UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to_________
Commission File No. 0-12374
EQUITEX, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 84-0905189
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7315 East Peakview Avenue
Englewood, Colorado 80111
---------------------------------------------------
(Address of principal executive offices) (Zip code)
(303) 796-8940
---------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Number of shares of common stock outstanding at May 15, 2000: 7,106,943
<PAGE>
EQUITEX, INC.
PART I FINANCIAL INFORMATION Page
----
Item 1. Financial statements:
Independent Accountants Report on condensed
consolidated financial statements 3
Condensed consolidated balance sheets - March
31, 2000 and December 31, 1999 4
Condensed consolidated statements of operations-
three months ended March 31, 2000 and 1999 5
Condensed consolidated statement of changes in
stockholders' equity - three months ended March
31, 2000 6-7
Condensed consolidated statements of cash
flows - three months ended March 31, 2000, and 1999 8-9
Notes to condensed consolidated financial statements 10-14
Item 2. Management's discussion and analysis of financial 15-17
condition and results of operations
Item 3. Quantitative and qualitative disclosures of market risk 17
PART II OTHER INFORMATION
Item 1. Legal proceedings 18
Item 2. Changes in securities and use of proceeds 18
Item 3. Defaults upon senior securities 18
Item 4. Submission of matters to a vote of security holders 18
Item 5. Other information 18
Item 6. Exhibits and reports on Form 8-k 18
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Equitex, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Equitex, Inc. and subsidiaries as of March 31, 2000, and the related condensed
consolidated statements of operations, stockholders' equity, and cash flows for
the three-month period then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet as of December 31, 1999, and the related statements
of operations, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated April 10, 2000, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1999, is fairly stated, in all material respects, in relation
to the balance sheet from which it has been derived.
GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
May 18, 2000
3
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2000 1999
----------- -----------
(Unaudited)
Cash and cash equivalents ...................... $ 721,832 $ 783,606
Mortgage loans held for sale, net .............. 6,688,344 14,787,080
Receivables, net:
Related parties ........................... 1,012,017 958,810
Other ..................................... 1,055,964 504,571
Inventories .................................... 109,622 167,346
Investments:
Equity investments ........................ 1,774,404 1,707,898
Other investments ......................... 1,801,570 1,767,537
Furniture, fixtures and equipment, net ......... 952,382 1,058,032
Intangible and other assets, net ............... 19,627,902 20,010,057
----------- -----------
$33,744,037 $41,744,937
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse loans ........................... $10,596,137 $18,582,351
Accounts payable .......................... 1,763,405 1,584,926
Accrued liabilities:
Related parties ......................... 561,311 454,235
Others .................................. 2,196,408 2,773,989
Notes and advances payable:
Related parties ......................... 1,209,550 832,000
Others .................................. 1,883,055 1,941,954
----------- -----------
Total liabilities .............................. 18,209,866 26,169,455
----------- -----------
Minority interest .............................. 7,995,070 6,473,070
----------- -----------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock; par value $1,000;
4,500 shares authorized:
Series D, 6%, 1,200 shares issued and
outstanding; liquidation preference
$1,602,700 1,200,000 1,200,000
Series E, 250 shares issued and outstanding 250,000 250,000
Common stock, par value $.02; 7,500,000
shares authorized; 7,140,293 shares issued;
7,106,943 shares outstanding ........... 142,806 142,806
Additional paid-in capital ................ 19,166,127 18,820,223
Accumulated deficit ....................... (13,105,795) (11,196,580)
Less treasury stock at cost (33,350 shares) (114,037) (114,037)
----------- -----------
Total stockholders' equity ..................... 7,539,101 9,102,412
----------- -----------
$33,744,037 $41,744,937
=========== ===========
See notes to condensed consolidated financial statements.
4
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
2000 1999
----------- -----------
Revenues:
Product sales ............................. $ 115,564 $ 222,348
Loan production and processing revenues ... 196,475
Secondary marketing revenues, net ......... 860,575
Interest and dividend income .............. 229,315 12,050
Other ..................................... 55,364 32,647
----------- -----------
1,457,293 267,045
----------- -----------
Expenses:
Cost of product sales ..................... 72,633 131,086
Loan production and processing ............ 593,374
Selling, general and administrative ...... 2,641,878 901,957
----------- -----------
3,307,885 1,033,043
----------- -----------
Loss from operations ........................... (1,850,592) (765,998)
----------- -----------
Other income (expenses):
Investment gains, net ..................... 154,125 299,653
Equity in earnings of affiliates .......... 66,506
Interest expense:
Related parties ......................... (40,058)
Other ................................... (315,796) (20,786)
Other income .............................. 76,600
----------- -----------
(58,623) 278,867
----------- -----------
Loss before minority interest .................. (1,909,215) (487,131)
Minority interest .............................. 11,787
----------- -----------
Net loss ....................................... (1,909,215) (475,344)
Other comprehensive income,
unrealized holding gains on investments ... 35,851
----------- -----------
Comprehensive loss ............................. $(1,909,215) $ (439,493)
=========== ===========
Net loss ....................................... $(1,909,215) $ (475,344)
Amortization of discount on preferred stock .... (1,333,098)
Deemed preferred stock dividends ............... (17,700) (23,600)
----------- -----------
Net loss applicable to common shareholders ..... $(1,926,915) $(1,832,042)
=========== ===========
Basic and diluted net loss per common share .... $ (.27) $ (.33)
=========== ===========
Weighted average number of common
shares outstanding ........................... 7,140,293 5,612,291
=========== ===========
See notes to condensed consolidated financial statements.
5
<PAGE>
EQUITEX, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
Convertible preferred stock Common stock
----------------------- ----------------------
Shares Amount Shares Amount
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Balances, January 1, 2000 ... 1,450 $1,450,000 7,140,293 $ 142,806
Subsidiary equity transaction
Net loss
---------- ---------- ---------- ----------
Balances, March 31, 2000 .... 1,450 $1,450,000 7,140,293 $ 142,806
========== ========== ========== ==========
</TABLE>
(Continued)
6
<PAGE>
EQUITEX, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
Additional
Treasury paid-in Accumulated
stock capital Deficit Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balances, January 1, 2000 ... $ (114,037) $ 18,820,223 $(11,196,580) $ 9,102,412
Subsidiary equity transaction 345,904 345,904
Net loss .................... (1,909,215) (1,909,215)
------------ ------------ ------------ ------------
Balances, March 31, 2000 .... $ (114,037) $ 19,166,127 $(13,105,795) $ 7,539,101
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
7
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Cash flows used in operating activities:
Net loss .................................................... $(1,909,215) $ (475,344)
----------- -----------
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization .......................... 544,458 17,644
Gain on sale of subsidiary assets ...................... (76,620)
Warrants issued for services ........................... 150,000
Provision for bad debts ................................ 12,867
Investment gain, net ................................... (154,125)
Equity in earnings of affiliates ....................... (66,506)
Minority interest ...................................... (11,787)
Changes in assets and liabilities:
Decrease in investments in trading securities .......... 193,198 87,839
Increase in investments in available-for-sale securities (35,851)
Increase in equity investments ......................... (250,000)
Increase in receivables ................................ (39,496) (520,129)
Decrease in mortgage loans held for sale ............... 8,085,869
Increase in inventories ................................ (10,338) (22,974)
Increase in other assets ............................... (164,138) (13,694)
Increase in bank overdrafts ............................ (12,666)
Decrease in accounts payable and accrued liabilities ... (292,026) (282,256)
----------- -----------
Total adjustments ...................................... 8,033,143 (893,874)
----------- -----------
Net cash provided by (used in) operating activities ......... 6,123,928 (1,369,218)
----------- -----------
Cash flows from investing activities:
Purchase of other investments .......................... (12,471) (175,000)
Sales of other investments ............................. 7,431
Purchases of furniture, fixtures and equipment ......... (8,658) (1,662)
Repayment of loans and notes receivable ................ 3,484
Issuance of loans and notes receivable ................. (300,526)
Increase in intangible and other assets ................ (115,119)
----------- -----------
Net cash used in investing activities ....................... (310,740) (291,781)
----------- -----------
Cash flows from financing activities:
Common stock issued for cash ........................... 1,214,650
Preferred stock issued for cash ........................ 1,950,000
Issuance of notes payable .............................. 447,721 18,199
Repayment of notes payable ............................. (129,070) (1,431)
Warehouse loans ........................................ (7,986,214)
Proceeds from subsidiary stock transactions ............ 1,792,601
----------- -----------
Net cash (used in) provided by financing activities ......... (5,874,962) 3,181,418
----------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
8
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Change in cash and cash equivalents ......................... (61,774) 1,520,419
Cash and cash equivalents, beginning ........................ 783,606 --
----------- -----------
Cash and cash equivalents, ending ........................... $ 721,832 $ 1,520,419
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest: ................................ $ 335,879 $ 21,829
=========== ===========
Supplemental disclosure of non-cash
investing and financing activities:
Sale of subsidiary assets:
Equipment ............................................ $ 38,500
Intangible assets .................................... 84,880
Inventory ............................................ 68,062
Note receivable issued in exchange ................... (268,062)
-----------
Gain on sale of subsidiary assets .................... $ (76,620)
===========
Common stock issued in satisfaction of
note payable ......................................... $ 150,000
===========
Amortization of discount on preferred stock ............ $ 1,333,098
===========
</TABLE>
See notes to condensed consolidated financial statements.
9
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
1. Basis of presentation:
The condensed consolidated financial statements of Equitex, Inc. (the
"Company") for the three-month periods ended March 31, 2000 and 1999,
have been prepared by the Company without audit by the Company's
independent auditors. In the opinion of the Company's management, all
adjustments necessary to present fairly the financial position, results
of operations, and cash flows of the Company as of March 31, 2000, and
for the periods then ended have been made. Those adjustments consist only
of normal and recurring adjustments. The condensed consolidated balance
sheet as of December 31, 1999, has been derived from the audited
consolidated balance sheet of the Company as of that date.
Certain information and note disclosures normally included in the Company's
annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These
condensed consolidated financial statements should be read in conjunction
with a reading of the financial statements and notes thereto included in
the Company's Form 10-K annual report for 1999, filed with the Securities
and Exchange Commission. The results of operations for the three months
ended March 31, 2000 and 1999, are not necessarily indicative of the
results to be expected for the full year.
The consolidated financial statements as of March 31, 2000 include the
accounts of Equitex, Inc., and the following significant subsidiaries:
nMortgage, Inc. ("nMortgage") and its wholly- owned subsidiary First
Bankers Mortgage Services, Inc. ("FBMS"), First Teleservices Corporation
("FTC"), and Triumph Sports Group, Inc. ("Triumph"). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Minority interest at March 31, 2000, represents preferred stock of FBMS and
nMortgage. During the three months ended March 31, 2000, nMortgage issued
1,522,000 shares of Series A preferred stock for $1,522,000. As a result,
minority interest increased from $6,473,070 at December 31, 1999 to
$7,995,070 at March 31, 2000. During the three months ended March 31,
2000, net losses incurred by the Company's majority owned subsidiaries
exceeded the minority interest in the common equity (deficiency) of the
subsidiaries. As a result, the excess of losses applicable to the
minority interest have been charged against the Company and no minority
interest is reflected in the Company's 2000 statement of operations.
2. Commitments and contingencies:
Litigation:
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse impact
either individually or in the aggregate on consolidated results of
operations, financial position or cash flows of the Company.
10
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
2. Commitments and contingencies (continued):
Minimum regulatory capital requirements:
FBMS is subject to various regulatory capital requirements administered by
the various state banking agencies in certain states in which the Company
is licensed to do business. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material
effect on the Company's consolidated results of operations, financial
position and/or cash flows. At March 31, 2000, FBMS is not in compliance
with all regulatory requirements in certain states.
3. Stockholders' equity:
Series A, B, and C convertible preferred stock:
In January and February 1999, the Company issued a total of 2,100 shares of
6%, Series A, B, and C convertible preferred stock for $1,000 cash per
share, which is the stated value per share. Each series of stock was
convertible into common stock at any time by the holders at a conversion
price equal to 65% of the average closing bid price of the Company's
common stock as specified in the agreement.
Because this preferred stock contained an immediate beneficial conversion
feature, both additional paid-in capital and the accumulated deficit were
increased by $1,333,098 during the first quarter of 1999, the amount of
the discount due to this beneficial conversion feature. The holders were
entitled to receive a cumulative annual dividend of $60 per share,
payable quarterly, and had preference to any other dividends which might
have been paid by the Company. The dividend was payable either in cash or
in shares of the Company's common stock, at the Company's option. The
preferred stockholders also received warrants to purchase a total of
250,000 shares of the Company's common stock at 120% of the market price
as of the grant date. In addition, the placement agent was issued 20,000
shares of the Company's common stock, valued at $200,000 in exchange for
services in connection with the preferred stock sales.
In April 1999, all 2,100 shares of Series A, B and C convertible preferred
stock, plus accumulated dividends on those shares, were converted into
320,528 shares of common stock, at an average conversion price of $6.63
per share.
Series D convertible preferred stock:
In May 1999, the Company reached an agreement with an accredited investor
to sell 3,500 shares of Series D, 6% convertible preferred stock (the
"Series D Preferred Stock") for $1,000 cash per share, which is the
stated value per share. In August 1999, the Company issued a total of
1,200 shares of the Series D Preferred Stock in consideration for
$1,200,000. The balance of $2,300,000 for the remaining 2,300 shares of
Series D Preferred Stock is being held in escrow pending authorization by
the Company's stockholders of a sufficient number of shares of the
Company's common stock to cover those shares underlying the Series D
Preferred Stock.
11
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
3. Stockholders' equity (continued):
Series D convertible preferred stock (continued):
The holder of each share of Series D Preferred Stock is entitled to a 6%
cumulative annual dividend, payable quarterly. The dividend is payable
either in cash or in shares of the Company's common stock, at the
discretion of the Company. The Series D Preferred Stock contains a
liquidation preference equal to the sum of the stated value of each share
plus an amount equal to 100% of the stated value plus the aggregate of
all accrued and unpaid dividends on each share of Series D Preferred
Stock until the most recent dividend payment date or date of liquidation,
dissolution or winding up of the Company.
The Series D Preferred Stock is convertible into common stock at any time,
at a conversion price per share of common stock equal to 65% of the
average closing bid price of the Company's common stock as specified in
the agreement. Because this preferred stock contained an immediate
beneficial conversion feature, both additional paid-in capital and the
accumulated deficit were increased by $1,884,615 during the third quarter
of 1999, the amount of the discount due to this beneficial conversion
feature.
Series E convertible preferred stock:
The holders of the Series E Preferred Stock are not entitled to dividends,
do not have a liquidation preference and do not have voting rights. The
Series E Preferred stock, if fully issued, automatically converts to
1,000,000 shares of common stock upon the approval of an increase in the
authorized shares of common stock from 7,500,000 shares to 50,000,000
shares, or the subsequent merger of the Company with or into another
company, or the sale of substantially all the Company's assets.
4. Subsidiary transactions:
Effective January 1, 2000, Triumph sold the assets of one of its four
retail stores in exchange for a $268,000 note receivable. In connection
with this transaction, Triumph recorded a gain on the sale of
approximately $76,600, which is presented as other income in the
accompanying statement of operations.
During the three months ended March 31, 2000, an officer/shareholder of the
Company sold marketable securities to Triumph at his cost of $10,000.
Triumph subsequently sold a portion of these marketable securities for
approximately $278,000. The market value of the remaining securies held
by the Company at March 31, 2000 was approximately $77,000. The
difference between the cost and market value of these securities of
$345,904 was recorded as an increase in additional paid-in capital during
the quarter ended March 31, 2000.
12
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
5. Proposed business transactions:
Proposed sale of nMortgage, Inc.:
On December 31, 1999, the Company entered into an Agreement and Plan of
Merger, whereby all of the outstanding common stock of nMortgage is to be
acquired by Innovative Gaming Corporation of America ("IGCA"), an SEC
reporting company whose common stock trades on the Nasdaq SmallCap
Market. Under the terms of this proposed transaction, in exchange for all
outstanding shares of nMortgage, Inc., the Company and the other
nMortgage shareholders are to receive, approximately 46,000,000 shares of
IGCA common stock, assuming that there will be approximately 16,000,000
shares of IGCA common stock outstanding on a fully-diluted basis, before
the transaction.
IGCA was formed in 1991 to develop, manufacture, market and distribute
specialty video gaming machines. As a condition of the proposed
transaction, IGCA is to dispose of its gaming assets, resulting in
nMortgage as the sole business operation of IGCA.
There are a number of material conditions that must be satisfied prior to
the completion of this transaction, including any required approval by
the Company's shareholders, the disposal of IGCA's gaming assets, and
approval from all governmental bodies or agencies and regulatory
authorities. There is no assurance that the conditions summarized above
will be satisfied, or that the transaction will occur consistent with the
terms outlined above.
Proposed transactions with First TeleBanc Corp.:
On May 4, 1999, the Company entered into a definitive agreement whereby
First TeleBanc Corp. ("First TeleBanc"), a single bank holding company
based in Boca Raton, Florida, is to merge with the Company, with the
Company being the surviving corporation (the "TeleBanc Merger"). First
TeleBanc owns all of the issued and outstanding stock of 1st National
Bank, a national banking association. Consummation of the TeleBanc Merger
is subject to a number of conditions, including approval by the Federal
Reserve Bank of Atlanta, Georgia, the distribution of certain of the
Company's assets to a new wholly-owned subsidiary and the "spin-off" of
that subsidiary, and the approval of the TeleBanc Merger by the Company's
shareholders.
13
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
6. Operating segments:
Asof and during the three month periods ended March 31, 2000, and 1999,
the segment results were as follows:
<TABLE>
<CAPTION>
2000:
----
Sporting goods/ Corporate activities
Financial product ---------------------------
services related Investments Other Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 1,305,945 $ 115,564 $ 35,420 $ 364 $ 1,457,293
Segment gain (loss) (1,708,014) (16,089) 256,051 (441,163) (1,909,215)
Total assets 27,759,189 1,588,167 2,938,102 1,458,579 33,744,037
1999:
----
Sporting goods/ Corporate activities
Financial product ---------------------------
services related Investments Other Total
------------ ------------ ------------ ------------ ------------
Revenues $ $ 222,348 $ 44,697 $ $ 267,045
Segment gain (loss) (89,126) (46,486) (339,732) (475,344)
</TABLE>
14
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD LOOKING STATEMENTS
THIS REPORT MAY CONTAIN CERTAIN "FORWARD-LOOKING" STATEMENTS AS SUCH TERM IS
DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 OR BY THE
SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND RELEASES, WHICH
REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED TO,
STATEMENTS CONCERNING THE COMPANY'S OPERATIONS, ECONOMIC PERFORMANCE, FINANCIAL
CONDITION, GROWTH AND ACQUISITION STRATEGIES, INVESTMENTS, AND FUTURE
OPERATIONAL PLANS. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE
NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS
"MAY", "WILL", "EXPECT", "BELIEVE", "ANTICIPATE", "INTENT", "COULD", "ESTIMATE",
"MIGHT", OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE
TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN
OF WHICH ARE BEYOND THE COMPANY'S CONTROL, AND ACTUAL RESULTS MAY DIFFER
MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT FACTORS, INCLUDING UNCERTAINTY
RELATED TO THE COMPANY'S OPERATIONS, MERGERS OR ACQUISITIONS, GOVERNMENTAL
REGULATION, THE VALUE OF THE COMPANY'S ASSETS AND ANY OTHER FACTORS DISCUSSED IN
THIS AND OTHER COMPANY FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
(a) Liquidity.
(b) Capital Resources.
During 1999, as the Registrant restructured its business from an investment
company to an operating company, the Registrant relied primarily on private
placements of equity securities to fund its operations and acquisitions as it
sought to become a fully operating entity. Also during 1999, the Registrant
divested certain of its portfolio securities providing additional liquidity and
may continue to do so in 2000. Presently, all of the Registrant's subsidiaries
operate on a stand-alone basis and each is individually responsible for its own
liquidity. However, the Registrant may need to assist its subsidiaries from
time-to-time should unforeseen liquidity issues arise. Should additional
liquidity be necessary to fund the operations of its subsidiaries or to complete
any merger or acquisition, the Registrant believes it has sources available,
including the sales of certain investments or the private placement of equity
securities, to cover any such needs.
Following the acquisition of FBMS through nMortgage in August 1999, the
Registrant began incorporating major opeartional changes at nMortgage. The
purpose of these changes is to significantly reduce nMortgage's operating
overhead as it transitions from a traditional brick and mortar mortgage banker
to a technology driven mortgage banker, broker and Internet solution provider to
the mortgage industry. nMortgage is also seeking to mitigate the risk associated
with the warehouse funding and subsequent sale of its mortgage portfolios by
employing the "table funding" method described below for closing its retail
mortgage loans. This restructuring continued during the first quarter of 2000.
Additional capital expenditures have been incurred as nMortgage further develops
its information technology in connection with its Internet- based product
offerings.
Beginning in the second quarter of 2000, as nMortgage completes the first phase
of the planned changes, it will initially rely primarily on origination and
other loan related fees from lenders to whom it brokers mortgage loans. As
nMortgage rolls out its business to business Internet solutions during the
second and third quarters of 2000, additional fees will be recognized from
fee-based programs for private labeling third party website solutions. This
should generate additional loan-related as well as service-related fees.
Triumph and VP Sports both rely primarily on cash flows from operations for
their working capital. In addition, during 1999 and 2000, Triumph received a
cash infusion from the sale of an investment purchased from an officer of
Triumph considerably below market value. This capital infusion provided
additional cash of approximately $270,000 to operate its business and was
considered a contribution of capital. The Registrant anticipates Triumph's
liquidity and capital resources will be sufficient to fund its operations during
the year 2000.
15
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
(c) Results of operations.
The Registrant fundamentally changed its operations during 1999 most notably
with the acquisition of FBMS in August 1999. As a result, comparison of the
results of operations for 1999 as compared to 2000 would not provide for a
meaningful analysis. The discussion and analysis of the Registrant's results of
operations have been analyzed with a view toward the Registrant's current and
future business operations.
REVENUES: The Registrant's consolidated revenues for the quarter ended March 31,
2000 increased significantly when compared to March 31, 1999 as a result of the
addition of nMortgage. Of the total consolidated revenues, approximately $1.2
million is attributable to nMortgage.
As discussed above, nMortgage is continuing to implement changes in its
operations. During the quarter ended March 31, 2000, nMortgage was a company in
transition. While continuing to offer retail mortgages through both traditional
as well as Internet oriented channels, nMortgage began to transition from its
practice of warehouse funding to table funding a majority of its mortgage loans.
During the second quarter of 2000, nMortgage is expected to complete this
transition and be table funding nearly 100% of its loans. This change results in
the need for significantly fewer employees as the responsibilities for
underwriting, post closing, closing, auditing and disbursing loans are
transferred from nMortgage to the investors underwriting and funding the
originations. Therefore, nMortgage is consolidating its operations and as a
result continues to decrease its operating overhead. Two significant offices
were closed resulting in certain write-offs and severance costs during the first
quarter and continuing into the second quarter. As a result of these operational
changes, nMortgage experienced an overall decrease in loan originations during
the period as it trimmed its work force in anticipation of its Internet product
roll-out. In addition, nMortgage saw a decrease in mortgage originations due to
increasing interest rates. Financing of new home purchases decreased slightly
while refinancings decreased significantly as interest rates reached levels at
which most consumers chose not to refinance.
As nMortgage completes its "restructuring" program and fully integrates the
table funding concept for its mortgage originations, a majority of nMortgage's
revenues for the remainder of the year should be derived from origination fees.
Once a mortgage originated by nMortgage is closed and funded by the lender,
nMortgage will be paid its fee directly from that lender. nMortgage is
continuing its restructuring program and anticipates it will not be fully
completed until the third quarter of 2000. nMortgage debuted its second
generation business to consumer website as well as its first business to
business site during the beginning of the second quarter. As nMortgage's
Internet business to consumer and business to business technologies are
introduced, nMortgage anticipates an increase in loan originations during the
latter portion of 2000, compared to the first half of 2000.
Triumph, the second largest contributor to the Registrant's revenues, derived
those revenues from product sales at its three retail locations. Total sales
were down as compared to the prior year as a result of the divestiture of one of
its retail locations. This sale did result in a gain of approximately $76,600,
which is presented as other income.
The Registrant's revenues for the quarter on a stand-alone basis consisted
solely of interest income related to certain long-term and short-term loans to
non-affiliated entities. As a holding company, the Registrant has no significant
sources of revenue other than those of its operating subsidiaries. The
Registrant partially offset its operating overhead during 1999 from the sales of
certain investments which is considered other income not revenue. For the year
2000, the Registrant may continue to divest certain of its investments to cover
its operating overhead as it continues to work toward completion of its merger
with First TeleBanc Corp.
16
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
EXPENSES: Of the Registrant's total expenses on a consolidated basis for the
quarter ended March 31, 2000, approximately $2,600,000 are attributable to
nMortgage, $450,000 to Equitex, $62,000 to First Teleservices and $182,000 to
Triumph. This is an increase of approximately 220% when compared to the previous
year as a result of the addition of nMortgage.
A majority of the total expenses are selling, general and administrative
expenses with nMortgage accounting for approximately $2,000,000 of the total
$2,641,878. As stated above, nMortgage continues to decrease its operating
overhead mainly through employee layoffs and office closures the benefits of
which may not be fully realized until the third quarter of 2000. Of the
approximately $2,000,000 of expenses for nMortgage, approximately $463,000 is
the amortization of goodwill. The remaining portion of expenses attributable to
Equitex, Triumph and First TeleServices did not change significantly when
compared to the previous year's quarter.
OTHER INCOME (EXPENSES): Other income (expense) includes net investment gain of
$154,125 a majority of which is the unrealized gain on certain of the
Registrant's investments, equity in gains of affiliates of $66,506, interest
expense of $352,732 and other income of $73,478 from Triumph's sale of assets.
Of the total interest expense, approximately $317,000 is attributable to
nMortgage. This expense is related to nMortgage's warehouse lines of credit
which totaled approximately $10,600,000 at March 31, 2000 down from
approximately $18,600,000 at December 31, 1999. As a result of nMortgage's
transition from warehouse funding to table funding its loans, it is anticipated
the warehouse lines of credit will be paid down during the second quarter of
2000 to below $1,000,000. This will significantly decrease interest costs to
nMortgage for the second quarter and beyond.
Equity in gains of affiliates corresponds to the Registrant's 35.7% ownership
interest in VP Sports which is accounted for on an equity basis. VP Sports'
business is seasonal and traditionally, the first and second calendar quarters
are the peak sales periods for VP with the latter portion of the year being the
slowest.
NET LOSS: Of the net loss for the quarter ended March 31, 2000, approximately
$1,702,000 is attributable to nMortgage, approximately $185,000 to Equitex,
approximately $6,000 to First TeleServices and approximately $16,000 to Triumph.
This compares to a net loss of $439,493 for the quarter ended March 31, 1999
which did not include the operations of nMortgage.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS: Net loss applicable to common
stockholders was $1,926,915 for the quarter ended March 31, 2000 This amount
includes deemed preferred stock dividends on the outstanding Series D preferred
stock of the Registrant of $17,700 for the quarter.
ITEM THREE
QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
Not applicable
17
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports of Form 8-K
(a) Financial data schedule for SEC registrants
(b) None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EQUITEX, INC.
(Registrant)
Dated: May 22, 2000 By: /s/ Henry Fong
---------------------
Henry Fong
President, Treasurer and Chief
Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 721,832
<SECURITIES> 1,801,570
<RECEIVABLES> 2,067,981
<ALLOWANCES> 40,263
<INVENTORY> 109,622
<CURRENT-ASSETS> 0
<PP&E> 952,382
<DEPRECIATION> 1,190,724
<TOTAL-ASSETS> 33,744,037
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
1,450,000
<COMMON> 142,806
<OTHER-SE> 5,946,295
<TOTAL-LIABILITY-AND-EQUITY> 33,744,037
<SALES> 115,564
<TOTAL-REVENUES> 1,457,293
<CGS> 72,633
<TOTAL-COSTS> 3,307,885
<OTHER-EXPENSES> (299,231)
<LOSS-PROVISION> 12,867
<INTEREST-EXPENSE> 355,854
<INCOME-PRETAX> (1,909,215)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,909,215)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,909,215)
<EPS-BASIC> (.27)
<EPS-DILUTED> (.27)
</TABLE>
