SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or
15(d) of The Securities Act of 1934
Date of Report (Date of earliest event reported):
November 4, 1999 (August 23, 1999)
EQUITEX, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-12374 84-0905189
- --------------------------------------------------------------------------------
(State or other (Commission (I.R.S. Employer
jurisdiction File Number) Identification No.)
of incorporation)
7315 East Peakview Avenue
Englewood, Colorado 80111
--------------------------------------------------
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (303) 796-8940
-------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
As described in the Registrant's Current Report on Form 8-K filed on
September 7, 1999 (the "Initial 8-K"), effective August 23, 1999, Registrant
completed an acquisition of First Bankers Mortgage Services, Inc. ("FBMS").
FBMS, a Florida corporation, is a full service Mortgage Banking company
headquartered in the Fort Lauderdale, Florida area.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired.
Pursuant to paragraph (a)(4) of Item 7 of Form 8-K, the attached
financial statements were omitted from the disclosure contained in the
Initial 8-K. Attached hereto as are the audited financial statements of
First Bankers Mortgage Services, Inc. for the year ended December 31,
1998 along with unaudited financial statements for the six month period
ended June 30, 1999.
(b) Pro-forma financial information.
Pursuant to paragraph (b)(2) of Item 7 of Form 8-K, the following pro
forma financial information was omitted from the disclosures contained
in the Initial 8-K. Attached hereto are the unaudited pro forma
condensed consolidated balance sheet as of June 30, 1999, and the
statements of operations for the year ended December 31, 1998, and the
six months ended June 30, 1999, reflecting the acquisitions of VP
Sports, Inc. and First Bankers Mortgage Services, Inc., and including
the notes to the unaudited pro forma financial statements.
(c) Exhibits.
None
-2-
<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 hereunto duly authorized.
EQUITEX, INC.
By: /s/ Thomas B. Olson
--------------------------------
Date: November 4, 1999 Thomas B. Olson, Secretary
-3-
<PAGE>
First Bankers Mortgage
Services, Inc.
And Subsidiary
Consolidated Financial Statements
December 31, 1998 and 1997
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
Contents
- --------------------------------------------------------------------------------
Independent Auditors' Report ....................................... 3
Consolidated Financial Statements:
Balance Sheets ........................................... 4-5
Statements of Operations ................................... 6
Statements of Stockholders' Equity ......................... 7
Statements of Cash Flows ................................... 8
Summary of Significant Accounting Policies .............. 9-11
Notes to Financial Statements .......................... 12-19
2
<PAGE>
DBC
DAVID B. COHEN & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS AND
MANAGEMENT CONSULTANTS
1771 SPRINGDALE ROAD 5762 OKEECHOBEE BLVD.
CHERRY HILL, NJ 08003 SUITE 405
TEL: (888) 424-1667 WEST PALM BEACH, FLA. 33417
FAX: (609) 424-1713
INDEPENDENT AUDITORS' REPORT
First Bankers Mortgage Services, Inc.
Fort Lauderdale, Florida
Marlton, New Jersey
We have audited the consolidated balance sheets of First Bankers Mortgage
Services, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Bankers
Mortgage Services, Inc. at December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
David B. Cohen and Company
Certified Public Accountants
West Palm Beach, Florida
March 18, 1999
3
<PAGE>
First Bankers Mortgage
Services, Inc.
And Subsidiary
Consolidated Balance Sheets
December 31, 1998 1997
- --------------------------------------------------------------------------------
ASSETS
Cash ........................................ $ 403,294 $ 279,243
Mortgage loans held for sale ................ 60,407,432 59,711,231
Receivables due on mortgages sold ........... 1,011,868 1,232,150
Advances and other receivables .............. 1,723,460 1,232,519
Prepaid expenses and deferred charges ....... 154,777 136,658
Deferred income taxes (Note 4) .............. 25,628 10,000
Property and equipment, net (Note 1) ........ 922,389 911,589
Related party advances (Note 6) ............. 0 329,000
----------- -----------
$64,648,848 $63,842,390
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
First Bankers Mortgage
Services, Inc.
And Subsidiary
Consolidated Balance Sheets
December 31, 1998 1997
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Warehouse loans and other notes payable (Note 2) $54,616,448 $55,331,758
Accounts payable and accrued expenses ...... 5,011,976 4,680,841
Dividends payable .......................... 45,535 29,732
Customer deposits .......................... 1,084,493 395,902
Federal and state tax liablility (Note 4)
Current ........................... 283,725 20,000
Deferred .......................... 0 232,000
----------- -----------
Total Liabilities .............................. 61,042,177 60,690,233
----------- -----------
COMMITMENTS (Notes 5 and 8)
STOCKHOLDERS' EQUITY (Note 3)
Preferred stock, 12% cumulative,
callable at par value, $10 par;
1,000,000 shares authorized, 208,950
shares issued and outstanding ........... 2,089,500 1,752,000
Common stock, $.01 par; 10,000,000 shares
authorized, 3,000,000 shares issued
and outstanding ......................... 30,000 2,000
Additional paid-in capital ................. 1,351,687 1,379,687
Retained earnings .......................... 135,484 18,470
----------- -----------
Total Stockholders' Equity ..................... 3,606,671 3,152,157
----------- -----------
$64,648,848 $63,842,390
=========== ===========
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
First Bankers Mortgage
Services, Inc.
And Subsidiary
Consolidated Statements of Operations
Years ended December 31, 1998 1997
- --------------------------------------------------------------------------------
OPERATING REVENUES
Loan originations ....................... $ 3,461,348 $ 1,643,357
Sales of mortgage servicing rights ...... 23,449,275 12,761,948
Interest from mortgage operations ....... 5,061,693 2,717,380
Commercial income ....................... 223,464 0
Appraisal services ...................... 82,985 64,393
----------- -----------
TOTAL OPERATING REVENUES ................... 32,278,765 17,187,078
----------- -----------
OPERATING EXPENSES
Personel, including officers' salaries
and employee benefits ................ 6,743,825 5,205,653
Sales commissions and fees .............. 15,539,598 7,134,896
General and administrative .............. 4,961,827 1,906,198
Interest ................................ 4,434,843 2,578,007
----------- -----------
TOTAL OPERATING EXPENSES ................... 31,680,093 16,824,754
----------- -----------
Income from operations ..................... 598,672 362,324
Provision for income taxes (Note 4) ........ 173,465 165,000
----------- -----------
NET INCOME ................................. $ 425,207 $ 197,324
=========== ===========
The accompanying notes are an integral part of these financial statemants.
6
<PAGE>
First Bankers Mortgage
Services, Inc.
And Subsidiary
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 56,500 $ 565,000 200,000 $ 2,000 $ 1,379,687 $ 106,476 $ 2,053,163
Capital contributions ...... 118,700 1,187,000 -- -- -- -- 1,187,000
Dividends declared ......... -- -- -- -- -- (285,330) (285,330)
Net income for the year .... -- -- -- -- -- 197,324 197,324
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 175,200 $ 1,752,000 200,000 $ 2,000 $ 1,379,687 $ 18,470 $ 3,152,157
Capital contributions ...... 33,750 337,500 2,800,000 28,000 (28,000) -- 337,500
Dividends declared ......... -- -- -- -- -- (308,193) (308,193)
Net income for the year .... -- -- -- -- -- 425,207 425,207
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 208,950 $ 2,089,500 3,000,000 $ 30,000 $ 1,351,687 $ 135,484 $ 3,606,671
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
First Bankers Mortgage
Services, Inc.
And Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income ........................................... $ 425,207 $ 197,324
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depreciation and amortization ............ 324,533 164,518
Deferred income taxes .................... (246,493) 296,000
Mortgage loan reserve .................... 94,217 249,073
Decrease (Increase) in:
Mortgage loans held for sale ........ (854,418) (37,887,521)
Advances and other receivables ...... (490,775) 190,868
Prepaid expenses and deferred charges (18,285) (6,460)
Receivables due on mortgages sold ... 220,282 (547,017)
Related party advances .............. 329,000 (329,000)
Increase in:
Accounts payable and accrued expenses 334,436 1,769,533
Customers deposits .................. 688,591 111,779
Income tax liability ................ 263,725 11,000
------------ ------------
Net cash provided (used) by operating activities ..... 1,070,020 (35,779,903)
------------ ------------
Investing Activities
Expenditures for property and equipment............ (239,691) (133,841)
------------ ------------
Net cash used by investing activities ................ (239,691) (133,841)
------------ ------------
Financing Activities
Borrowings under credit lines, net ................ (751,388) 35,075,689
Capital contributions ............................. 337,500 1,187,000
Capital distributions - cash ...................... (292,390) (255,598)
------------ ------------
Net cash (used) provided by financing activities .... (706,278) 36,007,091
------------ ------------
Net increase in cash ................................ 124,051 93,347
Cash, beginning of period ........................... 279,243 185,896
------------ ------------
Cash, end of period ................................. $ 403,294 $ 279,243
============ ============
Interest paid ...................................... $ 2,034,000 $ 2,025,000
============ ============
Income taxes paid .................................. 21,949 18,536
============ ============
Non Cash Investing and Financing Activities
Capital lease obligations incurred
For use of equipment ......................... $ 61,186 $ 411,188
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
BUSINESS First Bankers Mortgage Services, Inc. (The "Company") is a
mortgage banker and is principally engaged in the
origination and sale of residential and commercial
mortgages. They are also a provider of FHA and VA assisted
mortgages under the United States HUD lending program. The
mortgages are classified as wholesale, retail, or commercial
and are originated through retail branches and wholesale
lending centers. In December 1997, the company's board of
directors adopted a plan to discontinue operations of its
Glastonbury Ct. branch office. Total operating revenues of
this branch office for the year ended December 31, 1998 were
$5,580,000. A loss of $174,537 was incurred from those
operations in 1998.
PRINCIPALS OF The accompanying consolidated financial statements include
CONSOLIDATION the accounts of the Company and its wholly owned subsidiary,
United Appraisal Services, Inc. All material intercompany
transactions and balances have been eliminated in
consolidations.
PROPERTY AND Property and equipment are recorded at cost. Depreciation
EQUIPMENT and amortization are computed using accelerated methods over
the estimated useful lives of the assets, generally three to
ten years.
LOAN ORIGINATIONS, Gain or loss on sale of loans is recognized at the time of
SALES AND SERVICING 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. At December 31, 1998 the Company had no
fixed rate loan commitments below prevailing market rates.
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 prices) of retained mortgages
servicing rights on loans sold (none in 1998 or 1997).
9
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
LOAN ORIGINATIONS, Capitalized mortgage servicing rights on such loans will be
SALES AND SERVICING amortized in proportion to and over the period of estimated
(CONTINUED) net servicing income. The carrying amount of capitalized
mortgage servicing rights is evaluated for impairment based
upon quoted market prices of similar loans.
Mortgage loans held for sale are recorded at the lower of
aggregate cost or market value.
The Company finances certain mortgage originations pursuant
to a gestation program with an investment banking firm. Such
loan originations are immediately sold to the investment
banking firm in exchange for approximately 98% of the sales
amount, with the balance due upon resale to the investor. As
of December 31, 1998 and 1997, loans aggregating
approximately $20.4 million and $20.1 million, respectively,
were pending ultimate resale to investors by the mortgage
services firm. Estimated losses (none at December 31, 1998
and 1997) 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.
INCOME TAXES The Company accounts for income taxes under the provisions
of Financial Accounting Standards No. 109, Accounting for
Income Taxes, which requires the recognition of deferred tax
assets and liabilities for the expected future tax
consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. Such
temporary differences arose principally from the use of the
cash basis of accounting for income tax purposes. For the
tax year ended 1998 the Company is required under provisions
of the Internal Revenue Code to file as an accrual basis
taxpayer.
10
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
ESTIMATES The preparation of financial statements in conformity with
gen- erally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the period reported. Estimates are used
when accounting for allowances for doubtful accounts,
accounts receivable, loan loss reserve, depreciation, taxes
and contingencies. Actual results could differ from those
estimates.
ADVERTISING Costs The Company expenses advertising costs when the
advertisement occurs. There were no capitalized advertising
costs at December 31, 1998 and 1997.
RECLASSIFICATIONS Certain reclassifications have been made to the 1997
financial statements to conform to the 1998 presentation.
11
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. PROPERTY AND Property and equipment consists of the following:
EQUIPMENT DECEMBER 31, 1998 1997
-----------------------------------------------------------
Furniture and fixtures $ 162,568 $ 116,090
Office equipment 235,770 241,838
Leasehold improvements 103,915 87,992
Computer software 58,973 39,402
Computer equipment 310,484 155,018
Telecommunication equipment 85,646 77,322
-----------------------------------------------------------
957,356 717,662
Accumulated depreciation (476,815) (297,759)
-----------------------------------------------------------
$ 480,541 $ 419,903
===========================================================
Capitalized Leases
------------------
In 1997, the Company entered into a capital lease to
purchase computer equipment for its various branch
locations. The term of the agreement does not exceed a four
year period and the asset is capitalized under the
provisions of Financial Accounting Standards No. 13.
Property acquired under capital
leases consists of the following:
DECEMBER 31, 1998 1997
-----------------------------------------------------------
Equipment $ 662,297 $ 601,111
Accumulated amortization (220,449) (109,425)
-----------------------------------------------------------
$ 441,848 $ 491,686
===========================================================
12
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. PROPERTY AND The company also has various equipment acquired under
EQUIPMENT capital lease agreements which require payments of
(CONTINUED) principal and interest. There were no capitalized interest
costs related to these transactions for either 1998 or 1997.
The total lease payments for 1998 and 1997 respectively were
$203,356 and $98,181 net of interest.
The future minimum lease payments under these financing
agreements are as follows:
Capital Leases
-----------------------------------------------------------
1999 $ 204,578
2000 122,205
2001 75,855
2002 39,791
-----------------------------------------------------------
Total minimum lease payment 442,429
Less: imputed interest 52,222
-----------------------------------------------------------
Present value of net minimum lease payments $ 390,207
===========================================================
2. BORROWINGS Borrowings consist of the following:
December 31, 1998 1997
-----------------------------------------------------------
Warehouse credit line,
$25,000,000 limit at December
31, 1998 bearing interest at
the federal funds rate plus
1.625% (8.750% December 31,
1998), matures in February 28,
1999 requires certain equity
and leverage ratios,
collateralized by first
mortgage loans with a carrying
value of $23,219,229 and
$29,119,936 for 1998 and
1997 respectively and is
guaranteed by the Company's
stockholders. $21,834,671 $27,383,526
13
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1998 1997
---- ----
2. BORROWINGS Loan financing credit line,
(CONTINUED) $30,000,000 limit at December
31, 1997, bearing interest at
the daily federal funds rate
(7.2168 at December 31, 1997),
due on demand, collateralized
by first mortgage loans with
a carrying value of
$27,846,089. This loan was
converted in 1998 to a repo
loan. $ - $27,563,736
Warehouse credit line,
$30,000,000 limit at December
31, 1998. Bearing interest at
the Cooper River Funding rate
plus 1.9625% (7.15% December
31, 1998) matures in February
1999 requires certain equity
and leverage ratios,
collateralized by first
mortgage loans with a carrying
value of $27,846,089 for 1998
and is guaranteed by the
Company's stockholders. 26,310,079 -
Working capital credit
facility at December 31, 1998,
interest payable monthly at an
annual rate equal to the
lender's prime rate plus 1%
uncollateralized line of
credit matures August 1999. 477,000 180,000
Warehouse credit line
$7,500,000 limit at December
31, 1998, bearing interest at
the federal funds rate plus
.50% requires certain equity
and leverage ratios,
collateralized by first
mortgage loans with a carrying
value of $5,722,509 and is
guaranteed by the Company's
stockholders. 5,398,593 -
Other notes payable at
December 31, 1998, consists of
bank debt and notes with
private investors, bearing
interest at rates of 10.25% to
15.00%, with interest payable
as agreed upon. 596,105 204,496
-----------------------------------------------------------
$54,616,448 $55,331,758
===========================================================
14
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. STOCKHOLDERS' The Company is required to maintain certain regulatory net
EQUITY worth requirements. These requirements prohibit the Company
from paying dividends or other distributions which would
reduce its regulatory net worth below standards set by
certain regulatory agencies. The Company's net worth at
December 31, 1998 and 1997 was in excess of the regulatory
requirements of $1,469,502 and $1,260,345 respectively.
Additionally, the company in accordance with requirements
under a warehouse loan agreement is required to maintain a
minimum adjusted tangable net worth of $2,500,000.
4. INCOME TAXES The Company's provision for income taxes was as follows:
1998 1997
-----------------------------------------------------------
Current $ 419,958 $ (131,000)
Deferred (246,493) 296,000
-----------------------------------------------------------
Total Provision for
Income Taxes $ 173,465 $ 165,000
===========================================================
The deferred tax consequences of temporary differences in
reporting items for financial statement and income tax
purposes are recognized if appropriate. Realization of the
future tax benefit of net operating loss carryforwards is
dependent on the Company's ability to generate taxable
income within the net operating loss carryforward period.
Management has considered this in reaching its conclusion
that no valuation allowance is necessary for financial
reporting purposes.
15
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INCOME TAXES The income tax effect of temporary differences comprising
(CONTINUED) the deferred tax assets (liabilities) on the accompanying
balance sheets is a result of the following:
1998 1997
-----------------------------------------------------------
Deferred tax assets:
Federal tax operating
Loss carry forwards $ 25,628 $ 10,000
Other - -
-----------------------------------------------------------
$ 25,628 $ 10,000
-----------------------------------------------------------
Deferred tax liabilities:
Federal - (152,000)
State - (80,000)
Valuation allowance - -
-----------------------------------------------------------
Net deferred tax asset
(liability) $ 25,628 $ (232,000)
===========================================================
A reconciliation between the statutory federal income tax
rate (34%) and the effective rate of income tax expense for
each of the two years during the period ended December 31,
1998 and 1997 follows:
1998 1997
-----------------------------------------------------------
Statutory federal income
tax rate 34% 34%
Increase/(decrease)in taxes
resulting from:
State tax average rates 9 9
Utilization of tax benefit
(costs) (14.0) (2.5)
-----------------------------------------------------------
Effective rate 29.0% 45.5%
===========================================================
16
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. COMMITMENTS The Company leases one of its facilities under the terms of
an operating lease from an entity in which the principal
stock- holders of the Company are partners. The lease
contains an escalatory clause which is tied to the consumer
price index. Additionally, the Company leases office
facilities and equip- ment under operating leases with
unrelated parties. Rent expense for 1998 and 1997 aggregated
$425,500 and $390,490 respectively, including $155,150 and
$121,430 on the related party lease.
The total future minimum lease commitments pursuant to these
leases are as follows:
Year ending December 31,
-----------------------------------------------------------
1999 $ 395,631
2000 212,069
2001 71,998
-----------------------------------------------------------
Minimum lease commitments terminate in year 2001.
6. RELATED PARTY Amounts due from an officer reflected as related party
TRANSACTIONS advances were repaid during 1998 by the issuance of
additional compensation to the officer.
17
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. FAIR VALUE OF Statement of Financial Accounting Standards No. 107,
FINANCIAL "Disclosure About Fair Value of Financial Instruments"
INSTRUMENTS ("SFAS No. 107"), requires that the Company disclose
estimated fair value for its financial instruments. Fair
value estimates, methods and assumptions are set forth below
for the Company's financial instruments:
December 31, 1998 December 31, 1997
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------------------------
Assets:
Mortgage
loans held
for Sale $60,407,432 $61,257,892 $59,711,231 $60,539,512
Liabilities:
Warehouse
Loans and
Other
Payables $54,616,448 $54,616,448 $55,331,758 $55,331,758
The fair value estimates are made at a distinct point in
time based on relevant market information and information
about the financial instruments. Because the Company's
financial instru- ments are not quoted on a specific market,
fair value estimates are based on judgements regarding
future expected loss experi- ence, current economic
conditions, risk characteristics of vari- ous financial
instruments and other factors. These estimates are
subjective in nature and involve uncertainties and matters
of sig- nificant judgement.
18
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. EMPLOYEE The Company has a defined contribution plan covering all
BENEFIT full-time employees of the company who have three months
PLAN(401-K) of service and are twenty-one years of age or older. For the
years ended December 31, 1998 and 1997, the employer's
matching contribution equals 50% of the portion of the
participant's salary reduction which does not exceed 2% of
the participant's compensation. The Company incurred a
contribution expense of $50,772 and $36,096 as of December
31, 1998 and 1997 respectively, representing the Company's
voluntary matching contribution to the plan.
19
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
AND
December 31, 1998
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
Contents
Financial Statements:
Balance Sheets.......................................................... 3 - 4
Statements of Operations................................................ 5
Statements of Stockholders' Equity...................................... 6
Statements of Cash Flows................................................ 7
Summary of Significant Accounting Policies.............................. 8 - 10
Notes to Financial Statements........................................... 11 - 18
Page 2
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
Assets
Cash ....................................... $ 822,101 $ 403,294
Mortgage loans held for sale ............... 61,169,957 60,758,903
less: Loan Loss Reserve Account .......... (1,118,564) (351,471)
Receivables due on mortgages sold .......... 545,006 1,011,868
Advances and other receivables ............. 1,905,099 1,723,460
Prepaid expenses and deferred charges ...... 408,268 154,777
Income taxes refund (Note 4) ............... 362,347 25,628
Property and equipment, net (Note 1) ....... 779,666 922,389
------------ ------------
$ 64,873,880 $ 64,648,848
============ ============
The accompanying notes are an integral part of these financial statements.
Page 3
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
Liabilities and Stockholders' Equity
Liabilities
Warehouse loans and other notes payable
(Note 2)................................. $ 55,995,837 $ 54,616,448
Accounts payable and accrued expenses .... 5,643,209 5,011,976
Customer deposits ........................ 1,405,392 1,084,493
Federal and state tax liability (Note 4)
Current .............................. 283,725 283,725
Deferred ............................. -- --
------------ ------------
Total Liabilities .......................... 63,328,163 60,996,642
------------ ------------
Commitments (Note 5 and 8)
Stockholders' Equity (Note 3)
Preferred Stock, 12% dividend payable
annually, cumulative, callable at
par value, $10 par; 1,000,000 shares
authorized, 286,000 shares issued and
outstanding at June 30, 1999, (208,950
shares at December 31, 1998) .......... 2,860,000 2,089,500
Common stock, $.01 par; 10,000,000 shares
authorized, 3,000,000 shares issued
and outstanding ....................... 30,000 30,000
Additional paid-in capital ............... 1,449,688 1,351,687
Retained earnings/(deficit) .............. (2,793,971) 181,019
------------ ------------
Total Stockholders' Equity ................. 1,545,717 3,652,206
------------ ------------
$ 64,873,880 $ 64,648,848
============ ============
The accompanying notes are an integral part of these financial statements.
Page 4
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six months ended Six months ended Year ended
June 30, June 30, December 31,
1999 1998 1998
------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Operating Revenues
Loan originations ......................... $ 443,135 $ 1,135,539 $ 3,461,348
Sales of mortgage servicing rights ........ 7,568,128 8,693,790 23,449,275
Interest from mortgage operations ......... 1,797,071 2,089,542 5,061,693
Commercial income ......................... 57,004 98,522 223,464
Appraisal services ........................ -- 22,445 82,985
------------ ------------ ------------
Total Operating Revenues .................... 9,865,338 12,039,838 32,278,765
------------ ------------ ------------
Personnel, including officers' salaries and
employee benefits ........................ 2,768,851 3,194,355 6,743,825
Sales commissions and fees ................ 3,436,572 4,674,319 15,539,598
General and Administrative ................ 4,556,095 2,018,671 4,961,827
Interest .................................. 1,927,363 1,429,594 4,434,843
Corporate reorganization .................. 308,210 -- --
------------ ------------ ------------
Total Operating Expenses .................... 12,997,091 11,316,939 31,680,093
------------ ------------ ------------
Income/(loss) before Income Tax ............. (3,131,753) 722,899 598,672
Income Tax (Provision)/Benefit (Note 4) ..... 336,719 (124,254) (173,465)
------------ ------------ ------------
Net Income/(Loss) ........................... $ (2,795,034) $ 598,645 $ 425,207
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 5
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional (Deficit)
Preferred Stock Common Stock Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 ....... 175,200 $ 1,752,000 200,000 $ 2,000 $ 1,379,687 $ 48,202 $ 3,181,889
Capital contributions .............. 33,750 337,500 2,800,000 28,000 (28,000) 337,500
Dividends - cash ................... (292,390) (292,390)
Net income ......................... 425,207 425,207
--------- ----------- ---------- ---------- ----------- ----------- -----------
Balance at December 31, 1998 ....... 208,950 $ 2,089,500 3,000,000 $ 30,000 $ 1,351,687 $ 181,019 $ 3,652,206
Capital contributions (unaudited) .. 77,050 770,500 -- -- 98,001 868,501
Dividends - cash (unaudited) ....... (179,956) (179,956)
Net loss (unaudited) ............... (2,795,034) (2,795,034)
--------- ----------- ---------- ---------- ----------- ----------- -----------
Balance at June 30, 1999 (unaudited) 286,000 $ 2,860,000 3,000,000 $ 30,000 $ 1,449,688 $(2,793,971) $ 1,545,717
========= =========== ========== ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 6
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended Six months ended Year ended
June 30, June 30, December 31,
1999 1998 1998
------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Operating Activities
Net Income/(loss) ........................... $ (2,795,034) $ 598,645 $ 425,207
Adjustments to reconcile net income to
net cash provided/(used) by operating
activities:
Depreciation and amortization ............ 127,099 83,567 324,533
Deferred income taxes .................... (336,719) -- (246,493)
Decrease/(Increase) in:
Mortgage loans held for sale ........... (411,054) 10,257,099 (854,418)
Loan Loss Reserve ...................... 767,093 11,714 94,217
Advances and other receivables ......... (181,639) (284,900) (490,775)
Prepaid expenses and deferred charges .. (253,491) (113,627) (18,285)
Receivables due on mortgages sold ...... 466,862 (62,230) 220,282
Related party advance .................. -- -- 329,000
Increase/(Decrease) in:
Accounts payable and accrued expenses .. 631,233 926,765 334,436
Customers deposits ..................... 320,899 (58,530) 688,591
Income tax liability ................... -- 263,725 263,725
------------ ------------ ------------
Net cash provided/(used) by operating
activities: ................................ (1,664,751) 11,622,228 1,070,020
------------ ------------ ------------
Investing Activities
Expenditures for property and equipment .. 15,624 (190,126) (239,691)
------------ ------------ ------------
Net cash used by investing activities ....... 15,624 (190,126) (239,691)
------------ ------------ ------------
Financing Activities
Borrowings under credit lines, net ....... 1,379,389 (11,308,941) (751,388)
Capital contributions .................... 868,501 17,500 337,500
Capital distributions - cash ............. (179,956) (140,180) (292,390)
------------ ------------ ------------
Net cash provided/(used) by financing
activities ................................. 2,067,934 (11,431,621) (706,278)
------------ ------------ ------------
Net increase in cash ........................ 418,807 481 124,051
Cash, Beginning of period ................... 403,294 279,243 279,243
------------ ------------ ------------
Cash, End of period ......................... $ 822,101 $ 279,724 $ 403,294
============ ============ ============
Interest Paid ............................... $ 2,585,920 $ 1,103,114 $ 2,034,000
Income Taxes Paid ........................... -- -- 21,949
============ ============ ============
Non Cash Investing and Financing Activities
Capital lease obligations incurred
For use of equipment .................... -- -- 61,186
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 7
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
BUSINESS First Bankers Mortgage Services, Inc. (The "Company") is
a mortgage banker and is principally engaged in the
origination and sale of residential mortgages and
commercial loan properties. They are also a provider of
FHA and VA assisted mortgages under the United States
HUD lending program. The mortgages are classified as
wholesale, retail, or commercial and are originated
through retail branches and wholesale lending centers.
In December 1998, the company's board of directors
adopted a plan to discontinue operations of its
Glastonbury, CT. branch office. Total operating revenues
of this branch office for the year ended December 31,
1998 were $5,580,000. A loss of $174,534 was incurred
from those operations in 1998.
PRINCIPALS OF The accompanying consolidated financial statements
CONSOLIDATION include the accounts of the Company and its wholly owned
subsidiary, United Appraisal Services, Inc. All material
inter-company transactions and balances have been
eliminated in consolidations.
PROPERTY AND Property and equipment are recorded at cost.
EQUIPMENT Depreciation and amortization are computed using
accelerated methods over the estimated useful lives of
the assets, generally three to ten years.
LOAN ORIGINATION, Gain or loss on sale of loans is recognized at the time
SALES AND SERVICING 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. At June 30,
1999 and December 31, 1998 the Company had no fixed rate
loan commitments below prevailing market rates.
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
mortgages servicing rights on loans sold (none in 1999
and 1998).
Page 8
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
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.
Mortgage loans held for sale are recorded at the lower
of aggregate cost or market value.
The Company finances certain mortgage origination
pursuant to a gestation program with an investment
banking firm. Such loan originations are immediately
sold to the investment banking firm in exchange for
approximately 98% of the sales amount, with the balance
due upon resale to the investor. As of June 30, 1999 and
December 31, 1998, loans aggregating aproximately $0 and
$20.4 million were pending ultimate resale to investors
by the mortgage services firm.
Estimated losses (none at June 30, 1999 and December 31,
1998) are provided on loans sold subject to repurchase
by the Company. However, an adequate provision is made
by way of a general loan losses reserve for any
potential loss that may result on loans for the periods
reported.
INCOME Taxes The Company accounts for income taxes under
provisions of Financial Accounting Standards No. 109,
Accounting for Income Taxes, which requires the
recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary
differences between the carrying amounts and the tax
bases of assets and liabilities. Such temporary
differences arose principally from the use of the cash
basis of accounting for income tax purposes. For the tax
year ended 1998 the Company is required under provisions
of the Internal Revenue Code to file as an accrual basis
taxpayer.
Page 9
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
ESTIMATES The preparation of financial statements in conformity
with gen- erally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
date of the financial statements and the reported
amounts of revenues and expenses during the period
reported. Estimates are used when accounting for
allowances for doubtful accounts, accounts receivable,
loan loss reserve, depreciation, taxes and
contingencies.
ADVERTISING Costs The Company expenses advertising costs when the
advertisement occurs. Advertising expenses amounted to
$41,950 for June 30, 1999. As of June 30, 1998 and
December 31, 1999 advertising expenses were $70,789 and
$151,851, respectively. No advertising expenses were
capitalized for the above mentioned periods.
RECLASSIFICATIONS Certain reclassifications have been made to the 1998
financial statements to conform to the 1999
presentation.
UNAUDITED The balance sheet as of June 30, 1999, the statement of
FINANCIAL operations and cash flows for the six months ended June
STATEMENTS 30, 1999 and 1998, and the statement of equity for the
six months ended June 30, 1999, have been prepared by
the Company without audit. In the opinion of management,
all adjustments (which include normal recurring
adjustments) necessary to present fairly the financial
positions, results of operations for the six months
ended June 30, 1999 and 1998 are not necessarily
indicative of the operating results for the full year.
Page 10
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PROPERTY AND Property and equipment consist of the following:
EQUIPMENT
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
Furniture and fixtures $ 172,071 $ 161,653
Office equipment 237,160 236,778
Leasehold improvements 56,172 103,915
Computer software 70,275 58,973
Computer equipment 318,360 310,391
Telecommunication equipment 85,646 85,646
------------ ------------
939,684 957,356
Accumulated depreciation (570,436) (476,815)
------------ ------------
$ 369,248 $ 480,541
============ ============
Capitalized Leases
------------------
In 1997, the Company entered into a capital lease to
purchase computer equipment for its various branch
locations. The term of the agreement does not exceed a four
year period and the asset is capitalized under the
provisions of Financial Accounting Standards No. 13.
Property acquired under capital leases consists of the
following:
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
Equipment $ 627,661 $ 662,297
Accumulated amortization (217,243) (220,449)
------------ ------------
$ 410,418 $ 441,848
============ ============
Page 11
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also has various equipment acquired under
capital lease agreements which require payments of principal
and interest. There were no capitalized interest costs
related to these transactions for either 1998 or 1999. The
total lease payments for 1999 and 1998 respectively were
$74,486 and $203,356 net of interest.
The future minimum lease payments under these financing
agreements at June 30, 1999 (unaudited) are as follows:
Capital Leases
1999 (remaining 6 months) $ 112,815
2000 177,497
2001 168,969
2002 29,978
------------
Total minimum lease payment 489,259
Less: imputed interest 78,841
------------
Present value of net minimum
lease payments $ 410,418
============
2. BORROWINGS Borrowings consist of the following:
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
Warehouse credit line,
$25,000,000 limit at June 30,
1999 (unaudited) bearing
interest at the federal funds
rate plus 1.625% (6.390% June
30, 1999), matures February
28, 2000, requires certain
equity and leverage ratios,
collateralized by first
mortgage loans with a carrying
value of $16,241,271 and
$23,219,229 for June 1999 and
December 1998, respectively,
and is guaranteed by the
Company's stockholders. $
15,885,690 $ 21,834,671
Page 12
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
Loan financing credit line,
$15,000,000 limit at June 30,
1999, bearing interest at
Libor plus 2% (7.030 at June
30, 1999), due on demand,
collateralized by first
mortgage loans with a carrying
value of $7,654,691. 7,484,285 --
-
Warehouse credit line,
$25,000,000 limit at June 30,
1999 ($30,000,000 limit at
December 31, 1998). Bearing
interest at the Cooper River
Funding rate plus 1.9625%
(6.76% June 30, 1999) matures
in February 2000, requires
certain equity and leverage
ratios, collateralized by
first mortgage loans with a
carrying value of $21,404,209
and $27,846,089 for 1999 and
1998 and is guaranteed by the
Company's stockholders. 21,079,287 26,310,079
Working capital credit
facility at June 30, 1999 and
December 31, 1998, interest
payable monthly at an annual
rate equal to the lender's
prime rate plus 1%
uncollateralized line of
credit matures November 1999. 477,000 477,000
Warehouse credit line
$7,500,000 limit at June 30,
1999 and December 31, 1998,
bearing interest at the
federal funds rate plus (.50%
December 31, 1998) requires
certain equity and leverage
ratios collateralized by first
mortgage loans. with a
carrying value of $7,229,571
and $5,722,509 for 1999 and
1998 and is guaranteed by the
Company's
stockholders. 7,155,277 5,398,593
Other notes payable at
December 31, 1998, consists of
bank debt and notes with
private investors, bearing
interest at rates of 10.25% to
15.00%, with interest payable
as agreed upon. 3,914,298 596,105
------------ ------------
$ 55,995,837 $ 54,616,448
Page 13
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. STOCKHOLDERS' The Company is required to maintain certain regulatory
EQUITY net worth requirements. These requirements prohibit the
Company from paying dividends or other distributions which
would reduce its regulatory net worth below standards set by
certain regulatory agencies. The company's net worth at June
30, 1999 and December 31, 1998 was $1,545,717 and $1,469,502
and is in excess of these regulatories and loan agreement
requirements.
4. INCOME TAXES The Company's provision/(benefit) for income taxes was as
follows:
June 30, June 30, December 31,
1999 1998 1998
-----------------------------------
(unaudited) (unaudited)
Current $ - $ 124,254 $ 419,958
Deferred (336,719) (10,000) (246,493)
---------- --------- ---------
Total Provision/
(Benefit) for
Income Taxes $ (336,719) $ 124,254 $ 173,465
========== ========= =========
The deferred tax consequences of temporary differences in
reporting items for financial statement and income tax
purposes are recognized if appropriate. Realization of the
future tax benefit of net operating loss carryforwards is
dependent on the Company's ability to generate taxable
income within the net operating loss carryforward period.
Management has considered this in reaching its conclusion
that no valuation allowance is necessary for financial
reporting purposes.
Page 14
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax effect of temporary differences comprising
the deferred tax assets/(liabilities) on the accompanying
balance sheets is a result of the following:
June 30, June 30, December 31,
1999 1998 1998
--------- --------- ---------
Deferred tax assets:
Federal tax operating
Loss carry forward $ 336,719 $ - $ 25,628
Other - - -
--------- --------- ---------
$ 336,719 $ - $ 25,628
--------- --------- ---------
Deferred tax liabilities:
Federal - - -
State - - -
Valuation allowance - - -
--------- --------- ---------
Net deferred tax asset/
(liability) $ 336,719 - $ 25,628
========= ========= =========
A reconciliation between the statutory federal income tax
rate (34%) and the effective rate income tax expense for
each of the two years during the period ended June 30, 1999
and December 31, 1998 follows:
June 30, June 30, December 31,
1999 1998 1998
--------- --------- ---------
Statutory federal
income tax rate 34% 34% 34%
Increase/(decrease)
in taxes resulting from:
State tax net of
federal benefit 4.0% 4% 4%
Increase in (utilization)
of net operating loss
carryforwards -2.3% -20.8% -9%
--------- --------- ---------
Effective rate 35.7% 17.2% 29%
========= ========= =========
The Company has available a minimal amount of the 1995 net
operating loss carry forward for tax purposes to offset
future taxable income. The net operating loss carryforward
expires principally in the year 2010.
Page 15
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. COMMITMENTS The Company leases one of its facilities under the terms of
an operating lease from an entity in which the principal
stock- holders of the Company are partners. The lease
contains an escalatory clause which is tied to the consumer
price index. Additionally, the Company leases office
facilities and equip- ment under operating leases with
unrelated parties. Rent expense for June 30, 1999, June 30,
1998 and December 31, 1998 aggregated $269,707, $216,237,
and $310,166, including $77,575, $77,575, and $155,150 on
the Related Party lease.
The total future minimum lease commitments pursuant to these
leases at June 30, 1999 are as follows:
Year ending December 31,
-----------------------------------------------------------
1999 (remaining 6 months) $ 241,961
2000 461,327
2001 376,913
2002 189,624
2003 103,433
-----------------------------------------------------------
Minimum lease commitments terminate in year 2003.
6. RELATED PARTY Amounts due from an officer reflected as related party
Transactions advances were repaid during 1998 by the
issuance of additional compensation to the officer.
Page 16
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FAIR VALUE OF Statement of Financial Accounting Standards No. 107,
FINANCIAL "Disclosure About Fair Value of Financial Instruments"
INSTRUMENTS ("SFAS No. 107"), requires that the Company disclose
estimated fair value for its financial instruments. Fair
value estimates, methods and assumptions are set forth below
for the Company's financial instruments:
June 30, 1999 December 31, 1998
------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Assets:
Mortgage
loans held
for sale $60,051,393 $60,976,595 $60,407,432 $61,257,892
----------- ----------- ----------- -----------
Liabilities:
Warehouse
loans and
other
payables $55,995,837 $55,995,837 $54,616,448 $54,616,448
----------- ----------- ----------- -----------
The fair value estimates are made at a discreet point in
time based on relevant market information and information
about the financial instruments. Because the Company's
financial instru- ments are not quoted on a specific market,
fair value estimates are based on judgements regarding
future expected loss experi- ence, current economic
conditions, risk characteristics of vari- ous financial
instruments and other factors. These estimates are
subjective in nature and involve uncertainties and matters
of sig- nificant judgement.
Page 17
<PAGE>
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. EMPLOYEE The Company has a defined contribution plan covering all
BENEFIT full-time employees of the company who have three months of
(401-K) Plan service and are twenty-one years of age or older. For
the periods ended June 30, 1999 and December 31, 1998, the
employer's matching contribution equals 50% of the portion
of the participant's salary reduction which does not exceed
2% of the participant's compensation. The Company incurred a
contribution expense of $14,561, $22,533 and $50,772 for the
periods ended June 30, 1999, June 30, 1998 and December 31,
1998, respectively representing the Company's voluntary
matching contribution to the plan.
9. CORPORATE As a result of an increase in interest rates, the Company's
REORGANIZATION loan production fell from $356,199,032 as of June 30, 1998
to $225,684,474 as of June 30, 1999. The Company closed two
of its production offices and reduced its workforce.
The Company recorded a charge of $308,210 related to this
reorganization for the period ended June 30, 1999. As of
June 30, 1999 other liabilities includes $260,467 for costs
related to this reorganization.
10. SUBSEQUENT August 23, 1999, Equitex Inc. completed an acquisition of
EVENT the Company from the Company's shareholder. The total
aggregate purchase price for the Company, subject to the
Company meeting certain performance standards and is now up
to 1,000 shares of Equitex's Series E convertible preferred
stock. In addition, the purchase price is subject to
post-closing adjustment pursuant to the acquisition.
At June 30, 1999, the company owed Equitex $2,750,000
(included in notes payable on the accompanying consoladated
balance sheet), which was converted into a series of the
Company's preferred stock, the terms, dividends, relative
rights and preferences will be determined by Equitex at its
reasonable discretion.
Page 18
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999, AND
YEAR ENDED DECEMBER 31, 1998
ACQUISITION OF FIRST BANKERS MORTGAGE SERVICES, INC.
On August 23, 1999, Equitex, Inc. (the "Registrant", or the "Company"),
and its wholly-owned subsidiary FMBS Acquisition Corp., entered into an
Agreement and Plan of Reorganization (the "Acquisition Agreement") with
First Bankers Mortgage Services, Inc., a Florida Corporation, and its
wholly-owned subsidiary United Appraisal Services, Inc., ("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 is
to be accounted for as a purchase.
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 are to be 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. is to be converted into
one share of newly issued FBMS common stock. Simultaneous with 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 equity securities by
nMortgage, Inc., and has received 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%.
1
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999, AND
YEAR ENDED DECEMBER 31, 1998
ACQUISITION OF VP SPORTS, INC.
Effective July 27, 1999, Equitex, through its majority-owned
subsidiary, VP Sports, Inc. ("VP") and VP's wholly-owned subsidiary
9066-8609 Quebec Inc., a Canadian corporation, acquired all of the
outstanding common shares of Victoria Precision Inc. ("Victoria"), also
a Canadian corporation, incorporated under the laws of the Province of
Quebec, as well as the rights to a four-year international consulting
and non-compete agreement. The transaction was accounted for as a
purchase, and the total purchase price was $3,966,600 ($6,000,000 CDN).
In order to finance the acquisition, in June 1999 VP authorized a
private placement of up to 40 units in exchange for cash of $5,000,000.
Each unit consists of 100 shares of $1,000 per share 8% secured
convertible preferred stock, 12,500 shares of VP common shares at $2
per share, and warrants to purchase 287,500 shares of VP common stock
at $.10 per shares. As of June 30, 1999, VP had sold 18.37 units for
$2,269,250, and warrants to purchase 575,000 shares of VP common stock
had been exercised resulting in proceeds of $57,500. Subsequent to June
30, 1999, VP sold an additional 17.38 units for $2,172,500, and
warrants to purchase 1,725,000 shares of VP common stock had been
exercised in exchange for $172,500.
As a result of the private placement of 35.75 units, the exercise of
warrants to purchase 2,300,000 shares of VP common stock, and the
issuance of 560,763 shares of VP common stock under an employment
agreement entered in connection with the acquisition, the Company's
investment in VP was reduced from approximately 87% at December 31,
1998, to approximately 35.7%. Due to the change in ownership %, the
Company changed its method of accounting for its investment in VP to
the equity method of accounting from consolidation.
The accompanying unaudited condensed pro forma consolidated balance sheet gives
effect to the acquisitions as if the purchases had been consummated on June 30,
1999. The accompanying unaudited condensed pro forma consolidated statements of
operations for the six months ended June 30, 1999, and the year ended December
31, 1998, give effect to the acquisitions as if the purchases had been
consummated on January 1, 1999, and January 1, 1998, respectively.
2
<PAGE>
The unaudited pro forma consolidated financial statements should be read in
conjunction with the historical financial statements of Victoria (included
herein) as well as those of the Company. The unaudited pro forma financial
statements do not purport to be indicative of the financial position or results
of operations that actually would have occurred had the acquisition been in
effect during the periods presented, or to project the Company's financial
position or results of operations to any future period.
3
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
<TABLE>
<CAPTION>
Historical
------------------------------------------
Equitex, Inc. First Bankers
and Victoria Mortgage
subsidiaries Precision Inc. Services, Inc. Pro forma adjustments
June 30, July 31, June 30, -------------------------------
1999 1999 1999 Note 1 Note 2
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 3,765,658 $ 822,101 $ 2,345,000 (1)
(3,107,170) (2)
Accounts, advances, and loans
receivable 939,901 $ 1,911,083 2,450,105
Mortgage loans held for sale 60,051,393 $ (2,750,000) (5)
Inventories 150,279 1,124,157
Prepaid expenses and other 112,418 126,092 408,267
Notes receivable, net 2,934,844
Investments, trading securities 1,269,621
Fixed assets, net 158,075 2,187,099 779,666
Other assets 1,201,500 420,752 362,347
Receivables from VP Sports, Inc.
Investment in First Bankers Mortgage
Service, Inc. 2,531,000 (4)
(2,531,000) (4)
Investment in VP Sports, Inc. 3,966,600 (2)
(3,966,600) (2)
Intangible and other assets 1,495,223 3,165,823 (2) 3,845,283 (4)
------------ ------------ ------------ ------------ ------------
Total assets $ 12,027,519 $ 5,769,183 $ 64,873,879 $ 2,403,653 $ 1,095,283
============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and
accrued expenses $ 793,200 $ 797,080 $ 5,643,208
Warehouse loans and other
notes payable 55,995,837 $ (2,750,000) (5)
Customer deposits 1,405,392
Income tax payable 283,725
Notes payable 426,598 1,336,034
Note payable to Seller, current
portion $ 429,715 (2)
Deferred income taxes 436,048
Note payable to Seller, net of
current portion 429,715 (2)
Long-term debt and notes payable 2,399,244
------------ ------------ ------------ ------------ ------------
Total liabilities 1,219,798 4,968,405 63,328,163 859,430 (2,750,000)
Minority interest 738,703 2,860,000 (4)
Stockholders' equity 10,069,018 800,777 1,545,717 2,345,000 (1) 2,531,000 (4)
(800,777) (2) (1,545,717) (4)
(1,121,526) (3)
1,121,526 (3)
------------ ------------ ------------ ------------ ------------
Total liabilities and stockholders'
equity $ 12,027,519 $ 5,769,183 $ 64,873,879 $ 2,403,653 $ 1,095,283
============ ============ ============ ============ ============
</TABLE>
(Continued)
4
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(Page 2)
<TABLE>
<CAPTION>
Accounting
for the pro
forma effects
on the
Company's
Pro forma investment in
adjustments VP Sports, Inc. Pro forma
------------ Pro forma ------------ combined
Note 3 combined Note 4 as adjusted
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 4,000,000 (9) $ 7,825,589 $ (1,592,264) (12) $ 6,233,325
Accounts, advances, and loans
receivable 5,301,089 (1,911,083) (12) 3,390,006
Mortgage loans held for sale 57,301,393 57,301,393
Inventories 1,274,436 (1,124,157) (12) 150,279
Prepaid expenses and other 646,777 (126,092) (12) 520,685
Notes receivable, net 2,934,844 2,934,844
Investments, trading securities 1,269,621 1,269,621
Fixed assets, net 3,124,840 (2,187,099) (12) 937,741
Other assets 1,984,599 (420,752) (12) 1,447,847
(116,000) (12)
Receivables from VP Sports, Inc. 173,652 (12) 173,652
Investment in First Bankers Mortgage
Service, Inc.
Investment in VP Sports, Inc. 3,165,823 (12) 1,640,875
(1,524,948) (12)
Intangible and other assets 8,506,329 (3,165,823) 5,340,506
------------ ------------ ------------ ------------
Total assets $ 4,000,000 $ 90,169,517 $ (8,828,743) $ 81,340,774
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and
accrued expenses $ 7,233,488 $ (797,079) (12) $ 6,436,080
(329) (12)
Warehouse loans and other
notes payable $ 53,245,837 53,245,837
Customer deposits 1,405,392 1,405,392
Income tax payable 283,725 283,725
Notes payable 1,762,632 (1,336,034) (12) 426,598
Note payable to Seller, current
portion 429,715 (429,715)
Deferred income taxes 436,048 (436,048) (12)
Note payable to Seller, net of
current portion 429,715 (429,715)
Long-term debt and notes payable 2,399,244 (2,399,244) (12)
------------ ------------ ------------ ------------
Total liabilities 0 67,625,796 (5,828,164) 61,797,632
Minority interest 671,000 (11) 4,269,703 (738,703) 3,531,000
Stockholders' equity 4,000,000 (9) 18,274,018 (2,261,876) (12) 16,012,142
3,329,000 (10)
(4,000,000) (11)
------------ ------------ ------------ ------------
Total liabilities and stockholders'
equity $ 4,000,000 $ 90,169,517 $ (8,828,743) $ 81,340,774
============ ============ ============ ============
</TABLE>
5
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Historical
------------------------------------------
Equitex, Inc. First Bankers
and Victoria Mortgage
subsidiaries Precision Inc. Services, Inc.
Six months Six months Six months
ended ended ended Pro forma adjustments
June 30, July 31, June 30, -------------------------------
1999 1999 1999 Note 1 Note 2
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 654,651 $ 11,836,767 $ 9,865,338
Cost of sales 242,552 10,197,011
------------ ------------ ------------ ------------ ------------
Gross profit 412,099 1,639,756 9,865,338
------------ ------------ ------------ ------------ ------------
Selling, general, and
administrative expenses 1,747,272 779,711 10,761,518 $ 192,300 (6)
Unrealized holding gains
on trading securities (177,810)
Equity earnings in VP Sports, Inc. $ 125,664 (6)
66,730 (8)
18,409 (7)
Interest expense 27,552 282,642 1,927,363 0
Corporate reorganization 308,210
------------ ------------ ------------ ------------ ------------
1,597,014 1,062,353 12,997,091 210,803 192,300
------------ ------------ ------------ ------------ ------------
Income (loss) before
minority interest and taxes (1,184,915) 577,403 (3,131,753) (210,803) (192,300)
Minority interest 28,047
------------ ------------ ------------ ------------ ------------
Income (loss) before taxes (1,156,868) 577,403 (3,131,753) (210,803) (192,300)
Provision for income taxes 146,467 (336,719)
------------ ------------ ------------ ------------ ------------
Net income (loss) (1,156,868) 430,936 (2,795,034) (210,803) (192,300)
Other comprehensive income,
net of tax 15,623
------------ ------------ ------------ ------------ ------------
Comprehensive income (loss) $ (1,141,245) $ 430,936 $ (2,795,034) $ (210,803) $ (192,300)
============ ============ ============ ============ ============
Net loss per share, basic and
fully diluted $ (0.19)
============
Weighted average number of
common shares outstanding 6,236,754
============
</TABLE>
(Continued)
6
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(Page 2)
<TABLE>
<CAPTION>
Accounting
for the pro
forma effects
on the
Company's
Pro forma investment in
adjustments VP Sports, Inc. Pro forma
------------ Pro forma ------------ combined
Note 3 combined Note 4 as adjusted
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 22,356,756 $(11,836,767) (12) $ 10,519,989
Cost of sales 10,439,563 (10,197,011) (12) 242,552
------------ ------------ ------------ ------------
Gross profit 11,917,193 (1,639,756) 10,277,437
------------ ------------ ------------ ------------
Selling, general, and
administrative expenses 13,480,801 (779,711) (12) 12,697,712
(3,378) (12)
Unrealized holding gains
on trading securities (177,810) (177,810)
Equity earnings in VP Sports, Inc. 210,803 (153,844) (12) 56,959
Interest expense 2,237,557 (282,642) (12) 1,948,767
(6,148) (12)
Corporate reorganization 308,210 308,210
------------ ------------ ------------ ------------
16,059,561 (1,225,723) 14,833,838
------------ ------------ ------------ ------------
Income (loss) before
minority interest and taxes (4,142,368) (414,033) (4,556,401)
Minority interest $ 746,834 (11) 774,881 774,881
------------ ------------ ------------ ------------
Income (loss) before taxes 746,834 (3,367,487) (414,033) (3,781,520)
Provision for income taxes (190,252) (146,467) (12) (336,719)
------------ ------------ ------------ ------------
Net income (loss) 746,834 (3,177,235) (267,566) (3,444,801)
Other comprehensive income,
net of tax 15,623 15,623
------------ ------------ ------------ ------------
Comprehensive income (loss) $ 746,834 $ (3,161,612) $ (267,566) $ (3,429,178)
============ ============ ============ ============
Net loss per share, basic and
fully diluted $ (0.55)
============
Weighted average number of
common shares outstanding 6,236,754
============
</TABLE>
7
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Historical
------------------------------------------
Equitex, Inc. First Bankers
and Victoria Mortgage
subsidiaries Precision Inc. Services, Inc.
Year ended Year ended Year ended Pro forma adjustments
December 31, January 31, December 31, -------------------------------
1998 1999 1998 Note 1 Note 2
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 447,840 $ 15,340,839 $ 32,278,766
Cost of sales 13,412,007
------------ ------------ ------------ ------------ ------------
Gross profit 447,840 1,928,832 32,278,766
------------ ------------ ------------ ------------ ------------
Selling, general, and
administrative expenses 2,317,243 1,367,702 27,245,250 $ 384,600 (6)
Net realized gain on investments (1,108,340)
Decrease in unrealized appreciation
of investments 1,056,054
Equity earnings in VP Sports, Inc. $ 251,328 (6)
133,461 (8)
27,614 (7)
Interest expense 101,002 463,180 4,434,843
------------ ------------ ------------ ------------ ------------
2,365,959 1,830,882 31,680,093 412,403 384,600
------------ ------------ ------------ ------------ ------------
Income (loss) before minority
interest and taxes (1,918,119) 97,950 598,673 (412,403) (384,600)
Minority interest
------------ ------------ ------------ ------------ ------------
Income (loss) before taxes (1,918,119) 97,950 598,673 (412,403) (384,600)
Provision for income taxes 63,180 16,562 173,465
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (1,981,299) $ 81,388 $ 425,208 $ (412,403) $ (384,600)
============ ============ ============ ============ ============
Net loss per share, basic
and fully diluted $ (0.45)
============
Weighted average number of
common shares outstanding 4,416,988
============
</TABLE>
(Continued)
8
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(Page 2)
<TABLE>
<CAPTION>
Accounting
for the pro
forma effects
on the
Company's
Pro forma investment in
adjustments VP Sports, Inc. Pro forma
------------ Pro forma ------------ combined
Note 3 combined Note 4 as adjusted
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 48,067,445 $(15,340,839) (12) $ 32,726,606
Cost of sales 13,412,007 (13,412,007) (12)
------------ ------------ ------------ ------------
Gross profit 34,655,438 (1,928,832) 32,726,606
------------ ------------ ------------ ------------
Selling, general, and
administrative expenses 31,314,795 (1,367,702) (12) 29,752,078
(195,015) (12)
Net realized gain on investments (1,108,340) (1,108,340)
Decrease in unrealized appreciation
of investments 1,056,054 1,056,054
Equity earnings in VP Sports, Inc. 412,403 (29,056) (12) 383,347
Interest expense 4,999,025 (463,180) (12) 4,531,369
(4,476) (12)
------------ ------------ ------------ ------------
36,673,937 (2,059,429) 36,614,508
------------ ------------ ------------ ------------
Income (loss) before minority
interest and taxes (2,018,499) 130,597 (1,887,902)
Minority interest $ (10,152) (11) (10,152) (10,152)
------------ ------------ ------------ ------------
Income (loss) before taxes (10,152) (2,028,651) 130,597 (1,898,054)
Provision for income taxes 253,207 (16,562) (12) 236,645
------------ ------------ ------------ ------------
Net income (loss) $ (10,152) $ (2,281,858) $ 147,159 $ (2,134,699)
============ ============ ============ ============
Net loss per share, basic
and fully diluted $ (0.48)
============
Weighted average number of
common shares outstanding 4,416,988
============
</TABLE>
9
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED PRO FORMA
CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS
AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999, AND FOR THE YEAR ENDED DECEMBER 31, 1998
The purchase method of accounting conforms the accounting policies followed by
the consolidated entities. There were no significant accounting policy
differences or other items which required adjustment in the unaudited pro forma
consolidated financial statements.
ACQUISITION OF FIRST BANKERS MORTGAGE SERVICES, INC.
On August 23, 1999, Equitex, Inc. (the "Registrant", or the "Company"), and its
wholly-owned subsidiary FMBS Acquisition Corp., entered into an Agreement and
Plan of Reorganization (the "Acquisition Agreement") with First Bankers Mortgage
Services, Inc., a Florida Corporation, and its wholly-owned subsidiary United
Appraisal Services, Inc., ("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 is to be
accounted for as a purchase.
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 are to be
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. is to be converted into one share of newly issued FBMS common stock.
Simultaneous with 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.
Each share of Series E Preferred Stock is convertible into 1000 shares of the
Company's common stock. The 250 shares of Series E Preferred Stock is valued at
approximately $2,531,000, based upon the underlying market value of the
Company's common stock at August 23, 1999. The Company is also to place 750
shares of Series E Preferred Stock into escrow pursuant to an Escrow Agreement
(the "Escrow Shares"). The Escrow shares are issuable upon the satisfaction and
completion of certain operational and performance objectives, as defined,
through December 31, 2000. The Company has also agreed to issue a number of
shares of the Company's common stock as "Bonus Shares", based upon defined
criteria, determined as of December 31, 2000.
10
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED PRO FORMA
CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS
AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999, AND FOR THE YEAR ENDED DECEMBER 31, 1998
In connection with the Company's acquisition of FBMS, the Company is proceeding
with a $4,000,000 private placement of equity securities by nMortgage, Inc., and
has received 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%.
ACQUISITION OF VP SPORTS, INC.
Effective July 27, 1999, Equitex, Inc. (the "Registrant", or the "Company")
through its majority owned subsidiary, VP Sports, Inc. ("VP") and VP's
wholly-owned subsidiary 9066- 8609 Quebec Inc., a Canadian corporation, acquired
all of the outstanding common shares of Victoria Precision Inc. ("Victoria"),
also a Canadian corporation, incorporated under the laws of the Province of
Quebec, as well as the rights to a four-year international consulting and
non-compete agreement for $3,966,600 ($6,000,000 CDN) in a transaction accounted
for as a purchase. Of the total purchase price, $3,107,170 ($4,700,000 CDN) was
paid in cash at the date of closing, and $859,430 ($1,300,000 CDN) was exchanged
in the form of a 6%, promissory note, due in two equal installments of $429,715
at six months and twelve months following the closing date.
In order to finance the acquisition, in June 1999 VP authorized a private
placement of up to 40 units in exchange for cash of $5,000,000. Each unit
consists of 100 shares of $1,000 per share 8% secured convertible preferred
stock, 12,500 shares of VP common stock at $2 per share, and warrants to
purchase 287,500 shares of VP common stock at $.10 per shares. As of June 30,
1999, VP had sold 18.37 units for $2,269,250, and warrants to purchase 575,000
shares of VP common stock had been exercised resulting in proceeds of $57,500.
Subsequent to June 30, 1999, VP sold an additional 17.38 units for $2,172,500,
and warrants to purchase 1,725,000 shares of VP common stock had been exercised
in exchange for $172,500.
As a result of the private placement of 35.75 units, the exercise of warrants to
purchase 2,300,000 shares of VP common stock, and the issuance of 560,763 shares
of VP common stock under an employment agreement entered in connection with the
acquisition, the Company's investment in VP was reduced from approximately 87%
at December 31, 1998, to approximately 35.7%.
11
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED PRO FORMA
CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS
AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999, AND FOR THE YEAR ENDED DECEMBER 31, 1998
NOTES 1 AND 2 PRO FORMA ADJUSTMENTS:
The following is a description of each of the pro forma adjustments:
(1) To reflect $2,345,000 of cash proceeds received from the sale of 17.38
units subsequent to June 30, 1999 and the exercise of warrants to
purchase 1,725,500 shares of VP common stock.
(2) To reflect the July 27, 1999, acquisition of all the outstanding common
stock of Victoria and the rights to a four-year international
consulting and non-compete agreement in exchange for consideration of
$3,966,600, which consists of $3,107,170 cash and a $859,430, 6%
promissory note payable, which is due in two equal, semi-annual
installments of $429,715. The acquisition price of $3,966,600 less the
net book value of the assets acquired, was allocated as follows:
Book value of net assets acquired $ 800,777
International consulting and non-compete
agreement 2,688,800
Other intangible assets 477,023
-----------
Purchase price $ 3,966,600
===========
(3) To reflect the issuance of 560,763 shares of VP common stock, valued at
$2 per share, and recognition of deferred compensation expense, under a
three-year employment agreement.
(4) To reflect the August 23, 1999, Acquisition of all the outstanding
common stock of FBMS in exchange for 250 shares of the Company's Series
E convertible preferred stock, valued at $2,531,000, and contingent
consideration of up to 750 shares of the Company's Series E convertible
preferred stock through December 31, 2000. The Acquisition price of
$2,531,000, less the net book value of the assets acquired was
allocated to goodwill. Minority interest of $2,860,000 represents
286,000 shares of 12%, cumulative, callable preferred stock of FBMS
outstanding at June 30, 1999.
(5) To reflect the elimination of intercompany receivables/payables of
$2,750,000 between Equitex and FBMS.
12
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED PRO FORMA
CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS
AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999, AND FOR THE YEAR ENDED DECEMBER 31, 1998
NOTES 1 AND 2 PRO FORMA ADJUSTMENTS (CONTINUED):
(6) To record amortization expense related to the intangible and other
assets as follows:
a. International consulting and non-compete agreement, valued at
$2,688,800, amortized on a straight-line basis over 4 years,
multiplied by the Company's 35.7% ownership interest in VP
Sports, Inc.
b. Other intangible assets attributable to the VP acquisition,
valued at $477,023, amortized on a straight-line basis over 15
years, multiplied by the Company's 35.7% ownership interest in
VP Sports, Inc.
c. Intangible assets attributable to the FBMS acquisition,
amortized on a straight-line basis over 10 years.
(7) To record interest expense on the 6%, $859,430 promissory note payable
to the sellers, multiplied by the Company's 35.7% ownership interest in
VP Sports, Inc.
(8) To record compensation expense under a three-year employment agreement,
multiplied by the Company's 35.7% ownership interest in VP Sports, Inc.
NOTE 3 PRO FORMA ADJUSTMENTS
(9) To reflect a $4,000,000 private placement of equity securities
by nMortgage, Inc. to minority shareholders, resulting in an
estimated decrease in the Company's ownership interest in FBMS
from 100% to 75%.
(10) To reflect the net increase in the Company's investment
balance in FBMS as a result of the subsidiary issuance of
equity.
(11) To reflect the elimination of the investment in FBMS and the
resulting 25% minority interest of as of June 30,
1999, and the minority interest in FBMS net income (loss).
13
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED PRO FORMA
CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS
AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999, AND FOR THE YEAR ENDED DECEMBER 31, 1998
NOTE 4 ACCOUNTING ADJUSTMENTS TO REFLECT THE COMPANY'S INVESTMENT
IN VP SPORTS, INC.:
The following is a description on each of the pro forma adjustments to reflect
the change in the Company's accounting for its investment in VP to the equity
method of accounting from consolidation:
(12) As described above, In connection with VP's private placement of units
and the related exercise of warrants to purchase common stock of VP,
and certain other equity transactions, the Company's ownership interest
in VP was reduced from approximately 87% at December 31, 1998, to
approximately 35.7%.
Because the Company's ownership interest in VP was reduced to less than
50% of the outstanding common stock of VP, the Company changed its
method of accounting for its investment in VP (which includes VP's
wholly-owned subsidiaries 9066-8609 Quebec Inc. and Victoria), from
consolidation to the equity method of accounting.
At June 30, 1999, an entry has been recorded to reflect the Company's
equity investment in VP Sports of $3,415,823. For the six months ended
June 30, 1999, and the year ended December 31, 1998, entries have been
recorded to reflect the Company's 35.7% equity interest in the earnings
of VP Sports, Inc.
14
