U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
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/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, 1995
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For transition period from to .
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Commission File Number: 0-12374
EQUITEX, INC.
(Name of small business issuer in its charter)
DELAWARE 84-0905189
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7315 EAST PEAKVIEW AVENUE, ENGLEWOOD, COLORADO 80111
(Address of principal executive offices)(Zip Code)
Issuer's telephone number: (303) 796-8940
Securities registered under Section 12 (b) of the Exchange Act:
NONE
Securities registered under Section 12 (g) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
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Check whether the Issuer (1) 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 / /
Check 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-KSB or any amendment to
this Form 10-KSB: /X/
Issuer's revenues for its most recent fiscal year: $308,190
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $6,183,942, based on the last sale price of the Registrant's
common stock on March 27, 1996, ($2.31 per share) as reported by the National
Association of Securities Dealers Automated Quotation System/National Market
System.
The issuer had 3,217,615 shares of common stock outstanding as of March 27,
1996.
Documents incorporated by reference: NONE
Transitional Small Business Disclosure Format: Yes / / No /X/
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EQUITEX, INC.
FORM 10-KSB
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(a) Business Development
(1) Equitex, Inc. (the "Registrant") is a business development company which
is a form of closed-end, non-diversified investment company under the Investment
Company Act of 1940 (the "Investment Company Act"). A business development
company generally must maintain 70% of its assets in new, financially troubled
or otherwise qualified companies and offers significant managerial assistance to
such companies. Business development companies are not subject to the full
extent of regulation under the Investment Company Act. (See Item 1 (b) (8)
"Regulation - Business Development Companies" below). The Registrant primarily
is engaged in the business of investing in and providing managerial assistance
to developing companies which, in its opinion, would have a significant
potential for growth. The Registrant's investment objective is to achieve
long-term capital appreciation, rather than current income, on its investments.
There is no assurance that the Company's investment objective will be achieved.
The Registrant was organized under the laws of the State of Delaware in 1983
and elected to become a business development company and be subject to the
applicable provisions of the Investment Company Act in 1984. The Registrant has
three investee companies to which it currently provides management assistance.
An investee company is a company in which the Registrant has invested and
generally is a new, financially troubled or otherwise qualified company.
With its acquisition of Roadmaster Industries, Inc. ("RMI") in 1987, the
Registrant began concentrating its efforts in acquiring interests in more mature
investee companies, in some cases, through asset-based financing transactions.
In that regard, the Registrant has devoted more of its time to providing
managerial assistance to fewer companies, most of which time over the past three
years has been devoted to current investees RMI and MacGregor Sports and
Fitness, Inc., which constitute a significant portion of the Registrant's
investment portfolio.
On April 25, 1991 Sports Acquisition Corporation ("SAC") purchased certain
assets of MacGregor Sports, Inc., the wholly-owned operating subsidiary of MGS
Acquisitions, Inc., a former investee of the Registrant, which had filed for
protection under Chapter 11 of the United States Bankruptcy Code in February
1991. These assets included, but were not limited to, intangibles, securities
and other assets. On December 30, 1991, the shareholders of SAC and the
shareholders of Vida Ventures Ltd. ("Vida"), a publicly-traded company, approved
the merger of the two companies. The name of the combined company was changed to
MacGregor Sports and Fitness, Inc. ("MacGregor Fitness") As a result of this
transaction, the Registrant owned 20.4% of the outstanding common stock of
MacGregor Fitness following the merger and owned 30.9% at December 31, 1995 on a
fully-diluted basis. The President of the Registrant is the Chairman of the
Board of MacGregor Fitness.
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Concurrent with the acquisition of the assets by SAC, SAC (MacGregor
Fitness) entered into an asset-based lending arrangement with its primary lender
which included several different loans in the aggregate principal amount of
$3,500,000. As a result of MacGregor Fitness' inability to pay a term loan due
in 1991 and 1992, the Registrant paid $1,250,020 to pay off the loan on
MacGregor Fitness' behalf during those years for which MacGregor Fitness signed
a promissory note. MacGregor Fitness paid off the remaining portion of the
lending arrangement in 1993. On May 10, 1995, the Registrant elected to convert
$1,000,000 of the principal of this promissory note into 1,000 shares of a newly
created Class C Convertible Preferred Stock ("Class C Stock") of MacGregor
Fitness. The Class C Stock carries a cumulative dividend of $70 per share which
can be paid at the discretion of MacGregor Fitness' board of directors in either
cash or common stock at a price equal to 90% of the average market price. The
Class C Stock is convertible beginning May 1, 1996 into common stock at one
share for $1.00 or 80% of the average market price, whichever is lower, and will
be automatically converted after that date should the price of MacGregor
Fitness' common stock trade at an average market price of $1.50 for twenty
straight trading days. In April 1994, the Registrant loaned MacGregor Fitness an
additional $27,000 which is due on demand and carries an annual rate of interest
of 10%. As of December 31, 1995, all principal and interest due on this note
remained outstanding. During 1995, the Registrant made two loans totaling
$160,000 to MacGregor Fitness both of which were repaid with interest prior to
year end. In addition, MacGregor Fitness made a payment of $20,000 during 1995
which was applied to interest receivable.
On January 16, 1996, MacGregor Fitness announced that it had signed a
definitive agreement to merge with Technical Publishing Solutions, Inc. ("TPSI")
through a tax-free exchange of common stock. The transaction is expected to be
completed during the second quarter of 1996 and is subject to certain customary
conditions. Under the terms of the agreement, the newly combined parent company
will change its name to IntraNet Solutions, Inc. and includes an exchange of
100% of the outstanding TPSI common stock for an amount equal to 55% of the
outstanding post-merger parent company common stock on a fully-diluted basis.
TPSI provides integrated solutions for the management and distribution of
business critical information contained in documents using proprietary and
standard internet technologies. The company has developed and implemented
information solutions for the Fortune 1500 sector since 1990.
The Registrant's largest investee company is Roadmaster Industries, Inc.,
the value of which comprised 60% of the Registrant's investment portfolio at
December 31, 1995. RMI is one of the largest manufacturers of bicycles and is a
leading producer of fitness equipment, toys, team sports and camping equipment
in the United States. The trademarks and brand names under which Roadmaster
currently sells its products include Roadmaster, Flexible Flyer, Vitamaster,
MacGregor, Weather-Rite American Camper, Remington, DP, Hutch and Reach. In
Preliminary reports for the year ended December 31, 1995, Roadmaster anticipates
total sales of approximately $730 million up 60% from $456 million in 1994, and
anticipates a net loss in excess of $9,000,000. On March 11, 1996, RMI announced
that it had completed the sale of its Nelson/Weather-Rite camping division to
Brunswick Corporation (NYSE: BC) for cash consideration of $120 million and has
used the net proceeds of the sale to reduce outstanding bank indebtedness. In
December of 1994, Roadmaster acquired Diversified Products Corporation, Hutch
Sports USA, Inc., Nelson/Weather-Rite, Inc. and Willow Hosiery Company, Inc.
from The Actava Group in exchange for approximately 19.2 million newly issued
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shares of RMI's common stock. RMI is listed on the New York Stock Exchange where
it is traded under the symbol "RDM". A significant portion of the Registrant's
time is spent working with RMI.
On December 18, 1995, the Registrant's shareholders approved a reverse stock
split whereby every two shares of the Registrant's $0.01 par value common stock
would be exchanged for one share of newly created $0.02 par value common stock
(1 for 2 reverse stock split). The stock split became effective on January 2,
1996 thereby reducing the Registrant's authorized shares of common stock from
15,000,000 to 7,500,000; the Registrant's issued shares from 6,448,930 to
3,224,465; and outstanding shares from 6,435,230 to 3,217,615. The Registrants
preferred stock remained unchanged with 2,000,000 $0.01 par value shares
authorized and no shares issued or outstanding.
(a)(2 (3) During the year ended December 31, 1995, the Registrant has not
been involved in any bankruptcy, receivership or similar proceedings; has not
undergone material reclassification, merger or consolidation; has not acquired
or disposed of any material amount of assets otherwise than in the ordinary
course of business; and has not experienced any material change in its mode of
conducting business.
(b) Business of Issuer
(1)(2)(3) The Registrant is a closed-end, non-diversified investment company
under the Investment Company Act and has elected to become a business
development company under that act. The Registrant's investment objective is to
achieve long-term capital appreciation, rather than current income, on its
investments. There can be no assurance that this objective will be realized. The
Registrant's investment decisions are made by its management in accordance with
policies approved by its board of directors. The Registrant does not have a
registered investment advisor. In addition, the Registrant does not operate
pursuant to a written investment advisory agreement that must be approved
periodically by shareholders. The Registrant relies solely upon its management,
particularly its officers on a day to day basis, and also on the experience of
its directors, in making investment decisions.
In accordance with this objective, the Registrant consults with its
investees with respect to obtaining capital and offers managerial assistance to
selected businesses that, in the opinion of the Registrant's management, have a
significant potential for growth.
In addition to acquiring investment positions in new and developing
companies, the Registrant also invests in more mature privately and
publicly-held companies which the Registrant believes could be further developed
or revitalized, some of which may be experiencing financial difficulties.
The Registrant plans to take advantage of other opportunities to maintain
and create independent companies with a significant potential for growth. The
Registrant's priorities for the future will be to (1) maximize the value and
liquidity of its present investees, (2) increase its cash flow, sources of
income tax benefits and intermediate term value through the acquisition of
securities or assets of more established companies, (3) make new investments in
more mature companies, and (4) to a lesser degree, make a few small higher risk
investments in new and developing companies.
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The Registrant has no fixed policy as to the business or industry group in
which it may invest or as to the amount or type of securities or assets that it
may acquire. During the Registrant's first several years as a business
development company, the Registrant made investments primarily in new and
developing companies whose securities had no established public market. Most of
these companies were unable to obtain significant capital on reasonable terms
from conventional sources. However, the Registrant, over the past several years,
has been seeking out and evaluating investments in more mature companies. The
Registrant endeavors to assist its investee companies and management teams in
devising realistic business strategies and obtaining necessary financing.
The Registrant does not currently intend to pay cash dividends. The
Registrant may elect to make in-kind distributions of its larger investment
positions to its stockholders when its Board of Directors deems such
distributions appropriate. Only one such distribution has been made to date and
there are no current plans for such a distribution.
The Registrant believes that the key to achieving its objectives is finding
and supporting business executives who have the ability, entrepreneurial
motivation and experience required to build independent companies with a
significant potential for growth. In the Registrant's view, it is more difficult
to locate and attract capable executives than to identify, select and finance
promising investment opportunities. The Registrant believes that its ability to
attract capable executives is enhanced by its policy and reputation for
maintaining the independence of its investee companies, supporting them when
appropriate in contracts, arranging or supplying necessary financing and
assisting the investee's management in obtaining a meaningful equity
participation in the investee.
Business development is by nature a high-risk activity that can result in
substantial losses. The companies in which the Registrant invests and will
invest, especially in the early stages of an investment, often lack effective
management, face operating problems and incur substantial losses. However, the
Registrant, at this time, is seeking out and evaluating investments in more
mature companies. Potential investees include established businesses which may
be experiencing severe financial or operating difficulties or may, in the
opinion of management, be ineffectively managed or have the potential for
substantial growth or reorganization into separate independent companies.
The Registrant attempts to reduce the level of its investment risks through
one or more of the following:
(i) carefully investigating potential investees;
(ii) financing only what it believes to be practical business opportunities
as contrasted with research projects;
(iii) selecting effective, entrepreneurial management for its investees;
(iv) providing active managerial assistance and support to investees;
(v) obtaining, alone or with others, actual or working control of its
investees;
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(vi) supporting the investees in obtaining necessary financing and arranging
major contracts, joint ventures or mergers and acquisitions where feasible; and
(vii) maintaining sufficient capital resources to make follow-on investments
where necessary, appropriate and feasible.
Investment Policies
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The Registrant has elected to be regulated as a business development company
and is subject to the provisions of Sections 55 through 65 of the Investment
Company Act and also is subject to those provisions of the Investment Company
Act made applicable to business development companies by Section 59 of the
Investment Company Act. In accordance with those provisions, the Registrant's
investment policies are defined and subject to certain limitations. Furthermore,
under Section 58 of the Investment Company Act, the Registrant may not withdraw
its election to be so regulated without the consent of a majority of its
stockholders. If the Registrant were to withdraw its election to be regulated as
a BDC, it may be subject full regulation under of the Investment Company Act as
if it were a closed-end investment company. [See Item 1 (b)(8) "Regulation
Business Development Companies."]
The Registrant has no fixed policy as to the business or industry group in
which it may invest or as to the amount or type of securities or assets that it
may acquire. However, the Registrant, at this time, is seeking out and
evaluating investments in more mature companies. The Registrant has in the past
and may continue to invest in assets that are not qualifying assets under
Section 55 of the Investment Company Act; however, no such additional assets
have been identified, and the Registrant does not intend to fall below the 70%
requirement as set forth in Section 55 [See Item 1. Business (a)].
The Registrant endeavors to achieve its objectives in accordance with the
following general policies:
(i) The Registrant acquires securities through negotiated private placement
transactions directly from the investee company, its affiliates, or third
parties, or through open market transactions.
(ii) The Registrant attempts to acquire, if possible and consistent with the
Registrant's capital resources, a large or controlling interest in its investees
through purchases of equity securities, including warrants, options, and other
rights to acquire such securities combined, if appropriate, with debt
securities, including demand notes, term loans and guarantees or debt
instruments or preferred stock convertible into, or with warrants to purchase,
equity securities.
(iii) The Registrant may make additional or "follow-on" investments in or
loans to its investees when appropriate to sustain the investees or to enhance
or protect the Registrant's existing investment.
(iv) The Registrant determines the length of time it will retain its
investment by evaluating the facts and circumstances of each investee and its
relationship with such investee. The Registrant generally retains its
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investments for a relatively long period, sometimes many years, with the result
that its rate of portfolio turnover is low. Investments are retained until, in
the opinion of the Registrant, the investee company has a demonstrated record of
successful operations and there is a meaningful public market for its securities
which reflects the investment value the Registrant sought (or such a market can
be readily established) or until the Registrant decides that its investment is
not likely to result in future long-term capital appreciation.
Valuation - Policy Guidelines
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The Registrant's Board of Directors is responsible for the valuation of the
Registrant's assets in accordance with its approved guidelines. The Registrant's
Board of Directors is responsible for (1) recommending overall valuation
guidelines and (2) the valuation of specific investments.
There is a range of values which are reasonable for an investment at any
particular time. Fair value is generally defined as the price at which the
investment in question could change hands, assuming that both parties to the
transaction are under no unusual pressure to buy or sell and both have
reasonable knowledge of all the relevant facts. To increase objectivity in
valuing the securities, the Registrant uses external measures of value such as
public markets or significant third-party transactions whenever possible.
Neither a long-term work-out value nor an immediate liquidation value is used,
and no increment of value is included for changes which may take place in the
future. Two of the Registrant's largest investee companies, Roadmaster
Industries, Inc. and MacGregor Sports and Fitness, Inc. represent 95.7% of the
total value of the Registrant's investment portfolio with Roadmaster Industries,
Inc. making up 60.0% of that total. Each is valued by the public market method,
the Registrant's preferred method of valuation. These companies have entered
into lending arrangements or have outstanding bonds under which each has
incurred substantial indebtedness which may be secured by substantially all of
such company's assets. As a result of their highly leveraged positions, these
companies have incurred substantial interest expense and any event which causes
diminished cash flow may adversely affect their ability to repay their loans.
The Registrant may be required to make follow-on investments or assist such
companies in obtaining additional financing or face impairment of its
investments in such companies. Certain members of the Registrant's Board of
Directors hold minor equity positions in some of the Registrant's investee
companies and certain members of the Board hold officer or director positions
with some of the Registrant's investee companies. No such equity position
exceeds 5% of the investee company's outstanding securities.
Valuations assume that in the ordinary course of its business the Registrant
will eventually sell its position in the public market or distribute its larger
positions to its stockholders. Accordingly, no premiums are placed on
investments to reflect the ability of the Registrant to sell block positions or
control of companies, either by itself or in conjunction with other investors.
The Registrant uses four basic methods of valuation for its investments and
there are variations within each of these methods. The Registrant's Board of
Directors has determined that the Registrant's four basic valuation methods
constitute fair value. As an investee evolves, its progress usually requires
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changes in the Registrant's method of valuing the investee's securities. The
Registrant's investment is separated into its component parts (such as debt,
preferred stock, common stock or warrants), and each component is valued
separately to arrive at total value. The Company believes that a mixture of
valuation methods is often essential to represent fairly the value of the
Registrant's investment position in an investee. For example, one method may be
appropriate for the equity securities of a company while another method may be
appropriate for the senior securities of the same company.
The Cost Method values an investment based on its original cost to the
Company, adjusted for the amortization of original issue discount, accrued
interest and certain capitalized expenditures of the Company. While the cost
method is the simplest method of valuation, it is often the most unreliable
because it is applied in the early stages of an investee's development and is
often not directly tied to objective measurements. The original cost may be
adjusted by the Board of Directors in good faith taking into account such
factors as available financial information of the investee, the nature and
duration of any restrictions as to resale and other factors which influence the
market in which a security is purchased or sold. All investments are carried at
cost until significant positive or adverse events subsequent to the date of the
original investment call for a change to another method. Some examples of such
events are: (1) a major recapitalization; (2) a major refinancing; (3) a
significant third-party transaction; (4) the development of a meaningful public
market for the investee's common stock; and (5) material positive or adverse
changes in the investee's business.
The Appraisal Method is used to value an investment position based upon a
careful analysis of the best available outside information when there is no
established public or private market in the investee company's own securities
and it is no longer appropriate to use the Cost Method. Comparisons are made
using factors (such as earnings, sales or net worth) that influence the market
value of similar public companies or that are used in the pricing of private
transactions of comparable companies. Major discounts, usually 50%, are taken
when private companies are appraised by comparing them to similar public
companies. Liquidation value may be used when an investee is performing
substantially below plan and it's continuation as an operating entity is in
doubt. Senior securities are discounted at a rate to yield 15% to 40% to
projected maturity. Depending on the relative uncertainty of the timing of
ultimate collection, 15% is used for relatively predictable positions, and 40%
for less predictable positions. Under the Appraisal Method, the differences
among companies in terms of the source and type of revenues, quality of
earnings, and capital structure, are carefully considered.
An appraisal value can be defined as the price at which the investment in
question could change hands, assuming that both parties to the transaction are
under no unusual pressure to buy or sell and both have reasonable knowledge of
all the relevant facts. In the case of start-up companies where the entire
assets may consist of only one or more of the following: a marketing plan,
management or a pilot operation, an evaluation may be established by
capitalizing the amount of the investment that could reasonably be obtained for
a predetermined percentage of the company. Valuations under the Appraisal Method
are considered to be more subjective than the Cost, Public Market or Private
Market Methods.
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The Private Market Method uses third-party transactions (actual or proposed)
in the investee's securities as the basis for valuation. This method is
considered to be an objective measure of value since it depends upon the
judgment of a sophisticated, independent investor. Actual firm offers are used
as well as historical transactions, provided that any offer used was seriously
considered and well documented and adjusted (if applicable) by the Board of
Directors in good faith taking into account such factors as available financial
information of the investee, the nature and duration of any restrictions as to
resale and other factors which influence the market in which a security is
purchased or sold.
The Public Market Method is the preferred method of valuation when there is
an established public market for the investee's common stock, since that market
provides the most objective basis for valuation. In determining whether the
public market is sufficiently established for valuation purposes, the Registrant
examines the trading volumes, the number of shareholders and the number of
market makers. Under the Public Market Method, as well as under the other
valuation methods, the Registrant discounts investment positions that are
subject to significant legal, contractual or practical restrictions and
appropriate adjustments may be made by the Board of Directors in good faith
taking into account such other factors as available financial information of the
investee, the nature and duration of any restrictions as to resale and other
factors which influence the market in which a security is purchased or sold.
When an investee's common stock is valued under the Public Market Method, common
stock equivalents such as presently exercisable warrants or options are valued
based on the difference between the exercise price and the market value of the
underlying common stock. Although the Registrant believes that a public market
could be created for the options and warrants of certain of its investees,
thereby possibly increasing the value of these rights above their arbitrage
value, the Registrant does not reflect this possibility in its valuation.
Managerial Assistance
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The Registrant believes that providing managerial assistance to its
investees is critical to its business development activities. "Making available
significant managerial assistance" as defined in the Investment Company Act with
respect to a business development company such as the Registrant means (a) any
arrangement whereby a business development company, through its directors,
officers, employees or general partners, offers to provide, and, if accepted,
does so provide, significant guidance and counsel concerning the management,
operations, or business objectives and policies of a portfolio company; or (b)
the exercise by a business development company of a controlling influence over
the management or policies of a portfolio company by the business development
company acting individually or as a part of a group acting together which
controls such portfolio company. The Registrant is required by the Investment
Company Act to make significant managerial assistance available at least with
respect to investee companies that the Registrant treats as qualifying assets
for purposes of the 70% test. The nature, timing and amount of managerial
assistance provided by the Registrant vary depending upon the particular
requirements of each investee company.
The Registrant may be involved with its investees in recruiting management,
product planning, marketing and advertising and the development of financial
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plans, operating strategies and corporate goals. In this connection, the
Registrant may assist clients in developing and utilizing accounting procedures
to efficiently and accurately record transactions in books of account which will
facilitate asset and cost control and the ready determination of results of
operations. The Registrant also seeks capital for its investees from other
potential investors and occasionally subordinates its own investment to those of
other investors. The Registrant introduces its investees to potential suppliers,
customers and joint venture partners and assists its investees in establishing
relationships with commercial and investment bankers and other professionals,
including management consultants, recruiters, legal counsel and independent
accountants. The Registrant also assists with joint ventures, acquisitions and
mergers.
In connection with its managerial assistance, the Registrant may be
represented by one or more of its officers or directors on the board of
directors of an investee. As an investment matures and the investee develops
management depth and experience, the Registrant's role will become progressively
less active. However, when the Registrant owns or on a pro forma basis could
acquire a substantial proportion of a more mature investee company's equity, the
Registrant remains active in and will frequently initiate planning of major
transactions by the investee. The Registrant's goal is to assist each investee
company in establishing its own independent and effective board of directors and
management.
(4) Although the Registrant does not directly compete with any single
company, individual or organization, the Registrant is subject to substantial
competition from business development companies, venture capital firms, new
product development companies, marketing companies and diversified
manufacturers, most of whom are larger than the Registrant and have
significantly larger net worths and financial and personnel resources than the
Registrant. In addition, the Registrant competes with companies and individuals
engaged in the business of providing management consulting services.
(5) The Registrant does not require raw materials.
(6) The Registrant's business is not dependent upon a single customer, or a
few customers, the loss of any one or more of which would have a material
adverse effect on the Registrant.
(7) The Registrant holds no patents or trademarks, and has no interest in
any franchises, concessions, royalty agreements or labor contracts.
(8)(9) Regulation - Business Development Companies. The following is a
summary description of the Investment Company Act as applied to business
development companies. This description is qualified in its entirety by
reference to the full text of the Investment Company Act and the rules adopted
thereunder by the SEC.
The Small Business Investment Incentive Act of 1980 modified the provisions
of the Investment Company Act that are applicable to a company, such as the
Registrant, which elects to be treated as a "business development company." The
Registrant elected to be treated as a business development company on July 30,
1984. The Registrant may not withdraw its election without first obtaining the
approval of a majority of its outstanding voting securities.
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A business development company must be operated for the purpose of investing
in the securities of certain present and former "eligible portfolio companies"
and certain bankrupt or insolvent companies and must make available significant
managerial assistance to its investee companies. An eligible portfolio company
generally is a United States company that is not an investment company (except
for wholly-owned SBIC's licensed by the Small Business Administration) and (1)
does not have a class of securities included in the Federal Reserve Board's
over-the-counter margin list, (2) is actively controlled by the business
development company and has an affiliate of the business development company on
its board of directors, or (3) meets such other criteria as may be established
by the SEC. Control, under the Investment Company Act, is presumed to exist
where the business development company owns 25% or more of the outstanding
voting securities of the investee.
The Investment Company Act prohibits or restricts the Registrant from
investing in certain types of companies, such as brokerage firms, insurance
companies, investment banking firms and investment companies. Moreover, the
Investment Company Act limits the type of assets that the Registrant may acquire
to "qualifying assets" and certain assets necessary for its operations (such as
office furniture, equipment and facilities) if, at the time of the acquisition,
less than 70% of the value of the Registrant's assets consists of qualifying
assets. The effect of the regulation is to require that at least 70% of a
business development company's assets be maintained in qualifying assets.
Qualifying assets include: (1) securities of companies that were eligible
portfolio companies at the time the Registrant acquired their securities; (2)
securities of bankrupt or insolvent companies that are not otherwise eligible
portfolio companies; (3) securities acquired as follow-on investments in
companies that were eligible at the time of the Registrant's initial acquisition
of their securities but are no longer eligible, provided that the Registrant has
maintained a substantial portion of its initial investment in those companies;
(4) securities received in exchange for or distributed on or with respect to any
of the forgoing; and (5) cash items, government securities and high-quality
short-term debt. The Investment Company Act also places restrictions on the
nature of the transactions in which, and the persons from whom, securities can
be purchased in order for the securities to be considered to be qualifying
assets. The Registrant believes that, as of December 31, 1995, at least 90% of
its assets would be considered qualifying assets.
The Registrant is permitted by the Investment Company Act, under specified
conditions, to issue multiple classes of senior debt and a single class of
preferred stock if its asset coverage, as defined in the Investment Company Act,
is at least 200% after the issuance of the debt or the preferred stock. The
Registrant currently has no policy regarding issuing multiple classes of senior
debt or a class of preferred stock.
The Registrant may issue in limited amounts, warrants, options and rights to
purchase its securities to its directors, officers and employees (and provide
loans to those persons for the exercise thereof) in connection with an executive
compensation plan if certain conditions are met. These conditions include the
authorization of such issuance by a majority of the Registrant's voting shares
and the approval of a majority of the independent members of the Board of
Directors and a majority of the directors who have no financial interest in the
transaction. The issuance of options, warrants or rights to directors who are
10
<PAGE>
not also officers requires the prior approval of the SEC.
The Registrant may sell its securities at a price that is below the
prevailing net asset value per share only upon the approval of the policy by the
holders of a majority of its voting securities, including a majority of the
voting securities held by non-affiliated persons, at its last annual meeting or
within one year prior to the transaction. In addition, the Registrant may
repurchase its Common Stock, subject to the restrictions of the Investment
Company Act. The Registrant at this time does not contemplate selling its
securities at a price below prevailing net asset value per share or repurchasing
its Common Stock.
In accordance with the Investment Company Act, a majority of the members of
the Registrant's Board of Directors must not be "interested persons" of the
Registrant as that term is defined in the Investment Company Act. Generally,
"interested persons" of the Registrant include all affiliated persons of the
Registrant and members of their immediate families, any "interested person" of
an underwriter or of an "investment advisor" to the Registrant, any person who
has acted as legal counsel to the Registrant within the last two years, or any
broker or dealer, or affiliate of a broker or dealer.
Most of the transactions involving the Registrant and its affiliates (as
well as affiliates of those affiliates) which were prohibited without the prior
approval of the SEC under the Investment Company Act prior to its amendment by
the Small Business Investment Incentive Act now require the prior approval of a
majority of the Registrant's independent directors and a majority of the
directors having no financial interest in the transactions. The effect of the
amendment is that the Registrant may engage in certain affiliated transactions
that would be prohibited absent prior SEC approval in the case of investment
companies which are not business development companies. However, transactions
involving certain closely affiliated persons of the Registrant, including its
directors, officers and employees, still require the prior approval of the SEC.
In general, "affiliated persons" of a person include: (a) any person who owns,
controls or holds with power to vote, more than five percent of the Registrant's
outstanding Common Stock (b) any director, executive officer or general partner
of that person, (c) any person who directly or indirectly controls, is
controlled by, or is under common control with, that person, and (d) any person
five percent or more of whose outstanding voting securities are directly or
indirectly owned, controlled or held with power to vote, by such other person.
Such persons generally must obtain the prior approval of a majority of the
Registrant's independent directors and, in some situations, the prior approval
of the SEC, before engaging in certain transactions involving the Registrant or
any company controlled by the Registrant. The Investment Company Act generally
does not restrict transactions between the Registrant and its investee
companies.
Finally, notwithstanding restrictions imposed under federal securities laws,
it is anticipated that the Registrant will acquire securities of investee
companies pursuant to stock purchase agreements or other agreements that may
further limit the Registrant's ability to distribute, or sell or transfer such
securities; and, as a practical matter, even if such transfers are legally or
contractually permissible, there may be no market, or a very limited market, for
the securities and economic conditions may make the price and terms of a sale or
transfer unattractive.
11
<PAGE>
The Registrant currently is considering the withdrawal of its election to be
treated as a business development company. Although the Registrant is not
subject to many of the provisions of the Investment Company Act, it is still
difficult to take certain action without a lengthy SEC review process and/or
requiring shareholder approval. In addition, the Registrant's investment
objectives have changed since the election was made in 1984 and, as a result,
the Registrant increasingly devotes substantial amounts of time and effort
working with its primary investee, RMI, a large operating company. The
Registrant is presently exploring its alternatives should it choose to
withdrawal its election, however, its investigation is in the preliminary stages
and there can be no assurance that it will choose to do so.
Other Securities Law Considerations
- -----------------------------------
In addition to the above-described provisions of the Investment Company Act,
there are a number of other provisions of the federal securities laws which
affect the Registrant's operations. For example, restrictions imposed by the
federal securities laws, in addition to possible contractual provisions, may
affect adversely the ability of the Registrant to sell or otherwise distribute
its portfolio securities.
Most if not all securities which the Registrant acquires as venture capital
investments will be "restricted securities" within the meaning of the Securities
Act of 1933 ("Securities Act") and will not be permitted to be resold without
compliance with the Securities Act. Thus, the Registrant will not be permitted
to resell portfolio securities unless a registration statement has been declared
effective by the SEC with respect to such securities or the Registrant is able
to rely on an available exemption from such registration requirements. In most
cases the Registrant will endeavor to obtain from its investee companies
"registration rights" pursuant to which the Registrant would be able to demand
that an investee company register the securities owned by the Registrant at the
expense of the investee company. Even if the investee company bears this
expense, however, the registration of the securities owned by the Registrant is
likely to be a time-consuming process, and the Registrant always bears the risk,
because of these delays, that it will be unable to resell such securities, or
that it will not be able to obtain an attractive price for the securities.
Sometimes the Registrant will not register portfolio securities for sale but
will seek to rely upon an exemption from registration. The most likely exemption
available to the Registrant is section 4(1) of the Securities Act which, in
effect exempts sales of securities not involving a distribution of the
securities. This exemption will likely be available to permit a private sale of
portfolio securities, and, in some cases, a public sale, if the provisions of
Rule 144 under the Securities Act are satisfied. Among other things, Rule 144
requires that securities be sold in "broker transactions," and imposes a
two-year holding period prior to the sale of restricted securities.
(10) During the last three years the Registrant spent no amounts on
Registrant-sponsored or customer-sponsored research and development activities.
(11) The Registrant is not subject to any federal, state or local provisions
which have been enacted or adopted regulating the discharge of materials into
the environment or otherwise relating to the protection of the environment.
12
<PAGE>
(12) The Registrant currently employs five persons, four of which are
full-time employees.
ITEM 2. DESCRIPTION OF PROPERTY.
(a) Description of Principal Plants and other Property
The Registrant's principal office is located at 7315 East Peakview Avenue,
Englewood, Colorado 80111. The Registrant leases this space, consisting of
approximately 1,800 square feet, for $2,500 per month, from a partnership in
which the Registrant's president and his wife are sole partners. The Registrant
believes these terms to be no less favorable than those which could be obtained
from a non-affiliated party for similar facilities in the same area.
(b) Investment Policies
The Registrant currently does not invest in real estate, real estate
mortgages, or securities of persons who primarily engage in real estate
activities. Although the Registrant does not currently make investments as
described above, and currently has no intention to make such investments in the
near future, it is limited in making such investments only as described in Item
1.(b) "Regulation - Business Development Companies".
(c) Description of Real Estate and Operating Data
The Registrant does not own property, the book value of which amounts to ten
percent or more of the total assets of the Registrant.
ITEM 3. LEGAL PROCEEDINGS.
The Registrant currently is not a party to any pending legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 18, 1995, the Registrant held an Annual Meeting of its
Stockholders. The stockholders re-elected each of the Registrant's three
directors to serve until the next Annual Meeting of Stockholders and the votes
were cast as follows:
<TABLE>
<CAPTION>
For Withhold Authority
--------- ------------------
<S> <C> <C>
Henry Fong 4,170,742 161,917
Russell L. Casement 4,174,250 158,409
Aaron Grunfeld 4,169,770 162,889
</TABLE>
Additionally, the following other proposals were presented and voted upon at
the meeting and the votes were cast as follows:
13
<PAGE>
To cause a 1 for 2 reverse stock split whereby every two shares of the
Registrant's common stock will be exchanged for one share of newly created
common stock.
<TABLE>
<CAPTION>
For Against Abstain Non-Voted
--------- ------- ------- ---------
<S> <C> <C> <C> <C>
Shares voted 3,942,617 163,352 33,139 193,550
</TABLE>
To ratify the appointment of Davis & Co., CPA's, P.C. as the independent
auditor of the Registrant for the year ending December 31, 1995.
<TABLE>
<CAPTION>
For Against Abstain Non-Voted
--------- ------- ------- ---------
<S> <C> <C> <C> <C>
Shares voted 4,223,809 60,815 48,235 -0-
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information
The principal market in which the Registrant's Common Stock is traded is the
over-the-counter market.
The Registrant's Common Stock trades on The Nasdaq Stock Market under the
symbol: EQTX. The table below states the quarterly high and low last sale prices
for the Registrant's Common Stock as reported by The Nasdaq Stock Market, and
represent actual high and low last sale prices.
<TABLE>
<CAPTION>
Last Sale
High Low
---- ---
<S> <C> <C>
Quarter ended
1994
March 31, 1994 $3.50 $2.81
June 30, 1994 $3.00 $2.00
September 30, 1994 $2.63 $1.94
December 31, 1994 $2.25 $1.75
Quarter ended
1995
March 31, 1995 $2.22 $1.41
June 30, 1995 $1.50 $1.25
September 30, 1995 $1.88 $1.25
December 31, 1995 $2.00 $1.28
</TABLE>
(b) Holders
The number of record holders of the Registrant's Common Stock as of March
27, 1996, was 2,928 according to the Registrant's transfer agent. This figure
excludes an indeterminate number of shareholders whose shares are held in
"street" or "nominee" name.
(c) Dividends
The Registrant does not currently intend to pay cash dividends. The
Registrant may elect to make in-kind distributions of its larger investment
positions to its stockholders when the Registrant's Board of Directors deems
14
<PAGE>
such distributions appropriate. Because the Registrant does not intend to make
cash distributions, shareholders would need to sell securities distributed
in-kind, when and if distributed, in order to realize a return on their
investment.
An in-kind distribution will be made only when, in the judgment of the
Registrant's Board of Directors, it is in the best interest of the Registrant's
stockholders to do so. The Board of Directors will review, among other things,
the investment quality and marketability of the securities considered for
distribution; the impact of a distribution of the investee's securities on its
customers, joint venture associates, other investors, financial institutions and
management; tax consequences and the market effects of an initial or broader
distribution of such securities. Securities of the Registrant's larger
investment positions in more mature investee companies with established public
markets are most likely to be considered for distribution. It is possible that
the Registrant may make an in-kind distribution of securities that are
substantially illiquid irrespective of the distributee stockholders' rights to
sell such securities. Any such in-kind distribution would require shareholder
approval only if the distribution represents substantially all of the
Registrant's assets. It is possible that the Registrant may make an in-kind
distribution of securities which have appreciated or depreciated from the time
of purchase depending upon the particular distribution. The Registrant has not
established a policy as to the frequency or size of distributions and indeed
there can be no assurance that any future distributions will be made. To date,
only one such distribution has been approved by the Board of Directors and was
distributed in April 1988.
ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS.
(a) Plan of Operation
Not applicable
(b) Management's Discussion and Analysis of Financial Condition and Results of
Operations
RESULTS OF OPERATIONS. Revenues for the year ended December 31, 1995 were
$308,190, down 30% as compared to $437,735 for the year ended December 31, 1994.
The decrease in revenues for 1995 over 1994 is primarily the result of lower
interest and dividend revenue in 1995 compared to 1994 due to the Registrant
converting $1,000,000 of its notes receivable in MacGregor Fitness, $500,00 of
which had been previously reserved, to equity [See also Part 1 Item 1(a).
Business Development]. The Registrant receives consulting fees on both a monthly
contract basis as well as on a per transaction basis when assisting investees
with acquisitions, refinancing or restructuring. The Registrant received
$144,000 in consulting fees from RMI during the past two years which made up a
majority of the consulting fee revenue. Under its agreement with RMI, the
Registrant will receive the same amount in 1996.
The realized gain on investments before income taxes for 1995 was $31,232 as
compared to a gain of $143,437 in 1994. While the proceeds from sales of
investments was slightly higher in 1995 than 1994, the cost of those investments
was significantly higher in 1995 thereby producing a lower realized gain before
15
<PAGE>
income taxes. The Registrant did not make any significant sales of any of its
lower cost long-term investments during 1995 which resulted in the increased
cost of investments sold. While the restrictions as to resale on many of the
Registrant's investments continue to diminish, the opportunity for the sale of
large portions of the investments cannot be predicted.
Expenses for 1995 were $1,499,869 as compared to $2,078,170 in 1994, a
decrease of 28%. While the Registrant's expenses were down in most categories,
bad debt expense and legal and accounting showed the most significant decreases.
In addition, during 1994, the Registrant's President settled a lawsuit which was
a one time non-recurring expense of $99,243. As the Registrant is not currently
a party to any lawsuit, it is expected that legal expenses for 1996 should
continue at these lower levels. The Registrant currently believes that expenses
for the year ending December 31, 1996 will continue at levels similar to those
of 1995.
The Registrant's net investment loss and realized gain on investments after
taxes for the year ended December 31, 1995 was a loss of $1,038,298 as compared
to a loss of $972,383 in 1994. The Registrant's net realized loss for 1995 is a
result of lower sales of its investments in 1995 and the higher cost of those
that were sold. In addition, the lack of sales of large portions of the
Registrant's lower cost long-term investments as described above contributed to
the higher net investment loss and realized gain on investments after taxes, and
may do so in future periods in the absence of such sales.
At December 31, 1995, unrealized appreciation of investments decreased
$1,043,785 as compared to a decrease of $2,139,454 at December 31, 1994. The
lower decrease in 1995 over 1994 is attributed to the significant decrease in
the market price of the Registrant's largest investee, RMI, at year end 1995
which was partially offset by a significant increase in the market value of
MacGregor Fitness. As there is no way to predict the future value of the
Registrant's investment portfolio, the Registrant cannot predict future changes
in the unrealized value of its investment portfolio. The net increase in net
assets resulting from operations decreased $1,775,008 for 1995 as compared to a
decrease of $2,874,336 for 1994.
With the acquisition of RMI in 1987, the Registrant began concentrating on
investments in more mature investee companies. Due to this change, the
Registrant's net asset value and cash flows have fluctuated as a result of the
market fluctuations of a few larger investees, particularly, RMI. As the
Registrant increases the number of its investments in more mature companies, the
Registrant's net asset value and cash flows should become less susceptible to
the market fluctuations of fewer investee companies. During the past three
years, the Registrant has been concentrating its efforts on enhancing the value
of its existing portfolio companies and therefore has not made any major new
investments. Until such time as more of these mature investments are added, the
Registrant will continue to be susceptible to market fluctuations.
In July of 1984, the Registrant elected to become a business development
company ("BDC"). Utilizing the "at value" method of evaluating fair value as
described in "Valuation - Policy Guidelines" the Registrant's assets as of
December 31, 1995 were $19,056,458 with a net asset value of $11,916,832.
Comparatively, as of December 31, 1994, the Registrant's assets were valued at
$20,253,338 and it had net assets of $13,696,718.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES. Of the Registrant's current liabilities of
$7,139,626 at December 31, 1995, the Registrant had no amounts due to banks. Of
those current liabilities, 33% or $5,498,778, is deferred income taxes,
primarily for the Registrant's unrealized appreciation on investments, leaving
$1,640,848 in other liabilities [See also Part IV Item 13 Financial Statements].
This compares to total liabilities of $6,556,620, deferred income taxes of
$5,651,252 and other liabilities of $905,368 at December 31, 1994. The
Registrant is not obligated to discharge a significant portion of its current
liabilities in the near future; however, the Registrant intends to extinguish
these liabilities to make other investments as cash flow permits.
In connection with its investments, the Registrant is required, from time
to time, to make loans to its investees in order to protect its investments. As
a result of these loans, the Registrant carried notes receivable of $126,195 and
$626,010 at years ended December 31, 1995 and 1994, respectively. The
significant decrease in notes receivable at year end 1995 as compared to 1994 is
the result of the Registrant converting $1,000,000 in notes receivable in
MacGregor Fitness to equity during 1995, $500,000 of which had previously been
reserved. [See also Part I, Item 1. Business Development].
The Registrant's cash position increased by $158,709 at December 31, 1995 as
compared to a decrease of $709,733 at December 31, 1994. Net cash provided by
operating activities was $167,738 for 1995 as compared to $869,715 used in 1994.
The change in cash by operating activities was due to several factors including
collections of notes receivable as well as lower provisions for bad debts on
notes receivable and higher proceeds from sales of investments. Cash flows from
investing activities used $4,151 in 1995 compared to $1,634 in 1994. The
increase was the result of purchases of computer equipment. Cash flows from
financing activities used $4,878 as compared to $161,616 provided during 1994.
The cash used by financing activities in 1995 was from legal costs associated
with a private placement. [See also Part IV Item 13 Financial Statements]
The Registrant's sources of income to defray operating overhead will be
derived primarily from consulting fees, transaction fees gained from the
Registrant assisting both existing and new investees in structuring and
completing mergers, acquisitions or asset-based financing transactions and
administrative fees through which the Registrant directly apportions a certain
amount of its operating overhead to an investee to help defray operating costs.
This allows some of the income generated by other sources to be used for
purposes other than operating overhead. The Registrant also receives income from
the sale of certain of its longer term investments from time to time during the
year as well as through utilizing its cash position at any given time to trade
in the equities markets. During 1995 the Registrant's sources of income were
sufficient to cover its operating overhead and it is anticipated this trend will
continue during 1996.
The Registrant's liquidity is affected primarily by the business success,
securities prices and marketability of its investee companies and by the amount
and timing of any new or incremental investments it makes. The Registrant
believes that its present liquidity and capital resources are adequate to
finance anticipated needs arising from or relating to its business in the 1995
year due to its increased ability to sell portions of its investee companies'
stock positions as restrictions on their ability to be sold end. Although the
Registrant expects that its ability to liquidate portions of its portfolio
17
<PAGE>
companies will be increased as the restrictions as to resale end, the Registrant
generally is a long-term holder if its investments and therefore does not
necessarily liquidate them upon the expiration of these restrictions. As the
Registrant cannot forecast the types of large-scale sales which generated
significant profit in previous years, the Registrant does not typically rely on
sales of this nature for its financing needs.
The Registrant's largest investee company, RMI, is a publicly held company
which conducts most of its business through its wholly-owned subsidiaries. The
Registrant owns common stock, senior subordinated notes and convertible
debentures in RMI which is one of the largest manufacturers of bicycles and is a
leading producer of fitness equipment, toys and team sports equipment in the
United States. Management of the Registrant devotes significant efforts and
resources to providing managerial assistance to RMI.
The seasonal nature of the RMI subsidiaries' sales imposes fluctuating
demands on their cash flow, due to the temporary build-up of inventories in
anticipation of, and receivables subsequent to, the peak seasonal period which
historically has occurred around November of each year. In the past, the
subsidiaries have relied heavily on revolving loan borrowings for working
capital. These loans provided them with an immediate and continued source of
liquidity. RMI's working capital increased significantly in 1993 as a result of
the issuance of $51,745,000, 8% Convertible Subordinated Debentures (the
"Debentures") and $100,000,000, 11.75% Senior Subordinated Notes (the "Notes").
In addition, RMI utilizes asset-based credit facilities provided by lending
institutions to provide for its fluctuating working capital needs. On October 2,
1995, RMI announced the signing of a three year loan and security agreement
which provides for borrowings based on certain inventories, accounts receivable
and capital expenditures, as well as funding for RMI's structured accounts
receivable subsidiary. RMI anticipates this loan facility will meet all of its
working capital needs through 1998. The Debentures, Notes and the loan and
security agreement carry restrictive covenants which may limit RMI's ability to
pay dividends to shareholders, including the Registrant.
In preliminary reports for the year ended December 31, 1995, RMI anticipates
net sales of approximately $730,000,000 with a net loss in excess of $9,000,000.
This compares to 1994 net sales of $456,000,000, net earnings of $5,000,000 and
earnings per share of $0.16 fully-diluted. At September 30, 1995, RMI's total
assets were $579,957,000 and its total liabilities were $483,735,000 with
shareholders' equity of $96,222,000. RMI's borrowings represented 61% of its
total assets at September 30, 1995.
As of December 31, 1995, the Registrant had made no other material
commitments for capital expenditures or loans to investees. The Registrant
expects that it will continue to sell certain of its investments, resulting in
additional realized gains, during the remainder of the current year. At the
discretion of the Board of Directors, the Registrant also may sell certain of
its investments resulting in a realized loss in order to prevent further losses
from occurring.
18
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
The financial statements are listed under Item 13.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with accountants during the
most recent two fiscal years.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACE OF THE REGISTRANT.
(a) Identification of Directors and Executive Officers
<TABLE>
<CAPTION>
Length of
Name Age Offices held Service
- ---- --- ------------ ---------
<S> <C> <C> <C>
Henry Fong 60 President, Treasurer, Since Inception
Principal Executive,
Financial and Accounting
Officer and Director
Thomas B. Olson 30 Secretary Since 1988
Russell L. Casement 52 Director Since 1989
Aaron A. Grunfeld 49 Director Since 1991
</TABLE>
The directors of the Registrant are elected to hold office until the next
annual meeting of the shareholders and until their respective successors have
been elected and qualified. Officers of the Registrant are elected by the 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 to such office or
position.
The Registrant has appointed an audit committee currently consisting of Dr.
Casement as chairman and Mr. Grunfeld and a compensation committee currently
consisting of Mr. Grunfeld as chairman and Dr. Casement.
HENRY FONG. Mr. Fong has been the President, Treasurer and a director of
the Registrant since inception. Since 1987 Mr. Fong has been the president,
chief executive officer, treasurer and a director of Roadmaster Industries, Inc.
a publicly-held investee of the Registrant. Mr. Fong has also been a director of
Roadmaster Corporation since August 1987, Hamilton Lamp Corporation since
October 1989 and Flexible Flyer Industries, Inc. since September 1994. Since
February 1991, Mr. Fong has served as the Chairman of the Board of Directors and
Treasurer of MacGregor Sports and Fitness Inc., a publicly-held company engaged
19
<PAGE>
in the business of marketing and distributing a broad range of sports,
recreational and fitness products under the MacGregor trademark. MacGregor
Sports and Fitness, Inc. was formed for the purpose of acquiring, and, in fact,
did in May 1991 acquire certain of the assets of MGS Acquisitions, Inc. in that
company' s Chapter 11 bankruptcy proceedings. 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 is a certified
public accountant. In March 1994, Mr. Fong was one of twelve CEO's selected as
Silver Award winners in FINANCIAL WORLD magazine's corporate American "Dream
Team."
THOMAS B. OLSON. Mr. Olson has been Secretary of the Registrant since
January 1988. Since February 1990, Mr. Olson has been a director, and since May
1994 Secretary, of Immune Response, Inc. a publicly held investee of the
Registrant formerly engaged in laboratory medical testing and related research
activities but which now is seeking other business opportunities. Mr. Olson has
attended Arizona State University and the University of Colorado at Denver.
RUSSELL L. CASEMENT. Dr. Casement has been a director of the Registrant
since February 1989. In 1994, Dr. Casement became the President of ProMark, Inc.
a privately-held investee of the Registrant which currently is inactive. Since
1969, Dr. Casement has been the president of his own private dental practice,
Russell Casement, D.D.S., P.C., in Denver, Colorado. Dr. Casement earned a
Doctor of Dental Science degree from Northwestern University in 1967. Dr.
Casement is a member of the American Dental Association, the Colorado Dental
Association and the Metro Denver Dental Association.
AARON A. GRUNFELD. Mr.Grunfeld has been a director of the Registrant since
November 1991. Mr. Grunfeld has been engaged in the practice of law for the past
25 years and has been a member of the firm of Resch, Polster, Alpert, and
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.
(b) Significant Employees
None
(c) Family Relationships
Not applicable
(d) Involvement in Certain Legal Proceedings
Not applicable
20
<PAGE>
COMPLIANCE WITH SECTION 16 OF THE SECURITIES ACT OF 1934
- --------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 ("Section 16") requires
the Registrant's officers, directors and persons who own more than ten percent
of the Registrant's voting securities to file reports of their ownership and
changes in such ownership with the Securities and Exchange Commission (the
"Commission"). Commission regulations also require that such persons provide the
Registrant with copies of all Section 16 reports they file.
Based solely upon its review of such reports received by the Registrant, or
written representations from certain persons that they were not required to file
any reports under Section 16, the Registrant believes that, during 1995, its
officers and directors have complied with all Section 16 filing requirements.
ITEM 10. EXECUTIVE COMPENSATION.
(a) General
Henry Fong, the President of the Registrant and the only officer of the
Registrant whose total compensation exceeded $100,000 for the fiscal year ended
December 31, 1995, received an annual salary of $183,013. Additionally, Mr. Fong
receives an annual bonus which equals 3% of the Registrant's total assets at
year end which bonus equaled $571,693 for the year ended December 31, 1995.
On April 1, 1992, the Registrant obtained a life insurance policy with
retirement benefits for Mr. Fong which pays his beneficiary $2,600,000 in the
event of Mr. Fong's untimely death or provides for retirement benefits for Mr.
Fong upon his retirement at or after age 65 utilizing the cash value of the
policy at that time. This benefit is being provided to Mr. Fong in consideration
of his thirteen years of service to the Registrant and in anticipation of his
serving the Registrant until retirement. The Registrant has no other retirement
or pension plan for Mr. Fong. The annual premium on this policy is $105,414 per
year for seven years until March 30, 1999, and may be considered other future
compensation to Mr. Fong. For the year ended December 31, 1995, $105,414 was
paid toward the policy and an additional $59,586 was paid to Mr. Fong for
deferred income taxes on the policy. Concurrently, the Registrant obtained a
Key-man Life Insurance policy which pays the Registrant $3,000,000 in the event
of Mr. Fong's death. The Registrant paid $11,510 on this policy in 1995 which is
not considered compensation to Mr. Fong.
(b) Summary Compensation Table
The following table sets forth information regarding compensation paid to
the officers of the Registrant during the years ended December 31, 1995, 1994
and 1993:
21
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation ($$)Long-Term
Compensation
Awards
(a) (b) (c) (d) (e) (g) (I)
Other All
Name & Annual Other
Principal Salary Bonus Compensation Options Compensation
Position Year ($) ($) ($) & SARs(#) ($)
- -------- ---- --- --- --- --------- ---
<S> <C> <C> <C> <C> <C> <C>
Henry Fong 1995 183,013 571,693 -0- -0- 165,000 <F1>
President,
Treasurer
Principal
Executive
Officer and
Accounting
Officer
Henry Fong 1994 183,013 669,536 -0- -0- 165,000 <F1>
Henry Fong 1993 183,013 703,958 -0- 413,090 165,120 <F2>
- ---------
<FN>
<F1> Includes payments and tax liability on the life insurance policy as
explained more fully in "Item 10 (a) General" above.
<F2> Includes payments and tax liability on the life insurance policy as
explained more fully in "Item 10 (a) General" above and partial use of a
Registrant owned vehicle.
</FN>
</TABLE>
(c) Option/SAR Grants Table
The Registrant made no grants of stock options or SARs during the year ended
December 31, 1995.
(d) Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End (#) at FY-End (#)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Henry Fong -0- -0- 413,090/-0- $(77,454)/-0-
</TABLE>
22
<PAGE>
(e) Long Term Incentive Plans - - Awards in Last Fiscal Year.
The Registrant has no long term incentive plans, and consequently has made
no such awards.
(f) Compensation of Directors
(1) Standard Arrangements
Beginning June 1, 1995, each independent member of the Registrant's Board of
Directors, Messrs. Russell L. Casement and Aaron A. Grunfeld, receive $10,000
per year payable monthly and $500 for each Board of Director's meeting attended
either in person or by telephone. Prior to June 1, 1995, each independent member
of the board received $1,500 for each Board of Director's meeting attended
either in person or by telephone. For the year ended December 31, 1995, Messrs.
Casement and Grunfeld each received a total of $8,833. Each member of the Board
of Directors also receives reimbursement for expenses incurred in attending
board meetings.
(2) Other Arrangements
1993 Stock Option Plan for Non-Employee Directors
During 1993, the Registrant adopted and the Registrant's stockholders
approved the Stock Option Plan for Non-Employee Directors (the "Directors'
Plan") reserving an aggregate of 500,000 shares of Common Stock for issuance
pursuant to the exercise of stock options (the "Options") which may be granted
to non-employee directors of the Registrant. The Directors' Plan is for a ten
year term commencing April 1, 1993. The Directors' Plan is designed to provide
additional incentive for such persons to become independent directors of the
Registrant, to reward independent directors for past services to the Registrant
and to encourage such persons to remain associated with the Registrant. Under
the terms of the Directors' Plan, each Non-Employee Director was automatically,
as of the effective date of the Directors' Plan, granted an option to purchase
100,000 shares of Common Stock. Each director who first becomes a Non-Employee
director after the effective date shall automatically, as of the Date 90 days
following the date such director first becomes a non-employee director, be
granted an option to purchase 100,000 shares of Common Stock. On the effective
date, options to purchase an aggregate of 200,000 shares of Common Stock under
the Director's Plan were granted to Non-Employee Directors. Both of the
Registrant's two non-employee directors were granted an option to purchase
100,000 shares of the Registrants' Common Stock for an exercise price of $1.50
per share which was the last sales price of the common stock on the grant date
of July 5, 1995, the date the Director's Plan received required approval by the
Securities and Exchange Commission. No additional options can be granted under
the Directors' Plan except to a director who first becomes a Non-Employee
Director after the effective date. No discretionary grants can be made under the
Directors' Plan.
The Directors' Plan will be administered by the Compensation Committee (the
"Committee") to be appointed by the Board or, at the Board's discretion, by the
entire Board. The Committee must consist of at least two Directors, each of whom
must be disinterested. In the absence of a designated and qualified Committee,
the entire Board must serve as the Committee. Currently, the Directors' Plan is
23
<PAGE>
administered by the entire Board. The Committee has no authority or discretion
to make additional grants under the Directors' Plan. Options granted under the
Directors' Plan are not intended to qualify for special treatment under the
Internal Revenue Code of 1986, as amended, and are intended to be non-qualified
options. The Committee may adopt, amend and rescind such rules and regulations
as in its opinion may be advisable for the administration of the Directors'
Plan.
Each option granted under the Directors' Plan shall not be exercisable for a
period of six months following the date of grant. Thereafter, 50% of the option
shall be exercisable for a period ending ten years from the date of grant and
the remaining 50% of the option shall be exercisable ratably on a monthly basis
over an 18 month period beginning on the seven month anniversary of the date of
grant and shall be exercisable for a period ending ten years from the date of
grant.
The Committee also may construe the Directors' Plan and the provisions in
the instruments evidencing Options granted under the Directors' Plan and is
empowered to make all other determinations deemed necessary or advisable for the
administration of the Directors' Plan. The Board may suspend, terminate, modify
or amend the Directors' Plan, but without the approval of the holders of a
majority of the voting shares of Common Stock represented at a meeting, and with
the approval of the Securities and Exchange Commission, the Board may not
increase the number of shares of Common Stock as to which Options may be granted
to Directors of the Company, grant eligibility to Directors not included within
the terms of the Directors' Plan prior to amendment, or increase the benefits to
be received by the Directors of the Registrant who are participants under the
Directors' Plan. The Board may not adversely affect the rights of any
participant under any unexercised Option or any portion thereof without the
consent of such participant. Unless sooner terminated by the Board, the
Directors' Plan will terminate on March 31, 2003.
The Directors' Plan provides that the purchase price per share for each
Option on the date of the grant may not be less that fair market value of the
Shares of Common Stock of the Registrant on the date of grant of the Option. The
fair market value is defined under the Plan to be the last sales price of the
Registrant's Common Stock on the date of grant as reported by NASDAQ/National
Market System. In the absence of a reported price on the date of the grant, the
Board, at its discretion, may select any reasonable method for the valuation of
the shares so long as the value is note less than the net asset value.
The term of any Option may not be greater than ten years. If an optionee
ceases to be a director of the Registrant for any reason other than death,
disability, retirement or termination for cause, the optionee may exercise all
Options within three months following such cessation to the extent exercisable
on the date of cessation. If an optionee is removed for cause, all Options held
by him/her will terminate immediately.
If an Optionee dies while a director of the Registrant, or during the three
month period following termination as a director (other than for cause), or if
the optionee retires or becomes disabled, the optionee's Options, unless
previously terminated, may be exercised, whether or not otherwise exercisable,
by the optionee or his legal representative or the person who acquires the
24
<PAGE>
Options by bequest or inheritance at any time within one year following the date
of death, disability or retirement of the optionee.
Any Option granted under the Directors' Plan is not transferable by the
optionee other than by will or by the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Internal
Revenue Code of 1986, as amended. During the lifetime of the optionee, Options
may be exercised only by the optionee, and thereafter only by his legal
representative.
(g) Employment Contracts and Termination of Employment and Change-in-Controls
Arrangements
On April 1, 1992, the Registrant obtained a life insurance policy on the
Registrant's President, Henry Fong, which policy provides for a payment to Mr.
Fong's beneficiary of $2,600,000 in the event of his untimely death or a
retirement benefit to Mr. Fong of the cash value of the policy upon Mr. Fong's
retirement from the Registrant at or after age 65 [See-Item 11. (a) "General."
above]. The Registrant has no other compensation plan or arrangement with
respect to any executive officer which plan or arrangement results or will
result from the resignation, retirement or any other termination of such
individual's employment with the Registrant. The Registrant has no plan or
arrangement with respect to any such persons which will result from a change in
control of the Registrant or a change in the individual's responsibilities
following a change in control.
(h) Report on Repricing of Options/SARs
Not applicable
ITEM 11. 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 27, 1996, as to the
beneficial ownership of shares of the Registrant's Common Stock by each person
who, to the knowledge of the Registrant 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 of the Registrant and all persons as a group who are officers and
directors of the Registrant and as to the percentage of outstanding shares so
held by them at March 27, 1996. All of the share amounts listed below have been
adjusted to reflect the one for two (1 for 2) reverse split of the Registrant's
common stock which took effect on January 2, 1996 as explained more fully in
Part 1. Item 1(a) Business Development.
25
<PAGE>
<TABLE>
<CAPTION>
Name and address Amount and Nature of
of beneficial owner Beneficial Ownership <F1> Percent of Class
- ------------------- ------------------------- ----------------
<S> <C> <C>
Henry Fong 524,829 <F2> 15.3%
7315 East Peakview Avenue
Englewood, Colorado 80111
Unnamed Association 187,500 5.8%
of Persons
c/o Gary L. Blum, Esq.
9595 Wilshire Blvd., Suite 511
Beverly Hills, California 90212
Russell L. Casement 75,000 <F3> 2.3%
1355 S. Colorado Blvd., Suite 320
Denver, Colorado 80222
Aaron A. Grunfeld 59,800 <F3> 1.8%
10390 Santa Monica Blvd, Fourth Floor
Los Angeles, California 90025
All officers and directors 664,629 <F2><F3><F4> 18.8%
as a group (four persons)
- ----------
<FN>
<F1> The beneficial owners exercise sole voting and investment power.
<F2> Includes 206,545 shares underlying options granted under the Registrant's
1993 Stock Option Plan.
<F3> Includes 50,000 shares underlying options granted under the Registrant's
1993 Stock Option Plan for Non-Employee Directors. [See also Item 10 (f)(2)
"Other Arrangements"]
<F4> Includes 5,000 shares underlying options granted under the Registrant's
1993 Stock Option Plan.
</FN>
</TABLE>
(c) Changes in Control.
The Registrant does not know of any arrangements, the operation of which
may, at a subsequent date, result in a change in control of the Registrant.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(a) Transactions with Management and Others.
The Registrant currently leases approximately 1,800 square feet of office
space in Greenwood Executive Park, 6400 South Quebec, Englewood, Colorado, from
a partnership in which its president and his wife are sole partners, on terms
comparable to the existing market for similar facilities. [See also Part I Item
2. Description of Property]
26
<PAGE>
During the year ended December 31, 1995, the President of the Registrant and
his wife made three separate loans totaling $125,000 to the Registrant. These
loans were due on demand and carried an interest rate of 10% per annum. The
loans were repaid with interest prior to December 31, 1995.
(b) Information which May be Excluded
Not applicable
(c) Parents of Registrant
Not applicable
(d) Transactions with Promoters
Not applicable
27
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report immediately
following the signature page.
1. Financial Statements and Supplementary Data.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants F-1
Statements of Assets and Liabilities at
December 31, 1995, and 1994.................................. F-3
Schedule of Investments at December 31, 1995
and December 31, 1994........................................ F-5
Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1995 and 1994....................... F-11
Statements of Operations for the Years ended
December 31, 1995 and 1994................................... F-13
Statements of Cash Flows for the Years Ended
December 31, 1995 and 1994................................... F-15
Notes to Financial Statements................................. F-17
</TABLE>
2. Financial Statements Schedules.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Schedule II - Valuation and Qualifying Accounts and Reserves.. S-1
</TABLE>
3. Exhibits.
<TABLE>
<S> <C>
3.1 Articles of Incorporation <F1>
3.2 Bylaws <F1>
10.5 1993 Stock Option Plan <F2>
10.6 1993 Stock Option Plan for Non-Employee Directors <F2>
10.7 Custody Agreement between Colorado National Bank
and the Registrant <F2>
- ----------
<FN>
<F1> Incorporated by reference from the like numbered exhibits filed with the
Registrant's Registration Statement on Form S-18, No. 2-82104-D effective April
11, 1983.
<F2> Incorporated by reference form the like numbered exhibits filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.
</FN>
</TABLE>
(b) Reports on Form 8-K.
A report on Form 8-K under Item 5. "Other Events" dated December 18, 1995
was filed during the quarter covered by this report relating to the Registrant's
Annual Meeting of Shareholders held December 18, 1995.
28
<PAGE>
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: March 29, 1996
--------------
EQUITEX, INC.
(Registrant)
By /S/ HENRY FONG
----------------------------
Henry Fong, President
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: March 29, 1996 /S/ HENRY FONG
-------------- ----------------------------
Henry Fong, President,
Treasurer and Director
(Principal Executive, Financial,
and Accounting Officer)
Date: March 29, 1996 /S/ RUSSELL L. CASEMENT
-------------- ----------------------------
Russell L. Casement, Director
Date: March 29, 1996 /S/ AARON A. GRUNFELD
-------------- ----------------------------
Aaron A. Grunfeld, Director
29
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Equitex, Inc.
We have audited the accompanying statements of assets and liabilities and
schedule of investments of Equitex, Inc. as of December 31, 1995 and 1994 and
the related statements of changes in stockholders' equity, operations and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 1995 and 1994 financial statements referred to above
present fairly, in all material respects, the financial position of Equitex,
Inc. at December 31, 1995 and 1994 and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
As explained more fully in Note 1b., the financial statements at December
31, 1995 and 1994 include securities and receivables, valued at $3,006,173
(25.2% of net assets) and $1,940,005 (14.2% of net assets), respectively, whose
values have been estimated by the Board of Directors in the absence of readily
attainable market values. We have reviewed the procedures used by the Board of
Directors in arriving at its estimate of value of such securities and
receivables and have inspected underlying documentation, and, in the
circumstances, we believe the procedures are reasonable and the documentation
appropriate. However, because of the inherent uncertainty of valuation of
restricted securities and receivables, those estimated values may differ
significantly from the values that would have been used had a ready market for
the restricted securities and receivables existed, and had the precise
recoverability of the receivables been determinable; and the differences could
be material.
(Continued)
F-1
<PAGE>
Report of Independent Certified Public Accountants
Page Two
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule on S-1 is presented for the
purpose of complying with the Securities and Exchange Commission's rules and is
not a required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, fairly states in all material respects the 1995
and 1994 financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
Davis & Co., CPAs, P.C.
Certified Public Accountants
Englewood, Colorado
March 22, 1996
F-2
<PAGE>
EQUITEX, INC.
Statements of Assets and Liabilities
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
ASSETS
- ------
Investments, at fair value:
Securities (cost of $3,470,057 and
$3,347,750 in 1995 and 1994, respectively) .... $18,376,939 $19,298,417
Notes receivable, net of allowance
for uncollectible accounts of $136,545
and $636,545 in 1995 and 1994, respectively ... 126,195 626,010
Accrued interest receivable, net of
allowance for uncollectible interest of
$120,617 and $105,690 in 1995 and
1994, respectively ............................ 120,031 105,236
Trade receivables, net of allowance
for uncollectible accounts of $7,095
and $6,346 in 1995 and 1994, respectively ..... 58,440 29,239
----------- -----------
18,681,605 20,058,902
Cash ............................................. 176,752 18,043
Accounts receivable - brokers .................... 918 1,474
Income taxes refundable .......................... 166,609 134,631
Furniture and equipment, net of
accumulated depreciation of $111,615
and $103,859 in 1995 and 1994, respectively ... 21,041 27,588
Other ............................................ 9,533 12,700
----------- -----------
$19,056,458 $20,253,338
=========== ===========
</TABLE>
(Continued)
The accompanying notes are a part of this statement.
F-3
<PAGE>
EQUITEX, INC.
Statements of Assets and Liabilities
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
LIABILITIES AND NET ASSETS
Liabilities
Accounts payable and other
accrued liabilities ......................... $ 220,628 $ 430,255
Accounts payable to brokers ................... 889,841 --
Accrued bonus to officer ...................... 530,379 455,287
Deferred revenue .............................. -- 19,826
Deferred income taxes ......................... 5,498,778 5,651,252
----------- -----------
7,139,626 6,556,620
Commitments and contingencies (Notes 4, 7, 8 and 9)
Net Assets
Preferred stock, par value $.01;
2,000,000 shares authorized; no
shares issued
Common stock, par value $.01;
15,000,000 shares authorized;
6,448,930 shares issued;
6,435,230 shares outstanding ................ 64,489 64,489
Additional paid-in capital .................... 4,447,175 4,452,053
Retained earnings
Accumulated deficit prior to
becoming a BDC ............................ (118,874) (118,874)
Accumulated net investment loss ............. (11,439,353) (10,369,823)
Accumulated net realized gains from
sales and permanent write-downs
of investments ............................ 9,895,044 9,863,812
Unrealized net gains on investments
(net of deferred income taxes of
$5,813,684 and $6,120,760 in 1995
and 1994, respectively) ................... 9,093,197 9,829,907
Less: treasury stock at cost
(13,700 shares) ........................... (24,846) (24,846)
----------- -----------
11,916,832 13,696,718
----------- -----------
$19,056,458 $20,253,338
=========== ===========
</TABLE>
The accompanying notes are a part of this statement.
F-4
<PAGE>
EQUITEX, INC.
Schedule of Investments
December 31, 1995
<TABLE>
<CAPTION>
Number Cost
of and/or Fair
Company Shares Owned Equity Value
- ------- ------------ ------ -----
<S> <C> <C> <C>
CONTROLLED COMPANIES
Common Stocks, Units and Warrants -
Public Market Method of Valuation (c)(e)
- ------------------------------------------
MacGregor Sports & Fitness, Inc.
Sporting Goods 1,180,566(c) $ 11,737 $ 2,479,189
150,000(b) 150,000 354,375
513,480 532,024 1,317,181
47,000 units 101,111 229,125
40,000 warrants 10,404 67,500
Preferred Stock - Private Market
Method of Valuation (e)
- --------------------------------
MacGregor Sports & Fitness
Sporting Goods 1,000 Series C(c) 500,000 2,100,000
AFFILIATED COMPANIES
Common Stocks - Public Market
Method of Valuation (c)(e)
- -----------------------------
Roadmaster Industries, Inc.
Manufacturer of Bicycles, Junior
Wheel Goods and Fitness Equipment 5,100,000(c) 1,093,702 10,901,250
5,437(b) 10,000 11,622
Other - Public Market Method
of Valuation
- ----------------------------
Roadmaster Industries, Inc.
Manufacturer of Bicycles, Jr. Sr. Subordinated
Wheel Goods and Fitness Equip. Notes-11.75% 37,793 34,876
Subordinated
Debentures-8% 88,116 84,000
Sub-Total-CONTROLLED AND ----------- -----------
AFFILIATED COMPANIES $ 2,534,887 $17,579,118
----------- -----------
UNAFFILIATED COMPANIES
Common Stocks - Public Market
Method of Valuation
- -----------------------------
Diametrics Medical
Medical Technology 20,000 204,387 97,500
Cambridge Holdings
Real Estate 87,209 34,000 29,974
Therapy Lasers
Medical Products 96 1,217 12
Meditech Pharmaceuticals, Inc.
Antiviral Products 500,000 40,000 5,000
Meteor Industries
Petroleum Distributor 15,120 68,257 30,240
Racotek
Medical Technology 10,000 63,129 52,500
Audio King
Consumer Electronics 25,000 65,629 62,500
</TABLE>
(Continued)
F-5
<PAGE>
EQUITEX, INC.
Schedule of Investments (Page 2)
December 31, 1995
<TABLE>
<CAPTION>
Number Cost
of and/or Fair
Company Shares Owned Equity Value
- ------- ------------ ------ -----
<S> <C> <C> <C>
UNAFFILIATED COMPANIES (Continued)
Common Stocks - Public Market
Method of Valuation
- ----------------------------------
Health Tech International
Employee Testing Systems 100 $ 156,527 $ 3,925
LaMan Corporation
Manufacturer-Decontamination Devices 8,500 units 55,250 19,125
28,000 61,264 31,500
Boca Raton Capital
Capital Formation 4,000 20,135 9,000
LaBarge, Inc.
Manufacturing Electronic
Devices/Cables 10,000 11,875 35,000
Skydoor, Inc.
Entertainment 50,000(b) 50,000 18,750
Common Stocks - Private Market
Method of Valuation (a)(e)
- ------------------------------
All Systems Go
Software Development 20,000(b) 25,000 25,000
Mesquite Gaming
Gaming Development 10,000(b) 38,500 38,500
Ocean Power Technology
Energy Development 35,714(b) 40,000 89,285
100,000 -- 250,000
Warrants (f)(e)
- ---------------
Nations Mart
Mass Merchant Consumer Services 10,000 -- 10
----------- -----------
Sub-total
UNAFFILIATED COMPANIES 935,170 797,821
----------- -----------
Total
ALL COMPANIES $ 3,470,057 $18,376,939
=========== ===========
</TABLE>
(Continued)
F-6
<PAGE>
EQUITEX, INC.
Schedule of Investments (Page 3)
December 31, 1995
Restrictions as to Resale
- -------------------------
(a) Non-public company whose securities are privately owned. The Board of
Directors determines fair value in good faith using cost information, but also
taking into consideration the impact of such factors as available financial
information of the investee, the nature and duration of any restrictions on
resale, and other factors which influence the market in which a security is
purchased and sold.
(b) May be sold under the provisions of Rule 144 of the Securities Act of 1933
after an initial two year holding period expires.
(c) Since the Company is a greater than five percent shareholder, it may be
affected by a sales limitation of one percent of the investee's outstanding
common stock during any three-month period.
(e) Since these securities have certain restrictions as to resale, the Board of
Directors determines fair value in good faith using public market information,
but also taking into consideration the impact of such factors as available
financial information of the investee, the nature and duration of restrictions
on the disposition of securities, and other factors which influence the market
in which a security is purchased and sold.
(f) Valued at higher of cost or fair market value of underlying stock less
exercise price, subject to valuation adjustments as determined in good faith by
the Board of Directors, taking into consideration the impact of such factors as
available financial information of the investee, the nature and duration of any
restrictions on resale, and other factors which influence the market in which a
security is purchased and sold.
The accompanying notes are a part of this statement.
F-7
<PAGE>
EQUITEX, INC.
Schedule of Investments
December 31, 1994
<TABLE>
<CAPTION>
Number Cost
of and/or Fair
Company Shares Owned Equity Value
- ------- ------------ ------ -----
<S> <C> <C> <C>
AFFILIATED COMPANIES
Common Stocks - Public Market
Method of Valuation (c)(e)
- -----------------------------
Roadmaster Industries, Inc.
Manufacturer of Bicycles, Junior
Wheel Goods and Fitness Equipment 5,085,000(c) $ 1,047,913 $17,161,875
5,437(b) 10,000 18,350
MacGregor Sports & Fitness, Inc.
Sporting Goods 1,220,566(c) 12,135 680,893
(formerly Sports Acquisition Corp.) 150,000(b) 150,000 83,678
333,480 338,062 186,033
22,000 units 63,915 16,362
40,000 warrants 10,404 1,314
----------- -----------
Sub-Total
AFFILIATED COMPANIES 1,632,429 18,148,505
----------- -----------
UNAFFILIATED COMPANIES
Common Stocks - Public Market
Method of Valuation
- -----------------------------
Ajay Sports, Inc.
Manufacture/Market-Golf Products 35,000 29,750 13,125
Actava Group, Inc.
Consumer Goods 14,000 107,786 131,250
Gaming Corporation of America
Casino Development 156,862 249,999 176,470
Greenwich Air Services
Airplane Engine Repair 37,000 326,753 222,000
Winners Entertainment
Gaming Development 125,000 250,000 148,437
Cambridge Holdings
Real Estate 87,209 34,000 24,527
Medici
Medical Products 96 1,217 12
Meditech Pharmaceuticals, Inc.
Antiviral Products 500,000 40,000 10,000
Meteor Industries
Petroleum Distributor 17,000 82,884 80,750
Nations Mart
Mass Merchant Consumer Services 15,000(b) units 105,000 11,750
</TABLE>
(Continued)
F-8
<PAGE>
EQUITEX, INC.
Schedule of Investments (Page 2)
December 31, 1994
<TABLE>
<CAPTION>
Number Cost
of and/or Fair
Company Shares Owned Equity Value
- ------- ------------ ------ -----
<S> <C> <C> <C>
UNAFFILIATED COMPANIES (Continued)
Common Stocks - Public Market
Method of Valuation
- -----------------------------
USA Health Tech
Employee Testing Systems 78,478 156,527 9,810
LaMan Corporation
Manufacturer-Decontamination Devices 8,500 units 55,250 6,290
36,000 78,770 13,500
Boca Raton Capital
Capital Formation 4,000 20,135 8,000
LaBarge, Inc.
Manufacturing Electronic Devices/Cable 20,000 23,750 24,750
Vegas Chips
Gaming Technology Development 50,000(b) 50,000 30,938
Touchstone Software
Software Development 20,000 -- 26,250
Common Stocks - Private Market
Method of Valuation (a)(e)
- ------------------------------
All Systems Go
Software Development 20,000(b) 25,000 25,000
Mesquite Gaming
Gaming Development 10,000(b) 38,500 38,500
Ocean Power Technology
Energy Development 35,714(b) 40,000 38,928
100,000 -- 109,000
Warrants (f)(e)
- ---------------
LaBarge, Inc.
Manufacturing Electronic
Devices/Cables 7,500 -- --
Nations Mart
Mass Merchant Consumer Services 10,000 -- 625
----------- -----------
Sub-total
UNAFFILIATED COMPANIES 1,715,321 1,149,912
----------- -----------
Total
ALL COMPANIES $ 3,347,750 $19,298,417
=========== ===========
</TABLE>
(Continued)
F-9
<PAGE>
EQUITEX, INC.
Schedule of Investments (Page 3)
December 31, 1994
Restrictions as to Resale
- -------------------------
(a) Non-public company whose securities are privately owned. The Board of
Directors determines fair value in good faith using cost information, but also
taking into consideration the impact of such factors as available financial
information of the investee, the nature and duration of any restrictions on
resale, and other factors which influence the market in which a security is
purchased and sold.
(b) May be sold under the provisions of Rule 144 of the Securities Act of 1933
after an initial two year holding period expires.
(c) Since the Company is a greater than five percent shareholder, it may be
affected by a sales limitation of one percent of the investee's outstanding
common stock during any three-month period.
(e) Since these securities have certain restrictions as to resale, the Board of
Directors determines fair value in good faith using public market information,
but also taking into consideration the impact of such factors as available
financial information of the investee, the nature and duration of restrictions
on the disposition of securities, and other factors which influence the market
in which a security is purchased and sold.
(f) Valued at higher of cost or fair market value of underlying stock less
exercise price, subject to valuation adjustments as determined in good faith by
the Board of Directors, taking into consideration the impact of such factors as
available financial information of the investee, the nature and duration of any
restrictions on resale, and other factors which influence the market in which a
security is purchased and sold.
The accompanying notes are a part of this statement.
F-10
<PAGE>
EQUITEX, INC.
Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
Accumulated
(Deficit)
Additional Prior to
Common Stock Treasury Paid-in Becoming
Shares Amount Stock Capital a BDC
--------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at Dec. 31, 1993 6,293,742 $62,937 $ (24,846) $4,108,005 $(118,874)
Issuance of common stock
in January 1994 in
exchange for cash of
$2.16 per share ...... 110,000 1,100 236,500
Issuance of common stock
in June 1994 at $2.39
per share to officer/
director in exchange
for note ............. 45,188 452 107,548
Net investment loss
Net realized gain
on investments
Unrealized gain on
investments
Balance at Dec. 31, 1994 6,448,930 64,489 (24,846) 4,452,053 (118,874)
--------- ------ -------- --------- ---------
Legal costs of
private placement .... (4,878)
Net investment loss
Net realized gain
on investments
Unrealized gain
on investments
--------- ------- ---------- ---------- ----------
Balance at Dec. 31, 1995 6,448,930 $64,489 $ (24,846) $4,447,175 $(118,874)
========= ======= ========== ========== ==========
</TABLE>
(a) Also includes permanent write-downs of investments
The accompanying notes are a part of this statement.
(Continued)
F-11
<PAGE>
EQUITEX, INC.
Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1995 and 1994
(Page 2)
<TABLE>
<CAPTION>
Accumulated
Realized Accumulated
Accumulated Net Gains Unrealized Total
Net From Sales Net Stock-
Investment of Invest- Apprec. on holders'
Loss ments(a) Investments Equity
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at Dec. 31, 1993 $ (9,254,003) $ 9,720,375 $11,731,860 $16,225,454
Issuance of common stock
in January 1994 in
exchange for cash of
$2.16 per share ...... 237,600
Issuance of common stock
in June 1994 at $2.39
per share to officer/
director in exchange
for note ............. 108,000
Net investment loss .... (1,115,820) (1,115,820)
Net realized gain ...... 143,437 143,437
on investments
Unrealized gain on
investments .......... (1,901,953) (1,901,953)
------------- ----------- ------------ -----------
Balance at Dec. 31, 1994 (10,369,823) 9,863,812 9,829,907 13,696,718
Legal costs of
private placement .... (4,878)
Net investment loss .... (1,069,530) (1,069,530)
Net realized gain
on investments ....... 31,232 31,232
Unrealized gain
on investments ....... (736,710) (736,710)
------------- ----------- ----------- ------------
Balance at Dec. 31, 1995 $(11,439,353) $ 9,895,044 $ 9,093,197 $11,916,832
============= =========== =========== ============
</TABLE>
(a) Also includes permanent write-downs of investments
The accompanying notes are a part of this statement.
F-12
<PAGE>
EQUITEX, INC
Statements of Operations
<TABLE>
<CAPTION>
For the years ended
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Revenues
Interest and dividends ......................... $ 69,465 $ 145,058
Consulting fees ................................ 163,826 183,653
Administrative fees ............................ 61,331 82,548
Miscellaneous .................................. 13,568 26,476
----------- -----------
308,190 437,735
Expenses
Salaries and consulting fees ................... 345,166 365,882
Officers' bonus ................................ 571,693 607,620
Office rent .................................... 30,871 50,180
Legal and accounting ........................... 71,150 169,512
Settlement of litigation and related costs ..... -- 99,243
Advertising and promotion ...................... 2,629 20,933
Other general and administrative ............... 203,039 220,740
Interest ....................................... 29,033 16,665
Bad debt expense ............................... 27,093 312,119
Depreciation and amortization .................. 9,650 9,527
Employee benefits .............................. 209,545 205,749
----------- -----------
1,499,869 2,078,170
----------- -----------
Net investment loss .............................. (1,191,679) (1,640,435)
----------- -----------
Net realized gain on investments and
net unrealized gain on investments:
Proceeds from sales of investments ............. 1,280,513 1,041,297
Less: cost of investments ...................... 1,249,281 876,770
----------- -----------
Realized gain from sales of investments ...... 31,232 164,527
Permanent write-down of investments ............ (--) (21,090)
----------- -----------
Realized gain on investments before
income taxes ................................. 31,232 143,437
----------- -----------
Net investment (loss) and realized gain
on investments before income taxes ........... (1,160,447) (1,496,998)
Less: income taxes (provision) benefit
Current ...................................... 151,079 131,753
Deferred....................................... (28,930) 392,862
----------- -----------
122,149 524,615
----------- -----------
</TABLE>
The accompanying notes are a part of this statement. (Continued)
F-13
<PAGE>
EQUITEX, INC
Statements of Operations (Page 2)
<TABLE>
<CAPTION>
For the years ended
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Net investment (loss) and realized gain
on investments after income taxes .............. $(1,038,298) $ (972,383)
(Decrease) in unrealized
appreciation of investments ................... (1,043,785) (2,139,454)
Less income tax benefit applicable
to (decrease) in unrealized
appreciation of investments
Deferred ................................... 307,075 237,501
----------- -----------
(736,710) (1,901,953)
----------- -----------
Net (decrease) in net assets
resulting from operations ..................... $(1,775,008) $(2,874,336)
=========== ===========
(Decrease) in net assets per
share - primary ............................... $ (.28) $ (.45)
=========== ===========
Weighted average number of common shares ......... 6,412,322 6,410,057
=========== ===========
(Decrease) in net assets per
share - fully-diluted ......................... $ (.25) $ (.41)
=========== ===========
</TABLE>
The accompanying notes are a part of this statement.
F-14
<PAGE>
EQUITEX, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net change in net assets ....................... $(1,775,008) $(2,874,336)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .............. 9,650 9,527
Provision for bad debts on notes
receivable ............................... 10,000 244,029
Realized (gain) on sale of investments ..... (31,232) (164,527)
Write-down of worthless investments ........ -- 21,090
Unrealized loss on investments ............. 1,043,785 2,139,454
Donation of stock of investee company ...... 398 1,182
Proceeds from sales of investments ............... 1,281,164 1,041,297
Purchases of investments ......................... (1,371,589) (1,111,273)
Decrease in certificates of deposit .............. -- 202,978
Issuance of notes receivable ..................... (170,185) (37,435)
Collections of notes receivable .................. 660,000 250,000
Changes in assets and liabilities:
(Increase) in interest receivable .............. (14,795) (21,736)
Decrease in accounts receivable-broker ......... 556 4,776
Decrease in accounts receivable-related entity . -- 35,305
(Increase) decrease in other assets ............ 3,167 (2,146)
(Increase) decrease in trade receivables ....... (29,201) 47,749
Decrease in accounts receivable - other ........ -- 73,440
(Increase) in income taxes refundable .......... (31,978) (134,631)
Increase (decrease) in accounts payable
and other accrued liabilities ................ (209,627) 35,893
(Decrease) in deferred revenue ................. (19,826) (39,653)
(Decrease) in accrued income taxes ............. -- (174,371)
(Decrease) in interest payable ................. -- (233)
Increase in accounts payable to brokers ........ 889,841 --
(Decrease) in deferred income taxes ............ (152,474) (599,122)
Increase in amounts due to officer ............. 75,092 183,028
----------- -----------
Net cash provided (used) by operating
activities ................................... 167,738 (869,715)
Cash flows from investing activities:
Purchase of furniture and equipment ............ (4,151) (1,634)
----------- -----------
Net cash (used) by investing activities .......... (4,151) (1,634)
</TABLE>
The accompanying notes are a part of this statement. (Continued)
F-15
<PAGE>
EQUITEX, INC.
Statements of Cash Flows (Page 2)
<TABLE>
<CAPTION>
For the years ended
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Cash flows from financing activities:
Common stock issued for cash ................... -- 237,600
Repayment of notes payable ..................... (100,000) (235,984)
Proceeds from issuance of notes payable ........ 100,000 160,000
Legal costs of private placement ............... (4,878) --
----------- -----------
Net cash provided (used) by
financing activities ......................... (4,878) 161,616
Increase (decrease) in cash ...................... 158,709 (709,733)
Cash, beginning of period ........................ 18,043 727,776
----------- -----------
Cash, end of period .............................. $ 176,752 $ 18,043
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid ................................ $ 23,141 $ 10,531
=========== ===========
Interest received ............................ $ 36,837 $ 35,426
=========== ===========
Income taxes paid (refunded) ................. $ (284,773) $ 184,235
=========== ===========
Non cash transactions:
Stock issued to officer in exchange
for note payable ............................. $ -- $ 108,000
=========== ===========
</TABLE>
The accompanying notes are a part of this statement.
F-16
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 1: SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies are as follows:
a. BUSINESS HISTORY
Equitex, Inc. (the "Company") was incorporated under the laws of the State
of Delaware on January 19, 1983. On July 30, 1984 the Company elected to become
a "Business Development Company" (BDC), as that term is defined in the Small
Business Investment Incentive Act of 1980, which Act is an amendment to the
Investment Company Act of 1940. This change resulted in the Company becoming a
specialized type of investment company. Consistent with this change in type of
business entity, the Company changed its method of valuation of investments from
cost to fair value.
b. INVESTMENT VALUATION
The fair value method adopted in 1984 provides for the Company's Board of
Directors to be responsible for the valuation of the Company's investments,
including notes receivable and interest receivable. Fair value is the value
which could reasonably be expected to be realized in a current arm's length
sale. Investments are carried at fair value using the following four basic
methods of valuation:
1. Cost - The cost method is based on the original cost to the Company
adjusted for amortization of original issue discounts, accrued interest for
certain capitalized expenditures of the corporation, and other adjustments as
determined to be appropriate by the Board of Directors in good faith taking into
consideration such factors as available financial information of the investee,
the nature and duration of any restrictions as to resale, and other factors
which influence the market in which a security is purchased and sold. Such
method is to be applied in the early stages of an investee's development until
significant positive or adverse events subsequent to the date of the original
investment require a change to another method.
2. Private market - The private market method uses actual or proposed third
party transactions in the investee's securities as a basis for valuation,
utilizing actual firm offers as well as historical transactions, provided that
any offer used is seriously considered and well documented by the investee, and
adjusted (if applicable) by the Board of Directors in good faith taking into
consideration such factors as available financial information of the investee,
the nature and duration of any restrictions as to resale, and other factors
which influence the market in which a security is purchased and sold.
3. Public market - The public market method is the preferred method of
valuation when there is an established public market for the investee's
securities. In determining whether the public market method is sufficiently
established for valuation purposes, the Company examines the trading volume, the
number of shareholders and the number of market makers in the investee's
securities, along with the trend in trading volume as compared to the Company's
proportionate share of the investee's securities. Investments in unrestricted
securities that are traded in the over-the- counter market are generally valued
at the high bid price on the last day
F-17
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 1: SIGNIFICANT ACCOUNTING POLICIES (Continued)
of the year. If the security is restricted as to resale or has significant
escrow provisions or other significant restrictions, appropriate adjustments are
determined in good faith by the Board of Directors taking into consideration
such factors as available financial information of the investee, the nature and
duration of restrictions on the ultimate disposition of securities, and other
factors which influence the market in which a security is purchased and sold.
4. Appraisal - The appraisal method is used to value an investment position
after analysis of the best available outside information where there is no
established public or private market in the investee's securities.
c. STATEMENT OF CASH FLOWS
Consistent with the reporting requirements of a BDC, cash and cash
equivalents consist only of demand deposits in banks and cash on hand. Financial
statement account categories such as investments and notes receivable, which
relate to the Company's activity as a BDC, are included as operating activities
in the statement of cash flows.
d. FURNITURE AND EQUIPMENT
Expenditures for furniture and equipment and for renewals and betterments
which extend the originally estimated economic life of assets or convert the
assets to a new use are capitalized at cost. Expenditures for maintenance,
repairs and other renewals of items are charged to expense. When items are
disposed of, the cost and accumulated depreciation are eliminated from the
accounts and any gain or loss is included in the results of operations.
The provision for depreciation is calculated using the straight-line method
over a five or seven year life.
e. SECURITIES TRANSACTIONS
Purchases and sales of securities transactions are accounted for on the
trade date which is the date the securities are purchased or sold. The cost of
securities sold is reported on the first-in first-out cost basis for financial
statement purposes.
f. REVENUE RECOGNITION
Due to the uncertainty of collection, the Company recognizes all types of
consulting fee revenues from portfolio companies (except for Roadmaster
Industries and Deucalion Research) as cash is received. All other types of
revenues are recognized on the accrual basis.
g. INCOME TAXES
The Company is not entitled to the special treatment available to regulated
investment companies and is taxed as a regular corporation for Federal and state
income tax purposes. Until 1986, the Company had made no provision for income
taxes because of financial statement and tax losses. Effective January 1, 1993,
the Company adopted FASB Statement No. 109, "Accounting for Income Taxes". The
adoption of the new accounting statement had no significant effect on the tax
provision or net income for 1993.
F-18
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 1: SIGNIFICANT ACCOUNTING POLICIES (Continued)
h. RECLASSIFICATIONS
Certain reclassifications have been made to the December 31, 1994 financial
statements to conform to the December 31, 1995 presentation.
i. NET ASSETS PER SHARE
In accordance with the fair value accounting method used by regulated
investment companies, net assets (total stockholders' equity) per share at
December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Number of Shares
Basis 1995 1994 1995 1994
- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary ................ 6,435,230 6,435,230 $ 1.73 $ 2.13
========= ========= ======== ========
Fully diluted .......... 7,058,320 7,058,320 $ 1.57 $ 1.94
========= ========= ======== ========
</TABLE>
Note 2: DETAIL OF RECEIVABLES AND SOURCES OF REVENUE
a. RECEIVABLES
Receivables are from the following types of companies at December 31, 1995
and 1994, respectively.
<TABLE>
<CAPTION>
Portfolio Companies
------------------------------------
Less
Than 5%
Controlled Affiliated Owned Total
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
1995
- ----
Notes receivable ........... $ 252,020 $ 10,250 $ 470 $ 262,740
Interest receivable ........ 240,063 532 53 240,648
Trade receivables .......... 7,469 18,368 39,698 65,535
Less: allowances for
uncollectible receivables (249,776) (13,140) (1,342) (264,258)
---------- -------- ---------- ---------
$ 249,776 $ 16,010 $ 38,879 $ 304,665
========== ======== ========== =========
1994
- ----
Notes receivable ........... $1,252,020 $ 10,535 $1,262,555
Interest receivable ........ 210,473 454 210,927
Trade receivables .......... 9,501 26,084 35,585
Less: allowances for
uncollectible receivables (736,910) (11,671) (748,581)
---------- ---------- ---------- ----------
$ $ 735,084 $ 25,402 $ 760,486
========== ========== ========== ==========
</TABLE>
Included in notes receivable and interest receivable above are amounts totaling
$492,083 and $735,084 at December 31, 1995 and 1994, respectively, which have
been valued at fair value and whose collectibility cannot be determined due to
future events (such as the success of investees' public offerings and the
ability of an investee to successfully market its licensing rights), the outcome
of which cannot be determined at this time.
F-19
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 2: DETAIL OF RECEIVABLES AND SOURCES OF REVENUE (Continued)
b. SOURCES OF REVENUES
Sources of revenues are from the following types of companies for the year
ended December 31, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
Portfolio Companies
--------------------------------
Less
Than 5%
Controlled Affiliated Owned Other Total
---------- ---------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
1995
- ----
Interest .......... $ 50,296 $ 515 $ -- $ 32,222 $ 83,033
Consulting fees ... -- 163,826 -- 240,648 163,826
Administrative fees -- 18,368 -- 55 61,331
-------- -------- ------- -------- --------
$ 50,296 $225,617 $ -- $ 32,277 $308,190
======== ======== ======= ======== ========
1994
- ----
Interest .......... $ -- $ 99,845 $22,842 $ 48,847 $171,534
Administrative fees -- 183,653 -- -- 183,653
Consulting fees ... -- 80,513 1,058 977 82,548
-------- -------- ------- -------- --------
$ -- $364,011 $23,900 $ 49,824 $437,735
======== ======== ======= ======== ========
</TABLE>
During 1995 two investee companies accounted for 65% and 16%, respectively, of
the Company's total revenues of $308,190.
Note 3: INVESTMENTS
Investments consist of holdings of securities in and receivables of
publicly and privately held companies. The Company has representation on the
boards of directors of four of its investee companies. Several investments are
in companies in which there is either direct or indirect ownership or control of
five percent or more of the outstanding voting shares.
a. INVESTMENT IN ROADMASTER INDUSTRIES, INC.
At December 31, 1993 the Company had the following options or warrants to
purchase RMI's common stock.
<TABLE>
<CAPTION>
Per Share
Number of Shares Exercise Price Expiration Date
- ---------------- -------------- ---------------
<C> <C> <C>
37,500 $1.50 January 19, 1994
</TABLE>
The warrants were exercised on January 17, 1994. Also during 1994 the
Company purchased 5,000 shares of RMI's common stock on the open market,
received 5,437 shares in exchange for 10,000 privately held shares of
International Sports & Fitness, Inc., and purchased 60,000 shares in a private
transaction with an investor. During 1995 the Company purchased 15,000 shares of
RMI on the open market and $50,000 and $100,000 (face value) of RMI's 11 3/4%
Senior Subordinated Notes and 8% Subordinated Debentures, respectively.
During each of 1995 and 1994 the Company recorded consulting fees from RMI
of $144,000. During 1995 and 1994, the Company also recorded administrative fees
from RMI totaling $60,648 and $76,629, respectively.
F-20
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 3: INVESTMENTS (Continued)
b. INVESTMENT IN MACGREGOR SPORTS & FITNESS, INC. (MACGREGOR) FORMERLY
SPORTS ACQUISITION CORPORATION (SAC)
During 1991, the Company received 1,213,511 shares of SAC common stock and
1,536,489 SAC warrants in exchange for consulting services rendered on SAC's
behalf. In January of 1992, Sports Acquisition Corporation merged with Vida
Ventures, Ltd., and formed a new entity, MacGregor Sports & Fitness, Inc., which
fully assumed SAC's obligations to the Company. The Company returned to SAC
955,049 of the SAC warrants that were not exercised by December 31, 1991. During
1992, the Company's SAC shares were converted into 1,220,556 shares of common
stock of MacGregor and the Company purchased another 27,000 shares on the open
market. During 1993, the Company purchased 150,000 shares directly from
MacGregor, 58,480 shares from another investor, and another 110,000 shares on
the open market. During 1994, the Company purchased 160,000 shares and 40,000
warrants on the open market. During 1995 the Company purchased 180,000 shares
and 25,000 units on the open market.
In 1991 the Company guaranteed a $3,500,000 term loan with SAC's lender
relative to Sports Acquisition Corporation's (SAC's) successful acquisition of
certain assets of MacGregor Sporting Goods, Inc. from U.S. Bankruptcy Court on
May 9, 1991. As guarantor of the above mentioned debt, the Company made total
debt payments of $875,010 during November and December 1991, and additional debt
payments of $375,010 during July 1992 on MacGregor's behalf. 1,077,500 and
400,000 shares of the Company's Roadmaster stock were sold relative to the debt
payments of 1991 and 1992, respectively. The Company recorded these payments as
notes receivable from MacGregor. At December 31, 1994 the balance of these notes
was $1,252,020 with related accrued interest receivable of $210,473. In May of
1995 the Company exchanged $1,000,000 of the outstanding Notes Receivable for
1,000 shares of Series C preferred stock. Starting in May of 1996, each share of
Series C preferred stock can be converted into 1,000 shares of common stock at a
per share conversion price equal to the lesser of 80% of the market price at
date of exchange or $1.00. During 1995 MacGregor both borrowed and paid back an
additional $160,000 resulting in a note balance of $252,020 at December 31, 1995
and interest receivable of $240,063.
During 1995 and 1994 the Company recorded a total of $-0- and $3,884,
respectively, from MacGregor for consulting and administrative fees. At December
31, 1995 and 1994, MacGregor owes a remaining balance for unpaid fees of
$281,500 to the Company. This balance due will not be recorded as revenue until
received pursuant to the Company's revenue recognition policy discussed in Note
1f., herein.
On January 16, 1996, MacGregor signed a definitive agreement to merge with
Technical Publishing Solutions, Inc. (TPSI) through a tax-free exchange of
common stock. After the merger, expected to be completed during the second
quarter of 1996, former MacGregor shareholders will own 45% of the combined
entity. TPSI was formed in 1990 and provides integrated solutions to large
corporations for the management and distribution of business critical
information contained in documents using proprietary and standard internet
technologies.
F-21
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 4: COMMON STOCK
a. STOCK OPTIONS
Effective April 1, 1993 the Company adopted two stock option plans: the
1993 Stock Option Plan (the "Option Plan") and the 1993 Stock Option Plan for
Non-Employee Directors (the "Directors' Plan").
Effective April 1, 1993 the Company's Board of Directors granted options to
purchase a total of 423,090 shares of common stock under the Option Plan to an
officer/director and an officer of the Company. These options are exercisable at
$1.50 per share and expire March 31, 1998. The Option Plan and the options
granted thereunder were approved by the Company's stockholders on December 28,
1993.
Under the terms of the Directors' Plan, each non-employee director of the
Company was automatically granted as of July 5, 1995, an option to purchase
100,000 shares of common stock at an exercise price of $1.50 per share. These
options expire ten years from the date of grant. The Directors' Plan and the
options granted thereunder were also approved by the Company's stockholders on
December 28, 1993.
b. TREASURY STOCK
On October 21, 1992, the Board of Directors authorized the development of a
plan whereby the Company could repurchase up to 1,000,000 shares of its own
common stock in the open market. Since then the Company has purchased 13,700
shares of its common stock on the open market for $24,846.
Note 5: INCOME TAXES
The (provision) benefit for income taxes for the years ended December 31,
1995 and 1994, consists of the following:
<TABLE>
<CAPTION>
December 31,
1995 1994
---- ----
<S> <C> <C>
Current:
Federal ......................... $ (15,530) $(109,059)
State ........................... -- --
Benefit of net operating loss
carryback/carryforward ......... 166,609 240,812
--------- ---------
Total current (provision) benefit $ 151,079 $ 131,753
========= =========
Deferred:
Accrued unpaid bonus ............. $ (59,050) $ 177,561
Bad debt expense ................. (6,113) 124,164
Previously recognized revenues ... -- (6,463)
Other ............................ 36,234 97,600
--------- ---------
Total deferred (provision) benefit $ (28,930) $ 392,862
========= =========
</TABLE>
F-22
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 5: INCOME TAXES (Continued)
Deferred taxes reflect the tax effects of differences between the amounts
recorded as assets and liabilities for financial reporting purposes and the
amounts recorded for income tax purposes. The tax effects of significant
temporary differences giving rise to deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
December 31,
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Accrued liabilities not currently deductible $ 211,846 $ 177,561
Allowance for uncollectible notes,
interest and trade receivables ............. 103,060 291,947
----------- -----------
Total deferred tax assets .................. 314,906 469,508
----------- -----------
Deferred tax liabilities:
Tax on unrealized gain on investments (5,813,684) (6,120,760)
----------- -----------
Total deferred tax liabilities ............. (5,813,684) (6,120,760)
----------- -----------
Net deferred tax liability ................. $(5,498,778) $(5,651,252)
=========== ===========
</TABLE>
A significant portion of the deferred tax assets at December 31, 1995 are
expected to be recovered through the carryback of amounts which will become
deductible when paid.
Tax years prior to 1991 are "closed" to adjustments by the running of the
statute of limitations. The Company's federal income tax return for 1991 has
been examined by the IRS with no changes. An agreement is in the process of
being finalized with the IRS Appeals Division regarding the deductibility of
certain expenses on the Company's 1992 federal income tax return. The Company
has made adequate provision for the assessment of additional taxes relative to
this agreement, which are not significant.
Note 6: RELATED PARTY TRANSACTIONS
a. OFFICE RENTAL
The Company rents office space on a month-to-month basis for $2,500 per
month from Beacon Investments, a partnership in which the Company's President
and his wife are the sole partners.
b. BONUSES TO OFFICERS
In November, 1989 the Board of Directors adopted a bonus arrangement
whereby the Company's President is entitled to an annual bonus equal to 3
percent of the Company's total assets as of each year end. All bonuses are paid
out of the Company's cash flow. The unpaid portion of these bonuses, amounts
totaling $501,482 and $455,287 have been accrued as a "Bonus to officer" in the
December 31, 1995 and 1994 balance sheets, respectively. During 1995 and 1994
the Company's Corporate Secretary also received bonuses of $20,992 and $13,496,
respectively.
c. DIRECTORS' FEES
During 1995 and 1994, respectively, the Company paid $8,833 and $6,000 to
each of its two outside directors for their attendance at the four meetings held
each year.
F-23
<PAGE>
EQUITEX, INC.
Notes to Financial Statements
Note 7: CONTINGENCIES AND COMMITMENTS
a. LITIGATION
In September, 1990 a civil complaint was filed against the Company and one
of its officers and directors, among others, in which monetary relief and
statutory interest was being sought, and a civil penalty was also being sought
against one of its officers and directors. This complaint was settled out of
court by the officer/director for $128,387 on August 19, 1994. Pursuant to the
indemnification provisions contained in the Company's Certificate of
Incorporation, the Company indemnified Henry Fong, an officer of the Company,
with respect to $99,243 of the aforementioned settlement and certain legal fees
incurred. Other litigation relating to a portfolio company was also settled out
of court for $75,000, which was paid on May 2, 1994.
b. PLEDGES OF INVESTEE COMMON STOCK
As of December 31, 1995, 400,000 shares of the Company's Roadmaster common
stock were pledged to be committed to escrow for a period of five years under a
performance guarantee clause in the Letter of Merger Intent between MacGregor
and TPSI. See Note 3b., herein. This commitment will be effected only if the two
entities merge. The Company's President is also the Chairman of the Board of
MacGregor.
Note 8: OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
The Company is party to financial instruments with off-balance-sheet risk
in the normal course of business to meet financing needs of its portfolio
companies. These financial instruments consist primarily of financial guarantees
including pledges of the Company's investment portfolio. These instruments
involve, to varying degrees, elements of credit risk in excess of the amount
recognized in the financial statements.
Financial guarantees are conditional commitments issued by the Company to
guarantee the payment of certain liabilities of portfolio companies to third
parties.
These guarantees are issued primarily to support borrowing arrangements,
and are scheduled to expire, subject to extension as follows:
<TABLE>
<CAPTION>
Expiration Maximum
Type of Guarantee Date Credit Loss
- ----------------- ---------- -----------
<S> <C> <C>
Guarantee of certain indebtedness
of Roadmaster under an Urban
Development Action Grant agreement
dated August 30,1983 2003 $1,118,000
</TABLE>
F-24
<PAGE>
EQUITEX, INC.
Notes to Financial Statements
Note 8: OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (Continued)
At December 31, 1995, the Company's primary concentration of credit risk
relates to its notes receivable (and related accrued interest receivable), which
are generally unsecured and its investments in certain portfolio companies,
certain of which are highly leveraged companies within the United States and
which are involved in the sporting goods and manufacturing industries.
Consideration was given to the financial position of these portfolio companies
when determining the appropriate fair values at December 31, 1995 and 1994.
Note 9: RETIREMENT PLAN FOR OFFICER
As part of the President's total compensation package, the Company
purchased a whole life insurance policy on April 1, 1992 in order to provide
compensation for the President's retirement. The Company pays an annual premium
of $105,413 per year for 7 years on behalf of the President and also reimburses
the President each year for the personal income tax on this additional
compensation.
Should the President die prior to age sixty-five, the policy pays a
$2,601,139 death benefit to his spouse. Upon retirement, provided the President
is at least age sixty-five, the cash surrender value and death benefit rider
become the President's property.
For the year ended December 31, 1995, the Company paid $105,413 in premiums
and $59,586 of additional compensation to the President for related income
taxes.
Note 10: SUBSEQUENT EVENT - REVERSE STOCK SPLIT
At a meeting which occurred on December 18, 1995, the Company's
stockholders approved a reverse stock split effective January 2, 1996, whereby
each two shares of $.01 par value common stock will be exchanged for one share
of $.02 par value common stock.
F-25
<PAGE>
EQUITEX, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- -------- -------- --------
Additions
---------
Balance Charged Balance
Beginning Charged to Other at End
of to Costs/ Accounts- Deduc- of
Period Expenses Describe tions Period
--------- --------- -------- ------ ------
For the year ended
Dec. 31, 1995:
Allowance for un-
collectible accounts
Notes receivable ..... $636,545 $ 10,000 $ $510,000 $136,545
Interest receivable .. 105,690 16,344 1,417 120,617
Accounts receivable .. 6,346 749 7,095
For the year ended
Dec. 31, 1994:
Allowance for un-
collectible accounts
Notes receivable ..... $392,517 $244,028 $ $ $636,545
Interest receivable .. 33,312 72,378 105,690
Accounts receivable .. 4,384 1,962 6,346
The accompanying notes are a part of this schedule.
S-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Registrant's Annual Report on 10-KSB
for the year ended December 31, 1995 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 176,752
<SECURITIES> 18,376,939
<RECEIVABLES> 569,841
<ALLOWANCES> 264,257
<INVENTORY> 0
<CURRENT-ASSETS> 18,859,275
<PP&E> 132,656
<DEPRECIATION> 111,615
<TOTAL-ASSETS> 19,056,458
<CURRENT-LIABILITIES> 1,640,840
<BONDS> 0
0
0
<COMMON> 64,489
<OTHER-SE> 11,852,343
<TOTAL-LIABILITY-AND-EQUITY> 19,056,458
<SALES> 0
<TOTAL-REVENUES> 339,422
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,443,743
<LOSS-PROVISION> 27,093
<INTEREST-EXPENSE> 29,033
<INCOME-PRETAX> (1,160,447)
<INCOME-TAX> (122,149)
<INCOME-CONTINUING> (1,038,298)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,038,298)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.25)
</TABLE>
