions are
discretionary. During 2003, Chex made a matching contribution of 100% on
the first 3% of employee deferrals and 50% on employee deferrals between
3% and 5%. Contribution expense was approximately $88,000 for the year
ended December 31, 2003.
LITIGATION:
In April 2004, the Company and Equitex executed a settlement agreement with
Cash Systems, Inc. ("Cash Systems") pursuant to which the Company paid
Cash Systems $125,000 for expenses related to the terminated Agreement
and Plan of Merger ("APM"). As part of the settlement agreement, Cash
Systems paid Chex approximately $476,000 for commissions owed to Chex by
Cash Systems. Both the Company and Cash Systems agreed to mutually
release each other from further liability related to the APM and the
Seminole Tribe termination, however, the Company has retained the right
to legal action against NASCF, NACS and its President, for the wrongful
termination of the Seminole Tribe casino contracts.
23
CHEX SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
7. COMMITMENTS AND CONTINGENCIES (CONTINUED):
LITIGATION (CONTINUED):
In March 2004, Chex commenced a lawsuit in Hennepin County, Minnesota
demanding repayment of $2,000,000, accrued interest and other fees, due
from iGames under a term note made in January 2004. In addition, in March
2004, the Company commenced a lawsuit in Delaware state court (New Castle
county) relative to the termination of the Stock Purchase Agreement
("SPA"). In March 2004, iGames commenced a lawsuit in United States
District Court for the District of Delaware relative to both the
termination of the SPA and iGames' obligations under the term note, which
is the subject of Chex's lawsuit in Hennepin County, Minnesota. The
Company is confident that its claims in litigation will be upheld and
management believes that the claims made by iGames lack merit. The
Company intends to vigorously prosecute its claims and defend against
iGames' claims.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse impact
either individually or in the aggregate on consolidated results of
operations, financial position or cash flows of the Company.
8. OTHER RECEIVABLES, AFFILIATES:
During 2002, Chex made $102,331 of net advances to Denaris Corporation
("Denaris"), a majority-owned subsidiary of Equitex. During 2003, Chex
made additional net advances of $117,078, resulting in a receivable
balance of $219,409 as of December 31, 2003. These amounts have been
classified as other receivables, related party on the consolidated
balance sheets.
9. INCOME TAXES
The operations of the Company for periods subsequent to the acquisition of
the Company by Equitex are included in consolidated federal income tax
returns filed by Equitex. However, for financial reporting purposes, the
Company's provision for income taxes has been computed on the basis that
the Company files a separate income tax return. For periods subsequent to
the Equitex acquisition, the Company did not make any federal tax
payments. Rather, calculated federal tax liabilities owed by the Company
were recorded as a contribution of capital from Equitex through December
31, 2003.
24
CHEX SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
9. INCOME TAXES (CONTINUED):
Income tax expense (benefit), for the years ended December 31, 2003 and
2002, is as follows:
2003 2002
------------- ------------
Current:
Federal $ 87,000 $ 485,000
State 38,000 105,000
------------- ------------
125,000 590,000
------------- ------------
Deferred:
Federal 54,000 (175,000)
State 8,000 (45,000)
Valuation allowance - (315,000)
------------- ------------
62,000 (535,000)
------------- ------------
$ 187,000 $ 55,000
============= ============
The following is a summary of the Company's deferred tax assets at December
31, 2003 and 2002 (the Company has no deferred tax liabilities):
2003 2002
------------ ------------
Deferred tax assets (current):
Net operating loss carryforwards $ 85,000 $ 85,000
Deferred tax assets (long-term):
Allowance for loan losses 388,000 450,000
------------ ------------
Total deferred tax assets $ 473,000 $ 535,000
============ ============
25
CHEX SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
9. INCOME TAXES (CONTINUED):
A reconciliation between the expected tax expense (benefit) computed at the
federal income tax rate of 34% and the effective tax rate for the years
ended December 31, 2003 and 2002, respectively, are as follows:
2003 2002
----------- -----------
Statutory federal income tax rate 34% 34%
State taxes, net of federal income
tax 4% 4%
Effect of change in allowance
for loan losses 22% (31%)
----------- -----------
60% 7%
=========== ===========
At December 31, 2003 and 2002, the Company had net operating loss
carryforwards for federal income tax purposes of approximately $315,000,
expiring at various dates through 2023. The utilization of the
carryforwards is dependent upon the ability to generate sufficient
taxable income during the carryforward period. In addition, the
availability of these net operating loss carryforwards to offset future
taxable income may be significantly limited due to ownership changes as
defined in the Internal Revenue Code.
10. STOCKHOLDER'S EQUITY:
INVESTMENT IN PARENT COMPANY:
At December 31, 2003, the Company has an investment in common stock of
Equitex. At December 31, 2002, the Company has an investment in common
and preferred stock of Equitex. These investments are presented as a
component of stockholders' equity in a manner similar to that of treasury
stock. The following table summarizes the activity of this investment.
2003 2002
---------------------- ---------------------
Shares Cost Shares Cost
----------- --------- --------- ----------
Common stock:
Beginning balances 382,507 $ 216,714
Shares purchased 525,000 312,050 251,645 $ 153,900
Shares received upon
Equitex conversion of
preferred stock and
unpaid dividends 1,647,211 658,884
Shares received upon
conversion of note
and interest receivable 130,862 62,814
Shares sold (1,226,000) (575,968)
----------- --------- --------- ----------
Ending balances 1,328,718 611,680 382,507 216,714
----------- --------- --------- ----------
26
CHEX SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
10. STOCKHOLDER'S EQUITY (CONTINUED):
INVESTMENT IN PARENT COMPANY (CONTINUED):
2003 2002
---------------------- ---------------------
Shares Cost Shares Cost
----------- --------- --------- ----------
Preferred stock:
Beginning balance 650 650,000
Shares purchased 650 650,000
Shares converted
to common stock (650) (650,000)
----------- --------- --------- ----------
Ending balances 650 650,000
----------- --------- --------- ----------
Total 1,328,718 $ 611,680 383,157 $ 866,714
=========== ========= ========= ==========
Purchases of Equitex common and preferred stock are stated at cost. Sales
of Equitex common stock are removed from the investment account at the
weighted average cost of the total shares outstanding, and the difference
between the sales price and cost of the shares sold is classified as
additional paid-in capital.
NOTES, ADVANCES AND INTEREST RECEIVABLE FROM AFFILIATES:
Chex has notes receivable due from Equitex and Denaris under various loan
agreements. In addition, Chex has made advances to Equitex and Denaris to
fund their operations. In accordance with SEC SAB No. 55, ALLOCATION OF
EXPENSES AND RELATED DISCLOSURE IN FINANCIAL STATEMENTS OF SUBSIDIARIES,
DIVISIONS OR LESSOR BUSINESS COMPONENTS OF ANOTHER ENTITY, certain
expenses paid by Chex on behalf of Equitex have been debited (charged) to
the receivables. General and administrative expenses allocated by Equitex
to Chex totaling $303,000 and income taxes payable offset with Equitex's
losses totaling $87,000 for the year ended December 31, 2003 have been
credited to additional paid-in capital as a contribution of capital by
Equitex.
At December 31, 2003, the Company offset income taxes payable of $535,000
against notes and advances due from Equitex. During 2003, payment of the
$535,000 by Chex to Equitex was forgiven by Equitex. Therefore, notes and
advances due from Equitex were increased by $535,000 with an offsetting
credit to additional paid-in capital in 2003 to account for this
transaction as a contribution of capital by Equitex.
27
CHEX SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
10. STOCKHOLDER'S EQUITY (CONTINUED):
NOTES, ADVANCES AND INTEREST RECEIVABLE FROM AFFILIATES (CONTINUED):
The following table summarizes the activity for the years ended December
31, 2003 and 2002.
2003 2002
----------- -----------
Beginning principal balances $ 540,760
Cash advances 1,111,655 $ 1,135,760
Cash repayments (595,000) (500,000)
Reduction in receivable for income tax payable (535,000)
Capital contribution for 2002 income taxes 535,000
Chex cash disbursements allocated to Equitex 352,370
Receivable from Equitex in exchange for
$300,000 reduction to officer note receivable
and a $200,000 payable to that officer 500,000
Reduction in receivable in exchange for shares
of common stock of Equitex, Inc. (60,000)
----------- -----------
1,944,785 540,760
Interest receivable 166,483 25,625
----------- -----------
Ending balances $ 2,111,268 $ 566,385
=========== ===========
The above balances at December 31, 2003 and 2002 are presented as a
reduction of stockholder's equity on the consolidated balance sheets of
the Company. The principal balance at December 31, 2003 is comprised of
$837,250 due from Denaris and $1,107,535 due from Equitex. The principal
balance at December 31, 2002 is comprised of $512,500 due from Denaris
and $28,260 due from Equitex. The Denaris receivables at December 31,
2003 are in the form of notes, $325,000 of which bears interest at 10%
per annum and $512,250, which bears interest at 12% per annum. The
Denaris receivables at December 31, 2002 are comprised of notes, $325,000
of which bear interest at 10% per annum and $187,500 which bear interest
at 12% per annum. The notes are collateralized by a pledge by Equitex of
1,000,000 shares of Equitex common stock. The Equitex receivables are in
the form of notes and advances, which bear interest at 10% per annum. The
notes and advances are collateralized by a pledge of 700,000 shares of
FFFC common stock owned by Equitex.
STOCK SUBSCRIPTION RECEIVABLE:
In December 2003, Chex sold 1,000,000 shares of Equitex common stock in
exchange for $200,000 cash and an $800,000 promissory note. The note is
presented as a reduction of stockholder's equity at December 31, 2003.
The note has an interest rate of 7% per annum and was originally payable
in three installments of principal and interest through June 30, 2004.
The promissory note is collateralized by a pledge agreement, which grants
Chex a security interest in 700,000 of the purchased shares.
28
CHEX SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
11. BUSINESS CONCENTRATIONS:
The Company's operations are not concentrated in any specific geographic
region, but are tied to the Native American gaming industry. The Company
generated its fee income from contracts with Native American Tribes for
the years ended December 31, 2003 and 2002, as follows:
Number of locations Percent of fees
--------------------- ----------------------
2003 2002 2003 2002
--------- -------- -------- ---------
Native American Tribe A 2 2 16% 13%
Native American Tribe B - 3 - 7%
Native American Tribe C 1 1 9% 9%
Native American Tribe D 5 5 23% 18%
--------- -------- -------- ---------
8 11 48% 47%
========= ======== ======== =========
[A] Effective November 2002, the contract with Native American Tribe B was
terminated.
[B] Effective January 2004, the contract with the Native American Tribe D,
was terminated.
29