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, 1996
/ / 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.
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(Name of small business issuer in its charter)
DELAWARE 84-0905189
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7315 EAST PEAKVIEW AVENUE, ENGLEWOOD, COLORADO 80111
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(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, $.02 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: $632,765
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $6,023,320 based on the last sale price of the Registrant's
common stock on March 26, 1997, ($2.25 per share) as reported by the National
Association of Securities Dealers Automated Quotation System/National Market
System.
The issuer had 3,191,115 shares of common stock outstanding as of March 26,
1997.
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.
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. While the Registrant is currently working on a
detailed withdrawal plan, management of Registrant believes any such withdrawal
would require the decertification to take place concurrently with the
acquisition of an operating company. As of the filing of the report, the
Registrant has been unable to identify a suitable acquisition candidate and
continues to work on the plan for decertification.(See Item 1.(b)(8) "Regulation
- - Business Development Companies" below).
With its acquisition of Roadmaster Industries, Inc. 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 four years has
been devoted to current investees RDM Sports Group, Inc. (f/k/a Roadmaster
Industries, Inc.) and IntraNet Solutions, Inc. (f/k/a MacGregor Sports and
Fitness, Inc.), which constitute a significant portion of the Registrant's
investment portfolio. The President of the Registrant is President and a
director of RDM Sports Group and is a director of IntraNet Solutions.
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The Registrant's largest investee company is RDM Sports Group, Inc.
("RDM"), the value of which comprised 58% of the Registrant's investment
portfolio at December 31, 1996. RDM is a leading producer of fitness equipment
and is a leading producer and distributor of toys and team sports equipment. The
trademarks and brand names under which RDM currently sells its products include
Flexible Flyer, Vitamaster, MacGregor, DP, Hutch, Reach and Forster. On March
11, 1996, RDM 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 used the net proceeds from the sale to reduce outstanding
bank indebtedness. On September 6, 1996, RDM announced that it had completed the
sale of its bicycle division, including the Flexible Flyer line of sleds and
wagons, to Brunswick for cash consideration of approximately $200 million and
used the net proceeds to reduce outstanding indebtedness, including the
repayment of approximately $90 million of 11 3/4% Senior Subordinated Notes, and
make funds available for reinvestment in RDM's remaining toy and fitness-related
businesses, or for general corporate purposes. RDM 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 RDM.
On July 31, 1996, MacGregor Sports and Fitness, Inc. and Technical
Publishing Solutions, Inc. completed a merger through a tax-free exchange of
common stock and the surviving entity was renamed IntraNet Solutions, Inc.
("IntraNet"). IntraNet provides integrated solutions for the management and
distribution of business critical information contained in documents using
proprietary and standard internet technologies. Concurrent with this
transaction, the Registrant converted all of its outstanding debt, consulting
fees and interest due totaling $688,756 into 309,782 shares of MacGregor Sports
and Fitness common stock. Prior to the merger, 1,000 shares of Class C
Convertible Preferred stock owned by the Registrant were automatically converted
into 1,000,000 shares of MacGregor Sports and Fitness common stock. The
Registrant received the Class C Convertible Preferred shares on May 10, 1995
when the Registrant elected to convert $1,000,000 principal amount of loans due
the Registrant by MacGregor Sports and Fitness into the Class C Preferred stock.
At the time the Class C Preferred shares were converted to common stock, $70,000
in dividends had accumulated which amount was subsequently paid with 26,515
shares of common stock. Following the merger and a subsequent 4 for 1 reverse-
split declared by IntraNet on October 15, 1996, the Registrant owned 645,085
shares of IntraNet common stock, or approximately 9% of the outstanding shares
at December 31, 1996, which comprised 32% of the Registrant's investment
portfolio as of that date.
On January 2, 1996, a reverse stock split approved by the Registrant's
stockholders on December 18, 1995 became effective and every two shares of the
Registrant's $0.01 par value common stock were exchanged for one share of newly
created $0.02 par value common stock (1 for 2 reverse stock split). As a result,
the Registrant's authorized shares of common stock were decreased 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 Registrant's
preferred stock remained unchanged with 2,000,000 $0.01 par value shares
authorized and no shares issued or outstanding. All share amounts and per share
figures in this report for years prior to 1996 have been restated to reflect the
1 for 2 reverse split.
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(a)(2)(3) During the year ended December 31, 1996, 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.
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
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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;
(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
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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 to 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
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
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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, RDM and IntraNet,
represent 89.9% of the total value of the Registrant's investment portfolio.
Each is valued by the public market method, the Registrant's preferred method of
valuation. RDM is subject to lending arrangements and has bonds outstanding
under which it has incurred substantial indebtedness secured by substantially
all of such company's assets. As a result of its highly leveraged position, RDM
has incurred substantial interest expense and any event which causes diminished
cash flow may adversely affect its ability to repay its loans. IntraNet is a
company in the early stages of development which has yet to show a profit as a
publicly-traded company, a situation management of the company predicts could
continue for the near term. 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
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
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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.
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
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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
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.
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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.
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
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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, 1996, 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
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.
10
<PAGE>
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.
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, RDM, 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.
11
<PAGE>
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 (one-year after April 1997) prior to the sale of
restricted securities.
(10) During the last two 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) The Registrant currently employs five persons, four of which are
full-time employees.
12
<PAGE>
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 16, 1996, 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 1,460,166 1,087,117
Russell L. Casement 1,463,705 1,083,578
Aaron Grunfeld 1,463,925 1,083,358
</TABLE>
Additionally, the following proposal was presented and voted upon at the
meeting and the votes were cast as follows:
To ratify the appointment of Davis & Co., CPA's, P.C. as the independent
auditor of the Registrant for the year ending December 31, 1996.
<TABLE>
<CAPTION>
For Against Abstain Non-Voted
--------- ------- ------- ---------
<S> <C> <C> <C> <C>
Shares Voted 2,487,846 31,982 27,455 -0-
</TABLE>
13
<PAGE>
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 National Market tier of
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
Quarter ended High Low
------------- ---- ----
<S> <C> <C>
1995
----
March 31, 1995 $4.44 $2.82
June 30, 1995 $3.00 $2.50
September 30, 1995 $3.75 $2.50
December 31, 1995 $4.00 $2.56
1996
----
March 31, 1996 $2.75 $2.31
June 30, 1996 $4.00 $2.13
September 30, 1996 $3.69 $3.00
December 31, 1996 $3.13 $1.66
</TABLE>
(b) Holders
The number of record holders of the Registrant's Common Stock as of March
26, 1997, was 2,762 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
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
14
<PAGE>
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. MANAGEMENT'S 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, 1996 were
$632,765, up 105% as compared to $308,190 for the year ended December 31, 1995.
The increase in revenues for 1996 over 1995 is primarily the result of the
Registrant receiving transaction fees and interest due from MacGregor Sports and
Fitness through a conversion of debt to equity [See also Part 1 Item 1(a).
Business Development]. The Registrant received $144,000 in consulting fees from
RDM during 1995 which made up a majority of the consulting fee revenue during
that year. That contract expired in January 1996 and the Registrant did not
receive such fees in 1996, nor will it in 1997. The Registrant may receive
consulting fees on both a monthly contract basis as well as on a per transaction
basis when assisting investees with acquisitions, refinancing or restructuring,
however, the timing, nature and amount of these fees cannot be predicted. With
the expiration of the RDM contract and the absence of any current monthly
consulting contracts, the Registrant currently believes revenues for 1997 will
be lower as compared to 1996.
The realized gain on investments before income taxes for 1996 was
$1,226,190 as compared to a gain of $31,232 in 1995. Proceeds from sales of
investments was significantly higher in 1996 than 1995 and the cost of those
investments was significantly lower as a percentage of the gain producing a
higher realized gain before income taxes than in 1995. During 1996, the
Registrant sold 497,000 shares of common stock and 87,000 warrants of MacGregor
Sports and Fitness accumulated through open-market purchases from 1992 through
1995 resulting in the significantly higher realized gain for 1996. 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 1996 were $1,152,910 as compared to $1,499,869 in 1995, a
decrease of 23%. While the Registrant's expenses were slightly lower in several
15
<PAGE>
categories, the decrease in officer's bonus accounts for a majority of the
decrease for 1996. The Registrant currently believes that expenses for the year
ending December 31, 1997 will continue at levels similar to those of 1996.
The Registrant's net investment loss and realized gain on investments after
taxes for the year ended December 31, 1996 was a gain of $639,874 as compared to
a loss of $1,038,298 in 1995. The Registrant's net realized gain for 1996 is the
direct result of sales of MacGregor Sports and Fitness common stock as explained
above.
At December 31, 1996, unrealized appreciation of investments decreased
$8,535,628 as compared to a decrease of $1,043,785 at December 31, 1995. The
significantly higher decrease in 1996 over 1995 can be attributed to the roughly
50% decrease in the market values of the Registrant's two largest investees, RDM
and IntraNet, which together accounted for 90% of the Registrant's portfolio
value at year end 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 investments. The net increase in net assets
resulting from operations decreased $4,566,858 for 1996 as compared to a
decrease of $1,775,008 for 1995.
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 its two largest investees, RDM and IntraNet. The
Registrant must increase the number of its investments in more mature companies
in order to reduce its susceptibility to the market fluctuations of its investee
companies that have occurred over the past few years. During the past four
years, the Registrant has been concentrating its efforts on assisting 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 BDC. Utilizing the "at
value" method of evaluating fair value as described in "Valuation - Policy
Guidelines", the Registrant's assets as of December 31, 1996 were $10,478,003
with a net asset value of $7,260,783. Comparatively, as of December 31, 1995,
the Registrant's assets were valued at $19,056,458 and it had net assets of
$11,916,832.
LIQUIDITY AND CAPITAL RESOURCES. Of the Registrant's current liabilities of
$3,217,220 at December 31, 1996, the Registrant had no amounts due to banks. Of
those current liabilities, 71% or $2,274,650, is deferred income taxes,
primarily for the Registrant's unrealized appreciation on investments, leaving
$942,570 in other liabilities [See also Part IV Item 13 Financial Statements].
This compares to total liabilities of $7,139,626, deferred income taxes of
$5,498,778 and other liabilities of $1,640,848 at December 31, 1995. 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 $20,250 and
16
<PAGE>
$126,195 at years ended December 31, 1996 and 1995, respectively. The decrease
in notes receivable at year end 1996 as compared to 1995 is the result of the
Registrant converting notes receivable in MacGregor Sports and Fitness to equity
during 1996. [See also Part I, Item 1. Business Development].
The Registrant's cash position decreased by $122,957 at December 31, 1996
as compared to an increase of $158,709 at December 31, 1995. Net cash used by
operating activities was $14,175 for 1996 as compared to $167,738 provided by
operating activities in 1995. No one use of cash used in operating activities
accounted for the change from 1995 to 1996; however, the Registrant spent a
significant amount of cash for the purchase of new investments in 1996 as
compared to 1995 and utilized cash to decrease the amounts due to an officer of
the Registrant. Cash flows from investing activities used $19,591 in 1996
compared to $4,151 in 1995 due to the purchase of a new company vehicle. Cash
flows from financing activities used $89,191 as compared to $4,878 used during
1995. The cash used by financing activities in 1996 was from purchases of the
Registrant's common stock for treasury. [See also Part IV, Item 13. Financial
Statements].
The Registrant's sources of income to defray operating overhead are derived
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, administrative fees through which the
Registrant directly apportions a certain amount of its operating overhead to an
investee to help defray operating costs, and sales of the Registrant's
investments. 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.
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's ability to liquidate portions of its portfolio companies have
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 generate significant profits, the
Registrant had not typically relied on sales of this large nature for its
financing needs. However, as the Registrant expects lower transaction and
consulting fees and therefore reduced revenue during 1997, sales of portfolio
securities may be necessary for its financing needs.
The Registrant's largest investee company, RDM, is 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 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 RDM.
The seasonal nature of the RDM's sales imposes fluctuating demands on their
17
<PAGE>
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. RDM's subsidiaries rely heavily on
revolving loan borrowings for working capital. These loans provide them with an
immediate and continued source of liquidity. RDM utilizes asset-based credit
facilities provided by lending institutions to provide for its fluctuating
working capital needs.
During 1996, RDM sold two of its divisions to Brunswick Corporation for
total net proceeds of approximately $320 million in cash. A majority of the net
proceeds were used to pay down RDM's debt including payments on their revolving
bank debt as well as the repayment of approximately $90 million of 11.75% Senior
Subordinated Notes. Concurrent with the sale of RDM's bicycle division to
Brunswick, RDM entered into a new bank credit agreement which provides for
borrowings of up to $130 million based on eligible trade receivables and
inventory. RDM's bank debt and convertible debentures carry restrictive
covenants which may limit their ability to pay dividends to shareholders,
including the Registrant.
At September 28, 1996, the most recently available date, RDM had net sales
through nine months of $304 million with net income of $412 thousand. At
September 30, 1996, RDM's total assets were $292 million and its total
liabilities were $237 million with shareholders' equity of $55 million. RDM's
borrowings represented 35% of its total assets at September 30, 1996.
The Registrant's second largest investee company is IntraNet, a publicly
held company. The Registrant owns common stock in IntraNet which provides
document handling, storage and retrieval solutions to Fortune 1000 companies
utilizing internet and intranet technologies. For the nine months ended December
31, 1996, the latest available date, IntraNet had total revenues of $14 million
and a net loss of $1.5 million.
As of December 31, 1996, 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.
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.
18
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
(a) Identification of Directors and Executive Officers
<TABLE>
<CAPTION>
Length of
Name Age Offices held Service
- ---- --- ------------ ---------
<S> <C> <C> <C>
Henry Fong 61 President, Treasurer, Since Inception
Principal Executive,
Financial and Accounting
Officer and Director
Thomas B. Olson 31 Secretary Since 1988
Russell L. Casement 53 Director Since 1989
Aaron A. Grunfeld 50 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. Mr. Fong is also chairman of the board and chief
executive officer of RDM Sports Group, Inc. (f/k/a Roadmaster Industries, Inc.)
a publicly-held investee of the Registrant and was its president and treasurer
from 1987 to 1996. Since July 1996, Mr. Fong has been a director of IntraNet
Solutions, Inc., a publicly-held investee company which provides
internet/intranet solutions to Fortune 1000 companies and was the chairman of
the board and treasurer of its predecessor company, MacGregor Sports and
Fitness, Inc. from February 1991 until the two companies merged in July 1996.
Since January 1993, Mr. Fong has been chairman of the board and chief executive
officer of California Pro Sports, Inc., a publicly-traded manufacturer and
distributor of in-line skates, hockey equipment and related accessories. From
1959 to 1982 Mr. Fong served in various accounting, finance and budgeting
positions with the Department of the Air Force. During the period from 1972 to
1981 he was assigned to senior supervisory positions at the Department of the
Air Force headquarters in the Pentagon. In 1978, he was selected to participate
in the Federal Executive Development Program and in 1981, he was appointed to
the Senior Executive Service. In 1970 and 1971, he attended the Woodrow Wilson
School, Princeton University and was a Princeton Fellow in Public Affairs. Mr.
Fong received the Air Force Meritorious Civilian Service Award in 1982. Mr. Fong
19
<PAGE>
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
26 years and has been of counsel to 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
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
- -------------------------------------------------------
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
20
<PAGE>
any reports under Section 16, the Registrant believes that, during 1996, 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, 1996, 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 $314,328 for the year ended December 31, 1996.
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 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
fourteen 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, 1996, $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 $14,300 on this policy in 1996 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, 1996, 1995
and 1994:
21
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
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 1996 183,013 314,328 -0- -0- 165,000 <F1>
President,
Treasurer
Principal
Executive
Officer and
Accounting
Officer
Henry Fong 1995 183,013 571,693 -0- -0- 165,000 <F1>
Henry Fong 1994 183,013 669,536 -0- -0- 165,000 <F1>
- ---------
<FN>
<F1> Includes payments and tax liability on the life insurance policy as
explained more fully in "Item 10 (a) General" above.
</FN>
</TABLE>
(c) Option/SAR Grants Table
The Registrant made no grants of stock options or SARs during the year
ended December 31, 1996.
(d) Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
- --------------------------------------------------------------------------------
(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- 206,545/-0- $(245,272)/-0-
</TABLE>
(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.
22
<PAGE>
(f) Compensation of Directors
(1) Standard Arrangements
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, 1996, Messrs. Casement and
Grunfeld each received a total of $12,000. Members of the Board of Directors
also receive reimbursement for expenses incurred in attending board meetings.
(2) Other Arrangements
1993 Stock Option Plan for Non-Employee Directors
-------------------------------------------------
The Registrant has adopted the 1993 Stock Option Plan for Non-Employee
Directors (the "Directors' Plan") reserving an aggregate of 250,000 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. On
July 5, 1995, an order was issued by the Securities and Exchange Commission
authorizing the Directors' Plan and the options granted thereunder. The
Directors' Plan is for a ten-year term commencing July 5, 1995 (the "Effective
Date"). Each non-employee director automatically, as of the Effective Date, was
granted an option to purchase 50,000 shares of common stock at $3.00 per share.
Thereafter, each director who first becomes a non-employee director shall
automatically, as of the date 90 days following the date such person becomes a
non-employee director, be granted an option to purchase 50,000 shares of common
stock. No additional options can be granted under the Directors' Plan except to
an individual who first becomes a non-employee director after the Effective
Date. No discretionary grants can be made under the Directors' Plan.
(g) Employment Contracts and Termination of Employment and Change-in-Control
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 death or a retirement
benefit to Mr. Fong consisting 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
23
<PAGE>
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 26, 1997, 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 or executive officer of the Registrant and all persons as a group
who are executive officers and directors of the Registrant and as to the
percentage of outstanding shares so held by them at March 26, 1997.
<TABLE>
<CAPTION>
Name and address Amount and Nature of
of beneficial owner Beneficial Ownership<F1> Percent of Class
- ------------------- ------------------------ ----------------
<S> <C> <C>
Henry Fong 547,829 <F2> 16.1%
7315 East Peakview Avenue
Englewood, Colorado 80111
Unnamed Association 187,500 5.5%
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 687,629 <F2><F3><F4> 19.6%
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.
24
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(a) Transactions with Management and Others.
The Registrant currently leases approximately 1,800 square feet of9 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]
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. No such loans
were made in 1996.
(b) Information which May be Excluded
Not applicable
(c) Parents of Registrant
Not applicable
(d) Transactions with Promoters
Not applicable
25
<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, 1996, and 1995.................................. F-3
Schedule of Investments at December 31, 1996
and December 31, 1995........................................ F-5
Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1996 and 1995....................... F-11
Statements of Operations for the Years ended
December 31, 1996 and 1995................................... F-13
Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995................................... F-15
Notes to Financial Statements................................. F-17
</TABLE>
2. Financial Statements Schedules.
<TABLE>
<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.
No reports on Form 8-K were filed during the period covered by this report.
26
<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 26, 1997
--------------
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 26, 1997 /S/ HENRY FONG
-------------- -------------------------------
Henry Fong, President,
Treasurer and Director
(Principal Executive, Financial,
and Accounting Officer)
Date: March 26, 1997 /S/ RUSSELL L. CASEMENT
-------------- -------------------------------
Russell L. Casement, Director
Date: March 26, 1997 /S/ AARON A. GRUNFELD
-------------- -------------------------------
Aaron A. Grunfeld, Director
27
<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, 1996 and 1995 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 1996 and 1995 financial statements referred to above present
fairly, in all material respects, the financial position of Equitex, Inc. at
December 31, 1996 and 1995 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,
1996 and 1995 include securities and receivables, valued at $483,130 (6.7% of
net assets) and $3,006,173 (25.2% 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 1996
and 1995 financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
/S/ DAVIS & CO., CPA'S, P.C.
Davis & Co., CPAs, P.C.
Certified Public Accountants
Englewood, Colorado
March 21, 1997
F-2
<PAGE>
EQUITEX, INC.
Statements of Assets and Liabilities
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
Investments, at fair value:
Securities (cost of $3,767,308 and
$3,470,057 in 1996 and 1995, respectively) .... $10,138,562 $18,376,939
Notes receivable, net of allowance
for uncollectible accounts of $100 and
$136,545 in 1996 and 1995, respectively ....... 20,250 126,195
Accrued interest receivable, net of
allowance for uncollectible interest of
$35 and $120,617 in 1996 and
1995, respectively ............................ 1,902 120,031
Trade receivables, net of allowance
for uncollectible accounts of $2,943
and $7,095 in 1996 and 1995, respectively ..... 39,623 58,440
----------- -----------
10,200,337 18,681,605
Cash ............................................. 53,795 176,752
Accounts receivable - brokers .................... 4,766 918
Income taxes refundable .......................... 166,609 166,609
Furniture and equipment, net of
accumulated depreciation of $106,362
and $111,615 in 1996 and 1995, respectively ... 38,720 21,041
Other ............................................ 13,776 9,533
----------- -----------
$10,478,003 $19,056,458
=========== ===========
</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,
1996 1995
---- ----
<S> <C> <C>
LIABILITIES AND NET ASSETS
Liabilities
Accounts payable and other
accrued liabilities ......................... $ 55,441 $ 220,628
Accounts payable to brokers ................... 739,023 889,841
Accrued bonus to officer ...................... 148,106 530,379
Deferred income taxes ......................... 2,274,650 5,498,778
----------- -----------
3,217,220 7,139,626
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 $.02;
7,500,000 shares authorized; 3,224,465
shares issued; 3,191,115 and 3,217,615
shares outstanding in 1996 and 1995,
respectively ................................ 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 ............. (12,025,669) (11,439,353)
Accumulated net realized gains from
sales and permanent write-downs
of investments ............................ 11,121,234 9,895,044
Unrealized net gains on investments
(net of deferred income taxes of
$2,484,788 and $5,813,684 in 1996
and 1995, respectively) ................... 3,886,465 9,093,197
Less: treasury stock at cost
(33,350 and 6,850 shares in
1996 and 1995, respectively) .............. (114,037) (24,846)
----------- -----------
7,260,783 11,916,832
----------- -----------
$10,478,003 $19,056,458
=========== ===========
</TABLE>
The accompanying notes are a part of this statement.
F-4
<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)
The accompanying notes are a part of this statement.
F-5
<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)
The accompanying notes are a part of this statement.
F-6
<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.
The accompanying notes are a part of this statement.
F-7
<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, Inc. 1,000
Sporting goods .................. 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. Sr.
Manufacturer of bicycles, jr 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)
The accompanying notes are a part of this statement.
F-8
<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 8,500
devices ......................... 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
NevStar Gaming Corporation 10,000 Series
Gaming development .............. A preferred(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)
The accompanying notes are a part of this statement.
F-9
<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 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, 1996 and 1995
<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,
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)
1 for 2 reverse
stock split in
January 1996 ....... (3,224,465)
Purchases of treasury
stock in July and
August 1996 ........ (89,191)
Net investment (loss)
Net realized gain on
investments ........
Unrealized gain (loss)
on investments .....
---------- ---------- ---------- ---------- ----------
Balance at Dec. 31,
1996 .............. 3,224,465 $ 64,489 $ (114,037) $4,447,175 $ (118,874)
========== ========== ========== ========== ==========
</TABLE>
(Continued)
The accompanying notes are a part of this statement.
F-11
<PAGE>
EQUITEX, INC.
Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1996 and 1995
(Page 2)
<TABLE>
<CAPTION>
ACCUM.
REALIZED ACCUM.
ACCUM. NET GAINS UNREA- TOTAL
NET FROM SALES LIZED NET STOCK-
INVEST. OF INVEST- APPREC. ON HOLDERS'
LOSS MENTS INVESTMENTS EQUITY
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
1 for 2 reverse
stock split in
January 1996 ........ --
Purchases of treasury
stock in July and
August 1996 ......... (89,191)
Net investment (loss) .. (586,316) (586,316)
Net realized
gain on
investments ......... 1,226,190 1,226,190
Unrealized gain (loss)
on investments ...... (5,206,732) (5,206,732)
------------ ------------ ------------ ------------
Balance at Dec. 31, 1996 $(12,025,669) $ 11,121,234 $ 3,886,465 $ 7,260,783
============ ============ ============ ============
</TABLE>
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,
1996 1995
---- ----
<S> <C> <C>
Revenues
Interest and dividends ......................... $ 268,859 $ 69,465
Consulting and transaction fees ................ 281,500 163,826
Administrative fees ............................ 62,198 61,331
Miscellaneous .................................. 20,208 13,568
----------- -----------
632,765 308,190
Expenses
Salaries and consulting fees ................... 315,473 345,166
Officers' bonus ................................ 314,328 571,693
Office rent .................................... 30,000 30,871
Advertising and promotion ...................... 4,084 2,629
Other general and administrative ............... 208,527 274,189
Interest ....................................... 75,670 29,033
Bad debt expense ............................... (17,987) 27,093
Depreciation and amortization .................. 10,246 9,650
Employee benefits .............................. 212,569 209,545
----------- -----------
1,152,910 1,499,869
----------- -----------
Net investment (loss) ............................ (520,145) (1,191,679)
----------- -----------
Net realized gain on investments and
net unrealized gain on investments:
Proceeds from sales of investments ............. 2,876,744 1,280,513
Less: cost of investments sold ................. 1,650,554 1,249,281
----------- -----------
Realized gain from sales of investments ...... 1,226,190 31,232
Permanent write-down of investments ............ (--) (--)
----------- -----------
Realized gain on investments before
income taxes .............................. 1,226,190 31,232
----------- -----------
Net investment (loss) and realized gain
on investments before income taxes ........ 706,045 (1,160,447)
Less: income taxes (provision) benefit
Current ...................................... (35,406) 151,079
Deferred ..................................... (66,171) (28,930)
----------- -----------
(101,577) 122,149
Income tax benefit of
NOL carryforward .......................... 35,406 --
----------- -----------
(66,171) 122,149
</TABLE>
(Continued)
The accompanying notes are a part of this statement.
F-13
<PAGE>
EQUITEX, INC
Statements of Operations (Page 2)
<TABLE>
<CAPTION>
For the years ended
December 31,
1996 1995
---- ----
<S> <C> <C>
Net investment (loss) and realized gain
on investments after income taxes .............. 639,874 (1,038,298)
(Decrease) in unrealized
appreciation of investments ................... (8,535,628) (1,043,785)
Less income tax benefit applicable
to (decrease) in unrealized
appreciation of investments
Deferred ................................... 3,328,896 307,075
----------- -----------
(5,206,732) (736,710)
----------- -----------
Net (decrease) in net assets
resulting from operations ..................... $(4,566,858) $(1,775,008)
=========== ===========
(Decrease) in net assets per
share - primary ............................... $ (1.42) $ (.55)
=========== ===========
Weighted average number of common shares ......... 3,214,708 3,217,615
=========== ===========
(Decrease) in net assets per
share - fully-diluted ......................... $ (1.26) $ (.49)
=========== ===========
</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,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net change in net assets ....................... $(4,566,858) $(1,775,008)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .............. 10,246 9,650
Provision for bad debts on notes
receivable ............................... 116,241 10,000
Realized (gain) on sale of investments ..... (1,226,190) (31,232)
Unrealized loss on investments ............. 8,535,628 1,043,785
Donation of stock of investee company ...... -- 398
Proceeds from sales of investments ............... 2,876,744 1,281,164
Purchases of investments ......................... (1,956,805) (1,371,589)
Issuance of notes receivable ..................... (30,000) (170,185)
Collections of notes receivable .................. 20,370 660,000
Changes in assets and liabilities:
Decrease in interest receivable ................ 118,129 (14,795)
(Increase) in accounts receivable-broker ....... (3,848) 556
(Increase) decrease in other assets ............ (4,243) 3,167
(Increase) decrease in trade receivables ....... 18,817 (29,201)
(Increase) in income taxes refundable .......... -- (31,978)
(Decrease) in accounts payable and
other accrued liabilities .................... (165,187) (209,627)
(Decrease) in deferred revenue ................. -- (19,826)
(Decrease) increase in accounts
payable to brokers ........................... (150,818) 889,841
(Decrease) in deferred income taxes ............ (3,224,128) (152,474)
Increase (decrease) in amounts due
to officer ................................... (382,273) 75,092
----------- -----------
Net cash provided (used) by operating
activities ................................... (14,175) 167,738
Cash flows from investing activities:
Purchase of equipment and vehicle .............. (33,091) (4,151)
Proceeds from sale of vehicle .................. 13,500 --
----------- -----------
Net cash (used) by investing activities .......... (19,591) (4,151)
</TABLE>
(Continued)
The accompanying notes are a part of this statement.
F-15
<PAGE>
EQUITEX, INC.
Statements of Cash Flows (Page 2)
<TABLE>
<CAPTION>
For the years ended
December 31,
1996 1995
---- ----
<S> <C> <C>
Cash flows from financing activities:
Common stock re-purchased for cash ............. (89,191) --
Proceeds from issuance of notes payable ........ -- 100,000
Repayment of notes payable ..................... -- (100,000)
Legal costs of private placement ............... -- (4,878)
----------- -----------
Net cash (used) by financing
activities ................................... (89,191) (4,878)
Increase (decrease) in cash ...................... (122,957) 158,709
Cash, beginning of period ........................ 176,752 18,043
----------- -----------
Cash, end of period .............................. $ 53,795 $ 176,752
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid ................................ $ 17,526 $ 23,141
=========== ===========
Interest received ............................ $ 72,616 $ 36,837
=========== ===========
Income taxes paid (refunded) ................. $ 1,402 $ (284,773)
=========== ===========
</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 of the year. If the security is
F-17
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 1: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 RDM Sports Group)
as cash is received. All other types of revenues are recognized on the accrual
basis.
g. ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates. The estimate that is
particularly sensitive to future change is the determination of the fair value
of the Company's investments in and various receivables due from its investee
companies (see Note 1b., herein). Management believes that its estimates and
assumptions provide a reasonable basis for the fair presentation of the
Company's financial position and results of operations.
F-18
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 1: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
h. 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.
i. RECLASSIFICATIONS
Certain reclassifications have been made to the December 31, 1995 financial
statements to conform to the December 31, 1996 presentation.
j. 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, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
BASIS 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary ..... 3,191,115 3,217,615 $2.26 $3.70
========= ========= ===== =====
Fully diluted 3,502,660 3,529,160 $2.06 $3.38
========= ========= ===== =====
</TABLE>
Note 2: DETAIL OF RECEIVABLES AND SOURCES OF REVENUE
a. RECEIVABLES
Receivables are from the following types of companies at December 31, 1996
and 1995, respectively.
<TABLE>
<CAPTION>
PORTFOLIO COMPANIES
LESS
THAN 5%
CONTROLLED AFFILIATED OWNED TOTAL
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
1996
Notes receivable .......... $ -- $ 10,250 $ 10,100 $ 20,350
Interest receivable ....... -- 1,557 380 1,937
Trade receivables ......... -- 5,881 36,685 42,566
Less: allowances for
uncollectible receivables -- (2,943) (135) (3,078)
--------- --------- --------- ---------
$ -- $ 14,745 $ 47,030 $ 61,775
========= ========= ========= =========
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
========= ========= ========= =========
</TABLE>
F-19
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 2: DETAIL OF RECEIVABLES AND SOURCES OF REVENUE (CONTINUED)
a. RECEIVABLES (CONTINUED)
Included in notes receivable and interest receivable above are amounts
totaling $22,288 and $492,083 at December 31, 1996 and 1995, 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/private offerings),
the outcome of which cannot be determined at this time.
b. SOURCES OF REVENUES
Sources of revenues are from the following types of companies for the year
ended December 31, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
PORTFOLIO COMPANIES
LESS
THAN 5%
CONTROLLED AFFILIATED OWNED OTHER TOTAL
---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1996
Interest and other
income ............. $ -- $226,786 $ -- $ 62,281 $289,067
Consulting/transaction
fees ............... -- 281,500 -- -- 281,500
Administrative fees .. -- 61,960 -- 238 62,198
-------- -------- -------- -------- --------
$ -- $570,246 $ -- $ 62,519 $632,765
======== ======== ======== ======== ========
1995
Interest and other
income ............. $ 50,296 $ 515 $ -- $ 32,222 $ 83,033
Administrative fees .. -- 61,276 -- 55 61,331
Consulting/transaction
fees ............... -- 163,826 -- -- 163,826
-------- -------- -------- -------- --------
$ 50,296 $225,617 $ -- $ 32,277 $308,190
======== ======== ======== ======== ========
</TABLE>
During 1996 two investee companies accounted for 80% and 9%, respectively,
of the Company's total revenues of $632,765.
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 RDM SPORTS GROUP (FORMERLY ROADMASTER INDUSTRIES, INC.)
During 1995 the Company purchased 15,000 shares of RDM on the open market
and $50,000 and $100,000 (face value) of RDM's 11 3/4% Senior Subordinated Notes
and 8% Subordinated Debentures, respectively. During 1996 the Company purchased
36,600 shares of RDM on the open market and 75,000 (face value) of RDM's 8%
subordinated debentures.
F-20
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 3: INVESTMENTS (CONTINUED)
a. INVESTMENT IN RDM SPORTS GROUP
(FORMERLY ROADMASTER INDUSTRIES, INC.) (CONTINUED)
During 1995 the Company recorded consulting fees from RDM of $144,000. The
consulting fee contract with RDM expired on January 1, 1996. During 1996 and
1995, the Company recorded administrative fees from RDM totaling $58,828 and
$60,648, respectively.
b. INVESTMENT IN INTRANET SOLUTIONS, INC.
(FORMERLY MACGREGOR SPORTS & FITNESS, INC.)
On July 31, 1996, MacGregor Sports & Fitness, Inc. merged with Technical
Publishing Solutions, Inc. (TPSI) through a tax-free exchange of common stock.
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. After the
merger the Company owned 8.6% of the combined entity, which was named IntraNet
Solutions, Inc.
In May of 1996 the Company's 1,000 shares of Class C Convertible Preferred
stock of MacGregor were automatically converted into 1,000,000 shares of common
stock. Concurrently, $70,000 in accumulated dividends on the preferred stock
were paid to the Company by MacGregor with the issuance of 26,515 shares of
common stock. Immediately prior to the merger in June 1996, the Company
converted accounts, notes, and interest receivable in the aggregate amount of
$227,540 (net of reserves for uncollectibility of $242,363) along with a
previous stock subscription into 200,566 shares of MacGregor common stock. In
addition, in lieu of $281,500 of unpaid consulting fees dating back to 1991 and
$145,378 of applicable interest the Company received 109,216 shares of MacGregor
common stock. With these additional shares the Company owned 2,580,340 shares of
MacGregor common stock at the time of the merger. On October 15, 1996, IntraNet
Solutions declared a 1-for-4 reverse stock split resulting in the Company's
December 31, 1996 ownership position in IntraNet Solutions of 645,085 shares (or
8.6%).
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 211,545 shares of common stock under the Option Plan to an
officer/director and an officer of the Company. These options are exercisable at
$3.00 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
50,000 shares of common stock at an exercise price of $3.00 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.
F-21
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 4: COMMON STOCK (CONTINUED)
b. TREASURY STOCK
On October 21, 1992, the Board of Directors authorized the Company to
repurchase up to 500,000 shares of its own common stock in the open market.
During 1996 the Company has purchased 26,500 shares of its common stock on the
open market for $89,191.
c. REVERSE STOCK SPLIT
The Company's stockholders approved a reverse stock split effective January
2, 1996 whereby each two shares of $.01 par value common stock were exchanged
for one share of $.02 par value common stock. Information for 1995 included
herein has been adjusted to reflect this reverse split.
Note 5: INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31,
1996 and 1995, consists of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Current:
Federal and state .............................. $ (35,406) $ (15,530)
Benefit of net operating loss
carryback/carryforward ........................ 35,406 166,609
----------- -----------
Total current (provision) benefit .............. $ -- $ 151,079
=========== ===========
Deferred:
Accrued unpaid bonus ........................... $ (52,038) $ (59,050)
Bad debt expense ............................... (7,755) (6,113)
Other .......................................... (6,378) 36,233
----------- -----------
Total deferred (provision) benefit ............. $ (66,171) $ (28,930)
=========== ===========
</TABLE>
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,
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Accrued liabilities not currently deductible ..... $ 117,174 $ 211,846
Excess "tax" basis on investment ................. 92,964 103,060
----------- -----------
Total deferred tax assets ........................ 210,138 314,906
----------- -----------
Deferred tax liabilities:
Tax on unrealized gain on investments ............ (2,484,788) (5,813,684)
----------- -----------
Total deferred tax liabilities ................... (2,484,788) (5,813,684)
----------- -----------
Net deferred tax liability ....................... $(2,274,650) $(5,498,778)
=========== ===========
</TABLE>
A significant portion of the deferred tax assets at December 31, 1996 are
expected to be recovered through the carryback of amounts which will become
deductible when paid.
F-22
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 5: INCOME TAXES (CONTINUED)
Tax years prior to 1992 are "closed" to adjustments by the running of the
statute of limitations. An agreement was finalized with the IRS Appeals Division
during 1996 regarding the deductibility of certain expenses on the Company's
1992 federal income tax return. The additional taxes incurred relative to this
agreement were 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 $148,106 and $530,379 have been accrued as a "Bonus to Officer" in the
December 31, 1996 and 1995 balance sheets, respectively. During 1996 and 1995
the Company's Corporate Secretary received bonuses of $16,674 and $20,992,
respectively.
c. DIRECTORS' FEES
During 1996 and 1995 the Company paid $12,000 and $8,833, respectively, to
each of its two outside directors for their attendance at the four meetings held
each year.
Note 7: CONTINGENCY
As of December 31, 1996, 597,500 shares of the Company's RDM Sports Group
common stock were pledged in escrow for a period not to exceed three years
pursuant to the performance guarantee clause in the merger agreement of
MacGregor and TPSI. The two entities merged in July 1996, forming IntraNet
Solutions, Inc. The guarantee, under which the Company's maximum exposure is
$2,000,000, expires July 31, 1999. See Note 3b., herein.
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 (see Note 7, herein).
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, and are scheduled to expire, subject to extension as follows:
F-23
<PAGE>
EQUITEX, INC.
Notes to Financial Statements
Note 8: OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (CONTINUED)
<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>
At December 31, 1996, the Company's primary concentration of credit risk
relates to 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, 1996 and 1995.
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 (ending March 31, 1999) 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
$2,600,000 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, 1996, the Company paid $105,413 in premiums
and $59,586 of additional compensation to the President for related income
taxes.
F-24
<PAGE>
EQUITEX, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II
<TABLE>
<CAPTION>
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
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
For the year ended
Dec. 31, 1996:
Allowance for un-
collectible accounts
Notes receivable .. $136,545 $ -- $ $136,445 $ 100
Interest receivable 120,617 264 120,846 35
Accounts receivable 7,095 229 4,381 2,943
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
</TABLE>
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 Form 10-KSB
for the year ended December 31, 1996 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 53,795
<SECURITIES> 10,138,562
<RECEIVABLES> 236,228
<ALLOWANCES> 3,078
<INVENTORY> 0
<CURRENT-ASSETS> 10,425,507
<PP&E> 145,082
<DEPRECIATION> 106,362
<TOTAL-ASSETS> 10,478,003
<CURRENT-LIABILITIES> 3,217,220
<BONDS> 0
0
0
<COMMON> 64,489
<OTHER-SE> 7,196,294
<TOTAL-LIABILITY-AND-EQUITY> 10,478,003
<SALES> 0
<TOTAL-REVENUES> 1,858,955
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,095,227
<LOSS-PROVISION> (17,987)
<INTEREST-EXPENSE> 75,760
<INCOME-PRETAX> 706,045
<INCOME-TAX> 66,171
<INCOME-CONTINUING> 639,874
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 639,874
<EPS-PRIMARY> .20
<EPS-DILUTED> .18
</TABLE>
