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, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to_________
Commission File No. 0-12374
EQUITEX, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 84-0905189
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7315 East Peakview Avenue
Englewood, Colorado 80111
---------------------------------------------------
(Address of principal executive offices) (Zip code)
(303) 796-8940
---------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Number of shares of common stock outstanding at November 12, 1999: 7,106,943
<PAGE>
EQUITEX, INC.
PART 1 FINANCIAL INFORMATION
PART 2 OTHER INFORMATION
2
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(UNAUDITED)
ASSETS
Cash and cash equivalents .................................... $ 908,829
------------
Receivables, net of allowance for
uncollectible accounts of $223,000:
Accounts receivable ..................................... 1,000,499
Loans and notes receivable .............................. 891,316
------------
1,891,815
Mortgage loans held for sale, less loan
loss reserve of $958,000 ................................... 28,778,109
------------
Inventories .................................................. 156,383
------------
Fixed assets, net of accumulated
depreciation of $980,400 .................................... 1,031,818
------------
Investments:
Trading securities ...................................... 1,034,262
Available for sale securities ........................... 39,836
Other Investments ....................................... 141,434
Investment in First TeleBanc Corp. ...................... 800,000
Investment in VP Sports, Inc. ........................... 1,957,800
Investment in First Net One Joint Venture ............... 275,811
------------
4,249,143
------------
Intangible assets, net of accumulated
amortization of $69,000 .................................. 8,810,888
Restricted cash and other deposits ........................... 374,924
Other ........................................................ 708,703
------------
9,894,515
------------
$ 46,910,612
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities ................ $ 6,157,463
Notes payable and other obligations ..................... 2,398,777
Warehouse loans and other notes payable ................. 21,934,169
------------
Total liabilities ..................................... 30,490,409
------------
Minority interest ............................................ 2,857,000
------------
Stockholders' equity:
Preferred stock; convertible, par value $1,000;
4,500 shares authorized:
Series D, 6%, 1,200 shares issued and outstanding ... 1,200,000
Series E, 250 shares issued and outstanding ......... 250,000
Common stock, par value $.02; 7,500,000
shares authorized; 7,140,293 shares issued; 7,106,943
shares outstanding ................................... 143,206
Additional paid-in capital .............................. 21,257,597
Accumulated comprehensive other income .................. 10,643
Accumulated deficit ..................................... (9,184,206)
Less: treasury stock at cost ............................ (114,037)
------------
Total stockholders' equity ............................ 13,563,203
------------
$ 46,910,612
============
See notes to consolidated financial statements.
3
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Nine
months ended months ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(Pro forma)* (Pro forma)*
<S> <C> <C> <C> <C>
Revenues .................................... $ 679,728 $ 204,272 $ 1,676,582 $ 209,182
Cost of sales ............................... 99,721 79,998 342,273 79,998
----------- ----------- ----------- -----------
Gross profit ................................ 580,007 124,272 1,334,309 129,184
----------- ----------- ----------- -----------
Selling, general and administrative expenses 1,302,220 1,282,702 3,128,514 2,128,917
Losses (gains) on trading securities ........ (55,266) (804,245) 82,489 (480,148)
Interest income ............................. (79,240) (154,169)
Interest expense ............................ 221,264 29,630 283,085
Equity loss in VP Sports, Inc. .............. 150,330 150,330 77,135
----------- ----------- ----------- -----------
1,539,308 508,087 3,490,249 1,725,904
----------- ----------- ----------- -----------
Loss before minority interest and taxes ..... (959,301) (383,815) (2,155,940) (1,596,720)
Minority interest ........................... 903 26,200
----------- ----------- ----------- -----------
Loss before income taxes .................... (959,301) (382,912) (2,155,940) (1,570,520)
Provision for income taxes .................. 41,974 63,180 41,968 63,180
----------- ----------- ----------- -----------
Net loss .................................... (1,001,275) (446,092) (2,197,908) (1,633,700)
Other comprehensive income (loss),
unrealized holding gain (loss) on
investments .............................. (39,835) (35,361) 21,391 16,176
----------- ----------- ----------- -----------
Comprehensive loss .......................... $(1,041,110) $ (481,453) $(2,176,517) $(1,617,524)
=========== =========== =========== ===========
Net loss .................................... $(1,001,275) $ (446,092) $(2,197,908) $(1,633,700)
Amortization of discount on preferred stock . (1,884,615) (3,217,713)
----------- ----------- ----------- -----------
Net loss applicable to common shareholders .. $(2,885,890) $ (446,092) $(5,415,621) $(1,633,700)
=========== =========== =========== ===========
Net loss per common share ................... $ (.40) $ (.09) $ (.83) $ (.40)
============ =========== =========== ===========
Weighted average number of
common shares outstanding ................. $ 7,152,823 $ 4,700,532 $ 6,542,114 $ 4,096,403
============ =========== =========== ===========
</TABLE>
* As if an operating company rather than a BDC.
See notes to consolidated financial statements.
4
<PAGE>
EQUITEX, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Nine
months ended months ended
September 30, September 30,
1998 1998
(while a BDC) (while a BDC)
----------- -----------
<S> <C> <C>
Revenues:
Interest and dividends ............................................ $ 16,128 $ 40,324
Consulting fees ................................................... 375,000
Administrative fees ............................................... 120 2,325
----------- -----------
16,248 417,649
----------- -----------
Expenses:
Salaries and consulting fees ...................................... 75,154 225,460
Officer's bonus ................................................... 714,777 802,342
Office rent ....................................................... 7,501 23,689
Legal and accounting .............................................. 225,288 276,077
Employee benefits ................................................. 37,186 169,947
Advertising and promotion ......................................... 9,510 15,065
Other general and administrative .................................. 53,589 224,759
Interest .......................................................... 29,606 77,135
Bad debt expense .................................................. 15,703
Depreciation and amortization ..................................... 2,532 7,888
----------- -----------
1,155,143 1,838,065
----------- -----------
Net investment loss .................................................... (1,138,895) (1,420,416)
----------- -----------
Net realized gain on investments and net unrealized gain on investments:
Proceeds from sales of investments ................................ 156,853 1,018,446
Less: cost of investments ......................................... (19,902) (258,565)
----------- -----------
Net realized gain on investments before income taxes ................... 136,951 759,881
----------- -----------
Net investment loss and net realized gain
on investments before income taxes ................................... (1,001,944) (660,535)
Income tax benefit (provision) - deferred .............................. 87,370 (63,180)
----------- -----------
Net investment loss and net realized
gain on investments .................................................. (914,574) (723,715)
----------- -----------
Decrease in unrealized appreciation on investments ..................... (822,396) (1,252,859)
Less income tax benefit applicable to decrease
(increase) in realized appreciation ................................... 320,734 488,616
Add: allowance for income tax benefit .................................. (488,616) (488,616)
----------- -----------
(990,278) (1,252,859)
----------- -----------
Net decrease in net assets resulting from
operations ........................................................... $(1,904,852) $(1,976,574)
=========== ===========
Decrease in net assets per share ....................................... $ (.41) $ (.48)
=========== ===========
Weighted average number of common
shares outstanding .................................................. 4,700,532 4,096,403
=========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(pro forma)*
<S> <C> <C>
Cash flows (used) provided by operating activities:
Net loss ............................................................... $(2,197,908) $(1,633,700)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization ..................................... 101,115 7,888
Services for stock ................................................ 200,000
Minority interest in net loss ..................................... 26,200
Losses in equity investments ...................................... 150,330 77,135
Changes in assets and liabilities, net of business
acquisitions:
Receivables ....................................................... (473,578) 22,455
Mortgage loans held for sale ...................................... (4,525,217)
Inventories ....................................................... (36,685)
Restricted cash and other deposits ................................ (374,924)
Other assets ...................................................... (805,104) 63,216
Accounts payable and accrued liabilities .......................... (1,851,824) 463,526
Warehouse loans and other notes payable ........................... 4,148,093
----------- -----------
Net cash provided by operating activities .............................. (5,665,692) (1,018,190)
----------- -----------
Cash flows (used) provided by investing activities:
Cash acquired on business acquisition ............................. (2,327,500)
Purchase of fixed assets .......................................... (76,323) (5,347)
Repayment of loans and notes receivable ........................... (585,107)
Increase in other investments ..................................... 27,301
Increase in deferred acquisition costs ............................ (228,988)
Increase in deposits and other
Decrease in tradename and franchise costs ......................... (27,500)
----------- -----------
Net cash used in investing activities .................................. (2,660,311) (563,153)
----------- -----------
Cash flows (used) provided by financing activities:
Common stock issued for cash ...................................... 5,819,965 1,664,352
Preferred stock issued for cash ................................... 3,300,000
Preferred dividends paid .......................................... (26,509)
Issuance of notes payable ......................................... 298,624 567,889
Repayment of notes payable ........................................ (132,601) (327,599)
----------- -----------
Net cash provided by financing activities .............................. 9,234,832 1,904,642
----------- -----------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(pro forma)*
<S> <C> <C>
Change in cash and cash equivalents .................................... 908,829 323,299
Cash and cash equivalents, beginning of period ......................... -- 9,187
----------- -----------
Cash and cash equivalents, end of period ............................... $ 908,829 $ 332,486
=========== ===========
Supplemental disclosure of non-cash investing and financing activities:
Common stock issued for common stock of
previously unrelated entity ..................................... $ 565,639
===========
Common stock issued in satisfaction of
note payable and accrued interest ............................... $ 158,236
===========
Common stock issued for services .................................. $ 200,000
===========
Conversion of preferred stock to common
stock ........................................................... $ 2,142,459
===========
Amortization of discount on preferred stock ....................... $ 1,333,098
===========
Purchase of FBMS, net of cash acquired:
Fair value of assets acquired ................................... $26,920,000
Intangible assets ............................................... 7,828,000
Liabilities assumed ............................................. (32,997,000)
Fair value of assets exchanged .................................. (2,531,000)
-----------
Cash acquired ................................................... $ (780,000)
===========
Purchase of Victoria Precision, Inc.:
Fair value of assets acquired ................................... $ 5,769,000
Intangible assets ............................................... 3,166,000
Liabilities assumed ............................................. (4,969,000)
Fair value of assets exchanged .................................. (859,000)
-----------
Cash paid ....................................................... $ 3,107,000
===========
</TABLE>
* As if an operating company rather than a BDC.
See notes to consolidated financial statements.
7
<PAGE>
EQUITEX, INC.
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(WHILE A BDC)
(UNAUDITED)
Cash flows from operating activities:
Net change in net assets ................................... $ (1,976,574)
Adjustments to reconcile net change in net assets
to net cash used in operating activities:
Depreciation and amortization ........................... 7,888
Realized gain on sale of investments .................... (759,881)
Unrealized loss on investments .......................... 1,252,859
Proceeds from sales of investments ........................... 1,018,446
Purchase of investments ...................................... (1,142,520)
Collection of notes receivable ............................... 173,083
Issuance of notes receivable ................................. (742,897)
Changes in assets and liabilities:
Increase in interest receivable ......................... (25,244)
Increase in trade receivables ........................... (93,144)
Decrease in accounts receivable - brokers ............... 73,741
Increase in subscriptions receivable .................... (1,446)
Increase in prepaid expense ............................. (23,714)
Decrease in deferred income tax benefit ................. 63,180
Increase in accounts payable and other accrued liabilities 80,448
Increase in accounts payable to brokers ................. 213,562
Increase in accrued bonus to officer .................... 347,576
------------
Net cash used in operating activities ........................ (1,534,637)
------------
Cash flows from investing activities:
Purchase of furniture and equipment ..................... (7,394)
------------
Net cash used in investing activities ........................ (7,394)
------------
Cash flows from financing activities:
Cash flows from financing activities:
Issuance of notes payable - officer ..................... 142,328
Issuance of notes payable - other ....................... 247,500
Repayment of notes payable .............................. (327,599)
Common stock issued for cash ............................ 1,664,352
------------
Net cash provided by financing activities .................... 1,726,581
------------
Net increase in cash ......................................... 184,550
Cash, beginning of period .................................... 9,187
------------
Cash, end of period .......................................... $ 193,737
============
Supplemental disclosures of cash flow information:
Interest paid ........................................... $ 67,874
============
Interest received ....................................... $ 15,079
============
Non-cash financing activities:
Common stock issued for common stock of previously
unrelated entity .................................... $ 565,639
============
See notes to consolidated financial statements.
8
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
1. THE INTERIM FINANCIAL STATEMENTS
The accompanying interim unaudited consolidated condensed financial
statements have been prepared by Equitex, Inc. (the "Company") 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, 1999, are not necessarily indicative of the results that
may be expected for the year ended December 31, 1999. These statements
should be read in conjunction with the financial statements and notes
thereto included in the Annual Report on Form 10-KSB (filed with the
Securities and Exchange Commission) for the year ended December 31, 1998.
The results of operations for the three and nine months ended September
30, 1999 and 1998, are not necessarily indicative of the operating
results for the full year.
2. ORGANIZATION
DECERTIFICATION AS A BUSINESS DEVELOPMENT COMPANY (BDC)
On January 4, 1999, the Company withdrew its election to be treated as a
BDC subject to the Investment Company Act. As a result of this
withdrawal, the Company is now required to present its financial
statements consistent with those of a normal operating company as opposed
to a Business Development Company . Because the Company was a BDC for the
three and nine months ended September 30, 1998, the statement of
operations and cash flows for the 1998 periods still reflect the BDC
format.
The September 30, 1999 unaudited pro forma column in the statement of
revenues and statement of cash flows reflects the Company's consolidated
activity for the three and nine months ended September 30, 1999 as if the
Company were an operating company rather than a BDC at that time.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of September 30, 1999, include the
accounts of Equitex, Inc., its wholly-owned subsidiary, First
TeleServices Corporation, which was acquired in August 1998, a 79%
interest in Triumph Sports, Inc., which was formed in January 1998, and
nMortgage, Inc. and its wholly owned subsidiary, First Bankers Mortgage
Services, Inc. ("FBMS"), which was acquired August 23, 1999 (Note 3). All
significant intercompany accounts and transactions have been eliminated
in consolidation.
Minority interest at September 30, 1999, represents 285,700 shares of 12%,
cumulative preferred stock of FBMS. Shares of this preferred stock are
callable at par value ($10 par), and dividends are payable quarterly.
Through the second quarter of 1999, the Company also consolidated its
majority-owned subsidiary, VP Sports, Inc. (VP Sports). In June 1999, in
connection with financing a July 27, 1999 acquisition of Victoria
Precision Inc. (Note 3), the Company authorized a private placement of up
to 40 units consisting of preferred and common shares of VP Sports, and
warrants to purchase common stock of VP Sports. As a result of this
placement, the Company's ownership interest was reduced from
approximately 87% at December 31, 1998 to approximately 35.7% at
September 30, 1999. Due to the change in ownership %, the Company changed
its method of accounting for its investment in VP Sports from the
consolidation to the equity method of accounting.
9
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
3. BUSINESS ACQUISITIONS
ACQUISITION OF FIRST BANKERS MORTGAGE SERVICES, INC. (FBMS)
On August 23, 1999, the Company, through its wholly-owned subsidiary FBMS
Acquisition Corp., entered into an Agreement and Plan of Reorganization
(the "Acquisition Agreement") with First Bankers Mortgage Services, Inc.,
a Florida Corporation ("FBMS) to acquire all of the outstanding common
stock of FBMS in exchange for 250 shares of the Company's Series E
convertible preferred stock (the "Series E Preferred Stock") valued at
approximately $2,531,000, and contingent consideration consisting of up
to 750 shares of Series E Preferred Stock, as well as potential "Bonus
Shares" issuable by the Company, as specified in the Acquisition
Agreement. The transaction was accounted for as a purchase, and the
results of operations of FBMS are included in the Company's consolidated
statement of operations from the date of acquisition. The total purchase
price was allocated to the assets and liabilities acquired based on their
estimated fair values, including intangible assets of approximately
$7,828,000, which is being amortized by the use of the straight-line
method over ten years.
In accordance with the terms of the Acquisition Agreement, FBMS Acquisition
Corp. was subsequently merged with, and into FBMS. At the effective date
of the agreement (the "Effective Date"), all shares of FBMS common stock
were converted into, and represent the right to receive, 250 shares of
the Company's Series E Preferred Stock, and each share of common stock of
FBMS Acquisition Corp. was converted into one share of newly issued FBMS
common stock. Subsequent to the merger of FBMS Acquisition Corp. into
FBMS, the Company formed nMortgage, Inc., a Delaware corporation, as the
Company's subsidiary holding company for FBMS.
In connection with the Company's acquisition of FBMS, the Company is
proceeding with a $4,000,000 private placement of up to $4,000,000 of
equity securities by nMortgage, Inc., and has received non-binding
commitments for the purchase of these equity securities from prospective
shareholders. The Company anticipates that as a result of the private
placement by nMortgage, Inc., the Company's ownership interest in
nMortgage, Inc. and its subsidiary FBMS, will be reduced from 100% to
approximately 75%.
INVESTMENT IN VP SPORTS, INC.
Effective July 27, 1999, the Company, through its majority-owned
subsidiary, VP Sports, Inc. ("VP Sports") and VP Sports' wholly-owned
subsidiary 9066-8609 Quebec Inc., a Canadian corporation, acquired all of
the outstanding common shares of Victoria Precision Inc. ("Victoria
Precision"), also a Canadian corporation, as well as the rights to a
four-year international consulting and non-compete agreement. The
transaction was accounted for as a purchase. The total purchase price of
$3,966,600 ($6,000,000 CDN) was allocated to the assets and liabilities
acquired based on their estimated fair values, including intangible
assets of approximately $477,000, which are being amortized by the use of
the straight-line method over ten years.
In order to finance the acquisition, in June 1999 VP Sports authorized a
private placement of up to 40 units, each unit consisting of 100 shares
of $1,000 per share, 8% convertible preferred stock, 12,500 shares of VP
Sports common shares at $2 per share, and warrants to purchase 287,500
shares of VP Sports common stock at $.10 per shares. As a result of this
placement of subsidiary stock, the Company's ownership interest in VP
Sports was reduced from approximately 87% at December 31, 1998 to
approximately 35.7% at September 30, 1999. Due to the change in ownership
%, the Company changed its method of accounting for its investment in VP
Sports from the consolidation to the equity method of accounting.
10
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
3. BUSINESS ACQUISITIONS (CONTINUED)
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information for the nine months
ended September 30, 1999 and 1998, give effect to the above acquisitions
as if they had occurred at the beginning of each respective period.
Nine months ended September 30,
-------------------------------
1999 1998
------------- -------------
Revenue $ 12,145,000 $ 19,603,000
Net loss $ (8,509,000) $ (48,000)
Net loss applicable to
common shareholders $ (9,843,000) $ (48,000)
Loss per share $ (1.50) $ (.01)
Shares used in per share calculation 6,542,114 4,096,403
The unaudited pro forma financial information above does not purport to
represent the results which would actually have been obtained if the
acquisitions had been in effect during the periods covered or any future
results which may in fact be realized.
4. LOAN ORIGINATION, SALES AND SERVICING
Mortgage loans held for sale are recorded at the lower of aggregate cost or
market value. Gain or loss on sales of loans is recognized at the time of
the sale. Origination fees and loan origination costs on such loans are
recognized when the mortgage is sold, which is normally within 30 days of
the origination of the loan. Interest earned on these mortgages is
recognized as income from the time the mortgage is closed to the time the
mortgage is sold.
The Company generally sells the servicing rights on mortgages. The Company
has adopted the provisions of Financial Accounting Standards No. 122,
Accounting for Mortgage Servicing Rights, and accordingly capitalizes the
fair value (quoted market price) of retained mortgage servicing rights on
loans sold. Capitalized mortgage servicing rights on such loans will be
amortized in proportion to and over the period of estimated net servicing
income. The carrying amount of capitalized mortgage servicing rights is
evaluated for impairment based upon quoted market prices of similar
loans.
Estimated losses (approximately $2,322,000 at September 30, 1999) are
provided on loans sold subject to repurchase by the Company. However, an
adequate provision is made by way of a general loan loss reserve for any
potential loss that may result on loans for the periods reported.
11
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
5. WAREHOUSE LOANS AND OTHER NOTES PAYABLE
The Company uses certain loan financing and warehouse credit lines to
finance its mortgage production. These warehouse lines bear different
terms and interest rates ranging from 7.00% to 8.00%. Each line also
requires certain equity and leverage ratios to be maintained by the
company. The lines are collateralized by the mortgage loans closed by the
company.
The Company also has other notes payable, which consist of bank debt and
notes with private investors bearing interest rate of 10.25% to 15.00%,
with interest payable as agreed upon.
6. STOCKHOLDERS' EQUITY
SERIES A, B, C, PREFERRED STOCK
In January and February 1999, the Company issued a total of 2,100 shares of
6% Series A, B, and C Convertible Preferred Stock in consideration for
$1,000 cash per share, which is the stated value per share. Each series
of stock was convertible into common stock at any time by the holders at
a conversion price equal to 65% of the average closing bid price of the
Company's common stock as specified in the agreement.
Because this preferred stock contained an immediate beneficial conversion
feature, both additional paid-in capital and the accumulated deficit were
increased by $1,333,098, the amount of the discount due to this
beneficial conversion feature. The holders were entitled to receive a
cumulative annual dividend of $60 per share, payable quarterly, and had
preference to any other dividends which might have been paid by the
Company. The dividend was payable either in cash or in shares of the
Company's common stock, at the Company's option. The preferred
stockholders also received warrants to purchase a total of 250,000 shares
of the Company's common stock at 120% of the market price as of the grant
date. In addition, the placement agent was issued 20,000 shares of the
Company's common stock, valued at $200,000 in exchange for services in
connection with the preferred stock sales.
In April 1999 all 2,100 shares of the Company's 6% Series A, B and C
Convertible Preferred Stock, plus accrued dividends on those shares, were
converted into approximately 320,528 shares of common stock, at an
average conversion price of $6.63 per share.
SERIES D PREFERRED STOCK
In May 1999, the Company reached an agreement with an accredited investor
to sell 3,500 shares of Series D, 6% convertible preferred stock (the
"Series D Preferred Stock") for $1,000 cash per share, which is the
stated value per share. In August 1999, the Company issued a total of
1,200 shares of the Series D Preferred Stock in consideration for
$1,200,000. The balance of $2,300,000 for the remaining 2,300,000 shares
of Series D Preferred Stock is being held in escrow pending authorization
by the Company's stockholders of a sufficient number of shares of the
Company's common stock to cover those shares underlying the Series D
Preferred Stock.
12
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
SERIES D PREFERRED STOCK (CONTINUED)
The holder of each share of Series D Preferred Stock is entitled to 6%
annual dividends, payable quarterly. The Series D Preferred Stock
contains a liquidation preference equal to the sum of the stated value of
each share plus an amount equal to 100% of the stated value plus the
aggregate of all accrued and unpaid dividends on each share of Series D
Preferred Stock until the most recent dividend payment date or date of
liquidation, dissolution or winding up of the Company.
The Series D Preferred Stock is convertible into common stock at any time
at a conversion price per share of common stock, equal to 65% of the
average closing bid price of the Company's common stock as specified in
the agreement. Because this preferred stock contained an immediate
beneficial conversion feature, both additional paid-in capital and the
accumulated deficit were increased by $1,884,615, the amount of the
discount due to this beneficial conversion feature. The holders are
entitled to receive a cumulative annual dividend of $60 per share,
payable quarterly, and had preference to any other dividends which might
have been paid by the Company. The dividend is payable either in cash or
in shares of the Company's common stock, at the discretion of the
Company.
SERIES E PREFERRED STOCK
In connection with the FBMS acquisition, the Company issued 250 shares of
Series E Convertible Preferred Stock (the "Series E Preferred Stock")
valued at approximately $2,531,000, and contingent consideration
consisting of up to 750 shares of Series E Preferred Stock, as well as
potential "Bonus Shares" issuable by the Company, as specified in the
Acquisition Agreement.
The holders of the Series E Preferred Stock are not entitled to dividends,
do not have a liquidation preference and do not have voting rights. The
Series E Preferred stock, if fully issued, automatically converts to
1,000,000 shares of common stock upon the approval of an increase in the
authorized shares of common stock from 7,500,000 shares to 50,000,000
shares, or the subsequent merger of the Company with or into another
company, or the sale of substantially all the Company's assets.
COMMON STOCK
Through June 30, 1999, the Company sold 330,312 shares of common stock in a
private placement for cash of $3.25 per share. In addition, during the
first quarter of 1999, a note holder exchanged a note and accrued
interest totaling $158,236 for 48,688 shares of the Company's common
stock.
Through September 30, 1999, employees and officers of the Company exercised
options to purchase 677,600 shares of common stock for $2,132,826. In
addition, 337,500 shares were issued pursuant to warrant exercises.
13
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS AND WARRANTS
In January 1999, the Company's Board of Directors adopted an incentive
stock option plan covering up to 1,000,000 shares of the Company's common
stock. During the six months ended June 30, 1999, the Company granted
incentive stock options for 29,000 shares and 8,000 shares to the
Company's officers and employees, respectively. In addition,
non-statutory stock options for 472,000 and 491,000 shares were granted
to officers and directors, respectively. All options were granted at a
price of $6.75 per share which represents fair market value at the grant
date.
A warrant to purchase 50,000 shares of the Company's common stock at $3.75
per share was granted to an unrelated entity for services rendered,
valued at $150,000. In addition, a warrant to purchase 62,500 shares at
an exercise price of $7.25 per share was granted to another unrelated
party.
7. PROPOSED BUSINESS TRANSACTIONS
PROPOSED SALE OF NMORTGAGE, INC.
On September 22, 1999, the Company entered into a letter of intent, whereby
all of the outstanding common stock of nMortgage is to be acquired by
Innovative Gaming Corporation of America ("IGCA"), an SEC reporting
company whose common stock trades on the Nasdaq SmallCap Market (the
"Proposed nMortgage Transaction"). Under the terms of the Proposed
nMortgage Transaction, in exchange for all outstanding shares of
nMortgage, Inc., the Company and the other nMortgage shareholders are to
receive, in the aggregate, approximately 45,000,000 shares of IGCA common
stock, assuming that there will be approximately 15,000,000 shares of
IGCA common stock outstanding on a fully-diluted basis, before the
Proposed nMortgage Transaction.
IGCA was formed in 1991 to develop, manufacture, market and distribute
specialty video gaming machines. As a condition of the Proposed nMortgage
Transaction, IGCA will dispose of all of its gaming assets. As a result,
upon completion of the transaction, the business of nMortgage will be the
sole business operation of IGCA.
There are a number of material conditions that must be satisfied prior to
the completion of the Proposed nMortgage Transaction, including any
required approval of the Proposed nMortgage Transaction by the Company's
shareholders, the disposal of IGCA's gaming assets, the negotiation and
execution of a definitive agreement between the Company and IGCA for the
Proposed nMortgage Transaction, and approval of the Proposed nMortgage
Transaction from all governmental bodies or agencies, and regulatory
authorities, including the gaming authorities of Nevada and other
applicable jurisdictions. There is no assurance that the conditions
summarized above will be satisfied, or that the Proposed nMortgage
Transaction will be consummated on the terms as outlined above.
14
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
7. PROPOSED BUSINESS TRANSACTIONS (CONTINUED)
PROPOSED TRANSACTIONS WITH FIRST TELEBANC CORP.
On May 4, 1999, the Company entered into a definitive agreement whereby
First TeleBanc Corp. ("First TeleBanc"), a single bank holding company
based in Boca Raton, Florida, is to merge with and into the Company, with
the Company being the surviving corporation (the "TeleBanc Merger").
First TeleBanc owns all of the issued and outstanding stock of net 1st
National Bank, a national banking association. Consummation of the
TeleBanc Merger is subject to a number of conditions, including approval
by the Federal Reserve Bank of Atlanta, Georgia, the distribution of
certain of the Company's assets to a new wholly-owned subsidiary and the
"spin-off" of that subsidiary, and the approval of the TeleBanc Merger by
the Company's shareholders.
15
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD LOOKING STATEMENTS
THIS 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 COMPANY'S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED TO,
STATEMENTS CONCERNING THE COMPANY'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 COMPANY'S CONTROL, AND ACTUAL RESULTS MAY DIFFER
MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT FACTORS, INCLUDING UNCERTAINTY
RELATED TO THE COMPANY'S OPERATIONS, MERGERS OR ACQUISITIONS, GOVERNMENTAL
REGULATION, THE VALUE OF THE COMPANY'S ASSETS AND ANY OTHER FACTORS DISCUSSED IN
THIS AND OTHER COMPANY FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
On January 4, 1999, Equitex, Inc. ("Equitex", the "Company", or the
"Registrant") filed with the Securities and Exchange Commission to withdraw its
election to be treated as a business development company ("BDC") and elected to
be treated for a maximum period of one year as a "transient investment company"
as that term is defined in the Investment Company Act of 1940 (the "Investment
Company Act"). A BDC is a form of closed-end, non-diversified investment company
under the Investment Company Act. As a result of the Company's acquisition
during the third quarter of First Bankers Mortgage Services, Inc. ("FBMS"), the
Company is no longer operating as a transient investment company but as a fully
operating company.
Following the withdrawal, the Registrant is no longer subject to the regulatory
provisions of the Investment Company Act for BDC's, such as insurance, custody,
composition of the board, affiliated transactions and compensation arrangements.
Despite the Company's withdrawal of its election as a BDC, the Company continues
to be subject to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Under the Exchange Act, the Registrant
continues to file periodic reports on Form 10-KSB and Form 10-QSB, as well as
reports on Form 8-K and proxy statements and any other reports required under
the Exchange Act. As a result of the Company's withdrawal of its election to be
treated as a BDC, the Company is now operating as a holding company which must
consolidate its financial statements with those of its wholly owned subsidiary,
First TeleServices Corp. ("FTC"), and majority-owned subsidiaries, Triumph
Sports, Inc. ("Triumph") and nMortgage, Inc. The results for the three and nine
months ended September 30, 1999 include one month of operations for nMortgage
following the acquisition of FBMS in late August 1999. The Company also accounts
for its minority investment in VP Sports, Inc. ("VP") using the equity method of
accounting.
On August 13, 1998, the Registrant acquired all of the outstanding stock of FTC
in exchange for 625,000 shares of the Registrant's common stock. As a result of
this transaction, FTC became a wholly owned subsidiary of the Company. FTC is a
financial services marketing company marketing various financial products
targeted to the sub-prime consumer.
16
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
FTC is in the development stage, has only partially begun operations and has not
yet generated significant income. As a marketing arm for financial institutions,
FTC's business plan calls for it to perform as a consumer finance company,
offering financial products and services to the sub-prime market. These products
will be developed through correspondent relationships with companies
specializing in the particular product offered.
During the first quarter, FTC entered into a joint venture agreement with RLG
Holdings, LLC ("RLG") to service, collect and sell portfolios of consumer debt.
RLG is a Florida based financial services company specializing in acquisition,
value enhancement and profitable disposition of consumer collection portfolios
and performing and non-performing real estate secured notes receivable
portfolios. Utilizing funds provided by FTC and RLG, the joint venture company,
FirstNet Capital, acquired two debt portfolios, the first of which consists of
over 13,000 accounts representing in excess of $100 million. The second and most
recent acquisition consists of 15,600 charged-off credit accounts in Canada with
an aggregate balance of approximately $34 million Canadian. The Company, through
FTC, advanced a total of $565,000 to the joint venture, First Net Capital,
during the quarter ended March 31, 1999. Payments totaling $275,000 have been
received from First Net Capital as of September 30, 1999 and an additional
$25,000 was received during the fourth quarter.
In the first and second quarters of 1999, the Company, through FTC, loaned
$300,000 to National Business Finance, LLC ("NBF"). NBF is a SBA (Small Business
Administration) loan originator which originates and sells to SBA lenders,
including net First National Bank, SBA loans for a fee.
In the fourth quarter of 1998, the Registrant acquired a number of shares of
First TeleBanc Corp. ("FTB") which now totals 7.5% of FTB's outstanding capital
stock. On April 12, 1998 the Registrant announced its intent to merge with FTB
(the "TeleBanc Merger") and has since executed a definitive agreement for the
merger which calls for the Company to acquire all of the outstanding capital
stock of FTB in an exchange of stock. Under the terms of the agreement, the
existing stockholders of FTB will receive shares of Equitex common stock based
on certain factors, principally the relative value of each company. In addition,
certain of the non-financial services related assets of Equitex will be spun off
to the Company's stockholders through a newly formed publicly traded company.
Equitex has filed its final application with the Federal Reserve Bank of Atlanta
which must approve Equitex as a bank holding company prior to completion of the
proposed merger. The application has been amended in response to comments from
the Federal Reserve Bank.
Consummation of the TeleBanc Merger is subject to a number of conditions,
including: (i) approval by the Federal Reserve Bank of Atlanta, Georgia of the
Company's application to become a bank holding company under the Bank Holding
Company Act of 1956; (ii) the distribution of all of the Company's business
development company assets to a new wholly-owned subsidiary, Equitex 2000, Inc.
("E2000"), and the spin-off of E2000 to the Company's existing shareholders; and
(iii) the approval of the TeleBanc Merger by the Company's shareholders. The
Company will solicit the approval of its shareholders for the TeleBanc Merger at
a special meeting of shareholders to be called later this year.
FTB is the bank holding company for net 1st National Bank, N.A., formerly known
as Boca Raton First National Bank, a 13 year-old nationally chartered bank based
in Boca Raton, Florida. FTB intends to operate as a single bank holding company
through net 1st National Bank offering both traditional walk-in banking services
as well as Internet banking. net 1st National Bank will also focus on fee-based
programs such as SBA lending, secured credit cards and electronic transaction
processing. Concurrent with the closing of the merger, if consummated, the newly
merged company intends to change its name to more accurately reflect the new
business operations of the Company, and FTB's existing board of directors will
become the board of the new bank holding company.
17
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
On August 23, 1999, the Company, through a wholly-owned subsidiary, acquired
FBMS. Subsequent to the acquisition of FBMS, all outstanding shares of FBMS were
transferred to a new majority owned subsidiary of the Company, nMortgage. FBMS,
a Florida corporation, is a full service mortgage banking company headquartered
in the Fort Lauderdale, Florida area. The Company acquired all of the
outstanding common stock of FBMS from its sole shareholder, Vincent Muratore.
The total aggregate purchase price for FBMS, was 1,000 shares of the Company's
Series E Convertible Preferred Stock (the "Series E Preferred Stock"). Of these
shares, 250 shares valued at $2,531,000 were issued at closing and 750 shares
are issuable upon satisfaction of certain future performance conditions. In
addition, the purchase price is subject to post-closing adjustments pursuant to
the Agreement and Plan of Reorganization, dated June 22, 1999.
The holders of the Series E Convertible Preferred Stock are not entitled to
dividends, do not have a liquidation preference and do not have voting rights.
The Series E Convertible Preferred Stock, if fully issued, automatically
converts to 1,000,000 shares of common stock upon (i) the approval of the
increase in the authorized shares of common stock from 7,500,000 shares to
50,000,000 or the subsequent merger of the Company with or into another company
or (ii) the sale of substantially all the Company's assets.
The Company is proceeding with a $4,000,000 private placement of equity
securities by nMortgage the result of which will reduce the Company's ownership
interest in nMortgage and its subsidiary from 100% to approximately 75% assuming
all of the shares are sold.
In connection with the FBMS transaction, the Company has invested, as of
September 30, 1999, $4,534,000 in FBMS for working capital purposes. Of this
amount, $2,750,000 had been previously advanced as loans to FBMS. Prior to
September 30, 1999, all of the principal and interest on these loans was
converted to equity.
On September 22, 1999, the Company entered into a letter of intent whereby all
of the outstanding common stock of nMortgage will be acquired by Innovative
Gaming Corporation of America ("IGCA"), a reporting company under the Securities
Exchange Act of 1934, whose common stock trades on the Nasdaq National Market
under the symbol "IGCA" (the "Proposed nMortgage Transaction"). Under the terms
of the Proposed nMortgage Transaction, in exchange for all outstanding shares of
nMortgage, the Company and other nMortgage shareholders will receive, in the
aggregate, approximately 45,000,000 shares of IGCA common stock, assuming that
there will be approximately 15,000,000 shares of IGCA common stock outstanding
on a fully-diluted basis, before the Proposed nMortgage Transaction.
IGCA was formed in 1991 to develop, manufacture, market and distribute specialty
video gaming machines. As a condition of the Proposed nMortgage Transaction,
IGCA will dispose of all of its gaming assets. As a result, upon completion of
the transaction, the business of nMortgage will be the sole business operation
of IGCA.
There are a number of additional customary conditions that must be satisfied
prior to the completion of the Proposed nMortgage Transaction, including: the
negotiation and execution of a definitive agreement; approval by the
stockholders of both companies, if required; and any necessary regulatory or
governmental approval.
In June 1998, the Registrant commenced a private placement of up to 300,000
shares of the Registrant's common stock at $3.25 per share to accredited
investors. In October 1998, the board of directors of the Registrant increased
the number of shares which could be sold pursuant to the offering from 300,000
to 750,000 shares. As of April 1999, the Registrant completed this offering with
the sale of 379,000 shares of common stock for total proceeds of $1,231,750,
$158,236 of which was converted debt.
18
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
During the first quarter of 1999, the Registrant completed three offerings
through which a total of 2,100 shares of the Company's $.01 par value preferred
stock were sold to accredited investors for $1,000 per share. The Company sold
900 shares of its Series A 6% Convertible Preferred Stock for total proceeds of
$900,000, less offering expenses. The Series A 6% Convertible Preferred Stock
carries a 6% interest rate paid quarterly in either cash or stock and may be
convertible into shares of the Company's common stock at 65% of the five day
average bid price of the Company's common stock for the five days immediately
preceding conversion. The Company sold 600 shares of its Series B 6% Convertible
Preferred Stock for proceeds of $600,000 and 600 shares of its Series C 6%
Convertible Preferred Stock for proceeds of $600,000. The Series B and C
Preferred Stock carries the same terms and conditions as those of Series A.
During the month of April 1999, all of the outstanding shares of the Series A, B
and C preferred stock, including dividends payable, were converted into a total
of 320,528 shares of Equitex common stock.
During the month of May 1999, the Company reached agreement with an accredited
investor to sell 3,500 shares of its Series D 6% Convertible Preferred Stock
under terms and conditions similar to those of the Series A, B and C Preferred
Stock. On August 27, 1999, the investor purchased 1,200 of these shares for
gross proceeds of $1,200,000. The balance of $2,300,000, less offering costs,
are being held in escrow pending authorization by the Company's stockholders of
a sufficient number of shares of the Company's common stock to cover those
shares underlying the Series D preferred stock. The Company has filed a
preliminary proxy statement with the Securities and Exchange Commission for a
Special Meeting of Stockholders at which the Company's stockholders will be
asked to vote on a proposal to increase the number of authorized shares of the
Company's common stock from 7,500,000 to 50,000,000.
In addition to the above common stock issuances, the Registrant has issued stock
pursuant to the exercise of certain warrants to purchase common stock. A total
of 250,000 warrants to purchase common stock were issued in conjunction with the
Series A, B and C 6% Convertible Preferred Private Placements at exercise prices
ranging from $8.205 to $11.73 per share. Of these outstanding warrants, 190,000
were exercised during the quarter ended June 30, 1999 for total proceeds to the
Registrant of $1,798,000. During the nine month period ended September 30, 1999,
an additional 147,500 shares of common stock were issued pursuant to the
exercise of 147,500 warrants to purchase common stock issued to three separate
entities for total proceeds to the Registrant of $815,625.
During the nine months ended September 30, 1999, officers, directors, and
employees of the Registrant exercised 677,600 stock options pursuant to the
Registrant's 1993 Stock Option Plan and 1993 Stock Option Plan for Non- Employee
Directors. Total proceeds from these exercises were $2,132,826.
A majority of the proceeds from the issuances of common stock, preferred stock,
and warrants have been and will be used in connection with the Registrant's
merger and acquisition activities as well as for working capital. For the nine
months ended September 30, 1999, the Company has total loans outstanding of
$1,172,872 to its wholly owned subsidiary, FTC, which funds were used in
connection with FTC's investment activities as outlined above as well as for
working capital and operating overhead. Additionally, portions of the proceeds
were also used in the advances made to FBMS totaling $4,534,000 at September 30,
1999, as explained above.
As part of the Company's transition from a BDC to an operating company, the
operations of one of the Company's BDC investments, Triumph, which is majority
owned by the Registrant, must be consolidated with those of the
19
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
Registrant, its wholly owned subsidiary FTC, and its majority owned subsidiary,
nMortgage. In the latter part of 1998, Triumph acquired four health food,
nutritional and supplement related retail outlets in south Florida and now
operates a total of five locations. Triumph is an authorized franchisee of
General Nutrition Centers ("GNC") which stores comprise two of those operated.
The Company owns approximately 79% of Triumph.
On July 27, 1999 VP completed an acquisition pursuant to which Victoria
Precision, Inc. ("Victoria"), a corporation incorporated under the laws of the
Province of Quebec, merged with and into a wholly-owned subsidiary of VP. VP
acquired all of the capital stock of Victoria from its existing stockholders.
Total invested proceeds were approximately $6,000,000 CDN resulting in ownership
of all of the assets, liabilities and business operations of Victoria. The
transaction included future rights to a four-year international consulting and
non-compete agreement executed with an entity affiliated with Victoria's former
principal stockholder. Of the purchase price, $4,700,000 CDN was paid in cash at
closing with the remaining $1,300,000 paid in the form of a promissory note
bearing interest at 6% per annum.
Victoria is a Canadian manufacturer and distributor of a broad range of bicycles
and tricycles. All production and assembly is performed in Victoria's 175,000
square foot manufacturing facility in Montreal, Quebec, Canada. Victoria is one
of the second largest manufacturer's of bicycles in Canada. Victoria targets the
low to middle price ranges of the bicycle market, manufacturing durable,
precision crafted bicycles and tricycles priced to retail up to $600 CDN per
unit. Victoria has a product assortment of more than 90 models of bicycles
ranging from adult mountain and hybrid bicycles to juvenile and children's
bicycles, BMX bikes and tricycles.
In June 1999, VP commenced a private placement through which it is offering up
to 40 units with each unit consisting of 100 shares of $1,000 per share 8%
preferred stock, 12,500 shares of common stock at $2.00 per share, and 287,500
warrants to purchase 287,500 shares of common stock at $.10 per share. As of
September 30, 1999, 38 units had been sold for proceeds to VP of $4,750,000. A
majority of these funds were used for payment of the $4,700,000 CDN cash
purchase component of the Victoria acquisition while the remainder will be used
for working capital purposes.
Given the increase in shares outstanding following the VP private placement, the
Company's ownership percentage in VP has been substantially reduced resulting in
Equitex presently owning approximately 35% of VP's outstanding common stock. For
the first two quarter's of 1999, the Company consolidated the operations of VP
with that of the Company and its subsidiaries. Due to the changes in VP's
capital structure, for the three and nine months ended September 30, 1999, the
Company is utilizing the equity method of accounting for its ownership in VP.
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and notes thereto. As a result of the Company's change from
a BDC to an operating company effective January 4, 1999, the Company is now
required to present its financial statements consistent with those of an
operating company as opposed to an investment company. Accordingly, the
statements of operations and cash flows for the three and nine months ended
September 30, 1998 are presented in both a pro-forma format which assumes the
Company was an operating company instead of a BDC as well as the investment
company format which includes the actual results for the Company's operations as
a BDC in the presented periods. The results of operations include those of the
Company, its wholly-owned subsidiary, First TeleServices Corp., its
majority-owned subsidiary, Triumph Sports, one month of its majority-owned
subsidiary, nMortgage, and the equity loss in the Registrant's investment in VP
Sports, Inc.
20
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
REVENUES: Revenues for the quarter ended September 30, 1999 were $679,728 as
compared to pro-forma revenues of $204,272 at September 30, 1998 and actual
revenues of $16,248 for the Company's BDC operations for the same period. For
the nine months ended September 30, 1999, revenues were $1,676,582 compared to
pro-forma revenues of $209,182 and actual revenues of $417,649 at September 30,
1998. Of these revenues for the nine months ended September 30, 1999, $572,433
are attributed directly to the operations of Triumph, $352,862 from the
operations of nMortgage, with $282,244 from FTC and the balance from the
Registrant itself. Cost of sales was $99,721 and $342,273 for the three and nine
months ended September 30, 1999 as compared to pro-forma $79,998 for the three
and nine months ended September 30, 1998. Gross profit for the quarter ended
September 30, 1999 was $580,007 or 85% of revenues compared to $124,272 or 61%
of sales on a pro-forma basis for the similar period in 1998. For the nine
months ended September 30, 1999, gross profit was $1,334,309 or 80% of revenue
as compared to $129,184 which is 62% of revenue for the pro-forma period in
1998.
A majority of these revenues for the Registrant prior to consolidation represent
realized gains on the sales of investments which can vary greatly from period to
period. The revenues from FTC were derived primarily from its joint venture
activities and were relatively stable as compared to the previous quarter.
Triumph revenues consist of sales from the company's health food, vitamin and
supplement operations which were down slightly versus the previous periods.
nMortgage revenues are derived primarily from loan origination fees, mortgage
sales and short-term interest gains.
Due to the Registrant's change from a BDC to an operating company at the
beginning of 1999, and as the Registrant implements its plans relative to
becoming a fully operating company through the FTB merger and FBMS acquisition,
the Registrant has recorded minimal revenues through the first nine months of
1999. Now that the Registrant is a fully operational company with the addition
of nMortgage and its operating subsidiary, FBMS, it is anticipated that a
significant increase in revenues will be recorded for the quarter ended December
31, 1999 and throughout the year 2000.
EXPENSES: The Registrant's expenses during the third quarter of 1999 were
$1,539,308 as compared to a pro-forma $508,087 and actual expenses as a BDC of
$1,155,143 for the same period in 1998. For the nine months ended September 30,
1999, the Registrant had total expenses of $3,490,249 with pro-forma expenses of
$1,725,904 and actual expenses as a BDC of $1,838,065 for the same period in
1998. Of these amounts, FTC accounted for $141,891 and 372,861 for the three and
nine months ended September 30, 1999, respectively, Triumph $170,350 and
$457,705 for the same periods, and nMortgage $560,258 for both periods. Included
in the expenses for the three and nine months ended September 30, 1999 is equity
loss in VP Sports of $150,330. While the Registrant's expenses, on a stand alone
basis prior to consolidation, remained nearly identical to that of 1998, the
consolidation of three new entities with that of the Registrant as well as the
equity loss for VP Sports were major contributors in the increase from 1998 to
1999.
Included in these expenses are losses (gains) on trading securities. This
represents both the realized and unrealized gain or loss on those securities
that have been designated as trading securities. For the quarter ended September
30, 1999, unrealized holding losses (gains) on trading securities was $(55,266)
as compared to
21
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
$(804,245) on a pro-forma basis during the previous year's period. For the nine
months ended September 30, 1999, unrealized holding losses (gains) on trading
securities was $82,489 as compared to $(480,148) for the 1998 period. With the
exception of a significant realized gain on the sale of certain shares of
IntraNet Solutions common stock during the first quarter of 1999 which accounts
for the gain of $177,810 at September 30, 1999, a majority of these gains or
losses are unrealized and represent the change in the market value of the
trading securities from period to period. While these unrealized gains and
losses are categorized as expenses, they represent only paper gains or losses
which have not actually been incurred.
MINORITY INTEREST: For the three and nine months ended September 30, 1999, the
Registrant had no minority interest in net income as a result of the change in
accounting method for the Company's ownership in VP. For the three and nine
months ended September 30, 1998, the Registrant had minority interest in net
income of $903 and $26,200.
OTHER INCOME: The Registrant recorded $(39,835) and $21,391 in other
comprehensive income (loss), net of tax, for the three and nine months ended
September 30, 1999 as compared to $(35,361) and $16,176 pro-forma, respectively,
for the same period in 1998. This represents non-cash income or losses for
unrealized gains on certain of the Company's securities that have been
classified as "available for sale securities".
NET LOSS: For the three months ended September 30, 1999, the Registrant recorded
a net loss of $1,001,275 as compared to pro-forma net loss of $446,092 for the
quarter ended September 30, 1998. As a BDC, the Company recorded net investment
loss and net realized gain on investments of $(914,574) and a net decrease in
net assets resulting from operations of $1,904,852 for the third quarter of
1998. For the nine months ended September 30, 1999, the Registrant recorded a
net loss of $2,197,908 as compared to pro-forma net loss of $1,633,700 for the
nine months ended September 30, 1998. As a BDC, the Company recorded net
investment loss and net realized gain on investments of $(723,715) and a net
decrease in net assets resulting from operations of $1,976,574 for the first
nine months of 1998.
COMPREHENSIVE LOSS: Comprehensive loss for the three and nine months ended
September 30, 1999 was $1,041,110 and $2,176,517, respectively. Comprehensive
loss at September 30, 1998 on a pro-forma basis was $481,453 and $1,617,524,
respectively. Comprehensive loss is the net loss less other comprehensive
income, net of tax which includes unrealized gains and losses on the
Registrant's "available for sale securities".
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS: Net loss attributable to common
shareholders following amortization of discount on preferred stock was
$2,885,890 or $.40 per common share and $5,415,621 or $.83 per common share for
the three and nine months ended September 30, 1999 as compared to $446,092 or
$.09 per common share and $1,633,700 or $.40 per common share, respectively, for
the pro-forma three and nine months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES: The Registrant's sources of liquidity and
capital resources prior to consolidation are derived from varied sources, most
notably sales of investments and proceeds from sales of the Registrant's common
and preferred stock. The Registrant's subsidiaries sources of liquidity and
capital resources are derived primarily from their operations as well as
infusions of capital from the Registrant, if and when necessary. As a result of
the cash receipts outlined below as well as the sale of the a portion of the
Series D Convertible Preferred stock, the Registrant presently anticipates its
liquidity and capital resources are sufficient to fund the Company's current and
planned operations for the foreseeable future. However, as more fully explained
in "Overview" above, the Company has signed agreements, which, if consummated,
would result in a fundamental change in the nature of the Company's business.
While terms of those agreements call for significant cash balances to remain
with the Registrant following the proposed transactions, no assurance can be
made that
22
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
the Company's present liquidity and capital resources will be sufficient to fund
the future operations of the Registrant should the contemplated mergers and
acquisitions take place. Further sales of the Registrant's securities or other
sources of income may be necessary to adequately fund those operations.
During the first nine months of 1999, the Registrant received a total of
$9,073,000, before expenses, from the sale of common stock and preferred stock,
the exercise of common stock purchase warrants and the exercise of officer,
director and employee stock options. At September 30, 1999, the Registrant had a
total cash position of $908,829 on a consolidated basis. Of this amount,
$465,418 was held by the Registrant, $431,464 was held by FBMS, and the
remainder was held by Triumph and FTC.
The Company has received a third party commitment to purchase 3,500 shares of
its Series D 6% Convertible Preferred stock for total proceeds of $3,500,000.
During the third quarter, the Company sold 1,200 of these shares for gross
proceeds of $1,200,000. The balance of 2,300 shares are being held in escrow
pending an increase in the number of authorized shares of the Company.
Completion of this offering may be necessary to implement the Registrant's
business plan and could be required for completion of the FTB merger. This
transaction is more fully described in "Overview" above.
During the fourth quarter of 1999, the market values of the Company's two
"trading securities" increased significantly. As a result, the Registrant
anticipates that it will liquidate all or a portion of these investments
generating additional cash and further liquidity in the fourth quarter.
YEAR 2000 READINESS
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process date field containing a
two-digit year is commonly referred to as the "Year 2000 Issue." As the year
2000 approaches, such systems may recognize a date using "00" as the year 1900
rather than the year 2000 and be unable to accurately process certain date-based
information. This error could potentially result in a system failure or
miscalculation causing disruptions of operations, including, among other things,
a temporary inability to process transactions or engage in similar normal
business activities.
The Registrant has reviewed its computer systems in order to evaluate necessary
modifications for the Year 2000 readiness. In addition, the Registrant is in the
process of communicating with others with whom it does significant business to
determine their Year 2000 readiness status and the extent to which the Company
could be affected by any third party Year 2000 readiness issues. Although the
Registrant has not received responses from all third parties with which it does
business, The Registrant does not anticipate that it will be materially affected
by any third party Year 2000 readiness issues. However, the systems of the
Registrant or those of other companies on which the Registrant's systems rely
may not be timely converted. A failure to convert by another company, or a
conversion that is incompatible with the Company's systems, could have a
material adverse effect on the Registrant.
Currently, the Registrant estimates its cost related to Year 2000 modifications
to be less than $3,000 for the Company and its subsidiaries. The anticipated
costs and timeliness of completion of Year 2000 modifications are based on
management's best estimates, which were derived using numerous assumptions
relating to future events, including, without limitation, the continued
availability of certain resources and third party modification plans. However,
these estimates and assumptions may turn out to be inaccurate. Presently, the
Company has no formal contingency plan in place as it does not anticipate its
systems will be materially affected by any internal or external Year 2000
readiness issues.
23
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
On April 8, 1999 the Registrant issued 145,788 shares of its common stock
in exchange for 900 shares of the registrant's Series A Convertible
Preferred Stock. The Registrant relied on exemptions from registration
provided by Sections 4(2) and/or 4(6) of the Securities Act.
On April 8, 1999 the Registrant issued 77,941 shares of its common stock
in exchange for 600 shares of the Registrant's Series B Convertible
Preferred Stock. The Registrant relied on exemptions from registration
provided by Sections 4(2) and/or 4(6) of the Securities Act.
On April 8, 1999 the Registrant issued 96,799 shares of its common stock
in exchange for 600 shares of the Registrant's Series C Convertible
Preferred Stock. The Registrant relied on exemptions from registration
provided by Sections 4(2) and/or 4(6) of the Securities Act.
On April 19, 1999 the Registrant issued 50,000 shares of its common stock
in exchange for warrants to purchase common stock at $3.75 per share. The
Registrant relied on exemptions from registration provided by Sections
4(2) and/or 4(6) of the Securities Act.
On April 19, 1999 the Registrant issued 40,000 shares of its common stock
in exchange for 40,000 warrants to purchase common stock at $8.895 per
share. The Registrant relied on exemptions from registration provided by
Sections 4(2) and/or 4(6) of the Securities Act.
On April 23, 1999 the Registrant issued 90,000 shares of its common stock
in exchange for 90,000 warrants to purchase common stock at $8.205 per
share. The Registrant relied on exemptions from registration provided by
Sections 4(2) and/or 4(6) of the Securities Act.
On April 23, 1999 the Registrant issued 20,000 shares of its common stock
in exchange for 20,000 warrants to purchase common stock at $7.25 per
share. The Registrant relied on exemptions from registration provided by
Sections 4(2) and/or 4(6) of the Securities Act.
On April 27, 1999 the Registrant issued 60,000 shares of its common stock
in exchange for 60,000 warrants to purchase common stock at $11.73 per
share. The Registrant relied on exemptions from registration provided by
Sections 4(2) and/or 4(6) of the Securities Act.
On May 6, 1999 the Registrant issued 20,000 shares of its common stock in
exchange for 20,000 warrants to purchase common stock at $7.25 per share.
The Registrant relied on exemptions from registration provided by
Sections 4(2) and/or 4(6) of the Securities Act.
On July 7, 1999, the Registrant issued 35,000 shares of it common stock
in exchange for 35,000 warrants to purchase common stock at $5.00 per
share. The Registrant relied on exemptions from registration provided by
Sections 4(2) and/or 4(6) of the Securities Act.
24
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
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) On August12, 1999, the Company filed a report on Form 8-K
reporting the Company's acquisition of Victoria Precision Inc. (a
Canadian Corporation).
On August 23, 1999, the Company filed a report on Form 8-K
reporting a change in its auditors.
On September 8, 1999, the Company filed a report on Form 8-K
reporting the acquisition of First Bankers Mortgage Services, Inc.
and subsidiary.
On October 12, 1999, the Company filed a report on Form 8-K/A
amending the 8-K filed on August 12, 1999, to include financial
statements of the business acquired (Victoria Precision Inc.) and
pro forma financial information.
On November 4, 1999, the Company filed a report on Form 8-K/A
amending the 8-K filed on September 8, 1999, to include financial
statements of the business acquired (First Bankers Mortgage
Services, Inc. and subsidiary) and pro forma financial
information.
25
<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)
Dated: November 19, 1999 By: /s/ Henry Fong
------------------------------
Henry Fong
President, Treasurer and Chief
Financial Officer
26
<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, 1999, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 908,829
<SECURITIES> 1,074,098
<RECEIVABLES> 1,891,815
<ALLOWANCES> 223,000
<INVENTORY> 156,283
<CURRENT-ASSETS> 0
<PP&E> 1,031,818
<DEPRECIATION> 980,400
<TOTAL-ASSETS> 46,910,612
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
1,450,000
<COMMON> 143,206
<OTHER-SE> 21,268,240
<TOTAL-LIABILITY-AND-EQUITY> 46,910,612
<SALES> 0
<TOTAL-REVENUES> 1,676,582
<CGS> 342,273
<TOTAL-COSTS> 342,273
<OTHER-EXPENSES> 3,490,249
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 283,085
<INCOME-PRETAX> (2,155,940)
<INCOME-TAX> 41,968
<INCOME-CONTINUING> (2,197,908)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,197,908)
<EPS-BASIC> (.83)
<EPS-DILUTED> (.83)
</TABLE>
