UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended SEPTEMBER 30, 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 November 13, 1998: 5,352,315
<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 nine months ended September 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
SEPT. 30, DEC. 31,
1998 1997
----------- ----------
(Unaudited)
ASSETS
Investments, at fair value:
Securities (cost of $5,017,639 and
$3,568,045 in 1998 and 1997, respectively) .... $4,362,728 $4,165,993
Notes receivable, net of allowance
for uncollectible accounts of $40,293
in 1998 and 1997, respectively ................ 942,552 418,210
Accrued interest receivable, net of
allowance for uncollectible interest
of $35 ........................................ 30,945 5,701
Trade receivables, net of allowance
for uncollectible accounts of $69,445
and $53,742 in 1998 and 1997, respectively .... 204,098 110,954
---------- ----------
5,540,323 4,700,858
Cash ............................................. 193,737 9,187
Accounts receivable - brokers .................... -- 73,741
Subscriptions receivable ......................... 1,446 --
Note receivable - director ...................... 45,472 --
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 $125,320
and $117,750 in 1998 and 1997, respectively ... 28,710 29,204
Deferred income tax benefit ...................... -- 63,180
Other ............................................ 33,819 10,105
---------- ----------
$5,995,657 $5,038,425
========== ==========
(Continued)
The accompanying notes are a part of this statement.
F-2
<PAGE>
EQUITEX, INC.
Statements of Assets and Liabilities
SEPT. 30, DEC. 31,
1998 1997
----------- ----------
(Unaudited)
LIABILITIES AND NET ASSETS
Liabilities
Notes payable - related parties ............... $ 242,328 $ 177,599
Notes payable - others ........................ 247,500 250,000
Accounts payable and other
accrued liabilities ......................... 201,797 121,349
Accounts payable to brokers ................... 863,864 650,302
Accrued bonus to officer ...................... 646,835 299,259
---------- ----------
2,202,324 1,498,509
Net Assets
Preferred stock, par value $.01;
2,000,000 shares authorized; no
shares issued
Common stock, par value $.02;
a 7,500,000 shares authorized; 5,206,665
and 3,494,465 shares issued; 5,173,315
and 3,461,115 shares outstanding in
1998 and 1997, respectively ................. 104,133 69,889
Additional paid-in capital .................... 6,840,022 4,644,275
Retained earnings
Accumulated deficit prior to
becoming a BDC ............................ (118,874) (118,874)
Accumulated net investment loss ............. (14,914,865) (13,431,269)
Accumulated net realized gains from
sales and permanent write-downs
of investments ............................ 12,885,066 12,125,185
Unrealized net gains (losses) on
investments (net of deferred income
taxes of $233,201 in 1998
and 1997, respectively) ................... (888,112) 364,747
Less: treasury stock at cost
(33,350 shares) ........................... (114,037) (114,037)
---------- ----------
3,793,333 3,539,916
---------- ----------
$5,995,657 $5,038,425
========== ==========
The accompanying notes are a part of this statement.
F-3
<PAGE>
EQUITEX, INC.
Schedule of Investments
September 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 - BOARD APPRAISAL
METHOD OF VALUATION
First Teleservices Corporation
Fee-based financial services .......... 100 565,639 565,639
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
First Telebank Corporation
Bank acquisition company .............. 20,000 200,000 200,000
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 22,407
OTHER - PUBLIC MARKET METHOD
OF VALUATION
RDM Sports Group 8% Convertible
Manufacturer of fitness Subordinated
equipment and juvenile products ....... Debentures 150,682 --
---------- ----------
Sub-Total
CONTROLLED AND AFFILIATED COMPANIES .. 2,630,136 2,163,046
---------- ----------
</TABLE>
(Continued)
The accompanying notes are a part of this statement.
F-4
<PAGE>
EQUITEX, INC.
Schedule of Investments (Page 2)
September 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
IntraNet Solutions, Inc. (formerly
MacGregor Sports & Fitness, Inc.)
Document management services,
web-based internet software,
electronic document management
and demand printing ................. 348,250 1,399,096 1,349,468
Zamba (formerly Racotek)
Medical technology .................... 200,000 814,907 375,000
NevStar Gaming Corporation
Gaming development .................... 7,000 38,500 7,000
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 .................... 35,714(b) 40,000 98,214
research and development .............. 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 ................ 2,387,503 2,199,682
---------- ----------
Total
ALL COMPANIES ......................... $5,017,639 $4,362,728
========== ==========
</TABLE>
(Continued)
The accompanying notes are a part of this statement.
F-5
<PAGE>
EQUITEX, INC.
Schedule of Investments (Page 3)
September 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>
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 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-9
<PAGE>
EQUITEX, INC.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Interest and dividends .......... $ 16,128 $ 130 $ 40,324 $ 30,731
Consulting fees ................. -- -- 375,000 --
Administrative fees ............. 120 43 2,325 26,315
Miscellaneous ................... -- 652 -- 67,112
----------- ----------- ----------- -----------
16,248 825 417,649 124,158
Expenses
Salaries and consulting fees .... 75,154 87,147 225,460 241,017
Officer's bonus ................. 714,777 (16,120) 802,342 125,462
Office rent ..................... 7,501 11,724 23,689 26,724
Legal and accounting ............ 225,288 37,304 276,077 69,864
Employee benefits ............... 37,186 97,811 169,947 173,823
Advertising and promotion ....... 9,510 465 15,065 1,959
Other general and administrative 53,589 19,554 224,759 103,972
Interest ........................ 29,606 23,931 77,135 59,874
Loss on indemnification agreement -- 599,813 -- 599,813
Bad debt expense ................ -- 7,036 15,703 7,036
Depreciation and amortization ... 2,532 2,801 7,888 8,623
----------- ----------- ----------- -----------
1,155,143 871,466 1,838,065 1,418,167
Net investment gain (loss) ......... (1,138,895) (870,641) (1,420,416) (1,294,009)
Net realized gain on investments
and net unrealized gain on
investments:
Proceeds from sales
of investments .................. 156,853 364,455 1,018,446 424,713
Less: cost of investments ....... (19,902) (417,531) (258,565) (499,509)
----------- ----------- ----------- -----------
Net realized gain (loss) on
investments before income taxes . 136,951 (53,076) 759,881 (74,796)
Net investment gain (loss) and
net realized gain on investments
before income taxes ............. (1,001,944) (923,717) (660,535) (1,368,805)
Income tax benefit (provision) -
current ......................... -- -- -- (56,307)
Income tax benefit (provision) -
deferred ........................ 87,370 104,385 (63,180) (16,858)
Recovery of income taxes through
utilization of net operating
loss carryforward ............... -- -- -- --
----------- ----------- ----------- -----------0
</TABLE>
The accompanying notes are a part of this statement. (Continued)
F-10
<PAGE>
EQUITEX, INC.
Statements of Operations (Page 2)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net investment gain (loss)
and net realized gain
on investments .................. $ (914,574) $ (819,332) $ (723,715) $(1,441,970)
----------- ----------- ----------- -----------
Increase (decrease) in
unrealized appreciation
on investments .................. (822,396) (3,429,554) (1,252,859) (4,271,643)
Less income tax benefit
(provision) applicable to
decrease (increase) in
realized appreciation ........... 320,734 1,649,526 488,616 1,977,940
Add: allowance for income
tax benefit ..................... (488,616) -- (488,616) --
----------- ----------- ----------- -----------
(990,278) (1,780,028) (1,252,859) (2,293,703)
----------- ----------- ----------- -----------
Net increase (decrease)
in net assets resulting
from operations ................. $(1,904,852) $(2,599,360) $(1,976,574) $(3,735,673)
=========== =========== =========== ===========
Increase (decrease) in net
assets per share ................ $ (.41) $ (.81) $ (.48) $ (1.17)
=========== =========== =========== ===========
Weighted average number
of common shares ................ 4,700,532 3,191,115 4,096,403 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 NINE MONTHS
ENDED SEPTEMBER 30,
1998 1997
----------- -----------
Cash flows from operating activities:
Net change in net assets ...................... $(1,976,574) $(3,735,673)
Adjustments to reconcile net change in
net assets to net cash provided by
operating activities:
Depreciation and amortization ............ 7,888 8,623
Donation of stock ........................ -- 4,136
Realized (gain) loss on sale of
investments ............................ (759,881) 74,796
Unrealized (gain) loss on investments .... 1,252,859 4,271,643
Proceeds from sales of investments ............ 1,018,446 424,713
Purchase of investments ....................... (1,142,520) (61,215)
Collection of notes receivable ................ 173,083 20,250
Issuance of notes receivable .................. (742,897) (45,000)
Transfer of cash to escrow account ............ -- (300,000)
Changes in assets and liabilities:
(Increase) decrease in interest receivable . (25,244) 120
(Increase) decrease in trade receivables ... (93,144) 29,339
(Increase) decrease in accounts
receivable - brokers ..................... 73,741 3,992
(Increase) in subscriptions receivable ..... (1,446) --
(Increase) in prepaid expense .............. (23,714) (26,003)
Decrease in income taxes refundable ........ -- 164,459
(Increase) decrease in deferred income
tax benefit .............................. 63,180
Increase in accounts payable and
other accrued liabilities ................ 80,448 37,522
Increase in accrued liability -
indemnification agreement ................ -- 564,755
Increase (decrease) in accounts payable
to brokers ............................... 213,562 (54,405)
Increase (decrease) in accrued bonus
to officer ............................... 347,576 125,462
Increase in income taxes payable ........... -- --
Increase (decrease) in deferred income taxes -- (1,961,081)
---------- ----------
Net cash (used) by operating
activities ............................... (1,534,637) (453,567)
Cash flows from investing activities:
Purchase of furniture and equipment ........... (7,394) --
---------- ----------
Net cash (used) by investing activities .... (7,394) --
(Continued)
F-12
<PAGE>
EQUITEX, INC.
Statements of Cash Flows (Page 2)
(Unaudited)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
1998 1997
----------- -----------
Cash flows from financing activities:
Issuance of notes payable - officer ........... $ 142,328 $ 321,519
Issuance of notes payable - other ............. 247,500 100,000
Repayment of notes payable .................... (327,599) --
Common stock issued for cash .................. 1,664,352 --
---------- ----------
Net cash provided (used) by
financing activities ................... 1,726,581 421,519
Increase (decrease) in cash ...................... 184,550 (32,048)
Cash, beginning of period ........................ 9,187 53,795
---------- ----------
Cash, end of period .............................. $ 193,737 $ 21,747
========== ==========
Supplemental disclosures of cash flow information:
Interest paid ............................. $ 67,874 $ 55,332
========== ==========
Interest received ......................... $ 15,079 $ 30,851
========== ==========
Non-cash financing activities:
Common stock issued for common
stock of previously unrelated
entity .................................... $ 565,639 $ --
========== ==========
F-13
<PAGE>
EQUITEX, INC.
Selected Notes to Financial Statements
September 30, 1998
(Unaudited)
NOTE 1. INVESTMENTS
a. 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.
b. Investment in First Teleservices Corporation (FTC)
Effective August 13, 1998, the Company acquired all of the outstanding
common shares of FTC in exchange for 625,000 shares of Equitex, Inc. common
stock. The Company is holding this investment as part of its investment pool
until such time as it might elect to de-certify as a BDC. The Board of Directors
used the Board appraisal method of valuation for this investment and recorded
this investment at $565,639, which was the net asset value of FTC's underlying
assets and liabilities at the acquisition date.
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. NOTE PAYABLE
In September 1998 an unrelated entity loaned the Company $247,000
pursuant to a note agreement. The note bears interest at 10% per annum, is
personally guaranteed by the Company's President, and is secured by 200,000
shares of Equitex, Inc. common stock owned by an entity controlled by the
Company's President. Both principal and interest are due in one lump sum on
December 15, 1998. In addition, the Company has promised, subject to stockholder
approval, to issue warrants to the noteholder to purchase 25,000 shares of the
Company's common stock exercisable at $5 per share for a period of five years
from the date of issuance. If shareholder approval is not obtained by December
31, 1998, then the Company's President must transfer to the noteholder, 10,000
shares of his personal shares of the Company's common stock.
NOTE 4. BONUS ARRANGEMENT WITH OFFICER
In August 1998 the Company's Board of Directors finalized a new bonus
arrangement with the Company's president as recommended by an outside consulting
firm. The annual bonus is to be calculated quarterly and is based on a
combination of 1 percent of the Company's assets combined with 5 percent of the
increase in the market value of the Company's common stock each quarter.
The new bonus arrangement is effective January 1, 1998. The bonus
accrual at September 30, 1998 has been adjusted to reflect the terms of the new
bonus arrangement.
(Continued)
F-14
<PAGE>
EQUITEX, INC.
Selected Notes to Financial Statements
September 30, 1998
(Unaudited)
NOTE 5. 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 750,000 shares of its common stock at $3.25 per share.
As of September 30, 1998, 246,000 shares have been sold. Subsequent to September
30, 1998, an additional 120,000 shares were sold.
NOTE 6. 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
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. As of September 30,
1998, 12,000 shares of non-qualified options issued to employees were exercised.
Subsequent to September 30, 1998, an additional 59,000 shares of non-qualified
stock options were exercised.
NOTE 7. 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.
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 $2,202,324 at September 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 liabilities in the near future except for a note
payable of $247,500 which matures in December 1998. However, the Registrant
intends to extinguish these remaining 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 $942,552 and $418,210 at September 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 three 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 $193,737 at September 30, 1998
as compared to December 31, 1997. Net cash used by operating activities was
$1,534,637 for the first nine months of 1998 as compared to $453,567 used in the
first nine months of 1997. No one use or provision of cash from operating
(Continued)
F-16
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued).
activities accounted for the change from 1998 to 1997. Cash flows from investing
activities used $7,394 for the purchase of fixed assets in 1998 compared to $0
in the first nine months of 1997. The cash provided by financing activities of
$1,726,581 in 1998 was derived primarily from sales of the Registrant's common
stock in private placement offerings combined with an overall net increase in
notes payable of $62,000.
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 nine months of 1998, the
Registrant's sources of income were not sufficient to cover its operating
overhead and it is anticipated this trend will continue during the remainder of
1998. In order to cover its operating costs, additional cash was generated
through sales of the Company's common stock, the sale of portfolio securities,
and through issuance of net additional notes payable of $62,000 in 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 has
sold and anticipates that it will continue to offer limited private placements
of the Registrant's common stock in order to maintain or 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
expects that additional funds from sales of its common stock through a private
placement will continue during the fourth quarter of 1998.
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 six
months ended September 30, 1998, the latest available date, IntraNet had total
revenues of $8.4 million and a net loss of $700,000. Highlights for IntraNet for
the six months ended September 30, 1998 included the sale of IntraNet's hardware
integration unit to Osage Systems Group, Inc. effective September 30, 1998. The
sale was completed for a purchase price of $1.6 million, and certain future
financial consideration, dependent on the performance of the unit divested over
the next two years. IntraNet also posted its first profitable quarter for the
(Continued)
F-17
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued).
quarter ended September 30, 1998 with net income attributable to common
stockholders of $242,000. In addition, in May 1998, IntraNet issued $3,000,000
of Series B 4% Convertible Preferred Stock.
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.
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 September
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 $22,407 and $6,231, respectively.
As of September 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.
RESULTS OF OPERATIONS
Revenues for the three and nine months ended September 30, 1998 were
$16,248 and $417,649, respectively, as compared to $825 and $124,158,
respectively, for the three and nine months ended September 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 nine 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 to those of 1997.
The realized gain on investments before income taxes for year-to-date 1998
was $759,881 as compared to a loss of $74,796 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.
(Continued)
F-18
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued).
Expenses for the first nine months of 1998 were $1,838,065 as compared to
$1,418,167 in the first nine months of 1997, an increase of 30%. While the
Registrant's expenses were fairly similar in many categories, significant
changes were recorded in officer's bonus, legal and accounting, bad debt
expense, and other general and administrative in 1998. The officer's bonus was
significantly higher as a result of the Registrant's finalization of a new bonus
arrangement with the Company's president as recommended by an outside consulting
firm. The annual bonus is to be calculated quarterly and is based on a
combination of 1 percent of the Company's assets combined with 5 percent of the
increase in the market value of the Company's common stock each quarter. The new
bonus arrangement is effective January 1, 1998. The bonus accrual at September
30, 1998 has been adjusted to reflect the terms of the new bonus arrangement. In
addition, legal and accounting expense increased during 1998 primarily due to
legal fees associated with the RDM bankruptcy situation, and with the litigation
relative to the Registrant's contract deposit receivable. 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 1998 increases in these expense categories were
offset somewhat by the nonrecurring loss on indemnification agreement of
$599,813 which occurred in the third quarter of 1997. The Registrant currently
believes that expenses for the fourth quarter of 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 nine months ended September 30, 1998, unrealized appreciation of
investments decreased $1,252,859 as compared to a decrease of $4,271,643 for the
comparable period of 1997. The decrease in 1998 was caused by some of the
unrealized gains of IntraNet being converted to realized gains during 1998.
During the nine months ended September 30, 1997, the Registrant's investments in
RDM and IntraNet were experiencing significant 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
$1,976,574 for 1998 as compared to a decrease of $3,735,673 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
(Continued)
F-19
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued).
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. Effective August 1998, another new investee, First
Teleservices Corporation (FTC) was added. The Company acquired all of the
outstanding common shares of FTC, a development stage company which intends to
operate in the fee-based financial services industry, in exchange for 625,000
shares of Equitex, Inc. common stock. Until such time as more 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
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
operating business in the banking industry while also pursuing other
alternatives in other industries. 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
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.
Presently, the Company has determined it should not be at risk internally
as a result of year 2000 date conversions and does not anticipate any
significant expenditures will be required for internal software failures. There
can be no assurance, however, that the company will not be affected by outside
(Continued)
F-20
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued).
and third party failures from service providers such as banks, stock brokerage
firms, transfer agents, and other businesses with whom the Company does
business. While the Company will make every effort to determine its exposure
with respect to such businesses, there can be no assurance such failures will
not take place and presently there is no accurate way to determine any costs the
Company may incur should such failures occur.
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) The Company filed no reports on Form 8-K during
the quarter covered by this report
F-21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EQUITEX, INC.
(Registrant)
By /s/ Henry Fong
------------------------------------
Henry Fong
President, Treasurer and Chief
Financial Officer
Date: November 19, 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 September 30, 1998, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 193,737
<SECURITIES> 4,362,728
<RECEIVABLES> 1,287,368
<ALLOWANCES> 109,773
<INVENTORY> 0
<CURRENT-ASSETS> 5,540,323
<PP&E> 154,030
<DEPRECIATION> 125,320
<TOTAL-ASSETS> 5,995,657
<CURRENT-LIABILITIES> 2,202,324
<BONDS> 0
0
0
<COMMON> 104,133
<OTHER-SE> 3,689,200
<TOTAL-LIABILITY-AND-EQUITY> 5,995,657
<SALES> 0
<TOTAL-REVENUES> 417,649
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,745,227
<LOSS-PROVISION> 15,703
<INTEREST-EXPENSE> 77,135
<INCOME-PRETAX> (660,535)
<INCOME-TAX> (63,180)
<INCOME-CONTINUING> (1,976,574)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,976,574)
<EPS-PRIMARY> (.48)
<EPS-DILUTED> (.48)
</TABLE>
