U.S. SECURITIES AND EXCHANGE
COMMISSION Washington,
D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended: DECEMBER 31, 2004
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(NO FEE REQUIRED)
Commission File Number: 333-1026-D
FASTFUNDS FINANCIAL CORPORATION
(Name of Registrant in its charter)
NEVADA 87-0425514
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11100 WAYZATA BOULEVARD, SUITE 111, MINNETONKA, MINNESOTA 55305
(Address of principal executive offices)(Zip Code)
Issuer's telephone number: (952) 541-0455
Securities registered under Section 12 (b)
of the Exchange Act:
NONE
Securities registered under Section 12 (g)
of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
- --------------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Exchange during the past 12 months
(or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
Days: Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained in this form, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: /X/
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2): Yes / / No /X/
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $14,367,913 based on the last sale price of the Registrant's
common stock on April 12, 2005, ($5.30 per share) as reported on the
Over-the-Counter Bulletin Board.
The Registrant had 10,413,627 shares of common stock outstanding as of April 12,
2005.
Documents incorporated by reference: None
FASTFUNDS FINANCIAL CORPORATION
FORM 10-K
THIS REPORT MAY CONTAIN CERTAIN "FORWARD-LOOKING" STATEMENTS AS SUCH TERM IS
DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 OR BY THE
SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND RELEASES, WHICH
REPRESENT THE REGISTRANT'S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED
TO, STATEMENTS CONCERNING THE REGISTRANT'S OPERATIONS, ECONOMIC PERFORMANCE,
FINANCIAL CONDITION, GROWTH AND ACQUISITION STRATEGIES, INVESTMENTS, AND FUTURE
OPERATIONAL PLANS. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE
NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS
"MAY", "WILL", "EXPECT", "BELIEVE", "ANTICIPATE", "INTENT", "COULD", "ESTIMATE",
"MIGHT", OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE
TERMINOLOGY ARE FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE
INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND THE
REGISTRANT'S CONTROL, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A
VARIETY OF IMPORTANT FACTORS, INCLUDING UNCERTAINTY RELATED TO ACQUISITIONS,
GOVERNMENTAL REGULATION, MANAGING AND MAINTAINING GROWTH, THE OPERATIONS OF THE
COMPANY AND ITS SUBSIDIARIES, VOLATILITY OF STOCK PRICE AND ANY OTHER FACTORS
DISCUSSED IN THIS AND OTHER REGISTRANT FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(a) General development of business.
FastFunds Financial Corporation ("FastFunds" or the "Company") is a holding
company, organized in Nevada in 1985, operating through its wholly owned
subsidiary Chex Services, Inc. ("Chex"). As discussed below, FastFunds
previously existed under the name "Seven Ventures, Inc." Chex is a Minnesota
corporation formed in 1992, and provides financial services, primarily check
cashing, automated teller machine (ATM) access and credit and debit card
advances, to customers predominantly at Native American owned casinos and gaming
establishments. On June 29, 2004, the Company changed its name to FastFunds
Financial Corporation.
On June 7, 2004, a wholly owned subsidiary of Seven Ventures, Inc. merged with
and into Chex (the "Merger"). In the Merger, Equitex, Inc., a publicly traded
SEC registrant incorporated in Delaware ("Equitex"), exchanged its 100%
ownership of Chex for 7,700,000 shares of Company common stock representing
approximately 93% of the Company's outstanding common stock immediately
following the Merger. In addition, Equitex received warrants to purchase 800,000
shares of Company common stock at an exercise price of $0.10 per share, expiring
five years from the date of closing. In connection with the Merger, the Company
received $400,000 through the issuance of convertible promissory notes bearing
interest at five percent per annum and convertible into 4,000,000 shares of
Company common stock upon the occurrence of certain future events. Unless
earlier converted, any outstanding balance of principal and interest is due on
April 14, 2007. In June 2004, $100,000 of principal of the convertible
promissory notes was converted into 1,000,000 shares of common stock; and an
additional $100,000 of principal of the convertible promissory notes was
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converted into 1,000,000 shares of common stock in August 2004. The remaining
$200,000 of convertible promissory notes remains convertible into 2,000,000
shares of common stock upon the occurrence of certain future events.
In August 2004, the Company formed FastFunds International, Inc., a wholly owned
Delaware corporation principally based in London, to build a presence in Europe
for the Company's stored value card program. In September 2004, the Company
formed FFC FastFunds (Cyprus) Limited, a wholly owned corporation organized
under the laws of Cyprus. In October 2004, FastFunds International, Inc. formed
a wholly owned subsidiary, FastFunds International Limited, with the Registrar
of Companies for England and Wales.
(b) Financial information about segments.
We operate in one industry segment, cash disbursement services.
(c) Narrative description of business.
The Company's primary business is that of its wholly owned subsidiary, Chex.
Chex was formed to provide comprehensive cash access services to casinos, and
other gaming establishments, while also marketing their products a la carte to
other establishments in the casino, entertainment, and hospitality industries.
Chex's total funds transfer system allows casino patrons to access cash through
check cashing, credit/debit card cash advances, automated teller machines and
wire transfers. Chex's check and credit card advance systems compiles detailed
demographic data about patrons that utilize these services. The collected patron
demographic data is then provided to the casino operators and can be used in
their marketing efforts.
As of February 1, 2005, Chex operates at 30 casino and gaming locations and 18
other retail establishments throughout the United States. At each of these
locations Chex can provide any one or a combination of: check cashing;
credit/debit card cash advance systems; and ATM terminals. Chex either staffs
the locations with its personnel or provides its products and services to the
locations based upon the contract with the location.
Chex's services are provided pursuant to the terms of a financial services
agreement entered into with the respective establishment. The agreement
specifies which cash access services will be provided by Chex, the transaction
fees to be charged by Chex to patrons for each type of cash access transaction,
and the amount of compensation to be paid by Chex to the location. Pursuant to
all of these agreements with the locations serviced, Chex maintains the
exclusive rights (with rare exception) to provide its services for the term of
the contract.
At each of the locations where Chex provides its cash access services, it must
have sufficient cash available to process both check cashing and credit card
advance transactions. Additionally, at each location where it operates ATMs,
Chex must have sufficient cash available to replenish the ATM machines. The
amount of cash required is dependent upon the transaction volumes of each
product and the average dollar amount per transaction. To meet its cash needs,
Chex arranges to have the cash it maintains on deposit delivered from a local
bank as needed. If Chex is providing its products to its customers, then the
customer is responsible for providing the cash to manage its operations. Chex
has a treasury management account with Wells Fargo Bank that is set up to sweep
all the local banking accounts each day in order to control, expedite, and
realize economies of scale in their money management.
CREDIT/DEBIT CARD CASH ADVANCE SERVICES. Chex's credit/debit card cash advance
services allow patrons to use their VISA, MasterCard, Discover, and American
Express cards to obtain cash. The remote cash access terminals and other
equipment used to provide credit/debit card advance services are provided by a
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vendor pursuant to cash advance service agreements between Chex and the vendor.
Each of the agreements requires the vendor to supply, install and maintain, at
the vendor's expense, the equipment and supplies necessary to operate the cash
advance system. Chex has recently completed development of its own proprietary
credit/debit card cash advance system (called "CreditGuard") and began to
retrofit all of its locations to enable them to use the new technology beginning
in the second quarter of 2004. In addition, the Chex sales organization began
marketing the CreditGuard product to the gaming and retail industry in 2004.
At the locations at which Chex provides credit card advance services, it pays
the operator a commission for each completed credit card cash advance
transaction. At locations, which utilize CreditGuard, casinos have the funds
electronically transferred into their account, thus maximizing their cash
position and expediting the float of funds. At the locations where we utilize
third party vendors, under the terms of the vendor agreements, the vendor
charges each patron completing a credit card advance transaction a service fee
based on the cash advance amount and pays a portion of such service fee to Chex.
The service fee and the credit card cash advance amount are charged against the
credit card account of the location patron effecting the transaction and are
deposited by the appropriate credit card company into the vendor's account. The
vendor reimburses Chex for the advance amount, by check, and pays the commission
due to Chex in the month following the month the transaction was completed.
Patrons may initiate a credit/debit card cash advance transaction at a remote
credit card cash advance terminal ("kiosk") at Chex's teller facility. The kiosk
consists of a credit/debit card reader with an integrated keypad and a digital
display. The patron initiates the credit/debit card cash advance transaction by
swiping the credit/debit card's magnetic strip through the card reader and then
entering the amount of cash requested. The remote terminal automatically
accesses the credit card company's authorization center for approval of the
transaction. If the transaction is approved, a cash advance draft is
automatically generated at the teller facility and the patron is directed to go
to the teller facility to obtain the cash advance. At the teller facility, the
employee verifies the patron's identity and performs certain other security
measures gathering certain demographic information, including the patron's
address and telephone number. The patron then endorses the back of the cash
advance draft, initials the front of the draft acknowledging the service fee
charge and receives the cash requested with a transaction receipt. The vendor,
pursuant to the terms of the agreements with Chex, guarantees payment to Chex
for all transactions that are processed in accordance with the procedures
specified in the agreements.
For the year ended December 31, 2004, Chex processed approximately 256,000
credit/debit card transactions. These transactions totaled over $87 million in
advances and earned fees of approximately $3,719,000.
CHECK CASHING SERVICES. Chex's check cashing services allow location patrons to
access cash by writing a check to Chex at its teller facility staffed by
employees of the company. Chex' employees conduct the authorization and
verification process for check cashing transactions in accordance with detailed
procedures developed by Chex to help minimize bad debt from returned checks.
Chex' new product, ChexGuard, developed with Wells Fargo Bank and VISA POS,
electronically deposits the checks, and utilizes the VISA banking rail to verify
that the account is open and that the funds written for the check amount are
currently in the account. The funds are deposited into Chex's account the
following day, thus significantly speeding up deposits into their account
(compared to the manual deposit method) and decreasing overall bank charges.
Chex has implemented ChexGuard in all of our locations and began marketing the
product in 2004 to potential customers in the retail, entertainment, and gaming
industries.
Chex charges the customer a fee for cashing checks. The fee for personal checks
ranges from 3% to 6% of the amount of the cashed check. At the locations where
Chex provides check-cashing services, Chex pays the location operator a
commission based upon the monthly amount of checks cashed. Chex also cashes
other financial instruments, such as; money orders, government checks, payroll
checks and insurance checks at varying service fee charges.
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Chex's check cashing services benefit location operators by providing
demographic information on the location's patrons, relieving the location of any
risk and collection costs associated with returned checks and by allowing the
location to focus on the aspects of the business that they do best.
Chex mitigates its potential for returned items by establishing check-cashing
limits based on the customer's history at Chex locations. In addition, Chex
utilizes its recently developed ChexGuard product to determine if a customer has
a valid open account and whether the funds for the amount of the check written
are currently in the account.
In the event a check is returned, Chex utilizes its own in-house collections
department to pursue collection of returned checks. In September 2002, Chex
incorporated this department as Collection Solutions, Inc. creating a separate
wholly-owned stand-alone collections subsidiary intending to offer its services
to customers other than Chex. During 2003, Chex shut down the operations of
Collection Solutions but continues to operate its in-house collections
department. For the year ended December 31, 2004, Chex collected fees of
approximately $413,000 on returned checks.
For the year ended December 31, 2004, Chex cashed over $213 million in customer
checks and earned fees of approximately $7,183,000 on these transactions.
ATM SYSTEMS. Under the terms of agreements with each processor, also known as a
vendor, Chex receives a surcharge fee for each cash withdrawal and the vendor
credits Chex' bank settlement account for each transaction, less any processing
fees. The surcharge, which is a charge in addition to the cash advance, is made
against the bank account of the patron effecting the transaction and is
deposited in the vendor's account. The vendor reimburses Chex for the cash
advance amount generally within two days of the transaction and pays the
surcharge commission due Chex for each withdrawal either immediately or in the
month following the month the transactions were completed. This variance in the
timing of the surcharge payments is based upon the ATM processing agreements
between Chex and its vendors. The Company generally passes on an agreed upon
percentage of the surcharge commissions to the locations where the ATMs are
placed. For the year ended December 31, 2004, Chex processed 2 million ATM
transactions with $176 million in advances and earned fees or commissions of
approximately $3,807,000.
STORED VALUE CARD. In August 2002, Chex executed an agreement with West Suburban
Bank to issue stored-value cards. Under the terms of this agreement, Chex will
primarily function as an independent marketing agent. The "FastFunds" Stored
Value Card program allows customers to load money onto the "FastFunds" card that
can be used at ATM's worldwide and at any location that accepts PIN based point
of sale debit transactions. "FastFunds" current gaming customer base can load
jackpot winnings on to the card, up to a maximum of $7,500 per day, which is
less costly and more secure for gaming establishments and generally safer for
the customers. Customers can also load money onto the card rather than leave the
gaming establishment with a significant amount of cash winnings. Using two cards
and transferring money from one card to the other also allows the card to be
used for money remittance in a method that can be less expensive and more
convenient than traditional remittance systems.
PREPAID PAYROLL CARD. Chex has been approved by Visa U.S.A. to market a prepaid
payroll card program through West Suburban Bank to current and prospective
clients. This program allows employees to have their payroll loaded onto the
"PowerCash" payroll card, which they can then use at ATM's to make cash
withdrawals or make purchases at any location that accepts debit and credit
cards. In addition, the payroll card can be used as a virtual checking account
for purposes such as bill payment. The PowerCash payroll card is targeted at
employees who do not have checking accounts or do not prefer direct deposit.
In March 2003, Chex began marketing the PowerCash prepaid payroll card to
employees of the gaming establishments in which Chex operates. By law, employers
are generally required to offer to their employees at least one alternative to
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direct deposit for receiving their pay. To comply with this law, employers have
traditionally offered costly manual checks. The PowerCash prepaid payroll card
will allow employers to comply with the law with more ease and less cost. If
requested by the employee, Chex can "load" the amount of the employee's pay, as
reported by the employer, onto a card, which the employee may then utilize to
draw down the balance like a debit card. Chex's PowerCash prepaid payroll cards
are accepted by most merchants throughout the world. Chex receives a transaction
fee each time the employee utilizes the card as well as half of the monthly
maintenance fee. Because we believe this product can be utilized in a broad
context, we intend to market this product outside of the gaming industry.
MARKETING AND SALES OF SERVICES. Our objective is to increase the number of
locations at which Chex provides cash access services in the gaming industry. We
continue to pursue obtaining additional contracts with new casinos, existing
casinos not currently contracting with a cash access provider and other existing
casinos when such casino's current contracts with another cash access service
provider are due to expire. At December 31, 2004, Chex had 30 contracts with
casinos and other gaming establishments and 18 contracts with other retail
establishments to provide varying levels of cash access services.
In furtherance of our objective to increase Chex's market share, our marketing
plan is designed to increase our profile in the casino industry. The marketing
plan includes increasing direct personal contact with casino management
personnel responsible for making decisions regarding cash access services,
including the implementation of customer service workshops that are designed for
the casino's employees. Chex has developed a network of associates in the casino
industry who are able to refer casino management to Chex's services. Chex also
advertises in trade publications, attends industry trade shows and distributes
sales material to casino operators through direct mail.
SIGNIFICANT CUSTOMERS. For the year ended December 31, 2004, three of Chex's
largest customers represented approximately 46% of the Company's revenues
including approximately 22% from one customer (Potawatomi). While the Company
and Chex strive to maintain good working relationships with contracted casinos
and presently believe those relationships to be satisfactory, the loss of any of
these casinos could adversely affect the Company's results of operations in
future periods.
In January 2004, Chex received a termination notice from Native American Cash
Systems Florida for our contract providing cash access services at five of the
Seminole Tribe of Florida Tribal casino properties located throughout Florida.
These locations accounted for $4,089,557 (22.6%) and $3,486,707 (17.8%) of our
revenues for the years ended December 31, 2003 and 2002, respectively.
COMPETITION. We compete with a number of companies in our market niche. The
other companies that offer full-service booth check-cashing operations are Game
Financial Corporation, a subsidiary of Certegy, Inc., operating as GameCash;
Global Cash Access, Inc., Cash Systems, Inc. and Americash. We also compete with
a number of companies that offer ala carte credit card cash advance systems and
ATMs to the gaming and hospitality industries which include Global Cash Access,
Inc., Game Financial Corporation, Cash Systems, Inc., Cash & Win (through an
alliance with Comerica Bank and NDC), Americash, and Borrego Springs Bank. With
our ChexGuard product, we compete in the gaming and retail markets with
Telecheck, Checkwrite, SCAN and a number of other vendors for the check
conversion, authorization, and guarantee business. Currently Global Cash Access,
Inc. controls a majority of the cash advance business in the industry. The full
booth cash access financial service centers located in gaming facilities are
fairly equally split between, Chex, Cash Systems, Inc. and GameCash.
GOVERNMENT REGULATION
Many states require companies engaged in the business of providing cash access
services or transmitting funds to obtain licenses from the appropriate state
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agencies. In this regard, state agencies have extensive discretion to deny or
revoke licenses. Chex has obtained the necessary licenses and bonds to conduct
business with the casinos where it currently operates, and the Company will be
subject to similar licensing requirements as it expands operations into other
jurisdictions (either through Chex or its other subsidiaries). As part of our
application for licenses and permits, members of our board of directors
(including the boards of directors of our subsidiaries), our officers and those
of our subsidiaries, key employees (and those of our subsidiaries) and certain
stockholders holding five percent or more of our stock may be required to submit
to a personal background check. While there can be no assurance that we will be
able to do so, we anticipate that we will be able to obtain and maintain the
state licenses necessary for the conduct of our business.
Many suppliers to Native American casinos are subject to the rules and
regulations of the local tribal gaming commission. These gaming commissions have
authority to regulate all aspects of casino operations, including the selection
of vendors (such as Chex) at their casinos. Some gaming commissions require
vendors to obtain licenses and may exercise extensive discretion to deny or
revoke licenses. Chex has obtained the necessary licenses or approvals from the
appropriate tribal gaming commissions where it operates. While there can be no
assurance that it will be able to do so, we anticipate that Chex will be able to
obtain and maintain the tribal licenses and approvals necessary to conduct
business.
Currently, a majority of locations where Chex provides its services are on
tribal lands. Chex is licensed at many of the locations where it operates by the
local tribal authority and/or various state licensing organizations. All of the
tribes operate under various compacts negotiated with the states where they are
domiciled. The Bureau of Indian Affairs, a division of the United States
Department of Commerce, oversees the regulatory aspects of these compacts. If a
tribe were found to be violating the regulations of the state compact, its
gaming and entertainment locations could be closed down. Any such closures would
likely have a materially adverse effect on the Chex's and the Company's
business, growth, financial condition and results of operations. Furthermore,
tribal adherence to the applicable provisions of state compacts is completely
beyond the control of Chex or the Company.
Tribal governments enjoy a form of sovereign governmental immunity that is
comparable to the immunity of states, local governments and the federal
government. Like the federal government, tribal governments retain limited
immunity in order to protect government funds and discretionary governmental
functions from lawsuits and may limit the size of damages or claims. Tribes
provide for insurance and limited waivers of their sovereign immunity, taking
responsibility for the actions of tribal employees. Tribal sovereign immunity
may limit our ability to pursue certain legal remedies should we believe that we
have a claim against a tribal authority.
Our business may also be affected by state and federal regulations governing the
gaming industry in general. Changes in the general approach to regulation of
casino gaming could affect the number of new gaming establishments in which we
may provide cash access services.
EMPLOYEES
Chex employs 11 full-time employees at its corporate office, 8 employees in home
offices, and 101 full-time and 25 part-time employees at its casino locations.
FastFunds has two employees and the Company's FastFunds International Limited
subsidiary employs three full-time employees.
(d) Financial information about geographic areas.
FastFunds International, Inc., a wholly-owned subsidiary of the Company, with
operations principally based in London, has long-lived assets of $158,914
consisting primarily of computer hardware and software.
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RISK FACTORS
THE PURCHASE OF SHARES OF THE COMPANY'S COMMON STOCK IS VERY SPECULATIVE AND
INVOLVES A VERY HIGH DEGREE OF RISK. An investment in the Company is suitable
only for the persons who can afford the loss of their entire investment.
Accordingly, investors should carefully consider the following risk factors, as
well as other information set forth herein, in making an investment decision
with respect to securities of the Company.
WE INCURRED A NET LOSS IN 2004 AND 2003, AND THERE IS NO ASSURANCE WE WILL BE
PROFITABLE IN 2005. For the year ended December 31, 2004, we incurred a net loss
of $4,787,994. Furthermore, as a wholly owned subsidiary of Equitex, Inc. prior
to the Merger, Chex incurred a loss of $504,990 for the year ended December 31,
2003. There is no assurance that the Company will realize a profit for the year
ending December 31, 2005.
WE MAY INCUR SIGNIFICANT EXPENSE AS A RESULT OF PENDING LEGAL ACTIONS RELATING
TO CHEX'S ATTEMPTS TO ENGAGE IN TRANSACTIONS PRIOR TO THE MERGER. Prior to the
Merger, Equitex unsuccessfully attempted to enter into similar transactions (in
which Chex would be sold) with Cash Systems, Inc. and iGames Entertainment, Inc.
Nevertheless, Equitex was unable to consummate transactions with either company.
Litigation subsequently arose with Cash Systems, which was settled prior to the
Merger. Equitex and Chex continue to engage in litigation with iGames. As a
result, there may be significant costs related to these legal actions and there
is no guarantee Equitex or Chex will be successful either in defending against
the iGames lawsuit or successfully pursuing any possible counterclaims. As part
of the Merger, Equitex agreed to fully indemnify Chex and the Company for any
costs, expenses and damages incurred in connection with the iGames litigation.
THE POTENTIAL FOR LOSSES RELATED TO RETURNED CHECKS IS SIGNIFICANT, AND IF SUCH
LOSSES MATERIALIZE THEY COULD MATERIALLY AND ADVERSELY AFFECT THE FINANCIAL
PERFORMANCE AND OPERATIONS OF THE COMPANY. Chex transacted approximately $213
million in check-cashing volume during 2004. Chex charges operations for
potential losses on returned checks in the period such checks are cashed, since
ultimate collection of these items is uncertain. Recoveries on returned checks
are credited in the period when the recovery is received. Chex employs a
full-time collections specialist and has systems in place to mitigate the amount
of returned checks. However, the potential for losses on returned checks could
be significant and could have a material negative impact on our financial
condition and results of operations in any given period.
FOR ITS REVENUES, CHEX'S BUSINESS IS HIGHLY DEPENDENT ON CHECK CASHING,
CREDIT/DEBIT CARD CASH ADVANCES AND ATM FEES, ANY OR ALL OF WHICH COULD BE
LIMITED BY STATE AND/OR FEDERAL REGULATION. Chex's revenues are mainly composed
of fees charged to its customers for check cashing, credit card and ATM
transactions. If federal or state authorities were to limit or ban fees charged
for any or all of these services, Chex would suffer a significant decline in
revenues that could have a material adverse effect on our business, growth,
financial condition and results of operations.
CHEX'S BUSINESS IS SUBJECT TO REGULATION BY VARIOUS TRIBAL AND GOVERNMENTAL
AGENCIES. A majority of locations where Chex offers its services are on tribal
lands. Chex is licensed at many of the locations where it operates by the local
tribal authority and/or various state licensing organizations. All of the tribes
operate under various compacts negotiated with the states where they are
domiciled. The Bureau of Indian Affairs, a division of the U.S. Department of
Commerce, oversees the regulatory aspects of these compacts. If a tribe were
found to be violating the regulations of the state compact, its locations could
be closed down. Any such closures could have a material adverse effect on our
business, growth, financial condition and results of operations. Furthermore,
tribal adherence to the applicable provisions of state compacts is beyond our
control.
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TO FUND CHEX'S CHECK-CASHING OPERATIONS AND GROWTH, CHEX MATERIALLY RELIES ON
CERTAIN NOTES PAYABLE, WHICH ARE SUBJECT TO REPAYMENT ON 90 DAYS' DEMAND. Chex
materially relies on debenture notes issued to private investors to operate its
business and to fund its growth. As of December 31, 2004, Chex had debenture
notes payable in the aggregate amount of approximately $11,402,602. There is no
assurance that Chex (or the Company) will continue to be able to raise the
necessary funds to support its future growth through similar financing
transactions. These debenture notes have a one-year term, but are cancelable
(and thereby subject to repayment) by either party with 90 days notice. There is
no assurance that we will be able to replace funds in the event of the
non-renewal of a note or a cancellation notice. If in the future we are unable
to rely on the debenture notes to finance our continued operations and growth,
the Company may be forced to seek additional means of financing the Chex
business. There can be no assurance that any form of financing will be available
to us on terms acceptable, if at all.
ADDITIONAL FINANCING COULD BE SOUGHT FROM A NUMBER OF SOURCES, INCLUDING BUT NOT
LIMITED TO ADDITIONAL SALES OF EQUITY OR DEBT SECURITIES, LOANS FROM BANKS, AND
LOANS FROM AFFILIATES OF THE COMPANY OR OTHER FINANCIAL INSTITUTIONS. No
assurance can be given, however, that we will be able to sell any securities, or
obtain any such additional financing when needed, or do so on terms and
conditions acceptable or favorable to the Company, if at all. If financing is
not available, we may be forced to abandon our business plans or our entire
business, discontinue our preparation and filing of public disclosure reports
with the SEC, or dissolve the Company. Moreover, even if financing is available
and obtained, your equity ownership in the Company will be diluted.
CHEX IS A GUARANTOR OF CERTAIN DEBT OF EQUITEX, AND THE COMPANY'S ENTIRE
INVESTMENT IN CHEX (I.E., ITS OWNERSHIP OF ALL OUTSTANDING CHEX SERVICES, INC.
STOCK) IS SUBJECT TO A SECURITY INTEREST SECURING SUCH OBLIGATION. Furthermore,
all of the assets of Chex are subject to a security interest for the same debt.
In March 2004, Equitex (then the parent company of Chex) closed on $5 million
convertible promissory notes with two financial institutions. The proceeds from
the promissory notes were immediately thereafter loaned to Chex. These
promissory notes carry a stated interest rate of 7% per annum and have a
45-month term. From April 2004 through June 2004 only interest payments were
due. Beginning in July 2004, principal and interest payments began to amortize
over the remaining 42-month period. The promissory notes are collateralized,
among other things, by all of the assets of Chex, and by the Company common
stock owned by Equitex. Accordingly, if Equitex defaults on the obligations
specified under the promissory notes, and if Chex cannot cure such defaults, the
Company's entire business could be lost.
THE COMPANY'S BALANCE SHEET CONTAINS CERTAIN PROMISSORY NOTES RECEIVABLE AND
ADVANCES, WHICH WE CANNOT ASSURE TO BE COLLECTIBLE. Included among the Company's
balance sheet as of December 31, 2004 are promissory notes, advances and
interest receivable whose carrying value aggregate to $7,445,568. Among these
notes are a promissory note from iGames Entertainment, Inc. in the principal
amount of $2 million (the "iGames Note"), which bears interest at 10% per annum.
The iGames Note matures and becomes due and payable in January 2005. The iGames
Note is currently in default and subject to litigation between iGames with
Equitex and Chex. Also among these notes are various promissory notes and
advances due from affiliates of the Company and/or Equitex, including $2,616,118
due from Equitex; $1,087,762 due from Denaris Corporation (a majority-owned
subsidiary of Equitex); $205,391 receivable from the estate of a deceased former
officer of Chex (which is net of a reserve of $1,279,300 as of December 31,
2004); $485,936 receivable from a former officer of Chex; $100,000 receivable
from a customer of Chex (which is net of a reserve of $236,500 and is in the
actual principal amount of $606,316); $205,000 receivable from Equitex 2000,
Inc., an affiliate of Equitex; and $52,900 receivable from various Company
employees and a former shareholder of Chex. Interest receivable on all of these
notes and advances is $692,461. Although the Company believes all of the notes
will be collected, there can be no assurance that the Company will be able to
collect any of these amounts.
-8-
ANTI-DILUTION PROTECTIONS IN FAVOR OF PRE-MERGER STOCKHOLDERS OF THE COMPANY AND
CERTAIN LENDERS WHO RECEIVED CONVERTIBLE PROMISSORY NOTES IN CONNECTION WITH THE
MERGER MAY FURTHER SUBSTANTIALLY DILUTE YOUR PERCENTAGE OWNERSHIP IN THE
COMPANY'S EQUITY. In the Agreement and Plan of Merger (the "Merger Agreement")
entered into in connection with the Merger, the Company agreed to issue
additional shares of its common stock to (a) pre-Merger stockholders of the
Company and (b) holders of certain convertible promissory notes (but only to the
extent that such promissory notes become convertible in accordance with their
terms), in the event that the Company issues common stock or securities
convertible into or exchangeable for common stock, the proceeds of which are
used to satisfy debt owed by Equitex and guaranteed by Chex (discussed above)
(the "Equitex Debt"). Therefore, under certain circumstances it is substantially
likely that additional shares of common stock will be issued pursuant to such
anti-dilution protections. If such issuances occur, the dilutive effect upon our
stockholders would likely be substantial and material.
THERE ARE CURRENTLY OUTSTANDING SECURITIES CONVERTIBLE INTO OR EXCHANGEABLE FOR
AN AGGREGATE OF 6,243,128 SHARES OF OUR COMMON STOCK WHICH, IF CONVERTED OR
EXCHANGED, WILL SUBSTANTIALLY DILUTE OUR EXISTING STOCKHOLDERS. The Company
currently has outstanding notes and securities convertible into or exchangeable
for an aggregate of 6,243,128 shares of common stock under certain conditions.
In addition, the effective conversion and exercise prices are significantly
lower than the current market value of our common stock. If these notes and/or
securities are converted into or exchanged for common stock, their issuance
would have a substantial dilutive effect on your percentage ownership of our
equity. These convertible notes and securities consist of: (i) $200,000 in
convertible promissory notes entered into in connection with the Merger with
certain lenders, which are convertible into an aggregate of 2,000,000 shares of
common stock; (ii) outstanding warrants to purchase an aggregate of 695,000
shares of our common stock at a purchase price of $0.10 per share, which were
originally issued to Equitex in connection with the Merger; (iii) $1,774,064 in
convertible promissory notes issued in exchange for certain loans made to the
Company, which notes are convertible into an aggregate of 1,774,064 shares of
common stock; and (iv) warrants to purchase an aggregate of approximately
1,774,064 shares of our common stock at a purchase price of $2.00 per share.
EQUITEX, INC. IS A CONTROLLING STOCKHOLDER OF THE COMPANY AND IS ABLE TO
EFFECTIVELY CONTROL OUR MANAGEMENT AND OPERATIONS. CURRENTLY, EQUITEX, INC. OWNS
7,700,000 SHARES OF OUR OUTSTANDING COMMON STOCK, REPRESENTING APPROXIMATELY 74%
OF OUR VOTING POWER. In addition, Equitex holds a warrant to purchase an
additional 160,000 shares of our common stock at a purchase price of $0.10 per
share. The brings Equitex's beneficial ownership, together with our directors,
executive officers and a former executive officer affiliated with Equitex, to
approximately 75% of the Company's voting power. As a result, Equitex, either
alone or together with our directors and executive officers, has the ability to
control our management and affairs through the election and removal of our
entire board of directors and will control the outcome of all matters requiring
stockholder approval, including the future merger, consolidation or sale of all
or substantially all of our assets. This concentrated control could discourage
others from initiating any potential merger, takeover or other change of control
transaction that may otherwise be beneficial to our stockholders. As a result,
the return on your investment in our common stock through the market price of
our common stock or ultimate sale of our business could be adversely affected.
OUR COMMON STOCK TRADES ONLY IN AN ILLIQUID TRADING MARKET, WHICH GENERALLY
RESULTS IN LOWER PRICES FOR OUR COMMON STOCK. Trading of our common stock is
conducted on the Over-The-Counter Bulletin Board. This has an adverse effect on
the liquidity of our common stock, not only in terms of the number of shares
that can be bought and sold at a given price, but also through delays in the
timing of transactions and the lack of security analysts' and the media's
-9-
coverage of our Company and its common stock. This may result in lower prices
for our common stock than might otherwise be obtained and could also result in a
larger spread between the bid and asked prices for our common stock.
CHEX OPERATES AT GAMING ESTABLISHMENTSS UNDER WRITTEN CONTRACTS WHOSE MATERIAL
TERMS MAY NOT BE ENFORCEABLE. Generally, Chex operates at gaming establishments
pursuant to written contracts. Nevertheless, because many of the gaming
establishments are located in Native American tribal lands, some or all of the
material provisions of these contracts may not be enforceable due to the
unwillingness of a tribe to provide a waiver of its sovereign immunity, limited
or otherwise. Alternatively, the enforcement of an enforceable contract is
likely to be much more costly if the contracting party is a tribe, due to a
failure to waive sovereign immunity.
CHEX FACES INTENSE COMPETITION FOR ITS PRODUCTS AND SERVICES. Chex competes with
a number of companies in its market niche. Companies such as Game Financial
Corporation, a subsidiary of Certegy, Inc., operating as GameCash, Global Cash
Access, Inc., Cash Systems, Inc. and Americash offer full-service-booth
check-cashing operations. In addition, Chex competes with Global Cash Access,
Inc., Game Financial Corporation, Cash Access Systems, Inc., Cash & Win (through
an alliance with Comerica Bank and NDC), Americash and Borrego Springs Bank for
ala carte credit card cash advance systems and ATMs to the gaming and
hospitality industries. Some of these companies are much larger and better
financed than Chex. There can be no assurance that Chex will be able to compete
successfully with these companies in its particular market niche.
AS COMPETITION INCREASES, THERE CAN BE NO ASSURANCE THAT WE WILL BE ABLE TO
SECURE RENEWALS OF OUR EXISTING CONTRACTS. Chex operates its business at most
locations through contracts negotiated with tribal authorities and other
entities that typically last for one to five years. While Chex historically has
had significant success in renewing these contracts for successive terms, there
can be no assurance that future contract renewals will be successful and that
Chex will be able to maintain its existing client base. Chex's failure to
complete a significant number of contract renewals could have a material adverse
effect on our business, growth, financial condition and results of operations.
CHEX'S FUTURE GROWTH DEPENDS ON ITS ABILITY TO OBTAIN NEW CUSTOMER CONTRACTS.
The continued expansion and development of our business will depend on the
execution of new contracts with casinos and other gaming establishments. To
date, Chex has concentrated its efforts on Native American tribal casinos where
it has significant market penetration. In order to continue its growth, Chex
will likely be required to market its products to non-tribal casinos and other
gaming establishments in larger traditional gaming markets. In this regard, Chex
intends to market its new products (the "FastFunds" stored value card and the
prepaid payroll card) to industries outside of the Native American gaming
industry. There can be no assurance that our efforts will be successful. The
inability to penetrate these new markets could have a material adverse effect on
our future growth.
THE COMPANY IS DEPENDENT UPON ITS MANAGEMENT, AND THAT OF ITS SUBSIDIARIES, AND
MAY NOT BE ABLE TO RETAIN KEY EMPLOYEES. Our growth and profitability materially
depend on our ability to retain key executives and managers, attract capable
employees, and maintain and develop the systems necessary to operate our
businesses, primarily the Chex business. The loss of any one or more of its key
executives could have a material adverse effect on our business, growth,
financial condition and results of operations.
CHEX'S COMPUTER SYSTEMS ARE SUBJECT TO SECURITY RISKS, WHICH, IF BREACHED, COULD
ADVERSELY EFFECT OUR BUSINESS AND FINANCIAL CONDITION. Chex currently maintains
a site on the World Wide Web at WWW.FASTFUNDS.COM to promote, and enhance its
services and products and to educate and encourage customers to use its services
and products. On a secure section of its website, Chex maintains its proprietary
application management software for use by its customers. Like most computer
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systems, Chex's systems are subject to the risks of computer viruses and
unauthorized individuals (hackers) obtaining access to and inadvertently or
purposefully damaging its systems. The Company believes the implemented security
and virus-detection controls and systems significantly reduce these risks. If
those systems were nonetheless compromised, Chex's customers could lose data or
be unable to access the system. In addition, sensitive information regarding its
customers that is maintained on its system may become publicly available. In
such an event, we may be exposed to liability from customers, may lose customers
and may suffer significant damage to our business reputation. Any of these
events could have a material and adverse effect on our business and financial
condition.
WE HAVE NOT PAID DIVIDENDS TO DATE, AND HAVE NO INTENTION OF PAYING DIVIDENDS TO
OUR STOCKHOLDERS. To date, we have not paid any cash dividends and do not
anticipate the payment of cash dividends in the foreseeable future. Accordingly,
the only return on an investment in our common stock, if any, may occur upon a
subsequent sale of the shares of common stock.
ITEM 2. PROPERTIES.
Chex leases approximately 3,300 square feet for its executive office in
Minnetonka, Minnesota, which is adequate for its current needs. The current
minimum lease payment is approximately $6,000 per month through March 31, 2006,
when it expires. Pursuant to the terms of the lease, Chex is also responsible
for its pro-rata share of taxes, operating expenses and improvement costs.
Beginning in July 2004, FastFunds International Limited began to lease office
space in London for approximately $6,700 per month, including taxes. The lease
expires in July 2005. In addition, in August 2004, FastFunds International, Inc.
began to lease office space in Chicago, Illinois for $6,000 per month on a
month-to-month basis. Effective March 2005, FastFunds International, Inc.
terminated the Chicago lease.
ITEM 3. LEGAL PROCEEDINGS.
On November 3, 2003, Chex (and its then parent company, Equitex, Inc.) executed
a Stock Purchase Agreement (the "Stock Purchase Agreement") with iGames
Entertainment, Inc, ("iGames") which contemplated iGames's acquisition of Chex.
This Stock Purchase Agreement was terminated on March 12, 2004.
On or about March 15, 2004, iGames commenced a lawsuit in Pennsylvania state
court against Chex and Equitex alleging breach of the Stock Purchase Agreement.
This lawsuit was later voluntarily withdrawn by iGames. On March 16, 2004, Chex
commenced a lawsuit in Hennepin County, Minnesota against iGames demanding
repayment of the $2,000,000 principal balance, accrued interest and other fees
due from iGames under a term promissory note delivered by iGames in favor of
Chex (the "iGames Note").
On March 23, 2004, Chex commenced a lawsuit in Delaware state court (New Castle
County) against iGames seeking payment of the $1,000,000 termination fee
expressly provided for under the Stock Purchase Agreement, including related
costs.
On March 24, 2004, iGames commenced a lawsuit in United States District Court
for the District of Delaware against Equitex and Chex alleging breaches of the
terms of both the Stock Purchase Agreement and the iGames Note, and that both
Equitex and Chex had tortiously interfered with iGames' business relationship
with one of its lenders. In sum, iGames has asserted that it is entitled to
approximately $3.3 million in damages which includes the termination fee
provided for under the Stock Purchase Agreement, plus consequential and punitive
damages and related attorneys fees.
-11-
On September 13, 2004, the three existing legal actions summarized above were
consolidated in the United States District Court for the District of Delaware
and are proceeding in the normal course of litigation. Chex and Equitex have
participated in a court-ordered mediation process in a good faith attempt to
resolve the lawsuit, but the parties have not reached a mutually-agreeable
resolution. We are confident that our claims in litigation will be upheld and
believe that the various claims made by iGames lack merit. While the ultimate
outcome of these lawsuits cannot presently be predicted with certainty, we
intend to vigorously prosecute our claims and defend against iGames's claims.
We are involved in various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse impact either
individually or in the aggregate on our consolidated results of operations,
financial position or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) Market Information.
Our common stock is not listed on any exchange; however, market quotes for the
Company's common stock (under the symbol FFFC) may be obtained from the
Over-the-Counter Bulletin Board ("OTCBB"). The OTCBB is a regulated quotation
service that displays real-time quotes, last-sale prices and volume information
in over-the-counter securities. The table below states the quarterly high and
low bid prices for the common stock as reported by the OTCBB. However, such
Over-the-Counter market quotations reflect inter-dealer prices without retail
mark-up, mark-down or commission and may not represent actual transactions.
------------------------------------------------------------------------
Year Ended December 31, 2003
------------------------------------------------------------------------
Quarter Ended High Low
------------------------ ----------------------- -----------------------
March 31, 2003 $1.05 $0.05
------------------------ ----------------------- -----------------------
June 30, 2003 $1.05 $0.05
------------------------ ----------------------- -----------------------
September 30, 2003 $1.05 $0.05
------------------------ ----------------------- -----------------------
December 31, 2003 $0.07 $0.07
------------------------ ----------------------- -----------------------
------------------------------------------------------------------------
Year Ended December 31, 2004
------------------------------------------------------------------------
Quarter Ended High Low
------------------------ ----------------------- -----------------------
March 31, 2004 $0.07 $0.07
------------------------ ----------------------- -----------------------
June 30, 2004 $7.00 $0.07
------------------------ ----------------------- -----------------------
September 30, 2004 $6.00 $2.50
------------------------ ----------------------- -----------------------
December 31, 2004 $5.65 $4.90
------------------------ ----------------------- -----------------------
For each of the following transactions, we relied upon the exemptions from
registration provided by Sections 4(6) or 4(2) of the Securities Act of 1933 and
Rule 506 promulgated thereunder based upon (i) representations from each
investor that it was an accredited or sophisticated investor with experience in
investing in securities such that it could evaluate the merits and risks related
to our securities; (ii) the fact that no general solicitation of the securities
-12-
was made by us; (iii) representations from each investor that it was acquiring
the securities for its own account and not with a view towards further
distribution; (iv) the fact that the securities issued were "restricted
securities" as that term is defined under Rule 144 promulgated under the
Securities Act; (v) the fact that we placed appropriate restrictive legends on
the certificates representing the securities; and (vi) the fact that prior to
completion of the transaction, each investor was informed in writing of the
restricted nature of the securities, provided with all information regarding
FastFunds and were given the opportunity to ask questions of and receive
additional information from us regarding our financial condition and operations.
The shares issued during the quarter ended December 31, 2004 of our $0.001 par
value common stock were as follows:
In November 2004, we issued 50,000 shares of common stock upon the exercise of
warrants to purchase such shares at a per share purchase price of $0.10. In
addition, we issued 53,957 shares of common stock upon the cashless exercises of
warrants to purchase shares of our common stock.
(b) Holders.
The number of record holders of our common stock as of March 11, 2005 was 156
according to our transfer agent. This figure excludes an indeterminate number of
shareholders whose shares are held in "street" or "nominee" name.
(c) Dividends.
FastFunds has not declared nor paid cash dividends on our common stock during
the previous two fiscal years, nor do we anticipate paying any cash dividends in
the foreseeable future. We currently intend to retain any future earnings to
fund operations and for the continued development of our business.
(d) Securities authorized for issuance under equity compensation plans.
We have the following securities authorized for issuance under our equity
compensation plans as of December 31, 2004, including options outstanding or
available for future issuance under our 2004 Stock Option Plan.
Equity Compensation Plan Information
Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available
exercise of outstanding for future issuance
outstanding options, options, warrants under equity
Plan category warrants and rights and rights compensation plans
- --------------------- -------------------- ----------------- --------------------
(a) (b) (c)
- --------------------- -------------------- ----------------- --------------------
Equity compensation 1,800,000
plans not approved by
security holders
-------------------- ----------------- --------------------
Total 1,800,000
==================== ================= ====================
ITEM 6. SELECTED FINANCIAL DATA.
The following table contains selected financial data of FastFunds for the
previous five years. The selected financial data presented for periods prior to
the June 7, 2004 Merger are those of Chex. The historical basic and diluted
income (loss) per share presented is adjusted to reflect the new capital
structure as a result of the June 7, 2004 merger.
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In light of the foregoing, the historical data presented below is not indicative
of future results. You should read this information in conjunction with the
audited consolidated financial statements of the Company, including the notes to
those statements (Item 8), and "Management's Discussion and Analysis of
Financial Conditions and Results of Operations (Item 7) that follows.
2004 2003 2002 2001 2000
------------- ------------- ------------- ------------- -------------
Revenues $ 15,233,735 $18,100,788 $ 19,580,399 $ 14,763,669 $ 8,984,534
Location gross margin 3,942,225 5,390,552 5,887,321 3,466,250 2,809,429
Corporate operating
expenses 6,752,919 4,605,327 3,634,467 2,445,383 1,758,975
Other expenses 1,455,411 1,103,215 1,411,389 2,447,473 875,241
Net (loss) income (4,787,994) (504,990) 786,465 (1,379,894) 127,476
Basic and diluted net
(loss) income per share (0.54) (0.07) 0.10 (0.18) 0.02
Total assets 22,714,759 22,853,342 24,891,057 14,930,023 11,138,635
Total long-term liabilities 3,044,016 37,243 240,629 - 479,663
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and notes thereto for the years ended December 31, 2004, 2003 and
2002. The financial statements presented for the years ended December 31, 2003
and 2002 are those of Chex and beginning September 2002, Collection Solutions.
The financial statements presented for the year ended December 31, 2004 include
Chex, Collection Solutions, FastFunds as of June 7, 2004 and FastFunds
International Limited from July 15, 2004.
In light of the foregoing, the historical data presented below is not indicative
of future results. You should read this information in conjunction with the
audited consolidated financial statements of the Company, including the notes to
those statements (Item 8), and the following "Management's Discussion and
Analysis of Financial Conditions and Results of Operations".
(a) Liquidity and capital resources
We presently anticipate our liquidity and capital resource needs for the next 12
months may not be satisfied solely from cash flows generated from our operating
activities. Chex has begun to develop and introduce new products during the
year. These products are complementary to its existing products and services.
Future products may include: cashless gaming smart cards, debit cards and
customized funds transfer systems for multi-jurisdictional gaming operators.
Also, Chex plans on expanding its business into non-gaming cash access products.
Development and costs associated with such products have been and will continue
to be incurred. Additionally, the Company formed a newly wholly owned
London-based subsidiary, FastFunds International, Inc. which began operations in
July by opening London and Chicago offices. There will be costs associated with
the business operations of FastFunds International, prior to the realization, if
at all, of any positive cash flow. In connection with the start-up of Fast Funds
International and the Company's objective to expand its business model into new
markets and products, the Company, Chex and FastFunds International have entered
into various management advisory and consultant agreements.
In March 2004, Equitex closed on an aggregate of $5,000,000 of convertible
promissory notes (the "Whitebox Notes") from Pandora Select Partners, L.P. and
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Whitebox Hedged High Yield Partners, L.P. The Whitebox Notes carry interest at a
rate of 7% per annum and have a 45-month term. The Whitebox Notes are senior to
all other debt of both Equitex and Chex. Concurrently with the loan, Equitex
loaned the borrowed proceeds to Chex under terms identical to the Whitebox
Notes. The Whitebox Notes are collateralized by all of the assets of Chex,
Equitex's stock ownership in the Company and Chex's note delivered in favor of
Equitex. In connection with the transaction, the two lenders received aggregate
fees of $150,000, and reimbursement for legal fees of a total of $15,000.
In December 2004, the Company closed on the sale of $1,774,064 of unsecured
convertible promissory notes (the "Convertible Notes") with various investors,
in a private placement made under Section 4(2) of, and Regulation D under, the
Securities Act of 1933. The Convertible Notes accrue interest at a rate of 9.5%
per annum, have a 9-month term, and are convertible at the holder's option
(including any unpaid interest) into shares of Company common stock at a rate of
$1.00 per share for a three-year period commencing on the due date. The
Convertible Notes may be prepaid at any time, in whole or in part and from time
to time, without premium or penalty, so long as at least 50% of the outstanding
amount due on the Whitebox Notes discussed above have then been paid. At this
time it is uncertain whether the Company will prepay the Convertible Notes. In
connection with the sale and issuance of the Convertible Notes, investors also
received warrants to purchase an aggregate of 1,774,064 shares of Company common
stock at an exercise price of $2.00. The Company paid an aggregate of $137,925
to two advisory firms in connection with the transaction, which was recorded as
deferred loan costs and are being amortized over the nine-month term of the
Convertible Notes. Accordingly, $14,261 is included in general and
administrative expense for the year ended December 31, 2004.
Cash flow activity for the year ended December 31, 2004, includes the activity
of Chex and Collection Solutions for the entire year, and from June 7, 2004, on
a consolidated basis with the Company, and effective July 15, 2004, FastFunds
International, Inc. The 2002 and 2003 activity includes the activity of Chex
(and Collection Solutions, effective September 2002). For the year ended
December 31, 2004, net cash used in operating activities was $1,404,335 compared
to cash provided by operating activities of $262,063 for the year ended December
31, 2003. The most significant portion of this change was the change in net
loss, which was $4,787,994 in 2004 compared to $504,990 in 2003. Location gross
margin decreased by approximately $1,448,000 for the year ended December 31,
2004 compared to the prior year, due primarily to the loss of the 5 Seminole
Tribe locations. Additionally, during the year ended December 31, 2004, total
corporate expenses increased by approximately $2,148,000. The increase in
corporate operating expenses consisted primarily of increases in expenses
related to FastFunds International operations of approximately $778,000, an
increase of $527,500 in the provision for receivables in 2004, compared to a
decrease in the provision of $157,800 in 2003, $252,000 of stock-based
compensation expense and an increase of approximately $315,000 in depreciation
and amortization expense. Other significant non-cash adjustments to the net loss
for the year ended December 31, 2004 consisted of deferred income taxes of
$473,000 and non-cash interest expense related to warrants and beneficial
conversion features on convertible notes payable totaling $477,702.
Cash used in investing activities for the year ended December 31, 2004 was
$2,538,977 compared to $842,321 for the year ended December 31, 2003. The
significant increase in the 2004 period was due to an advance on a note
receivable of $2 million to iGames.
Cash provided by financing activities for the year ended December 31, 2004 was
$3,610,811 compared to cash used in financing activities of $1,101,290 for the
year ended December 31, 2003. The 2004 activity is primarily due to net proceeds
received from the issuance and payment of various debt instruments totaling
$2,599,922 as well as net proceeds received in 2004 from the sale of Equitex
common stock totaling $1,010,889. The net proceeds received from the issuance
and payment of debt instruments and the net activity of Equitex stock
aggregating to $3,610,811 were primarily utilized to fund the Company's
operations, including operations of FastFunds International Limited.
-15-
For the year ended December 31, 2004, net cash decreased $332,501 compared to a
decrease of $1,681,548 for the year ended December 31, 2003, and ending cash at
December 31, 2004, was $8,438,341 compared to $8,770,842 at December 31, 2003.
Other sources available to us that we may utilize include the sale of equity
securities as well as the exercise of stock options and/or warrants, all of
which may cause dilution to our stockholders. We may also be able to borrow
funds from related and/or third parties.
Contractual obligations for future payments under existing debt and lease
commitments at December 31, 2004, were as follows:
Contractual Less than More than
Obligation Total one year 1-3 years 3-5 years 5 years
- ------------- ----------- ----------- ----------- --------- ---------
Notes payable (1) $11,402,602 $11,402,602
Convertible
promissory
notes (2) 1,774,064 1,774,064
Long-term debt (3) 4,558,279 1,352,623 $ 3,205,656
Operating lease
obligations 169,787 85,539 84,248
----------- ----------- ----------- --------- ---------
Total $17,904,732 $14,614,828 $ 3,289,904
=========== =========== =========== ========= =========
(1) Notes are unsecured, mature various dates through December 2005, renewable,
subject to repayment with 90-day notice from noteholder.
(2) Convertible promissory notes excludes the reduction of $1,588,729 to the
carrying value of the notes for the beneficial conversion feature (Note 6)
associated with the notes that are included in the Company's balance sheet
as of December 31, 2004.
(3) Long-term debt excludes discounts on certain notes payable of $368,833 that
are included in the Company's balance sheet as of December 31, 2004.
(b) Results of operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Preparation of the consolidated financial statements in accordance with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the balance sheets and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
We believe that the following are some of the more critical accounting policies
that currently affect our financial condition and results of operations:
1) accounts and notes receivable;
2) returned checks;
3) stock based compensation;
4) litigation;
5) income taxes, deferred taxes;
6) goodwill and other intangible assets; and,
7) revenue recognition
16
RECEIVABLES
ACCOUNTS RECEIVABLE
Accounts receivable arise primarily from fees from credit card and ATM advances
provided at casino locations. Concentrations of credit risk related to the fees
from credit card and ATM advances are limited to the credit card and ATM
processors who remit to the Company our share of fees earned. The Company
believes these processors are financially stable and no significant credit risk
exists with respect to accounts receivable arising from the fees for ATM and
credit card advances. The allowance for doubtful accounts was $65,000 at
December 31, 2004. No allowance was considered necessary on these receivables at
December 31, 2003.
NOTES RECEIVABLE
The Company has made advances to various third parties, as well as officers,
affiliates and employees of the Company under various loan agreements. The
advances made to officers ("Officer's Loans") were made prior to the acquisition
of Chex by Equitex in December 2001. The Officer's Loans have a face value of
approximately $1,971,000 as of December 31, 2004, that is collateralized by
Equitex common stock, including registered and unregistered shares. The
Company's allowance for doubtful notes receivable is adjusted based on the value
of the underlying collateral. Due to the level of risk associated with this
common stock, it is reasonably possible that change in the value of the common
stock will occur in the near term and that such changes could materially affect
the value of the collateral underlying the notes. After all attempts to collect
a note receivable have failed, the note receivable is written-off against the
allowance. Based on management's evaluation of repayment intentions, $485,936 of
this amount has been presented as a reduction in stockholders' equity at
December 31, 2004. The allowance for doubtful notes receivable was $1,515,800
and $1,053,300 as of December 31, 2004 and 2003, respectively.
RETURNED CHECKS
We charge operations for potential losses on returned checks in the period such
checks are returned, since ultimate collection of these items are uncertain.
Recoveries on returned checks are credited in the period when the recovery is
received.
In September 2003, Chex cashed checks totaling $606,316 from one customer that
was returned for insufficient funds. In March 2004, Chex received a non-interest
bearing, promissory note (see Note 3 to the consolidated financial statements
included in this report). Based on an imputed interest rate of 12%, a discount
of $256,316 was charged to operating expense in 2003. Based on management's
evaluation of the collectibilty of this note, during the fourth quarter of 2004
an allowance of $236,500 was recorded against this note. We believe the
remaining carrying value of $100,000 is collectible based upon collateral
pledged in connection with the note.
STOCK BASED COMPENSATION
Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting for
Stock Based Compensation, defines fair value-based method of accounting for
stock-based employee compensation plans and transaction in which an entity
issued its equity instruments to acquire goods or services from non-employees,
and encourages but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. We have chosen to account
for employee stock-based compensation plans using the intrinsic-value method
prescribed in Accounting Principles Board Opinion No. 25 (APB No. 25),
Accounting form Stock Issued to Employees, and related interpretations.
Accordingly, employee compensation cost for stock is measured as the excess, if
any, of the estimated fair value of our stock at the date of the grant over the
amount an employee must pay to acquire the stock. In December 2004, the FASB
issued SFAS No. 123(R) Share-Based Payment, which addresses the accounting for
share-based payment transactions. SFAS No. 123(R) eliminates the ability to
-17-
account for share-based compensation transactions using APB 25, and generally
requires instead that such transactions be accounted for and recognized in the
statement of operations based on their fair value. SFAS No. 123(R) will be
effective for public companies that do not file as small business issuers as of
the beginning of the first interim or annual reporting period that begins after
June 15, 2005. Management is evaluating the provisions of this standard.
Depending upon the number and terms of options that may be granted in future
periods, the implementation of this standard could have a material impact on the
Company's financial position and results of operations.
LITIGATION
We are currently involved in certain legal proceedings, as described in Note 7
to the consolidated financial statements included in this report.
INCOME TAXES, DEFERRED TAXES
Income taxes are provided for the tax effects of transactions reported in the
financial statements, and a deferred income tax liability or asset is recognized
for temporary differences between our financial statements and tax returns.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to reverse. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the statement of
operations in the period that includes the enactment date.
The operations of the Company for periods subsequent to the acquisition of the
Company by Equitex and through August 2004, at which time Equitex's ownership
interest fell below 80% are included in consolidated federal income tax returns
filed by Equitex. However, for financial reporting purposes, the Company's
provision for income taxes has been computed on the basis that the Company files
a separate income tax return. For periods subsequent to the Equitex acquisition,
the Company did not make any federal tax payments. Rather, calculated federal
tax liabilities owed by the Company were recorded as a contribution of capital
from Equitex through December 31, 2003.
During the quarter ended June 30, 2004 management assessed the realization of
its deferred tax assets. Based on this assessment it was determined to be more
likely than not that the Company's deferred tax assets will not be realizable,
and the Company determined that a valuation allowance was required. Accordingly,
the Company's valuation allowance was increased by $473,000, which resulted in
an increase to the provision for income taxes of the same amount.
ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS
We have significant intangible assets on our balance sheet that include goodwill
and other intangibles related to acquisitions. The valuation and classification
of these assets and the assignment of useful amortization lives involves
significant judgments and the use of estimates. The testing of these intangibles
under established account guidelines for impairment also requires significant
use of judgment and assumptions. Our assets are tested and reviewed for
impairment on an ongoing basis under the established accounting guidelines.
Changes in business conditions could potentially require future adjustments to
asset valuations.
Since the adoption of SFAS 142 on January 1, 2002, we no longer amortize
goodwill but instead test annually for impairment. If the carrying value of
goodwill exceeds its fair value, an impairment loss must be recognized. A
present value technique is often the best available technique with which to
estimate the fair value of a group of assets. The use of a present value
technique requires the use of estimates of future cash flows. These cash flow
estimates incorporate assumptions that marketplace participants would use in
their estimates of fair value as well as our own assumptions. These cash flow
-18-
estimates are based on reasonable and supportable assumptions and consider all
available evidence. However, there is inherent uncertainty in estimates of
future cash flow. As such, different assumptions were used in our calculations
and the likelihood of possible outcomes was considered.
We evaluate long-lived assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In
performing the review of recoverability, we estimate future cash flows expected
to result from the use of the asset and its eventual disposition. The estimates
of future cash flows, based on reasonable and supportable assumptions and
projections, require management's subjective judgments. The time periods for
estimating future cash flows is often lengthy, which increases the sensitivity
to assumptions made. Depending on the assumptions and estimates used, the
estimated future cash flows projected in the evaluation of long-lived assets can
vary within a wide range of outcomes. We consider the likelihood of possible
outcomes in determining the best estimate of future cash flows. At December 31,
2004, based on tests performed, management believes no impairment has occurred.
REVENUE RECOGNITION
Revenue is recognized from financial services at the time the service is
provided. Revenues are derived from check cashing fees, credit and debit card
advance fees and ATM surcharge and transaction fees.
In general, check cashing fees are comprised of a fee based upon a percentage of
the face amount of total checks cashed, and is recognized at the point a
transaction is generated by the casino cage.
Credit and debit card advance fees are comprised of the fee charged to patrons
for credit and debit card cash advances and is recognized at the point a
transaction is generated by the casino cage for the patron's transaction or cash
is dispensed from an ATM.
ATM surcharge and transaction fees are comprised of upfront patron transaction
fees or surcharges assessed at the time the transaction is initiated and a
percentage of interchange fees paid by the patron's issuing bank. These issuing
banks share the interchange revenue with the Company. Upfront patron transaction
fees are recognized when a transaction is initiated, and interchange revenue is
recognized on a monthly basis based on the total transactions occurring during
the month.
RESULTS OF OPERATIONS
RESULTS OF CONTINUING OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004 VS.
DECEMBER 31, 2003
REVENUES
Consolidated revenues for the year ended December 31, 2004 were $15,233,735
compared to revenues of $18,100,788 for the year ended December 31, 2003.
In January 2004, Chex was advised that 5 existing casino locations were
terminating the agreements for Chex to provide its services. These locations
accounted for $4,089,557 in revenues for the year ended December 31, 2003.
Accordingly, Chex experienced a decline in 2004 revenues due to the loss of
these contracts and the absence until the third quarter of 2004, of any
significant new contracts to replace the revenues lost. In the third quarter,
Chex entered into new contracts resulting in approximately $778,000 of revenues
for 2004. Management estimates that these new contracts will provide
approximately $2,200,000 of revenues during fiscal year 2005.
-19-
Chex recognizes revenue at the time certain financial services are performed.
Revenues are derived from check cashing fees, credit and debit card advance
fees, and automated teller machine ("ATM") surcharge and transaction fees. Chex
revenues were comprised of:
2004 2003
-------------------------------------- --------------------------------------
Number of Dollars Earned Number of Dollars Earned
Transactions Handled Revenues Transactions Handled Revenues
----------- ------------ ----------- ----------- ------------ -----------
Personal checks 674,195 $125,011,732 $ 6,361,227 796,594 $157,086,984 $ 8,027,449
"Other" checks 261,662 88,555,373 822,140 373,869 149,762,190 1,061,680
Credit cards 219,354 76,272,507 3,544,278 368,922 125,955,019 4,819,287
Debit cards 36,442 11,201,804 174,592 65,141 23,785,520 451,503
ATM transactions 2,008,275 176,176,451 3,807,382 3,620,947 353,699,208 3,178,163
NSF Collection
Fees - - 413,142 - - 510,375
Other - - 110,974 - - 52,331
----------- ------------ ----------- ----------- ------------ -----------
3,199,928 $477,217,867 $15,233,735 5,225,473 $810,288,921 $18,100,788
=========== ============ =========== =========== ============ ===========
In July 2004, Chex began to use its own proprietary credit and debit cash
advance platform to process cash advance transactions. Chex anticipates that by
April 2005 all of its customers will be utilizing the proprietary product.
Management expects that this will have the effect of increasing revenues since
Chex will receive the full fee as revenue as opposed to being paid only a
percentage of the surcharge as commission.
LOCATION EXPENSES
Chex location expenses were $11,291,510 for the year ended December 31, 2004
compared to $12,710,236 for the year ended December 31, 2003. Chex location
expenses were comprised as follows:
2004 2003
-------------- -------------
Fees to casinos $ 5,312,522 $ 6,300,398
Salaries and related costs 3,098,663 4,102,398
Processing fees 838,292 210,351
Returned checks, net of collections 623,871 495,500
General operating expenses 1,418,162 1,601,589
-------------- -------------
$ 11,291,510 $ 12,710,236
============== =============
Fees to casinos are comprised of compensation paid to the casino pursuant to the
terms of each financial services agreement that the company has entered into
with the respective establishment. At locations where Chex provides
check-cashing services, Chex pays the location operator a commission based upon
the monthly amount of checks cashed or a fixed percentage of the net income from
operations at that location. Chex passes on an agreed upon percentage of the
surcharge commissions to the locations where ATM's are utilized. At the
locations at which Chex uses third party vendors to provide credit/debit card
advance services, it pays the operator a commission for each completed
transaction. For the locations where Chex's proprietary product is used, Chex
pays a fee to the casino based on the fees it receives from processing the
transaction. For these transactions, Chex also has a cost of processing the
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transaction. Chex began installing their proprietary product in July 2004. As
Chex continues to expand its proprietary product processing costs will increase,
as Chex must now process the transaction.
Chex employs personnel at the locations where it provides check cashing
services. Due to terminated locations, which had salaries and related costs of
approximately $760,000 in 2003, Chex had reduced staffing needs in 2004.
Chex generally records a returned check expense for potential losses in the
period such checks are returned.
General location operating expenses include bank charges, depreciation,
communications, insurance licensing, collections, and travel and entertainment.
For the year ended December 31, 2004, these expenses decreased compared to the
year ended December 31, 2003 primarily as a result of the terminated locations,
which accounted for approximately $213,000 of costs in 2003.
CORPORATE OPERATING EXPENSES
Corporate expenses for the year ended December 31, 2004, were $6,752,919
compared to $4,605,327 for the year ended December 31, 2003. The expenses were
comprised of the following:
2004 2003
-------------- -------------
Salaries and related costs $ 2,168,770 $ 1,825,031
Accounting, legal and consulting 877,236 173,180
Travel and entertainment 495,417 318,206
Advertising 220,059 365,172
Allocated expenses from Equitex 91,000 303,000
Depreciation and amortization 1,248,229 941,144
Provision for (recovery of) losses 462,500 (157,800)
Other 937,708 581,078
Stock-based compensation 252,000
Discount on note receivable 256,316
-------------- -------------
$ 6,752,919 $ 4,605,327
============== =============
Corporate operating expenses include Chex's Minneapolis administrative office,
which supports the 48 operating locations and also include for the year ended
December 31, 2004 those expenses associated with the opening of the FastFunds
International, Inc. London and Chicago offices.
Salaries and related costs increased in 2004 period compared to 2003 period as a
result of the hiring of the Company's Chief Executive Officer, as well as the
corporate staffing of FastFunds International, Inc. London office. The expenses
included in 2004 for the above items were approximately $89,000 and $167,000,
respectively.
Accounting, legal and consulting expenses increased by $704,056 during the year
ended December 31, 2004 compared to the year ended December 31, 2003. Accounting
fees increased by approximately $124,000 as additional expenses were incurred in
2004 compared to 2003 as a result of the Merger, upon which FastFunds became a
public reporting company. Legal fees increased by approximately $248,000 for the
year ended December 31, 2004 primarily as a result of costs related to the
Merger, compliance costs of being a public reporting company, as well as legal
costs associated with lawsuits. Consulting fees were approximately $335,000 for
the year ended December 31, 2004. FastFunds International hired marketing and
sales consultants to assist the Company in entering the store-valued card
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international market in the gaming and retail industries. In addition, we have
consulting agreements with a financial advisor and individuals who provide SEC
consulting services to the Company.
Travel and entertainment increased for the year ended December 31, 2004 compared
to December 31, 2003 as a result of the increased costs of travel associated
with employees of FastFunds and FastFunds International, and consultants.
Prior to July 1, 2004 Equitex was incurring certain general and administrative
expenses on behalf of Chex that were allocated by Equitex to Chex. Beginning
July 1, 2004, Chex and FastFunds began incurring these expenses on their own
behalf, and accordingly, there is no longer an allocation from Equitex.
Depreciation and amortization increased in 2004 compared to 2003 primarily as a
result of increased depreciation as a result of additional fixed assets, as well
as the amortization of deferred loan costs.
For the year ended December 31, 2004 the valuation allowance on the note
receivable from the estate of a deceased officer was increased by $226,000
compared to a decrease of the allowance of $157,800 for the year ended December
31, 2003. Shares of Equitex common stock collateralize the note and the
allowance is adjusted accordingly based on the value of the underlying
collateral. Additionally, the Company recorded a valuation allowance of $236,500
on a note receivable from a customer in the fourth quarter of 2004.
Other costs included in corporate operating expenses increased by $356,630 for
the year ended December 31, 2004 compared to December 31, 2003. The primary
reason for the increase was the indemnification fee of $100,000 associated with
the June 7, 2004 Merger. Other increases were the additional rent and occupancy
costs of approximately $78,000 for the London and Chicago offices, as well as
other office expenses such as, telecommunication and supplies.
The stock based compensation expense recorded in 2004 was a result of Equitex
distributing to Chex employees 280,000 of the 800,000 warrants to purchase
Company common stock at $0.10 per share it had received in the Merger. The
warrants were determined to have a fair value of $1.00 on the distribution date.
In September 2003, checks totaling $606,316 from one customer were cashed by
Chex and were returned for insufficient funds. In March 2004, the company
received a non-interest bearing promissory note from this customer. Based on an
imputed interest rate of 12%, a discount of $256,316 was applied to this note,
which was charged to operating expense during the fourth quarter of 2003. As
described above, the Company recorded a valuation allowance of $236,500 on this
note in the fourth quarter of 2004. The Company believes the remaining balance
of $100,000 is collectible, based on collateral pledged in connection with the
note.
OTHER INCOME (EXPENSE)
Other expense, net for the year ended December 31, 2004 was $1,455,411 compared
to $1,103,215 for the year ended December 31, 2003. Interest expense for the
year ended December 31, 2004 was $1,910,974 compared to $1,324,749 for the year
ended December 31, 2003. The primary reasons for the increase was interest
expense of approximately $245,000 related to the $5,000,000 note payable issued
in March 2004 and approximately $373,000 expensed as interest related to the
beneficial conversion features on convertible promissory notes. Interest income
increased to $455,563 for the year ended December 31, 2004, from $221,534 for
the year ended December 31, 2003. The increase was due primarily to the interest
income of $96,111 recorded on the $2.0 million iGames Note, and the higher note
and advances receivable from Equitex resulting in additional interest income.
-22-
INCOME TAX EXPENSES
Income tax expense for the year ended December 31, 2004 was $521,889 compared to
$187,000 for the year ended December 31, 2003. The primary reason for this
increase was because during the quarter ended June 30, 2004, management assessed
the realization of its recorded deferred tax assets. Based on this assessment,
management concluded, that it was more likely than not that existing deferred
tax assets would not be realizable, and determined a valuation allowance was
required for recorded deferred tax assets. Accordingly, the Company's valuation
allowance was increased by $473,000 during the second quarter of 2004, which
resulted in an increase to the provision for income taxes of the same amount.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2003 VS. DECEMBER 31, 2002
REVENUES
Consolidated revenues for the year ended December 31, 2003 were $18,100,788
compared to revenues of $19,580,399 for the year ended December 31, 2002.
Chex recognizes revenue at the time certain financial services are performed.
Revenues are derived from check cashing fees, credit and debit card advance
fees, and automated teller machine ("ATM") surcharge and transaction fees. Chex
revenues were comprised of:
2004 2003
-------------------------------------- --------------------------------------
Number of Dollars Earned Number of Dollars Earned
Transactions Handled Revenues Transactions Handled Revenues
----------- ------------ ----------- ----------- ------------ -----------
Personal checks 796,594 $157,086,984 $ 8,027,449 1,334,375 $167,831,673 $ 8,782,513
"Other" checks 373,869 149,762,190 1,061,680 (A) 154,146,088 1,178,106
Credit cards 368,922 125,955,019 4,819,287 418,947 149,367,510 5,210,635
Debit cards 65,141 23,785,520 451,503 62,316 25,092,053 279,589
ATM transactions 3,620,947 353,699,208 3,178,163 3,385,536 332,525,867 3,453,572
NSF Collection
Fees - - 510,375 - - 465,820
Other - - 52,331 - - 210,164
----------- ------------ ----------- ----------- ------------ -----------
5,225,473 $810,288,921 $18,100,788 5,201,174 $828,963,191 $19,580,399
=========== ============ =========== =========== ============ ===========
(A) For the year ended December 31, 2002, "other" checks, number of transactions
are included with personal checks.
Revenues decreased by approximately $1,480,000 for the year ended December 31,
2003 compared to the year ended December 31, 2002. The reason for the decline in
revenues was attributable to contracts that expired during 2002 and 2003 that
were not renewed that accounted for approximately $3,960,000 of 2002 revenues.
This decline was partially offset by new contracts received by Chex during 2002
and 2003 that accounted for approximately $2,391,000 in revenues in 2003
compared to approximately $1,200,000 in revenues in 2002, representing an
increase of $1,191,000 for the year ended December 31, 2003. Additionally,
revenues from contracts that were in force for two full years ended December 31,
2003 increased by approximately $1,200,000 for the year ended December 31, 2003
compared to December 31, 2002.
-23-
In January 2004, Chex was advised that 5 existing casino locations were
terminating the agreements for Chex to provide its services. These locations
accounted for $4,089,557 and $3,486,707 in revenues for the years ended December
31, 2003 and 2002, respectively.
LOCATION EXPENSES
Operating expenses were $12,710,236 for the year ended December 31, 2003
compared to $13,693,078 for the year ended December 31, 2002. Chex expenses were
comprised as follows:
2003 2002
-------------- -------------
Fees to casinos $ 6,300,398 $ 6,189,730
Salaries and related costs 4,102,398 4,543,489
Returned checks, net of collections 495,500 848,414
Processing fees 210,351 236,494
General operating expenses 1,601,589 1,874,951
-------------- -------------
$ 12,710,236 $ 13,693,078
============== =============
Chex pays a fee to casinos as compensation pursuant to the terms of each
financial services agreement that the company has entered into with the
respective establishment. At locations where Chex provides check-cashing
services, Chex pays the location operator a commission based upon the monthly
amount of checks cashed, or a fixed percentage of the net income from operations
at that location. Chex passes on an agreed upon percentage of the surcharge
commissions to the locations where ATM's are utilized. At all of the locations
at which Chex provides credit/debit card advance services, it pays the operator
a commission for each completed transaction.
Chex employs personnel at the locations where it provides check cashing
services. For the year ended December 31, 2003 location salaries and related
costs were $4,102,398 compared to $4,543,489 for the year ended December 31,
2002. The decrease is due to reduced location staffing needs.
CORPORATE OPERATING EXPENSES
2003 2002
-------------- -------------
Salaries and benefits $ 1,825,031 $ 1,381,485
Discount on note receivable 256,316
Accounting, legal and consulting 173,180 276,410
Travel and entertainment 318,206 118,663
Advertising 365,172 203,375
Allocated expenses from Equitex 303,000
Depreciation and amortization 941,144 1,010,607
Provision for (recovery of) losses (157,800) 61,100
Other 581,078 582,827
-------------- -------------
$ 4,605,327 $ 3,634,467
============== =============
Chex generally records a returned check expense for potential losses in the
period such checks are returned. In September 2003, checks totaling $606,316
from one customer were cashed by Chex and were returned for insufficient funds.
In March 2004, the company received a non-interest bearing promissory note from
this customer. Based on an imputed interest rate of 12%, a discount of $256,316
was applied to this note, which was charged to operating expense during the
fourth quarter of 2003.
-24-
For the year ended December 31, 2003 the valuation allowance on the note
receivable from the estate of a deceased officer of Chex was decreased by
$157,800 compared to an increase in the allowance of $61,100 for the year ended
December 31, 2002. Shares of Equitex common stock collateralize the note and the
allowance is adjusted accordingly based on the value of the underlying stock.
OTHER INCOME AND EXPENSES
For the year ended December 31, 2003, other expenses were $1,103,215 compared to
$1,411,389 for the year ended December 31, 2002. Interest expense for the year
ended December 31, 2003 was $1,324,749 compared to $1,529,438 for the year ended
December 31, 2002. The primary reason for the decrease was the lower balances in
2003 compared to 2002 of notes payable. Interest income increased to $221,534
for the year ended December 31, 2003 from $118,049 for the year ended December
31, 2002. The increase was due primarily to additional interest income on the
higher note and advances receivable from Equitex.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123(R) SHARE-BASED PAYMENT, which
addresses the accounting for share-based payment transactions. SFAS No. 123(R)
eliminates the ability to account for share-based compensation transactions
using APB 25, and generally requires instead that such transactions be accounted
for and recognized in the statement of operations based on their fair value.
SFAS No. 123(R) will be effective for public companies that do not file as small
business issuers as of the beginning of the first interim or annual reporting
period that begins after June 15, 2005. Management is evaluating the provisions
of this standard. Depending upon the number and terms of options that may be
granted in future periods, the implementation of this standard could have a
material impact on the Company's financial position and results of operations.
In December 2003, the FASB issued Interpretation No. 46R ("FIN 46R"), a revision
to SFAS Interpretation No. 46 ("FIN 46"), CONSOLIDATION OF VARIABLE INTEREST
ENTITIES. FIN 46R clarifies some of the provisions of FIN 46 and exempts certain
entities from its requirements. FIN 46R requires a variable interest entity to
be consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or is entitled to
receive a majority of the entity's residual returns or both. FIN 46R also
requires disclosures about variable interest entities that a company is not
required to consolidate but in which it has a significant variable interest. FIN
46R became effective for variable interest entities or potential variable
interest entities for periods ending after December 15, 2003 and became
effective for all other types of entities by the beginning of the first annual
reporting period beginning after March 15, 2004. The adoption of FIN 46R did not
have an impact on the Company's financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY, which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
its scope, which may have previously been reported as equity, as a liability (or
an asset in some circumstances). Mandatorily redeemable instruments (i.e.,
instruments issued in the form of shares that unconditionally obligate the
issuer to redeem the shares for cash or by transferring other assets) are to be
reported as liabilities by their issuers. This statement does not affect the
classification or measurement of convertible bonds, puttable stock, or other
outstanding shares that are conditionally redeemable. The provisions of SFAS No.
150 are generally effective for all financial instruments entered into or
modified after May 31, 2003, except for those provisions relating to mandatorily
redeemable non-controlling interests, which have been deferred. The adoption of
SFAS No. 150 did not have a material impact on the financial position or results
of operations of the Company. If the deferred provisions of SFAS No. 150 are
finalized in their current form, management does not expect adoption to have a
material effect of the financial position or results of operations of the
Company.
-25-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as interest rates and a decline in the stock market. The
Company does not enter into derivatives or other financial instruments for
trading or speculative purposes. The Company has limited exposure to market
risks related to changes in interest rates. The Company does not currently
invest in equity instruments of public or private companies for business or
strategic purposes.
The principal risks of loss arising from adverse changes in market rates and
prices to which the Company and its subsidiaries are exposed relate to interest
rates on debt. The Company has both fixed and variable rate debt. Chex has
$17,904,731 (before certain discounts on notes) of debt outstanding as of
December 31, 2004, of which $11,402,602 has been borrowed at fixed rates ranging
from 9% to 15%. This fixed rate debt is subject to renewal quarterly or annually
and is payable upon demand with 90 days written notice by the debt holder.
Additionally, $4,358,279, $1,774,064, and $200,000 of the total debt at December
31, 2004 have fixed rates of 7%, 9.5% and 5%, respectively. Chex also has
$169,786 of obligations under capital leases with fixed rates ranging from 6.5%
to 7% at December 31, 2004.
As most of the Company's average outstanding indebtedness is renewed annually
and carries a fixed rate of interest, a change in interest rates is not expected
to have a material impact on the consolidated financial position, results of
operations or cash flows of the Company during the year ending December 31,
2005.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements are listed under Item 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On July 7, 2004, our Board of Directors appointed the registered independent
public accounting firm of GHP Horwath, P.C. (formerly Gelfond Hochstadt
Pangburn, P.C.) as the Company's independent auditors for the fiscal year ending
December 31, 2004. Mantyla McReynolds, the Company's prior independent auditing
firm was dismissed effective June 7, 2004 and notified of their dismissal on
July 9, 2004.
During the two most recent fiscal years ended December 31, 2003 and 2002, and
interim periods subsequent to December 31, 2003, there have been no
disagreements with Mantyla McReynolds on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure or any
reportable events.
Mantyla McReynolds' reports on the financial statements for the years ended
December 31, 2003 and 2002 contained a going concern emphasis paragraph,
describing substantial doubt about SVI's ability to continue as a going concern.
With the exception of the foregoing, the report of Mantyla McReynolds contained
no adverse opinion or disclaimer of opinion and was not qualified or modified as
to uncertainty, audit scope or accounting principles.
During the two most recent fiscal years through July 7, 2004, the Company has
not consulted with GHP Horwath, P.C. regarding either (i) the application of
accounting principles to a specific completed or contemplated transaction; or
the type of audit opinion that might be rendered on the Company's financial
statements; or (ii) any matter that was either the subject of a disagreement, as
that term is defined in Item 304(a) (1) (iv) of Regulation S-K and the related
instructions to Item 304 of Regulation S-K, or a reportable event, as that term
is defined in Item 304 (a) (1) (v) of Regulation S-K.
-26-
ITEM 9A. CONTROLS AND PROCEDURES.
The Company carried out an evaluation, with the participation of our chief
executive and chief financial officers, of the effectiveness, as of a date
within 90 days prior to the filing of this annual report, of our disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) of the
Securities Exchange Act of 1934). Based upon that evaluation, made at the end of
the period, our chief executive officer and chief financial officer concluded
that our disclosure controls and procedures are effective in alerting them on a
timely basis to material information required to be disclosed in our periodic
reports to the Securities and Exchange Commission, and that there has been no
significant change in such internal controls, or other factors which could
significantly affect such controls including any corrective actions with regard
to significant deficiencies or material weaknesses, since our evaluation.
Nevertheless, due to the limited number of Company employees engaged in the
authorization, recording, processing and reporting of transactions, there is
inherently a lack of segregation of duties. The Company periodically assesses
the cost versus benefit of adding the resources that would remedy or mitigate
this situation, and currently does not consider the benefits to outweigh the
costs of adding additional staff in light of the limited number of transactions
related to the Company's operations.
ITEM 9B OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
(a)(b)(c) Identification of directors, executive officers and certain
significant persons
Length of
Name Age Offices Held service
- ------------------ --- ----------------------- -------------------
Henry Fong 69 Chairman Since June 2004
Chief Executive Officer June 2004
John McMahon 42 Director Since November 2004
Thomas B. Olson 39 Secretary Since June 2004
James Welbourn 55 Director and President Since June 2004
Aaron A. Grunfeld 58 Director Since June 2004
Graham Newall 49 Chief Executive Officer Since July 2004
Ijaz Anwar 34 Chief Financial Officer Since June 2004
Chief Operating Officer Since July 2004
Our directors hold office until the next annual meeting of the stockholders and
until their respective successors have been elected and qualified. Officers are
appointed by our Board of Directors and hold office until their successors are
duly elected and qualified.
No arrangement exists between any of the above officers and directors pursuant
to which any one of those persons was elected or appointed to such office or
position.
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(d) Family relationships.
Not applicable.
(e) Business experience.
HENRY FONG
Mr. Fong became the Company's chairman and chief executive officer upon the
effectiveness of the Merger. In July 2004, Mr. Graham Newall was hired as the
chief executive officer. Mr. Fong has served in a variety of roles for other
public corporations. Mr. Fong has been the president, treasurer and a director
of Equitex since its inception. Mr. Fong has been president and a director of
Equitex 2000, Inc. since its inception in 2001. Mr. Fong has been President and
a Director of Torpedo Sports USA, Inc. since March 2002. Torpedo Sports USA,
Inc. is a publicly traded manufacturer and distributor of recreational
equipment. From December 2000 to January 2002, Mr. Fong was a director of
Popmail.com, Inc., a publicly traded Internet marketing company. From January
1993 to January 20, 1999, Mr. Fong was chairman of the board and chief executive
officer of California Pro Sports, Inc., a publicly traded manufacturer and
distributor of in-line skates, hockey equipment and related accessories. From
1959 to 1982 Mr. Fong served in various accounting, finance and budgeting
positions with the Department of the Air Force. During the period from 1972 to
1981 he was assigned to senior supervisory positions at the Department of the
Air Force headquarters in the Pentagon. In 1978, he was selected to participate
in the Federal Executive Development Program and in 1981, he was appointed to
the Senior Executive Service. In 1970 and 1971, he attended the Woodrow Wilson
School, Princeton University and was a Princeton Fellow in Public Affairs. Mr.
Fong received the Air Force Meritorious Civilian Service Award in 1982. Mr. Fong
has passed the uniform certified public accountant exam. In March 1994, Mr. Fong
was one of twelve CEOs selected as Silver Award winners in FINANCIAL WORLD
magazine's corporate American "Dream Team."
THOMAS B. OLSON
Mr. Olson became the Company's secretary upon the effectiveness of the Merger.
Mr. Olson also serves as secretary of Equitex since January 1988 and has been a
director of Chex since May 2002. Since March 2002, Mr. Olson has been the
secretary of Torpedo Sports USA, Inc., a publicly traded manufacturer and
distributor of recreational equipment. Mr. Olson has been Secretary of Equitex
2000, Inc. since its inception in 2001. From August 2002 to July 2004, Mr. Olson
was the secretary of El Capitan Precious Metals, Inc., a publicly traded company
with ownership interest in a mining property. From February 1990 to February
2000, Mr. Olson was a director, and from May 1994 to February 2000 secretary, of
Immune Response, Inc. a publicly held investee of Equitex which merged with
Opticon Medical, Inc., in February 2000. Mr. Olson has attended Arizona State
University and the University of Colorado at Denver.
AARON A. GRUNFELD
Mr. Grunfeld became a director of the Company's upon the effectiveness of the
Merger. Mr. Grunfeld is also a director of Equitex since November 1991. Mr.
Grunfeld has been a director of Equitex 2000, Inc. since its inception in 2001.
Mr. Grunfeld has been engaged in the practice of law since 1971 and has been of
counsel to the firm of Resch Polster Alpert & Berger, LLP, Los Angeles,
California since November 1995. From April 1990 to November 1995, Mr. Grunfeld
was a member of the firm of Spensley Horn Jubas & Lubitz, Los Angeles,
California. Mr. Grunfeld received an A.B. in Political Science from UCLA in 1968
and a J.D. from Columbia University in 1971. He is a member of the California
Bar Association.
JOHN MCMAHON
Mr. McMahon became a director of the Company's in November 2004. Our business
advisor, pursuant to the provision of certain convertible promissory notes,
nominated Mr. McMahon. Since January 1998, Mr. McMahon has been the president
and chief financial officer of Emerald Ventures, Inc., a private investment
holding company. In June 1999, Mr. McMahon was appointed senior Vice President,
Chief Financial Officer and Treasurer of Emerald Casino, Inc. ("Emerald"), an
owner of a license to operate a riverboat casino in the state of Illinois. In
January 2001, the Illinois Gaming Board issued an initial decision, based upon
preliminary findings, to revoke Emerald's license. Emerald denied the
allegations upon which the initial decision was based and appealed the decision.
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Subsequently certain creditors filed an involuntary Chapter 7 bankruptcy
petition against Emerald, which was converted by Emerald to a voluntary Chapter
11 case. Mr. McMahon served as Senior Vice President, Chief Financial Officer
and Treasurer of Blue Chip Casino, Inc. from July 1996 until November 1999, when
Blue Chip was sold to Boyd Gaming Corporation. From June 1995 until July 1996,
he was Vice President of Flynn Enterprises, Inc., a venture capital, hedging and
consulting firm. From October 1994 to June 1995 Mr. McMahon was responsible for
treasury operations for Discovery Zone, Inc. a publicly traded company in the
business of developing and franchising indoor children's playgrounds. For more
than five years prior thereto, Mr. McMahon held a variety of increasingly
responsible Corporate Finance positions for Waste Management, Inc. a publicly
traded global waste services company.
GRAHAM NEWALL
Mr. Newall was appointed Chief Executive of FastFunds Financial Corporation in
July 2004. In 2001 Mr. Newall founded Pay2 Ltd, designing and developing a
payment system based upon a Visa or MasterCard stored value card linked to an
e-wallet or a bank account. From August 2001 through May 2004, Mr. Newall was
the Chief Executive Officer of PayGard, Inc., a private financial services
provider operating the Pay2 payment system. Mr. Newall began his career in
banking in 1978 with Australian Investment Bank Capel Court Corporation. During
the early eighties Graham specialized in Financial Futures at Bankers Trust
Australia and became a director of the Investment Banking arm of National Royal
Bank from 1986 through 1990. In May 1990 Mr. Newall led a team to found BZW
Australia Futures and in 1991 became the chief executive officer and Global Head
of BZW Futures a division of Barclay's Bank PLC.In early 1998, Mr. Newall joined
Bank Austria Creditanstalt Futures as managing director and developed a
technology driven trading platform clearing futures and options over the
Internet. Mr. Newall joined Earthport PLC in March 1999 and was the principal
conceptual architect of the Earthport payment system. Mr. Newall was a founding
director of the re-structured London Clearing House and a director of the
Futures Industry Association in Washington DC. Mr Newall has an MBA from the
University of Surrey.
JAMES P. WELBOURN
Mr. Welbourn became a director and president of the Company upon effectiveness
of the Merger. Mr. Welbourn is a founder of Chex and was the president and chief
executive officer of Chex since it's inception in 1992 through January 31, 2005.
He also serves as chairman of the Chex board of directors. Mr. Welbourn also
serves on the board of directors of Denaris, Inc., a subsidiary of Equitex,
whose primary business is developing private network and specialty use programs
for "Stored Value Cards" and on the board of directors of Paymaster Jamaica, a
Kingston, Jamaica company that provides bill pay and other products and service
throughout the island. Mr. Welbourn graduated from Marquette University with a
degree in Education and earned his MBA degree from George Williams College. Mr.
Welbourn has been selected as an honored professional of the National Directory
of Who's Who in Executive and Professionals from 1996 through 2002 and was
appointed to the Business Advisory Council in 2001 and the Presidents Business
Commission in 2002.
IJAZ ANWAR
Mr. Anwar became the chief financial officer of the Company upon the
effectiveness of the Merger. In July 2004, Mr. Anwar also became the chief
operating officer of the Company. Mr. Anwar has been employed by Chex Services
since January 2001 in various capacities, most recently as its chief financial
officer and chief operating officer. Mr. Anwar combines over twelve years of
management experience with his background in accounting and finance. Recently,
Mr. Anwar has participated in a number of merger and acquisition transactions,
where he has evaluated economic and investment strategies. He has held various
management positions within the entertainment industry and has also overseen a
multi-million dollar finance operation for an international hotel chain. Mr.
Anwar received his Bachelor of Science degree from the University of Houston and
completed his coursework in accounting from the university's Department of
-29-
Accounting and Taxation. He has passed the Certified Public Accountants Exam and
is a member of the American Institute of Certified Public Accountants (AICPA),
as well as the Minnesota Society of Certified Public Accountants.
(f) Involvement in certain legal proceedings.
Not applicable.
(g) Promoters and control persons.
Not applicable.
(h) Audit committee financial expert.
(i) Identification of the audit committee
The Company does not currently have an audit committee of the board of
directors, as currently the entire board of directors serves in that function.
While certain individuals on the Board of Directors may have the necessary
attributes of a financial expert to serve as the Financial Expert on an audit
committee, the Company has not yet formed a formal audit committee.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires executive officers
and directors and persons who beneficially own more than 10% of our common stock
to file initial reports of ownership and reports of changes in ownership with
the SEC. Executive officers, directors and greater-than-10% beneficial owners
are required by SEC regulations to furnish us with copies of all Section 16(a)
reports they file. Based solely on a review of the copies of such forms
furnished to us during 2004 and written representations from the executive
officers, directors and greater-than-10% beneficial owners of our common stock,
the following table shows the transactions for 2004 that were not in compliance.
Description of Required Filing Actual Filing
Name of Filer Transaction Date Date
- -------------- ---------------------- ------------------ --------------
Graham Newall Initial filing on Form 3 August 3, 2004 Not filed
John McMahon Initial filing on Form 3 November 29, 2004 Not filed
CODE OF ETHICS
We have adopted a Code of Ethics for our senior financial management, which
includes our chief executive officer and chief financial officer as principal
executive and accounting officers, that has been filed as an exhibit to this
report.
ITEM 11. EXECUTIVE COMPENSATION.
(a) Mr. Graham Newall became our chief executive officer in July 2004. Mr.
Newall receives an annual salary of $175,000. During 2004 Mr. Newall
received compensation of $87,500.
Mr. Jim Welbourn has been the president of Chex since 1992. Pursuant to an
employment agreement that expired in January 2005, Mr. Welbourn received
base compensation of $166,418, $172,720 and $161,394 for the years ended
December 31, 2004, 2003 and 2002, respectively. Mr. Welbourn was also paid
a bonus of $200,000 and $34,000 for the years ended December 31, 2003 and
-30-
2002, respectively. Additionally, Mr. Welbourn received a commission for
the years ended December 31, 2004, 2003 and 2002 of $33,205, $29,746 and
$24,537, respectively.
Mr. Ijaz Anwar became the chief financial officer of FastFunds in June and
became the chief operating officer of FastFunds in July 2004. Since
September 2002, Mr. Anwar has been the chief financial officer and
treasurer of Chex and from March 2002 through August 2002 Mr. Anwar was the
controller of Chex. Mr. Anwar has an employment agreement with Chex through
February 2006.
Mr. Henry Fong became the Company's chairman upon the effectiveness of the
Merger. Mr. Fong has not received any compensation from the Company.
(b) Summary compensation table.
The following table sets forth information regarding compensation paid to our
officers during the years ended December 31, 2004, 2003 and 2002:
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term
Name and Other Annual Compensation All Other
Principal Position Year Salary Bonus Compensation Options/SARs Compensation
- ------------------ ------ -------- -------- ------------ ------------ ------------
Graham Newall, 2004 $ 87,500 $ $ $
Chief Executive Officer
James P. Welbourn (1) 2004 166,418 41,605 $ 7,987
President 2003 172,720 200,000 38,308 7,908
2002 161,394 34,000 31,389
Ijaz Anwar (2) 2004 119,011 8,400 4,760
Chief Financial Officer 2003 117,346 8,561 4,628
2002 77,745 24,500 7,431
(1) Mr. Welbourn's other annual compensation is comprised of earned commissions
of $33,205, $29,746 and $24,537 for the years ended December 31, 2004, 2003
and 2002, respectively, and an automobile allowance of $8,400, $8,562 and
$6,852 for the years ended December 31, 2004, 2003 and 2002, respectively.
Mr. Welbourn's other compensation of $7,987 and $7,908 is a result of
employer 401(k) match for the years ended December 31, 2004 and 2003.
(2) Mr. Anwar's other annual compensation is comprised of auto allowances. Mr.
Anwar's other compensation represents employer 401(k) match for the years
ended December 31, 2004 and 2003, respectively.
(c) Option/SAR grants table.
None granted.
(d) Aggregated Option/SAR exercises and fiscal year-end Option/SAR value table.
None granted.
(e) Long Term Incentive Plans -- awards in last fiscal year.
Not applicable.
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(f) Defined benefit or actuarial plan disclosure.
Not applicable.
(g) Compensation of directors.
(1) Currently, the Company pays no compensation to the members of its Board
of Directors. Members of the Board of Directors receive reimbursement
for expenses incurred in attending board meetings or for other services
related to their responsibilities as board members.
(h) Employment contracts and termination of employment and change-in-control
arrangements.
We have an employment agreement with our chief operating officer / chief
financial officer through February 2006; whereby the Company would be
responsible for the remaining term of the contract if he is terminated for other
than an egregious act. We have no plan or arrangement with respect to any
officer's of the Company, which will result from a change in control of the
Company or a change in the individual's responsibilities following a change in
control.
(i) Report on repricing of Options/SARs.
Not applicable.
(j) Additional information with respect to compensation committee interlocks and
insider participation in compensation decisions
Not applicable.
(k) Board compensation committee report on executive compensation
We have no compensation committee of our board of directors. For the year ended
December 31, 2004, our board of directors did not formally review executive
compensation primarily because our president and chief financial and operating
officer were performing under employment agreements executed prior to the
Merger. Our board of directors, in the absence of a formal compensation
committee, intends to review executive compensation during the year ended
December 31, 2005.
(l) Performance graph
12/31/2002 12/31/2003 12/31/2004
- -----------------------------------------------------------------------
Nasdaq US 100.00 149.51 162.71
Nasdaq Financial 100.00 135.25 157.88
FastFunds Financial 100.00 12.73 918.18
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a)(b) Security Ownership of Certain Beneficial Owners and Security Ownership of
Management.
The following table contains information at March 11, 2005, as to the beneficial
ownership of shares of our common stock by each person who, to our knowledge at
that date, was the beneficial owner of five percent or more of the outstanding
shares of the class, each person who is a director or executive officer of us
and all persons as a group who are executive officers and directors, and as to
the percentage of outstanding shares so held by them at March 11, 2005.
Shares of Shares of
Shares of Shares of Common Stock Common Percentage
Common Common Stock Underlying Stock of Common
Name and Address of Stock Owned Underlying Preferred Underlying Stock Owned
Beneficial Owner (1) Options (1) Stock (1) Warrants (1) Total (4)
- ---------------- ------------- --------------- --------------- ------------ ----------- ------------
Equitex, Inc. 7,700,000 0 0 160,000 7,860,000 74.2%
7315 E Peakview Ave
Englewood CO 80111
Henry Fong 7,700,000(2) 0 0 320,000(2) 8,020,000 74.6%
7315 E Peakview Ave
Englewood CO 80111
Graham Newall 0 0 0 0 0 0.0%
11100 Wayzata Blvd
Suite 111
Minnetonka MN 553050
Aaron A. Grunfeld 0 0 0 35,000 35,000 0.3%
10390 Santa Monica Blvd
Fourth Floor
Los Angeles CA 90025
Ijaz Anwar 0 0 0 70,000 70,000 0.7%
11100 Wayzata Blvd
Suite 111
Minnetonka MN 55305
John P. McMahon 0 0 0 0 0 0.0%
11100 Wayzata Blvd
Suite 111
Minnetonka MN 55305
Thomas Olson 0 0 0 25,000 25,000 0.2%
7315 E Peakview Ave
Englewood CO 80111
James Welbourn 2,700 0 0 210,000 212,700 2.0%
500 Australian Ave S
Suite 625
West Palm Beach FL 33401
All officers and 7,702,700(3) 0 0 660,000(3) 8,362,700 75.4%
directors as a group (seven persons)
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(1) The beneficial owners exercise sole voting and investment power.
(2)(3) Includes 7,700,000 shares and 160,000 shares underlying warrants owned
by a corporation in which Mr. Fong is an officer and director. Mr. Fong
disclaims beneficial ownership of the shares and shares underlying the
warrants owned by Equitex.
(4) As of March 11, 2005, 10,428,627 shares of our common stock were
outstanding.
(c) Changes in control.
We are unaware of any arrangements that may, at a subsequent date, result in a
change in control of our company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
WARRANT ISSUED TO EQUITEX IN CONNECTION WITH MERGER
In connection with the Merger, the Company issued a five-year warrant to Equitex
for the purchase of an aggregate of 800,000 shares of Company common stock at a
purchase price of $0.10 per share. Equitex has subsequently distributed 640,000
of these warrants to purchase common stock and owns 160,000 warrants to purchase
common stock.
(a) Transactions with Management and Others.
In July 2004, FastFunds International, Inc. entered into a month-to-month lease
for office space in Chicago, Illinois with a director of the Company as landlord
under such lease.
(b) Certain business relationships.
Not applicable.
(c) Indebtedness of management.
One of the Company's directors has a note payable to the Company at December 31,
2004 in the amount of $485,936, and is presented as a reduction of stockholders'
equity in the Company's balance sheet as of December 31, 2004.
(d) Transactions with promoters.
Not applicable.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
GHP Horwath, P.C. served as our auditors for the year ended December 31, 2004.
Mantyla McReynolds served as SVI's auditors for the year ended December 31,
2003.
AUDIT FEES
Fees billed and expected to be billed by GHP Horwath, P.C. for audit and review
services related to the years ended December 31, 2004 and 2003 were
approximately $115,000 and $89,000, respectively, which includes out-of-pocket
costs incurred in connection with these services.
-34-
AUDIT-RELATED FEES
Fees billed by GHP Horwath, P.C. for audit-related services related to the years
ended December 31, 2004 and 2003 were approximately $0 and $23,000,
respectively. In 2003, GHP Horwath, P.C. performed due diligence services which
comprised these fees.
TAX FEES
Fees billed and expected to be billed by GHP Horwath, P.C. for tax return
preparation services related to the years ended December 31, 2004 and 2003 were
approximately $10,000 and $5,000, respectively.
ALL OTHER FEES
Fees billed by GHP Horwath, P.C. were approximately $2,000 and $0 for the years
ended December 31, 2004 and 2003. Fees in 2004 were incurred for time and out of
pocket costs related to responding to a plaintiff's subpoena related to certain
Company litigation described in Item 3 against the Company.
Pursuant to our Audit Committee Charter, before the accountant is engaged by us
to render audit or non-audit services, our audit committee approves the
engagement.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report immediately
following the signature page.
Page
-----------
1. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm F-1
Consolidated financial statements:
Consolidated balance sheets - December 31, 2004 and 2003 F-2
Consolidated statements of operations - years ended
December 31, 2004, 2003 and 2002 F-3
Consolidated statements of changes in stockholders' equity
Years ended December 31, 2004, 2003 and 2002 F-4 - F-5
Consolidated statements of cash flows - years ended
December 31, 2004, 2003 and 2002 F-6 - F-7
Notes to consolidated financial statements F-8 - F-38
2. Financial Statements Schedules.
Financial statements and exhibits - Schedule 11, Valuation and Qualifying
Accounts, is omitted because the information is included in the
consolidated financial statements and notes.
3. Exhibits.
2.1 Agreement and Plan of Merger and Reorganization by and among Chex
Services, Inc., Seven Ventures, Inc. (n/k/a FastFunds Financial
Corporation) and Seven Ventures Newco, Inc. (incorporated by reference to
Exhibit 2.1 of the registrant's Current Report on Form 8-K filed on June
22, 2004).
2.2 Articles of Merger (incorporated by reference to Exhibit 2.2 of the
registrant's Current Report on Form 8-K filed on June 22, 2004).
3.1 Articles of Incorporation of FastFunds Financial Corporation
(incorporated by reference to Exhibit 3.(I) of the registrant's
Registration Statement on Form 10-SB filed on August 7, 2001).
3.2 Bylaws of FastFunds Financial Corporation (incorporated by reference to
Exhibit 3 of the registrant's Registration Statement on Form 10-SB filed
on August 7, 2001).
4.1 Form of Convertible Promissory Notes, dated as of April 14, 2004, issued
to [lenders referred by MBC Global, LLC] in connection with the Agreement
and Plan of Merger and Reorganization (see item 2.1 above) (incorporated
by reference to Exhibit 10.6 of the registrant's Current Report on Form
8-K filed on June 22, 2004).
-36-
4.2 Form of Warrant to purchase 800,000 shares of common stock, dated as of
April 14, 2004, issued to Equitex, Inc., in connection with the Agreement
and Plan of Merger and Reorganization (see item 2.1 above) (incorporated
by reference to Exhibit 10.7 of the registrant's Current Report on Form
8-K filed on June 22, 2004).
4.3 Form of Purchase Agreement by and between FastFunds Financial Corporation
and accredited investors, dated on or about December 16, 2004
(incorporated by reference to Exhibit 10.1 of the registrant's Current
Report on Form 8-K filed on December 21, 2004).
4.4 Form of Convertible Promissory Notes issued to investors on or about
December 16, 2004, in connection with the Purchase Agreement (see item
4.3 above) (incorporated by reference to Exhibit 10.2 of the registrant's
Current Report on Form 8-K filed on December 21, 2004).
4.5 Form of Warrant to purchase common stock of FastFunds Financial
Corporation, issued to investors on or about December 16, 2004, in
connection with the Purchase Agreement (see item 4.3 above) (incorporated
by reference to Exhibit 10.3 of the registrant's Current Report on Form
8-K filed on December 21, 2004).
10.1 Employment Agreement by and between Ijaz Anwar and Chex Services, Inc.,
dated as of March 1, 2003 (FILED HEREWITH).
10.2 Employment Agreement by and between James P. Welbourn and Chex Services,
Inc., dated as of January 15, 1999 (FILED HEREWITH).
10.3 Secured Promissory Note in the amount of $5,000,000, issued by Chex
Services, Inc. in favor of Equitex, Inc., dated March 8, 2004
(incorporated by reference to Exhibit 10.1 to the registrant's Current
Report on Form 8-K filed on June 22, 2004).
10.4 Chex Note Security Agreement by and between Chex Services, Inc. and
Equitex, Inc., dated March 8, 2004 (incorporated by reference to Exhibit
10.2 to the registrant's Current Report on Form 8-K filed on June 22,
2004).
10.5 Guaranty Agreement by and among Chex Services, Inc., Pandora Select
Partners, L.P. and Whitebox Hedged High Yield Partners, L.P., dated March
8, 2004 (incorporated by reference to Exhibit 10.3 to the registrant's
Current Report on Form 8-K filed on June 22, 2004).
10.6 Chex Guarantee Security Agreement by and among Chex Services, Inc.,
Pandora Select Partners, L.P. and Whitebox Hedged High Yield Partners,
L.P., dated March 8, 2004 (incorporated by reference to Exhibit 10.4 to
the registrant's Current Report on Form 8-K filed on June 22, 2004).
10.7 Security Agreement by and among Equitex, Inc., Pandora Select Partners,
L.P., and Whitebox Hedged High Yield Partners, L.P., dated March 8, 2004
(incorporated by reference to Exhibit 10.5 to the registrant's Current
Report on Form 8-K filed on June 22, 2004).
14.1 Code of Ethics of FastFunds Financial Corporation (FILED HEREWITH).
16.1 Letter Regarding Change in Certifying Accountant.(incorporated by
reference to Exhibit 10.5 to the registrant's Current Report on Form 8-K
filed on July 14, 2004).
21.1 List of Subsidiaries of FastFunds Financial Corporation (FILED HEREWITH).
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002 (FILED HEREWITH).
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31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002 (FILED HEREWITH).
32.1 Certifications under Section 906 of Sarbanes-Oxley Act of 2002 (FILED
HEREWITH).
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: April 14, 2005 FASTFUNDS FINANCIAL CORPORATION
(Registrant)
By /S/ IJAZ ANWAR
---------------------------------------
Ijaz Anwar, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: April 14, 2005 /S/ GRAHAM NEWALL
---------------------------------------
Graham Newall, Chief Executive Officer
Date: April 14, 2005 /S/ IJAZ ANWAR
---------------------------------------
Ijaz Anwar, Chief Financial Officer
Date: April 14, 2005 /S/ JAMES P. WELBOURN
---------------------------------------
James P. Welbourn, Director
Date: April 14, 2005 /S/ AARON A. GRUNFELD
---------------------------------------
Aaron A. Grunfeld, Director
Date: April 14, 2005 /S/ JOHN P. MCMAHON
---------------------------------------
John P. McMahon, Director
Date: April 14, 2005 /S/ HENRY FONG
---------------------------------------
Henry Fong, Director
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FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
-----------
Report of Independent Registered Public Accounting Firm F-1
Consolidated financial statements:
Consolidated balance sheets F-2
Consolidated statements of operations F-3
Consolidated statements of changes in stockholders' equity F-4 - F-5
Consolidated statements of cash flows F-6 - F-7
Notes to consolidated financial statements F-8 - F-38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
FastFunds Financial Corporation
We have audited the accompanying consolidated balance sheets of FastFunds
Financial Corporation and subsidiaries (the "Company") as of December 31, 2004
and 2003, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FastFunds Financial
Corporation and subsidiaries as of December 31, 2004 and 2003, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
/s/ GHP HORWATH, P.C.
Denver, Colorado
March 24, 2005
F-1
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,438,341 $ 8,770,842
Accounts receivable, net 1,010,518 1,319,458
Prepaid amounts on casino contracts (Note 7) 268,929 182,498
Current portion of notes, advances and interest receivable,
including related parties of $7,900 (2004) and $8,700 (2003) (Note 3) 61,900 58,200
Deferred tax asset (Note 9) 85,000
Other current assets 230,325 117,054
------------ ------------
Total current assets 10,010,013 10,533,052
------------ ------------
Notes and interest receivable, including related parties of $247,890
(2004) and $773,344 (2003), net of current portion (Note 3) 2,640,391 1,576,117
Other receivables, related party (Note 8) 219,409
Property and equipment, net (Note 4) 1,322,737 1,171,856
Deferred tax asset (Note 9) 388,000
Intangible and other assets, net (Note 5) 3,105,618 3,328,908
Goodwill (Note 5) 5,636,000 5,636,000
------------ ------------
12,704,746 12,320,290
------------ ------------
$ 22,714,759 $ 22,853,342
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft (Note 6) $ 2,497,766
Accounts payable $ 323,949 207,078
Accrued expenses 908,952 446,565
Accrued liabilities on casino contracts (Note 7) 574,516 587,099
Convertible promissory notes (Note 6) 185,335
Notes and loans payable, including related parties of $105,105
(2004) (Note 6) 11,402,602 10,692,177
Current portion of long-term debt (Note 6) 1,315,217 201,727
------------ ------------
Total current liabilities 14,710,571 14,632,412
Long-term debt, net of current portion (Note 6) 3,044,016 37,243
------------ ------------
17,754,587 14,669,655
------------ ------------
Commitments and contingencies (Notes 6 and 7)
Stockholders' equity (Note 10):
Preferred stock, $.001 par value; 5,000,000 shares
authorized; no shares issued and outstanding
Common stock, $.001 par value; 250,000,000 shares
authorized; 10,428,627 shares (2004) and 7,700,000 (2003)
shares issued and outstanding 10,429 7,700
Additional paid-in capital 15,054,695 11,748,128
Stock subscription receivable (216,000) (800,000)
Investment in Equitex, Inc. (308,488) (611,680)
Notes, advances and interest receivable, related parties (4,743,277) (2,111,268)
Accumulated deficit (4,837,187) (49,193)
------------ ------------
Total stockholders' equity 4,960,172 8,183,687
------------ ------------
$ 22,714,759 $ 22,853,342
============ ============
See notes to consolidated financial statements.
F-2
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
------------ ------------ ------------
Fee revenue $ 15,233,735 $ 18,100,788 $ 19,580,399
------------ ------------ ------------
Location expenses:
Fees to casinos 5,312,522 6,300,398 6,189,730
Salaries and benefits 3,098,663 4,102,398 4,543,489
Selling, general and administrative 1,418,162 1,601,589 1,874,951
Processing fees 838,292 210,351 236,494
Returned checks 623,871 495,500 848,414
------------ ------------ ------------
Total location expenses 11,291,510 12,710,236 13,693,078
------------ ------------ ------------
Location gross margin 3,942,225 5,390,552 5,887,321
------------ ------------ ------------
Selling, general and administrative 5,429,504 3,766,811 2,696,612
Amortization of intangible and other assets (Note 5) 860,915 740,000 876,755
Provision for (recovery of) losses on related party
notes receivable (Note 3) 462,500 (157,800) 61,100
Discount on note receivable, other (Note 3) 256,316
------------ ------------ ------------
Total corporate operating expenses 6,752,919 4,605,327 3,634,467
------------ ------------ ------------
(Loss) income from operations (2,810,694) 785,225 2,252,854
------------ ------------ ------------
Other income (expense):
Interest expense including related party interest
of $275,114 (2004) (1,910,974) (1,324,749) (1,529,438)
Interest income including related party interest
of $ 346,957 (2004), $167,971 (2003) and
$29,195 (2002) 455,563 221,534 118,049
------------ ------------ ------------
Total other expense (1,455,411) (1,103,215) (1,411,389)
------------ ------------ ------------
(Loss) income before income taxes (4,266,105) (317,990) 841,465
Income tax expense (Note 9) (521,889) (187,000) (55,000)
------------ ------------ ------------
Net (loss) income $ (4,787,994) $ (504,990) $ 786,465
============ ============ ============
Basic and diluted net (loss) income per share $ (0.54) $ (0.07) $ 0.10
============ ============ ============
Weighted average number of common shares outstanding:
Basic and diluted 8,933,269 7,700,000 7,700,000
============ ============ ============
See notes to consolidated financial statements.
F-3
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Notes,
advances
Investment and interest (Accumulated
Common stock Additional Stock in receivable, deficit) Total
------------------ paid-in subscription Equitex, related retained stockholders'
Shares Amount capital receivable Inc. parties earnings equity
---------- ------- ------------ --------- --------- ----------- ----------- -----------
Balances, January 1, 2002
(Note 1) 7,700,000 7,700 $ 10,247,092 $ (330,668) $9,924,124
Investment in Equitex, Inc. $(866,714) (866,714)
Increase in notes, advances
and interest receivable,
affiliates $ (566,385) (566,385)
Net income 786,465 786,465
---------- ------- ------------ --------- --------- ----------- ----------- -----------
Balances, December 31, 2002 7,700,000 7,700 10,247,092 (866,714) (566,385) 455,797 9,277,490
Receipt of Equitex, Inc.
common stock in exchange for
dividends payable (8,884) (8,884)
Sales of Equitex, Inc. common
stock (Note 10) 20,440 115,968 136,408
Contribution of capital from
Equitex, Inc.for allocated
expenses and reduction of
income tax payable (Note 10) 925,000 925,000
Purchases of Equitex, Inc.
common stock (Note 10) (312,050) (312,050)
Sale of Equitex, Inc. common
stock for cash and note
receivable (Note 10) 555,596 (800,000) 460,000 215,596
Increase in notes, advances
and interest receivable,
affiliates (Note 10) (1,544,883) (1,544,883)
Net loss (504,990) (504,990)
---------- ------- ------------ --------- --------- ----------- ----------- -----------
Balances, December 31, 2003 7,700,000 7,700 11,748,128 (800,000) (611,680) (2,111,268) (49,193) 8,183,687
(Continued)
F-4
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
Notes,
advances
Investment and interest (Accumulated
Common stock Additional Stock in receivable, deficit) Total
------------------ paid-in subscription Equitex, related retained stockholders'
Shares Amount capital receivable Inc. parties earnings equity
---------- ------- ------------ --------- --------- ----------- ----------- -----------
Distribution of Equitex, Inc.
common stock in exchange for
receivable due from Equitex,
Inc. (Note 10) 29,180 21,570 (50,750) -
Proceeds received in
connection with stock
subscription receivable
(Note 10) 200,000 200,000
Cancellation of portion of
stock subscription receivable
and return of common stock
(Note 10) (250,000) 600,000 (350,000) -
Acquisition of Seven Ventures,
Inc. 584,670 585 (8,700) (8,115)
Sales of Equitex, Inc. common
stock (Note 10) 174,267 745,247 919,514
Purchases of Equitex, Inc.
common stock (Note 10) (113,625) (113,625)
Conversion of notes payable to
common stock (Note 6) 2,000,000 2,000 198,000 200,000
Beneficial conversion feature
on convertible promissory
notes (Note 6) 200,000 200,000
Exercise of warrants (Note 10) 50,000 50 4,950 5,000
Issuance of common stock in
exchange for stock
subscription receivable
(Note 10 40,000 40 215,960 (216,000) -
Issuance of common stock upon
cashless exercises of
warrants (Note 10) 53,957 54 (54) -
Contribution of capital from
Equitex, Inc. for allocated
expenses, fair value of
warrants and deferred loan
costs (Note 10) 716,900 716,900
Warrants issued in connection
with convertible promissory
notes (Note 6) 113,097 113,097
Beneficial conversion features
issued in connection with
convertible promissory notes
(Note 6) 1,660,967 1,660,967
Increase in notes, advances
and interest receivable due
from affliliates (Note 10) (1,783,745) (1,783,745)
Reclassification of related
party receivables (Notes 8
and 10) (797,514) (797,514)
Issuance of warrants to
employees for services
(Note 1) 252,000 252,000
Net loss (4,787,994) (4,787,994)
---------- ------- ------------ --------- --------- ----------- ----------- -----------
Balances, December 31, 2004 10,428,627 $10,429 $ 15,054,695 $(216,000) (308,488) $(4,743,277) $(4,837,187) $ 4,960,172
========== ======= ============ ========= ========= =========== =========== ===========
See notes to consolidated financial statements.
F-5
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
----------- ----------- -----------
Cash flows from operating activities:
Net (loss) income $(4,787,994) $ (504,990) $ 786,465
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization 1,408,449 1,093,480 1,151,838
Non-cash interest expense 104,502
Stock-based compensation 252,000
Provision for (recovery of) losses 527,500 (157,800) 61,100
Discount on note receivable 256,316
Beneficial conversion feature on convertible promissory
notes payable 373,200
Allocated expenses from Equitex, Inc. 91,000 390,000
Deferred income taxes 473,000 62,000 (535,000)
Decrease (increase) in assets:
Accounts receivable 243,941 (28,762) (28,986)
Interest and other receivables (456,907) (215,697) 282,786
Prepaid amounts on casino contracts (86,431) 7,219 152,295
Other current assets (113,271) 31,990 (34,660)
(Decrease) increase in liabilities:
Accounts payable 116,872 (336,117) 64,812
Accrued interest, payroll, and other expenses 462,387 (300,314) 91,433
Accrued liabilities on casino contracts (12,583) (35,262) 104,556
----------- ----------- -----------
Net cash (used in) provided by operating activities (1,404,335) 262,063 2,096,639
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (553,277) (411,522) (428,375)
Repayments on notes receivable 18,973 380,517 233,852
Advances on notes receivable (2,004,673) (811,316) (186,160)
----------- ----------- -----------
Net cash used in investing activities (2,538,977) (842,321) (380,683)
----------- ----------- -----------
Cash flows from financing activities:
(Decrease) increase in bank overdraft (2,497,766) 2,497,766
Net repayments on line of credit (1,000,000) (2,000)
Borrowings on convertible promissory notes 1,774,064
Borrowings on notes and loans payable 8,047,530 1,825,000 1,962,277
Repayments on notes and loans payable (2,487,105) (3,341,599) (2,033,461)
Borrowings on long-term debt 400,000
Repayments of long-term debt (706,043) (253,386) (198,364)
Proceeds received in connection with stock subscription receivable 200,000
Proceeds from exercise of warrants 5,000
Purchase of Equitex, Inc. common stock (113,625) (312,050) (803,900)
Proceeds from sale of Equitex, Inc. common stock 919,514 352,004
Payments of deferred loan costs (472,925)
Notes and advances to related parties (1,457,833) (1,464,025) (1,135,760)
Payments received on notes and advances to related parties 595,000 500,000
----------- ----------- -----------
Net cash provided by (used in) financing activities 3,610,811 (1,101,290) (1,711,208)
----------- ----------- -----------
(Continued)
F-6
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents (332,501) (1,681,548) 4,748
Cash and cash equivalents, beginning 8,770,842 10,452,390 10,447,642
----------- ----------- -----------
Cash and cash equivalents, ending $ 8,438,341 $ 8,770,842 $10,452,390
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,299,269 $ 1,376,324 $ 1,500,888
=========== =========== ===========
Cash paid for income taxes $ 12,242 $ 190,000 $ 10,000
=========== =========== ===========
Supplemental disclosure of non-cash investing and financing activities:
Contribution of capital from Equitex, Inc. for allocated expenses,
fair value of warrants and deferred loan costs $ 625,900
===========
Reclassification of related party receivables $ 250,512
-----------
Reclassification of notes and interest receivable from an
officer of Chex 547,002
-----------
$ 797,514
===========
Cancellation of portion of stock subscription receivab$e 250,000
-----------
Return of Equitex common stock in exchange for stock subscription
receivable 350,000
-----------
$ 600,000
===========
Conversion of notes payable to common stock $ 200,000
===========
Issuance of common stock in exchange for stock subscription
receivable $ 216,000
===========
Distribution of Equitex, Inc. common stock to third parties in exchange
for receivable due from Equitex, Inc. $ 50,750
===========
Warrants issued in connection with convertible promissory
notes $ 113,097
Beneficial conversion features issued in connection with
convertible promissory notes 1,660,967
-----------
$ 1,774,064
===========
Contribution of capital from Equitex, Inc. for reduction of $ 535,000
income tax payable ===========
Sale of Equitex, Inc. common stock for note receivable $ 800,000
===========
Receipt of Equitex, Inc. common stock in exchange for
dividends payable $ 8,884
===========
Reduction in related party note receivable and recognition
of accrual to related party in consideration for receivable
from Equitex, Inc.:
Decrease in note receivable, related party $ 300,000
Increase in note payable, related party 200,000
-----------
Receivable from Equitex, Inc. $ 500,000
===========
Note receivable offset against note payable $ 200,000
===========
Conversion of note payable and accrued interest to common
stock of Equitex, Inc. $ 62,814
===========
Capital lease obligations $ 145,138 $ 157,000
=========== ===========
See notes to consolidated financial statements.
F-7
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
1. BUSINESS, ORGANIZATION AND MANAGEMENT'S PLANS:
BUSINESS:
FastFunds Financial Corporation ("FFFC") is a holding company operating
through its wholly-owned subsidiary Chex Services, Inc. ("Chex", or the
"Company"). As discussed below, FFFC was previously organized as Seven
Ventures, Inc. ("SVI"). Effective June 7, 2004, Chex merged with SVI, a
Nevada corporation formed in 1985, whereby Equitex, Inc., a
publicly-traded SEC registrant incorporated in Delaware ("Equitex"),
exchanged its 100% ownership interest in Chex for 93% of SVI's
outstanding common stock. On June 29, 2004, SVI changed its name to FFFC.
The Company's wholly-owned subsidiaries include the following:
CHEX, a Minnesota corporation, provides financial services, primarily check
cashing, automated teller machine (ATM) access, and credit card advances
to customers primarily at Native American owned casinos and gaming
establishments. As of December 31, 2004, 2003 and 2002, the Company
operates at 48, 44 and 49 establishments, respectively. As of December
31, 2004, the Company operated in gaming establishments located in
Connecticut, Illinois, Michigan, Minnesota, Nebraska, New Mexico, North
Dakota, South Dakota and Wisconsin.
COLLECTION SOLUTIONS, INC. ("Collection Solutions"), a Minnesota
corporation, formed for the purpose of providing collection services for
the Company, customers of the Company, and other entities both within and
outside the gaming industry. Collection Solutions is licensed as a
collection agency in Minnesota.
FASTFUNDS INTERNATIONAL, INC. ("FFI"), a Delaware corporation based in
London. FFI was formed to build a presence in Europe for the Company's
stored value card program.
FFC FASTFUNDS (CYPRUS) LIMITED ("FFC"), formed in September 2004, under the
Laws of Cyprus. FFC was formed to have a presence in Cyprus to work with
a financial institution regarding the issuance of stored value cards
throughout Europe.
FASTFUNDS INTERNATIONAL LIMITED ("FFIL"), formed in October 2004 with the
Registrar of Companies for England and Wales. FFIL was formed in order to
have a local presence in the European community.
Collection Solutions, FFI, FFC and FFIL generated no revenues through
December 31, 2004. All significant intercompany accounts and transactions
have been eliminated in consolidation.
F-8
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
1. BUSINESS, ORGANIZATION AND MANAGEMENT'S PLANS (CONTINUED):
ORGANIZATION:
ACQUISITION OF CHEX BY FFFC (FORMERLY SVI) AND BASIS OF PRESENTATION:
Effective June 7, 2004, Equitex and the Company executed an Agreement and
Plan of Merger (the "Merger Agreement") with SVI to merge Chex into a
wholly-owned subsidiary of SVI (the "Merger Subsidiary"), whereby the
separate corporate existence of the Merger Subsidiary ceased. Under the
terms of the Merger Agreement, Equitex exchanged 100% of its equity
ownership in Chex for 7,700,000 shares of SVI, representing 93% of SVI's
outstanding common stock. In addition, Equitex received warrants to
purchase 800,000 shares of SVI common stock at an exercise price of $0.10
per share, expiring five years from the date of closing. Of the warrants
received by Equitex, 640,000 were subsequently transferred to officers,
directors and a consultant of Equitex and Chex for services performed.
The warrants were determined to have a fair value of $1.00 at the date of
the grant. Of these warrants, 280,000 were issued to Chex officers
resulting in $252,000 of compensation expense in 2004.
As a result of the merger, Chex became a wholly-owned subsidiary of SVI, a
publicly-traded shell company. In addition, under the terms of the Merger
Agreement, FFFC received $400,000 through the issuance of convertible
promissory notes bearing interest at 5% per annum and convertible into
four million shares of Company common stock upon the occurrence of
certain future events (Note 6).
At the date of the Merger, SVI was a public shell with no significant
operations. The acquisition of Chex by SVI has been recorded as a reverse
acquisition based on factors demonstrating that Chex represents the
accounting acquirer. Equitex received 93% of the post-acquisition
outstanding common stock of SVI. In addition, at closing, management
personnel and the board members of the Company consisted of individuals
previously holding positions with Chex and/or Equitex. The transaction is
equivalent to the issuance of stock by Chex for the net monetary assets
of SVI. The historical stockholder's equity of Chex prior to the exchange
has been retroactively restated (a recapitalization) for the equivalent
number of shares received in the exchange after giving effect to any
differences in the par value of the SVI and Chex common stock, with an
offset to additional paid-in capital. The restated consolidated
accumulated deficit of the accounting acquirer (Chex) has been carried
forward after the exchange.
F-9
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
1. BUSINESS, ORGANIZATION MANAGEMENT'S PLANS (CONTINUED):
ACQUISITION OF CHEX BY EQUITEX AND BASIS OF PRESENTATION:
Effective December 1, 2001, Equitex acquired all of Chex's issued and
outstanding common stock in exchange for 1,992,001 shares of Equitex
common stock valued at $10,119,000 ($5.08 per share). In connection with
the acquisition, and in accordance with Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 54, APPLICATION
OF "PUSH-DOWN" BASIS OF ACCOUNTING IN FINANCIAL STATEMENTS OF
SUBSIDIARIES ACQUIRED BY PURCHASE, the accounts of Chex have been
adjusted using the push-down basis of accounting to recognize the
allocation of the consideration exchanged for the Company's common stock
to the respective net assets. An allocation of the purchase price was
made to major categories of assets and liabilities, of which $5,636,000
was allocated to goodwill and $5,000,000 was allocated to identifiable
intangible assets (Note 5).
MANAGEMENT'S PLANS:
The Company incurred a net loss of $4,787,994 for the year ended December
31, 2004. Although the net loss included certain non-cash expenses of
approximately $3,230,000, the Company incurred and continues to incur
significant costs related to FFIL's international marketing strategy and
expansion plans, including costs associated with the development of
proprietary software. Therefore, the Company anticipates that its
liquidity and capital resources needs for the next 12 months may not be
satisfied solely from cash flows generated from operating activities.
The Company has developed plans and strategies to address its capital and
liquidity needs for the next twelve-month period. Management believes
that cash flows from operations will provide the Company's primary source
of operating capital, as Chex continues to generate location income.
However, the Company may be required to issue additional debt or equity
instruments in order to raise additional capital, to continue the support
of FFIL's international marketing efforts, as well as for the ongoing
development of new software. Accordingly, the Company has entered into
discussions with an investment banker to provide advisory services
regarding a contemplated equity offering. Additionally, management is
monitoring the activities of FFIL to determine if the expenditures
associated with FFIL's marketing efforts should continue if revenues are
not being generated.
The Company also evaluates, on an ongoing basis, potential business
acquisition/restructuring opportunities that become available from time
to time, which management considers in relation to its corporate plans
and strategies.
Management believes that these plans will provide sufficient resources to
fund its operations, 2005 debt payments, and working capital needs at
least through December 31, 2005.
F-10
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS AND PRESENTATION OF CASH FLOWS:
For the purpose of the statements of cash flows, the Company considers all
highly-liquid investments with an original maturity three-months or less
to be cash equivalents.
The Company maintains cash in bank accounts, which, at times, may exceed
federally insured limits. At December 31, 2004 and 2003, the Company had
deposits in excess of federally insured amounts of approximately
$1,183,000 and $483,000, respectively, at various financial institutions.
The Company believes it has its cash deposits at high quality financial
institutions. In addition, the Company maintains a significant amount of
cash at each of the casinos. Management believes the Company has controls
in place to safeguard these on-hand amounts, and that no significant
credit risk exists with respect to cash.
Cash and cash equivalents also include cash in the process of collection
("CIPC"). CIPC includes ATM advances, as well as credit card advances
made to customers. ATM advances made to customers included in CIPC
totaled approximately $809,000 and $1,164,000 as of December 31, 2004 and
2003, respectively. Credit card advances made to customers included in
CIPC totaled approximately $745,000 as of December 31, 2004.
Concentrations of credit risk related to credit card and ATM advances are
limited to the credit card and ATM processors who remit the cash back to
the Company. The Company believes these processors are financially stable
and no significant credit risk exists with respect to CIPC arising from
ATM and credit card advances.
RECEIVABLES:
Accounts receivable arise primarily from fees from credit card and ATM
advances provided at casino locations. Concentrations of credit risk
related to the fees from credit card and ATM advances are limited to the
credit card and ATM processors who remit to the Company its share of fees
earned. The Company believes these processors are financially stable and
no significant credit risk exists with respect to accounts receivable
arising from the fees for ATM and credit card advances. No allowance was
considered necessary on these receivables through December 31, 2002 and
2003. During 2004, the allowance was increased by $65,000 by a charge to
expense.
F-11
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
NOTES RECEIVABLE:
The Company has made advances to various third parties, as well as
officers, affiliates and employees of the Company under various loan
agreements (Notes 3 and 10). The advances made to officers were made
prior to the acquisition of Chex by Equitex in December 2001. The loans
have a face value of approximately $1,971,000 as of December 31, 2004,
and are collateralized by Equitex common stock, including registered and
unregistered shares. The Company's allowance for doubtful notes
receivable is adjusted based on the value of the underlying collateral.
Due to the level of risk associated with this common stock, it is
reasonably possible those changes in the value of the common stock will
occur in the near term and that such changes could materially affect the
value of the collateral underlying the notes. After all attempts to
collect a note receivable have failed, the note receivable is written-off
against the allowance. Based on management's evaluation of repayment
intentions, $485,936 of this amount is presented as a reduction of
stockholders' equity at December 31, 2004. The allowance for doubtful
notes receivable was $1,515,800 and $1,053,300 as of December 31, 2004
and 2003, respectively.
REVENUE RECOGNITION:
Revenue is recognized from financial services at the time the service is
provided. Revenues are derived from check cashing fees, credit and debit
card advance fees and automated teller machine ("ATM") surcharge and
transaction fees.
In general, check cashing fees are comprised of a fee based upon a
percentage of the face amount of total checks cashed, and is recognized
at the point a transaction is generated by the casino cage.
Credit and debit card advance fees are comprised of the fee charged to
patrons for credit and debit card cash advances and is recognized at the
point a transaction is generated by the casino cage for the patron's
transaction or cash is dispensed from an ATM.
ATM surcharge and transaction fees are comprised of upfront patron
transaction fees or surcharges assessed at the time the transaction is
initiated and a percentage of interchange fees paid by the patron's
issuing bank. These issuing banks share the interchange revenue with the
Company. Upfront patron transaction fees are recognized when a
transaction is initiated, and interchange revenue is recognized on a
monthly basis based on the total transactions occurring during the month.
RETURNED CHECKS:
The Company charges operations for potential losses on returned checks in
the period in which the amounts are deemed uncollectible, generally when
such checks are returned. Recoveries on returned checks are credited to
operations in the period when the recovery is received.
F-12
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
RETURNED CHECKS (CONTINUED):
In September 2003, checks totaling $606,316 from one customer were cashed
by the Company and were returned as insufficient funds. In March 2004,
the Company received a non-interest bearing promissory note from this
customer. Based on an imputed interest rate of 12%, a discount of
$256,316 was applied to this note, which was charged to operating expense
during the fourth quarter of 2003. Based on management's evaluation of
the collectibility of this note, during the fourth quarter of 2004 an
allowance of $236,500 was recorded against this note. The Company
believes that the remaining balance of $100,000 is collectible, based on
collateral pledged in connection with the note (Note 3).
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair value of financial instruments has been determined by
the Company using available market information and appropriate
methodologies; however, considerable judgment is required in interpreting
information necessary to develop these estimates. Accordingly, the
Company's estimates of fair values are not necessarily indicative of the
amounts that the Company could realize in a current market exchange.
The fair values of cash and cash equivalents, current non-related party
accounts receivable, and accounts payable approximate their carrying
amounts because of the short maturities of these instruments.
The fair values of notes receivable from non-related parties approximate
their carrying values because of the allowances recorded as well as the
short maturities of these instruments. The fair values of receivables
from related parties are not practicable to estimate, based upon the
related party nature of the underlying transactions.
The fair values of notes and advances receivable from non-related parties
approximate their carrying values because of the short maturities of these
instruments, except for a $606,316 non-interest bearing note receivable
from a Chex customer(Note 3), as to which the fair value is estimated to
be approximately $100,000. The fair values of notes and advances
receivable from related parties are not practicable to estimate, based
upon the related party nature of the underlying transactions.
The fair values of notes and loans payable to non-related parties
approximate their carrying values because of the short maturities of
these instruments. The fair value of long-term debt to non-related
parties approximates carrying values, net of discounts applied, based on
market rates currently available to the Company. The fair value of the
notes payable to related parties are not practicable to estimate, based
on the related party nature of the underlying transactions.
F-13
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
PROPERTY AND EQUIPMENT:
Property and equipment is stated at cost, and depreciation is provided by
use of accelerated and straight-line methods over the estimated useful
lives of the assets. The cost of leasehold improvements is depreciated
over the estimated useful lives of the assets, or the length of the
respective leases, whichever period is shorter. The estimated useful
lives of property, equipment and leaseholds are as follows:
Office equipment and furniture 3 to 7 years
Computer hardware and software 3 to 5 years
Leasehold improvements 7 years
Expenditures for additions and improvements are capitalized, while repairs
and maintenance are expensed as incurred.
SOFTWARE DEVELOPMENT COSTS:
The Company develops computer software for internal use. Internal and
external costs incurred for the development of computer applications, as
well as for upgrades and enhancements that result in additional
functionality of the applications, are capitalized. Internal and external
training and maintenance costs are charged to expense as incurred. When
an application is placed in service, the Company begins amortizing the
related capitalized software costs using the straight-line method and an
estimated useful life varying from 3 to 5 years.
INVESTMENT IN EQUITEX COMMON STOCK:
At December 31, 2004 and 2003, the Company has an investment in common
stock of Equitex (Note 10). The Company's investment in Equitex common
stock is accounted for under the cost method and is adjusted only for
other-than-temporary declines in fair value.
The Company presents its investment in Equitex common stock as a component
of stockholders' equity in a manner similar to that of treasury stock.
This presentation is based upon the Company's consideration of the
provisions of EITF Issue No. 98-2, ACCOUNTING BY A SUBSIDIARY OR JOINT
VENTURE FOR AN INVESTMENT IN THE STOCK OF ITS PARENT COMPANY OR JOINT
VENTURE PARTNER. This EITF discusses that in the separate financial
statements of a subsidiary; an investment in the common stock of a parent
whose only significant asset is its investment in the subsidiary is
essentially the same as stock of the subsidiary and should be classified
as a reduction to stockholders' equity.
F-14
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
GOODWILL, INTANGIBLE ASSETS AND AMORTIZATION:
In connection with Equitex's acquisition of Chex and in accordance with SAB
No. 54, goodwill and intangible assets have been "pushed down" to Chex.
Goodwill represents the excess of the purchase price paid by Equitex over
the estimated fair values of the Company's net tangible and identifiable
intangible assets acquired. As discussed below, goodwill and intangible
assets with indefinite lives are not amortized pursuant to recently
issued accounting standards. Identifiable intangible assets with finite
lives are being amortized on a straight-line basis over three to seven
years (Note 5).
The Company applies the provisions of SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS. SFAS No. 142 no longer allows the amortization of
goodwill and intangible assets with indefinite useful lives. SFAS No. 142
requires that these assets be reviewed for impairment at least annually,
or whenever there is an indication of impairment. Intangible assets with
finite lives continue to be amortized over their estimated useful lives
and are reviewed for impairment in accordance with SFAS No. 144,
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, discussed
below.
SFAS No. 142 requires companies to allocate goodwill to identifiable
reporting units, which are then tested for impairment using a two-step
process. The first step requires comparing the fair value of each
reporting unit with its carrying amount, including goodwill. If the fair
value exceeds the carrying amount, goodwill of the reporting unit is
considered not impaired, and the second step of the impairment test is
not necessary. If the fair value of the reporting unit does not exceed
the carrying amount, the second step of the goodwill impairment test must
be performed to measure the amount of impairment loss, if any. This step
requires the allocation of the fair value of the reporting unit to the
reporting unit's assets and liabilities (including any unrecognized
intangible assets) as if the reporting unit had been acquired in a
business combination and the fair value of the reporting unit was the
price paid to acquire the reporting unit. The excess of the fair value of
the reporting unit over its re-evaluated net assets would be the new
basis for the reporting unit's goodwill, and any necessary goodwill write
down to this new value would be recognized as an impairment expense.
Chex adopted SFAS No. 142 on January 1, 2002, and completed the first step
of the transitional goodwill impairment test as required. The fair value
of the reporting unit exceeded the carrying value of the reporting unit
and accordingly, as of that date, there was no goodwill impairment. The
Company also performed goodwill impairment tests in the fourth quarters
of 2004, 2003 and 2002 and determined that there was no goodwill
impairment as of the test date. A goodwill impairment test is performed
annually in the fourth quarter or upon significant changes in the
Company's business environment.
IMPAIRMENT OF LONG-LIVED ASSETS:
Management assesses the carrying value of long-lived assets for impairment
when circumstances indicate such amounts may not be recoverable from
future operations. Generally, assets to be held and used are considered
impaired if the sum of the expected undiscounted future cash flows is
less than the carrying amount of the asset. At December 31, 2004 and
2003, management believes no impairment has occurred.
F-15
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
ADVERTISING:
Advertising costs are expensed as incurred. Total advertising costs were
approximately $232,000, $386,000 and $241,000 for the years ended
December 31, 2004, 2003 and 2002, respectively.
INCOME TAXES:
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes. Deferred taxes represent the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes.
NET INCOME (LOSS) PER SHARE:
SFAS No. 128, EARNINGS PER SHARE, requires dual presentation of basic and
diluted earnings or loss per share ("EPS") with a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. Basic EPS excludes
dilution. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the entity.
Income and loss per share of common stock is computed based on the weighted
average number of common shares outstanding during the period. The
historical income (loss) per share of Chex prior to the merger has been
presented to reflect the new capital structure. Stock options, warrants,
and common stock underlying convertible promissory notes are not
considered in the calculations for the period ended December 31, 2004, as
the impact of the potential common shares, which total 6,243,128, would
be to decrease loss per share. Therefore, diluted loss per share in 2004
is equivalent to basic loss per share. Chex did not have any options,
warrants or other potentially dilutive securities outstanding for the
periods ended December 31, 2003 or 2002; therefore, diluted income (loss)
per share is equivalent to basic income per share.
COMPREHENSIVE INCOME (LOSS):
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, establishes requirements for
disclosure of comprehensive income (loss). During the years ended
December 31, 2004, 2003 and 2002, the Company did not have any components
of comprehensive income (loss) to report.
USE OF ESTIMATES:
Preparation of the consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the dates of the balance sheets and the
reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
F-16
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards ("SFAS") No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION ("SFAS No. 123"), defines a fair-value based
method of accounting for stock-based employee compensation plans and
transactions in which an entity issues its equity instruments to acquire
goods or services from non-employees, and encourages but does not require
companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to
account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and guidance provided in SFAS Interpretation
("FIN") No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION. Accordingly, compensation cost for employee stock options
is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.
In May 2003, Equitex issued options to purchase 126,667 shares of its
common stock to employees of Chex for services performed. The options
were issued with an exercise price of $4.08 per share (the market value
of the common stock at the date of the grant) and expire in May 2008.
In July 2004, Equitex issued options to purchase 97,500 shares of its
common stock to employees of Chex for services performed. The options
were issued with an exercise price of $5.10 per share (the market value
of the Company stock at the date of the grant) and expire in July 2009.
Had compensation cost for stock-based awards issued to employees been
determined based on the fair values at the grant dates for awards under
the plans consistent with the fair-value based method of accounting
prescribed by SFAS No. 123, the Company's results would have been changed
to the pro-forma amounts indicated below:
Year Ended December 31,
2004 2003 2002
------------ ---------- ---------
Net (loss) income $(4,787,994) $(504,990) $ 786,465
ADD: Stock-based employee compensation
expense included in reported net income 252,000
DEDUCT: Total stock-based employee
compensation expense determined under fair
value based method for all awards (265,000) (214,000)
------------ ---------- ---------
Pro-forma net (loss) income $(4,800,994) $(718,990) $ 786,465
============ ========== =========
Net (loss) income per share:
Basic and diluted, as reported $ (0.54) $ (0.07) $ 0.10
============ ========== =========
Basic and diluted pro forma $ (0.54) $ (0.09) $ 0.10
============ ========== =========
F-17
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
STOCK-BASED COMPENSATION:
The fair value of the option granted to purchase Equitex common stock were
estimated on the date of the grant using the Black-Scholes option pricing
model with the following assumptions used for the grants in the years
ended December 31, 2004 and 2003. No options were granted during 2002.
2004 2003
------------ -------------
Expected dividend yield 0 0
Expected stock price volatility 74% 74%
Risk fee interest rate 2.0% 1.15%
Expected life of options 1 year 2.5 years
NEW ACCOUNTING PRONOUNCEMENTS:
In December 2004, the FASB issued SFAS No. 123(R) SHARE-BASED PAYMENT,
which addresses the accounting for share-based payment transactions. SFAS
No. 123(R) eliminates the ability to account for share-based compensation
transactions using APB 25, and generally requires instead that such
transactions be accounted for and recognized in the statement of
operations based on their fair value. SFAS No. 123(R) will be effective
for public companies that do not file as small business issuers as of the
beginning of the first interim or annual reporting period that begins
after June 15, 2005. Management is evaluating the provisions of this
standard. Depending upon the number and terms of options that may be
granted in future periods, the implementation of this standard could have
a material impact on the Company's financial position and results of
operations.
In December 2003, the FASB issued Interpretation No. 46R ("FIN 46R"), a
revision to SFAS Interpretation No. 46 ("FIN 46"), CONSOLIDATION OF
VARIABLE INTEREST ENTITIES. FIN 46R clarifies some of the provisions of
FIN 46 and exempts certain entities from its requirements. FIN 46R
requires a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the
variable interest entity's activities or is entitled to receive a
majority of the entity's residual returns or both. FIN 46R also requires
disclosures about variable interest entities that a company is not
required to consolidate but in which it has a significant variable
interest. FIN 46R became effective for variable interest entities or
potential variable interest entities for the periods ending after
December 15, 2003 and became effective for all other types of entities by
the beginning of the first annual reporting period beginning after March
15, 2004. The adoption of FIN 46R did not have an impact on the Company's
financial position or results of operations.
F-18
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED):
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY, which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 requires that an issuer classify a financial
instrument that is within its scope, which may have previously been
reported as equity, as a liability (or an asset in some circumstances).
Mandatorily redeemable instruments (i.e., instruments issued in the form
of shares that unconditionally obligate the issuer to redeem the shares
for cash or by transferring other assets) are to be reported as
liabilities by their issuers. This statement does not affect the
classification or measurement of convertible bonds, puttable stock, or
other outstanding shares that are conditionally redeemable. The
provisions of SFAS No. 150 are generally effective for all financial
instruments entered into or modified after May 31, 2003, except for those
provisions relating to mandatorily redeemable non-controlling interests,
which have been deferred. The adoption of SFAS No. 150 did not have a
material impact on the financial position or results of operations of the
Company. If the deferred provisions of SFAS No. 150 are finalized in
their current form, management does not expect adoption to have a
material effect of the financial position or results of operations of the
Company.
RECLASSIFICATIONS:
Certain amounts reported in the 2003 and 2002 consolidated financial
statements have been reclassified to conform to the 2004 presentation.
3. NOTES, ADVANCES AND INTEREST RECEIVABLE:
Notes receivable at December 31, 2004 and 2003, consist of the following:
2004 2003
----------- -----------
Note receivable from iGames Entertainment,
Inc. (iGames); interest at 10%; maturity
January 2005, currently in default [A], [C] $ 2,000,000
Notes receivable from the estate of a
deceased officer of Chex; interest at 6%;
principal and unpaid interest due in
November 2004; collateralized by
unregistered shares of Equitex common
stock; a valuation allowance of $1,279,300
and $1,053,300 has been recorded against
this receivable at December 31, 2004 and
2003, respectively, currently in default
[B], [C] 1,484,691 $ 1,484,691
F-19
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
3. Notes, advances and interest receivable (continued):
2004 2003
----------- -----------
Notes receivable from an officer of Chex;
interest at rates ranging from 5.75% to 6%;
due on demand; collateralized by
unregistered shares of Equitex common
stock; at December 31, 2004 this receivable
is presented as a reduction in
stockholders' equity based on management's
evaluation of repayment intentions (Note
10) [B], [C] 485,936
Note receivable from a customer of Chex;
non-interest bearing; principal balance of
$606,316, net of $256,316 discount, based
on imputed interest rate of 12%; discount
charged to operating expense in 2003;
monthly payments of $4,500 beginning May
2004 through December 2010, at which time
the balance is due in full; collateralized
by mortgages on three parcels of real
property in Florida, a valuation allowance
of $236,500 has been recorded against this
receivable at December 31, 2004, currently
five months delinquent [C] 336,500 350,000
Notes receivable from Equitex 2000, Inc., an
affiliate of Equitex; interest at 10%;
unsecured; due on demand [B] 205,000 205,000
Note receivable from a former shareholder;
non-interest bearing; unsecured and due on
demand [B] 45,000 45,000
Notes receivable from various Chex employees;
non-interest bearing, unsecured and due on
demand, or in weekly deductions from
payroll 7,900 8,700
----------- -----------
4,079,091 2,579,327
Interest receivable, includes related party
interest of $42,890 (2004) and $82,408
(2003) [B] 139,000 108,290
Less current maturities (61,900) (58,200)
----------- -----------
Notes receivable, net of current portion,
before valuation allowance 4,156,191 2,629,417
Less valuation allowance (1,515,800) (1,053,300)
----------- -----------
Notes receivable, long-term $ 2,640,391 $ 1,576,117
=========== ===========
F-20
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
3. NOTES, ADVANCES AND INTEREST RECEIVABLE (CONTINUED):
[A] In January 2004, Chex advanced iGames $2,000,000 under a Term Loan
Note (the "Note"). Interest accrues at 10% per annum, and the
maturity date was scheduled to occur in January 2005, as defined in
the Note. The Note was to be secured by a pledge of capital stock of
the borrower pursuant to a stock pledge agreement. The stock pledge
agreement was not executed, which resulted in an event of default
under the terms of the Note. Therefore, Chex has demanded that the
entire unpaid principal and accrued interest be paid in full. Chex
has commenced litigation relating to the collection of the Note (Note
7). The Company has presented the Note as a non-current asset at
December 31, 2004 due to uncertainty as to the anticipated litigation
settlement date.
[B] Demand notes receivable and interest receivable aggregating to
$1,141,393 and $1,275,617, at December 31, 2004 and 2003,
respectively have been classified as non-current assets, as it is
management's intention not to demand payment within the next year.
[C] The Company is no longer accruing interest on these loans due to
uncertainty as to collection.
Changes in the allowance for notes receivable for the years ended December
31, 2004, 2003 and 2002 are as follows:
2004 2003 2002
----------- ----------- -----------
Balances, beginning of year $ 1,053,300 $ 1,211,100 $ 1,150,000
Additions charged to costs and
expenses (deducted from
notes receivable) 462,500 61,100
Deductions credited to costs
and expenses (added to
notes receivable) (157,800)
----------- ----------- -----------
Balances, end of year $ 1,515,800 $ 1,053,300 $ 1,211,100
=========== =========== ===========
Changes in the discount on a note receivable originally recorded in 2003
for the years ended December 31, 2004 and 2003 are as follows:
2004 2003
----------- -----------
Balances, beginning of year $ 256,316 $ 0
Additions charged to costs and
expenses (deducted from
notes receivable) 256,316
----------- -----------
Balances, end of year $ 256,316 $ 256,316
=========== ===========
F-21
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
4. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 2004 and 2003 are as follows:
2004 2003
------------ ------------
Furniture and equipment $ 2,481,648 $ 2,402,404
Computer hardware and software 757,832 138,661
Leasehold improvements 52,765 52,765
------------ ------------
3,292,245 2,593,830
Less accumulated depreciation
and amortization (1,969,508) (1,421,974)
------------ ------------
$ 1,322,737 $ 1,171,856
============ ============
The amounts above include equipment under capital leases with a gross
carrying value of approximately $302,000 and $157,000 at December 31,
2004 and 2003, respectively, and accumulated depreciation of
approximately $99,000 and $47,000 at December 31, 2004 and 2003,
respectively.
The amounts above include long-lived assets of $158,914 located in London,
England consisting primarily of computer hardware and software.
Depreciation expense was $547,534 and $353,766, respectively, for the years
ended December 31, 2004 and 2003.
F-22
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
5. GOODWILL, INTANGIBLE AND OTHER ASSETS:
At December 31, 2004 and 2003, goodwill was $5,636,000, none of which is
deductible for income tax purposes based on the tax structuring of the
acquisition of Chex by Equitex in December 2001. Intangible and other
assets are as follows:
2004 2003
-------------------------------------------- -------------------------------------------
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
amount amortization amount amount amortization amount
------------- ------------- -------------- ------------- ------------- --------------
Casino contracts $ 4,300,000 $ 1,949,440 $ 2,350,560 $ 4,300,000 $ 1,349,440 $ 2,950,560
Non-compete
agreements 350,000 227,300 122,700 350,000 163,300 186,700
Customer lists 250,000 250,000 250,000 178,600 71,400
Trade names 100,000 100,000 100,000 100,000
------------- ------------- -------------- ------------- ------------- --------------
Total intangible
assets 5,000,000 2,426,740 2,573,260 5,000,000 1,691,340 3,308,660
Loan costs 637,625 125,515 512,110
Other assets 20,248 20,248 20,248 20,248
------------- ------------- -------------- ------------- ------------- --------------
$ 5,657,873 $ 2,552,255 $ 3,105,618 $ 5,020,248 $ 1,691,340 $ 3,328,908
============= ============= ============== ============= ============= ==============
Casino contracts represent the Company's renewable agreements with Native
American owned gaming establishments to operate in those establishments
for initial terms of one to five years. Casino contracts have
historically been renewed by gaming establishments and are amortized
using the straight-line method over seven years. The non-compete
agreements with members of management are amortized using the
straight-line method over five years. Customer lists relate to core
customers that rely on the use of the Company's facilities and have been
fully amortized. Trade names consist of the CHEX SERVICES and FAST FUNDS
names, which are believed to be readily identified and known in the
marketplace by customers. Trade names are considered to have an
indefinite life and are therefore not amortized. Other assets primarily
represent long-term deposits and deferred loan costs.
Loan costs are amortized over the terms of the related loans, which range
from nine to forty-five months.
Aggregate amortization expense for intangible assets was $735,400, $740,000
and $876,755 for the years ended December 31, 2004, 2003 and 2002,
respectively. Estimated amortization expense for intangible assets for
each of the following succeeding years is as follows:
F-23
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
5. GOODWILL, INTANGIBLE AND OTHER ASSETS (CONTINUED):
Year Amount
-------------- ---------------
2005 $ 664,000
2006 659,000
2007 600,000
2008 551,000
6. CONVERTIBLE PROMISSORY NOTES, NOTES PAYABLE AND LONG-TERM DEBT:
Convertible promissory notes, notes payable and long-term debt at December
31, 2004 and 2003, consist of the following:
2004 2003
----------- -----------
Convertible promissory notes:
Convertible promissory notes; interest at
9.5%, net of discounts [A] $ 185,335 $
=========== ===========
NOTES PAYABLE:
Notes payable to individuals; interest rates
ranging from 9% to 15%; interest and
principal payable monthly or quarterly; the
notes are unsecured and mature on various
dates through December 2005; the notes are
subject to repayment with ninety days
notice at the option of the holder;
subsequent to December 31, 2004, the
Company repaid $168,000 of these notes
payable $11,402,602 $10,692,177
=========== ===========
LONG-TERM DEBT:
Note payable to Equitex, net of discount [B] $ 3,989,446
Convertible promissory notes; interest at 5%
[C] 200,000
Notes payable to bank; interest at prime plus
.25%; repaid in June 2004 $ 150,000
Obligations under capital leases; imputed
interest rates ranging from 6.5% to 7%; due
at various dates through October 2007;
collateralized by equipment 169,787 88,970
----------- -----------
4,359,233 238,970
Less current portion (1,315,217) (201,727)
----------- -----------
Long-term debt, net of current portion $ 3,044,016 $ 37,243
=========== ===========
F-24
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
6. CONVERTIBLE PROMISSORY NOTES, NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED):
LONG-TERM DEBT (CONTINUED):
The weighted average interest rate on short-term borrowings was 10.5%, 9.8%
and 10.5% in 2004, 2003 and 2002, respectively.
Aggregate maturities of long-term debt for each of the following succeeding
years are as follows:
Year Amount
-------------- ---------------
2005 $ 1,315,217
2006 1,375,755
2007 1,668,261
At December 31, 2003, the Company had a bank overdraft of $2,497,766
outstanding with a bank. Interest on the overdraft was charged at 4.5%.
In March 2004, Chex paid the amount due on the overdraft with funds
received in a $5 million debt financing, as discussed below.
[A] In December 2004, FFFC closed on $1,774,064 of unsecured convertible
promissory notes (the "Convertible Notes") with various note holders
(the "Holders"). The Convertible Notes carry a stated interest rate
of 9.5% per annum, have a 9-month term and are convertible at the
Holders' option, including any unpaid interest, into shares of FFFC
common stock at $1.00 per share for a three-year period commencing on
the due date. The Convertible Notes may be prepaid at any time, in
whole or in part and from time to time without premium or penalty,
provided however that the Company may not make any prepayments unless
at least 50% of the outstanding amount due on the $5 million notes
(discussed below) have been paid. At this time, it is uncertain
whether the Company will prepay the Convertible Notes. The Holders
also received warrants to purchase 1,774,064 shares of FFFC common
stock at an exercise price of $2.00 per share.
The proceeds from the Convertible Notes have been allocated between
the estimated fair value of the warrants and the beneficial
conversion features based on their respective estimated fair values.
The warrants were valued at approximately $113,100 based upon the
Company's assumption that the market interest rate for a similar
convertible note without the warrants and the beneficial conversion
features would be approximately 18%. Therefore $113,100 of the total
proceeds was allocated to the warrants. The Company reduced the
carrying value of the Convertible Notes for this amount, with an
offset to additional paid-in capital, and is amortizing this discount
as additional interest expense over the nine-month term of the
Convertible Notes. Accordingly, $12,135 is included in interest
expense during the year ended December 31, 2004. The beneficial
conversion features were valued at $1,660,967 as the intrinsic value
of the beneficial conversion features is limited to the total amount
of the proceeds received, net of the amount allocated to the
warrants. The Company reduced the carrying value of the Convertible
Notes for this amount, with an offset to additional paid-in capital,
and is amortizing this discount as additional interest expense to the
date first convertible by the Holder's, which is 9 months.
Accordingly, $173,200 is included in interest expense during the year
ended December 31, 2004.
F-25
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
6. CONVERTIBLE PROMISSORY NOTES, NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED):
The Company also paid $137,925 to an advisory firm in connection with
the transaction, which was recorded as deferred loan costs and is
being amortized over the nine-month term of the Convertible Notes.
Accordingly, $14,261 is included in general and administrative
expense for the year ended December 31, 2004.
[B] In March 2004, Equitex closed on $5,000,000 of convertible promissory
notes (the "Notes") with two financial institutions (the "Lenders").
The proceeds from the Notes were forwarded to Chex. The Notes carry a
stated interest rate of 7% per annum and have a 45-month term.
Interest-only payments were due and paid from April 2004 through June
2004. Beginning in July 2004, principal and interest payments
amortize over the remaining 42-month period. The Notes are senior to
all other debt of the Company and are collateralized by all assets of
Chex as defined in the security agreement. In connection with the
closing, Equitex entered into a $5,000,000 secured promissory note
(the "Chex Note") agreement with Chex. Interest and payment terms of
the Chex Note are identical to those set forth in the Notes.
The Notes are convertible into common stock of Equitex, and Equitex
has the right to make any monthly payment of principal and interest
in shares of its common stock. Any payments made by Equitex in shares
of its common stock are to be issued based on 85% of the average bid
price for 20 trading days prior to the payment due date. Any
beneficial conversion features will be recorded in earnings of the
Company (allocated by Equitex) at the time of conversion, as the
number of shares the Lenders will receive is not known until the
payment in shares occurs.
The Lenders also received warrants to acquire up to 133,334 shares of
Equitex's common stock at an exercise price of $9.00 per share. In
June 2004, Equitex reduced the exercise price of these warrants to
$7.65. In August 2004, Equitex reduced the exercise price of these
warrants to $4.26. These warrants, inclusive of the additional
allocation resulting from the reduced exercise prices, were valued at
$461,200 based upon the Black-Scholes option-pricing model, and
therefore $461,200 of the total proceeds were allocated to the
warrants, resulting in an imputed interest rate of 7.5%. Equitex
allocated the value of these warrants to Chex; therefore, the Company
reduced the carrying value of the Notes for this amount and is
amortizing the discount to interest expense over the 45-month term of
the Note. Accordingly, Chex has recorded $92,367 as interest expense
during the year ended December 31, 2004.
In addition, in March 2004, warrants to acquire up to 50,000 shares
of Equitex's common stock were issued to an advisory firm in
connection with the transaction. These warrants were valued at
$164,700 based upon the Black-Scholes option-pricing model. The
Company also paid cash of $320,000 for legal services and finders'
fees in connection with the transaction. Equitex allocated the value
of these warrants to Chex. The cash paid and the values of these
warrants were recorded as deferred loan costs and the Company is
amortizing these costs over the 45-month term of the Notes.
Accordingly, $107,710 is included in general and administrative
expense for the year ended December 31, 2004.
F-26
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
6. CONVERTIBLE PROMISSORY NOTES, NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED):
[C] In connection with the June 7, 2004 Merger Agreement, the Company
received $400,000 in exchange for convertible promissory notes. The
notes are convertible into 4,000,000 shares ($0.10 per share) of FFFC
common stock upon the occurrence of certain future events, and bear
interest at 5% per annum. Unless converted, any outstanding balance
of principal and interest is due in April 2007. On June 29, 2004, an
advisory agreement between Chex and the financial advisor was
executed (Note 7). As a result, 25% ($100,000) of the notes were
converted into 1,000,000 shares of FFFC common stock. An additional
25% ($100,000) was converted in August 2004 upon an independent
director being added to the FFFC board of directors and the
satisfaction of certain other criteria. The remaining 50% ($200,000)
is to convert into 2,000,000 shares of FFFC common stock upon FFFC's
execution of a definitive merger agreement or acquisition of an
entity having not less than $10,000,000 in revenue. The conversion of
the note is deemed to be beneficial as the note converts to common
stock of FFFC at $0.10 per share (the estimated fair value of FFFC's
common stock was determined to be $1.00 per share on the date of
closing). The intrinsic value of the beneficial conversion feature is
limited to the amount of the proceeds allocated to the convertible
note; therefore the value of the convertible feature was determined
to be $400,000. In connection with each of the conversions of a 25%
portion of the note to common stock, the Company recorded an
additional $100,000 of interest expense related to the beneficial
conversion feature. Accordingly, $200,000 has been recorded as
additional interest expense during the year ended December 31, 2004.
As the remaining 50% of the conversion feature is contingent upon the
occurrence of future events, it will be recorded in earnings when
converted.
7. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES:
The Company leases its corporate facilities under a non-cancelable
operating lease for approximately $6,000 per month through March 2006, at
which time the leases expires. Pursuant to this lease, the Company is
required to pay its pro-rata share of taxes, operating expenses and
improvement costs. Also, beginning in July 2004, FFI began leasing office
space in London for approximately $6,700 per month. This lease expires in
July 2005. In August 2004, FFFC began leasing office space in Chicago,
Illinois for approximately $6,000 per month on a month-to-month basis. In
March 2005, the Chicago lease was terminated.
The Company also leases office space pursuant to non-cancelable operating
leases that expire through March 2006.
Future minimum lease payments due under non-cancelable operating leases as
of December 31, 2004, are as follows:
F-27
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
7. COMMITMENTS AND CONTINGENCIES (CONTINUED):
OPERATING LEASES (CONTINUED):
Years ending
December 31, Amount
------------ -------------
2005 $ 114,000
2006 19,000
-------------
$ 133,000
=============
Total rent expense under operating leases was $197,542, $131,390 and
$128,252 for the years ended December 31, 2004, 2003 and 2002
respectively.
EMPLOYMENT CONTRACTS:
The Company has a salary continuation plan for one of its employees.
Pursuant to the plan, this individual is guaranteed two years of salary
(approximately $68,000 at December 31, 2004), in the event that the
Company is sold and employment is terminated under certain circumstances.
As of December 31, 2004, the Company has employment agreements with four of
its employees which expire at various dates through February 2006.
Pursuant to the agreements, if terminated for other than an egregious
act, the employees are to continue to receive their annual compensation
through the term of the agreement, aggregating to approximately $273,000
at December 31, 2004. The amounts would be paid in monthly installments
over the duration of the contract.
In 2002, the Company terminated one of its employees under an employment
agreement. In July 2002, the Company and the former employee entered into
a settlement agreement and mutual release, in which the Company paid the
former employee $65,000, which was charged to operating expense in 2002.
CASINO CONTRACTS:
The Company operates at a number of Native American owned gaming
establishments under contracts requiring the Company to pay a rental fee
to operate at the respective gaming locations. Occasionally, these
agreements require the Company to prepay a negotiated amount of such
anticipated fees. Typically, the gaming establishment earns the fees over
the life of the contract based on one of the following scenarios:
o A minimum amount as defined in the contract.
o A dollar amount, as defined by the contract, per transaction volume
processed by the Company.
o A percentage of the Company's profits at the respective location.
o The greater of the monthly amount, dollar amount per transaction
volume or percent of the Company's profits payable at the end of the
contract term.
F-28
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
7. COMMITMENTS AND CONTINGENCIES (CONTINUED):
CASINO CONTRACTS (CONTINUED):
As of December 31, 2004 and 2003, the Company has recorded $268,929 and
$182,498, respectively, of prepaid amounts on casino contracts and has
recorded $574,516 and $587,099, respectively, of accrued liabilities on
casino contracts.
Pursuant to the contracts, the Native American owned casinos have not
waived their sovereign immunity.
EMPLOYEE BENEFIT PLAN:
In January 2003, the Company adopted a 401(k) retirement plan (the "Plan"),
which covers defined eligible employees of Chex. Eligible employees are
able to contribute a portion of their compensation to the Plan, subject
to an annual Internal Revenue Service deferral limit. Employee
contributions are 100% vested when made. Company contributions are
discretionary. During 2004 and 2003, Chex made matching contributions of
100% on the first 3% of employee deferrals and 50% on employee deferrals
between 3% and 5%. Contribution expense was approximately $83,000 and
$88,000 for the years ended December 31, 2004 and 2003, respectively.
LITIGATION:
In April 2004, the Company and Equitex executed a settlement agreement with
Cash Systems, Inc. ("Cash Systems") pursuant to which the Company paid
Cash Systems $125,000 for expenses related to an Agreement and Plan of
Merger ("APM"), which was terminated in December 2003. As part of the
settlement agreement, Cash Systems paid Chex approximately $476,000 for
commissions owed to Chex by Cash Systems. In April 2004, both the Company
and Cash Systems agreed to mutually release each other from further
liability related to the APM and the Seminole Tribe termination in
January 2004; however, the Company retained the right to legal action
against Native American Cash Systems Florida, Inc. (NACSF), Native
American Cash Systems, Inc. (NACS) and its President, for the wrongful
termination of the Seminole Tribe casino contracts. In February 2005,
Equitex and Chex reached a tentative settlement agreement with NACSF,
NACS and its President under which all the parties agreed to dismiss
their claims against each other and exchange mutual releases. It is
anticipated that this agreement will end litigation.
In March 2004, Chex commenced a lawsuit in Hennepin County, Minnesota
demanding repayment of $2,000,000, plus a $1,000,000 termination fee,
accrued interest and other fees, due from iGames under a term note
executed in January 2004. In addition, in March 2004, the Company
commenced a lawsuit in Delaware state court (New Castle County) relative
to the termination of the Stock Purchase Agreement ("SPA"). iGames has
asserted that it is entitled to approximately $3.3 million in damages.
All of the matters have since been consolidated so that all of the
disputes are being heard before the United States District Court for the
District of Delaware. The Company is confident that its claims in
litigation will be upheld, and management believes that the claims made
by iGames lack merit. The Company intends to vigorously prosecute its
claims and defend against iGames' claims.
F-29
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
7. COMMITMENTS AND CONTINGENCIES (CONTINUED):
LITIGATION (CONTINUED):
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
impact either individually or in the aggregate on consolidated results of
operations, financial position or cash flows of the Company.
CONSULTING AGREEMENTS:
In May 2004, Chex entered into a consulting agreement with a financial
advisor to provide assistance in the placement of debt or equity
financing with prospective investors and facilitating future merger,
acquisition and strategic partnerships on behalf of the Company. The term
of the agreement is two years and requires the Company to pay a total of
$240,000 to the financial advisor in monthly installments of $10,000 each
month. Additionally, the advisor is to receive a fee if the advisor is
successful in completing a debt or equity financing for or on behalf of
the Company. Pursuant to the agreement and in connection with the
December 2004 closing on $1,774,064 of convertible promissory notes
issued by FFFC, the advisory firm earned fees of $101,925. The Company
paid $62,000 of the fee and recorded a liability of $39,925 as of
December 31, 2004 to the advisory firm, which was paid in February 2005.
In July 2004, FFIL entered into a twelve-month agreement with a third party
consultant who is to provide sales, program and business development, and
consulting services for FFFC's International operations. Under the terms
of the agreement, FFIL is required to pay the consultant approximately
$15,800 per month as an advance against future commissions earned by the
consultant. The consultant will be entitled to a 10% commission on all
sales generated. In addition, the consultant is to earn a minimum of 3%
of the acquisition value if the Company closes on an acquisition
introduced by the consultant. The agreement can be terminated by either
party subject to not less than three months written notice.
In August 2004, Chex entered into a six-month consulting agreement with a
business advisor to provide management services to assist FFFC to
establish operations in Canada, as well as to identify acquisition
prospects in Canada, the United States and abroad. Under the terms of the
agreement, FFFC was required to pay $10,000 per month, plus pre-approved
expenses. The agreement terminated in January 2005 and was not renewed.
In September 2004, FFFC entered into a non-exclusive financial advisory and
investment banking services agreement with a third party. The third party
is to provide strategic direction to the Company and to identify and
assist the Company in specified transactions, as defined. FFFC agreed to
pay a fee if the advisor is successful in the closing of a transaction as
defined in the agreement. Pursuant to the agreement and in connection
with the December 2004 closing of $1,774,064 of convertible promissory
notes issued by FFFC, the advisor earned fees of $36,000, which were
included in accrued expenses at December 31, 2004.
F-30
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
7. COMMITMENTS AND CONTINGENCIES (CONTINUED):
CONSULTING AGREEMENTS (CONTINUED):
In October 2004, the Company entered into a management services agreement
on a month-to-month basis with a third party consultant. The consultant
provides general administrative and management services to FFFC, as well
as develops and implements consumer financial services products. These
products include the FFFC kiosk and stored-value card programs. FFFC is
required to pay the consultant $10,000 per month. Additionally, FFFC is
to pay a monthly revenue participation fee at the rate of 10% of gross
revenues received from sales of its kiosk and stored-value card programs
after deducting all third party costs. As of December 31, 2004, there
were no revenues generated.
8. OTHER RECEIVABLES, AFFILIATES:
Through December 31, 2003, Chex made net advances of $219,409 to Denaris
Corporation ("Denaris"), a majority owned subsidiary of Equitex. During
the year ended December 31, 2004, Chex made additional net advances of
$31,103, resulting in a receivable balance of $250,512 as of December 31,
2004. At December 31, 2004, this receivable is presented as a reduction
in stockholders' equity based on management's evaluation of repayment
intentions (Note 10). These receivables are non-interest bearing,
unsecured and due on demand.
9. INCOME TAXES
The operations of the Company for periods subsequent to the acquisition of
the Company by Equitex and through August 2004, at which time Equitex's
ownership interest fell below 80% are included in consolidated federal
income tax returns filed by Equitex. Subsequent to August 2004 the
Company will file a separate income tax return. For financial reporting
purposes, the Company's provision for income taxes has been computed on
the basis that the Company files a separate income tax return for each
year presented. For periods subsequent to the Equitex acquisition, the
Company did not make any federal tax payments. Rather, calculated federal
tax liabilities owed by the Company were recorded as a contribution of
capital from Equitex through December 31, 2003.
During the quarter ended June 30, 2004 management assessed the realization
of its deferred tax assets. Based on this assessment it was determined to
be more likely than not that the Company's deferred tax assets will not
be realizable, and the Company determined that a valuation allowance was
required. Accordingly, the Company's valuation allowance was increased by
$473,000, which resulted in an increase to the provision for income taxes
of the same amount.
Income tax expense (benefit), for the years ended December 31, 2004, 2003
and 2002, is as follows:
2004 2003 2002
------------ ------------ ------------
Current:
Federal $ 87,000 $ 485,000
State $ 48,889 38,000 105,000
------------ ------------ ------------
48,889 125,000 590,000
------------ ------------ ------------
F-31
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
9. INCOME TAXES (CONTINUED):
2004 2003 2002
------------ ------------ ------------
Deferred:
Federal 54,000 (175,000)
State 8,000 (45,000)
Valuation allowance 473,000 - (315,000)
------------ ------------ ------------
473,000 62,000 (535,000)
------------ ------------ ------------
$ 521,889 $ 187,000 $ 55,000
============ ============ ============
The following is a summary of the Company's deferred tax assets at December
31, 2004 and 2003 (the Company has no deferred tax liabilities):
2004 2003
----------- -----------
Deferred tax assets (current):
Net operating loss carryforwards $ 85,000
Deferred tax assets (long-term):
Net operating loss carryforwards $ 822,000
Allowance for loan losses 601,000 388,000
Stock-based compensation 96,000
Non-cash interest expense 182,000
------------ -----------
1,701,000 473,000
Less valuation allowance (1,701,000)
------------- -----------
Total deferred tax assets $ $ 473,000
============ ===========
A reconciliation between the expected tax expense (benefit) computed at the
federal income tax rate of 34% and the effective tax rate for the years
ended December 31, 2004, 2003 and 2002, respectively, are as follows:
2004 2003 2002
-------- -------- ---------
Statutory federal income tax rate (34%) (34%) 34%
State taxes, net of federal income
tax (4%) (4%) 4%
Effect of change in valuation
allowance 50% 98% (31%)
-------- -------- ---------
12% 60% 7%
======== ======== =========
F-32
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
9. INCOME TAXES (CONTINUED):
At December 31, 2004, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $2,163,000, expiring at
various dates through 2024. The utilization of the carryforwards is
dependent upon the ability to generate sufficient taxable income during
the carryforward period. In addition, the availability of these net
operating loss carryforwards to offset future taxable income may be
significantly limited due to ownership changes as defined in the Internal
Revenue Code.
10. STOCKHOLDERS' EQUITY:
COMMON STOCK:
In 2004, FFFC issued a total of 2,000,000 shares of common stock in
exchange for two 25% conversions of convertible notes of $400,000 issued
in connection with the June 7, 2004 Merger Agreement.
In November 2004, FFFC issued 50,000 shares of common stock upon the
exercise of 50,000 warrants at $0.10 per share for proceeds of $5,000.
FFFC also issued 53,957 shares of common stock upon the cashless
exercises of warrants to purchase 55,000 shares.
STOCK OPTIONS:
In July 2004, FFFC's board of directors authorized the 2004 Stock Option
Plan (the "Plan"). The Company has reserved up to 1,800,000 shares of
Company common stock to be issued under the Plan. As of December 31, 2004
no options have been granted.
INVESTMENT IN PARENT COMPANY:
At December 31, 2004 and 2003, the Company has an investment in common
stock of Equitex. This investment is presented as a component of
stockholders' equity in a manner similar to that of treasury stock. The
following table summarizes the activity of this investment.
F-33
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
10. STOCKHOLDERS' EQUITY (CONTINUED):
2004 2003
--------------------- ---------------------
Shares Cost Shares Cost
-------- --------- -------- ---------
Common stock:
Beginning balances 221,453 $ 611,680 63,751 $ 216,714
Shares purchased 17,250 113,625 87,500 312,050
Shares received upon Equitex conversion
of preferred stock and unpaid dividends 274,535 658,884
Shares sold (228,050) (745,247) (204,333) (575,968)
Shares returned to Chex in exchange for stock
subscription receivable 83,333 350,000
Shares distributed to third parties on behalf
of Equitex, in exchange for an Equitex
receivable (7,500) (21,570)
-------- -------- -------- ---------
Ending balances 86,486 308,488 221,453 611,680
-------- -------- -------- ---------
Preferred stock:
Beginning balance 650 650,000
Shares converted to common stock (650) (650,000)
-------- --------- -------- ---------
Ending balances
-------- --------- -------- ---------
Total 86,486 $ 308,488 221,453 $ 611,680
======== ========= ======== =========
Purchases of Equitex common and preferred stock are stated at cost. Sales
of Equitex common stock are removed from the investment account at the
weighted average cost of the total shares outstanding, and the difference
between the sales price and cost of the shares sold is classified as
additional paid-in capital. The Company sold 228,050 and 204,333 shares
of Equitex common stock for cash proceeds of $352,004 and $919,514
respectively, during the years ended December 31, 2004 and 2003.
On January 5, 2005, pursuant to Equitex's annual meeting of its
stockholders, the stockholders approved a one share for six shares (1 for
6) reverse split of its common stock. After the reverse split, Equitex
has approximately 6 million shares outstanding at December 31, 2004. All
shares of Equitex common stock owned by the Company have been restated in
prior periods to reflect the reverse split.
F-34
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
10. STOCKHOLDERS' EQUITY (CONTINUED):
NOTES, ADVANCES AND INTEREST RECEIVABLE FROM RELATED PARTIES:
Chex has notes receivable due from Equitex and Denaris under various loan
agreements. In addition, Chex has made advances to Equitex and Denaris to
fund their operations. In accordance with SEC SAB No. 9, ALLOCATION OF
EXPENSES AND RELATED DISCLOSURE IN FINANCIAL STATEMENTS OF SUBSIDIARIES,
DIVISIONS OR LESSOR BUSINESS COMPONENTS OF ANOTHER ENTITY, certain
expenses paid by Chex on behalf of Equitex have been debited (charged) to
the receivables. General and administrative expenses, the fair value of
warrants issued to purchase Equitex common stock and deferred loan costs
allocated by Equitex to Chex totaling $716,900 for the year ended
December 31, 2004, and general and administrative expenses of $303,000
and income taxes payable offset with Equitex's losses totaling $87,000
for the year ended December 31, 2003, have been credited to additional
paid-in capital as a contribution of capital by Equitex. These
transactions include the allocation of certain operating expenses from
Equitex to Chex, as well as certain capitalized costs relating to the
$5,000,000 promissory note that have been allocated from Equitex to Chex.
At December 31, 2003, the Company offset income taxes payable of $535,000
against notes and advances due from Equitex. During 2003, Equitex forgave
payment of the $535,000 by Chex to Equitex. Therefore, notes and advances
due from Equitex were increased by $535,000 with an offset credit to
additional paid-in capital in 2003 to account for this transaction as a
contribution of capital by Equitex.
The following table summarizes the activity for the years ended December
31, 2004 and 2003.
2004 2003
----------- ------------
Beginning principal balances $ 1,944,785 $ 540,760
Cash advances 1,125,000 1,111,655
Cash repayments (595,000)
Capital contribution for 2002 income taxes 535,000
Chex cash disbursements allocated to Equitex 332,833 352,370
Reclassification of other receivables due from Denaris 250,512
Reclassification of notes receivable from an officer
of Chex 485,936
Distribution of Equitex common stock held by
Chex to third parties in exchange for receivable
from Equitex 50,750
----------- -----------
4,189,816 1,944,785
Interest receivable, including reclassification of
interest from an officer of Chex of $61,066 (2004) 553,461 166,483
------------ -----------
Ending balances $ 4,743,277 $ 2,111,268
=========== ===========
F-35
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
10. STOCKHOLDERS' EQUITY (CONTINUED):
NOTES, ADVANCES AND INTEREST RECEIVABLE FROM RELATED PARTIES (CONTINUED):
The above balances at December 31, 2004 and 2003 are presented as a
reduction of stockholders' equity on the accompanying consolidated
balance sheets. The principal balance at December 31, 2004 is comprised
of $1,087,762 due from Denaris, $2,616,118 due from Equitex and $485,936
due from an officer of Chex. The principal balance at December 31, 2003
is comprised of $837,250 due from Denaris and $1,107,535 due from
Equitex. The Denaris receivables at December 31, 2004 and 2003 are in the
form of promissory notes and advances, $325,000 of which bear interest at
10% per annum and $512,250 which bear interest at 12% per annum. The
notes are collateralized by a pledge by Equitex of 1,000,000 shares
166,667 shares of Equitex common stock. The Equitex receivables are in
the form of promissory notes and advances, which bear interest at 10% per
annum. The notes and advances are collateralized by a pledge of 700,000
shares of FFFC common stock owned by Equitex. The notes receivable from
an officer of Chex are due on demand and the Company is no longer
accruing interest on these notes due to uncertainty as to collection. The
notes are collateralized by unregistered shares of Equitex common stock.
STOCK SUBSCRIPTION RECEIVABLE:
In December 2003, Chex sold 166,667 shares of Equitex common stock in
exchange for $200,000 cash and an $800,000 promissory note. The note is
presented as a reduction of stockholders' equity at December 31, 2003.
The note had an interest rate of 7% per annum and was originally payable
in three installments of principal and interest through June 30, 2004.
The promissory note was collateralized by a pledge agreement, which
granted Chex a security interest in up to 700,000 of the purchased
shares. A payment of $200,000 was received during the year ended December
31, 2004.
In June 2004, the Company reached an agreement with the note holder to
return 83,333 shares of Equitex common stock in full payment of the
remaining $600,000 receivable. Since the market price of the 83,333
shares of common stock on the date of the agreement was approximately
$350,000, the Company reduced the receivable by $250,000 and charged
equity (additional paid-in capital). The 83,333 shares were returned to
Chex during the third quarter of 2004.
In August 2004, the Company issued 40,000 shares of FFFC common stock to a
convertible note holder in exchange for a stock subscription receivable.
In February 2005, 15,000 of the shares were returned to the Company.
STOCK PURCHASE AGREEMENT:
In August 2004, FFFC entered into a Stock Purchase Agreement (the "SPA")
with Seaside Investments PLC ("Seaside"), a corporation organized under
the laws of England and Wales. Seaside is an open-end diversified
investment fund holding securities from numerous small-cap companies.
Under the terms of the SPA, FFFC, upon closing, was to sell and issue
800,000 shares of its common stock to Seaside in exchange for 1,321,440
shares of Seaside. The shares of FFFC and Seaside were being held in
escrow. The execution of the transaction, including the delivery of
FFFC's 800,000 shares of common stock and receipt by FFFC of 1,321,440
shares of Seaside was dependent upon the Seaside shares being accepted
for trading on the London Stock Exchange, PLC.
F-36
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
10. STOCKHOLDERS' EQUITY (CONTINUED):
STOCK PURCHASE AGREEMENT (CONTINUED):
If the Seaside shares were accepted for trading, FFFC would have been
allowed to sell 10% of its Seaside shares on a monthly basis and would of
have to utilize at least 75% of such proceeds to reduce its obligations
on the $5,000,000 convertible promissory note described in Note 6.
In January 2005, FFFC terminated the SPA due to the failure of Seaside to
effectuate the listing of their shares as required by the SPA. The
Company incurred no early termination penalties as a result of the
termination and the shares that were being held in escrow will be
cancelled and returned to the authorized but unissued shares of common
stock of the Company.
11. BUSINESS CONCENTRATIONS:
The Company's operations are not concentrated in any specific geographic
region, but are tied to the Native American gaming industry. The Company
generated its fee income from contracts with Native American Tribes for
the years ended December 31, 2004, 2003 and 2002, as follows:
Number of locations Percent of fees
------------------------------- -------------------------------
2004 2003 2002 2004 2003 2002
--------- --------- --------- --------- --------- ---------
Native American Tribe A 2 2 2 22% 16% 13%
Native American Tribe B - - 3 - - 7%
Native American Tribe C 3 1 1 11% 9% 9%
Native American Tribe D - 5 5 - 23% 18%
Native American Tribe E 3 2 2 13% 10% 7%
--------- --------- --------- --------- --------- ---------
8 10 13 46% 58% 54%
========= ========= ========= ========= ========= =========
[A] Effective November 2002, the contract with Native American Tribe B was
terminated.
[B] Effective January 2004, the contract with the Native American Tribe D,
was terminated.
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Selected unaudited quarterly financial data for the years ended 2004 and
2003 is summarized as follows:
2004 quarters
-----------------------------------------------------------
First Second Third Fourth
quarter quarter (a) quarter quarter (b)
------------- ------------ ------------- -------------
Revenues $ 3,463,103 $ 3,458,260 $ 4,308,684 $ 4,003,688
Location gross margin 1,005,758 897,858 1,102,862 935,747
Net loss (296,032) (1,694,194) (815,244) (1,982,524)
Basic and diluted loss per common share (c) (0.04) (0.22) (0.08) (0.20)
F-37
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED):
2003 quarters
-----------------------------------------------------------
First Second Third Fourth
quarter quarter (a) quarter quarter (d)
------------- ------------ ------------- -------------
Revenues $ 4,573,949 $ 4,545,488 $ 4,825,043 $ 4,156,308
Location gross margin 1,594,222 1,406,698 1,378,283 1,011,349
Net income (loss) 155,079 106,732 26,653 (793,454)
Basic and diluted income (loss) per common share (c) 0.02 0.01 * (0.10)
*Amount is less than $0.01 per share.
(a) Includes an increase in the valuation allowance for deferred tax assets of
$473,000 and $252,000 if stock-based compensation.
(b) Includes $236,500 recorded as a valuation allowance on a note receivable
and $173,200 recorded as interest expense for beneficial conversion
features on convertible promissory notes.
(c) The sum of earnings per share for the four quarters may differ from the
annual earnings per share due to the required method of computed weighted
average number of shares in the respective periods.
(d) Includes approximately $256,000 recorded as a discount on a note receivable
due from a customer, approximately $241,000 to increase the allowance on
notes receivable and $143,000 of allocating expenses to Chex from Equitex.
F-38