UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to_________
Commission File No. 0-12374
EQUITEX, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 84-0905189
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7315 East Peakview Avenue
Englewood, Colorado 80111
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(303) 796-8940
---------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Number of shares of common stock outstanding at July 27, 1998: 4,290,315
<PAGE>
EQUITEX, INC.
Part 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The accompanying interim unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-QSB and do not include
all the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included, and the disclosures are adequate to
make the information presented not misleading. Operating results for the three
and six months ended June 30, 1998 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1998. These statements
should be read in conjunction with the financial statements and notes thereto
included in the Annual 10-KSB Report (filed with the Securities and Exchange
Commission) for the year ended December 31, 1997.
F-1
<PAGE>
EQUITEX, INC.
Statements of Assets and Liabilities
JUNE 30, DEC. 31,
1998 1997
---- ----
(Unaudited)
ASSETS
Investments, at fair value:
Securities (cost of $4,271,902 and
$3,568,045 in 1998 and 1997, respectively) $4,439,387 $4,165,993
Notes receivable, net of allowance
for uncollectible accounts of $40,293
in 1998 and 1997, respectively ............ 662,531 418,210
Accrued interest receivable, net of
allowance for uncollectible interest
of $35 .................................... 15,053 5,701
Trade receivables, net of allowance
for uncollectible accounts of $69,445
and $53,742 in 1998 and 1997, respectively 188,025 110,954
--------- ---------
5,304,996 4,700,858
Cash ......................................... 28,898 9,187
Accounts receivable - brokers ................ 28,500 73,741
Note receivable - director .................. 45,472 --
Notes receivable - other ..................... 157,000 --
Contract deposit receivable, net of
allowance for uncollectibility of $150,000 150,000 150,000
Income taxes refundable ...................... 2,150 2,150
Furniture and equipment, net of
accumulated depreciation of $123,107
and $117,750 in 1998 and 1997, respectively 29,196 29,204
Deferred income tax benefit .................. 80,512 63,180
Other ........................................ 10,905 10,105
---------- ----------
$5,837,629 $5,038,425
========== ==========
(Continued)
The accompanying notes are a part of this statement.
F-2
<PAGE>
EQUITEX, INC.
Statements of Assets and Liabilities
JUNE 30, DEC. 31,
1998 1997
---- ----
(Unaudited)
LIABILITIES AND NET ASSETS
Liabilities
Notes payable - related party ............. $ 142,328 $ 177,599
Notes payable - others .................... 100,000 250,000
Accounts payable and other
accrued liabilities ..................... 163,980 121,349
Accounts payable to brokers ............... 1,053,511 650,302
Accrued bonus to officer .................. 83,043 299,259
---------- ----------
1,542,862 1,498,509
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; 4,323,665
and 3,494,465 shares issued; 4,290,315
and 3,461,115 shares outstanding in
1998 and 1997, respectively ............. 86,473 69,889
Additional paid-in capital ................ 5,454,263 4,644,275
Retained earnings
Accumulated deficit prior to
becoming a BDC ........................ (118,874) (118,874)
Accumulated net investment loss ......... (13,863,339) (13,431,269)
Accumulated net realized gains from
sales and permanent write-downs
of investments ........................ 12,748,115 12,125,185
Unrealized net gains on investments
(net of deferred income taxes of
$65,319 and $233,201 in 1998 and
1997, respectively) ................... 102,166 364,747
Less: treasury stock at cost
(33,350 shares) ....................... (114,037) (114,037)
---------- ----------
4,294,767 3,539,916
---------- ----------
$5,837,629 $5,038,425
========== ==========
The accompanying notes are a part of this statement.
F-3
<PAGE>
EQUITEX, INC.
Schedule of Investments
June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
NUMBER COST
OF AND/OR FAIR
COMPANY SHARES OWNED EQUITY VALUE
- ------- ------------ ------ -----
<S> <C> <C> <C>
CONTROLLED COMPANIES
COMMON STOCKS - PRIVATE
MARKET METHOD OF VALUATION (a)(e)
VP Sports, Inc. .......................
Entity formed to seek acquisitions
in the manufacturing segment of
the sporting goods and leisure-
time industry ....................... 2,000,000 $ 250,000 $1,000,000
COMMON STOCKS - COST METHOD
OF VALUATION
Triumph Sports Group
Entity formed to seek acquisitions
in the non-manufacturing licensed and
supplemental segments of the sporting
goods and leisure-time industry ..... 1,500,000 375,000 375,000
AFFILIATED COMPANIES
COMMON STOCKS - PUBLIC MARKET
METHOD OF VALUATION (c)(e)
RDM Sports Group
Manufacturer of fitness
equipment and juvenile products ..... 4,979,437 1,088,815 56,018
OTHER - PUBLIC MARKET METHOD
OF VALUATION
RDM Sports Group 8% Convertible
Manufacturer of fitness Subordinated
equipment and juvenile products ..... Debentures 150,682 1,750
---------- ----------
Sub-Total
CONTROLLED AND AFFILIATED COMPANIES 1,864,497 1,432,768
---------- ----------
UNAFFILIATED COMPANIES
COMMON STOCKS - PUBLIC MARKET
METHOD OF VALUATION
IntraNet Solutions, Inc. (formerly
MacGregor Sports & Fitness, Inc.)
Document management services,
web-based internet software,
electronic document management
and demand printing ............... 378,250 1,406,998 1,938,530
Racotek
Medical technology .................. 200,000 814,907 550,000
NevStar Gaming Corporation
Gaming development .................. 7,000 38,500 21,875
</TABLE>
The accompanying notes are a part of this statement. (Continued)
F-4
<PAGE>
EQUITEX, INC.
Schedule of Investments (Page 2)
June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
NUMBER COST
OF AND/OR FAIR
COMPANY SHARES OWNED EQUITY VALUE
- ------- ------------ ------ -----
<S> <C> <C> <C>
UNAFFILIATED COMPANIES
COMMON STOCKS - PUBLIC MARKET
METHOD OF VALUATION (CONTINUED)
Osage System Group, Inc.
Network computing solutions
provider ............................ 4,000 12,000 28,000
COMMON STOCKS - PRIVATE MARKET
METHOD OF VALUATION (a)(e)
All Systems Go
Software development ................ 20,000(b) 25,000 25,000
Ocean Power Technology
Alternative energy
research and development ............ 35,714(b) 40,000 98,214
100,000 -- 275,000
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 2,407,405 3,006,619
---------- ----------
Total
ALL COMPANIES $4,271,902 $4,439,387
========== ==========
</TABLE>
(Continued)
The accompanying notes are a part of this statement.
F-5
<PAGE>
EQUITEX, INC.
Schedule of Investments (Page 3)
June 30, 1998
(Unaudited)
RESTRICTIONS AS TO RESALE
(a) Non-public company whose securities are privately owned. The Board of
Directors determines fair value in good faith using cost information, but
also taking into consideration the impact of such factors as available
financial information of the investee, the nature and duration of any
restrictions on resale, and other factors which influence the market in
which a security is purchased and sold.
(b) May be sold under the provisions of Rule 144 of the Securities Act of 1933
after an initial holding period expires.
(c) Since the Company is an affiliate, it may be affected by sales limitations
of one percent of the investee's outstanding common stock during any
three-month period, or four- week average trading volume during any
three-month period.
(e) Since certain of these securities have certain restrictions as to resale,
the Board of Directors determines fair value in good faith using public
market information, but also taking into consideration the impact of such
factors as available financial information of the investee, the nature and
duration of restrictions on the disposition of securities, and other
factors which influence the market in which a security is purchased and
sold.
(f) Valued at higher of cost or fair market value of underlying stock less
exercise price, subject to valuation adjustments as determined in good
faith by the Board of Directors, taking into consideration the impact of
such factors as available financial information of the investee, the nature
and duration of any restrictions on resale, and other factors which
influence the market in which a security is purchased and sold.
The accompanying notes are a part of this statement.
F-6
<PAGE>
EQUITEX, INC.
Schedule of Investments
December 31, 1997
<TABLE>
<CAPTION>
NUMBER COST
OF AND/OR FAIR
COMPANY SHARES OWNED EQUITY VALUE
- ------- ------------ ------ -----
<S> <C> <C> <C>
CONTROLLED COMPANIES
COMMON STOCKS - PRIVATE
MARKET METHOD OF VALUATION (a)(e)
VP Sports, Inc. .......................
Entity formed to seek-out
acquisitions in the sports
and health products industries ...... 2,000,000 $ 250,000 $1,000,000
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 ............... 473,250 1,410,776 2,498,529
RDM Sports Group (formerly
Roadmaster Industries, Inc.)
Manufacturer of fitness
equipment and juvenile products ..... 4,979,437 1,088,815 4,481
OTHER - PUBLIC MARKET METHOD
OF VALUATION
RDM Sports Group 8% Convertible
Manufacturer of fitness Subordinated
equipment and juvenile products ..... Debentures 150,682 1,750
---------- ----------
Sub-Total
CONTROLLED AND AFFILIATED COMPANIES 2,900,273 3,504,760
---------- ----------
UNAFFILIATED COMPANIES
COMMON STOCKS - PUBLIC MARKET
METHOD OF VALUATION
IVI Publishing
Publishing technology ............... 25,000 116,881 64,063
Racotek
Medical technology .................. 75,000 377,391 110,156
NevStar Gaming Corporation
Gaming development .................. 7,000 38,500 18,750
</TABLE>
(Continued)
The accompanying notes are a part of this statement.
F-7
<PAGE>
EQUITEX, INC.
Schedule of Investments (Page 2)
December 31, 1997
<TABLE>
<CAPTION>
NUMBER COST
OF AND/OR FAIR
COMPANY SHARES OWNED EQUITY VALUE
- ------- ------------ ------ -----
<S> <C> <C> <C>
COMMON STOCKS - PRIVATE MARKET
METHOD OF VALUATION (a)(e)
All Systems Go
Software development ................ 20,000(b) 25,000 25,000
Ocean Power Technology
Alternative energy
research and development ............ 35,714(b) 40,000 98,214
100,000 -- 275,000
Gain, Inc.
Male vascular devices ............... 20,000(b) 50,000 50,000
Juice Island
Health food stores .................. 10,000(b) 20,000 20,000
WARRANTS (f)(e)
Nationsmart
Consumer services ................... 10,000 -- 50
Juice Island
Health food stores .................. 2,500 -- --
---------- ---------- ----------
Sub-total
UNAFFILIATED COMPANIES 667,772 661,233
---------- ----------
Total
ALL COMPANIES ....................... $3,568,045 $4,165,993
========== ==========
</TABLE>
(Continued)
The accompanying notes are a part of this statement.
F-8
<PAGE>
EQUITEX, INC.
Schedule of Investments (Page 3)
December 31, 1997
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-9
<PAGE>
EQUITEX, INC.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Interest and dividends ......... $ 13,816 $ 23,011 $ 24,196 $ 30,601
Consulting fees ................ 125,000 -- 375,000 --
Administrative fees ............ 1,264 12,149 2,205 26,272
Miscellaneous .................. -- 2,805 -- 66,460
----------- ----------- ----------- -----------
140,080 37,965 401,401 123,333
Expenses
Salaries and consulting fees ... 75,153 76,107 150,306 153,870
Officer's bonus ................ 44,020 66,259 87,565 141,582
Office rent .................... 7,499 7,500 16,188 15,000
Legal and accounting ........... 23,156 4,164 50,789 32,560
Employee benefits .............. 36,587 38,006 132,761 76,012
Advertising and promotion ...... 3,221 1,419 5,555 1,494
Other general and administrative 76,749 37,742 171,194 84,418
Interest ....................... 27,181 17,646 47,505 35,943
Bad debt expense ............... 1,970 -- 15,703 --
Depreciation and amortization .. 2,635 2,918 5,356 5,822
----------- ----------- ----------- -----------
298,171 251,761 682,922 546,701
Net investment gain (loss) ........ (158,091) (213,796) (281,521) (423,368)
Net realized gain on investments
and net unrealized gain on
investments:
Proceeds from sales
of investments ................. 149,450 -- 861,593 60,258
Less: cost of investments ...... (18,994) -- (238,663) (81,978)
----------- ----------- ----------- -----------
Net realized gain (loss) on
investments before income taxes 130,456 -- 622,930 (21,720)
Net investment gain (loss) and
net realized gain on investments
before income taxes ............ (27,635) (213,796) 341,409 (445,088)
Income tax benefit (provision) -
current ........................ -- (52,659) -- (56,307)
Income tax benefit (provision) -
deferred ....................... (61,099) (61,293) (150,550) (121,243)
Recovery of income taxes through
utilization of net operating
loss carryforward .............. -- -- -- 93,250
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are a part of this statement. (Continued)
F-10
<PAGE>
EQUITEX, INC.
Statements of Operations (Page 2)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net investment gain (loss)
and net realized gain
on investments ................. $ (88,734) $ (327,748) $ 190,859 $ (622,638)
----------- ----------- ----------- -----------
Increase (decrease) in
unrealized appreciation
on investments ................. (691,746) (534,034) (430,463) (842,089)
Less income tax benefit
(provision) applicable to
decrease (increase) in
realized appreciation .......... 269,781 208,273 167,882 328,414
----------- ----------- ----------- -----------
(421,965) (325,761) (262,581) (513,675)
----------- ----------- ----------- -----------
Net increase (decrease)
in net assets resulting
from operations ................ $ (510,699) $ (653,509) $ (71,722) $(1,136,313)
=========== =========== =========== ===========
Increase (decrease) in net
assets per share ............... $ (.13) $ (.20) $ (.02) $ (.35)
=========== =========== =========== ===========
Weighted average number
of common shares ............... 4,016,029 3,191,115 3,789,331 3,191,115
=========== =========== =========== ===========
</TABLE>
The accompanying notes are a part of this statement.
F-11
<PAGE>
EQUITEX, INC.
Statements of Cash Flows
(Unaudited)
FOR THE SIX MONTHS
ENDED JUNE 30,
1998 1997
---- ----
Cash flows from operating activities:
Net change in net assets ...................... $ (71,722) $(1,136,313)
Adjustments to reconcile net change in
net assets to net cash provided by
operating activities:
Depreciation and amortization ............ 5,356 5,822
Donation of stock ........................ -- 4,136
Realized (gain) loss on sale of
investments ............................ (622,930) 21,720
Unrealized (gain) loss on investments .... 430,463 842,089
Proceeds from sales of investments ............ 861,593 60,258
Purchase of investments ....................... (942,520) (1,210)
Collection of notes receivable ................ 16,083 20,250
Issuance of notes receivable .................. (462,876) --
Changes in assets and liabilities:
(Increase) decrease in interest receivable . (9,352) 123
(Increase) decrease in trade receivables ... (77,071) (4,993)
(Increase) decrease in accounts
receivable - brokers ..................... 45,241 3,992
(Increase) in prepaid expense .............. (800) (7,868)
Decrease in income taxes refundable ........ -- 47,963
(Increase) in deferred income tax benefit .. (17,332)
Increase in accounts payable and
other accrued liabilities ................ 42,631 18,737
Increase in accounts payable to brokers .... 403,209 26,260
Increase (decrease) in accrued bonus
to officer ............................... (216,216) 141,582
Increase in income taxes payable ........... -- 4,696
Increase (decrease) in deferred income taxes -- (207,170)
----------- -----------
Net cash (used) by operating
activities ............................... (616,243) (159,926)
Cash flows from investing activities:
Purchase of furniture and equipment ........... (5,347) --
----------- -----------
Net cash (used) by investing activities .... (5,347) --
(Continued)
F-12
<PAGE>
EQUITEX, INC.
Statements of Cash Flows (Page 2)
(Unaudited)
FOR THE SIX MONTHS
ENDED JUNE 30,
1998 1997
---- ----
Cash flows from financing activities:
Issuance of notes payable ..................... $ 142,328 $ 113,000
Repayment of notes payable .................... (327,599) --
Common stock issued for cash .................. 826,572 --
----------- -----------
Net cash provided (used) by
financing activities ................... 641,301 113,000
Increase (decrease) in cash ...................... 19,711 (46,926)
Cash, beginning of period ........................ 9,187 53,795
----------- -----------
Cash, end of period .............................. $ 28,898 $ 6,869
=========== ===========
Supplemental disclosures of cash flow
information:
Interest paid ............................. $ 45,040 $ 35,865
=========== ===========
Interest received ......................... $ 14,844 $ 30,724
=========== ===========
F-13
<PAGE>
EQUITEX, INC.
Selected Notes to Financial Statements
June 30, 1998
(Unaudited)
NOTE 1. INVESTMENT IN TRIUMPH SPORTS
During the first and second quarter of 1998, the Company has received
1,000,000 and 500,000 shares, respectively, of the common stock of Triumph
Sports, a private company formed for the purpose of seeking out and acquiring an
operating entity in the non- manufacturing licensed and supplemental segments of
the sporting goods and leisure-time industry. The stock was received in exchange
for consulting services valued at $375,000. The Company's president is also the
President and a director of Triumph Sports.
NOTE 2. RELATED PARTY TRANSACTION
In May 1998 a director of the Company executed a promissory note for
$45,472 in payment for 39,200 shares of Equitex, Inc. common stock at $1.16 per
share purchased pursuant to the March 1998 private placement. The note is due in
December 1998 and bears interest at 8%.
NOTE 3. BONUS ARRANGEMENT WITH OFFICER
In April 1998 the Company's Board of Directors approved a change in the
Company's bonus arrangement with its president as outlined in a report from an
outside consulting firm. The exact details and date of adoption of the new bonus
arrangement must still be decided. However, the bonus is to be based on a
combination of a reduced percentage of the Company's assets combined with a
percentage of the increase in the market value of the Company's common stock.
Until the exact terms of the new bonus arrangement are decided, the Company
is accruing the officer's bonus quarterly under the terms of the old existing
bonus arrangement.
NOTE 4. PRIVATE PLACEMENTS OF COMMON STOCK
In March 1998, the Company's Board of Directors authorized a private
placement offering of the Company's common stock. The Company was authorized to
sell up to 500,000 shares of its common stock at $1.16 per share. As of the
close of the private placement on May 21, 1998, 499,200 shares were sold.
On June 29, 1998 the Company's Board of Directors authorized an additional
private placement of the Company's common stock. The Company is authorized to
sell up to 300,000 shares of its common stock at $3.25 per share. During July
1998, 15,000 shares have been subscribed.
NOTE 5. STOCK OPTIONS
In June 1998 the Board of Directors granted stock options to two
independent directors to purchase up to 75,000 shares each of the Company's
common stock at $3.19 per share which was the closing stock price at the date of
grant. Such options are subject to the Company's decertification as a BDC.
The Board also granted the following stock options to officers and
employees of the Company:
OPTION TYPE TO WHOM NO. OF SHARES OPTION PRICE
Incentive Officer 31,000 $3.19
Non-qualified Officers 478,655 $3.19
Non-qualified Employees 28,800 $3.19
(Continued)
F-14
<PAGE>
EQUITEX, INC.
Selected Notes to Financial Statements
June 30, 1998
(Unaudited)
NOTE 5. STOCK OPTIONS (CONTINUED)
All of these options were issued at the closing stock price at date of
grant, and all options expire five years from date of grant.
NOTE 6. PROPOSED DECERTIFICATION AS A BDC
At a meeting held on April 3, 1998, the Company's stockholders approved a
proposal authorizing the Company to change the nature of its business and
withdraw its election as a Business Development Company (BDC) under the
Investment Company Act of 1940. The withdrawal will become effective when the
Securities and Exchange Commission receives the Company's official notice of
election of withdrawal. The Company does not intend to file its election of
withdrawal until such time as it is relatively certain that it will qualify as
an operating business rather than an investment company.
NOTE 7. ACQUISITION OF FIRST TELESERVICES CORPORATION (FTC)
On June 19, 1998 the Company's Board of Directors approved the letter of
intent from FTC whereby the Company would acquire FTC in exchange for 625,000
shares of Equitex, Inc. common stock. FTC would become a wholly-owned subsidiary
of the Company.
F-15
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
FORWARD-LOOKING STATEMENTS
The report may contain certain "forward-looking" statements as such term is
defined in the Private Securities Litigation Reform Act of 1995 or by the
Securities and Exchange Commission in its rules, regulations and releases, which
represent the Registrant's expectations or beliefs, including but not limited
to, statements concerning the Registrant's operations, economic performance,
financial condition, growth and acquisition strategies, investments, and future
operational plans. For this purpose, any statements contained herein that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words such as
"may", "will", "expect", "believe", "anticipate", "intent", "could", "estimate",
"might", or "continue" or the negative or other variations thereof or comparable
terminology are intended to identify forward-looking statements. These
statements by their nature involve substantial risks and uncertainties, certain
of which are beyond the Registrant's control, and actual results may differ
materially depending on a variety of important factors, including uncertainty
related to acquisition, governmental regulation, managing and maintaining
growth, the value of the Registrant's investments, the operations of the
Registrant's investee companies, volatility of stock price and any other factors
discussed in this and other Registrant filings with the Securities and Exchange
Commission.
LIQUIDITY AND CAPITAL RESOURCES
Of the Registrant's liabilities of $1,542,862 at June 30, 1998, the
Registrant had no amounts due to banks. This compares to total liabilities of
$1,498,509 at December 31, 1997. 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 as well as other notes receivable, the Registrant
carried notes receivable of $662,531 and $418,210 at June 30, 1998 and December
31, 1997, respectively. The majority of the increase in notes receivable at both
of these dates as compared to 1996 is the result of the Registrant covering
portions of expenses and start-up costs for two new investees during the latter
part of 1997 and continuing into 1998. As these companies complete mergers or
acquisitions, or raise capital through private or public offerings, these notes
may be repaid or otherwise extinguished although no assurance can be given at
this time that such repayments will take place.
The Registrant's cash position increased by $19,711 at June 30, 1998 as
compared to December 31, 1997. Net cash used by operating activities was
$616,243 for 1998 as compared to $159,926 used in 1997. No one use or provision
of cash from operating activities accounted for the change from 1998 to 1997.
(Continued)
F-16
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued).
Cash flows from investing activities used $5,347 for the purchase of fixed
assets in 1998 compared to $0 in the first six months of 1997. The cash provided
by financing activities of $641,301 in 1998 was derived from a sale of the
Registrant's common stock in private placement offerings. These funds were used
to repay notes payable of $327,599. However, an additional $142,328 of new notes
were issued resulting in an overall cash provision from financing activities of
$641,301.
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
investees as warranted to help defray operating costs, and sales of the
Registrant's investments. During 1997 and the first six months of 1998, the
Registrant's sources of income were sufficient to cover its operating overhead
and it is anticipated this trend will continue during the remainder of 1998.
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 1998
year due to its increased ability to sell portions of its investee companies'
stock positions as restrictions on their ability to be sold end. However, the
Registrant has sold and anticipates that it will continue to offer limited
private placements of the Registrant's common stock in order to increase its
present liquidity. 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 of its investments and therefore does
not necessarily liquidate them upon the expiration of these restrictions. As the
Registrant cannot forecast the types of large-scale sales which generate
significant profits, the Registrant has 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 1998, sales
of portfolio securities may be necessary for its financing needs.
The Registrant's largest investee company is IntraNet, a publicly held
company which provides document handling, storage and retrieval solutions to
Fortune 1000 companies utilizing internet and intranet technologies. For the
year ended March 31, 1998, the latest available date, IntraNet had total
revenues of $19.4 million and net loss of $3.7 million.
On August 29, 1997 RDM Sports Group, Inc. ("RDM") filed Chapter 11
bankruptcy petitions for the company and all of its subsidiaries with the U.S.
(Continued)
F-17
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued).
Bankruptcy Court for the Northern District of Georgia and ceased all operations.
As part of the ongoing bankruptcy proceedings, certain of RDM's assets have been
sold to pay creditors and no plan of reorganizations has been filed to date.
Following the initiation of this bankruptcy proceeding, the fair value of the
Registrant's investment in RDM was substantially reduced so that at June 30,
1998 and December 31, 1997, the Registrant had a cost basis of $1,239,497 in its
investment in RDM with fair value of $57,768 and $6,231, respectively.
As of June 30, 1998, the Registrant had made no other material commitments
for capital expenditures or loans to investees. However, the Registrant may be
required to make such expenditures or loans during the remainder of 1998, the
amount of which is unknown at this time. 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. The
Registrant does not currently anticipate any extraordinary costs will be
incurred as a result of year 2000 computer date conversions.
RESULTS OF OPERATIONS
Revenues for the three and six months ended June 30, 1998 were $140,080 and
$401,401, respectively, as compared to $37,965 and $123,333, respectively, for
the three and six months ended June 30, 1997. The increase in revenues for 1998
over 1997 is primarily the result of the consulting fee revenue recognized
relative to the Registrant's newest investee company, Triumph Sports (Triumph).
The Registrant received stock in Triumph in exchange for consulting services. In
the first six months of 1997, the Registrant received payments of $65,850 on
notes receivable which had been written off in prior years. In the past, the
Registrant has received 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. The Registrant expects that overall 1998 revenues,
other than the Triumph consulting fees, will be similar or possibly slightly
higher than those of 1997.
The realized gain on investments before income taxes for year-to-date 1998
was $622,930 as compared to a loss of $21,720 in 1997. Proceeds from sales of
investments were significantly higher in 1998 than 1997. A majority of the sales
of investments in 1998 was IntraNet Solutions common stock. 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. However, the Registrant currently has fewer positions in
its portfolio which are valued utilizing the public market method and presently
believes there is sufficient market liquidity for the Registrant to conduct an
orderly sale of any position over a relatively short period of time.
Expenses for the first six months of 1998 were $682,922 as compared to
$546,701 in the first six months of 1997, an increase of 25%.
(Continued)
F-18
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued).
While the Registrant's expenses were fairly similar in many categories,
significant changes were recorded in officer's bonus, bad debt expense, employee
benefits and other general and administrative in 1998. The officer's bonus was
significantly lower as a result of the Registrant's lower assets while the bad
debt provision increased as a result of additional lending activity which
occurred in the latter half of 1997. Other general and administrative expenses
increased as a result of additional costs associated with the April shareholders
meeting and the private placements. The Registrant currently believes that
expenses for the remainder of the year ending December 31, 1998 will continue at
levels similar to those of 1997 should the Registrant continue to operate as a
BDC. Should the Registrant decertify as a BDC as set forth below, the Registrant
is unable to estimate its expenses for later in 1998.
For the six months ended June 30, 1998, unrealized appreciation of
investments decreased $430,463 as compared to a decrease of $842,089 for the
comparable period of 1997. The smaller decrease in 1998 was caused by some of
the unrealized gains of IntraNet being converted to realized gains during 1998.
During the six months ended June 30, 1997, the Registrant's investments in RDM
and IntraNet were experiencing market value declines. 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, however, the Registrant is encouraged by recent developments with
respect to IntraNet, and a new investee, VP Sports, which the Registrant added
during 1997, and which the Registrant believes will enhance its portfolio in
1998. Overall, the net decrease in net assets resulting from operations was
$71,722 for 1998 as compared to a decrease of $1,136,313 for the comparable
period of 1997.
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 largest
investees. The Registrant must increase the number of its investments in order
to reduce its susceptibility to the operating performance and market
fluctuations of its investee companies that have occurred over the past few
years. During the past several years, the Registrant had been concentrating its
efforts on assisting its existing portfolio companies and therefore had not made
any major new investments. During 1997, the Registrant added a major new
investee company, VP Sports, and in the first quarter of 1998 added another new
investee, Triumph Sports. Until such time as more of these mature investments
are added, the Registrant will continue to be susceptible to market fluctuations
as long as it continues to operate as a BDC.
At a special meeting of stockholders held on April 3, 1998, the
Registrant's stockholders approved a proposal authorizing the Registrant to
change the nature of its business and withdraw its election as a BDC under the
(Continued)
F-19
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued).
Investment Company Act. The Registrant's Board of Directors has adopted a plan
which began with stockholder approval for the Registrant to withdraw as a BDC,
with the intent of becoming an operating company. The Registrant is actively
pursuing business opportunities to acquire or otherwise purchase an ongoing
business or, in the alternative, target an appropriate merger candidate. The
Registrant has not reached a level in its discussions which would lead it to
believe that any particular acquisition, purchase or merger is likely to occur
with any of the opportunities it has pursued to date; however, based on the
types of discussions held so far, the Registrant believes that a transaction of
this nature could be completed within six to twelve months following stockholder
approval of the proposal. Further, the Board believes that with the flexibility
and authority to withdraw as a BDC prior to entering into any definitive
acquisition or merger agreement, the Registrant has increased its ability to
attract interested businesses which it may acquire or consider merging with.
The Registrant does not intend to file its election to withdraw as a BDC
with the Securities and Exchange Commission until such time as it is relatively
certain that it will qualify as an operating business rather than as an
investment company. A voluntary election to withdraw as a BDC becomes effective
upon filing with the Securities and Exchange Commission unless a later date is
specified in the election form. The Board of Directors has opted for this
approach because it believes that if it does not qualify as an operating company
within a short period of time after the Registrant withdraws its election as a
BDC, the Registrant could possibly be considered an unregistered investment
company which is not in compliance with the Investment Company Act. The
Registrant will continue to conduct business as a BDC until such time as the
election to withdraw becomes effective.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports of Form 8-K
(a) Financial data schedule for SEC registrants
(b) No reports on Form 8-K were filed during the quarter
covered by this report.
F-20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EQUITEX, INC.
(Registrant)
By /S/ HENRY FONG
------------------------------
Henry Fong
President, Treasurer and Chief
Financial Officer
Date: July 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Registrant's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1998, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 28,898
<SECURITIES> 4,439,387
<RECEIVABLES> 975,382
<ALLOWANCES> 109,773
<INVENTORY> 0
<CURRENT-ASSETS> 5,304,996
<PP&E> 152,303
<DEPRECIATION> 123,107
<TOTAL-ASSETS> 5,837,629
<CURRENT-LIABILITIES> 1,542,862
<BONDS> 0
0
0
<COMMON> 86,473
<OTHER-SE> 4,208,294
<TOTAL-LIABILITY-AND-EQUITY> 5,837,629
<SALES> 0
<TOTAL-REVENUES> 401,401
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 619,714
<LOSS-PROVISION> 15,703
<INTEREST-EXPENSE> 47,505
<INCOME-PRETAX> 341,409
<INCOME-TAX> (150,550)
<INCOME-CONTINUING> (71,722)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (71,722)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
