UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended SEPTEMBER 30, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to_________
Commission File No. 0-12374
EQUITEX, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 84-0905189
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7315 East Peakview Avenue
Englewood, Colorado 80111
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(303) 796-8940
---------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Number of shares of common stock outstanding at November 12, 1997: 3,191,115
<PAGE>
EQUITEX, INC.
Part 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The accompanying interim unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-QSB and do not include
all the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included, and the disclosures are adequate to
make the information presented not misleading. Operating results for the nine
months ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1997. These statements
should be read in conjunction with the financial statements and notes thereto
included in the Annual 10-KSB Report (filed with the Securities and Exchange
Commission) for the year ended December 31, 1996.
F-1
<PAGE>
EQUITEX, INC.
Statements of Assets and Liabilities
SEPT. 30, DEC. 31,
1997 1996
(Unaudited)
ASSETS
Investments, at fair value:
Securities (cost of $3,324,879 and
$3,767,309 in 1997 and 1996, respectively) .... $ 5,424,489 $10,138,562
Notes receivable, net of allowance
for uncollectible accounts of $100
at December 31, 1996 .......................... 45,000 20,250
Accrued interest receivable, net of
allowance for uncollectible interest of $35 ... 1,782 1,902
Trade receivables, net of allowance
for uncollectible accounts of $9,980 and
$2,943 in 1997 and 1996, respectively ......... 10,284 39,623
----------- -----------
5,481,555 10,200,337
Cash - unrestricted .............................. 21,747 53,795
Restricted cash held in escrow ................... 300,000
Accounts receivable - brokers .................... 774 4,766
Income taxes refundable .......................... 2,150 166,609
Furniture and equipment, net of
accumulated depreciation of $114,985
and $106,362 in 1997 and 1996, respectively ... 30,097 38,720
Prepaid expenses ................................. 39,779 13,776
----------- -----------
$ 5,876,102 $10,478,003
=========== ===========
(Continued)
The accompanying notes are a part of this statement.
F-2
<PAGE>
EQUITEX, INC.
Statements of Assets and Liabilities
SEPT. 30, DEC. 31,
1997 1996
(Unaudited)
LIABILITIES AND NET ASSETS
Liabilities
Notes payable to officer ...................... $ 321,519 $ --
Notes payable - others ........................ 100,000 --
Accounts payable and other
accrued liabilities ......................... 92,963 55,441
Accrued liability - indemnification agreement . 564,755
Accounts payable to brokers ................... 684,618 739,023
Accrued bonus to officer ...................... 273,568 148,106
Deferred income taxes ......................... 313,569 2,274,650
----------- -----------
2,350,992 3,217,220
Net Assets
Preferred stock, par value $.01;
2,000,000 shares authorized; no
shares issued
Common stock, par value $.02;
7,500,000 shares authorized;
3,224,465 shares issued;
3,191,115 shares outstanding ................ 64,489 64,489
Additional paid-in capital .................... 4,447,175 4,447,175
Retained earnings
Accumulated deficit prior to
becoming a BDC ............................ (118,874) (118,874)
Accumulated net investment loss ............. (13,392,843) (12,025,669)
Accumulated net realized gains from
sales and permanent write-downs
of investments ............................ 11,046,438 11,121,234
Unrealized net gains on investments
(net of deferred income taxes of
$475,478 and $2,484,788 in 1997
and 1996, respectively) ................... 1,592,762 3,886,465
Less: treasury stock at cost
(33,350 shares) ........................... (114,037) (114,037)
----------- -----------
3,525,110 7,260,783
----------- -----------
$ 5,876,102 $10,478,003
=========== ===========
The accompanying notes are a part of this statement.
F-3
<PAGE>
EQUITEX, INC.
Schedule of Investments
September 30, 1997
(Unaudited)
<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)
IntraNet Solutions, Inc. (formerly
MacGregor Sports & Fitness, Inc.)
Document management services,
web-based internet software,
electronic document management
and demand printing ................. 645,085 $ 1,417,610 $ 4,719,610
RDM Sports Group (formerly
Roadmaster Industries, Inc.)
Manufacturer of fitness
equipment and juvenile products ....... 4,979,437 1,088,815 4,481
OTHER - PUBLIC MARKET METHOD
OF VALUATION
RDM Sports Group 8% Convertible
Manufacturer of fitness Subordinated
equipment and juvenile products ....... Debentures 150,682 7,000
----------- -----------
Sub-Total
AFFILIATED COMPANIES ................. 2,657,107 4,731,091
----------- -----------
UNAFFILIATED COMPANIES
COMMON STOCKS - PUBLIC MARKET
METHOD OF VALUATION
IVI Publishing
Publishing technology ................. 25,000 116,881 64,063
Racotek
Medical technology .................... 75,000 377,391 150,000
NevStar Gaming Corporation
Gaming development .................... 7,000 38,500 45,000
</TABLE>
(Continued)
The accompanying notes are a part of this statement.
F-4
<PAGE>
EQUITEX, INC.
Schedule of Investments (Page 2)
September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
NUMBER COST
OF AND/OR FAIR
COMPANY SHARES OWNED EQUITY VALUE
- ------- ------------ ------ -----
<S> <C> <C> <C>
COMMON STOCKS - PRIVATE MARKET
METHOD OF VALUATION (a)(e)
All Systems Go
Software development .................. 20,000(b) 25,000 25,000
Ocean Power Technology
Alternative energy
research and development .............. 35,714(b) 40,000 89,285
100,000 -- 250,000
Gain, Inc. ..............................
Male vascular devices ................. 20,000(b) 50,000 50,000
Juice Island
Health food stores .................... 10,000(b) 20,000 20,000
WARRANTS (f)(e)
Nationsmart
Consumer services ..................... 10,000 -- 50
Juice Island
Health food stores .................... 2,500 -- --
--------------- ----------- -----------
Sub-total
UNAFFILIATED COMPANIES ................ 667,772 693,398
----------- -----------
Total
ALL COMPANIES ......................... $ 3,324,879 $ 5,424,489
=========== ===========
</TABLE>
(Continued)
The accompanying notes are a part of this statement.
F-5
<PAGE>
EQUITEX, INC.
Schedule of Investments (Page 3)
September 30, 1997
(Unaudited)
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 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 certain of 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-6
<PAGE>
EQUITEX, INC.
Schedule of Investments
December 31, 1996
<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)
IntraNet Solutions, Inc. (formerly
MacGregor Sports & Fitness, Inc.)
Document management services,
web-based internet software,
electronic document management
and demand printing ................. 645,085 $ 1,417,610 $ 3,193,171
RDM Sports Group (formerly
Roadmaster Industries, Inc.)
Manufacturer of fitness
equipment and juvenile products ....... 5,142,037 1,149,559 5,789,367
OTHER - PUBLIC MARKET METHOD
OF VALUATION
RDM Sports Group 8% Convertible
Manufacturer of fitness Subordinated
equipment and juvenile products ....... Debentures 150,682 130,375
----------- -----------
Sub-Total
AFFILIATED COMPANIES ................. 2,717,851 9,112,913
----------- -----------
UNAFFILIATED COMPANIES
COMMON STOCKS - PUBLIC MARKET
METHOD OF VALUATION
Diametrics Medical
Medical equipment ..................... 10,000 76,883 42,500
Cambridge Holdings
Real estate - commercial .............. 87,209 34,000 54,506
IVI Publishing
Publishing technology ................. 30,000 171,258 93,750
Meditech Pharmaceuticals, Inc.
Antiviral products .................... 500,000 40,000 13,750
Meteor Industries
Petroleum distributor ................. 5,120 19,502 25,920
Racotek
Medical technology .................... 50,000 317,387 212,500
Audio King
Consumer electronics .................. 12,000 31,543 13,500
</TABLE>
(Continued)
F-7
<PAGE>
EQUITEX, INC.
Schedule of Investments (Page 2)
December 31, 1996
<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
Frontier Airlines
Commercial air carrier ................ 10,000 92,520 32,500
LaMan Corporation
Manufacturer - decontamination
devices ............................... 29,400 61,265 36,750
Las Vegas Discount Golf
and Tennis
Sporting goods retailer ............... 30,000 31,600 27,188
COMMON STOCKS - PRIVATE MARKET
METHOD OF VALUATION (a)(e)
All Systems Go
Software development .................. 20,000(b) 25,000 25,000
NevStar Gaming Corporation 10,000 Series
Gaming development .................... A preferred 38,500 38,500
Ocean Power Technology
Alternative energy
research and development .............. 35,714(b) 40,000 89,285
100,000 -- 250,000
Gain, Inc. ..............................
Male vascular devices ................. 20,000(b) 50,000 50,000
Juice Island
Health food stores .................... 10,000(b) 20,000 20,000
WARRANTS (f)(e)
Juice Island
Health food stores .................... 2,500 -- --
--------------- ----------- -----------
Sub-total
UNAFFILIATED COMPANIES ................ 1,049,458 1,025,649
----------- -----------
Total
ALL COMPANIES ......................... $ 3,767,309 $10,138,562
=========== ===========
</TABLE>
(Continued)
F-8
<PAGE>
EQUITEX, INC.
Schedule of Investments (Page 3)
December 31, 1996
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 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 certain of 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.
F-9
<PAGE>
EQUITEX, INC.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPT. 30, SEPT. 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Interest and dividends .......................... $ 130 $ 16,071 $ 30,731 $ 195,729
Consulting fees ................................. -- -- -- 281,500
Administrative fees ............................. 43 18,211 26,315 48,532
Miscellaneous ................................... 652 325 67,112 9,184
Gain on sale of fixed assets .................... -- 8,334 -- 8,334
----------- ----------- ----------- -----------
825 42,941 124,158 543,279
Expenses
Salaries and consulting fees .................... 87,147 73,503 241,017 246,949
Officer's bonus ................................. (16,120) 28,963 125,462 331,397
Office rent ..................................... 11,724 7,500 26,724 22,500
Legal and accounting ............................ 37,304 5,857 69,864 35,369
Employee benefits ............................... 97,811 37,985 173,823 173,843
Advertising and promotion ....................... 465 482 1,959 2,428
Other general and administrative ................ 19,554 37,142 103,972 137,034
Interest ........................................ 23,931 19,850 59,874 58,143
Loss on indemnification agreement ............... 599,813 -- 599,813 --
Bad debt expense ................................ 7,036 329 7,036 (6,534)
Depreciation and amortization ................... 2,801 2,435 8,623 7,310
----------- ----------- ----------- -----------
871,466 214,046 1,418,167 1,008,439
Net investment gain (loss) ......................... (870,641) (171,105) (1,294,009) (465,160)
Net realized gain on investments
and net unrealized gain on
investments:
Proceeds from sales
of investments .................................. 364,455 145,398 424,713 2,640,926
Less: cost of investments ....................... 417,531 99,924 499,509 1,216,980
----------- ----------- ----------- -----------
Net realized gain (loss) on
investments before income taxes ................. (53,076) 45,474 (74,796) 1,423,946
Net investment gain (loss) and
net realized gain on investments
before income taxes ............................. (923,717) (125,631) (1,368,805) 958,786
Income tax benefit (provision) -
current ......................................... -- -- (56,307) (93,250)
Income tax benefit (provision) -
deferred ........................................ 104,385 -- (16,858) (153,044)
Recovery of income taxes through
utilization of net operating
loss carryforward ............................... -- -- -- 93,250
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are a part of this statement (Continued)
F-10
<PAGE>
EQUITEX, INC.
Statements of Operations (Page 2)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPT. 30, SEPT. 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net investment gain (loss)
and net realized gain
on investments .................................. $ (819,332) $ (125,631) $(1,441,970) $ 805,742
----------- ----------- ----------- -----------
Increase (decrease) in
unrealized appreciation
on investments .................................. (3,429,554) (5,201,623) (4,271,643) (4,903,146)
Less income tax benefit
(provision) applicable to
decrease (increase) in
realized appreciation ........................... 1,649,526 2,028,633 1,977,940 1,915,737
----------- ----------- ----------- -----------
(1,780,028) (3,172,990) (2,293,703) (2,987,409)
----------- ----------- ----------- -----------
Net (decrease) in net
assets resulting
from operations ................................. $(2,599,360) $ 3,298,621 $(3,735,673) $(2,181,667)
=========== =========== =========== ===========
Increase (decrease) in net
assets per share ................................ $ (.81) $ (1.03) $ (1.17) $ (.68)
=========== =========== =========== ===========
Weighted average number
of common shares ................................ 3,191,115 3,201,565 3,191,115 3,212,226
=========== =========== =========== ===========
</TABLE>
The accompanying notes are a part of this statement.
F-11
<PAGE>
EQUITEX, INC.
Statements of Cash Flows
(Unaudited)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
1997 1996
---- ----
Cash flows from operating activities:
Net change in net assets .................. $(3,735,673) $(2,181,767)
Adjustments to reconcile net change in
net assets to net cash provided by
operating activities:
Depreciation and amortization ........ 8,623 7,310
Donation of stock .................... 4,136 --
Provision for bad debts on notes
receivable ........................ -- --
Realized (gain) loss on sale of
investments ....................... 74,796 (1,423,946)
Unrealized (gain) loss on investments 4,271,643 4,903,146
Proceeds from sales of investments ........ 424,713 2,640,926
Purchase of investments ................... (61,215) (1,759,247)
(Issuance) of notes receivable ............ (45,000)
Collection of notes receivable ............ 20,250 116,195
Transfer of cash to escrow account ........ (300,000)
Gain on sale of assets .................... -- (8,334)
Changes in assets and liabilities:
Decrease in interest receivable ........ 120 119,938
Decrease in other assets ............... -- 4,875
(Increase) decrease in trade receivables 29,339 10,351
(Increase) in prepaid expense .......... (26,003) (7,949)
(Increase) decrease in accounts
receivable - brokers ................. 3,992 51
Decrease in income taxes refundable .... 164,459 --
Increase (decrease) in accounts payable
and other accrued liabilities ........ 37,522 (58,524)
Increase in accrued liability -
indemnification agreement ............ 564,755
Increase (decrease) in accounts payable
to brokers ........................... (54,405) (59,366)
Increase (decrease) in accrued bonus to
officer .............................. 125,462 (176,607)
Increase (decrease) in provision for
deferred income taxes ................ (1,961,081) (1,762,693)
----------- -----------
Net cash (used) by operating
activities ........................... (453,567) 364,359
Cash flows from investing activities:
Purchases of fixed assets ................. (32,205)
Proceeds from sales of fixed assets ....... 13,500
----------- -----------
Net cash (used) by investing activities -- (18,705)
The accompanying notes are a part of this statement. (Continued)
F-12
<PAGE>
EQUITEX, INC.
Statements of Cash Flows (Page 2)
(Unaudited)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
1997 1996
---- ----
Cash flows from financing activities:
Issuance of notes payable - officer ....... $ 321,519 $ --
Issuance of notes payable - other ......... 100,000 --
Repayment of notes payable ................ -- --
Purchase of treasury stock ................ -- (89,191)
----------- -----------
Net cash provided by financing activities 421,519 (89,191)
Increase (decrease) in cash .................. (32,048) 256,463
Cash, beginning of period .................... 53,795 176,752
----------- -----------
Cash, end of period .......................... $ 21,747 $ 433,215
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid ......................... $ 55,332 $ 58,143
=========== ===========
Interest received ..................... $ 30,851 $ 204,729
=========== ===========
Non-cash financing activities:
Conversion of notes receivable into
investment in common stock .......... $ -- $ 252,020
=========== ===========
The accompanying notes are a part of this statement.
F-13
<PAGE>
EQUITEX, INC.
Selected Notes to Financial Statements
September 30, 1997
(Unaudited)
NOTE 1. RESTRICTED CASH HELD IN ESCROW
Pursuant to an August 8, 1997 agreement with RDM, the Company placed
$300,000 in an escrow account. However, because RDM did not perform as required
by the agreement, the Company is in a position to terminate the agreement and
ask that these funds be returned.
NOTE 2. NOTES PAYABLE
In August and September 1997, the Company's President loaned the Company a
total of $240,000. This in addition to prior loans totaling $81,519 made to the
Company during the second quarter of 1997 and which are still outstanding at
September 30, 1997. These uncollateralized loans are all due on demand and bear
interest at 8% per annum. In addition, a related entity loaned the Company
$100,000 in August 1997. This loan bears interest at 12% per annum, is due on
demand and is collateralized by 25,000 shares of the Company's investment in an
investee company's common stock.
NOTE 3. LOSS ON INDEMNITY AGREEMENT PERFORMANCE
Effective October 31, 1997, the Company entered into an agreement with an
investee company, IntraNet Solutions, Inc. (IntraNet). Because the Company had
entered into a prior indemnification agreement with IntraNet in July 1996, it
agreed to purchase a certain note receivable in the amount of $564,755 which
IntraNet had from an RDM subsidiary, Hutch Sports USA (Hutch). This amount is
included as "accrued liability-indemnity agreement" in the September 30, 1997
financial statements, herein. Hutch had filed bankruptcy on August 29, 1997 (see
Note 4 below). The Company paid $414,755 of the purchase amount to IntraNet on
October 31, 1997. The balance of $150,000 is due on demand but no later than
December 31, 1997. The note bears interest at 8.75% per annum, is secured by an
officer's pledging of a common stock purchase warrant relating to 62,550 shares
of IntraNet and is also personally guaranteed by the Company's President.
Furthermore, the Company's President agreed to resign from the Board of
IntraNet, both IntraNet and the Company agreed to terminate effective October
31, 1997 the indemnification agreement under which the Company's maximum
exposure was $2,000,000, and agreed to mutually release each other from any
claims relating to this agreement and certain other items.
NOTE 4. BANKRUPTCY OF SIGNIFICANT INVESTEE
On August 29, 1997, RDM Sports Group (RDM) and all of its operating
subsidiaries filed concurrent Chapter 11 petitions with the U.S. Bankruptcy
Court. As a result of this, the fair market value of this investee company
dropped to almost zero as reflected in the Schedule of Investments, herein. The
Company has reserved 100% of its trade receivable from RDM. In addition, as
discussed in Note 3 above, the Company was required to perform on an indemnity
agreement with another investee company.
NOTE 5. SUBSEQUENT EVENTS
In October 1997 the Company entered into a nonbinding letter of intent
whereby the Company agreed to purchase the assets of a previously unrelated
company in the sporting goods industry. In consideration of
(Continued)
F-14
<PAGE>
EQUITEX, INC.
Selected Notes to Financial Statements
September 30, 1997
(Unaudited)
NOTE 5. SUBSEQUENT EVENTS (CONTINUED)
certain prior extensions of the original letter of intent, the Company pledged
certain shares of its IntraNet common stock having a market value of $250,000.
Except for certain delineated "special circumstances", if the purchase
transaction does not close by November 25, 1997, the Company will forfeit the
IntraNet common stock it has pledged and upon proper notice may extend the
closing to no later than December 15, 1997. Should the shares be forfeited, the
Company will record a note receivable from the newly-formed company for the
market value of the common stock on November 25, 1997.
The Company intends to pursue decertification as a Business
Development Company (BDC) during the fourth quarter of 1997 and in early 1998.
F-15
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
FORWARD-LOOKING STATEMENTS
Certain statements made below relating to plans, conditions, objectives,
and economic performance go beyond historical information and may provide an
indication of future results. To that extent, they are forward-looking
statements within the meaning of Section 21E of the Exchange Act, and each is
subject to factors that could cause actual results to differ from those in the
forward-looking statement. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated or projected.
LIQUIDITY AND CAPITAL RESOURCES
The Registrant's cash position decreased by $32,048 at September 30, 1997
as compared to an increase of $256,463 at September 30, 1996. The Company's
increase in cash during the first nine months of 1996 was caused by two
operational items. One was the receipt of $281,500 in consulting and transaction
fees, and $145,378 in interest income from MacGregor Sports & Fitness (now
IntraNet Solutions, Inc.). In addition, there were realized gains of $1,423,946
from the sales of investments during the nine months ended September 30, 1996 as
compared to a loss of $74,796 during the comparable period of 1997.
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 $20,250 at
December 31, 1996. These loans were repaid during the nine months ended
September 30, 1997. During the quarter ended September 30, 1997, new loans of
$45,000 were made to a newly formed company in which the Registrant intends to
take an equity position.
Of the Registrant's total liabilities of $2,350,992 at September 30, 1997,
the Registrant had no amounts due to banks. Of those liabilities, 13% or
$313,569 is deferred income taxes, primarily for the Registrant's unrealized
appreciation on investments, leaving $2,037,423 in other liabilities. This
compares to total liabilities of $3,217,220, deferred income taxes of $2,274,650
and other liabilities of $942,570 at December 31, 1996. The increase in other
liabilities reflects $321,519 in loans from an officer which were made during
the second and third quarters of 1997, and $564,755 which the Registrant owes
pursuant to an indemnification agreement with an investee company. All but
$150,000 of this liability was paid by the Registrant in the fourth quarter of
1997 with the balance due by December 31, 1997. The officer loans were used
primarily to pay $300,000 which was placed in an escrow account relative to an
agreement with RDM. However, RDM did not perform relative to this agreement and
the Registrant expects its funds to be returned. Regular trade payables
increased $35,855 between December 31, 1996 and September 30, 1997. There were
no loans from officers during the nine months ended September 30, 1996. Except
for the $564,755 indemnification related amount, 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 as cash
flow permits.
The Registrant's sources of income to defray operating overhead will be
derived primarily from consulting fees, transaction fees gained
(Continued)
F-16
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued).
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 1996 the Registrant's sources of income were
sufficient to cover its operating overhead and it is anticipated this trend will
continue during 1997 as the Registrant expects to realize gains from the sale of
some of its longer term investments during the fourth quarter of 1997.
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 1997
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
companies will be increased as the restrictions as to resale end, the Registrant
generally is a long-term holder of 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.
Until August 1997, the Registrant's largest investee company had been RDM
Sports Group, Inc. (RDM) a publicly held-company which conducts most of its
business through its wholly-owned subsidiaries. The Registrant owns common stock
and convertible debentures in RDM which is one of the largest manufacturers of
juvenile products and a leading producer of fitness equipment, toys and team
sports equipment in the United States. Management of the Registrant devoted
significant efforts and resources to providing managerial assistance to RDM.
Effective, June 20, 1997, the Registrant's President resigned from all his
positions with RDM and its subsidiaries, including Chief Executive Officer and
director. The Registrant and RDM were to negotiate the settlement of all amounts
owed to the Registrant or its President. However, as discussed below, RDM filed
bankruptcy in August 1997, and following are excerpts of information obtained
from its second quarter 10-Q.
RDM operates in an intensively competitive environment and has experienced
significant losses in the eighteen months ending June 29, 1997. Factors
contributing to these losses included, among other things, excess financial
leverage, adverse publicity associated with RDM's financial difficulties, excess
labor costs, quality control problems, poor operating performance, and
difficulties in obtaining adequate levels of working capital.
(Continued)
F-17
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued).
RDM has sought to de-leverage its financial position through the sale of
various assets, including its camping operations, its bicycle operations and its
snow products operations, and is continuing to seek to further de-leverage its
operations through the sales of both strategic and non-strategic assets. Despite
such asset sales which have occurred to date, the RDM operations continue to be
adversely affected by the problems identified above, including excess financial
leverage. Although RDM has sought to improve its financial condition and
operating performance by, among other things, reducing labor and other operating
and financing costs, RDM has been generally unable to improve its results of
operations in either the first six months or the third quarter to date, due to,
among other things, insufficient financial resources.
RDM has no unused credit lines and must satisfy substantially all of its
working capital and capital expenditure requirements from cash provided by
operating activities and from external capital sources or from the sale of
assets. Substantially all of RDM's assets are pledged to secure existing
indebtedness. Due to its current financial position and working capital
deficiency, RDM was forced to shut down substantially all of its manufacturing
operations, and on August 29, 1997 filed for protection under the United States
bankruptcy laws with the United States Bankruptcy Court for the Northern
District of Georgia, Newnan Division (the "Court") in Re: RDM Sports Group,
Inc., Case No. 97-12788. Concurrent cases were filed with the Court by all of
RDM's operating U.S. subsidiaries. RDM has received initial debtor in possession
("DIP") financing; however, RDM may require additional DIP financing in order
to, among other things, allow it to complete orders utilizing existing raw
materials, and management believes additional DIP financing will be required in
connection with any possible reorganization. While RDM is negotiating with its
existing DIP lenders and other potential DIP lenders to receive such additional
funding, no assurances can be given as to when, if at all, such additional DIP
financing will be secured. RDM management believes any such additional DIP
financing will be obtainable, if at all, only after the sale of one or more of
RDM's existing operations.
RDM's management intends to seek additional DIP financing to allow RDM to
fill post petition orders for its products. However, many of the RDM's mass
merchandiser customers do not place firm or committed orders and RDM
historically has produced products on the basis of its customers' program
estimates for the year. In the absence of firm or committed orders, RDM may not
be able to secure additional DIP financing and/or reorganize one or more
portions of its operations. In light of RDM's financial condition, no assurances
also can be given that RDM will be selected by its customers to participate in
their production programs. Accordingly, RDM may be subject to a rapid and
substantial decline in its customer base, which could have a material adverse
effect on its ability to reorganize one or more portions of its businesses under
the protection of the federal bankruptcy laws. In the event RDM is unable to
secure prompt permission from its creditors and the bankruptcy court to sell
various assets, the value of such assets could be rapidly and materially
impaired. In such event, RDM may be required to liquidate all of its assets to
(Continued)
F-18
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued).
satisfy its creditors. No assurances can be given as to when, if at all, RDM
will receive sufficient working capital to resume its operations, either on a
temporary basis or otherwise. In any reorganization, management anticipates that
it will be necessary to sell one or more of its product lines and the assets
associated therewith in connection with RDM's reorganization efforts.
RDM has sought or expects to seek approval from the Bankruptcy Court to,
among other things, negotiate the sale of its toy products operations (swing
sets, trampolines, bulk plastic toys and hobby horses), its free weight fitness
equipment operations, (including its operations with respect thereto in Olney,
Illinois), its Opelika, Alabama manufacturing facility and its trucking
operations. RDM also has received some preliminary expressions of interest with
respect to its other fitness equipment operations. The exact nature and scope of
the operations to be disposed of will depend on the interest of third persons in
such operations, the price offered for such operations and the timing of such
offers, and any such sales are subject to consent of RDM's DIP Lenders, the
existing lenders under the Loan Agreement and the Bankruptcy Court.
RDM's ability to improve its financial position and meet its financial
obligations will depend upon a variety of factors, including the ability to
obtain sufficient DIP financing -- whether from its existing lenders under the
DIP Facility and/or additional financing from third party sources -- a continued
ability to participate in customer product programs and thereby preserve its
customer base, favorable pricing environments for its products, a substantial
reduction in the rate of product returns, especially in fitness products, the
absence of adverse general economic conditions, effective operating cost control
measures and the sale of additional assets and the consent of its lenders to
such sale, including the ability to utilize a portion of such assets for
operating requirements. RDM management believes RDM's recurring losses from
operations and its limited sources of additional liquidity raise substantial
doubt about RDM's ability to reorganize as a going concern. Prior to filing for
bankruptcy protection, RDM had been unable to attract new capital and/or
reschedule or restructure a number of its current obligations. Furthermore, RDM
management does not believe RDM can expect additional financial support from any
of its principal stockholders. Accordingly, whether as part of a reorganization
or a liquidation, RDM management believes RDM will be required to sell one or
more of its current operations. No assurance can be given that RDM will be
successful in generating the operating results, attracting new capital or
restructuring sufficient indebtedness required for future viability.
Due to these recent developments, the fair value of the Registrant's RDM
investment has substantially decreased form $5,789,367 at December 31, 1996 to
$11,481 at September 30, 1997. As of September 30, 1997, the Registrant had made
no other material commitments for capital expenditures or loans to investees.
The Registrant expects that it will sell certain of its investments during the
remaining quarter of the current year to continue to fund its operations and to
pay the indemnification liability of $564,755 which existed at September 30,
1997. 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.
(Continued)
F-19
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued).
With the decline in the fair market value of RDM, IntraNet Solutions, Inc
(IntraNet) is the Company's largest investee company as of September 30, 1997.
IntraNet's financial information at June 30, 1997 is as follows as disclosed in
their first quarter 10-Q:
IntraNet's total revenues increased to $5.8 million for the quarter ended
June 30, 1997 from $4.2 million for the quarter ended June 30, 1996, or
$1.6 million (38.1%). This increase related to increases in all revenue
product lines.
IntraNet's total cost of revenues increased to $4.4 million for the quarter
ended June 30, 1997 from $3.2 million for the quarter ended June 30, 1996.
Total cost of revenues as a percent of total revenues was 76.6% in 1997
compared to 77.2% in 1996. Gross profit increased to $1.4 million for the
quarter ended June 30, 1997 compared to $1.0 million for the quarter ended
June 30, 1996. Total gross profit as a percent of total revenues was 23.4%
in 1997 compared to 22.8% in 1996. The increase in gross profit was
primarily attributable to incremental revenue contributions in all product
lines.
Sales and marketing expenses increased to $800,000 for the quarter ended
June 30, 1997 compared to $600,000 for the quarter ended June 30, 1996.
General and administrative expenses increased to $1.0 million for the
quarter ended June 30, 1997 compared to $500,000 for the quarter ended June
30, 1996, compared to 11.1% in 1996. General and administrative expenses
increased primarily due to increases in staffing, expenses related to the
relocation of corporate headquarters, and other related new facility costs.
Research and development expenses were $300,000 for each of the quarters
ended June 30, 1997 and June 30, 1996.
In July 1997, IntraNet completed a $4.0 million private placement of 5%
Series A $5.00 par value convertible preferred stock. Included in the $4.0
million was $150,000 of 9% promissory notes which were converted into the
private placement. The remaining 9% promissory notes mature on January 15,
1998 ($850,000) and April 15, 1998 ($250,000).
With the completion of the $4.0 million private placement, IntraNet
management believes that the net cash received of $3.4 million, after
related offering costs, and the availability under its credit line will
provide IntraNet adequate capital resources to sustain its current plan of
operations for the foreseeable future. However, IntraNet's capital
requirements in connection with its development and marketing activities
have been and will continue to be significant.
IntraNet's revolving working capital line of credit allows for borrowings
of up to $3.1 million based on available collateral at the bank's base
lending rate plus 2.5%. At June 30, 1997, the Company had advances of $2.5
million, which are due on demand. On August 8, 1997, IntraNet has $601,900
in advances and $1.1
(Continued)
F-20
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued).
million of availability on its working capital line of credit. At June 30,
1997, IntraNet also had term loans and promissory notes with financial
institutions outstanding in the amount of $944,000.
During the year ended March 31, 1997 IntraNet acquired substantially all
the assets of a graphic communications and custom printing business. The
purchase price consisted of cash of $675,800, a promissory note of
$267,800, and shares of the Company's common stock valued at $350,000. The
promissory note bears interest at prime plus 1.5%. The balance of $125,200
remaining on this note is due March 1, 1998.
Revenues for the three and nine months ended September 30, 1997 were $825
and $124,158, respectively; as compared to $42,941 and $534,279, respectively
for the three and nine months ended September 30, 1996.
The total revenue during the first nine months of 1996 was unusually high
due to the receipt of $281,500 in consulting and transaction fees, and $145,378
in interest income from IntraNet Solutions, Inc. (IntraNet), formerly known as
MacGregor Sports & Fitness. During 1997, the Company has received no consulting
fees. During 1997 the decreased consulting fees and interest income was offset
partially by an increase in miscellaneous income received from investee
companies which included $65,850 in payments on notes receivable which had been
written off in prior years.
During the nine months ended September 30, 1996 there were realized gains
of $1,423,946 from the sales of investments as compared to a loss of $74,796
during the comparable period of 1997. The Registrant's sales activity in 1996
was very high as compared to the first three quarters of 1997. The lack of sales
of large portions of the Registrant's lower cost long-term investments during
1997 as described above contributed to the higher net investment loss (and/or
less realized gain on investments after taxes), and may do so in future periods
in the absence of such sales. 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.
During the first nine months of 1997 the Registrant had higher operating
expenses of $1,418,167 as compared to the comparable period of 1996. The higher
1997 operating expenses were primarily caused by the $599,813 loss on
indemnification agreement which occurred in 1997. This was partially offset by
an increase in officer's bonus of $205,935 in 1996 principally because of the
higher unrealized appreciation of investments at September 30, 1996 as compared
to the unrealized depreciation which existed at September 30, 1997.
For the nine months ended September 30, 1997, the net unrealized gain on
investments decreased $2,293,703 as compared to a decrease of $2,987,409 for the
same period in 1996. The decrease in 1997 is attributed to the above mentioned
decrease in the fair market value of RDM as compared to its fair market
(Continued)
F-21
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued).
values at December 31, 1996. The comparable decrease in 1996 was due to a
decrease of $3,415,421 in RDM's market value in the first nine months of 1996.
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.
With the acquisition of RDM 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 RDM and IntraNet.
The Registrant expects that its cash flows and investment values will continue
to be susceptible to the market fluctuations of these 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.
On December 12, 1996, the Registrant announced that it intended to
implement a withdrawal of its election as a Business Development Company ("BDC")
under the Investment Company Act. The Registrant's Board of Directors instructed
its management to prepare a detailed plan which will address the corporate
governance issues and process which must be followed for decertification
including the legal, accounting, securities listing and other effects of such
withdrawal on the Registrant. Based on this plan, the Registrant intends to
further pursue decertification as a BDC between now and early 1998.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports of Form 8-K
(a) Financial data schedule for SEC registrants
(b) No reports on Form 8-K were filed during the current
quarter covered by this report
F-22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EQUITEX, INC.
(Registrant)
By /S/ HENRY FONG
-----------------------------------
Henry Fong
President, Treasurer and Chief
Financial Officer
Date: November 19, 1997
F-23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Registrant's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1997, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 21,747
<SECURITIES> 5,424,489
<RECEIVABLES> 67,081
<ALLOWANCES> 10,015
<INVENTORY> 0
<CURRENT-ASSETS> 5,481,555
<PP&E> 145,082
<DEPRECIATION> 114,985
<TOTAL-ASSETS> 5,876,102
<CURRENT-LIABILITIES> 2,350,992
<BONDS> 0
0
0
<COMMON> 64,489
<OTHER-SE> 3,460,621
<TOTAL-LIABILITY-AND-EQUITY> 5,876,102
<SALES> 0
<TOTAL-REVENUES> 124,158
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,358,293
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,874
<INCOME-PRETAX> (1,368,805)
<INCOME-TAX> 73,165
<INCOME-CONTINUING> (3,735,673)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,735,673)
<EPS-PRIMARY> (1.17)
<EPS-DILUTED> (1.17)
</TABLE>
