U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
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/X/ ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended: DECEMBER 31, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE
REQUIRED) For transition period from _____ to _____.
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Commission File Number: 0-12374
EQUITEX, INC.
(Name of small business issuer in its charter)
DELAWARE 84-0905189
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7315 EAST PEAKVIEW AVENUE, ENGLEWOOD, COLORADO 80111
(Address of principal executive offices)(Zip Code)
Issuer's telephone number: (303) 796-8940
Securities registered under Section 12 (b) of the Exchange Act:
NONE
Securities registered under Section 12 (g) of the Exchange Act:
COMMON STOCK, $.02 PAR VALUE
(Title of Class)
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Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 Days: Yes /X/ No / /
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained in this form, and will not be contained, to the best of the
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB: /X/
Issuer's revenues for its most recent fiscal year: $447,840
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $86,676,429 based on the last sale price of the Registrant's
common stock on April 9, 1999, ($17.875 per share) as reported by the Nasdaq
Stock Market.
The issuer had 6,028,715 shares of common stock outstanding as of April 9, 1999.
Documents incorporated by reference: NONE
Transitional Small Business Disclosure Format: Yes / / No /X/
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EQUITEX, INC.
FORM 10-KSB/A
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 REGISTRANT'S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED
TO, STATEMENTS CONCERNING THE REGISTRANT'S OPERATIONS, ECONOMIC PERFORMANCE,
FINANCIAL CONDITION, GROWTH AND ACQUISITION STRATEGIES, INVESTMENTS, AND FUTURE
OPERATIONAL PLANS. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE
NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS
"MAY", "WILL", "EXPECT", "BELIEVE", "ANTICIPATE", "INTENT", "COULD", "ESTIMATE",
"MIGHT", OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE
TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN
OF WHICH ARE BEYOND THE REGISTRANT'S CONTROL, AND ACTUAL RESULTS MAY DIFFER
MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT FACTORS, INCLUDING UNCERTAINTY
RELATED TO ACQUISITIONS, GOVERNMENTAL REGULATION, MANAGING AND MAINTAINING
GROWTH, THE VALUE OF THE REGISTRANT'S INVESTMENTS, THE OPERATIONS OF THE
REGISTRANT'S INVESTEE COMPANIES, VOLATILITY OF STOCK PRICE AND ANY OTHER FACTORS
DISCUSSED IN THIS AND OTHER REGISTRANT FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(a) Business Development
(1) The Registrant was organized under the laws of the State of Delaware in
1983 and elected to become a business development company and be subject to the
applicable provisions of the Investment Company Act in 1984. Until January 4,
1999, Equitex, Inc. (the "Registrant") was a business development company
("BDC") which is a form of closed-end, non-diversified investment company under
the Investment Company Act of 1940 (the "Investment Company Act"). A business
development company generally must maintain 70% of its assets in new,
financially troubled or otherwise qualified companies, known as investee
companies, and offers significant managerial assistance to such companies.
Business development companies are not subject to the full extent of regulation
under the Investment Company Act. (See Item 1 (b) (8) "Regulation - Business
Development Companies" below). The Registrant primarily was engaged in the
business of investing in and providing managerial assistance to developing
companies which, in its opinion, would have a significant potential for growth.
The Registrant's investment objective was to achieve long-term capital
appreciation, rather than current income, on its investments. On January 4,
1999, the Registrant withdrew its election to be treated as a BDC subject to the
Investment Company Act. The Company has elected to be treated for a maximum
period of one year as a "transient investment company" as that term is defined
in Rule 3a-2 under the Investment Company Act of 1940.
On December 12, 1996, the Registrant announced that it intended to
implement a withdrawal of its election as a BDC under the Investment Company
Act. The Registrant prepared a detailed plan which addressed the corporate
governance issues and process which must be followed for decertification
including the legal, accounting, securities listing and other effects of such
withdrawal on the Registrant. At a meeting held on April 3, 1998, the
Registrant's stockholders authorized the Registrant to change the nature of its
business and withdraw its election as a BDC under the Investment Company Act.
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The withdrawal would become effective only upon the Securities and Exchange
Commission's receipt of the Registrant's notice of election of withdrawal within
a period of one year from the date of vote. On January 4, 1999, the Registrant
filed its withdrawal and elected to be treated for a maximum period of one year
as a "transient investment company" as that term is defined under the Investment
Company Act. Following the withdrawal, the Registrant is no longer subject to
the regulatory provisions of the Investment Company Act for BDCs, such as
insurance, custody, composition of the board, affiliated transactions and
compensation arrangements. Despite the Registrant's withdrawal of its election
as a BDC, the Registrant 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.
The Registrant's Board of Directors adopted a plan which began with
stockholder approval for the Registrant to withdraw as a BDC, with the intent of
becoming an operating company. On August 13, 1998, the Registrant acquired all
of the outstanding stock of First TeleServices Corp. in exchange for 625,000
shares of the Registrant=s common stock. As a result of the transaction, FTC
became a wholly owned subsidiary of the Company. FTC is a fee-based financial
services organization consisting of a database marketing division, consumer
finance division, an inbound/outbound calling center, and an operations center.
FTC has developed strategic alliances with a number of nationwide organizations
to outsource the products and services it offers.
In the fourth quarter of 1998, the Registrant acquired 9.9% of the
outstanding common stock of First TeleBanc Corp. ("FTB"), a bank holding company
which operates through its wholly owned subsidiary, Boca Raton First National
Bank, in Boca Raton, Florida. FTB intends to focus as a `direct to the consumer
bank' on a national level. It will use the Internet, including electronic
payment processing, to facilitate e-commerce transactions, and call center
technology to deliver its products and services to its customers 24 hours a day,
7 days a week. On April 9, 1999, the Registrant signed a letter of intent to
merge FTB with and into the Registrant. Consummation of the merger is subject to
certain conditions and adjustments.
As an operating company, the nature of the Registrant's business will
change from investing in a portfolio of securities to achieve gains on
appreciation and dividend income, to becoming actively engaged in the management
of a business or businesses for the generation of income from those operations.
Thus, withdrawal of the Registrant's election as a BDC will result in a
significant change in the Registrant's method of accounting from the value
method of accounting required of investment companies to either fair value or
historical cost accounting, depending on the classification of the investment
and the Registrant's intent with respect to the period it intends to hold the
investment.
Over the past several years as a BDC, the Registrant concentrated its
efforts in acquiring interests in more mature investee companies, in some cases,
through asset-based financing transactions. In that regard, the Registrant
devoted more of its time to providing managerial assistance to fewer companies,
most of which time over the past several years was devoted to investees RDM
Sports Group, Inc. and IntraNet Solutions, Inc., which constituted a significant
portion of the Registrant's investment portfolio. The President of the
Registrant was President and a director of RDM Sports Group from 1987 to June
1997 and was director of IntraNet Solutions and its predecessor from February
1991 to October 1997.
During the fourth quarter of 1997, the Registrant received 2,000,000 shares
of common stock of VP Sports, Inc. ("VP Sports") in payment for the transfer of
a letter of intent for the acquisition of an unrelated company involved in the
sporting goods business as well as merger and acquisition advisory services
rendered to VP Sports. The total value for the transfer and services was
$250,000 which represents the Registrant's cost basis for the shares. During
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1998, VP Sports executed a letter of intent for the acquisition of a North
American manufacturing company. No definitive agreement has been reached to
date, however, VP has received a financing commitment for asset based lending
and is completing with that lender a final due diligence review. While there is
no assurance the acquisition will be completed, VP anticipates signing a
definitive agreement during the first half of 1999.
During 1998, the Registrant received 1,500,000 shares of the common stock
of Triumph Sports, Inc. ("Triumph") in payment of merger and acquisition
advisory services totaling $375,000. During 1997, Triumph was unsuccessful in
its attempt to acquire a golf accessory manufacturer. During 1998, Triumph
acquired and currently operates four health food, nutritional and supplement
related retail outlets in the South Florida area. Triumph became an authorized
franchisee of General Nutrition Centers ("GNC") which stores comprise two of
those operated. As of the date of this report, Triumph is negotiating for the
purchase of an additional GNC location, the success of which acquisition cannot
be assured.
In November 1997, the Registrant was notified by the Nasdaq Stock Market
that the Registrant failed to meet the minimum maintenance requirements for
continued listing on the Nasdaq National Market. As a result of this
notification and subsequent review by Nasdaq of materials provided by the
Registrant, on February 19, 1998 a hearing was held to consider the Registrant's
plan for continued compliance with the maintenance requirements and a
determination was made to move trading of the Registrant's common stock to the
Nasdaq SmallCap Market effective March 13, 1998. The Registrant's common stock
continues to trade on the Nasdaq Stock Market SmallCap Market under the symbol
EQTX.
(a)(2)(3) During the year ended December 31, 1998, the Registrant has not
been involved in any bankruptcy, receivership or similar proceedings; has not
undergone material reclassification, merger or consolidation; has not acquired
or disposed of any material amount of assets otherwise than in the ordinary
course of business; and has not experienced any material change in its mode of
conducting business. However, on January 4, 1999, the Registrant filed a
withdrawal of its election as a business development company to become an
operating company. [See Item 1(a)(1) above for an explanation of the
Registrant's withdrawal on January 4, 1999 of its election as a BDC]
(b) Business of Issuer
(1)(2)(3)(4) As a result of the Registrant's decertification as a business
development company, the Registrant is now a holding company which operates
through its wholly owned subsidiary, FTC. FTC is a fee-based financial services
organization consisting of a database marketing division, consumer finance
division, an inbound/outbound calling center, and an operations center. FTC has
developed strategic alliances with a number of nationwide organizations to
outsource the products and services it offers.
FTC only recently began operations and has not yet generated income. As a
marketing arm for financial institutions, FTC will perform as a consumer finance
company, offering a broad array of financial products and services to the
sub-prime market. These products will be developed and serviced through
correspondent relationships with companies specializing in those particular
products which include:
* debt transfer servicing
* balance transfer servicing
* secured credit cards
* sub-prime mortgage loans
* sub-prime auto loans
* prepaid calling cards
* prepaid residential long distance service
* prepaid cellular service
* insurance products
* other selected products and services
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The calling center is the engine that drives the product delivery system;
eventually handling tens of thousands of inbound and outbound calls monthly. The
inbound calls will be the result of various targeted media programs and the
by-product of FTC's customer base, which is anticipated to grow to hundreds of
thousands of consumers. The outbound calls will be the result of cross selling
large data bases of customers a variety of products and services offered on a
brokered basis through the Registrant's strategic alliances. Through interactive
voice response technology, the latest call center software and hardware, and a
well-trained staff of customer service representatives, telemarketers and
telebankers, FTC will be able to turn these calls into revenue while operating
at the highest level of efficiency. The call center functions have been
outsourced to The Scribers, Inc. in Lansing, Michigan, an experienced call
center services company.
Initially, FTC will offer secured credit cards to large data bases of
customers through its debt transfer servicing program. ADebt transfer servicing@
is a term used in the collection industry which means using a new loan account
number to service and collect debt purchased in the secondary market. As
customers continue to make payments on their new accounts, thereby
rehabilitating their credit, the Registrant will begin cross selling other
financial and telecommunications products on a fee basis without the risk of
extending credit. A debt transfer servicing agreement has already been signed
with a Midwest financial services firm that has a large network of collection
agencies. In addition, FTC recently entered into a joint venture agreement with
a southeastern financial services company which has acquired a portfolio of
13,000 accounts representing receivables in excess of $100 million.
FTC believes that it differs from other financial services organizations in
that it understands and will specialize in handling the sub-prime consumer and
offer that consumer only those products and services they need. The Registrant
will target those financial institutions which recognize the potential in the
sub-prime market and have relationships with strategic alliances already working
with this market.
(5) The Registrant does not require raw materials.
(6) The Registrant's business is dependent upon the alliance partnerships
it maintains with other organizations for referral of debt portfolios which
generate new customers. Because the Registrant=s business is ultimately
dependent upon the quantity and quality of these alliance partnerships, the
Registrant must actively seek out new partnerships while maintaining and
evaluating its current relationships. If any of these alliance partners fail to
deliver quality products or services on a timely basis, and if the Registrant is
unable to develop alternative sources as required, dissatisfied clients may turn
to other sources to provide the products or services they desire which may
adversely affect the Registrant's business.
(7) The Registrant holds no patents or trademarks, and has no interest in
any franchises, concessions, royalty agreements or labor contracts.
(8)(9) The Registrant is not subject to any governmental approval for its
products and services. Because the Registrant is dependent upon alliance
partnerships, the Company can provide no assurance that future regulatory,
judicial, legislative or political considerations will permit these partners to
offer their products and services, that regulators or third parties will not
raise material issues regarding the compliance of these partners with applicable
laws or regulations, or that these regulatory, judicial, legislative or
political decisions will not have an adverse effect on the ability of these
alliance partners to provide the products and/or services.
(10) The Registrant has incurred no research and development costs in each
of the last two fiscal years and does not anticipate any such expenditures in
the near future.
(11) The Registrant is not subject to any federal, state or local
provisions which have been enacted or adopted regulating the discharge of
materials into the environment or otherwise relating to the protection of the
environment.
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(12)The Registrant currently employs four persons all of whom are full-time
employees. In addition, FTC employs two full-time employees.
ITEM 2. DESCRIPTION OF PROPERTY.
(a) Description of Principal Plants and other Property
The Registrant's principal office is located at 7315 East Peakview Avenue,
Englewood, Colorado 80111. The Registrant leases this space, consisting of
approximately 1,800 square feet, for $2,500 per month, from a partnership in
which the Registrant's president is the partner. The Registrant believes these
terms to be no less favorable than those which could be obtained from a
non-affiliated party for similar facilities in the same area. The Registrant
also leases at the market rate for such facilities in the area an executive
office in Palm Beach Gardens, Florida where it shares secretarial and office
facilities with several other lessees.
(b) Investment Policies
The Registrant currently does not invest in real estate, real estate
mortgages, or securities of persons who primarily engage in real estate
activities. Although the Registrant does not currently make investments as
described above, and currently has no intention to make such investments in the
near future, it is limited in making such investments only as described in Item
1.(b) "Regulation - Business Development Companies". (c) Description of Real
Estate and Operating Data
The Registrant does not own real property, the book value of which amounts
to ten percent or more of the total assets of the Registrant.
ITEM 3. LEGAL PROCEEDINGS.
The Registrant is a plaintiff in a declaratory judgement action, EQUITEX,
INC. AND HENRY FONG V. BERTRAND T. UNGAR, Case No. 98 CV 2437 (District Court,
Arapahoe County, Colorado), commenced in July 1998, asserting that the
Registrant has no obligation to Mr. Ungar for indemnification and defense claims
which Ungar had previously asserted against the Registrant. Ungar filed
counter-claims which alleged that while acting as an attorney and business
advisor for Equitex, he had incurred tort liabilities to third parties, and that
Registrant, as his client, owed him a fiduciary duty and other alleged duties,
and therefore should indemnify and reimburse him for his losses and costs of
defense in the actions with third parties, an amount allegedly in excess of
$1,000,000. The Registrant is vigorously pursuing its claims and will defend the
counterclaims.
The registrant is a defendant in the cases of THEOHAROUS, ET AL. V. HENRY
FONG, EQUITEX, INC., CHARLES E. SANDERS AND METROMEDIA INTERNATIONAL GROUP,
INC., Civil Action No. 1-98-CV-2366 (U.S. District Court for the Northern
District of Georgia), and LESLIE SCHUETTE, ET AL. V. HENRY FONG, EQUITEX, INC.,
CHARLES E. SANDERS AND METROMEDIA INTERNATIONAL GROUP, INC., Civil Action No.
1-98-CV-2366 (U.S. District Court for the Northern District of Georgia). These
alleged class actions on behalf of a purported class of stockholders of RDM
Sports Group, Inc. ("RDM") were filed on August 19, 1998, and October 19, 1998,
respectively. Both cases assert that during 1996 and 1997, the defendants
(including the Registrant) made numerous allegedly false statements and overly
optimistic predictions regarding the business and financial condition of RDM in
the press releases and public filings of RDM, with knowledge of their falsehood,
thereby misleading RDM stockholders. The complaints allege that the defendants,
(including the Registrant) violated Section 10 (b) of the Securities Exchange
Act and SEC Rule 10b-5, and that the individual defendants violated Section 20
(a) of the Exchange Act, and seek unspecified compensatory damages, costs,
expenses and attorney fees. Registrant did not prepare or review the alleged
false statements or predictions. Registrant was not a controlling stockholder of
RDM after December 1994, when Metromedia International Group, Inc. acquired 40%
of RDM's common stock, while the Registrant held just over 10% of RDM"s
outstanding stock. The Registrant intends to seek dismissal of both cases and to
vigorously defend these actions.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 4, 1998, the Registrant held an Annual Meeting of its
Stockholders. The stockholders re-elected each of the Registrant's three
directors to serve until the next Annual Meeting of Stockholders and the votes
were cast as follows:
For Withhold Authority
--- ------------------
Henry Fong 3,457,146 67,056
Russell L. Casement 3,461,444 62,758
Aaron Grunfeld 3,461,444 62,758
Additionally, the following two proposals were presented and voted upon at
the meeting and the votes were cast as follows:
To ratify the appointment of Davis & Co., CPA's, P.C. as the independent
auditor of the Registrant for the year ending December 31, 1998.
For Against Abstain Non-Voted
--- ------- ------- ---------
Shares voted 3,446,317 53,260 4,625 -0-
To approve the issuance of warrants, options or other securities that may
be changed into common stock of the Company.
For Against Abstain Non-Voted
--- ------- ------- ---------
Shares voted 2,128,266 1,001,925 18,255 375,756
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information
The principal market in which the Registrant's Common Stock is traded is
the over-the-counter market.
The Registrant's Common Stock trades on the Nasdaq Stock Market under the
symbol EQTX. The table below states the quarterly high and low last sale prices
for the Registrant's Common Stock as reported by The Nasdaq Stock Market, and
represent actual high and low last sale prices.
Last Sale
Quarter ended High Low
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1997
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March 31, 1997 $3.00 $1.88
June 30, 1997 $2.13 $1.50
September 30, 1997 $1.88 $0.69
December 31, 1997 $1.56 $0.69
1998
March 31, 1998 $3.57 $0.81
June 30, 1998 $5.31 $3.00
September 30, 1998 $7.13 $4.50
December 31, 1998 $7.50 $6.50
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(b) Holders
The number of record holders of the Registrant's Common Stock as of April
9, 1999, was 2,460 according to the Registrant's transfer agent. This figure
excludes an indeterminate number of shareholders whose shares are held in
"street" or "nominee" name.
(c) Dividends
The Registrant has not declared or paid cash dividends on its Common Stock,
nor does it anticipate paying any cash dividends in the foreseeable future. The
Registrant currently intends to retain any future earnings to fund operations
and for the continued development of its business. While a BDC, the Registrant
made an in-kind distribution of its larger investment positions to its
stockholders. Any further in-kind distribution will be made only when, in the
judgment of the Registrant's Board of Directors, it is in the best interest of
the Registrant's stockholders to do so. It is possible that the Registrant may
make an in-kind distribution of securities which have appreciated or depreciated
from the time of purchase depending upon the particular distribution. The
Registrant has not established a policy as to the frequency or size of
distributions and indeed there can be no assurance that any future distributions
will be made. To date, only one such distribution has been approved by the Board
of Directors and was distributed in April 1988.
(d) Recent Sales of Unregistered Securities
On November 20, 1997, the Registrant commenced a private placement under
which 600,000 shares of its Common Stock were sold to a group of accredited
investors for $0.75 per share. No underwriting discounts or commissions were
paid. The Company relied upon Section 4(2) of the Securities Act of 1933 and
Rule 506 of Regulation D promulgated under the Act.
On March 13, 1998, the Registrant commenced a private placement under which
499,200 shares of its Common Stock were sold to a group of accredited investors
for $1.16 per share. No underwriting discounts or commissions were paid. The
Company relied upon Section 4(2) of the Securities Act of 1933 and Rule 506 of
Regulation D promulgated under the Act.
On June 29, 1998, the Registrant commenced a private placement under which
750,000 shares of its Common Stock were sold to a group of accredited investors
for $0.75 per share. No underwriting discounts or commissions were paid. The
Company relied upon Section 4(2) of the Securities Act of 1933 and Rule 506 of
Regulation D promulgated under the Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
(a) Plan of Operation
Not applicable
(b) Management's Discussion and Analysis of Financial Condition and Results of
Operations
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 Registrant's expectations or beliefs, including but not limited
to, statements concerning the Registrant's operations, economic performance,
financial condition, growth and acquisition strategies, investments, and future
operational plans. For this purpose, any statements contained herein that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words such as
"may", "will", "expect", "believe", "anticipate", "intent", "could", "estimate",
"might", or "continue" or the negative or other variations thereof or comparable
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terminology are intended to identify forward-looking statements. These
statements by their nature involve substantial risks and uncertainties, certain
of which are beyond the Registrant's control, and actual results may differ
materially depending on a variety of important factors, including uncertainty
related to acquisitions, governmental regulation, managing and maintaining
growth, the value of the Registrant's investments, the operations of the
Registrant's investee companies, volatility of stock price and any other factors
discussed in this and other Registrant filings with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS. Revenues for the year ended December 31, 1998 were
$447,840, an increase of 18% as compared to $378,391 for the year ended December
31, 1997. This increase is primarily the result of an increase in consulting and
transaction fees related to the Registrant's receipt of stock in lieu of fees
from Triumph Sports. In the past, as a BDC, the Registrant received consulting
fees on both a monthly contract basis as well as on a per transaction basis when
assisting investees with acquisitions, refinancing or restructuring. With the
Registrant's decertification as a BDC and the resulting change to an operating
company, the Registrant will rely on the operations of its subsidiary or
subsidiaries to generate a majority of its revenues. As the Company only
recently decertified as a BDC to become an operating company, the timing, nature
and amount of these revenues cannot be predicted. The Registrant cannot
accurately predict anticipated revenues for the fiscal year ended December 31,
1999 as a result.
The realized gain on investments before income taxes for 1998 was
$1,108,340 as compared to a gain of $1,003,951 in 1997. A majority of the sales
of investments in both 1998 and 1997 were IntraNet Solutions common stock. While
the restrictions as to resale on most of the Registrant's publicly traded
investments have diminished, the opportunity for the sale of large portions of
the investments cannot be predicted. However, the Registrant currently has fewer
positions in its portfolio which are valued utilizing the public market method
and presently believes there is sufficient market liquidity for the Registrant
to conduct an orderly sale of any position over a relatively short period of
time.
Expenses for 1998 were $2,418,245 as compared to $1,813,926 in 1997, an
increase of 33%. A significant portion of the increase in expenses can be
attributed to an officer's bonus and legal and accounting fees. During 1998, the
Registrant changed the nature of the President's compensation with a majority of
his annual bonus tied to increases in the market value of the Registrant's
common stock. The market value of the Registrant's common stock rose
significantly during 1998 and is continuing to do so in 1999. Legal fees
increased primarily as a result of costs involved with researching and
implementing the Registrant's plan for withdrawal as a BDC. The Registrant
currently believes that expenses for the year ending December 31, 1999 will be
higher than those of 1998, the amount of which is difficult to predict. The
Registrant anticipates higher expenses relating to the Registrant's withdrawal
as a BDC coupled with the legal, accounting and other expenses relating to the
proposed acquisition of FTB. Should the market value of the Registrant's common
stock continue to rise significantly, expenses relating to an officer's bonus
could also increase without a change in his compensation structure.
The Registrant's net investment loss and realized gain on investments after
taxes for the year ended December 31, 1998 was a loss of $(925,245) as compared
to a loss of $(401,649) in 1997. The Registrant's increased net realized loss is
directly related to higher expenses and lower realized gain on the sale of
investments. At December 31, 1998, unrealized appreciation of investments
decreased $(1,056,054) as compared to a decrease of $(5,773,305) at December 31,
1997. With the exception of the addition of Triumph Sports during 1998, the
Registrant made no significant investments in new investee companies in
anticipation of decertifying as a BDC to become an operating company. The
resulting lack of new investments caused the value of the Registrant's
investment portfolio to remain at levels similar to 1997 following the loss of
nearly all the value of the Registrant's investment in RDM Sports due to
bankruptcy. The net decrease in net assets resulting from operations was
$(1,981,299) for 1998 as compared to a decrease of $(3,923,367) for 1997.
In July of 1984, the Registrant elected to become a BDC. Utilizing the "at
value" method of evaluating fair value as described in Note 1 of the
Registrant's financial statements, the Registrant's assets as of December 31,
1998 were $5,859,075 with a net asset value of $4,088,229. Comparatively, as of
December 31, 1997, the Registrant's assets were valued at $5,038,425 and it had
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<PAGE>
net assets of $3,539,916. At a special meeting of stockholders held on April 3,
1998, the Registrant's stockholders approved a proposal authorizing the
Registrant to change the nature of its business and withdraw its election as a
BDC under the Investment Company Act. On January 4, 1999, the Registrant filed
for withdrawal. [See Part I. Item 1(a) Business Development].
LIQUIDITY AND CAPITAL RESOURCES. Of the Registrant's current liabilities of
$1,770,846 at December 31, 1998, the Registrant had no amounts due to banks.
This compares to total liabilities of $1,498,509 at December 31, 1997. The
Registrant is not obligated to discharge a significant portion of its current
liabilities in the near future; however, the Registrant intends to extinguish
these liabilities as cash flow permits.
In connection with its investments while operating as a BDC, the Registrant
was required, from time to time, to make loans to its investees in order to
protect its investments. As a result of these loans as well as other notes
receivable, the Registrant carried notes receivable of $1,225,232 and $418,210
at years ended December 31, 1998 and 1997, respectively. The majority of the
increase in notes receivable at year end 1998 as compared to 1997 is the result
of the Registrant covering portions of expenses and start-up costs for two new
investees during each of the past two years, as well as loans made to the
Registrant's wholly owned subsidiary during 1998. As these companies complete
mergers or acquisitions, or raise capital through private or public offerings,
these notes may be repaid or otherwise extinguished although no assurance can be
given at this time that such repayments will take place.
The Registrant's cash position increased by $23,303 at December 31, 1998 as
compared to a decrease of $(44,608) at December 31, 1997. Net cash used by
operating activities was $(2,098,204) for 1998 as compared to $(672,835) used in
1997. A significant portion of the use of cash by operating activities is the
change in net assets of $(1,981,299) which reflects the Registrant's results of
operations for the year. This amount includes both cash entries which reflect
the operations of the Registrant including its revenues of $447,840, expenses of
$(2,418,245) and realized gains on investments of $1,108,340 as well as non-cash
entries for unrealized loss on investments of $(1,056,054).
The Company's primary uses of cash from operating activities for the year
ended December 31, 1998 included purchases of investments totaling $1,388,626
for the acquisition of various investments most notably First TeleBanc Corp.
totaling $400,000 and Zamba Corp. totaling $583,622. The Company also issued
notes receivable totaling $943,365 to various investee companies including
$160,000 to FTC and $497,091 to Triumph Sports. The Registrant recorded an
increase in bonus due to officer of $376,909 reflecting a portion of the
officer's bonus which was accrued but not paid during the year.
Cash flows from investing activities used $(10,396) for the purchase of
fixed assets in 1998 compared to $(1,872) in 1997 due mainly to upgrading and
purchasing new computer equipment. Cash flows from financing activities provided
$2,131,903 as compared to $630,099 used during 1997. During 1997, the Registrant
completed one private offering of the Registrant's common stock and began two
others. As a result, the Registrant received $2,002,174 in proceeds providing
the significant increase in cash from financing activities.
-10-
<PAGE>
[See also Part III, Item 12. Certain Relationships and Related Transactions and
Part IV, Item 13. Financial Statements].
As a BDC, the Registrant's sources of income to defray operating overhead
were derived from consulting fees, transaction fees gained from the Registrant
assisting both existing and new investees in structuring and completing mergers,
acquisitions or asset-based financing transactions, administrative fees through
which the Registrant directly apportions a certain amounts of its operating
overhead to investees as warranted to help defray operating costs, and sales of
the Registrant's investments. During 1998, the Registrant also utilized funds
received from the private placement of the Registrant's common stock. As an
operating company, the Registrant will be dependent primarily on the operations
of its subsidiaries to defray operating overhead. The Registrant's sources of
income were sufficient to cover its operating overhead during 1998.
As the Registrant makes the transition from an investment company to an
operating company it will be dependent upon income sources other than from its
operations to cover operating expenses. Presently, the Registrant anticipates it
will primarily utilize funds received from private placements of the both common
stock and preferred stock to fund not only its operating expenses, but also its
acqusition and merger plans. During the first quarter of 1999, the Registrant
raised $2,100,000 from the sale of its Series A, B and C 6% Convertible
Preferred Stock. In addition, the Registrant received approximately $1,025,000
from the sale of 315,312 shares of common stock in a private placement. The
Company also received approximately $180,000 from the exercise of Company stock
options during the quarter and anticipates further exercises will generate
additional income which could exceed $2,000,000.
The Registrant also may sell certain of its investments to generate cash
flow. During the first quarter of 1999, the Registrant had realized gain on the
sale of investments totaling $315,564, a majority of which came from the sale of
IntraNet Solutions common stock.
While the Registrant believes the above referenced sources of income will
be sufficient to cover its operating expenses for 1999, further private
placements of common or preferred stock as well as divestiture of portions of
its investment portfolio may be required to fund its merger and acquisition
plans. Although the Registrant believes it can generate the funds necessary to
implement its plan for becoming a fully operating company, no assurances can be
made that the Registrant will be successful in generating the funds necessary to
achieve its goals.
The Registrant's liquidity has primarily been affected by the business
success, securities prices and marketability of its investee companies and by
the amount and timing of any new or incremental investments it makes. As an
operating company, the Registrant will be reliant on cash flows from operations.
The Registrant believes that its present liquidity and capital resources are
adequate to finance anticipated needs arising from or relating to its business
in 1999 due to funds received from private placements of both common and
convertible preferred stock. Although the Registrant's ability to liquidate
portions of its portfolio companies have increased as the restrictions as to
resale end, the Registrant generally has been a long-term holder if its
investments and therefore does not necessarily liquidate them upon the
expiration of these restrictions. In addition, with the Registrant's change to
an operating company and resulting proposed acquisition of FTB, the company is
contemplating spinning off certain of its non-financial services assets to its
stockholders through the creation of a new publicly traded company. As a result,
the Registrant currently does not anticipate it will liquidate significant
portions of its portfolio in the near future.
As of December 31, 1998, the Registrant had made no other material
commitments for capital expenditures or loans to investees however the
Registrant may be required to make such expenditures or loans during 1999 the
amount of which is unknown at this time. It is possible the Registrant will
continue to sell certain of its investments, resulting in additional realized
gains, during the remainder of the current year. At the discretion of the Board
of Directors, the Registrant also may sell certain of its investments resulting
in a realized loss in order to prevent further losses from occurring.
-11-
<PAGE>
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 system 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.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements are listed under Item 13.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with accountants during the
most recent two fiscal years.
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<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
(a) Identification of Directors and Executive Officers
Length of
Name Age Offices held Service
- ---- --- ------------ ---------
Henry Fong 63 President, Treasurer, Since Inception
Principal Executive,
Financial and Accounting
Officer and Director
Thomas B. Olson 33 Secretary Since 1988
Russell L. Casement 55 Director Since 1989
Aaron A. Grunfeld 52 Director Since 1991
The directors of the Registrant are elected to hold office until the next
annual meeting of the stockholders and until their respective successors have
been elected and qualified. Officers of the Registrant are elected by the Board
of Directors and hold office until their successors are duly elected and
qualified.
No arrangement exists between any of the above officers and directors
pursuant to which any one of those persons was elected to such office or
position.
The Registrant has appointed an audit committee currently consisting of Dr.
Casement as chairman and Mr. Grunfeld and a compensation committee currently
consisting of Mr. Grunfeld as chairman and Dr. Casement.
HENRY FONG. Mr. Fong has been the President, Treasurer and a director of
the Registrant since inception. From 1987 to June 1997, Mr. Fong was chairman of
the board and chief executive officer of RDM Sports Group, Inc. (f/k/a
Roadmaster Industries, Inc.) a publicly-held investee of the Registrant and was
its president and treasurer from 1987 to 1996. Subsequent to Mr. Fong's
departure from RDM, the company filed on August 29, 1997 Chapter 11 bankruptcy
petitions for the company and all of its subsidiaries with the U.S. Bankruptcy
Court for the Northern District of Georgia. From July 1996 to October 1997, Mr.
Fong was a director of IntraNet Solutions, Inc., a publicly-held investee
company which provides internet/intranet solutions to Fortune 1000 companies and
was the chairman of the board and treasurer of its predecessor company,
MacGregor Sports and Fitness, Inc. from February 1991 until the two companies
merged in July 1996. From January 1993 to January 20, 1999, Mr. Fong was
chairman of the board and Chief Executive Officer of California Pro Sports,
Inc., a publicly-traded manufacturer and distributor of in-line skates, hockey
equipment and related accessories. From 1959 to 1982 Mr. Fong served in various
accounting, finance and budgeting positions with the Department of the Air
Force. During the period from 1972 to 1981 he was assigned to senior supervisory
positions at the Department of the Air Force headquarters in the Pentagon. In
1978, he was selected to participate in the Federal Executive Development
Program and in 1981, he was appointed to the Senior Executive Service. In 1970
and 1971, he attended the Woodrow Wilson School, Princeton University and was a
Princeton Fellow in Public Affairs. Mr. Fong received the Air Force Meritorious
Civilian Service Award in 1982. Mr. Fong is a certified public accountant. In
March 1994, Mr. Fong was one of twelve CEOs selected as Silver Award winners in
FINANCIAL WORLD magazine's corporate American "Dream Team."
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<PAGE>
THOMAS B. OLSON. Mr. Olson has been Secretary of the Registrant since
January 1988. Since February 1990, Mr. Olson has been a director, and since May
1994 secretary, of Immune Response, Inc. a publicly held investee of the
Registrant formerly engaged in laboratory medical testing and related research
activities but which now is seeking other business opportunities. Mr. Olson has
attended Arizona State University and the University of Colorado at Denver.
RUSSELL L. CASEMENT. Dr. Casement has been a director of the Registrant
since February 1989. In 1994, Dr. Casement became the President of ProMark, Inc.
a privately-held investee of the Registrant which currently is inactive. Since
1969, Dr. Casement has been the president of his own private dental practice,
Russell Casement, D.D.S., P.C., in Denver, Colorado. Dr. Casement earned a
Doctor of Dental Science degree from Northwestern University in 1967. Dr.
Casement is a member of the American Dental Association, the Colorado Dental
Association and the Metro Denver Dental Association.
AARON A. GRUNFELD. Mr. Grunfeld has been a director of the Registrant since
November 1991. Mr. Grunfeld has been engaged in the practice of law for the past
27 years and has been of counsel to the firm of Resch, Polster, Alpert, and
Berger, LLP, Los Angeles, California since November 1995. From April 1990 to
November 1995, Mr. Grunfeld was a member of the firm of Spensley Horn Jubas &
Lubitz, Los Angeles, California. Mr. Grunfeld received an A.B. in Political
Science from UCLA in 1968 and a J.D. from Columbia University in 1971. He is a
member of the California Bar Association.
(b) Significant Employees
JOHN CAHILL. Mr. Cahill has been President of the FTC since June 1, 1998.
From 1992 to April 1998 Mr. Cahill was Senior Vice President of First Data Card
Services Group. Mr. Cahill has over twenty year experience in the bank
card/credit Card industry.
(c) Family Relationships
Not applicable
(d) Involvement in Certain Legal Proceedings
Not applicable
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 ("Section 16")
requires the Registrant's officers, directors and persons who own more than ten
percent of the Registrant's voting securities to file reports of their ownership
and changes in such ownership with the Securities and Exchange Commission (the
"Commission"). Commission regulations also require that such persons provide the
Registrant with copies of all Section 16 reports they file. Based solely upon
its review of such reports received by the Registrant, or written
representations from certain persons that they were not required to file any
reports under Section 16, the Registrant believes that, during 1998, its
officers and directors have complied with all Section 16 filing requirements.
ITEM 10. EXECUTIVE COMPENSATION.
(a) General
Henry Fong, the President of the Registrant and the only officer of the
Registrant whose total compensation exceeded $100,000 for the fiscal year ended
December 31, 1998, received an annual salary of $183,013. In January, 1998, the
Compensation Committee of the Registrant's board of directors retained an
independent consultant to review the President's compensation. As a result of
that review, a new compensation arrangement was instituted based on
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<PAGE>
recommendations made by the independent consultant. In addition to Mr. Fong's
annual salary, beginning January 1, 1998, Mr. Fong is to receive an annual bonus
equaling 1% of the Registrant's total assets combined with 5% of the increase in
the market value of the Company's common stock calculated quarterly from January
1 to December 31 of any fiscal year. During the year ended December 31, 1998,
this bonus totaled $1,208,042. This new compensation arrangement replaces the
previous bonus of 3% of the Registrant's total assets at year end which totaled
$151,153 for the year ended December 31, 1997.
On April 1, 1992, the Registrant obtained a life insurance policy with
retirement benefits for Mr. Fong which pays his beneficiary $2,600,000 in the
event of Mr. Fong's death or provides for retirement benefits for Mr. Fong upon
his retirement at or after age 65 utilizing the cash value of the policy at that
time. This benefit is being provided to Mr. Fong in consideration of his sixteen
years of service to the Registrant and in anticipation of his serving the
Registrant until retirement. The Registrant has no other retirement or pension
plan for Mr. Fong. The annual premium on this policy is $105,414 per year for
seven years until March 30, 1999, and may be considered other future
compensation to Mr. Fong. For the year ended December 31, 1998, $105,414 was
paid toward the policy and an additional $59,586 was paid to Mr. Fong for
deferred income taxes on the policy. Concurrently, the Registrant obtained a
Key-man Life Insurance policy which pays the Registrant $3,000,000 in the event
of Mr. Fong's death. The Registrant paid $20,223 on this policy in 1998 which is
not considered compensation to Mr. Fong.
(b) Summary Compensation Table
The following table sets forth information regarding compensation paid to
the officers of the Registrant during the years ended December 31, 1998, 1997
and 1996:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
Annual Compensation ($$)Long-Term
----------------------------------- Compensation
Awards
-------------
(a) (b) (c) (d) (e) (g) (i)
Other All
Name & Annual Other
Principal Salary Bonus Compensation Options Compensation
Position Year ($) ($) ($) & SARs(#) ($)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Henry Fong 1998 183,013 1,208,042 -0- 469,655 165,000 (1)
President,
Treasurer
Principal
Executive
Officer and
Accounting
Officer
Henry Fong 1997 183,013 151,153 -0- -0- 165,000 (1)
Henry Fong 1996 183,013 314,328 -0- -0- 165,000 (1)
</TABLE>
- -----------------
(1) Includes payments and tax liability on the life insurance policy as
explained more fully in "Item 10 (a) General" above.
-15-
<PAGE>
(c) Option/SAR Grants Table
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
-------------------------------------
Grant Date
Individual Grants Value
(a) (b) (c) (d) (e) (f)
Number
of
Securities % of Total
Under- Options/
Lying SARs
Options/ Granted to Exercise Grant
SARs Employees or Base Date
Granted in Fiscal Price Expiration Present
Name (#) Year ($/Sh) Date Value($)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Henry Fong 469,655 87% $3.19 6/2/2003 1,498,200
</TABLE>
(d) Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
---------------------------------------------------
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End (#) at FY-End (#)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
- --------------------------------------------------------------------------------
Henry Fong 100,000 508,250 576,200/-0- $2,143,541/-0-
(e) Long Term Incentive Plans - - Awards in Last Fiscal Year.
The Registrant has no long term incentive plans, and consequently has made
no such awards.
(f) Compensation of Directors
(1) Standard Arrangements
Each independent member of the Registrant's Board of Directors, Messrs.
Russell L. Casement and Aaron A. Grunfeld, receive $10,000 per year payable
monthly and $500 for each Board of Director's meeting attended either in person
or by telephone. For the year ended December 31, 1998, Messrs. Casement and
Grunfeld each received a total of $12,500. Members of the Board of Directors
also receive reimbursement for expenses incurred in attending board meetings.
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<PAGE>
(2) Other Arrangements
1993 Stock Option Plan for Non-Employee Directors
The Registrant has adopted the 1993 Stock Option Plan for Non-Employee
Directors (the "Directors' Plan") reserving an aggregate of 250,000 shares of
Common Stock for issuance pursuant to the exercise of stock options (the
"Options") which may be granted to non-employee directors of the Registrant. On
July 5, 1995, an order was issued by the Securities and Exchange Commission
authorizing the Directors' Plan and the options granted thereunder. The
Directors' Plan is for a ten-year term commencing July 5, 1995 (the "Effective
Date"). Each non-employee director automatically, as of the Effective Date, was
granted an option to purchase 50,000 shares of common stock at $3.00 per share.
Thereafter, each director who first becomes a non-employee director shall
automatically, as of the date 90 days following the date such person becomes a
non-employee director, be granted an option to purchase 50,000 shares of common
stock. No additional options can be granted under the Directors' Plan except to
an individual who first becomes a non-employee director after the Effective
Date. No discretionary grants can be made under the Directors' Plan.
On June 2, 1998, the Registrant's board of directors authorized the
granting of 75,000 options to purchase common stock of the Registrant to each of
the Registrant's two independent directors at $3.19 per share for a period of
five years. The grant of these options was contingent upon the Company's
successful withdrawal as a business development company. On January 4, 1999 the
Registrant filed for withdrawal as a business development company [see Part I,
Item 1 (a) Business for a description of the Registrant's withdrawal of its
election as a business development company]. On January 5, 1999, the
Registrant's board of directors adopted a new stock option plan, the 1999 Stock
Option Plan. On January 5, 1999, the Registrant's two independent directors each
received options to purchase 158,700 shares of the Registrant's common stock at
an exercise price of $6.75 per share expiring on January 5, 2004. These options
were granted in lieu of the 75,000 options at $3.19 per share, which were
cancelled. In addition, each director received 86,800 options to purchase 86,800
shares of the Registrant's common stock at an exercise price of $6.75 per share
under the 1999 Plan.
(g) Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
On April 1, 1992, the Registrant obtained a life insurance policy on the
Registrant's President, Henry Fong, which policy provides for a payment to Mr.
Fong's beneficiary of $2,600,000 in the event of his death or a retirement
benefit to Mr. Fong consisting of the cash value of the policy upon Mr. Fong's
retirement from the Registrant at or after age 65 [See-Item 11. (a) "General."
above]. The Registrant has no other compensation plan or arrangement with
respect to any executive officer which plan or arrangement results or will
result from the resignation, retirement or any other termination of such
individual's employment with the Registrant. The Registrant has no plan or
arrangement with respect to any such persons which will result from a change in
control of the Registrant or a change in the individual's responsibilities
following a change in control.
(h) Report on Repricing of Options/SARs
Not applicable
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) (b) Security Ownership of Certain Beneficial Owners and Security Ownership
of Management.
The following table contains information at March 31, 1999, as to the
beneficial ownership of shares of the Registrant's Common Stock by each person
who, to the knowledge of the Registrant at that date, was the beneficial owner
of five percent or more of the outstanding shares of the class, each person who
is a director or executive officer of the Registrant and all persons as a group
who are executive officers and directors of the Registrant and as to the
percentage of outstanding shares so held by them at April 9, 1999.
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<PAGE>
<TABLE>
Name and address Amount and Nature of
of beneficial owner Beneficial Ownership (1) Percent of Class
- ------------------- ------------------------ ----------------
<S> <C> <C>
Henry Fong 1,574,384 (2)(3) 22.3%
7315 East Peakview Avenue
Englewood, Colorado 80111
Wayne W. Mills 475,000 7.9%
5020 Blake Road South
Edina, Minnesota 55436
Russell L. Casement 506,900 (4) 8.0%
1355 S. Colorado Blvd., Suite 320
Denver, Colorado 80222
Aaron A. Grunfeld 334,700 (5) 5.3%
10390 Santa Monica Blvd, Fourth Floor
Los Angeles, California 90025
All officers and directors 2,484,284 (2)(3)(6)(7) 32.2%
as a group (four persons)
</TABLE>
(1) The beneficial owners exercise sole voting and investment power.
(2) Includes 576,200 shares underlying options granted under the Registrant's
1993 Stock Option Plan and 469,700 shares underlying options granted under
the Registrant's 1999 Stock Option Plan.
(3) Includes 479,544 shares owned by a corporation in which Mr. Fong is an
officer and director; and 48,940 owned by a partnership in which the
reporting person is a general partner.
(4) Includes 36,400 shares underlying options granted under the Registrant's
1993 Stock Option Plan for Non-Employee Directors and 245,500 shares
underlying options granted under the Registrant's 1999 Stock Option Plan.
[See also Item 10.(f)(2) "Other Arrangements"]
(5) Includes 50,000 shares underlying options granted under the Registrant's
1993 Stock Option Plan for Non-Employee Directors and 245,500 shares
underlying options granted under the Registrant's 1999 Stock Option Plan.
[See also Item 10.(f)(2) "Other Arrangements"]
(6) Includes 86,400 shares underlying options granted under the Registrant's
1993 Stock Option Plan for Non-Employee Directors and 491,000 shares
underlying options granted under the Registrant's 1999 Stock Option Plan.
(7) Includes 25,000 shares underlying options granted under the Registrant's
1993 Stock Option Plan and 31,300 shares underlying options granted under
the Registrant's 1999 Stock Option Plan.
The Registrant does not know of any arrangements, the operation of which
may, at a subsequent date, result in a change in control of the Registrant.
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<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(a) Transactions with Management and Others.
The Registrant currently leases approximately 1,800 square feet of office
space in Greenwood Executive Park, 6400 South Quebec, Englewood, Colorado from a
partnership in which its President is the sole partner, on terms comparable to
the existing market for similar facilities.
During the year ended December 1, 1997, the Registrant's President loaned
the Registrant a total of $531,000. Of this amount, $353,401 was repaid leaving
a principal balance due at December 31, 1997 of $177,599 plus accrued interest.
These uncollateralized loans were due on demand and carried an interest rate of
8% per annum. All of the remaining balance was repaid during the first quarter
of 1998. During 1998, a company in which the Registrant's President is an
officer and director loaned the Registrant a total of $165,000 which is due on
demand and bears interest at 8% per annum. Of that amount, $22,672 was repaid
during 1998 leaving a principal balance due at December 31, 1998 of $142,328.
In addition, a related entity loaned the Registrant $100,000 in August
1997. This loan carried an interest rate of 12% per annum, was due on demand and
was collateralized by 25,000 shares of the Registrant's investment in an
investee company's common stock. The Registrant paid $30,000 in principal due on
this note during 1998 leaving a principal balance due of $70,000 at December 31,
1998. As of the filing of this report, all principal and interest due under this
note has been repaid.
During 1998, the Registrant made loans totaling $160,000 to its wholly
owned subsidiary, FTC. Additional loans totaling $325,000 were advanced during
the first quarter of 1999. All of these loans bear interest at 10% per annum and
are due on demand.
During 1998, the Registrant loaned VP Sports a total of $89,000. All loans
are due on demand and bear interest at the rate of 10% per annum. As of December
31, 1998, $24,734 of these loans had been repaid leaving an outstanding
principal balance at year end of $64,266. During the first quarter of 1999, the
Registrant loaned VP an additional $70,000 under terms identical to the previous
loans.
During 1997 and 1998, the Registrant loaned Triumph Sports a total of
$963,087 in various separate loans. On December 8, 1997, the Registrant
forfeited 41,835 shares of IntraNet common stock which had a fair market value
on that date of $6.50 per share or $271,928. A note for this amount is included
in the above referenced total. These shares were pledged by the Registrant on
behalf of Triumph Sports relating to an acquisition which subsequently was not
completed. All notes are due on demand and bear interest at 10% per annum.
During 1998, $60,068 in principal was repaid on these notes leaving a balance
due at year end of $899,018. Additional loans totaling $85,000 were made to
Triumph during the first quarter of 1999 and a principal payment of $51,500 was
received during the quarter.
During 1998, a director of the Registrant purchased 39,200 shares of common
stock of the Registrant pursuant to a private placement at $1.16 per share. In
payment of the shares, the director executed a note payable to the Registrant in
the amount of $45,472, which was due on December 15, 1998 and carried interest
at 8% per annum. The due date on this note was subsequently extended to February
15, 1999. All principal and interest due was paid on this note prior to the
extended expiration date.
-19-
<PAGE>
Effective October 29, 1997, the Registrant entered into an agreement with
an investee company, IntraNet Solutions, Inc. ("IntraNet"). Because the
Registrant had entered into a prior indemnification agreement with IntraNet in
July 1996, it agreed to purchase a certain note receivable in the amount of
$564,755 which IntraNet had from an RDM subsidiary, Hutch Sports USA ("Hutch").
Hutch had filed bankruptcy on August 29, 1997. The Registrant paid $414,755 of
the purchase amount to IntraNet on October 29, 1997. The balance of $150,000 was
due on demand but no later than December 31, 1997 carried an interest rate of
8.75% per annum, was secured by an officer's pledging of a common stock purchase
warrant relating to 62,550 shares of IntraNet and was also personally guaranteed
by the Registrant's President. This note was repaid on January 23, 1998.
Furthermore, the Registrant's President agreed to resign from the Board of
IntraNet, both IntraNet and the Registrant agreed to terminate effective October
29, 1997 the indemnification agreement under which the Registrant's maximum
exposure was $2,000,000, and agreed to mutually release each other from any
claims relating to this agreement and certain other items.
The Registrant has placed members of its Board and its officers on the
boards of directors of certain investee companies and other companies in which
it has obtained an equity interest or to which it has made loans or guarantees.
In most instances, the board representation was subsequent to these
acquisitions, loans or guarantees. The Registrant may be considered to be in
control of certain of its investee companies.
(b) Information which May be Excluded
Not applicable
(c) Parents of Registrant
Not applicable
(d) Transactions with Promoters
Not applicable
-20-
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report immediately
following the signature page.
1. Financial Statements and Supplementary Data. Page
----
Report of Independent Certified Public Accountants......................F-1
Statements of Assets and Liabilities at
December 31, 1997, and 1996...........................................F-3
Schedule of Investments at December 31, 1998 and December 31, 1997......F-5
Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1998 and 1997...............................F-11
Statements of Operations for the Years Ended
December 31, 1998 and 1997...........................................F-15
Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997...........................................F-17
Notes to Financial Statements..........................................F-19
2. Financial Statements Schedules.
Schedule II - Valuation and Qualifying Accounts and Reserves............S-1
3. Exhibits.
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
10.1 1993 Stock Option Plan (2)
10.2 1993 Stock Option Plan for Non-Employee Directors (2)
10.3 Custody Agreement between Colorado National Bank and the
Registrant (2)
10.4 1999 Stock Option Plan. PREVIOUSLY FILED.
21 List of Subsidiaries. PREVIOUSLY FILED.
(1) Incorporated by reference from the like numbered exhibits filed with the
Registrant's Registration Statement on Form S-18, No. 2-82104-D effective
April 11, 1983.
(2) Incorporated by reference form the like numbered exhibits filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1993.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the period covered by this report.
-21-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: July 14, 1999 EQUITEX, INC.
(Registrant)
By /S/ HENRY FONG
--------------------------------------
Henry Fong, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: July 14, 1999 /S/ HENRY FONG
-----------------------------------------
Henry Fong, President,
Treasurer and Director
(Principal Executive, Financial,
and Accounting Officer)
Date: July 14, 1999 /S/ RUSSELL L. CASEMENT
-----------------------------------------
Russell L. Casement, Director
Date: July 14, 1999 /S/ AARON A. GRUNFELD
-----------------------------------------
Aaron A. Grunfeld, Director
-22-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Equitex, Inc.
We have audited the accompanying statements of assets and liabilities and
schedule of investments of Equitex, Inc. as of December 31, 1998 and 1997 and
the related statements of changes in stockholders' equity, operations and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1998 and 1997 financial statements referred to above present
fairly, in all material respects, the financial position of Equitex, 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.
As explained more fully in Note 1b., the financial statements at December 31,
1998 and 1997 include securities and receivables, valued at $2,799,145 (68.2% of
net assets) and $1,468,214 (41.5% of net assets), respectively, whose values
have been estimated by the Board of Directors in the absence of readily
attainable market values. We have reviewed the procedures used by the Board of
Directors in arriving at its estimate of value of such securities and
receivables and have inspected underlying documentation, and, in the
circumstances, we believe the procedures are reasonable and the documentation
appropriate. However, because of the inherent uncertainty of valuation of
restricted securities and receivables, those estimated values may differ
significantly from the values that would have been used had a ready market for
the restricted securities and receivables existed, and had the precise
recoverability of the receivables been determinable; and the differences could
be material.
(Continued)
F-1
<PAGE>
Report of Independent Certified Public Accountants
Page Two
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule on S-1 is presented for the
purpose of complying with the Securities and Exchange Commission's rules and is
not a required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, fairly states in all material respects the 1998
and 1997 financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
Davis & Co., CPAs, P.C.
Certified Public Accountants
Englewood, Colorado
March 27, 1999
F-2
<PAGE>
EQUITEX, INC.
Statements of Assets and Liabilities
DECEMBER 31,
1998 1997
---- ----
ASSETS
Investments, at fair value:
Securities (cost of $4,917,848 and
$3,568,045 in 1998 and 1997, respectively) .... $ 4,226,541 $ 4,165,993
Notes receivable, net of allowance
for uncollectible accounts of $100 and
$40,293 in 1998 and 1997, respectively ........ 1,225,232 418,210
Accrued interest receivable, net of
allowance for uncollectible interest
of $1,830 and $35 in 1998 and 1997,
respectively .................................. 32,134 5,701
Trade receivables, net of allowance
for uncollectible accounts of $57,705
and $53,742 in 1998 and 1997, respectively .... 108,286 110,954
------------ ------------
5,592,193 4,700,858
Cash ............................................. 32,490 9,187
Accounts receivable - brokers .................... 22,798 73,741
Contract deposit receivable, net of
allowance for uncollectibility of $150,000 .... 150,000 150,000
Income taxes refundable .......................... 2,150 2,150
Furniture and equipment, net of
accumulated depreciation of $129,924
and $117,750 in 1998 and 1997, respectively ... 26,220 29,204
Deferred income tax benefit ...................... -- 63,180
Other assets ..................................... 33,224 10,105
------------ ------------
$ 5,859,075 $ 5,038,425
============ ============
(Continued)
The accompanying notes are a part of this statement.
F-3
<PAGE>
EQUITEX, INC.
Statements of Assets and Liabilities
DECEMBER 31,
1998 1997
---- ----
LIABILITIES AND NET ASSETS
Liabilities
Notes payable - officer ....................... $ 142,328 $ 177,599
Notes payable - others ........................ 220,000 250,000
Accounts payable and other
accrued liabilities ......................... 76,290 121,349
Accounts payable to brokers ................... 656,060 650,302
Accrued bonus to officer ...................... 676,168 299,259
------------ ------------
1,770,846 1,498,509
Net Assets
Preferred stock, par value $.01;
2,000,000 shares authorized; no
shares issued
Common stock, par value $.02;
7,500,000 shares authorized; 5,417,665
and 3,494,465 shares issued;
5,384,315 and 3,461,115 shares
outstanding in 1998 and 1997,
respectively ................................ 108,353 69,889
Additional paid-in capital .................... 7,368,624 4,644,275
Retained earnings
Accumulated deficit prior to
becoming a BDC ............................ (118,874) (118,874)
Accumulated net investment loss ............. (15,698,055) (13,431,269)
Accumulated net realized gains from
sales and permanent write-downs
of investments ............................ 13,233,525 12,125,185
Unrealized net gains (losses) on
investments (net of deferred income
taxes of $233,201 in 1997) ................ (691,307) 364,747
Less: treasury stock at cost
(33,350 shares) ........................... (114,037) (114,037)
------------ ------------
4,088,229 3,539,916
------------ ------------
$ 5,859,075 $ 5,038,425
============ ============
The accompanying notes are a part of this statement.
F-4
<PAGE>
EQUITEX, INC.
Schedule of Investments
December 31, 1998
<TABLE>
<CAPTION>
NUMBER COST
OF AND/OR FAIR
COMPANY SHARES OWNED EQUITY VALUE
<S> <C> <C> <C>
CONTROLLED COMPANIES
COMMON STOCKS - PRIVATE
MARKET METHOD OF VALUATION (a)(e)
VP Sports, Inc.
Entity formed to seek acquisitions
in the manufacturing segment of
the sporting goods and leisure-
time industry ......................... 2,000,000 $ 250,000 $1,000,000
COMMON STOCKS - BOARD APPRAISAL
METHOD OF VALUATION (a)
First TeleServices Corporation
Fee-based financial services .......... 1,000 565,639 565,639
COMMON STOCKS - COST METHOD
OF VALUATION
Triumph Sports Group
Entity formed to seek acquisitions
in the non-manufacturing licensed
and supplemental segments of the
sporting goods and leisure-time
industry .............................. 1,500,000 375,000 375,000
First TeleBanc Corporation
Bank holding company .................. 40,000 400,000 350,000
AFFILIATED COMPANIES
COMMON STOCKS - PUBLIC MARKET
METHOD OF VALUATION (c)(e)
RDM Sports Group
Manufacturer of fitness
equipment and juvenile products ....... 4,979,437 1,088,815 8,963
OTHER - PUBLIC MARKET METHOD
OF VALUATION
RDM Sports Group 8% Convertible
Manufacturer of fitness Subordinated
equipment and juvenile products ....... Debentures 50,681 --
---------- ----------
Sub-Total
CONTROLLED AND AFFILIATED COMPANIES .. 2,730,135 2,299,602
---------- ----------
</TABLE>
(Continued)
The accompanying notes are a part of this statement.
F-5
<PAGE>
EQUITEX, INC.
Schedule of Investments (Page 2)
December 31, 1998
<TABLE>
<CAPTION>
NUMBER COST
OF AND/OR FAIR
COMPANY SHARES OWNED EQUITY VALUE
<S> <C> <C> <C>
UNAFFILIATED COMPANIES
COMMON STOCKS - PUBLIC MARKET
METHOD OF VALUATION
IntraNet Solutions, Inc. (formerly
MacGregor Sports & Fitness, Inc.)
Document management services,
web-based internet software,
electronic document management
and demand printing ................. 188,585 1,053,200 919,351
Zamba (formerly Racotek)
Medical technology .................... 275,000 961,013 532,813
NevStar Gaming Corporation
Gaming development .................... 7,000 38,500 6,562
COMMON STOCKS - PRIVATE MARKET
METHOD OF VALUATION (a)(e)
All Systems Go
Software development .................. 20,000(b) 25,000 25,000
Ocean Power Technology
Alternative energy .................... 35,714(b) 40,000 98,213
research and development .............. 100,000 -- 275,000
Gain, Inc. ..............................
Male vascular devices ................. 20,000(b) 50,000 50,000
Juice Island
Health food stores .................... 10,000(b) 20,000 20,000
WARRANTS (f)(e)
Juice Island
Health food stores .................... 2,500 -- --
---------- ----------
Sub-total
UNAFFILIATED COMPANIES ................ 2,187,713 1,926,939
---------- ----------
Total
ALL COMPANIES ......................... $4,917,848 $4,226,541
========== ==========
</TABLE>
(Continued)
The accompanying notes are a part of this statement.
F-6
<PAGE>
EQUITEX, INC.
Schedule of Investments (Page 3)
December 31, 1998
RESTRICTIONS AS TO RESALE
(a) Non-public company whose securities are privately owned. The Board of
Directors determines fair value in good faith using cost information, but
also taking into consideration the impact of such factors as available
financial information of the investee, the nature and duration of any
restrictions on resale, and other factors which influence the market in
which a security is purchased and sold.
(b) May be sold under the provisions of Rule 144 of the Securities Act of 1933
after an initial holding period expires.
(c) Since the Company is an affiliate, it may be affected by sales limitations
of one percent of the investee's outstanding common stock during any
three-month period, or four-week average trading volume during any
three-month period.
(e) Since certain of these securities have certain restrictions as to resale,
the Board of Directors determines fair value in good faith using public
market information, but also taking into consideration the impact of such
factors as available financial information of the investee, the nature and
duration of restrictions on the disposition of securities, and other
factors which influence the market in which a security is purchased and
sold.
(f) Valued at higher of cost or fair market value of underlying stock less
exercise price, subject to valuation adjustments as determined in good
faith by the Board of Directors, taking into consideration the impact of
such factors as available financial information of the investee, the nature
and duration of any restrictions on resale, and other factors which
influence the market in which a security is purchased and sold.
The accompanying notes are a part of this statement.
F-7
<PAGE>
EQUITEX, INC.
Schedule of Investments
December 31, 1997
<TABLE>
<CAPTION>
NUMBER COST
OF AND/OR FAIR
COMPANY SHARES OWNED EQUITY VALUE
<S> <C> <C> <C>
CONTROLLED COMPANIES
COMMON STOCKS - PRIVATE
MARKET METHOD OF VALUATION (a)(e)
VP Sports, Inc. .........................
Entity formed to seek-out
acquisitions in the sports
and health products industries ........ 2,000,000 $ 250,000 $1,000,000
AFFILIATED COMPANIES
COMMON STOCKS - PUBLIC MARKET
METHOD OF VALUATION (c)(e)
IntraNet Solutions, Inc. (formerly
MacGregor Sports & Fitness, Inc.)
Document management services,
web-based internet software,
electronic document management
and demand printing ................. 473,250 1,410,776 2,498,529
RDM Sports Group (formerly
Roadmaster Industries, Inc.)
Manufacturer of fitness
equipment and juvenile products ....... 4,979,437 1,088,815 4,481
OTHER - PUBLIC MARKET METHOD
OF VALUATION
RDM Sports Group 8% Convertible
Manufacturer of fitness Subordinated
equipment and juvenile products ....... Debentures 150,682 1,750
---------- ----------
Sub-Total
CONTROLLED AND AFFILIATED COMPANIES .. 2,900,273 3,504,760
---------- ----------
UNAFFILIATED COMPANIES
COMMON STOCKS - PUBLIC MARKET
METHOD OF VALUATION
IVI Publishing
Publishing technology ................. 25,000 116,881 64,063
Racotek
Medical technology .................... 75,000 377,391 110,156
NevStar Gaming Corporation
Gaming development .................... 7,000 38,500 18,750
</TABLE>
(Continued)
The accompanying notes are a part of this statement.
F-8
<PAGE>
EQUITEX, INC.
Schedule of Investments (Page 2)
December 31, 1997
<TABLE>
<CAPTION>
NUMBER COST
OF AND/OR FAIR
COMPANY SHARES OWNED EQUITY VALUE
<S> <C> <C> <C>
COMMON STOCKS - PRIVATE MARKET
METHOD OF VALUATION (a)(e)
All Systems Go
Software development .................. 20,000(b) 25,000 25,000
Ocean Power Technology
Alternative energy
research and development .............. 35,714(b) 40,000 98,214
100,000 -- 275,000
Gain, Inc. ..............................
Male vascular devices ................. 20,000(b) 50,000 50,000
Juice Island
Health food stores .................... 10,000(b) 20,000 20,000
WARRANTS (f)(e)
Nationsmart
Consumer services ..................... 10,000 -- 50
Juice Island
Health food stores .................... 2,500 -- --
---------- ----------
Sub-total
UNAFFILIATED COMPANIES ................ 667,772 661,233
---------- ----------
Total
ALL COMPANIES ......................... $3,568,045 $4,165,993
========== ==========
</TABLE>
(Continued)
The accompanying notes are a part of this statement.
F-9
<PAGE>
EQUITEX, INC.
Schedule of Investments (Page 3)
December 31, 1997
RESTRICTIONS AS TO RESALE
(a) Non-public company whose securities are privately owned. The Board of
Directors determines fair value in good faith using cost information, but
also taking into consideration the impact of such factors as available
financial information of the investee, the nature and duration of any
restrictions on resale, and other factors which influence the market in
which a security is purchased and sold.
(b) May be sold under the provisions of Rule 144 of the Securities Act of 1933
after an initial holding period expires.
(c) Since the Company is a greater than five percent shareholder, it may be
affected by a sales limitation of one percent of the investee's outstanding
common stock during any three-month period.
(e) Since certain of these securities have certain restrictions as to resale,
the Board of Directors determines fair value in good faith using public
market information, but also taking into consideration the impact of such
factors as available financial information of the investee, the nature and
duration of restrictions on the disposition of securities, and other
factors which influence the market in which a security is purchased and
sold.
(f) Valued at higher of cost or fair market value of underlying stock less
exercise price, subject to valuation adjustments as determined in good
faith by the Board of Directors, taking into consideration the impact of
such factors as available financial information of the investee, the nature
and duration of any restrictions on resale, and other factors which
influence the market in which a security is purchased and sold.
The accompanying notes are a part of this statement.
F-10
<PAGE>
EQUITEX, INC.
Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
ACCUMULATED
(DEFICIT)
ADDITIONAL PRIOR TO
COMMON STOCK TREASURY PAID-IN BECOMING
SHARES AMOUNT STOCK CAPITAL A BDC
<S> <C> <C> <C> <C> <C>
Balance at Dec. 31,
1996 ............................ 3,224,465 $ 64,489 $ (114,037) $4,447,175 $ (118,874)
Common stock sold to
officer/director at
$.75 per share .................. 270,000 5,400 197,100
Net investment (loss)
Net realized gain on
investments
Unrealized gain (loss)
on investments
--------- ---------- ---------- ---------- ----------
Balance at Dec. 31,
1997 ............................ 3,494,465 69,889 (114,037) 4,644,275 (118,874)
Common stock sold to
officer at $1.16
per share ....................... 10,000 200 11,400
Common stock sold to
o/s directors at
$1.16 per share ................. 139,200 2,784 158,688
Common stock sold to
officers pursuant to
option conversions at:
$3.00 per share .............. 74,000 1,480 220,520
$3.19 per share .............. 29,000 580 91,930
Common stock sold to others at:
$.75 per share .............. 330,000 6,600 240,900
$1.16 per share ............. 350,000 7,000 399,000
$3.25 per share ............. 366,000 7,320 1,812,180
</TABLE>
(Continued)
The accompanying notes are a part of this statement.
F-11
<PAGE>
EQUITEX, INC.
Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1998 and 1997
(Page 2)
<TABLE>
<CAPTION>
ACCUM.
REALIZED ACCUM.
ACCUM. NET GAINS UNREA- TOTAL
NET FROM SALES LIZED NET STOCK-
INVEST. OF INVEST- APPREC. ON HOLDERS'
LOSS MENTS INVESTMENTS EQUITY
<S> <C> <C> <C> <C>
Balance at Dec. 31, 1996 ....... $(12,025,669) $ 11,121,234 $ 3,886,465 $ 7,260,783
Common stock sold to
officer/director at
$.75 per share ............... 202,500
Net investment (loss) .......... (1,405,600) (1,405,600)
Net realized gain
on investments ............... 1,003,951 1,003,951
Unrealized gain (loss)
on investments ............... (3,521,718) (3,521,718)
------------ ------------ ------------ ------------
Balance at Dec. 31,
a1997 ......................... (13,431,269) 12,125,185 364,747 3,539,916
Common stock sold to
officer at $1.16
per share .................... 11,600
Common stock sold to
o/s directors at
$1.16 per share .............. 161,472
Common stock sold to
officers pursuant to
option conversions at:
$3.00 per share ........... 222,000
$3.19 per share ........... 92,510
Common stock sold to others at:
$.75 per share ........... 247,500
$1.16 per share .......... 406,000
$3.25 per share .......... 1,189,500
</TABLE>
(Continued)
The accompanying notes are a part of this statement.
F-12
<PAGE>
EQUITEX, INC.
Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1998 and 1997
(Page 3)
<TABLE>
<CAPTION>
ACCUMULATED
(DEFICIT)
ADDITIONAL PRIOR TO
COMMON STOCK TREASURY PAID-IN BECOMING
SHARES AMOUNT STOCK CAPITAL A BDC
<S> <C> <C> <C> <C> <C>
Stock issued in
exchange for First
TeleServices
Corporation ..................... 625,000 12,500 553,139
Commissions/fees paid
on 1998 private
placement sales ................. (133,408)
Net investment
(loss)
Net realized gain
(loss) on
investments
Unrealized gain
(loss) on
investments
Balance at Dec. 31,
1998 ............................ 5,417,665 $ 108,353 $ (114,037) $7,368,624 $ (118,874)
========== ========== ========== ========== ==========
</TABLE>
(Continued)
The accompanying notes are a part of this statement.
F-13
<PAGE>
EQUITEX, INC.
Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1998 and 1997
(Page 4)
<TABLE>
<CAPTION>
ACCUM.
REALIZED ACCUM.
ACCUM. NET GAINS UNREA- TOTAL
NET FROM SALES LIZED NET STOCK-
INVEST. OF INVEST- APPREC. ON HOLDERS'
LOSS MENTS INVESTMENTS EQUITY
<S> <C> <C> <C> <C>
Stock issued in
exchange for First
TeleServices
Corporation .................. 565,639
Commissions/fees paid
on 1998 private
placement sales .............. (133,408)
Net investment
(loss) ....................... (2,266,786) (2,266,786)
Net realized gain
(loss) on
investments .................. 1,108,340 1,108,340
Unrealized gain
(loss) on
investments .................. (1,056,054) (1,056,054)
------------ ------------ ------------ ------------
Balance at Dec. 31,
a1998 ......................... $(15,698,055) $ 13,233,525 $ (691,307) $ 4,088,229
============ ============ ============ ============
</TABLE>
The accompanying notes are a part of this statement.
F-14
<PAGE>
EQUITEX, INC
Statements of Operations
FOR THE YEARS ENDED
DECEMBER 31,
1998 1997
---- ----
Revenues
Interest and dividends ......................... $ 70,445 $ 34,784
Consulting and transaction fees ................ 375,000 250,000
Administrative fees ............................ 2,371 26,495
Miscellaneous .................................. 24 67,112
------------ ------------
447,840 378,391
Expenses
Salaries and consulting fees ................... 300,613 300,164
Officers' bonus ................................ 1,208,042 151,153
Office rent .................................... 31,188 38,575
Advertising and promotion ...................... 48,612 2,951
Legal and accounting ........................... 276,359 69,502
Loss on indemnity agreement .................... -- 509,054
Other general and administrative ............... 266,129 190,261
Interest ....................................... 101,002 87,005
Bad debt expense ............................... (34,435) 240,991
Depreciation and amortization .................. 12,833 11,388
Employee benefits .............................. 207,902 212,882
------------ ------------
(2,418,245) 1,813,926
------------ ------------
Net investment (loss) ............................ (1,970,405) (1,435,535)
------------ ------------
Net realized gain on investments and
net unrealized gain on investments:
Proceeds from sales of investments ............. 1,712,802 1,508,629
Less: cost of investments sold ................. (604,462) (504,678)
------------ ------------
Realized gain from sales of investments ...... 1,108,340 1,003,951
Permanent write-down of investments ............ (--) (--)
------------ ------------
Realized gain on investments before
income taxes .............................. 1,108,340 1,003,951
------------ ------------
Net investment (loss) and realized gain
on investments before income taxes ........ (862,065) (431,584)
Less: income taxes (provision) benefit
Current ...................................... -- (56,307)
Deferred ..................................... (63,180) 86,242
------------ ------------
(63,180) 29,935
Income tax benefit of
NOL carryforward .......................... -- --
------------ ------------
-- 29,935
(Continued)
The accompanying notes are a part of this statement.
F-15
<PAGE>
EQUITEX, INC
Statements of Operations (Page 2)
FOR THE YEARS ENDED
DECEMBER 31,
1998 1997
---- ----
Net investment (loss) and realized gain
on investments after income taxes .............. (925,245) (401,649)
(Decrease) in unrealized
appreciation of investments ................... (1,056,054) (5,773,305)
Less: income tax benefit applicable
to (decrease) in unrealized
appreciation of investments ................... 431,361 2,251,587
Add: allowance for income tax benefit ............ (431,361) --
------------ ------------
(1,056,054) (3,521,718)
------------ ------------
Net (decrease) in net assets
resulting from operations ..................... $ (1,981,299) $ (3,923,367)
============ ============
(Decrease) in net assets per
share - primary ............................... $ (.45) $ (1.25)
============ ============
Weighted average number of common shares ......... 4,416,988 3,192,600
============ ============
The accompanying notes are a part of this statement.
F-16
<PAGE>
EQUITEX, INC.
Statements of Cash Flows
FOR THE YEARS ENDED
DECEMBER 31,
1998 1997
---- ----
Cash flows from operating activities:
Change in net assets ........................... $ (1,981,299) $ (3,923,367)
Adjustments to reconcile change in net
assets to net cash provided by
operating activities:
Depreciation and amortization .............. 12,833 11,388
Provision for bad debts on notes
receivable ............................... (40,193) 40,193
Realized (gain) on sale of investments ..... (1,108,340) (1,003,951)
Unrealized loss on investments ............. 1,056,054 5,773,305
Donation of stock of investee company ...... -- 4,136
Proceeds from sales of investments ............... 1,712,802 1,508,629
Purchases of investments ......................... (1,388,626) (309,551)
Issuance of notes receivable ..................... (943,365) (458,402)
Collections of notes receivable .................. 177,083 20,250
Changes in assets and liabilities:
(Increase) in interest receivable .............. (26,433) (3,799)
(Increase) decrease in accounts
receivable - broker .......................... 50,943 (68,975)
(Increase) decrease in other assets ............ (23,119) 3,671
(Increase) decrease in trade receivables ....... 2,668 (71,331)
(Increase) in contract deposit receivable ...... -- (150,000)
Decrease in income taxes refundable ............ -- 164,459
Increase (decrease) in accounts payable
and other accrued liabilities ................ (45,059) 65,908
(Decrease) increase in accounts
payable to brokers ........................... 5,758 (88,721)
(Decrease) increase in deferred
income taxes ................................. 63,180 (2,337,830)
Increase in bonus due to officer ............... 376,909 151,153
------------ ------------
Net cash (used) by operating
activities ................................... (2,098,204) (672,835)
Cash flows from investing activities:
Purchase of fixed assets ....................... (10,396) (1,872)
Proceeds from sale of fixed assets ............. -- --
------------ ------------
Net cash (used) by investing activities .......... (10,396) (1,872)
(Continued)
The accompanying notes are a part of this statement.
F-17
<PAGE>
EQUITEX, INC.
Statements of Cash Flows (Page 2)
FOR THE YEARS ENDED
DECEMBER 31,
1998 1997
---- ----
Cash flows from financing activities:
Common stock issued for cash ................... $ 2,197,174 $ 202,500
Issuance of notes payable - officer ............ 165,000 531,000
Issuance of notes payable - other .............. 250,000 250,000
Repayment of notes payable ..................... (480,271) (353,401)
------------ ------------
Net cash provided by financing
activities ................................... 2,131,903 630,099
Change in cash and cash equivalents .............. 23,303 (44,608)
Cash and cash equivalents,
beginning of period ............................ 9,187 53,795
------------ ------------
Cash and cash equivalents,
end of period .................................. $ 32,490 $ 9,187
============ ============
Supplemental disclosures of cash flow information:
Interest paid ................................ $ 95,677 $ 79,305
============ ============
Interest received ............................ $ 42,217 $ 30,985
============ ============
Income taxes paid (refunded) ................. $ -- $ (116,496)
============ ============
Non-cash financing activities:
Common stock issued for common
stock of previously unrelated entity ......... $ 565,639 $ --
============ ============
Supplemental disclosure of non-cash investing activities:
On August 13, 1998, the Company acquired all of the outstanding stock
of First TeleServices Corporation in exchange for 625,000 shares of the
Company's common stock.
The accompanying notes are a part of this statement.
F-18
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 1: SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies are as follows:
a. BUSINESS HISTORY
Equitex, Inc. (the "Company") was incorporated under the laws of the State
of Delaware on January 19, 1983. On July 30, 1984 the Company elected to become
a "Business Development Company" (BDC), as that term is defined in the Small
Business Investment Incentive Act of 1980, which Act is an amendment to the
Investment Company Act of 1940. This change resulted in the Company becoming a
specialized type of investment company. Consistent with this change in type of
business entity, the Company changed its method of valuation of investments from
cost to fair value. On January 4, 1999, the Company withdrew its election to be
treated as a BDC subject to the Investment Company Act.
b. INVESTMENT VALUATION
The fair value method adopted in 1984 provides for the Company's Board of
Directors to be responsible for the valuation of the Company's investments,
including notes receivable and interest receivable. Fair value is the value
which could reasonably be expected to be realized in a current arm's length
sale. Investments are carried at fair value using the following four basic
methods of valuation:
1. Cost - The cost method is based on the original cost to the Company adjusted
for amortization of original issue discounts, accrued interest for certain
capitalized expenditures of the corporation, and other adjustments as determined
to be appropriate by the Board of Directors in good faith taking into
consideration such factors as available financial information of the investee,
the nature and duration of any restrictions as to resale, and other factors
which influence the market in which a security is purchased and sold. Such
method is to be applied in the early stages of an investee's development until
significant positive or adverse events subsequent to the date of the original
investment require a change to another method.
2. Private market - The private market method uses actual or proposed third
party transactions in the investee's securities as a basis for valuation,
utilizing actual firm offers as well as historical transactions, provided that
any offer used is seriously considered and well documented by the investee, and
adjusted (if applicable) by the Board of Directors in good faith taking into
consideration such factors as available financial information of the investee,
the nature and duration of any restrictions as to resale, and other factors
which influence the market in which a security is purchased and sold.
3. Public market - The public market method is the preferred method of valuation
when there is an established public market for the investee's securities. In
determining whether the public market method is sufficiently established for
valuation purposes, the Company examines the trading volume, the number of
shareholders and the number of market makers in the investee's securities, along
with the trend in trading volume as compared to the Company's proportionate
share of the investee's securities. Investments in unrestricted securities that
are traded in the over-the-counter market are generally valued at the high bid
price on the last day
F-19
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 1: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of the year. If the security is restricted as to resale or has significant
escrow provisions or other significant restrictions, appropriate adjustments are
determined in good faith by the Board of Directors taking into consideration
such factors as available financial information of the investee, the nature and
duration of restrictions on the ultimate disposition of securities, and other
factors which influence the market in which a security is purchased and sold.
4. Appraisal - The appraisal method is used to value an investment position
after analysis of the best available outside information where there is no
established public or private market in the investee's securities.
c. STATEMENT OF CASH FLOWS
Consistent with the reporting requirements of a BDC, cash and cash
equivalents consist only of demand deposits in banks and cash on hand. Financial
statement account categories such as investments and notes receivable, which
relate to the Company's activity as a BDC, are included as operating activities
in the statement of cash flows.
d. FURNITURE AND EQUIPMENT
Expenditures for furniture and equipment and for renewals and betterments
which extend the originally estimated economic life of assets or convert the
assets to a new use are capitalized at cost. Expenditures for maintenance,
repairs and other renewals of items are charged to expense. When items are
disposed of, the cost and accumulated depreciation are eliminated from the
accounts and any gain or loss is included in the results of operations. The
provision for depreciation is calculated using the straight-line method over a
five or seven year life.
e. SECURITIES TRANSACTIONS
Purchases and sales of securities transactions are accounted for on the
trade date which is the date the securities are purchased or sold. The cost of
securities sold is reported on the first-in first-out cost basis for financial
statement purposes.
f. REVENUE RECOGNITION
Due to the uncertainty of collection, the Company recognizes all types of
consulting fee revenues from portfolio companies (except for RDM Sports Group)
as cash is received. All other types of revenues are recognized on the accrual
basis.
g. ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates. The estimate that is
particularly sensitive to future change is the determination of the fair value
of the Company's investments in and various receivables due from its investee
companies (see Note 1b., herein). Management believes that its estimates and
assumptions provide a reasonable basis for the fair presentation of the
Company's financial position and results of operations. F-20
F-20
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 1: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
h. CAPITAL STRUCTURE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
129, "Disclosure of Information about Capital Structure" ("SFAS No. 129"), which
requires all companies to disclose all relevant information regarding their
capital structure. The Company has adopted SFAS No. 129 in 1998. For both years
ended December 31, 1998 and 1997, there is no impact on the financial statements
or disclosures.
i. SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS No.
131"), which amends the requirements for a public enterprise to report financial
and descriptive information about its reportable operating segments. Operating
segments, as defined in the pronouncement, are components of an enterprise about
which separate financial information is available that is evaluated regularly by
the Company in deciding how to allocate resources and in assessing performance.
The financial information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. The disclosures required by SFAS No. 131 are effective
for all fiscal years beginning after December 15, 1997. The Company adopted SFAS
No. 131 in 1997. For both years ended December 31, 1998 and 1997, there is no
impact on the financial statements or disclosures.
j. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"), which establishes
standards for the reporting of comprehensive income for all fiscal years
beginning after December 15, 1997. This pronouncement had no effect on the
Company since it is following the fair value accounting guidelines required for
BDCs.
k. PENSION AND OTHER POST RETIREMENT BENEFITS
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pension and Other Post Retirement Benefits" is effective for
financial statements with fiscal years beginning after December 31, 1997.
Earlier application is permitted. The new standard revises employers'
disclosures about pension and other post retirement benefit plans but does not
change the measurement of recognition of those plans. SFAS No. 132 standardizes
the disclosure requirements for pensions and other post retirement benefits to
the extent practicable, requires additional information on change in the benefit
obligations and fair values of the plan assets that will facilitate financial
analysis, and eliminates certain disclosure previously required when no longer
useful. The Company adopted SFAS No. 132 in 1998, with no material impact on its
results of operations.
l. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The FASB has recently issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). SFAS No. 133 established standards for recognizing all derivative
instruments including those for hedging
F-21
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 1: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
l. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (CONTINUED)
activities as either assets or liabilities in the statement of financial
position. The adoption of this standard during 1998 by the Company had no effect
on its financial position or results of operation.
m. STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), was issued in October 1995 by the
Financial Accounting Standards Board. SFAS No. 123 provides an alternative
method of accounting for stock-based compensation arrangements, based on fair
value of the stock-based compensation utilizing various assumptions regarding
the underlying attributes of the options and stock rather than the existing
method of accounting for stock-based compensation which is provided in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). The Financial Accounting Standards Board encourages
entities to adopt the fair-value based method but does not require adoption of
this method. The Company will continue its current accounting policy under APB
No. 25 but has adopted the disclosure-only provisions of SFAS No. 123 for any
options and warrants issued to non-employees, directors or consultants.
Accordingly, no compensation expense was recognized in the statement of
operations for the options granted during June 1998 to an officer,
officer/director, and employees.
The following represents the pro-forma change in net assets and pro-forma
change in net assets per share (primary) had the Company elected to account for
these options using the fair-value based method beginning in June 1998. In
estimating the pro-forma compensation expense for the options granted during the
year ended December 31, 1998, the Company used the Black-Scholes option pricing
model, a risk-free interest rate of 6.5%, expected dividend yield of zero,
expected option lives of 5 years and expected volatility of 83%. The estimated
pro-forma results may not be representative of actual results had the Company
accounted for equity awards using the fair-value based method.
1998
Net (decrease) in net assets - as reported $(1,981,299)
Pro-forma net (decrease) in net assets (2,724,153)
(Decrease) in net assets per share - primary
as reported (.45)
Pro-forma (decrease) in net assets per share -
primary (.62)
n. INCOME TAXES
The Company is not entitled to the special treatment available to regulated
investment companies and is taxed as a regular corporation for Federal and state
income tax purposes. Until 1986, the Company had made no provision for income
taxes because of financial statement and tax losses. Effective January 1, 1993,
the Company adopted FASB Statement No. 109, "Accounting for Income Taxes". The
adoption of the new accounting statement had no significant effect on the tax
provision or net income for 1993.
F-22
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 1: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
o. RECLASSIFICATIONS
Certain reclassifications have been made to the December 31, 1997 financial
statements to conform to the December 31, 1998 presentation.
p. NET ASSETS PER SHARE
In accordance with the fair value accounting method used by regulated
investment companies, net assets (total stockholders' equity) per share at
December 31, 1998 and 1997 were as follows:
NUMBER OF SHARES
BASIS 1998 1997 1998 1997
---- ---- ---- ----
Primary 5,384,315 3,461,115 $.74 $1.03
========= ========= ==== =====
Fully diluted 6,156,015 3,772,660 $.65 $ .95
========= ========= ==== =====
Note 2: DETAIL OF RECEIVABLES AND SOURCES OF REVENUE
a. RECEIVABLES
Receivables are from the following types of companies at December 31, 1998
and 1997, respectively.
PORTFOLIO COMPANIES
CONTROLLED AFFILIATED OTHER TOTAL
1998
Notes receivable $1,123,284 $56,575 $45,473 $1,225,332
Interest receivable 29,843 1,829 2,292 33,964
Trade receivables 111,287 11,427 43,277 165,991
Less: allowances for
uncollectible receivables (5,527) (7,685) (46,423) (59,635)
---------- ------- ------- ----------
$1,258,887 $62,146 $44,619 $1,365,652
========== ======= ======= ==========
1997
Notes receivable $ 401,928 $56,575 $ -- $ 458,503
Interest receivable 3,917 1,819 -- 5,736
Trade receivables 123,283 41,413 -- 164,696
Less: allowances for
uncollectible receivables (52,913) (41,157) -- (94,070)
---------- ------- ------- ----------
$ 476,215 $58,650 $ -- $ 534,865
========== ======= ======= ==========
Included in notes, interest, and accounts receivable above are amounts
totaling $1,271,542 and $534,865 at December 31, 1998 and 1997, respectively,
which have been valued at fair value and whose collectibility cannot be
determined due to future events (such as the success of investees'
public/private offerings), the outcome of which cannot be determined at this
time.
b. SOURCES OF REVENUES
Sources of revenues are from the following types of companies for the year
ended December 31, 1998 and 1997, respectively.
F-23
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 2: DETAIL OF RECEIVABLES AND SOURCES OF REVENUE (CONTINUED)
b. SOURCES OF REVENUES (CONTINUED)
PORTFOLIO COMPANIES
CONTROLLED AFFILIATED OTHER TOTAL
1998
Interest and other
income $ 68,043 $ 10 $2,416 $ 70,469
Consulting/transaction
fees 375,000 -- -- 375,000
Administrative fees -- 2,371 -- 2,371
-------- -------- ------ --------
$443,043 $ 2,381 $2,416 $447,840
======== ======== ====== ========
1997
Interest and other
income $ 3,917 $ 88,967 $9,012 $101,896
Consulting/transaction
fees 250,000 -- -- 250,000
Administrative fees -- 26,176 319 26,495
-------- -------- ------ --------
$253,917 $115,143 $9,331 $378,391
======== ======== ====== ========
During 1998 one investee company accounted for 96% of the Company's total
revenues of $447,840.
Note 3: INVESTMENTS
Investments consist of holdings of securities in and receivables of
publicly and privately held companies. The Company has representation on the
boards of directors of four of its investee companies. Several investments are
in companies in which there is either direct or indirect ownership or control of
five percent or more of the outstanding voting shares.
a. INVESTMENT IN RDM SPORTS GROUP (FORMERLY ROADMASTER INDUSTRIES, INC.)
On August 29, 1997, RDM Sports Group (RDM) and all of its operating
subsidiaries filed concurrent Chapter 11 petitions with the U.S. Bankruptcy
Court. As a result of this, the fair market value (as measured using the public
market valuation method) of this investee company dropped to almost zero as
reflected in the Schedule of Investments, herein. The Company has also reserved
100% of its $7,685 trade receivable from RDM at December 31, 1998.
During 1998 the Company was included as a alleged defendant in two class-
action lawsuits filed by shareholders of RDM Sports Group following RDM's
bankruptcy filing. The Company intends to seek dismissal of both cases and to
vigorously defend these actions.
During July of 1997, prior to the bankruptcy filing, the Company sold
127,600 shares of RDM on the open market for cash proceeds of $126,366.
During 1998 and 1997, the Company recorded administrative fees from RDM
totaling $25,893 and $649, respectively. At December 31, 1998, the Company is
holding a note receivable from Hutch Sports USA (an RDM subsidiary) with a face
value of $564,755 (See Note 3 b. below). The note is recorded at an estimated
net realizable value from bankruptcy proceeds of $56,475.
F-24
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 3: INVESTMENTS (CONTINUED)
b. INVESTMENT IN INTRANET SOLUTIONS, INC. (FORMERLY MACGREGOR SPORTS &
FITNESS, INC.)
On July 31, 1996, MacGregor Sports & Fitness, Inc. merged with Technical
Publishing Solutions, Inc. (TPSI) through a tax-free exchange of common stock.
As part of the merger agreement the Company agreed to indemnify the new entity
up to a maximum limit of $2,000,000 against any subsequent claims relating to
MacGregor (pre-merger).
On October 31, 1997, the Company entered into an agreement with IntraNet
relative to this indemnification agreement whereby the Company agreed to
purchase a certain note receivable in the amount of $564,755 which IntraNet had
from an RDM subsidiary, Hutch Sports USA (Hutch). Hutch had filed bankruptcy on
August 29, 1997 (see Note 3a. above). The Company paid $414,755 of the purchase
amount to IntraNet during 1997. The remaining balance of $150,000 was paid on
January 21, 1998. Also, the Company's President agreed to resign from the Board
of IntraNet and both IntraNet and the Company agreed to terminate the
indemnification agreement under which the Company's maximum exposure was
$2,000,000, and agreed to mutually release each other from any claims relating
to this agreement and certain other items.
During 1997, the Company sold and/or forfeited 171,835 shares of IntraNet
for $814,653 used to pay the above mentioned indemnity settlement and also raise
working capital, resulting in an ownership position of 473,250 shares (or 5.7%)
at December 31, 1997. During 1998, the Company sold 284,665 shares of IntraNet
for proceeds of $1,240,613 used to provide working capital, resulting in an
ownership position of 188,585 shares (less than 5%) at December 31, 1998. These
shares have been valued using the public market valuation method.
c. INVESTMENT IN VP SPORTS, INC.
In December of 1997, the Company received 2,000,000 shares (or 88%) of the
common stock of VP Sports, Inc., a private company formed for the purpose of
seeking out and acquiring an operating entity in the sporting goods/recreation
industry. The stock was received in exchange for consulting services and an
acquisition letter of intent valued at $250,000. At December 31, 1998 these
common shares have been valued using the private market valuation method. The
valuation reflects the price at which the most recent common stock sales
occurred in 1998.
The Company's president is also the President and a director of VP. During
1998 the Company loaned $103,131 to VP for working capital purposes, of which
$38,865 was repaid. In September of 1998 VP Sports, Inc. entered into an
agreement to purchase a Canadian bicycle manufacturer.
d. INVESTMENTS IN FIRST TELESERVICES CORPORATION/FIRST TELEBANC CORPORATION
On August 13, 1998, the Company acquired all of the outstanding stock of
First TeleServices Corporation (FTC) in exchange for 625,000 shares of the
Company's common stock. As a result of the transaction, FTC became a
wholly-owned subsidiary of the Company.
FTC is a fee-based financial services organization consisting of a database
marketing division, consumer finance division, an inbound/outbound calling
center, and an operations center. FTC has developed strategic
F-25
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 3: INVESTMENTS (CONTINUED)
d. INVESTMENTS IN FIRST TELESERVICES CORPORATION/FIRST TELEBANC CORPORATION
(CONTINUED)
alliances with a number of nationwide organizations to outsource the
products and services it offers.
The Board of Directors used the Board appraisal method of valuation for
this investment and recorded FTC at $565,639, which was the net asset value of
FTC's underlying assets and liabilities at the acquisition date. Since the date
of the acquisition, the Company has loaned $160,000 to FTC for working capital
purposes.
During 1998 the Company acquired for $300,000 a 9.9% interest in First
TeleBanc Corporation ("First TeleBanc"), a closely-held Florida corporation.
First TeleBanc was incorporated in March of 1997 for the purpose of becoming a
one-bank holding company and to acquire 100% of the outstanding stock of Boca
Raton First National Bank. The acquisition by First TeleBanc of all of the
outstanding stock of Boca Raton First National Bank was completed on December
30, 1998. As a one-bank holding company, First TeleBanc may engage in any
activity which the Board of Governors of the Federal Reserve System has
previously approved or approves subsequent to an application.
e. INVESTMENT IN TRIUMPH SPORTS GROUP
During the first and second quarter of 1998, the Company received 1,000,000
and 500,000 shares, respectively, of the common stock of Triumph Sports Group, a
private company formed for the purpose of seeking out and acquiring operating
entities in the non-manufacturing licensed and supplemental segments of the
sporting goods and leisure-time industry. The stock was received in exchange for
consulting services valued at $375,000. The Company's president is also the
President and a director of Triumph Sports. At December 31, 1998 the investment
is valued using the cost valuation method because no more recent common stock
sales have occurred.
During 1997 and 1998 the Company loaned $401,927 and $561,569 to Triumph,
respectively, which has been used by Triumph primarily to acquire four retail
vitamin/health supplement centers in south Florida. $64,478 of these notes and
$39,939 of interest were repaid by Triumph during 1998, resulting in balances
due the Company at December 31, 1998 of $899,018 and $23,088 for note, principal
and accrued interest, respectively.
Note 4: COMMON STOCK
a. STOCK OPTIONS
During 1993 the Company adopted two stock option plans: the 1993 Stock
Option Plan (the "Option Plan") and the 1993 Stock Option Plan for Non- Employee
Directors (the "Directors' Plan").
Effective April 1, 1993 the Company's Board of Directors granted options to
purchase a total of 211,545 shares of common stock under the Option Plan to an
officer/director and an officer of the Company. These options are exercisable at
$3.00 per share and expire July 2000. The Option Plan and the options
granted thereunder were approved by the Company's stockholders on December 28,
1993.
F-26
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 4: COMMON STOCK (CONTINUED)
a. STOCK OPTIONS (CONTINUED)
Under the terms of the Directors' Plan, each non-employee director of the
Company was automatically granted as of July 5, 1995, an option to purchase
50,000 shares of common stock at an exercise price of $3.00 per share. These
options expire ten years from the date of grant. The Directors' Plan and the
options granted thereunder were also approved by the Company's stockholders on
December 28, 1993.
In June 1998, the Board of Directors also granted the following stock
options to officers and employees of the Company:
OPTION TYPE TO WHOM NO. OF SHARES OPTION PRICE
Incentive Officer 62,000 $3.19
Non-qualified Officers 445,655 $3.19
Non-qualified Employees 28,800 $3.19
-------
538,455
All of these options were issued at the closing stock price at date of
grant and all options expire five years from date of grant. During 1998 101,000
shares of the non-qualified options issued to officers and employees,
respectively, were exercised.
The status of the Company's stock option plans is summarized below as of
December 31:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
Outstanding at Dec. 31, 1996 311,545 $3.00
Granted -- --
Exercised -- --
Canceled/expired -- --
-------
Outstanding at Dec. 31, 1997 311,545 $3.00
Granted 538,455 3.19
Exercised (101,000) 3.05
Canceled/expired -- --
-------
Outstanding at Dec. 31, 1998 749,000 $3.13
=======
Options exercisable at:
Dec. 31, 1998 749,000 $3.13
======= =====
Dec. 31, 1997 311,545 $3.00
======= =====
b. TREASURY STOCK
On October 21, 1992, the Board of Directors authorized the Company to
repurchase up to 500,000 shares of its own common stock in the open market.
During 1996 the Company purchased 26,500 shares of its common stock on the open
market for $89,191.
c. REVERSE STOCK SPLIT
The Company's stockholders approved a reverse stock split effective January
2, 1996 whereby each two shares of $.01 par value common stock were exchanged
for one share of $.02 par value common stock. Information included herein has
been adjusted to reflect this reverse split.
d. SALE OF STOCK TO OFFICER
During December of 1997, the Company's President purchased 270,000 shares
of common stock at $.75 each.
e. During 1998 the Company sold to an officer 10,000 shares of common stock
at $1.16 each. Another 139,200 shares were sold to outside directors at $1.16
each. Common stock sales to unrelated individuals during 1998 were as follows:
SHARE PRICE NUMBER SOLD
$.75 330,000
1.16 350,000
3.19 24,000
3.25 306,000
F-27
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 4: COMMON STOCK (CONTINUED)
d. SALE OF STOCK TO OFFICER (CONTINUED)
In March 1998 the Company's Board of Directors authorized a private
placement offering of up to 500,000 shares of the Company's common stock at
$1.16 per share. As of the close of the private placement on May 21, 1998,
499,200 shares were sold.
On June 29, 1998 the Company's Board of Directors authorized an additional
private placement of up to 750,000 of the Company's common stock at $3.25 per
share. As of December 31, 1998, 306,000 shares were sold under this placement.
Note 5: INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31,
1998 and 1997, consists of the following:
DECEMBER 31,
1998 1997
Current:
Federal and state $ -- $(56,307)
Benefit of net operating loss
carryback/carryforward -- --
------- --------
Total current (provision) benefit $ -- $(56,307)
======= ========
Deferred:
Accrued unpaid bonus $ -- $(48,930)
Bad debt expense -- 93,948
Other 63,180 41,224
------- --------
Total deferred (provision) benefit $63,180 $ 86,242
======= ========
Deferred taxes reflect the tax effects of differences between the amounts
recorded as assets and liabilities for financial reporting purposes and the
amounts recorded for income tax purposes. The tax effects of significant
temporary differences giving rise to deferred tax assets and liabilities are as
follows:
DECEMBER 31,
1998 1997
Deferred tax assets:
Accrued items not currently deductible $263,140 $203,417
Excess "tax" basis on investment -- 92,964
Tax benefit of unrealized loss on
investments 431,361 --
Valuation allowance (694,501) --
-------- --------
Total deferred tax assets -- 296,381
-------- --------
Deferred tax liabilities:
Tax on unrealized gain on investments -- (233,201)
-------- --------
Total deferred tax liabilities -- (233,201)
-------- --------
Net deferred tax asset (liability) $ -- $ 63,180
======== ========
Recognition of a deferred tax asset is allowed if future realization is
more-likely-than-not. The Company has provided a full valuation allowance for
its deferred tax assets (relative to accrued items not currently deductible and
unrealized loss on investments) because its realization is not considered
more-likely-than-not.
F-28
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 5: INCOME TAXES (CONTINUED)
Tax years prior to 1994 are "closed" to adjustments by the running of the
statute of limitations.
Note 6: RELATED PARTY TRANSACTIONS
a. OFFICE RENTAL
The Company rents office space on a month-to-month basis for $2,500 per
month from Beacon Investments, a partnership in which the Company's President
is the sole partner.
b. BONUSES TO OFFICERS
In November, 1989 the Board of Directors adopted a bonus arrangement
whereby the Company's President is entitled to an annual bonus equal to 3
percent of the Company's total assets as of each year end. All bonuses are paid
out of the Company's cash flow. In August 1998 the Company's Board of Directors
approved a new bonus arrangement with the Company's president as recommended by
an outside consulting firm, with the annual bonus to be calculated quarterly
based on a combination of 1 percent of the Company's assets and 5 percent of the
increase in the market value of the Company's common stock each quarter. The new
bonus arrangement is effective January 1, 1998. The bonus accrual at December
31, 1998 has been adjusted to reflect the terms of the new bonus arrangement.
The unpaid portion of these bonuses, amounts totaling $676,168 and $299,259 have
been accrued as a "Bonus to Officer" in the December 31, 1998 and 1997 balance
sheets, respectively. During 1997 the Company's Corporate Secretary received a
bonus of $6,744.
c. DIRECTORS' FEES
During 1998 and 1997 the Company paid $12,500 to each of its two outside
directors for their attendance at the meetings held in each year.
d. NOTE PAYABLE TO OFFICER
During 1998 the Company's President loaned the Company a total of $165,000
primarily for working capital needs. Of this amount $22,672 was repaid during
the year leaving an unpaid balance of $142,328 at December 31, 1998. These
uncollaterialized loans are all due on demand and bear interest at 8% per annum.
e. NOTE PAYABLE TO RELATED ENTITY
A related entity loaned the Company $100,000 in August 1997 pursuant to a
note agreement, which is due on demand, pays interest at 12% per annum and is
collateralized by 25,000 common shares of IntraNet Solutions. Of this amount,
$30,000 was repaid during 1998 leaving an unpaid balance at December 31, 1998 of
$70,000.
Note 7: CONTRACT DEPOSIT RECEIVABLE
The Company is the plaintiff in an action whereby it is seeking to recover
$300,000 deposited into escrow pending the receipt of documentation needed
pursuant to a contractual agreement. The defendant never delivered the required
documents. This item has been recorded at an estimated net realizable value of
$150,000 under "Contract Deposit Receivable", herein.
F-29
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 8: OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
The Company is party to financial instruments with off-balance-sheet risk
in the normal course of business to meet financing needs of its portfolio
companies. These financial instruments consist primarily of financial guarantees
including pledges of the Company's investment portfolio. These instruments
involve, to varying degrees, elements of credit risk in excess of the amount
recognized in the financial statements.
At December 31, 1998, the Company's primary concentration of credit risk
relates to its investments in certain portfolio companies, certain of which are
highly leveraged companies within the United States and which are involved in
the sporting goods and manufacturing industries. Consideration was given to the
financial position of these portfolio companies when determining the appropriate
fair values at December 31, 1998 and 1997.
Note 9: RETIREMENT PLAN FOR OFFICER
As part of the President's total compensation package, the Company
purchased a whole life insurance policy on April 1, 1992 in order to provide
compensation for the President's retirement. The Company pays an annual premium
of $105,413 per year for 7 years (ending March 31, 1999) on behalf of the
President and also reimburses the President each year for the personal income
tax on this additional compensation.
Should the President die prior to age sixty-five, the policy pays a
$2,600,000 death benefit to his spouse. Upon retirement, provided the President
is at least age sixty-five, the cash surrender value and death benefit rider
become the President's property.
For the year ended December 31, 1998, the Company paid $105,413 in premiums
and $59,586 of additional compensation to the President for related income
taxes.
Note 10: SUBSEQUENT EVENTS
Since December 31, 1998, the Company has sold an additional 384,000 shares
of its June 29, 1998 private placement of common stock at $3.25 per share to
unrelated private investors.
Since December 31, 1998, the Company has loaned $70,000 and $30,000 to VP
Sports, Inc. and Triumph Sports Group pursuant to note agreements which are
uncollateralized, due on demand and pay interest at 10% per annum.
Since December 31, 1998 the Company has loaned $325,000 to First
TeleServices Corporation pursuant to note agreements which are uncollateralized,
due on demand and pay interest at 10% per annum. The Company has also loaned
$200,000 to First TeleBanc under similar terms.
On January 5, 1999, the Registrant's two independent directors each
received options to purchase 158,700 shares of the Registrant's common stock at
an exercise price of $6.75 per share expiring on January 5, 2004. On the same
date under the 1999 plan, the two independent directors wre granted an
additional 86,800 options each (exercisable at $6.75 per share) and the oficers
and employes of the Company were granted a total of 509,000 options at the same
exercise price. All options granted were issued at the closing stock price at
date of grant.
F-30
<PAGE>
EQUITEX, INC.
Notes to the Financial Statements
Note 10: SUBSEQUENT EVENTS (CONTINUED)
During the first quarter of 1999 the Company issued the following 6%
convertible preferred stock:
SERIES NUMBER SHARES PROCEEDS
A 900 $ 900,000
B 600 600,000
C 600 600,000
----------
$2,100,000
The preferred stockholders may convert their stock into common shares at
65% of the current market quote on common at the date of conversion. The Company
is required to convert the preferred stock into common stock at the 3 year
anniversary date.
F-31
<PAGE>
EQUITEX, INC.
Unaudited Pro Forma Consolidated Financial Information
The following unaudited pro forma consolidated balance sheet and statement of
operations present the pro forma consolidated financial position and operations
of Equitex, Inc. at December 31, 1998 and for the year then ended. Because the
Company withdrew its election to be a BDC on January 4, 1999, this unaudited pro
forma information reflects the December 31, 1998 financial information as if the
Company were an operating company rather than a BDC for all of 1998. As a result
of being an operating company, the 1998 pro forma unaudited financial
information is presented on a consolidated basis and includes the accounts of
Equitex, Inc., its wholly-owned subsidiary First TeleServices Corporation, which
was acquired in August 1998, and two majority-owned subsidiaries, VP Sports,
Inc. and Triumph Sports, Inc., which were formed in December 1997 and January
1998, respectively. Pro forma adjustments were made for revaluing certain
investments from fair market value to cost, consolidating three entities versus
carrying them as investments at fair value, eliminating all inter- company
receivables, payables, income and expense, and recording gains and losses on
trading securities.
EQUITEX, INC.
Pro Forma Condensed Consolidated Balance Sheet
December 31, 1998 (Unaudited)
(As if Operating Company)
ASSETS
Current assets
Receivables ........................................... $ 71,090
Inventories ........................................... 119,698
Other current assets .................................. 5,530
Notes receivable ...................................... 101,948
Investments ........................................... 1,467,689
-----------
1,765,955
Net fixed assets ............................................. 153,876
Other assets:
Investment in First TeleBanc .......................... 725,000
Other investments ..................................... 195,000
Intangible assets ..................................... 975,746
Deposits and other .................................... 196,619
-----------
$ 4,012,196
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable ......................................... $ 411,575
Accounts payable and other accrued liabilities ........ 996,552
Accrued bonus to officer .............................. 676,168
-----------
2,084,295
Minority interest ............................................ 215,429
STOCKHOLDERS' EQUITY
Common stock .......................................... 108,353
Additional paid-in capital ............................ 7,368,624
Accumulated comprehensive other income ................ 2,732
Accumulated deficit ................................... (5,653,200)
Less: treasury stock at cost .......................... (114,037)
-----------
$ 4,012,196
===========
(Continued)
F-32
<PAGE>
EQUITEX, INC.
Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 1998
(Unaudited)
(As if Operating Company)
REVENUES
Sales, consulting and other fees ...................... $ 574,425
Interest and dividend income .......................... 7,052
Gain (loss) on trading securities ..................... 105,367
-----------
686,844
EXPENSES
Cost of goods sold .................................... 201,898
Advertising and promotion ............................. 54,088
Interest .............................................. 112,040
Bad debt expense ...................................... (34,435)
Depreciation and amortization ......................... 37,512
General and administrative ............................ 3,178,710
-----------
3,549,813
Net income (loss) before minority interest
and taxes .................................... (2,862,969)
Minority interest in net income (loss) ................ 34,571
Net income (loss) before income taxes ........... (2,828,398)
Provision for income taxes - deferred ................. (63,180)
-----------
Net income (loss) ............................... (2,891,578)
Other comprehensive income, net of tax
Unrealized holding gains (losses) on
securities arising during period ............. 2,732
Comprehensive income (loss) ........................... $(2,888,846)
Net income (loss) per common share - primary .......... $ (.65)
===========
Net income (loss) per common share -
fully diluted ................................... $ (.65)
===========
Weighted average number of common shares .............. 4,416,988
===========
F-33
<PAGE>
EQUITEX, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
BALANCE CHARGED BALANCE
BEGINNING CHARGED TO OTHER AT END
OF TO COSTS/ ACCOUNTS- DEDUC- OF
PERIOD EXPENSES DESCRIBE TIONS PERIOD
<S> <C> <C> <C> <C> <C>
For the year ended
Dec. 31, 1998:
Allowance for un-
collectible accounts
Notes receivable ............ $ 40,293 $ -- $ $(40,193) $ 100
Interest receivable ......... 35 1,795 -- 1,830
Accounts receivable ......... 53,742 3,936 -- 57,705
For the year ended
Dec. 31, 1997:
Allowance for un-
collectible accounts
Notes receivable ............ $ 100 $ 40,193 $ $ -- $ 40,293
Interest receivable ......... 35 -- -- 35
Accounts receivable ......... 2,943 50,799 -- 53,742
</TABLE>
The accompanying notes are a part of this schedule.
S-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Registrant's Annual Report on Form
10-KSB/A for the year ended December 31, 1998, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 32,490
<SECURITIES> 4,226,541
<RECEIVABLES> 1,750,235
<ALLOWANCES> 209,635
<INVENTORY> 0
<CURRENT-ASSETS> 1,456,314
<PP&E> 156,144
<DEPRECIATION> 129,924
<TOTAL-ASSETS> 5,859,075
<CURRENT-LIABILITIES> 1,770,846
<BONDS> 0
0
0
<COMMON> 108,353
<OTHER-SE> 5,750,722
<TOTAL-LIABILITY-AND-EQUITY> 5,859,075
<SALES> 1,712,802
<TOTAL-REVENUES> 447,840
<CGS> 604,462
<TOTAL-COSTS> 2,317,243
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 101,002
<INCOME-PRETAX> (862,065)
<INCOME-TAX> 63,180
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (925,245)
<EPS-BASIC> (.45)
<EPS-DILUTED> (.45)
</TABLE>
