SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or
15(d) of The Securities Act of 1934
Date of Report (Date of earliest event reported): March 6, 2002
(December 21, 2001)
EQUITEX, INC.
----------------
(Exact name of registrant as specified in its charter)
Delaware 0-12374 84-0905189
- --------------------------------------------------------------------------------
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
7315 EAST PEAKVIEW AVENUE, ENGLEWOOD, COLORADO 80111
-------------------------------------------------------------------------------
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (303) 796-8940
------------------------------------------------------
(Former name or former address, if changed since last
report.)
Item 2. 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 January 7, 2002 (the "Initial 8-K"),
On December 21, 2001, Equitex completed the acquisition of 100% of the capital
stock of Chex Services, Inc.
Item 7. Financial Statements and Exhibits
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
Pursuant to paragraph (a)(4) of Item 7 of Form 8-K, the attached
financial statements were omitted from the disclosure contained in the
Initial 8-K. Attached hereto are the audited financial statements of
Chex Services, Inc. for the years ended December 31, 2000 and 1999
along with unaudited financial statements for the nine month periods
ended September 30, 2001 and 2000.
(b) PRO-FORMA FINANCIAL INFORMATION.
Pursuant to paragraph (b)(2) of Item 7 of Form 8-K, the following pro
forma financial information was omitted from the disclosures contained
in the Initial 8-K. Attached hereto are the unaudited pro forma
condensed consolidated balance sheet as of September 30, 2001, the
unaudited pro forma condensed consolidated statement of operations for
the year ended December 31, 2000, and the unaudited pro forma condensed
consolidated statement of operations for the nine months ended
September 30, 2001, reflecting the acquisition of Chex Services, Inc.,
and including the notes to the unaudited pro forma financial
statements.
(c) EXHIBITS
Exhibit Number Exhibit
-------------- -------
None
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
EQUITEX, INC.
Date: March 6, 2002
By:/s/Thomas B. Olson
-----------------------------
Secretary
3
UNAUDITED PRO FORMA FINANCIAL INFORMATION
On August 31, 2001, Equitex, Inc. (the "Registrant", or the "Company") signed a
definitive agreement to acquire Chex Services, Inc. ("Chex"), the effectiveness
of which was subject to the completion of certain final closing documents and
other customary pre-closing conditions. On November 30, 2001, Equitex closed the
acquisition of Chex into escrow pending the execution of certain remaining
documents required for closing, which subsequently occurred on December 21,
2001, at which time the Company signed an amended Stock Purchase Agreement (the
"Agreement").
Pursuant to the Agreement, effective December 1, 2001, Equitex acquired all the
outstanding common stock of Chex in exchange for 1,992,000 shares of the
Company's common stock valued at $10,119,000, in a transaction accounted for as
a purchase. The purchase method of accounting conforms the accounting policies
followed by the consolidated entities. There were no significant accounting
policy differences or other items which required adjustment in the accompanying
unaudited pro forma consolidated financial statements. In conjunction with the
Agreement, the Company entered into an employment incentive agreement with the
president of Chex in which the Company granted him a warrant to purchase up to
730,000 shares of the Company's common stock at an exercise price of $3.85 per
share, which was the quoted market price of the Company's common stock at the
date the warrant was granted. The warrant is exercisable for a four-year period
beginning December 1, 2001.
Chex, incorporated in Minnesota in July 1992, is a financial services company
that provides check cashing services, automated teller machine and credit card
advances to customers primarily at Native American-owned gaming establishments.
The accompanying unaudited condensed pro forma consolidated balance sheet gives
effect to the acquisition as if it had been consummated on September 30, 2001.
The accompanying unaudited condensed pro forma consolidated statements of
operations for the nine months ended September 30, 2001, and the year ended
December 31, 2000, give effect to the acquisition as if it had been consummated
on January 1, 2001, and January 1, 2000, respectively.
The pro forma consolidated statement of operations for the year ended December
31, 2000, also reflects the distribution of certain assets of Equitex, net of
certain related liabilities, to Equitex 2000, Inc. and the acquisition (recorded
as a reverse acquisition) of all of the outstanding common shares of Key
Financial Systems, Inc. ("Key") and Nova Financial Systems, Inc. ("Nova"),
companies under common control with nearly an identical ownership structure.
These transactions occurred on August 6, 2001, as disclosed in a Form 8-K filed
with the Securities and Exchange Commission (SEC) on August 21, 2001.
The unaudited pro forma consolidated financial statements should be read in
conjunction with the historical financial statements of Chex (included herein)
as well as those of the Company. The unaudited pro forma consolidated financial
statements do not purport to be indicative of the financial position or results
of operations that would have actually been obtained had such transactions been
completed as of the assumed dates and for the periods presented, or which may be
obtained in the future. The pro forma adjustments are described in the
accompanying notes and are based upon available information and certain
assumptions that the Company believes are reasonable.
A preliminary allocation of the purchase price of Chex has been made to major
categories of assets and liabilities in the accompanying pro forma financial
statements. The actual allocation of the purchase price and the resulting effect
on income (loss) from operations may differ significantly from the pro forma
amounts included herein. The pro forma adjustments represent the Company's
preliminary determination of purchase accounting adjustments and are based upon
available information and certain assumptions that the Company believes to be
reasonable. Consequently, the amounts reflected in the unaudited pro forma
consolidated financial statements are subject to change, and the final amounts
may differ substantially.
EQUITEX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2001
Historical
--------------------------
Equitex, Inc.
and Chex Services, Pro forma Pro forma
subsidiaries Inc. adjustments consolidated
----------- ------------ ----------- ------------
ASSETS
Cash and cash equivalents $ 315,689 $ 9,709,065 $ 10,024,754
Receivables 7,798,713 3,137,269 10,935,982
Current portion of notes receivable,
related parties 280,113 280,113
Note receivable, other 100,000 100,000
Prepaid expenses and other 67,967 661,166 729,133
Deferred tax asset 350,000 350,000
----------- ------------ ----------- ------------
Total current assets 8,532,369 13,887,613 22,419,982
----------- ------------ ----------- ------------
Investment in Chex Services, Inc. $10,119,000 (A)
(10,119,000) (A)
Notes receivable, related parties 1,275,610 1,275,610
Property, equipment and leaseholds 296,985 915,699 1,212,684
Deferred tax asset 1,030,000 1,030,000
Intangible and other assets 140,000 20,248 4,800,000 (A) 4,960,248
Goodwill 4,560,053 (A) 4,560,053
----------- ------------ ----------- ------------
1,466,985 2,211,557 9,360,053 13,038,595
----------- ------------ ----------- ------------
Total assets $ 9,999,354 $ 16,099,170 $ 9,360,053 $ 35,458,577
=========== ============ =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,280,681 $ 325,009 $ 1,605,690
Accrued expenses and other liabilities 350,649 750,728 1,101,377
Due to cardholders 4,999,740 4,999,740
Notes payable, related parties 249,700 249,700
Notes payable, other 12,077,346 12,077,346
Loans payable, Money Centers of America, Inc. 1,650,000 1,650,000
Current portion of long-term debt 254,178 254,178
----------- ------------ ----------- ------------
Total current liabilities 6,880,770 15,057,261 21,938,031
Long-term debt, net of current portion 282,962 282,962
----------- ------------ ----------- ------------
Total liabilities 6,880,770 15,340,223 22,220,993
----------- ------------ ----------- ------------
Stockholders' equity 3,118,584 758,947 $ 9,360,053 (A) 13,237,584
----------- ------------ ----------- ------------
Total stockholders' equity 3,118,584 758,947 9,360,053 13,237,584
----------- ------------ ----------- ------------
Total liabilities and stockholders' equity $ 9,999,354 $ 16,099,170 $ 9,360,053 $ 35,458,577
=========== ============ =========== ============
EQUITEX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2001
Historical
------------------------------
Equitex, Inc.
and Chex Pro forma Pro forma
subsidiaries Services, Inc. adjustments consolidated
------------ ------------ ------------ ------------
Fee revenue $ 10,927,482 $ 10,927,482
Credit card income $ 7,689,222 7,689,222
Application fees, net of direct
marketing costs 3,172,562 3,172,562
Other 335,809 259,033 594,842
------------ ------------ ------------ ------------
Total income 11,197,593 11,186,515 22,384,108
------------ ------------ ------------ ------------
Salaries and wages 3,510,503 2,168,622 5,679,125
Third party servicing fees 4,339,950 2,331,944 6,671,894
Other operating expenses 1,938,383 4,356,167 $ 671,000 (B) 6,965,550
Interest expense 672 973,279 973,951
Returned checks 1,325,160 1,325,160
------------ ------------ ------------ ------------
Total operating expenses 9,789,508 11,155,172 671,000 21,615,680
------------ ------------ ------------ ------------
Income before income taxes 1,408,085 31,343 (671,000) 768,428
Provision for income taxes 57,500 265,000 (C) 322,500
------------ ------------ ------------ ------------
Net income 1,465,585 31,343 (406,000) 1,090,928
Beneficial conversion features (2,366,156) (2,366,156)
Deemed preferred stock dividends (60,600) (60,600)
------------ ------------ ------------ ------------
Net income (loss) applicable to
common shareholders $ (961,171) $ 31,343 $ (406,000) $ (1,335,828)
============ ============ ============ ============
Basic and diluted net loss
per common share $ (0.06) $ (0.07)
============ ============
Weighted average number of common
shares outstanding 16,591,387 (D) 18,583,387
============ ============
EQUITEX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000
ADJUSTMENTS TO REFLECT
THE ACQUISITIONS OF KEY AND NOVA (SEE AA)
---------------------------------------------
ADJUSTMENTS
TO REFLECT
DISTRIBUTION
OF ASSETS/
EQUITEX, INC. LIABILITIES KEY NOVA ADJUSTMENTS
AND TO EQUITEX FINANCIAL FINANCIAL AND
SUBSIDIARIES 2000, INC. SYSTEMS, INC. SYSTEMS, INC. ELIMINATIONS
------------ ------------ ----------- ---------- -----------
(AA) HISTORICAL HISTORICAL (AA)
Fee revenue
Credit card income $ 6,984,032 $4,554,266
Application fees, net of direct
marketing costs 2,735,438
Other $ 2,636,063 $ (2,636,063) 855,038 $ (672,420)
------------ ------------ ----------- ---------- -----------
Total income 2,636,063 (2,636,063) 10,574,508 4,554,266 (672,420)
------------ ------------ ----------- ---------- -----------
Salaries and wages 3,019,876
Third party servicing fees 739,735 (739,735) 3,007,077 3,342,984 (672,420)
Other operating expenses 9,666,523 (9,666,523) 1,566,772
Interest expense 736,749 (736,749) 635,345
Returned checks
Loss on First Bankers Mortgage
Services, Inc. rescission 3,979,000 (3,979,000)
------------ ------------ ----------- ---------- -----------
Total operating expenses 15,122,007 (15,122,007) 7,593,725 3,978,329 (672,420)
------------ ------------ ----------- ---------- -----------
Income (loss) before
income taxes (12,485,944) 12,485,944 2,980,783 575,937
Provision for income taxes 13,457 (13,457) 1,405,000
------------ ------------ ----------- ---------- -----------
Net income (loss) (12,499,401) $ 12,499,401 $ 2,980,783 $ 575,937 $(1,405,000)
============ =========== ========== ===========
Beneficial conversion features (700,000)
Accretion of redemption value
on Series G preferred stock (453,000)
Deemed preferred stock
dividends, series D, G and
other (97,000)
------------
Net income (loss) applicable
to common stockholders $(13,749,401)
============
Basic net income (loss)
per common share $ (1.93)
============
Diluted net income (loss)
per common share $ (1.93)
============
Weighted average number of
common shares outstanding 7,106,749
============
(CONTINUED)
EQUITEX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 2000
PRO FORMA
COMBINED
EQUITEX, INC.
BEFORE CHEX CHEX PRO FORMA
SERVICES, INC. SERVICES, INC. ADJUSTMENTS PRO FORMA
------------ ------------ ----------- ------------
(AA) HISTORICAL
Fee revenue $ 8,984,534 $ 8,984,534
Credit card income $ 11,538,298 11,538,298
Application fees, net of direct
marketing costs 2,735,438 2,735,438
Other 182,618 10,877 193,495
------------ ------------ ----------- ------------
Total income 14,456,354 8,995,411 23,451,765
------------ ------------ ----------- ------------
Salaries and wages 1,936,136 1,936,136
Third party servicing fees 5,677,641 1,492,673 7,170,314
Other operating expenses 3,663,254 $ 895,000 (B) 4,558,254
Interest expense 5,221,993 876,795 6,098,788
Returned checks 851,340 851,340
Loss on First Bankers Mortgage
Services, Inc. rescission --
------------ ------------ ----------- ------------
Total operating expenses 10,899,634 8,820,198 895,000 20,614,832
------------ ------------ ----------- ------------
Income (loss) before
income taxes 3,556,720 175,213 (895,000) 2,836,933
Provision for income taxes 1,405,000 47,737 (353,000) (C) 1,099,737
------------ ------------ ----------- ------------
Net income (loss) 2,151,720 $ 127,476 $ (542,000) 1,737,196
============ ===========
Beneficial conversion features (700,000) (700,000)
Accretion of redemption value
on Series G preferred stock (453,000) (453,000)
Deemed preferred stock
dividends, series D, G and
other (97,000) (97,000)
------------ ------------
Net income (loss) applicable
to common stockholders $ 901,720 $ 487,196
============ ============
Basic net income (loss)
per common share $ 0.06 $ 0.03
============ ============
Diluted net income (loss)
per common share $ 0.02 $ 0.01
============ ============
Weighted average number of
common shares outstanding 14,247,042 (D) 16,205,499
============ ============
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED PRO FORMA CONSOLIDATED
BALANCE SHEET AND STATEMENTS OF OPERATIONS
BALANCE SHEET AS OF SEPTEMBER 30, 2001, AND STATEMENTS OF
OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001, AND THE
YEAR ENDED DECEMBER 31, 2000
(A) This entry is recorded to reflect the acquisition of all of the
outstanding common stock of Chex Services, Inc. ("Chex") in exchange for
1,992,000 shares of the Company's common stock valued at $10,119,000,
which is based upon the quoted market price of the Company's common stock
on August 31, 2001 ($5.08 per share), the date the terms of the Agreement
were agreed to by the Company and the selling shareholders. The purchase
price and preliminary adjustments to historical book value are as
follows:
Purchase price:
Estimated value of common stock issued $ 10,119,000
Book value of net assets acquired (758,947)
------------
Purchase price in excess of net assets acquired $ 9,360,053
=============
Preliminary allocation of purchase price in excess of net assets
acquired:
Estimated fair value of casino contracts $ 3,500,000
Estimated fair value of non-compete agreement 500,000
Estimated fair value of technology 500,000
Estimated fair value of customer lists 300,000
Estimated fair value of trade name 200,000
Goodwill 4,360,053
------------
$ 9,360,053
============
In conjunction with the Stock Purchase Agreement, the Company entered
into an Employment Incentive Agreement with the Chex president, whereby
on December 1, 2001, the Company granted to the Chex president a warrant
to purchase up to 730,000 shares of the Company's common stock at $3.85
per share, which represents the quoted market price of the Company's
common stock on the date of grant. The warrant is exercisable at any time
from December 1, 2001 through December 1, 2005.
In accordance with the Company's accounting policies, the Company
accounted for this stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB No. 25). As a result,
because the exercise price per share was equivalent to the quoted market
price per share, no compensation expense has been recorded in the pro
forma statements of operations.
Had compensation cost for this stock-based transaction been determined
based on the fair value at the grant date consistent with the provisions
of Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, the fair value of the warrant at the date of
grant is estimated to be $1,050,000, based upon the Black Scholes
option-pricing model utilizing an expected risk free interest rate of
2.5%, an expected stock price volatility of 66%, an expected dividend
yield of 0%, and an expected two-year life of the warrant. Pro forma net
loss applicable to common shareholders would have increased by $259,000
($0.01 per common share) for the nine months ended September 30, 2001,
and pro forma net income per common shareholder would have decreased by
$345,000 ($0.01 per common share; none on a diluted basis) for the year
ended December 31, 2000.
(B) This entry is recorded to recognize amortization expense on the
identifiable intangible assets. Amortization expense is calculated based
on a straight-line method of amortization for each asset, as follows:
Pro forma
amortization expense
-----------------------
Asset Term Nine months Year
----- ---- ----------- ---------
Casino contracts 7 years $ 375,000 $ 500,000
Non-compete agreement 5 years 75,000 100,000
Technology 3 years 125,000 167,000
Customer lists 3 years 75,000 100,000
Trade name 7 years 21,000 28,000
----------- ---------
$ 671,000 $ 895,000
=========== =========
(C) This entry is recorded to reflect estimated federal and state income tax
effects of the transactions described above.
(D) This entry is recorded to reflect the pro forma weighted average number
of common shares outstanding, which includes 1,992,000 shares issued upon
the acquisition of Chex. Diluted pro forma income per common shareholder
includes the effect of outstanding options, warrants and convertible
securities (which total 23,301,000) on the weighted average number of
common shares outstanding.
(AA) These entries reflect the distribution of certain assets of Equitex, net
of certain related liabilities, to Equitex 2000, Inc. and the acquisition
(recorded as a reverse acquisition) of all of the outstanding common
shares of Key Financial Systems, Inc. ("Key") and Nova Financial Systems,
Inc. ("Nova"), companies under common control with nearly an identical
ownership structure, as well as applicable eliminating journal entries.
These transactions occurred on August 6, 2001, as disclosed in a Form 8-K
filed with the Securities and Exchange Commission (SEC) on August 21,
2001.
CHEX SERVICES, INC.
FINANCIAL STATEMENTS
For the Years Ended
December 31, 2000 and 1999
CHEX SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2000 and 1999
Independent Auditors' Report 1
Balance Sheets 2
Statement of Operations 3
Statement of Stockholders' Equity 4
Statement of Cash Flows 5
Notes to Financial Statements 6-15
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
Chex Services, Inc.
Minneapolis, Minnesota
We have audited the accompanying balance sheet of Chex Services, Inc. as of
December 31, 2000, and the related statements of operations, stockholders'
equity, and cash flows for the year 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 audit. The financial
statements of Chex Services, Inc., as of December 31, 1999, were audited by
other auditors whose report dated January 17, 2000 expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. 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 audit and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chex Services, Inc. as of
December 31, 2000, and the results of their operations and cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States of America.
SILVERMAN OLSON THORVILSON & KAUFMANN LTD
CERTIFIED PUBLIC ACCOUNTANTS
Minneapolis, Minnesota
April 30, 2001
CHEX SERVICES, INC.
BALANCE SHEETS
December 31, 2000 and 1999
ASSETS 2000 1999
------------ ------------
Current assets:
Cash and cash equivalents $ 6,611,088 $ 4,807,711
Accounts receivable (net of allowance for doubtful accounts
of $13,457 and $80,114, respectively) 1,879,871 424,172
Employee receivables 32,744 7,641
Prepaid amounts on casino contracts (Note 9) 339,523 197,515
Note receivable, other (Note 2) 100,000 100,000
Current portion of notes receivable, related parties (Note 3) 49,800 14,500
Other current assets 48,055 78,385
------------ ------------
Total current assets 9,061,081 5,629,924
Notes receivable, related parties (Note 3) 976,410 705,110
Property and equipment, net (Note 4) 747,616 471,656
------------ ------------
Total assets $ 10,785,107 $ 6,806,690
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable, bank (Note 6) $ 250,000 $ --
Notes payable, other (Note 5 and 11) 7,749,098 5,691,500
Accounts payable 277,628 162,683
Accrued liability on casino contracts (Note 9) 210,936 219,816
Accrued interest 195,702 144,861
Accrued payroll and benefits 142,225 63,393
Other accrued expenses 33,248 11,697
Loans payable (Note 7) 643,985 --
Current portion of long-term debt (Note 8) 137,519 108,572
------------ ------------
Total current liabilities 9,640,341 6,402,522
Long-term debt, net of current portion (Note 8) 479,663 166,541
------------ ------------
Total liabilities 10,120,004 6,569,063
------------ ------------
Commitments and contingencies (Note 9) -- --
Stockholders' equity:
Common stock, $.01 par value; 10,000,000 shares authorized,
1,978,333 and 1,781,666 issued and outstanding, respectively 19,784 17,817
Additional paid in capital 1,122,617 829,584
Accumulated deficit (462,298) (589,774)
Common stock subscription receivable (15,000) (20,000)
------------ ------------
Total stockholders' equity 665,103 237,627
------------ ------------
Total liabilities and stockholders' equity $ 10,785,107 $ 6,806,690
============ ============
See accompanying notes to financial statement.
-2-
CHEX SERVICES, INC.
STATEMENT OF OPERATIONS
For the Years Ended December 31, 2000 and 1999
2000 1999
------------------ ------------------
Amount Percent Amount Percent
------ ------- ------ -------
Fee Revenue $ 8,984,534 100.0% $ 4,625,955 100.0%
----------- ----- ----------- -----
Location expenses:
Salaries and benefits 1,936,136 21.5 1,029,331 22.3
Returned checks 851,340 9.5 458,297 9.9
Fees to casinos 1,492,673 16.6 995,404 21.5
Other 1,894,956 21.1 667,778 14.4
----------- ----- ----------- -----
Total location expenses 6,175,105 68.7 3,150,810 68.1
----------- ----- ----------- -----
Location gross margin 2,809,429 31.3 1,475,145 31.9
Corporate operating expenses 1,758,975 19.6 1,252,451 27.1
----------- ----- ----------- -----
Income from operations 1,050,454 11.7 222,694 4.8
----------- ----- ----------- -----
Other income (expense):
Interest expense (876,795) (9.7) (581,915) (12.6)
Interest income 10,877 .1 39,402 .9
Miscellaneous expense (9,323) (.1) (12,718) (.3)
----------- ----- ----------- -----
Total other income (expense) (875,241) (9.7) (555,231) (12.0)
----------- ----- ----------- -----
Income (loss) before taxes 175,213 2.0 (332,537) (7.2)
Provision for income taxes (Note 12) 47,737 .6 -- --
----------- ----- ----------- -----
Net income (loss) $ 127,476 1.4% $ (332,537) (7.2)%
=========== ===== =========== =====
See accompanying notes to financial statements.
-3-
CHEX SERVICES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the Year Ended December 31, 2000 and 1999
COMMON
COMMON STOCK ADDITIONAL STOCK TOTAL
-------------------------- PAID-IN SUBSCRIPTION ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT EQUITY
----------- ----------- ----------- ----------- ----------- -----------
Balance at
January 1, 1999 1,786,666 $ 17,867 $ 847,034 $ (70,000) $ (257,237) $ 537,664
Repurchase of
common stock (5,000) (50) (17,450) -- -- (17,500)
Receipt of stock
subscriptions -- -- -- 50,000 -- 50,000
Net loss -- -- -- -- (332,537) (332,537)
----------- ----------- ----------- ----------- ----------- -----------
Balances at
December 31, 1999 1,781,666 17,817 829,584 (20,000) (589,774) 237,627
Issuance of common
stock upon note holder
conversion (Note 5) 196,667 1,967 293,033 -- -- 295,000
Receipt of
stock subscriptions -- -- -- 5,000 -- 5,000
Net income -- -- -- -- 127,476 127,476
----------- ----------- ----------- ----------- ----------- -----------
Balances at
December 31, 2000 1,978,333 $ 19,784 $ 1,122,617 $ (15,000) $ (462,298) $ 665,103
=========== =========== =========== =========== =========== ===========
See accompanying notes to financial statements.
-4-
CHEX SERVICES, INC.
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2000 and 1999
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 127,476 $ (332,537)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 230,778 134,583
Loss on disposal of property and equipment 240 --
(Increase) decrease in assets:
Accounts receivable (1,455,699) (378,899)
Employee receivable (25,103) (7,411)
Prepaid amounts on Casino contracts (142,008) 92,275
Other current assets 30,330 60,442
Increase (decrease) in liabilities:
Accounts payable 114,945 157,453
Accrued liability on Casino contract (8,880) 219,816
Accrued income taxes 25,347 --
Accrued interest 50,841 73,186
Accrued payroll and benefits 78,832 29,871
Other accrued expenses (3,796) 11,120
----------- -----------
Net cash provided by (used in) operating activities (976,697) 59,899
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (508,978) (359,830)
Proceeds from sale of property and equipment 2,000 --
Repayment on notes receivable 169,650 500,000
Advances on notes receivable (476,250) (224,500)
----------- -----------
Net cash used in investing activities (813,578) (84,330)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in note payable, bank 250,000 --
Borrowings on loans payable 683,784 --
Payments on loans payable (39,799) --
Payments on notes payable, other (1,019,000) (52,000)
Borrowings on notes payable, other 3,371,598 2,866,000
Borrowings on long-term debt 539,798 250,000
Payment of long-term debt (197,729) (44,808)
Receipt of common stock subscription 5,000 50,000
Repurchase of common stock -- (17,500)
----------- -----------
Net cash provided by financing activities 3,593,652 3,051,692
----------- -----------
Increase in cash and cash equivalents 1,803,377 3,027,261
Cash and cash equivalents - beginning of year 4,807,711 1,780,450
----------- -----------
Cash and cash equivalents - ending of year $ 6,611,088 $ 4,807,711
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest during the year $ 825,954 $ 429,924
=========== ===========
Cash paid for income taxes during the year $ 22,390 $ --
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
During 2000, $295,000 of notes payable, other were converted into 196,667
shares of common stock.
See accompanying notes to financial statements.
-5-
CHEX SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 2000 and 1999
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization:
Chex Services, Inc. ("Chex" or the "Company") was incorporated in
Minnesota in July 1992. The Company provides financial services
primarily check cashing, automated teller machines (ATM) and credit
card advances to customers primarily at Native American owned gaming
establishments. As of December 31, 2000, the Company operates at
eighteen gaming establishments located in California, Michigan,
Minnesota, Nebraska, New Mexico, New York, North Dakota and
Wisconsin.
Advertising:
Advertising costs are expensed as incurred. Total advertising costs
were $167,551 and $75,514 for the years ended December 31, 2000 and
1999, respectively.
Cash Equivalents:
Cash equivalents represent investments with a maturity of
three-months or less at the time of purchase.
Concentrations:
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash and
accounts receivable. The Company maintains cash in bank deposit
accounts, which, at times, may exceed federally insured limits (Note
9). 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 gaming establishments. The
Company believes that it has controls in place to safeguard these
on-hand amounts. The Company believes no significant credit risk
exists with respect to cash.
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 processor industry who remit to the Company the cash
advanced plus Chex's allocable share of any 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.
Returned Checks:
The Company charges operations for potential losses on returned
checks in the period such checks are returned, since ultimate
collection of these items is uncertain. Recoveries on returned
checks are credited in the period when the recovery is received.
Property and Equipment:
Property and equipment is stated at cost. Depreciation is computed
using the straight-line method and is expensed based upon the
estimated useful lives of the assets.
Expenditures for additions and improvements are capitalized, while
repairs and maintenance are expensed as incurred.
-6-
CHEX SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 2000 and 1999
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of Long-Lived Assets:
The Company records impairment losses of long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets
are less than the assets' carrying amounts.
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 effect
of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes.
Compensated Absences:
The Company accounts for compensated absences on an actual payment
basis because of the difficulty in properly determining an
appropriate amount.
Stock Based Compensation:
The Company adopted the disclosure requirements of Statement of
Financial Accounting SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 establishes a fair value based method of
measuring stock-based compensation, but does not require an entity
to adopt the method for preparing its basic financial statements.
For entities not adopting the method for preparing basic financial
statements, the standard requires disclosures in the footnotes of
pro forma net earnings information as if the fair value based method
had been adopted.
Use of Estimates:
The preparation of the Company's financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and
liabilities, and the reported amounts of revenues and expenses
during the reporting period.
Reclassifications:
Certain amounts in the 1999 financial statements have been
reclassified to conform with the 2000 presentation. These
reclassifications have no effect on net loss or stockholders' equity
as previously reported.
NOTE 2: NOTES RECEIVABLE, OTHER
As of December 31, 2000 and 1999, the Company had a $100,000 note
receivable from an individual with interest accruing at 12%. The
note is unsecured and matured January 31, 2000; however, the Company
has verbally extended the loan on a month-to-month basis.
-7-
CHEX SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 2000 and 1999
NOTE 3: NOTES RECEIVABLE, RELATED PARTIES
Notes receivable, related parties consisted of the following at
December 31:
2000 1999
---------- ----------
Notes receivable due from two of the
Company's officers/shareholders, with
interest accruing at 6%. Annual payments
of interest only beginning October 2000
through maturity, October 2004, with a
balloon payment at maturity. The notes
are unsecured. $ 963,110 $ 714,610
Note receivable from an employee of the
Company, the note is non-interest
bearing, unsecured and due on demand. 18,100 -
Note receivable due from a Company
shareholder. The note is non-interest
bearing, unsecured and due on demand. 45,000 5,000
---------- ----------
Notes receivable 1,026,210 719,610
Less current portion of notes receivable (49,800) (14,500)
---------- ----------
Notes receivable, long-term $ 976,410 $ 705,110
========== ==========
Future maturities of notes receivable were as follows at December 31:
2001 $ 49,800
2002 $ 13,300
2003 $ -
2004 $ 963,110
-------------------
$ 1,026,210
===================
NOTE 4: PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following at December 31:
Estimated
Useful Lives
2000 1999 In Years
----------- ----------- ----------
Furniture and equipment $ 1,223,649 $ 718,171 3 - 7
Less accumulated depreciation 476,033 246,515
----------- -----------
Property and equipment, net $ 747,616 $ 471,656
=========== ===========
During 2000 and 1999 depreciation expense was $230,778 and $134,583,
respectively.
NOTE 5: NOTES PAYABLE, OTHER
As of December 31, 2000 and 1999, the Company had notes payable to
numerous individual investors aggregating $7,749,098 and $5,691,500,
respectively. These notes payable accrue interest at 12%, payable
quarterly and are unsecured. The notes mature at various dates
throughout the year ended December 31, 2001; however at option of the
note holder, the notes are subject to repayment with ninety days
notice.
During 2000, $295,000 of notes payable were converted to 196,667
shares of common stock.
-8-
CHEX SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 2000 and 1999
NOTE 6: NOTE PAYABLE, BANK
At December 31, 2000, the Company had a bank line of credit available
through July 2001. The maximum credit limit was $250,000, all of which
outstanding at December 31, 2000. Interest is payable monthly at a
variable rate (10.25% at December 31, 2000). Borrowings are secured by
substantially all of the Company's assets and guaranteed by two of the
Company's majority shareholders.
Subsequent to year end, on January 10, 2001, the Company entered into
an additional $1,000,000 revolving line of credit. Interest is payable
monthly at a variable rate (10.00% on January 10, 2001). Borrowings
are secured by substantially all of the Company's assets and
guaranteed by two of the Company's majority shareholders.
NOTE 7: LOANS PAYABLE, OTHER
During 2000, the Company entered into a verbal loan agreement with a
financial services company aggregating $300,000. The loan accrues
interest at 9%, payable monthly and is unsecured. The loan is due on
demand.
During 2000, the Company entered into a sale-lease back transaction
which was subsequently cancelled and refinanced in January 2001. The
transaction in substance represented an initial loan aggregating
$410,470 and therefore is being reflected as a note payable on the
accompanying balance sheet and statement of operations. At December
31, 2000, the outstanding balance was $343,985. The loan accrued
interest at 9.5%, payable monthly. The loan was secured by equipment.
NOTE 8: LONG TERM DEBT
Long-term debt consisted of the following at December 31:
2000 1999
---------- ----------
Note payable, bank accruing interest
at a variable rate (10.5% at December
31, 2000) and requires a balloon
payment at maturity, January 2001. The
note was secured by substantially all
corporate assets, guaranteed by two of
the Company's majority shareholders,
as well as a pledge of personal assets
by these shareholders. On January 10,
2001 the note was refinanced, accruing
interest at a variable rate (9.25% on
January 10, 2001), payable monthly and
principal payments payable quarterly.
The note is secured by substantially
all the Company's assets and
guaranteed by two of the Company's
majority shareholders. The note
matures in June 2004. $ 450,000 $ -
Note payable, bank accruing interest
at a variable rate (12% and 11.0% at
December 31, 2000 and 1999,
respectively). The note requires
monthly payments of principle and
interest and matures in October 2002.
The note is secured by substantially
all corporate assets and guaranteed by
three of the Company's shareholders. 163,289 238,785
-9-
CHEX SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 2000 and 1999
NOTE 8: LONG TERM DEBT (CONTINUED)
2000 1999
---------- ----------
Note payable, bank accruing interest
at a variable rate (10.75% and 9.75%
at December 31, 2000 and 1999,
respectively). The note requires
monthly payments of principle and
interest and matures in April 2001.
The note is secured by substantially
all corporate assets. 21,823 3,893
Note payable, bank accruing interest
at a variable rate (10.75% and 9.75%
at December 31, 2000 and 1999,
respectively). The note requires
monthly payments of principle and
interest. The note was repaid in 2000.
The note is secured by substantially
all corporate assets. - 14,505
---------- ----------
617,182 275,113
Less current portion (137,519) (108,572)
---------- ----------
Long-term debt $ 479,663 $ 166,541
========== ==========
Future maturities of long-term debt are as follows at December 31:
2001 $ 137,519
2002 $ 179,663
2003 $ 200,000
2004 $ 100,000
------------------
$ 617,182
==================
NOTE 9: COMMITMENTS AND CONTINGENCIES
Financial Instruments:
At December 31, 2000, the Company had deposits in excess of
federally insured amounts aggregating $468,212 at various financial
institutions.
Operating Leases:
As of December 31, 2000, the Company leased its corporate facilities
under an operating lease that provided for monthly lease payments
through February 2002. Pursuant to the lease agreement, the Company
had the option to terminate the lease after February 2001 in
exchange for a fee of $7,620. The Company exercised this option in
March of 2001.
In April 2001, the Company entered into a noncancelable operating
lease to lease its corporate facilities through April 2006.
Future minimum lease payments are as follows for the years ended
December 31:
2001 $ 51,914
2002 $ 69,218
2002 $ 70,791
2004 $ 71,315
2005 $ 72,102
Thereafter $ 18,091
------------------
$ 353,431
==================
-10-
CHEX SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 2000 and 1999
Note 9: COMMITMENTS AND CONTINGENCIES (CONTINUED)
Operating Leases (Continued):
Rent expense relating to the corporate facilities was $49,221 and
$17,959 for the years ended December 31, 2000 and 1999,
respectively.
Salary Continuation Plan:
During March 2000, the Company approved a salary continuation plan
for two of its employees. Pursuant to the plan, these two
individuals are guaranteed two years of salary, aggregating $211,000
at December 2000, for the two employees, in the event that the
Company is sold and their jobs are terminated.
Employment Contracts:
At December 31, 2000, the Company has a three-year employment
agreement with one of its employees expiring July 2003. Pursuant to
the agreement, if terminated for other than an egregious act, the
employee will continue to receive their annual compensation of
$70,000 in monthly installments through July 2003.
In addition, the Company has a three year employment agreement with
one of its employees expiring December 2003. Pursuant to the
agreement, if terminated for other than egregious act the employee
is entitled to receive a severance equal to one year's salary,
aggregating $84,000 at December 31, 2000. The employment agreement
is automatically extended for one year unless terminated by either
party with ninety days written notice.
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 location. 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 monthly amount as defined in the contract.
o A dollar amount, as defined by the contract, per transaction
volume processed by the Company.
o A percent 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.
Pursuant to the contracts, the Native American owned casinos have
not waived their sovereign immunity.
As of December 31, 2000 and 1999, the Company had $339,523 and
$197,515 of prepaid amounts on casino contracts and had $210,936 and
$219,816 of accrued liability on casino contracts, included on the
accompanying balance sheet.
Total fee expense relating to the casino locations was $1,492,673
and $995,404 for the years ended December 31, 2000 and 1999,
respectively.
-11-
CHEX SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 2000 and 1999
NOTE 10: EMPLOYEE BENEFIT PLAN
Employee Stock Option Plan:
In 1997, the Company adopted an employee incentive stock option
plan. Pursuant to the plan, the Board of Directors may grant options
to key individuals at their discretion. Option prices under the plan
may not be less than 100% of the fair market value of the common
stock on the date the option is granted. The options vest over
periods from one to five years and are exercisable no later than ten
years from grant date. Non-statutory stock option terms are
determined at the discretion of the Board, provided, however, that
the option price is not less than 85% of the market value of the
common stock as of the grant date. Upon grant, the Board establishes
the exercise price and vesting period of the options granted. As of
December 31, 2000, the Company has reserved 10% of the issued and
outstanding shares of common stock for issuance under the plan.
The Company has adopted the disclosure only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," but applies
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations in accounting for
its plans. If the Company had elected to recognize compensation
costs for the options granted consistent with the methods prescribed
in SFAS No. 123, the pro forma net income (loss) would have been
$120,033 and ($365,037) for the years ended December 31, 2000 and
1999, respectively. The fair value of the stock options used to
compute the pro forma income (loss) is the estimated present value
at the grant date with the minimum value method using risk-free
interest rates ranging from 4.5% to 6.4%.
A summary of the status of the Company's stock options and warrants
as of December 31:
2000 1999
---------------- ---------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------- ------ ------- ------
Outstanding at beginning of period 278,000 $ 1.50 25,000 $ 1.50
Granted 20,000 $ 1.50 253,000 $ 1.50
Exercised - $ - - $ -
Forfeited - $ - - $ -
------- ------ ------- ------
Outstanding at end of period 298,000 $ 1.50 278,000 $ 1.50
======= ====== ======= ======
Options and warrants exercisable
at end of period 288,000 $ 1.50 265,000 $ 1.50
======= ====== ======= ======
Weighted average fair value of
options and warrants granted
during the period $ .33 $ .13
======= =======
-12-
CHEX SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 2000 and 1999
NOTE 10: EMPLOYEE BENEFIT PLAN (CONTINUED)
The following table summarizes information about stock options
outstanding, including those issued to officers/shareholders of the
Company (Note 11), at December 31, 2000.
Options Outstanding Options Exercisable
---------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices At 12/31/00 Life Price At 12/31/00 Price
-------- ----------- ----------- -------- ----------- --------
$ 1.50 10,000 5.0 Years $ 1.50 10,000 $ 1.50
$ 1.50 5,000 4.8 Years $ 1.50 - $ -
$ 1.50 25,000 4.1 Years $ 1.50 25,000 $ 1.50
$ 1.50 20,000 3.4 Years $ 1.50 20,000 $ 1.50
$ 1.50 100,000 3.2 Years $ 1.50 100,000 $ 1.50
$ 1.50 100,000 3.0 Years $ 1.50 100,000 $ 1.50
$ 1.50 5,000 2.5 Years $ 1.50 - $ -
$ 1.50 25,000 1.1 Years $ 1.50 25,000 $ 1.50
------- -------
290,000 280,000
======= =======
Included in the table above are certain options outstanding which
are performance based and which become exercisable on the
achievement of certain goals reached, but no later than 2005. A
summary of these performance-based options is presented below:
Weighted
Average
Exercise
Performance Options Shares Price
---------------------------------------- ---------- -----------
Outstanding at beginning of year - $ -
Granted 10,000 $ 1.50
Forfeited - $ -
---------- -----------
Outstanding at end of year 10,000 $ 1.50
========== ===========
Options exercisable at year end - $ -
========== ===========
Weighted-average fair value of options
granted during the year $ .31
===========
As of December 31, 2000, the performance options outstanding under
the Plan have an exercise price of $1.50 and a weighted-average
remaining contractual life of 3.7 years.
Stock Warrants:
As of December 31, 2000 and 1999, the Company had warrants
outstanding as follows:
Common Shares Exercise Expiration
Under Warrant Price Per Share Date
--------------- --------------- --------------
8,000 $ 1.50 January 2004
-13-
CHEX SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 2000 and 1999
NOTE 11: RELATED PARTY TRANSACTIONS
Officer and Director Options:
At December 31, 2000 and 1999, the Company had outstanding the
following nonqualified stock options granted to officers and
directors (Note 10):
Common Shares Exercise Expiration
Under Option Price Per Share Date
------------- --------------- --------------
100,000 $ 1.50 January 2004
100,000 $ 1.50 March 2004
----------
200,000
==========
All the outstanding options granted to officers and directors are
exercisable at December 31, 2000 and 1999.
Officer and Director Warrants:
At December 31, 2000 and 1999, the Company had outstanding to
officers and directors, stock warrants to purchase 8,000 shares of
common stock at $1.50 per share (Note 10). The warrants expire
January 2004.
Consulting Agreement:
As of December 31, 2000 and 1999, the Company had a month-to-month
consulting contract with a majority shareholder of the Company;
whereby the Company pays the individual $3,000 per month for his
services.
Notes Payable, Other:
Notes payable to related parties consist of notes issued to
officers/shareholders of Chex and aggregated $3,551,000 and
$1,933,000, at December 31, 2000 and 1999, respectively.
NOTE 12: INCOME TAXES
The income tax provision consisted of the following for the years
ended December 31:
2000 1999
------------ --------------
Current:
Federal $ 36,177 $ -
State 11,560 -
------------ --------------
$ 47,737 $ -
============ ==============
Deferred:
Federal $ 12,472 $ 195,800
State - -
Valuation allowance (12,472) (195,800)
------------ --------------
$ - $ -
============ ==============
-14-
CHEX SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 2000 and 1999
NOTE 12: INCOME TAXES (CONTINUED)
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.
Temporary differences result primarily from the accounting methods
used in recording the allowance for doubtful accounts, accumulated
depreciation and net operating losses the Company can carry forward
for tax purposes.
At December 31, 2000 and 1999, the Company had net operating loss
carryforwards for federal purposes of approximately $0 and $106,000,
respectively, expiring at various dates through 2019.
During the years ended December 31, 2000 and 1999, the valuation
allowance charge aggregated $(183,328) and $195,800, respectively.
NOTE 13: 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 37% of its fee income from operations
at two casino locations, which is summarized below:
Year Ended
December 31, 2000 Percent of Fees
----------------- ---------------
Location A 22%
Location B 17%
NOTE 14: LITIGATION SETTLEMENT
As of December 31, 1999, two ex-employees had brought a suit against
the Company alleging breach of their employment contracts. In June
2000, the Company entered into an agreement to settle the dispute,
whereby the Company paid in aggregate $110,000 to the two former
employees. As of December 31, 1999, the $110,000 settlement is
included in accounts payable on the accompanying balance sheet.
NOTE 15: LETTER OF INTENT
Subsequent to year end, Chex signed a non-binding letter of intent to
merge with a publicly traded company. The discussions are at a
preliminary stage, and any merger is subject to due diligence by both
parties and approval by the board of directors of each party. Under
the preliminary terms of the letter of intent, all outstanding shares
of Chex's common stock would be exchanged for shares of stock of the
publicly traded company.
-15-
CHEX SERVICES, INC.
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
CHEX SERVICES, INC.
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
CHEX SERVICES, INC.
CONTENTS
================================================================================
INDEPENDENT AUDITORS' REPORT 3
FINANCIAL STATEMENTS
Balance sheet 4
Statement of operations 5
Statement of stockholders' equity 6
Statement of cash flows 7 - 8
SUMMARY OF ACCOUNTING POLICIES 9 - 10
NOTES TO FINANCIAL STATEMENT 11 - 19
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Chex Services, Inc.
Minneapolis, Minnesota
We have audited the accompanying balance sheet of Chex Services, Inc. as of
December 31, 1999 and the related statements of operations, changes in
stockholders' equity, and cash flows for the year 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 our management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chex Services, Inc. at December
31, 1999, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
BDO Seidman, LLP
January 17, 2001
3
CHEX SERVICES, INC.
BALANCE SHEET
================================================================================
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $4,807,711
Accounts receivable 424,172
Employee receivable (Note 2) 7,641
Prepaid casino contracts (Note 5) 197,515
Note receivable (Note 1) 100,000
Current portion of notes receivable, related parties (Note 2) 14,500
Other current assets 78,385
- --------------------------------------------------------------------------------
Total current assets 5,629,924
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Furniture and equipment 718,171
Less accumulated depreciation 246,515
- --------------------------------------------------------------------------------
Total property and equipment 471,656
- --------------------------------------------------------------------------------
NOTES RECEIVABLE, RELATED PARTIES (NOTE 2) 705,110
- --------------------------------------------------------------------------------
$6,806,690
================================================================================
CHEX SERVICES, INC.
BALANCE SHEET
================================================================================
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable (Note 3) $ 5,691,500
Accounts payable (Note 5) 162,683
Accrued casino contracts (Note 5) 219,816
Accrued interest (Note 3) 144,861
Accrued compensation 63,393
Other accrued expenses 11,697
Current portion of long-term debt (Note 4) 108,572
- --------------------------------------------------------------------------------
Total current liabilities 6,402,522
LONG-TERM LIABILITIES
Long-term debt, net of current portion (Note 4) 166,541
- --------------------------------------------------------------------------------
Total liabilities 6,569,063
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 5) --
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 10,000,000 shares
authorized, 1,786,666 issued and 1,781,666 outstanding 17,817
Additional paid in capital 829,584
Accumulated deficit (589,774)
Less subscription receivable (20,000)
- --------------------------------------------------------------------------------
Total stockholders' equity 237,627
- --------------------------------------------------------------------------------
$ 6,806,690
================================================================================
SEE ACCOMPANYING SUMMARY OF
ACCOUNTING POLICIES AND NOTES TO FINANCIAL STATEMENTS.
4
CHEX SERVICES, INC.
STATEMENT OF OPERATIONS
================================================================================
YEAR ENDED DECEMBER 31, 1999 %
- --------------------------------------------------------------------------------
FEES $ 4,625,955 100.0
- --------------------------------------------------------------------------------
LOCATION EXPENSES
Salaries and benefits 1,029,331 22.3
Returned checks 458,297 9.9
Occupancy 995,404 21.5
Other 667,778 14.4
- --------------------------------------------------------------------------------
Total location expenses 3,150,810 68.1
- --------------------------------------------------------------------------------
LOCATION GROSS MARGIN 1,475,145 31.9
CORPORATE EXPENSES 1,252,451 27.1
- --------------------------------------------------------------------------------
INCOME FROM OPERATIONS 222,694 4.8
- --------------------------------------------------------------------------------
OTHER EXPENSE
Interest expense, net of interest income of $39,402 542,513 11.7
Miscellaneous expense 12,718 0.3
- --------------------------------------------------------------------------------
Total other expense 555,231 12.0
- --------------------------------------------------------------------------------
LOSS BEFORE TAXES (332,537) (7.2)
INCOME TAXES -- 0.0
- --------------------------------------------------------------------------------
NET LOSS $ (332,537) (7.2)
================================================================================
SEE ACCOMPANYING SUMMARY OF
ACCOUNTING POLICIES AND NOTES TO FINANCIAL STATEMENTS.
5
CHEX SERVICES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
================================================================================
Common Stock
----------------------- Paid-In Subscription Accumulated Total
Shares Amount Capital Receivable Deficit Equity
- ----------------------------------------------------------------------------------------------------------
BALANCE,
December 31, 1998 1,786,666 $ 17,867 $ 847,034 $ (70,000) $ (257,237) $ 537,664
Repurchase of
common stock (5,000) (50) (17,450) -- -- (17,500)
Receipt of
stock subscriptions -- -- -- 50,000 -- 50,000
Net loss -- -- -- -- (332,537) (332,537)
- ----------------------------------------------------------------------------------------------------------
BALANCE,
December 31, 1999 1,781,666 $ 17,817 $ 829,584 $ (20,000) $ (589,774) $ 237,627
==========================================================================================================
SEE ACCOMPANYING SUMMARY OF
ACCOUNTING POLICIES AND NOTES TO FINANCIAL STATEMENTS.
6
CHEX SERVICES, INC.
STATEMENT OF CASH FLOWS
================================================================================
YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
CASH FLOWS PROVIDED IN OPERATING ACTIVITIES:
Net loss $ (332,537)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 134,583
Net (increase) decrease in cash due to changes in:
Accounts receivable (378,899)
Employee receivable (7,411)
Prepaid casino contracts 92,275
Other current assets 60,442
Accounts payable 157,453
Accrued casino contracts 219,816
Accrued interest 73,186
Accrued compensation 29,871
Other accrued expenses 11,120
- --------------------------------------------------------------------------------
Total adjustments 392,436
- --------------------------------------------------------------------------------
Net cash provided by operating activities 59,899
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment (359,830)
- --------------------------------------------------------------------------------
Repayment on notes receivable 500,000
Advances on notes receivable (224,500)
Net cash used in investing activities (84,330)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable 2,866,000
Payments on notes payable (52,000)
Borrowings on long-term debt 250,000
Payments on long-term debt (44,808)
Receipt of stock subscriptions 50,000
Repurchase of common stock (17,500)
- --------------------------------------------------------------------------------
Net cash provided by financing activities 3,051,692
- --------------------------------------------------------------------------------
7
CHEX SERVICES, INC.
STATEMENT OF CASH FLOWS
================================================================================
YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
Increase in cash $3,027,261
CASH, at beginning of year 1,780,450
- --------------------------------------------------------------------------------
CASH, at end of year $4,807,711
================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Interest $ 429,924
================================================================================
SEE ACCOMPANYING SUMMARY OF
ACCOUNTING POLICIES AND NOTES TO FINANCIAL STATEMENTS.
8
CHEX SERVICES, INC.
SUMMARY OF ACCOUNTING POLICIES
================================================================================
NATURE OF ORGANIZATION Chex Services, Inc. ("Chex") was incorporated in
Minnesota in July of 1992. The Company provides
financial services to customers primarily in the form
of check cashing, automated teller machines ("ATM") and
credit card advances and operates principally at Native
American owned gaming establishments. As of December
31, 1999, the Company operated in gaming establishments
located in Arizona, Michigan, Minnesota, New Mexico,
North Dakota and Wisconsin.
CASH Equivalents All temporary investments purchased with a
maturity of three-months or less are considered cash
equivalents.
CONCENTRATIONS Financial instruments that potentially subject the
Company to concentration of credit risk consist
principally of cash and accounts receivable. The
Company maintains cash in bank deposit accounts, which,
at times, may exceed federally insured limits. At
December 31, 1999, the Company's cash in banks exceeded
the federally insured limit by $901,727. The Company
believes it's cash deposits are maintained at high
quality financial institutions. In addition, the
Company maintains a significant amount of cash at each
of the gaming establishments. The Company believes that
is has controls in place to safeguard these on-hand
amounts. The Company believes no significant credit
risk exists with respect to cash.
Accounts receivables 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
processor industry who remit to the Company the cash
advanced plus Chex's allocable share of any fees
earned. The Company believes these processors are
financially stable and no significant credit risk
exists with respect to accounts receivables arising
from ATM and credit card advances.
9
CHEX SERVICES, INC.
SUMMARY OF ACCOUNTING POLICIES
================================================================================
PROPERTY AND Property and equipment is stated at cost and consists
EQUIPMENT of furniture and equipment with estimated useful lives
of 3-7 years. Depreciation is provided over the
estimated useful lives of the assets using the
straight-line method.
Expenditures for maintenance or repair are charged
against current income as incurred. Expenditures that
substantially increase the value or extend the useful
lives are capitalized. Costs and related allowances for
depreciation of property sold or otherwise retired are
removed from the accounts, and gains or losses on
disposition are included in earnings.
INCOME TAXES Income taxes are calculated using the liability method
specified by Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes".
RETURNED Checks The Company charges operations for potential
losses on returned checks in the period such checks are
returned, since ultimate collection of these items is
uncertain. Recoveries on returned checks are credited
in the period when the recovery is received.
USE OF ESTIMATES The preparation of the Company's financial statements
in conformity with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and
liabilities, and the reported amounts of revenues and
expenses during the reporting period. Actual results
could differ from those estimates.
10
Chex Services, Inc.
Notes to Financial Statement
================================================================================
1. NOTES RECEIVABLE As of December 31, 1999, the Company had a $100,000
unsecured note receivable from an individual with
interest accruing at 12%, due January 31, 2000. As
discussed in Note 11, this note was extended in January
2000.
2. RELATED PARTY Notes receivable from related parties consist of the
RECEIVABLES following:
DECEMBER 31, 1999
-------------------------------------------------------
Notes receivable, stockholders,
interest at 6%, annual payments of
interest only beginning October
2000 through maturity, principal
due July 2000 through October,
2004. These notes are unsecured. $ 714,610
Note receivable, stockholder,
non-interest bearing, unsecured and
due on demand. 5,000
--------------------------------------------------------
719,610
Less current portion of notes
receivable (14,500)
-------------------------------------------------------
Notes receivable, long-term $ 705,110
=======================================================
As of December 31, 1999, the Company had advances to
numerous employees totaling $7,641. These advances are
to be collected by the Company through regular payroll
withholdings.
3. NOTES PAYABLE, As of December 31, 1999, the Company had notes payable
OTHER to numerous individual investors aggregating
$5,691,500, of which $1,933,000 was with
officers/shareholders of the Company. These notes
accrue interest at 12% payable quarterly and are
unsecured. The notes mature at various dates throughout
the year ended December 31, 2000; however at the option
of the note holder, the notes are subject to repayment
with ninety days notice. Accrued interest payable on
these notes was $142,595 at December 31, 1999.
11
Chex Services, Inc.
Notes to Financial Statement
================================================================================
4. LONG-TERM Long-term debt consists of the following:
DEBT
DECEMBER 31, 1999
-------------------------------------------------------
Note payable, bank, interest at
prime plus 2.5% (11.0% at December
31, 1999), payable in monthly
installments of principle and
interest of $8,176, due October,
2002. The note is secured by
substantially all corporate assets
and guaranteed by three of the
Company's shareholders. $ 238,785
Note payable, bank, interest at
prime plus 1.25% (9.75% at December
31, 1999), payable in monthly
installments of principle and
interest of $1,607, due April 2001.
The note is secured by
substantially all corporate assets. 21,823
Note payable, bank, interest at
prime plus 1.25% (9.75% at December
31, 1999), payable in monthly
installments of principle and
interest of $1,515, due April 2001.
The note is secured by
substantially all corporate assets. 14,505
-------------------------------------------------------
275,113
Less current portion 108,572
-------------------------------------------------------
Long-term debt $ 166,541
=======================================================
Following are maturities of long-term debt for each of
the next three years:
-------------------------------------------------------
2000 $ 108,572
2001 88,626
2002 77,915
-------------------------------------------------------
$ 275,113
=======================================================
12
Chex Services, Inc.
Notes to Financial Statement
================================================================================
5. COMMITMENTS OPERATING LEASE
AND The Company leases its corporate facilities under a
CONTINGENCIES month to month operating lease. Rent expense under this
lease was $17,959 for the year ended December 31, 1999.
Subsequent to year end, the Company signed a two year
operating lease for the corporate facilities (see
Subsequent Events Note 6).
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 location. 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 monthly amount as defined in the
contract.
o A dollar amount, as defined by the contract, per
transaction volume processed by the Company.
o A percent 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.
Pursuant to the contracts, the Native American owned
casinos have not waived their sovereign immunity.
As of December 31, 1999, the Company had $197,515 of
prepaid amounts on casino contracts and $219,816 of
accrued liability on casino contracts.
13
Chex Services, Inc.
Notes to Financial Statement
================================================================================
Total minimum future payments under these contracts are
summarized as follows:
DECEMBER 31,
-------------------------------------------------------
2000 $ 226,750
2001 69,875
-------------------------------------------------------
$ 296,625
=======================================================
LITIGATION
----------
On October 15, 1999, two ex-employees brought an action
against the Company alleging breach of their employment
contracts. This matter was settled by arbitration in
June of 2000 and the Company paid both individuals a
total of $110,000 in full settlement. This amount is
included in accounts payable on the accompanying
balance sheet.
6. INCOME TAXES The Company accounts for income taxes using an asset
and liability approach which generally requires the
recognition of deferred income tax assets and
liabilities based on the expected future income tax
consequences of events that have previously been
recognized in the Company's financial statements or tax
returns. In addition, a valuation allowance is
recognized if it is more likely than not that some or
all of the deferred income tax asset will not be
realized. A valuation allowance is used to offset the
related net deferred income tax assets due to
uncertainties of realizing the benefits of certain net
operating loss and tax credit carryforwards.
14
Chex Services, Inc.
Notes to Financial Statement
================================================================================
The Company's deferred income tax assets are as
follows:
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------
Deferred income tax assets $ 195,800
Valuation allowance (195,800)
-------------------------------------------------------
Net deferred income 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. Temporary
differences resulted primarily from the accounting
methods used in recording stock options granted and net
operating losses the Company can carry forward for tax
purposes. As of December 31, 1999, the Company had
Federal and State net operating loss carryforwards of
approximately $106,000 and $90,000, respectively,
expiring at various dates through 2019.
7. STOCK OPTION Effective February 25, 1997, the shareholders and board
PLAN of directors adopted a stock option plan. The plan
allows for incentive stock options and non-statutory
stock options to be granted to key individuals at the
discretion of the Board of Directors. Incentive options
are exercisable no later than 10 years after the date
of grant and prices may not be less than 100% of the
fair market value of the common stock on the date the
option is granted. The options vest over periods from
one to five years. Non-statutory stock option terms are
fixed at the discretion of the Board, provided,
however, that the option price shall not be less than
85% of the market value of one share of common stock on
the date the option is granted. Upon grant, the Board
establishes the exercise price and vesting period of
the options granted. As of December 31, 1999, the
Company had reserved 10% of the issued and outstanding
shares of common stock for issuance under the plan.
15
Chex Services, Inc.
Notes to Financial Statement
================================================================================
A summary of the changes of the Company's stock options
and warrants for the year-ended December 31, 1999 is as
follows:
WEIGHTED-
AVERAGE
EXCERCISE
OPTIONS AND WARRANTS SHARES PRICE
-------------------------------------------------------
Outstanding at beginning of year 25,000 1.50
Granted 253,000 1.50
Exercised - -
Forfeited - -
-------------------------------------------------------
Outstanding at end of year 278,000 1.50
=======================================================
The weighted-average fair value of options and warrants
granted during the year was $.13.
The total outstanding grants at December 31, 1999 are
summarized as follows:
WEIGHTED
AVERAGE
NUMBER OF REMAINING
NUMBER SHARES EXERCISE CONTRACTUAL
OF SHARES EXERCISABLE PRICE LIFE - YEARS
-------------------------------------------------------
278,000 265,000 1.50 4.0
=======================================================
16
Chex Services, Inc.
Notes to Financial Statement
================================================================================
Included in the above analysis are the following
non-qualified exercisable stock options granted to
officers and directors during 1999:
COMMON SHARES EXCERCISE PRICE
UNDER OPTION PER SHARE EXPIRATION DATE
-------------------------------------------------------
100,000 $1.50 January, 2004
100,000 $1.50 March, 2004
-------------
200,000
=============
During 1999, the Company also issued warrants to
officers and directors for the purchase of 8,000 shares
of common stock at $1.50 per share. These warrants
expire in January of 2004.
The Company has adopted the disclosure only provisions
of SFAS No. 123, "Accounting for Stock-Based
Compensation," but applies Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting
for its plans. If the Company had elected to recognize
compensation costs for the options granted consistent
with the methods prescribed in SFAS No. 123, the pro
forma net loss would have been $365,037. The fair value
of the stock options used to compute the pro forma loss
is the estimated present value at the grant date with
the minimum value method using risk-free interest rates
ranging from 4.5% to 5.9%.
17
Chex Services, Inc.
Notes to Financial Statement
================================================================================
8. BUSINESS The Company's operations are not concentrated in any
CONCENTRATIONS specific geographic region, but are tied to the Native
American gaming industry. The Company generated 65% of
its fee income from operations at 5 casino locations,
which is summarized as follows:
PERCENT OF
YEAR ENDED DECEMBER 31, 2000 FEES
-------------------------------------------------------
Location A 20
Location B 12
Location C 11
Location D 11
Location E 11
-------------------------------------------------------
65
=======================================================
9. RELATED PARTY As of December 31, 1999, the Company had a
TRANSACTIONS month-to-month consulting contract with a majority
shareholder, whereby the Company is making monthly
payments of $3,000 for services rendered.
10. SUBSEQUENT EVENTS NOTE RECEIVABLE
---------------
On January 31, 2000, the Company extended the Note
receivable described in Note 1 on a month to month
basis. No other changes were made to the provisions of
the note.
CONVERSION OF NOTES PAYABLE
---------------------------
On April 1, 2000, $280,000 of notes payable (as
described in Note 3) were converted to 186,667 shares
of common stock.
SALARY CONTINUATION PLAN
------------------------
During March 2000, the Company approved a salary
continuation plan for two of its employees. Pursuant to
the plan, these two individuals are guaranteed two
years of salary, aggregating $188,640, in the event
that the Company is sold and their jobs are terminated.
18
Chex Services, Inc.
Notes to Financial Statement
================================================================================
CORPORATE FACILITY LEASE
------------------------
In January of 2000, the Company signed a noncancelable
operating lease for their corporate facilities to
commence March 1, 2000 and end February 28, 2002.
Future minimum payments under this lease are summarized
as follows:
-------------------------------------------------------
2000 $ 15,575
2001 19,031
2002 3,183
-------------------------------------------------------
$ 37,789
=======================================================
LINE OF CREDIT
--------------
On January 25, 2000, the Company entered into a
$250,000 revolving line of credit with a bank, due July
28, 2001. Interest is payable monthly at the prime rate
plus 0.75% (9.25% on January 25, 2000). Borrowings are
secured by substantially all of the Company's assets
and guaranteed by two of the Company's majority
shareholders.
NOTE PAYABLE
------------
On February 9, 2000, the Company entered into a note
payable agreement with a bank for $500,000. The note
bears interest at the prime rate plus 1.0% (9.75% on
February 9, 2000), interest payable monthly, due July
28, 2000. The note is secured by substantially all
corporate assets, guaranteed by two of the Company's
shareholders, as well as a pledge of personal assets by
the two shareholders. On July 28, 2000, this note was
extended to November 1, 2000 with a new principal
amount of $450,000 and no other modifications to the
terms of the note.
19
CHEX SERVICES, INC.
FINANCIAL STATEMENTS
For the Nine Months Ended
September 30, 2001 and 2000 (Unaudited)
CHEX SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2001 and 2000 (Unaudited)
Independent Accountants' Review Report 1
Balance Sheets (Unaudited) 2
Statement of Operations (Unaudited) 3
Statement of Stockholders' Equity (Unaudited) 4
Statement of Cash Flows (Unaudited) 5
Condensed Notes to the (Unaudited) Financial Statements 6-10
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
--------------------------------------
Board of Directors and Stockholders
Chex Services, Inc.
Minnetonka, Minnesota
We have reviewed the accompanying balance sheets of Chex Services, Inc. as of
September 30, 2001 and 2000 and the related statements of operations,
stockholders' equity and cash flows for the nine-month periods then ended. These
financial statements are the responsibilities of the Corporation's management
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial data
consists principally of applying analytical procedures to financial data and of
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit in accordance with auditing
standards generally accepted in the United States of America, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
SILVERMAN OLSON THORVILSON & KAUFMANN LTD
CERTIFIED PUBLIC ACCOUNTANTS
Minneapolis, Minnesota
February 4, 2002
CHEX SERVICES, INC.
BALANCE SHEETS
September 30, 2001 and 2000 (Unaudited)
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,709,065 $ 6,143,913
Accounts receivable (net of allowance for doubtful accounts
of $53,751 and $14,096, respectively) 3,091,842 1,180,289
Employee receivables 45,427 25,002
Prepaid amounts on casino contracts (Note 6) 484,859 340,605
Note receivable, other 100,000 100,000
Current portion of notes receivable, related parties (Note 3) 280,113 50,650
Other current assets 176,307 69,212
------------ ------------
Total current assets 13,887,613 7,909,671
Notes receivable, related parties (Note 3) 1,275,610 793,710
Property and equipment, net 915,699 721,879
Other long term assets 20,248 --
------------ ------------
Total assets $ 16,099,170 $ 9,425,260
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable, bank $ 1,044,037 $ 250,000
Notes payable, other (Note 4 and 8) 11,033,309 6,650,500
Accounts payable 325,009 146,538
Accrued liability on casino contracts (Note 6) 205,538 248,386
Accrued interest 264,910 161,196
Accrued payroll and benefits 191,703 81,688
Other accrued expenses 88,577 13,755
Loans payable (Note 5) 1,650,000 368,469
Current portion of long-term debt 254,178 584,854
------------ ------------
Total current liabilities 15,057,261 8,505,386
Long-term debt, net of current portion 282,962 104,178
------------ ------------
Total liabilities 15,340,223 8,609,564
------------ ------------
Commitments and contingencies (Note 6) -- --
Stockholders' equity:
Common stock, $.01 par value; 10,000,000 shares authorized,
a2,400,000 and 1,978,333 issued and outstanding, respectively 24,000 19,784
Additional paid in capital 1,750,902 1,122,617
Accumulated deficit (430,955) (311,705)
Common stock subscription receivable (585,000) (15,000)
------------ ------------
Total stockholders' equity 758,947 815,696
------------ ------------
Total liabilities and stockholders' equity $ 16,099,170 $ 9,425,260
============ ============
See accompanying notes to financial statement.
-2-
CHEX SERVICES, INC.
STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2001 and 2000 (Unaudited)
2001 2000
------------ ------------
Fee Revenue $ 10,927,482 $ 6,447,494
------------ ------------
Location expenses:
Salaries and benefits 2,168,622 1,362,133
Returned checks 1,325,160 787,058
Fees to casinos 2,331,944 1,160,204
Other 2,021,079 1,059,738
------------ ------------
Total location expenses 7,846,805 4,369,133
------------ ------------
Location gross margin 3,080,677 2,078,361
Corporate operating expenses 2,335,088 1,195,483
------------ ------------
Income from operations 745,589 882,878
------------ ------------
Other income (expense):
Interest expense (973,279) (621,196)
Interest income 76,204 8,619
Miscellaneous income (expense) 182,829 7,768
------------ ------------
Other income (expense) (714,246) (604,809)
------------ ------------
Income before taxes 31,343 278,069
Provision for income taxes -- --
------------ ------------
Net income $ 31,343 $ 278,069
============ ============
See accompanying notes to financial statements.
-3-
CHEX SERVICES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2001 and 2000 (Unaudited)
COMMON
COMMON STOCK ADDITIONAL STOCK TOTAL
----------------------- PAID-IN SUBSCRIPTION ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT EQUITY
---------- ---------- ---------- ---------- ---------- ----------
Balance at
January 1, 2000 1,781,666 $ 17,817 $ 829,584 $ (20,000) $ (589,774) $ 237,627
Issuance of common stock
upon note holder
conversion 196,667 1,967 293,033 -- -- 295,000
Receipt of stock
subscriptions -- -- -- 5,000 -- 5,000
Net income -- -- -- -- 278,069 278,069
---------- ---------- ---------- ---------- ---------- ----------
Balances at
September 30, 2000 1,978,333 $ 19,784 $1,122,617 $ (15,000) $ (311,705) $ 815,696
========== ========== ========== ========== ========== ==========
Balance at
January 1, 2001 1,978,333 $ 19,784 $1,122,617 $ (15,000) $ (462,298) $ 665,103
Issuance of common stock
upon exercise of stock
options and warrants 421,667 4,216 628,285 (570,000) -- 62,501
Net income -- -- -- -- 31,343 31,343
---------- ---------- ---------- ---------- ---------- ----------
Balances at
September 30, 2001 2,400,000 $ 24,000 $1,750,902 $ (585,000) $ (430,955) $ 758,947
========== ========== ========== ========== ========== ==========
See accompanying notes to financial statements.
-4-
CHEX SERVICES, INC.
STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2001 and 2000 (Unaudited)
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,343 $ 278,069
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation 225,064 120,039
(Increase) decrease in assets:
Accounts receivable (1,211,971) (756,117)
Employee receivable (12,683) (17,361)
Prepaid amounts on Casino contracts (145,336) (143,090)
Other current assets (176,307) 9,173
Other assets 27,807 --
Increase (decrease) in liabilities:
Accounts payable 47,381 (16,145)
Accrued liability on Casino contract (5,398) 28,570
Accrued income taxes (25,347) --
Accrued interest 69,207 16,335
Accrued payroll and benefits 49,477 18,295
Other accrued expenses 80,676 2,058
----------- -----------
Net cash used in operating activities (1,046,087) (460,174)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (393,147) (370,262)
Repayment of notes receivable 68,490 --
Advances on notes receivable (598,003) (124,750)
----------- -----------
Net cash used in investing activities (922,660) (495,012)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in note payable, bank 794,038 250,000
Borrowings on loans payable 1,006,015 368,469
Increase (decrease) on notes payable, other 3,284,211 1,254,000
Borrowings on long-term debt 455,962 500,000
Payment of long-term debt (536,003) (86,081)
Receipt of common stock subscription -- 5,000
Issuance of common stock 62,501 --
----------- -----------
Net cash provided by financing activities 5,066,724 2,291,388
----------- -----------
Increase in cash and cash equivalents 3,097,977 1,336,202
Cash and cash equivalents - beginning of period 6,611,088 4,807,711
----------- -----------
Cash and cash equivalents - ending of period $ 9,709,065 $ 6,143,913
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest during the period $ 904,072 $ 604,861
=========== ===========
Cash paid for income taxes during the period $ -- $ 22,390
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
During 2001, the Company issued 380,000 shares of common stock in exchange
for subscriptions aggregating $570,000.
During 2000, $295,000 of notes payable, other were converted into 196,667
shares of common stock.
See accompanying notes to financial statements.
-5-
CHEX SERVICES, INC.
CONDENSED NOTES TO THE FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2001 and 2000 (Unaudited)
Note 1: BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally
accepted in the United States of America. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the nine-month period ended September 30, 2001
and 2000, are not necessarily indicative of the results that may be
expected for the year ended December 31, 2001 and 2000. For further
information, refer to the Company's December 31, 2000 financial
statements and footnotes thereto included as an exhibit in this Form
8-K/A.
Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization:
Chex Services, Inc. ("Chex" or the "Company") was incorporated in
Minnesota in July 1992. The Company provides financial services
primarily check cashing, automated teller machines (ATM) and credit
card advances to customers primarily at Native American owned gaming
establishments. As of September 30, 2001 and 2000, the Company
operates at twenty-one and fifteen gaming establishments,
respectively, located in California, Michigan, Minnesota, Nebraska,
New Mexico, New York, North Dakota and Wisconsin.
Use of Estimates:
The preparation of the Company's financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and
liabilities, and the reported amounts of revenues and expenses
during the reporting period.
Changes in Accounting Standards
In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 141, "Business
Combinations", and SFAS No. 142 "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after
June 30, 2001. SFAS No. 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually. The
Company will adopt SFAS No. 142 on January 1, 2002. The Company is
currently evaluating the impact, if any, of this pronouncement on
its financial statements.
-6-
CHEX SERVICES, INC.
CONDENSED NOTES TO THE FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2001 and 2000 (Unaudited)
Note 3: NOTES RECEIVABLE, RELATED PARTIES
Notes receivable, related parties consisted of the following at
September 30:
2001 2000
----------- -----------
Notes receivable due from a deceased
shareholder's estate, with interest
accruing at 6%. Annual payments of
interest only beginning October 2000
through maturity, October 2004, with a
balloon payment at maturity. The note is
unsecured. $ 1,039,674 $ 583,664
Note receivable from an
officer/shareholder, with interest
accruing at 6%. Annual payments of
interest only beginning October 2000
through maturity, October 2004, with a
balloon payment at maturity. The note is
unsecured. 235,936 196,446
Note receivable due from a Company
shareholder, with interest accruing at
12%. The note is unsecured and matured
in January 2002 and has been extended on
a month to month basis 200,000 -
Note receivable due from a Company
shareholder. The note is non-interest
bearing, unsecured and due on demand. 47,853 45,000
Notes receivable from various Company
employees. The notes are non-interest
bearing, unsecured and due on demand. 32,260 19,250
Notes receivable 1,555,723 844,360
Less current portion (280,113) (50,650)
----------- -----------
Notes receivable, long-term $ 1,275,610 $ 793,710
=========== ===========
Note 4: NOTES PAYABLE, OTHER
As of September 30, 2001 and 2000, the Company had notes payable to
numerous individual investors aggregating $11,033,309 and $6,650,500,
respectively. These notes payable accrue interest at 12%, payable
quarterly and are unsecured. The notes mature at various dates
throughout the year ended December 31, 2002; however at option of the
note holder, the notes are subject to repayment with ninety days
notice.
Note 5: LOANS PAYABLE, OTHER
During 2000, the Company entered into a sale-lease back transaction
which was subsequently cancelled and refinanced in January 2001. The
transaction in substance represented an initial loan aggregating
$410,470 and therefore is being reflected as a note payable on the
accompanying balance sheet and statement of operations. The loan
accrued interest at 9.5%, payable monthly and was secured by
equipment. At September 30, 2001 and 2000, the outstanding balance was
$0 and $368,469, respectively.
-7-
CHEX SERVICES, INC.
CONDENSED NOTES TO THE FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2001 and 2000 (Unaudited)
Note 5: LOANS PAYABLE, OTHER (CONTINUED)
During 2001, the Company entered into various loan agreements with
Money Centers of America, Inc. (MCA) aggregating $1,200,000. The loans
accrue interest at 9%, are unsecured and due on demand. In addition,
the Company entered into a verbal loan agreement with MCA aggregating
$450,000. The verbal agreement is non-interest bearing, unsecured and
due on demand. As of September 30, 2001, loans payable to MCA
aggregated $1,650,000.
Note 6: COMMITMENTS AND CONTINGENCIES
Employment Contracts:
In February 2001, the Company entered into a three year employment
agreement with one of its employees expiring January 2004. Pursuant
to the agreement, if terminated for other than an egregious act, the
employee will continue to receive his annual compensation, of
$100,000 and guaranteed minimum bonus of $200,000, in monthly
installments for the duration of the original contract term.
In May 2001, the company entered into a three year employment
agreement with one of its employees expiring April 2004. Pursuant to
the agreement, if terminated for other than an egregious act, the
employee will continue to receive their annual compensation of
$115,000 in monthly installments.
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 location. 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 monthly amount as defined in the contract.
o A dollar amount, as defined by the contract, per transaction
volume processed by the Company.
o A percent 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.
Pursuant to the contracts, the Native American owned casinos have
not waived their sovereign immunity.
During 2001 and 2000, the Company and a gaming establishment made
verbal amendments to their existing written contract. The Company
and the gaming establishment are currently negotiating the actual
fees payable to the establishment after consideration of the various
verbal amendments. As of September 30, 2001, the Company has
recorded approximately $30,000 payable to the establishment, as this
represents management's estimate of the liability that will
ultimately be agreed upon. If the Company is unable to renegotiate
the fees based on the verbal amendments, the liability, as provided
for in the original written agreement, would be approximately
$70,000 at September 30, 2001.
-8-
CHEX SERVICES, INC.
CONDENSED NOTES TO THE FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2001 and 2000 (Unaudited)
NOTE 6: COMMITMENTS AND CONTINGENCIES (CONTINUED)
As of September 30, 2001 and 2000, the Company had $484,859 and
$340,605 of prepaid amounts on casino contracts and had $205,538 and
$248,386 of accrued liability on casino contracts, included on the
accompanying balance sheet.
Total fee expense relating to the casino locations was $2,331,944
and $1,160,204 for the years ended September 30, 2001 and 2000,
respectively.
NOTE 7: EMPLOYEE BENEFIT PLAN
Employee Stock Option Plan:
A summary of the activity within the Company's employee incentive
stock option plan and status of the related stock options as of
September 30, 2001 is as follows:
Weighted-
Average
Shares Exercise Price
------------ ----------
Outstanding at December 31, 2000 298,000 $ 1.50
Granted 123,667 $ 1.50
Exercised (421,667) $ 1.50
Forfeited - $ 1.50
------------ ----------
Outstanding at September 30, 2001 - $ -
============ ==========
NOTE 8: RELATED PARTY TRANSACTIONS
Officer and Director Options:
During the nine months ended September 30, 2001, the company granted
and the officers/directors exercised options to purchase 100,000
shares of the Company's common stock at an option price of $1.50.
Consulting Agreement:
As of September 30, 2001 and 2000, the Company had a month-to-month
consulting contract with a majority shareholder of the Company;
whereby the Company pays the individual $3,000 per month for his
services.
Notes Payable, Other:
Notes payable to related parties consist of notes issued to
officers/shareholders of Chex and aggregated $3,013,000 and
$4,428,000, at September 30, 2001 and 2000, respectively.
Stock Subscriptions:
During 2001, various officers/directors and employees of the Company
exercised options to purchase 380,000 shares of the Company's common
stock in exchange for the issuance of notes payable aggregating
$570,000. The notes bear interest at 8% and mature eighteen months
from the closing of the merger, December 21, 2001 with Equitex, Inc.
("Equitex) and are secured by the underlying shares of the Company's
common stock.
-9-
CHEX SERVICES, INC.
CONDENSED NOTES TO THE FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2001 and 2000 (Unaudited)
NOTE 9: ACQUISITION OF THE COMPANY
On December 21, 2001, Equitex completed the acquisition of 100% of the
capital stock of Chex from its stockholders in exchange for 1,992,001
shares of Equitex $0.02 par value common stock.
-10-