SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. __)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Sectioin 240.14a-12
Equitex, Inc.
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(Name of Registrant as Specified in its Charter)
John Kellogg, Esq.
RaLea Sluga, Esq.
Friedlob Sanderson Paulson & Tourtillott, LLC
1400 Glenarm Place
Denver, Colorado 80111
(303) 571-1400
(303) 595-3970
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(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11
(1) Title of each class of securities to which transaction applies:
Common Stock, $.02 Par Value
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(2) Aggregate number of securities to which transaction applies:
7,140,000
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(3) Per unit price or other underlying value of transaction computed
pursuat to Exchange Act Rule 0-11: n/a
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(4) Proposed Maximum aggregate value of transaction: $50,721,007
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(5) Total Fee Paid: $10,144.20
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[ ] Fee previously paid with preliminary materials
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by regitration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:__________________________________
(2) Form, Schedule or Registration Statement No.:____________
(3) Filing Party:____________________________________________
(4) Date Filed:______________________________________________
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Equitex, Inc.
7315 East Peakview Avenue
Englewood, Colorado 80111
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Notice of Special Meeting of Stockholders
To Be Held on __________ __, 2000
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________ __, 2000
To the Stockholders of Equitex, Inc.
A Special Meeting of Stockholders of Equitex, Inc., a Delaware corporation
(the "Company"), will be held at 2401 PGA Blvd., Suite 190, Palm Beach Gardens,
Florida 33410, on __________ __, 2000 at ___ a.m. Eastern Standard Time, to
consider and take action on:
1. A proposal to amend Paragraph 4 of the Certificate of Incorporation to
increase the number of authorized shares of the Company's common stock, $.02 par
value, from 7,500,000 shares to 50,000,000 shares. (Passage of this proposal
requires the affirmative vote of a majority of the outstanding stock of each
class entitled to vote thereon as a class.)
2. A proposal to provide for the following actions:
o the distribution by the Company of all of its assets, net of all
liabilities assumed, to Equitex 2000, Inc., a wholly-owned and
Delaware-chartered subsidiary of the Company ("E2000") (the
"Distribution"); and
o the distribution by the Company of all of the outstanding shares
of common stock of E2000 to shareholders of the Company on the
basis of one share of common stock of E2000 for each share of
common stock of the Company, as further described in the attached
Proxy Statement (the "Spin-Off").
(Passage of this proposal requires the affirmative vote of a majority
of the outstanding stock of each class entitled to vote thereon as a
class.)
3. A proposal to acquire all of the outstanding capital stock of Nova
Financial Systems, Inc. and Key Financial Systems, Inc. in exchange for the
greater of 7,140,000 shares, or 50% of the outstanding common stock of the
Company on a post acquisition basis and cash consideration of $5 million (the
"Acquisitions"). This proposal is subject to the approval of proposal Number One
(Passage of this proposal requires the affirmative vote of a majority of the
total votes cast on the proposal in person or by proxy.)
4. Such other business as may properly come before the meeting, or any
adjournment or adjournments thereof.
The discussion of the proposals by the Board of Directors set forth above
is intended only as a summary, and is qualified in its entirety by the
information relating to the proposals set forth in the accompanying Proxy
Statement.
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Only holders of record of Common Stock at the close of business on ________
___,2000 will be entitled to notice of and to vote at this Special Meeting, or
any postponements or adjournments thereof.
By Order of the Board of Directors:
Thomas B. Olson
Secretary
YOU ARE URGED TO DATE, SIGN AND PROMPTLY RETURN YOUR PROXY SO THAT YOUR
SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES. THE GIVING OF SUCH PROXY
DOES NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IF YOU ATTEND THE MEETING.
Your vote is important
<PAGE>
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Proxy
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Equitex, Inc.
7315 East Peakview Avenue
Englewood, Colorado 80111
Special Meeting of Stockholders
To Be Held On __________ ___, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Equitex, Inc. (the "Company") hereby
constitutes and appoints Henry Fong as attorney and proxy, to appear, attend and
vote all of the shares of the common stock of Equitex, Inc. standing in the name
of the undersigned at a Special Meeting of Stockholders of Equitex, Inc. to be
held at 2401 PGA Blvd, Suite 190, Palm Beach Gardens, Florida 33410, on _____
__, 2000, at ___ a.m. Eastern Standard Time, and at any postponements or
adjournments thereof:
1. To consider and vote upon an amendment to Paragraph 4 of the Certificate
of Incorporation to increase the number of authorized shares of the Company's
common stock, $.02 par value, from 7,500,000 shares to 50,000,000 shares.
FOR ______ AGAINST ______ ABSTAIN ______
2. To consider and vote upon the distribution by the Company of all of its
assets, net of all liabilities assumed, to Equitex 2000, Inc., a wholly-owned
and Delaware-chartered subsidiary of the Company ("E2000"), and the distribution
by the Company of all of the outstanding shares of common stock to
shareholders of the Company on the basis of one share of common stock of E2000
for each share of common stock of the Company.
FOR ______ AGAINST ______ ABSTAIN ______
3. To consider and vote upon the acquisition all of the outstanding capital
stock of Nova Financial Systems, Inc. and Key Financial Systems, Inc. in
exchange for the greater of 7,140,000 shares, or 50% of the outstanding common
stock of the Company on a post acquisition basis and cash consideration of $5
million. This proposal is subject to the approval of proposal Number One.
FOR ______ AGAINST ______ ABSTAIN ______
4. To transact such other business as may properly come before the meeting.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS SPECIFIED HEREON WITH
RESPECT TO EACH PROPOSAL AND FOR ALL OF THE PROPOSALS IF NO SPECIFICATION IS
MADE. THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE DISCRETION OF THE PROXIES
ON ANY OTHER BUSINESS PROPERLY BROUGHT BEFORE THE SPECIAL MEETING.
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Please mark, date and sign your name exactly as it appears hereon and
return the Proxy in the enclosed envelope as promptly as possible. It is
important to return this Proxy properly signed in order to exercise your right
to vote if you do not attend the meeting and vote in person. When signing as
agent, partner, attorney, administrator, guardian, trustee or in any other
fiduciary or official capacity, please indicate your title. If stock is held
jointly, each joint owner must sign.
Date: ____________, 2000 ____________________________________
Signature(s)
Address if different from that on label:
____________________________________
Street Address
____________________________________
City, State and Zip Code
____________________________________
Number of shares
Please check if you intend to be present at the meeting: ___________
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TABLE OF CONTENTS
Forward Looking Statements ................................................ 1
Questions and Answers about the Proposals ................................. 1
Who Can Help Answer Your Questions ........................................ 2
Proxy Statement Summary ................................................... 3
The Special Meeting .................................................... 3
The Increase in Common Stock ........................................... 5
The Distribution and Spin-Off .......................................... 5
E2000 .................................................................. 7
The Acquisitions ....................................................... 8
Risk Factors .............................................................. 9
The Special Meeting ....................................................... 13
Available Information ..................................................... 16
Documents Incorporated by Reference ....................................... 16
Revocability of Proxy ..................................................... 17
Solicitation .............................................................. 17
Voting Securities ......................................................... 17
Dividend Policy .......................................................... 17
Price Range of Equitex Common Stock........................................ 18
Selected Financial Data.................................................... 19
Security Ownership of Principal Stockholders and Management................ 21
Liability and Indemnification of Directors and Officers................... 22
Proposal Number One: Increase in Common Stock............................. 23
Acquisition of Nova Financial Systems, Inc. and Key Financial
Systems, Inc. ......................................................... 23
Acquisition of the Meridian Residential Group, Inc. .................. 24
Acquisition of First Bankers Mortgage Services, Inc. and Recission .... 26
Sale of Series G Convertible Preferred Stock ........................... 26
Description of Preferred Stock ......................................... 27
Options and Warrants ................................................... 28
Proposal Number Two: The Distribution and Spin-Off ..................... 30
The Distribution and Spin-Off........................................... 30
E2000's Business After Distribution and Spin-Off........................ 32
Proposal Number Three: The Acquisition of Nova Financial Systems, Inc.
and Key Financial Systems, Inc. .......................................... 34
Business of Nova Financial Systems, Inc and Key Financial Systems, Inc.. 34
Key Management's Discussion and Analysis of Financial Condition
and Results of Operation .............................................. 37
Nova Management's Discussion and Analysis of Financial Condition
and Results of Operation .............................................. 40
Equitex, Inc. and E2000 Pro Forma Financial Information ................ 42
Financial Information ..................................................... 55
Other Matters ............................................................. 55
Exhibit 1-- Revised Paragraph 4 of Certificate of Incorporation ...........
Exhibit 2 - Financial Statements of Nova Financial Systems, Inc. ..........
Exhibit 3 - Financial Statements of Key Financial Systems, Inc. ...........
Exhibit 4 - Financial Statements of The Meridian Residential Group, Inc. ..
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FORWARD-LOOKING STATEMENTS
THIS PROXY STATEMENT 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," "INTEND,"
"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 ACQUISITIONS, GOVERNMENTAL REGULATION, MANAGING
AND MAINTAINING GROWTH, VOLATILITY OF STOCK PRICES AND ANY OTHER FACTORS
DISCUSSED IN THIS AND OTHER COMPANY FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION (THE "COMMISSION").
QUESTIONS AND ANSWERS ABOUT THE PROPOSALS
Q1: WHAT DO I NEED TO DO NOW?
A1: You should vote your shares by mailing your signed proxy card in the
enclosed return envelope as soon as possible so that your shares will
be represented at the special meeting. If you do not vote your shares,
it will be the same as a vote against adoption of the proposal to
amend the Company's articles of incorporation.
Q2: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
VOTE MY SHARES FOR ME?
A2: Your broker will vote your shares only if you instruct your broker how
to vote. Your broker should mail information to you that will explain
how to give voting instructions to your broker. Please provide
instructions to your broker on how to vote your shares. If you do not
instruct your broker how to vote, your shares will not be voted. This
will be same as a vote against adoption of the proposal to amend the
Company's articles of incorporation.
Q3: WHAT IF I WANT TO CHANGE MY VOTE?
A3: You can change your vote at any time before your proxy is voted at the
special meeting. If you hold your shares directly, you can do this in
one of three ways:
o You can send a written notice to the Secretary of the Company
stating that you would like to revoke your proxy.
o You can complete and submit a new proxy card.
o You can attend the special meeting and request to vote in person.
Your attendance at the special meeting alone will not, however,
revoke your proxy.
If you have instructed a broker to vote your shares, you must follow
directions received from your broker to change those instructions.
Q4: WHAT ARE THE PRACTICAL EFFECTS OF THE DISTRIBUTION AND SPIN-OFF?
A4: After the Distribution, all of the Company's assets, net of all
liabilities assumed (listed under Proposal Two to this Proxy
Statement), will be owned by E2000. After the Spin-Off is completed,
the Company's shareholders will own shares of E2000 and, therefore, a
direct interest in the assets of Equitex. You will own the same number
of shares of E2000 that you own of the Company as of the close of
business on ______, 2000.
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Q5: WHY DO A DISTRIBUTION AND SPIN-OFF?
A5: The Company has been engaged, through its subsidiaries, in the active
conduct of two principal lines of business:
o Consumer financial service business; and
o Retail and commercial mortgage banking business.
The Distribution and Spin-Off are to separate the two principal lines
of business. The Company's believes that, after completing the
Distribution and Spin-Off, E2000 will have an enhanced ability to
focus more directly on the mortgage banking business and the Company
will be able to focus more directly on its consumer financial service
business.
The Spin-Off will give you a direct investment in the Company and
E2000. The Company believes that, following the Distribution and
Spin-Off, the financial markets will be able to focus on the
individual strengths of the Company and E2000 and more accurately
evaluate the performance of each distinct business compared to
companies in the same or similar businesses.
Q6: WILL SHARES TRADE ANY DIFFERENTLY AS A RESULT OF THE SPIN-OFF?
A6: YES. Because there is no public market for the new E2000 common stock,
its stock cannot be traded until the application for trading of its
common stock on the Nasdaq SmallCap Market is approved. If E2000's
application is not approved, its common stock may be traded on either
the electronic bulletin board or the National Quotation Bureau, Inc.'s
"Pink Sheets." The Company's common stock will continue to trade on a
regular basis on the Nasdaq Stock Market.
Q7: IS THE DISTRIBUTION AND SPIN-OFF TAXABLE FOR U.S. TAX PURPOSES?
A7: YES, but because the Company has no current and post-1913 accumulated
earnings and profits, the distribution will be applied against, and
reduce the adjusted basis of your stock in the Company. If the
distribution is greater than the adjusted basis of the stock, the
excess will be treated as gain from the sale or exchange of property.
Q8: SHOULD I SEND IN MY STOCK CERTIFICATES?
A8: No. After the Distribution, if you are a holder of record of the
Company's common stock as of the record date, you will receive a
separate stock certificate for your E2000 common stock.
WHO CAN HELP ANSWER YOUR QUESTIONS?
If you would like additional copies of this proxy statement or if you have
questions about the proposals to be acted on at the special meeting, you should
contact:
Equitex, Inc.
Thomas B. Olson, Secretary
7315 W. Peakview Avenue
Englewood, Colorado 80111
(303) 796-8940
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SUMMARY
This summary highlights selected information from this document, but does
not contain all the details about Equitex, Inc. (the "Company" or "Equitex") or
the proposals to be acted on at the special meeting, including information that
may be important to you. To better understand the proposals to be acted on at
the special meeting, you should carefully review this entire document, including
exhibits and documents incorporated by reference.
THE SPECIAL MEETING
DATE, TIME AND PLACE
The Company is providing this proxy statement in connection with its
solicitation of proxies from you for use at a Special Meeting of Stockholders of
the Company to be held at 2401 PGA Blvd., Suite 190, Palm Beach Gardens, Florida
33410 at _____ a.m. Eastern Standard Time on ________, 2000 and at any
adjournments of that meeting.
MATTERS FOR CONSIDERATION
At the special meeting, you will be asked to consider an vote upon
proposals providing for:
o An amendment of Paragraph 4 of the Certificate of Incorporation to
increase the number of authorized shares of the Company's common
stock, $.02 par value, from 7,500,000 shares to 50,000,000 shares;
o The distribution by the Company of all of its assets, net of all
liabilities assumed, to Equitex 2000, Inc., a wholly-owned and
Delaware-chartered subsidiary of the Company ("E2000") and the
distribution by the Company of all of its outstanding shares of common
stock of E2000 to shareholders of the Company on the basis of one
share of common stock of E2000 for each share of common stock of the
Company, as further described in this Proxy Statement; and
o The acquisition all of the outstanding capital stock of Nova Financial
Systems, Inc. and Key Financial Systems, Inc. in exchange for the
greater of 7,140,000 shares, or 50% of the outstanding common stock of
the Company on a post acquisition basis and cash consideration of $5
million. This proposal is subject to the approval of Proposal
Number One.
You may also be asked to act on other business that properly comes before
the special meeting.
SPECIAL MEETING RECORD DATE
Equitex' Board of Directors has fixed the close of business on ______, 2000
as the record date for the special meeting
VOTING AND QUORUM
Holders of record of Equitex common stock at the record date are entitled
to notice of, and to vote at, the special meeting. Each share of Equitex common
stock outstanding at the close of business on the record date is entitled to one
vote on each matter presented at the special meeting. The presence in person or
by proxy of shareholders holding a majority of the outstanding shares of Equitex
common stock on the record date will constitute a quorum for the transaction of
business at the special meeting.
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VOTE REQUIRED
o Approval of the adoption of the amendment of Paragraph 4 of the
Certificate of Incorporation to increase the number of authorized
shares of the Company's common stock, $.02 par value, from 7,500,000
shares to 50,000,000 shares will require the affirmative vote of a
majority of the outstanding stock of each class entitled to vote
thereon as a class;
o Approval of the distribution by the Company of all of its assets, net
of all liabilities assumed, to Equitex 2000, Inc., a wholly-owned and
Delaware-chartered subsidiary of the Company ("E2000") and the
distribution by the Company of all of the outstanding shares of common
stock of E2000 to shareholders of the Company on the basis of one
share of common stock of E2000 for each share of common stock of the
Company, as further described in this Proxy Statement will require the
affirmative vote of a majority of the outstanding stock of each class
entitled to vote thereon as a class; and
o Approval of the acquisition all of the outstanding capital stock of
Nova Financial Systems, Inc. and Key Financial Systems, Inc. in
exchange for the greater of 7,140,000 shares, or 50% of the
outstanding common stock of the Company on a post acquisition basis
and cash consideration of $5 million will require the affirmative vote
of a majority of the total votes cast on the proposal in person or by
proxy.
DISSENTERS' RIGHTS
If, under Delaware law, the Distribution and Spin-Off are the disposition
of substantially all of the Company's assets, shareholders who comply with the
requirements of Delaware General Corporation Law ss. 262 will be entitled to
dissent from the Distribution and Spin-Off proposal. The Company, however, does
not believe that, under Delaware law, the Distribution and Spin-Off would be a
disposition of substantially all of its assets. The Company therefore does not
believe that dissenters' rights would arise by reason of the Distribution and
Spin-Off. If, contrary to the Company's belief, rights of dissent are available,
shareholders who perfect dissenters' rights in accordance with Delaware General
Corporation Law ss. 262 will be entitled to the "fair value" of their Equitex
common stock, determined in accordance with the statutory procedure. If,
contrary to the Company's belief, dissenters' rights are available under
Delaware law, the Distribution and Spin-Off will not occur if holders of more
than 1% of Equitex' outstanding common stock exercise dissenters' rights.
If, under Delaware law, the acquisition all of the outstanding capital
stock of Nova Financial Systems, Inc. and Key Financial Systems, Inc. in
exchange for the greater of 7,140,000 shares, or 50% of the outstanding common
stock of the Company on a post acquisition basis and cash consideration of $5
million (the "Acquisitions"), is a disposition of substantially all of the
Company's assets, shareholders who comply with the requirements of Delaware
General Corporation Law ss. 262 will be entitled to dissent from the acquisition
proposal. The Company, however, does not believe that, under Delaware law, the
Acquisitions would be a disposition of substantially all of its assets. The
Company therefore does not believe that dissenters' rights would arise by reason
of the Acquisitions. If, contrary to the Company's belief, rights of dissent are
available, shareholders who perfect dissenters' rights in accordance with
Delaware General Corporation Law ss. 262 will be entitled to the "fair value" of
their Equitex common stock, determined in accordance with the statutory
procedure. If, contrary to the Company's belief, dissenters' rights are
available under Delaware law, the Acquisitions will not occur if holders of more
than 1% of Equitex' outstanding common stock exercise dissenters' rights.
BOARD RECOMMENDATIONS
The Company's Board unanimously recommends that shareholders vote "FOR"
each of the proposals.
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THE INCREASE IN COMMON STOCK
Equitex proposes to amend the Company's Certificate of Incorporation to
cause an increase in the number of authorized shares of the Company's common
stock, $.02 par value, from 7,500,000 shares to 50,000,000 shares.
RISK FACTORS
You should be aware that the increase in the number of authorized shares
involves certain risks, including those described under "Risk Factors," that
could adversely affect the value of your holdings.
BACKGROUND AND REASONS FOR THE INCREASE IN AUTHORIZED SHARES
The increase in authorized shares will allow the Company to issue shares of
the Company's common stock underlying the Company's convertible preferred stock
issuances, including preferred stock issued in connection with the following:
o preferred stock to be issued in the proposed Nova Financial Systems,
Inc. and Key Financial Systems, Inc. acquisitions;
o preferred stock to be issued in connection with the Meridian
Residential Group, Inc. acquisition; and
o preferred stock to be issued in connection with the First Bankers
Mortgage Services, Inc. acquisition and recission.
In addition, the increase in authorized shares will facilitate the
following:
o the possible issuance of common stock in connection with one or more
equity financing; and
o issue common stock issuable pursuant to Company stock option plans and
outstanding warrants.
CONDITION TO THE INCREASE IN COMMON STOCK
The Increase in Common Stock is conditioned upon:
(i) approval of the Increase in Common Stock by the holders of a majority
of the outstanding stock entitled to vote and a majority of the
outstanding stock of each class entitled to vote as a class.
THE DISTRIBUTION AND SPIN-OFF
Equitex proposes to distribute the Company's assets, net of all liabilities
assumed, to Equitex 2000, Inc., a wholly-owned and Delaware-chartered subsidiary
of the Company ("E2000") (the "Distribution") and to distribute all of its
outstanding shares of common stock of E2000 to shareholders of the Company on
the basis of one share of common stock of E2000 for each share of common stock
of the Company (the "Spin-Off").
RISK FACTORS
You should be aware that the Distribution and Spin-Off involves certain
risks, including those described under "Risk Factors," that could adversely
affect the value of your holdings.
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BACKGROUND AND REASONS FOR THE DISTRIBUTION AND SPIN-OFF
The Company's Board believes that the Distribution and Spin-Off will serve
a number of purposes, including:
o increasing the ability of both companies to improve the corporate fit
and focus of their respective businesses;
o facilitating acquisitions by both companies by improving the
attractiveness of their respective capital stock as acquisition
currency; and
o allowing both companies to effectively motivate and enhance management
performance by providing equity compensation and incentives more
closely tied to the businesses in which the employees work.
THE DISTRIBUTION AND WHAT EQUITEX SHAREHOLDERS WILL RECEIVE IN THE DISTRIBUTION
AND SPIN-OFF
If the Company's shareholders approve the Distribution and Spin-Off,
Equitex anticipates that the Company's Board will authorize the various
components of the Distribution and declare a special dividend payable in E2000
common stock and set a record date for that dividend. The Distribution would
involve the actions described below.
Equitex will contribute the following to E2000:
o all of the Company's cash, or such lesser amount as the Company's
Board of Directors may determine in its sole discretion;
o all securities and investments owned by the Company in its investee
companies;
o the rights of the Company to acquire the Meridian Residential Group,
the Company's wholly-owned mortgage banking subsidiary;
o any residual rights of the Company related to the FBMS Investment;
o all shares of nMortgage, the Company's Internet based mortgage
banking subsidiary;
o all receivables of any nature, including accounts and notes
receivable;
o all furniture, fixtures and equipment of the Company; and
o any other assets that are related in any manner to the Company.
E2000 will assume all liabilities of the Company and will indemnify the
Company and assume the prosecution or defense of the Company in the following
lawsuits: WILLIAM G. HAYES, JR. LIQUIDATING AGENT FOR RDM SPORTS GROUP, INC. AND
RELATED DEBTORS V. EQUITEX, INC., SMITH, GAMBRELL, RUSSELL, L.L.P., DAVID J.
HARRIS, P.C., AND DAVID J. HARRIS, INDIVIDUALLY, Adversary Proceeding No.,
00-1065 (U.S. Bankruptcy Court for the Northern District of Georgia, Newnan
Division); and EQUITEX, INC. AND HENRY FONG V. BERTRAND T. UNGER, Case No.
98-CV-2437 (Dist. Ct. Arapahoe County, Colorado).
Equitex then will distribute, in the form of a special dividend, all of the
outstanding shares of common stock of E2000, on a pro rata basis, to the holders
of Equitex' common stock as of a record date for the special dividend. In the
special dividend contemplated by the Distribution, each shareholder of Equitex
will retain its shares of Equitex common stock, and for each share of Equitex
common stock held by it on the record date for the special dividend contemplated
by the Distribution, will be entitled to receive one share of E2000 common
stock.
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Prior to its distribution to the Company's shareholders, the E2000 common
stock will be registered pursuant to Section 12(b) or 12(g) of the Securities
Exchange Act of 1934 and E2000 shall have filed and sought to make effective an
application for the inclusion of the E2000 common stock on the Nasdaq SmallCap
Market. If E2000's application is not approved, its common stock may be traded
on either the electronic bulletin board or the National Quotation Bureau, Inc.'s
"Pink Sheets."
Following the Distribution, the Company is expected to close on its
acquisitions of Nova Financial Systems, Inc. and Key Financial Systems, Inc.
The Equitex Board has retained discretion, even if all conditions to the
Distribution and Spin-Off are satisfied, to abandon, defer or modify the
Distribution and/or Spin-Off.
FEDERAL INCOME TAX CONSEQUENCES RELATED TO THE DISTRIBUTION AND SPIN-OFF
While the Spin-Off will be a taxable distribution to the Company's
stockholders, because the Company has no current and post-1913 accumulated
earnings and profits, the distribution will be applied against, and reduce the
adjusted basis of the stockholder's stock. If the distribution is greater than
the adjusted basis of the stock, the excess is treated as gain from the sale or
exchange of property.
CONDITIONS TO THE DISTRIBUTION AND SPIN-OFF
The Distribution and Spin-Off are conditioned upon, among other things:
(i) approval of the Distribution and Spin-Off by the holders of a
majority of the outstanding stock of each class entitled to vote
thereon as a class;
(ii) if holders of no more than 1% of Equitex' outstanding common stock
exercise dissenters' rights; and
(iii) there not being in effect any statute, rule, regulation or order of
any court, governmental or regulatory body that prohibits or makes
illegal the transaction contemplated by the distribution.
The conditions listed above cannot be waived. The Equitex Board has
reserved the right to abandon the Distribution and Spin-Off even if all
conditions are satisfied.
E2000
BUSINESS AFTER THE DISTRIBUTION AND SPIN-OFF
After the Distribution and Spin-Off, E2000 will own and operate Equitex's
assets contributed to it.
PRINCIPAL OFFICE AFTER THE DISTRIBUTION AND SPIN-OFF
Equitex 2000, Inc.
2401 PGA Boulevard, Suite 190
Palm Beach Gardens, Florida 33410
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THE ACQUISITIONS
Equitex proposes to acquire all of the outstanding capital stock of Nova
Financial Systems, Inc. and Key Financial Systems, Inc. in exchange for the
greater of 7,140,000 shares, or 50% of the outstanding common stock of the
Company on a post acquisition basis and cash consideration of $5 million (the
"Acquisitions"). Nova and Key are both financial companies which specialize in
selling credit card programs designed for high risk clients.
RISK FACTORS
You should be aware that the Acquisitions involve certain risks, including
those described under "Risk Factors," that could adversely affect the value of
your holdings.
BACKGROUND AND REASONS FOR THE ACQUISITIONS
The Company's Board believes that the Acquisitions will serve a number of
purposes, including:
o adding an ongoing, profitable, business to the Company's operations;
o adding a business which complements the Company's plans and objectives
relative to Internet financial services;
o provide the Company with additional revenues and resources with the
potential for future growth; and
o to create the potential for increased stockholder value.
CONDITIONS TO THE ACQUISITIONS
Consummation of the Acquisitions is subject to a number of conditions,
including:
(i) the distribution of all of the Company's assets, net of all
liabilities assumed, to E2000 and the Spin-Off;
(ii) the approval of the Acquisitions by our stockholders; and
(iii) the approval of the increase in the authorized shares of Common
Stock from 7,500,000 shares to 50,000,000 shares.
Nova and Key may waive the approval of the increase in authorized shares if
the Company's shareholder meeting has not been held prior to the closing of the
mergers or the closing may be postponed until the Company's shareholder meeting
has been held and an amended Certificate of Incorporation has been filed in
Delaware.
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RISK FACTORS
YOU SHOULD BE AWARE THAT THE DISTRIBUTION, SPIN-OFF AND OWNERSHIP OF E2000
COMMON STOCK INVOLVE RISKS, INCLUDING THOSE DESCRIBED BELOW AND ELSEWHERE IN
THIS PROXY STATEMENT, THAT COULD ADVERSELY AFFECT THE VALUE OF YOUR HOLDINGS.
YOU ARE ALSO URGED TO REVIEW THE RISK FACTORS INCLUDED IN EQUITEX'S FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999. EQUITEX AND E2000 ARE NOT MAKING,
AND NO OTHER PERSON IS AUTHORIZED TO MAKE, ANY REPRESENTATION AS TO THE FUTURE
MARKET VALUE OF E2000 COMMON STOCK.
RISKS ARISING FROM THE DISTRIBUTION AND SPIN-OFF
AN ACTIVE TRADING MARKET MIGHT NOT DEVELOP FOR THE E2000 COMMON STOCK AND
TRADING PRICES ARE UNCERTAIN
E2000 intends to apply to list the shares of its common stock to be
distributed in the Spin-Off on the Nasdaq SmallCap Market. There is no assurance
this application will be approved. If E2000's application is not approved, its
common stock may be traded on either the electronic bulletin board or the
National Quotation Bureau, Inc.'s "Pink Sheets." However, there is presently no
public market for the E2000 common stock and an active market may not develop
following the Distribution and Spin-Off. There can be no assurance regarding the
prices at which the E2000 common stock will trade on or after the date of the
special dividend contemplated by the Spin-Off. Until the E2000 common stock is
fully distributed and an orderly market develops, the prices at which the stock
trades may fluctuate significantly. Prices for the E2000 common stock will be
determined in the marketplace and may be influenced by many factors, including,
without limitation, (1) the depth and liquidity of the market for the E2000
common stock; (2) investors' perceptions of E2000 and the industries in which it
participates; (3) E2000's dividend policy; and (4) changes in government
regulation and general economic and market conditions.
E2000 MAY NOT PAY DIVIDENDS AFTER THE DISTRIBUTION AND SPIN-OFF
The dividend policy of E2000 after the Distribution and Spin-Off will be
determined by its Board of Directors. The future payment of dividends by E2000
will be based on the results of operations and financial condition of E2000 and
other business considerations that its Board of Directors considers relevant.
Equitex cannot assure you that E2000 will pay any dividends after the
Distribution and Spin-Off.
E2000'S ABSENCE OF HISTORY AS AN INDEPENDENT COMPANY MAKES IT DIFFICULT TO
PREDICT FUTURE PERFORMANCE
E2000' business has historically been conducted by Equitex as part of its
overall operations. Therefore, E2000 does not have an operating history as an
independent company. E2000 was recently formed solely for the purpose of
effecting the Distribution and Spin-Off. Therefore, the financial information
included in this proxy statement does not necessarily reflect the financial
position, results of operations and cash flows of E2000 had E2000 been operated
independently during the periods presented. As a stand-alone company, E2000'
results of operations may or may not continue at a level similar to its results
of operations while a part of Equitex. Equitex also believes that its general
and administrative expenses will be higher than the expenses reflected in the
historical financial statements of its businesses.
E2000 MAY NOT BE ABLE TO CONSUMMATE OR INTEGRATE EFFECTIVELY ACQUISITIONS AND
ITS RESULTS MAY BE ADVERSELY AFFECTED
Equitex has completed several acquisitions and the business strategy of
E2000 contemplates continued expansion, including growth through future
acquisitions. However, the ability of E2000 to consummate and integrate
effectively any future acquisitions on terms that are favorable to them may be
limited. E2000 may not have adequate financial resources to consummate any
acquisitions. In addition, the ability of E2000 to issue additional equity
securities to raise capital or consummate acquisitions may be impaired, for a
period of time after the Distribution and Spin-Off.
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ANTI-TAKEOVER PROVISIONS MAY AFFECT THE MARKETABILITY AND MARKET PRICE OF E2000
COMMON STOCK
The articles of incorporation of E2000, as well as Delaware statutory law,
contain provisions that may have the effect of discouraging an acquisition of
control of E2000 not approved by its Board. These provisions may also have the
effect of discouraging third parties from making proposals involving an
acquisition or change of control of E2000, although any proposals, if made,
might be considered desirable by a majority of E2000's shareholders. These
provisions could also have the effect of making it more difficult for third
parties to replace current management of E2000 without the concurrence of
E2000's Board. The existence of these provisions may adversely affect the
marketability and market price of E2000 common stock.
RISKS RELATED TO THE ACQUISITIONS
If the Acquisitions are approved and completed, Equitex will be subject to
the following risks:
SOCIAL, ECONOMIC AND GEOGRAPHIC FACTORS AFFECT CREDIT CARD PAYMENTS AND ARE
UNPREDICTABLE AND MAY CAUSE A DELAY OR DEFAULT IN PAYMENT
Changes in credit use, payment patterns and the rate of defaults by
cardholders may result from a variety of social, economic and geographic
factors. Social factors include changes in consumer confidence levels, the
public's perception of the use of credit cards and changing attitudes about
incurring debt and the stigma of personal bankruptcy. Economic factors include
the rates of inflation, the unemployment rates and the relative interest rates
offered for various types of loans.
CONSUMER PROTECTION LAWS MAY RESTRICT OUR ABILITY TO COLLECT RECEIVABLES AND
MAINTAIN YIELD ON PORTFOLIO
Federal and state consumer protection laws regulate the creation and
enforcement of consumer loans. The United States Congress and the states may
enact additional laws and amend existing laws to regulate further the credit
card and consumer revolving loan industry or to reduce finance charges or other
fees or charges. These laws, as well as many new laws, regulations or rulings
which may be adopted, may materially adversely affect the Company's ability to
collect the receivables or to maintain previous levels of finance charges or
fees.
Receivables also may be written off as uncollectible if a debtor seeks
relief under federal or state bankruptcy laws.
ABILITY TO GENERATE CREDIT CARD REVENUE IS DEPENDENT UPON RETAINING OLD
CUSTOMERS AND OBTAINING NEW CUSTOMERS
A significant portion of the Company's revenue will be derived from credit
card fees charged on accounts. This revenue is directly tied to the number of
active accounts in the portfolio. Continued generation of new fee revenue
depends, in part, on the number of accounts or account balances lost to
competing card issuers and the Company's ability to designate new accounts. The
credit card industry is highly competitive and the Company will compete with
numerous other credit card providers for new accounts and for use of the credit
cards.
Credit card customers choose their credit card issuers largely on the basis
of price, credit limit and other product features and once an account is
originated, customer loyalty may be limited. Customers can and frequently do
move accounts from one credit card issuer to another, or cease or limit use of
one credit card in favor of another.
The credit card and consumer revolving loan industry is highly competitive
and operates in a legal and regulatory environment increasingly focused on the
cost of services charged to consumers. There is increased use of advertising,
target marketing, pricing competition, incentive programs and new credit card
issuers seeking to expand or to enter the market and compete for customers. In
addition, some of the Company's competitors are now attempting to employ
programs similar to the specialized marketing programs and information based
strategies through which the Company has solicited new accounts.
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<PAGE>
TIMING OF PAYMENTS IS NOT CERTAIN
The receivables may be paid at any time. The Company cannot assure you that
any particular pattern of accountholder payments will occur. In addition to
other factors discussed above in this "Risk Factors" section, changes in finance
charges can alter the monthly payment rates of accountholders.
ABILITY TO CHANGE TERMS OF THE CREDIT CARD ACCOUNTS COULD ALTER PAYMENT PATTERNS
As owner of a participation interest in the accounts, the Company will have
the right to change various account terms (including the fees and the required
monthly minimum payment). If any fees are reduced, there could be a
corresponding decrease in the collection of finance charges. In addition,
changes in the account terms may alter payment patterns.
The Company ordinarily will not reduce any fees, unless the bank is
required by law to do so or it determines that such reduction is necessary to
maintain its credit card business on a competitive basis.
The Company may change the terms of the accounts or its servicing practices
(including the reduction of the required minimum monthly payment and the
calculation of the amount or the timing of fees and charge offs) if it takes the
same action on its other substantially similar accounts.
The Company has no restrictions on its ability to change the terms of the
accounts except as described above. Changes in relevant law, changes in the
marketplace, or prudent business practices could impel the Company to change
account terms.
INTENSE COMPETITION
The Company will face intense and increasingly aggressive competition from
other consumer lenders in all of its product lines. Many competitors are
substantially larger and have greater financial resources than the Company, and
customer loyalty is often limited. Competitive practices, such as the offering
of lower interest rates and fees and the offering of incentives to customers,
could hurt the Company's ability to attract and retain customers. The success of
Nova and Key has also attracted new lenders to traditionally underserved markets
such as the lower line credit card market, resulting in increased competition.
The Gramm-Leach- Bliley Act of 1999 (the "GLB Act"), which permits the
affiliation of commercial banks, securities firms and insurance companies, may
increase the number of competitors in the banking industry and the level of
competition in providing banking products, including credit cards. To the extent
that the GLB Act promotes competition or consolidation among financial service
providers active in the consumer credit market, the Company could experience
increased competition for customers, employees and funding. However, the Company
is unable to predict at this time the scope or extent of any such impact.
In October 1998, the U.S. Justice Department filed a complaint against
MasterCard International Incorporated, Visa U.S.A., Inc. and Visa International,
Inc., asserting that duality (the overlapping ownership and control of both the
MasterCard and Visa associations by the same group of banks) restrains
competition between Visa and MasterCard in the market for general purpose credit
card products and networks in violation of the antitrust laws. The government
seeks as relief that only member banks "dedicated" to one association be
permitted to participate in the governance of that association. In addition, the
complaint challenges the rules adopted by both MasterCard and Visa that restrict
member banks from joining American Express, Discover/Novus or other competing
networks. MasterCard and Visa have stated that they consider the suit without
merit and have denied the allegations of the complaint. Neither the ultimate
outcome of this litigation nor its effect on the competitive environment in the
credit card industry if the lawsuit succeeds can be predicted with any
certainty.
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<PAGE>
INCREASED DELINQUENCIES AND CREDIT LOSSES
The delinquency rate on the Company's consumer loans, as well as the rate
at which the Company's consumer loans are charged off as uncollectible (referred
to as the credit loss rate), may increase, depending on a number of factors,
including (i) an increase in new accounts which generally experience higher
delinquency and credit loss rates, and (ii) an increase in the number of
customers seeking protection under the bankruptcy laws. Increased delinquencies
and credit losses could also occur in the event of a national or regional
economic downturn or recession, or for other reasons. Unlike a traditional
credit card portfolio, sub prime portolios experience higher initial delinquency
and first payment default rates. An increase in new accounts can significantly
increase delinquency and loss rates.
VENDOR RELATIONSHIPS
The Company's business will depend on a number of services provided by
third parties, including telemarketing and data processing providers, nationwide
credit bureaus, postal and telephone service providers, bankcard associations
and providers of transaction processing services. A major disruption in one or
more of these services could significantly hurt the Company's operations.
GOVERNMENT POLICY AND REGULATION
Federal and state laws significantly limit the types of activities in which
the Company and/or its subsidiaries will be permitted to engage. In addition,
consumer protection and debtor relief laws limit the manner in which the Company
may offer, extend, manage and collect loans. Congress, the States, and other
jurisdictions in which the Company operates may enact new laws and amendments to
existing laws that further restrict consumer lending, including changes to the
laws governing bankruptcy, which could make it more difficult or expensive for
the Company to collect loans, or impose limits on the interest and fees that the
Company may charge its customers. The Company's earnings could also be hurt by
changes in government fiscal or monetary policies, including changes in capital
requirements and rates of taxation, and by changes in general social and
economic conditions.
MANAGEMENT AND OPERATIONS
The Company's growth and profitability will depend on its ability to retain
key executives and managers, attract capable employees, maintain and develop the
systems necessary to operate its businesses and control the rate of growth of
its expenses. Expenses could significantly increase due to acquisition-related
expenses, new product development, facilities expansions, increased funding or
staffing costs and other internal and external factors.
OTHER INDUSTRY RISKS
The Company will face the risk of fraud by accountholders and third
parties, as well as the risk that increased criticism from consumer advocates
and the media could hurt consumer acceptance of the Company's products. The
financial services industry as a whole is characterized by rapidly changing
technologies. System disruptions and failures may interrupt or delay the
Company's ability to provide services to its customers. In particular, the
Company faces technological challenges in the developing online credit card
market. The secure transmission of confidential information over the Internet is
essential to maintain consumer confidence in the products and services offered
by e-commerce business. Security breaches, acts of vandalism, and developments
in computer capabilities could result in a compromise or breach of the
technology the Company uses to protect customer transaction data. Consumers
generally are concerned with security breaches and privacy on the Internet, and
Congress, individual States and other jurisdictions could enact new laws
regulating the electronic commerce market that could adversely affect the
Company.
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THE SPECIAL MEETING
PURPOSE OF THE SPECIAL MEETING
The Increase in Common Stock
----------------------------
At the special meeting, shareholders will be asked to approve the increase
in common stock which involves the following:
o An amendment of Paragraph 4 of the Certificate of Incorporation to
increase the number of authorized shares of the Company's common
stock, $.02 par value, from 7,500,000 shares to 50,000,000 shares.
The Equitex Board has conditioned the Increase in Common Stock upon:
(i) approval of the Increase in Common Stock by the holders of a majority
of the outstanding stock entitled to vote and a majority of the
outstanding stock of each class entitled to vote as a class.
The Increase in Common Stock will not occur if the condition described
above is not satisfied.
The Distribution and Spin-Off
-----------------------------
At the special meeting, shareholders will be asked to approve the
Distribution and Spin-Off stock which involves the following:
o The distribution by the Company of all of its assets, net of all
liabilities assumed, to E2000 and the distribution by the Company of
all of its the outstanding shares of common stock of E2000 to
shareholders of the Company on the basis of one share of common stock
of E2000 for each share of common stock of the Company, as further
described in this Proxy Statement.
If Equitex's shareholders approve the Distribution and Spin-Off, and the
other conditions to the Distribution and Spin-Off are satisfied or waived,
Equitex anticipates that the Equitex Board will authorize the various components
of the Distribution and Spin-Off and declare a special dividend payable in E2000
common stock and set a record date for that dividend. Each holder of record of
Equitex common stock on the record date for the special dividend contemplated by
the Distribution and Spin-Off, other than shareholders who properly exercise
their dissenters' rights under Delaware law, if dissenters' rights are available
under Delaware law, will receive one share of E2000 common stock for each share
of Equitex common stock held on the record date for the Spin-Off. No
consideration will be paid by the holders of Equitex common stock for the E2000
common stock.
The Equitex Board has conditioned the Distribution and Spin-Off upon, among
other things:
(i) approval of the Distribution and Spin-Off by the holders of a
majority of the outstanding stock of each class entitled to vote
thereon as a class;
(ii) if dissenters' rights are available under Delaware law, holders of
no more than 1% of Equitex' outstanding common stock exercise
dissenters' rights; and
(iii) there not being in effect any statute, rule, regulation or order of
any court, governmental or regulatory body that prohibits or makes
illegal the transaction contemplated by the Distribution.
The Distribution and Spin-Off will not occur if the conditions described
above are not satisfied.
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<PAGE>
The Equitex Board has retained discretion, even if all conditions to the
Distribution and Spin-Off are satisfied, to abandon, defer or modify the
Distribution and/or the Spin-Off.
The Distribution and Spin-Off will separate Equitex into two publicly owned
companies. After the Distribution and Spin-Off, E2000 will primarily operate in
the mortgage banking industry.
The Acquisitions
----------------
At the special meeting, shareholders will be asked to approve the
Acquisitions which involves the following:
o The acquisition all of the outstanding capital stock of Nova and Key
in exchange for the greater of 7,140,000 shares, or 50% of the
outstanding common stock of the Company on a post acquisition basis
and cash consideration of $5 million.
The Equitex Board has conditioned the Acquisitions upon, among other
things:
(i) the Distribution and the Spin-Off;
(ii) the approval of the Acquisitions by our stockholders; and
(iii) the approval of the increase in the authorized shares of Common
Stock from 7,500,000 shares to 50,000,000 shares pursuant to
proposal number one.
The Acquisitions will not occur if the conditions described above are not
satisfied.
The Equitex Board has retained discretion, even if all conditions to the
Acquisitions are satisfied, to abandon, defer or modify the Acquisitions.
VOTE REQUIRED
The proposals to be acted on at the meeting require the following votes:
o Approval of the adoption of the amendment of Paragraph 4 of the
Certificate of Incorporation to increase the number of authorized
shares of the Company's common stock, $.02 par value, from 7,500,000
shares to 50,000,000 shares will require the affirmative vote of a
majority of the outstanding stock of each class entitled to vote
thereon as a class;
o Approval of the distribution by the Company of its assets, net of all
liabilities assumed, to E2000 and the distribution by the Company of
all of its outstanding shares of common stock of E2000 to shareholders
of the Company on the basis of one share of common stock of E2000 for
each share of common stock of the Company, as further described in
this Proxy Statement, will require the affirmative vote of a
majority of the outstanding stock of each class entitled to vote
thereon as a class; and
o Approval of the acquisition all of the outstanding capital stock of
Nova and Key in exchange for the greater of 7,140,000 shares, or 50%
of the outstanding common stock of the Company on a post acquisition
basis and cash consideration of $5 million will require the
affirmative vote of a majority of the total votes cast on the proposal
in person or by proxy.
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<PAGE>
Equitex believes that under Delaware law, which governs the Distribution
and Spin-Off, a vote of shareholders is not required in connection with the
Distribution and Spin-Off. Delaware law requires the approval by the holders of
at least a majority of Equitex's outstanding shares entitled to vote thereon for
a lease, sale, exchange, transfer, or other disposition of all, or substantially
all, of the assets of Equitex. Equitex believes that the Distribution and
Spin-Off is not a disposition of substantially all of the assets of Equitex.
Although Equitex believes that the Distribution and Spin-Off does not require
shareholder approval, Equitex is seeking to obtain the views of its shareholders
because of the importance of the Distribution and Spin-Off to shareholders.
PROXIES
All shares of Equitex common stock represented by properly executed proxies
will, unless the proxies have previously been revoked, be voted at the special
meeting in accordance with the directions on the proxies. If no direction is
indicated on a properly executed proxy, the shares will be voted in favor of
each of the proposals. If any other matters are properly presented at the
special meeting for action, which is not anticipated, the proxy holders will
vote the proxies which confer authority to such holders to vote on such matters
in accordance with their judgment. An Equitex shareholder returning a proxy
may revoke it at any time before it is voted by communicating the revocation in
writing to the Secretary of Equitex or by executing and delivering a later-dated
proxy. In addition, any person who has executed a proxy and is present at the
special meeting may vote in person instead of by proxy, thereby canceling any
proxy previously given, whether or not written revocation of the proxy has been
given. Any written notice revoking a proxy should be sent to Equitex, Inc., 7315
East Peakview Avenue, Englewood, Colorado 80111, Attention: Secretary.
If a quorum is not present at the time the special meeting is convened, or
if Equitex believes that additional time should be allowed for the solicitation
of proxies or for any other reason, Equitex may adjourn the special meeting from
time to time upon a vote of the shareholders present in person or by proxy at
the special meeting. If Equitex proposes any adjournment of the special meeting
by a vote of the shareholders, the person named in the enclosed form of proxy
will vote all shares of Equitex common stock for which they have voting
authority in favor of the adjournment.
COSTS OF SOLICITATION
Equitex will bear the costs of this solicitation. In addition to
solicitation by mail, Equitex will request banks, brokers and other custodians,
nominees and fiduciaries to supply proxy materials to the beneficial owners of
Equitex common stock of whom they have knowledge, and will reimburse them for
their expenses in so doing. In addition, some directors, officers and other
employees of Equitex, not specially employed for the purpose, may solicit
proxies, without additional remuneration therefor, by person interview, mail,
telephone or telefax.
DISSENTERS' RIGHTS
If, under Delaware law, the Distribution and Spin-Off are the disposition
of substantially all of the Company's assets, shareholders who comply with the
requirements of Delaware General Corporation Law ss. 262 will be entitled to
dissent from the Distribution and Spin-Off proposal. The Company, however, does
not believe that, under Delaware law, the Distribution and Spin-Off would be a
disposition of substantially all of its assets. The Company therefore does not
believe that dissenters' rights would arise by reason of the Distribution and
Spin-Off. If, contrary to the Company's belief, rights of dissent are available,
shareholders who perfect dissenters' rights in accordance with Delaware General
Corporation Law ss. 262 will be entitled to the "fair value" of their Equitex
common stock, determined in accordance with the statutory procedure. If,
contrary to the Company's belief, dissenters' rights are available under
Delaware law, the Distribution and Spin-Off will not occur if holders of more
than 1% of Equitex' outstanding common stock exercise dissenters' rights.
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<PAGE>
If, under Delaware law, the Acquisitions are a disposition of substantially
all of the Company's assets, shareholders who comply with the requirements of
Delaware General Corporation Law ss. 262 will be entitled to dissent from the
Acquisitions proposal. The Company, however, does not believe that, under
Delaware law, the Acquisitions would be a disposition of substantially all of
its assets. The Company therefore does not believe that dissenters' rights would
arise by reason of the Acquisitions. If, contrary to the Company's belief,
rights of dissent are available, shareholders who perfect dissenters' rights in
accordance with Delaware General Corporation Law ss. 262 will be entitled to the
"fair value" of their Equitex common stock, determined in accordance with the
statutory procedure. If, contrary to the Company's belief, dissenters' rights
are available under Delaware law, the Acquisitions will not occur if holders of
more than 1% of Equitex' outstanding common stock exercise dissenters' rights.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, NW, Washington, DC
20549 or at the Regional Offices of the Commission which are located as follows:
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and Seven World Trade Center, 13th Floor, New York, New York
10048. Copies of such material can also be obtained from the Commission at
prescribed rates. Written requests for such material should be addressed to the
Public Reference Section, Securities and Exchange Commission, 450 Fifth Street,
NW, Washington, DC 20549. The Commission maintains a Web site that contains
reports, proxy statements and other information filed electronically by the
Company with the Commission which can be accessed over the Internet at
http://www.sec.gov.
DOCUMENTS INCORPORATED BY REFERENCE
THIS PROXY STATEMENT INCORPORATES BY REFERENCE DOCUMENTS RELATING TO THE
COMPANY WHICH ARE NOT INCLUDED IN OR DELIVERED WITH THESE PROXY MATERIALS.
DOCUMENTS RELATING TO THE COMPANY (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS
SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE) ARE AVAILABLE TO ANY
PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT IS
DELIVERED, UPON WRITTEN OR ORAL REQUEST, WITHOUT CHARGE, FROM EQUITEX, INC.,
7315 EAST PEAKVIEW AVENUE, ENGLEWOOD, COLORADO 80111, ATTENTION: SECRETARY,
TELEPHONE (303) 796-8940. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS,
ANY SUCH REQUEST SHOULD BE MADE BY _______________ ___, 2000. COPIES OF
DOCUMENTS SO REQUESTED WILL BE SENT BY FIRST CLASS MAIL, POSTAGE PAID WITHIN ONE
BUSINESS DAY OF THE RECEIPT OF SUCH REQUEST.
The following documents of the Company are incorporated by reference
herein:
1. Annual report on Form 10-K, for the year ended December 31, 1999;
2. Quarterly Report on Form 10-Q for the quarter ended March 31, 2000;
3. Quarterly Report on Form 10-Q for the quarter ended June 30, 2000;
4. Current Report on Form 8-K dated August 30, 2000; and
5. The description of Equitex, Inc. Common Stock contained in its
Registration Statement on Form 8-A (Commission File No. 0-12374) as filed
with the Commission on July 21, 1983.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act after the date hereof and prior
to the date of the Meeting shall be deemed to be incorporated by reference
herein and shall be a part hereof from the date of filing of such documents. Any
statements contained in a document incorporated by reference herein or contained
in this Proxy Statement shall be deemed to be modified or superseded for
purposes hereof to the extent that a statement contained herein (or in any other
subsequently filed document which also is incorporated by reference herein)
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed to constitute a part hereof except as so modified or
superseded.
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<PAGE>
REVOCABILITY OF PROXY
If the enclosed Proxy is executed and returned, it will be voted on the
proposals as indicated by the stockholder. The Proxy may be revoked by the
stockholder at any time prior to its use by notice in writing to the Secretary
of the Company, by executing a later dated proxy and delivering it to the
Company prior to the meeting or by voting in person at the meeting.
SOLICITATION
The cost of preparing, assembling and mailing the Notice of Meeting, Proxy
Statement and Proxy (the "Proxy Materials"), miscellaneous costs with respect to
the Proxy Materials and solicitation of the Proxies will be paid by the Company.
The Company also may use the services of its directors, officers and employees
to solicit Proxies, personally or by telephone and telegraph, but at no
additional salary or compensation. The Company intends to request banks,
brokerage houses and other custodians, nominees and fiduciaries to forward
copies of the Proxy Materials to those persons for whom they hold such shares
and request authority for the execution of the Proxies. The Company will
reimburse them for the reasonable out-of-pocket expenses incurred by them in so
doing.
VOTING SECURITIES
Holders of record of the Company's common stock, $.02 par value (the
"Common Stock"), at the close of business on ________ ____, 2000 (the "Record
Date") will be entitled to vote on all matters. On the Record Date, the Company
had outstanding _________ shares of Common Stock. The holders of all shares of
Common Stock are entitled to one vote per share. The Common Stock is the only
class of voting securities outstanding. One-third of the issued and outstanding
shares of the Common Stock entitled to vote, represented in person or by proxy,
constitutes a quorum at any stockholders' meeting. Passage of Proposal Number
One requires the affirmative vote of a majority of the outstanding stock of each
class entitled to vote thereon as a class. Abstentions on a proposal will be
counted as votes against that proposal. Broker non-votes will not be counted as
shares represented at the meeting.
DIVIDEND POLICY
The payment and level of cash dividends by Equitex is subject to the
discretion of the Equitex Board of Directors. Dividend decisions are based on a
number of factors, including the future operating results and financial
requirements of Equitex , state law requirements and other factors. No dividends
have been declared.
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<PAGE>
PRICE RANGE OF EQUITEX COMMON STOCK
Equitex common stock is listed and traded on the Nasdaq SmallCap Market
under the symbol "EQTX." The following table reflect the high and low sales
prices per share of Equitex common stock, as reported on the Nasdaq SmallCap
Market for the fiscal period indicated.
PRICE RANGE
HIGH LOW
---- ---
1998:
First Quarter $ 3.6250 $0.8125
Second Quarter 5.6250 3.0000
Third Quarter 7.1250 4.3750
Fourth Quarter 7.5625 6.4375
1999:
First Quarter $12.7500 $6.7500
Second Quarter 48.8125 9.0000
Third Quarter 14.2500 8.5000
Fourth Quarter 10.5625 7.6250
2000:
First Quarter $11.7500 $6.4062
Second Quarter 9.3906 4.6250
Third Quarter 8.4375 5.6250
Fourth Quarter (through October 10, 2000) 6.6250 5.5000
Shareholders are urged to obtain current trading price information before
voting on the Distribution and Spin-Off.
There has not been established a public trading market for E2000 common
stock.
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<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below as of and for each of the years
in the five-year period ended December 31, 1999, have been derived from our
audited financial statements. The consolidated balance sheet data and statement
of operations data as of and for the year ended December 31, 1999, has been
derived from our consolidated financial statements which have been audited by
Gelfond Hochstadt Pangburn, P.C. The balance sheet data and statement of
operations data as of and for each of the years in the four-year period ended
December 31, 1998, has been derived from our financial statements which have
been audited by Davis & Co., CPAs, P.C. Balance sheet data and statement of
operations data as of and for the six-month periods ended June 30, 2000 and June
30, 1999, has been derived from our unaudited interim financial statements.
Because of recent changes in our business, the historical information
reflected below may not be a good basis for evaluating our current and future
performance. You should read this information, together with the financial
statements and related notes, and the information under the heading
"Management's discussion and analysis of financial condition and results of
operations."
BALANCE SHEET DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
As of
June 30, As of December 31,
----------- --------------------------------------------
(Unaudited) (Audited)
2000 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
(Note 1) (Note 1) (Note 1) (Note 1)
Assets:
<S> <C> <C> <C> <C> <C> <C>
Cash and Cash equivalents .. $ 221 $ 784 $ 32 $ 9 $ 54 $ 177
Mortgage loans held for sale 0 14,787 0 0 0 0
Investments ................ 2,542 3,475 5,592 4,701 10,200 18,682
Property, plant and ........ 162 1,058 26 29 39 21
equipment (net)
Intangible assets .......... 3,777 20,010 0 0 0 0
Total assets ............... 8,281 41,745 5,859 5,039 10,478 19,057
Liabilities:
Warehouse loans ............ 0 18,582 0 0 0 0
Total liabilities .......... 2,229 26,170 1,771 1,499 3,217 7,140
Minority interest ............... 5,488 6,473 0 0 0 0
Stockholders' equity ............ 564 9,102 4,088 3,540 7,261 11,917
</TABLE>
Note 1: On January 4, 1999, the Company withdrew its election to be treated as a
Business Development Company ("BDC") subject to the Investment Company Act. As a
result of this withdrawal, the Company is now required to present its financial
statements consistent with those of a normal operating company as opposed to a
BDC. Because the Company was a BDC during the years ended December 31, 1995
through December 31, 1998, the 1998, 1997, 1996 and 1995 financial statements
reflect the BDC format.
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<PAGE>
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
As of six
months
ended June 30, As of the year ended December 31,
---------------------- -------------------------------------------------------------
(Unaudited) (Audited)
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
(Note 1) (Note 1) (Note 1) (Note 1)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues .................. $ 1,779 $ 655 $ 2,419 $ 448 $ 378 $ 633 $ 308
Expenses .................. (4,947) (1,840) (8,351) (2,418) (1,814) (1,153) (1,500)
Loss on FBMS rescission ... (4,439)
Other income (expense) .... (1,277) 44 (1,785) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net loss .................. (8,884) (1,141) (7,717) (1,970) (1,436) (520) (1,192)
Net investment (loss) ..... -- -- -- (2,267) (1,406) (586) (1,070)
Net realized gain (loss) on
investments .......... -- -- -- 1,108 1,004 1,226 31
Unrealized gain (loss) on
investments .......... -- -- -- (1,056) (3,522) (5,207) (737)
Amortization of discount on
preferred stock ...... -- -- (3,218) -- -- -- --
Deemed preferred stock
dividends (36) -- (51) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net loss applicable to
common shareholders .. $ (8,920) $ (1,141) $ (10,986) $ (4,185) $ (5,360) $ (5,087) $ (2,968)
========= ========= ========= ========= ========= ========= =========
Net loss per common share . $ (1.25) $ (0.40) $ (1.64)
========= ========= =========
Decrease in net assets per
share - primary ...... $ (0.45) $ (1.25) $ (1.42) $ (0.55)
========= ========= ========= =========
Decrease in net assets per
share fully diluted .. $ (1.26) $ (0.49)
========= =========
Weighted average common
share outstanding .... 7,140,293 6,236,754 6,718,170 4,416,988 3,192,600 3,214,708 3,217,615
========= ========= ========= ========= ========= ========= =========
</TABLE>
Note 1: On January 4, 1999, the Company withdrew its election to be treated as a
BDC subject to the Investment Company Act. As a result of this withdrawal, the
Company is now required to present its financial statements consistent with
those of a normal operating company as opposed to a BDC. Because the Company was
BDC during the years ended December 31, 1995 through December 31, 1998, the
1998, 1997, 1996 and 1995 financial statements reflect the BDC format.
-20-
<PAGE>
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
Set forth below is certain information as of September 15, 2000, with
respect to ownership of the Company's Common Stock held of record or
beneficially by (i) the Company's executive officers (ii) each director of the
Company, (iii) each person who owns beneficially more than five percent of the
Company's outstanding Common; and (iv) all directors and executive officers as a
group:
Percentage
Number of Owned of
Name and Address Common Common
of Beneficial Owner Stock Owned (1) Stock
------------------- --------------- -----
Henry Fong 1,630,544 (2) (3) 20.2%
7315 East Peakview Avenue
Englewood, Colorado 80111
Russell L. Casement 486,900 (4) 6.5%
1355 S. Colorado Blvd., Suite 320
Denver, Colorado 80222
Aaron A. Grunfeld 412,200 (5) 5.5%
10390 Santa Monica Blvd., Fourth Floor
Los Angeles, California 90025
All officers and directors
as a group (four persons) 2,625,944 (6) 29.5%
----------------------
(1) The beneficial owners exercise sole voting and investment power.
(2) Includes 945,700 shares underlying options granted under the Company's
1999 Stock Option Plan.
(3) Includes 459,554 shares owned by a corporation in which Mr. Fong is an
officer and director.
(4) Includes 36,400 shares underlying options granted under the Company's
1993 Stock Option Plan for Non-Employee Directors and 329,500 shares
underlying options granted under the Company's 1999 Stock Option Plan.
(5) Includes 50,000 shares underlying options granted under the Company's
1993 Stock Option Plan for Non-Employee Directors and 329,500 shares
underlying options granted under the Company's 1999 Stock Option Plan.
(6) Includes 86,400 shares underlying options granted under the Company's
1993 Stock Option Plan for Non-Employee Directors and 1,671,000 shares
underlying options granted under the Company's 1999 Stock Option Plan.
The issuance of 7,140,000 shares of the Company's common stock in the
acquisitions of Nova Financial Systems, Inc. and Key Financial Systems, Inc., as
described under Proposal One, may, at a subsequent date, result in a change in
control of the Company.
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<PAGE>
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Generally, a director of a Delaware corporation will not be found to have
violated his fiduciary duties unless there is proof by clear and convincing
evidence that the director has not acted in good faith, in a manner he
reasonably believes to be in or not opposed to the best interests of the
corporation, or with the care that an ordinarily prudent person in a like
position would use under similar circumstances. In general, a director is liable
for monetary damages for any action or omission as a director only if it is
proved by clear and convincing evidence that such act or omission was undertaken
either with deliberate intent to cause injury to the corporation or with
reckless disregard for the best interest of the corporation.
Under Delaware law, a corporation must indemnify its directors, as well as
its officers, employees and agents, against expenses where any such person is
successful on the merits or otherwise in defense of an action, suit or
proceeding. A corporation may indemnify such persons in actions, suits and
proceeds (including derivative suits) if the individual has acted in good faith
and in a manner that he believes to be in or not opposed to the best interests
of the corporation. In the case of a criminal proceeding, the individual must
also have no reasonable cause to believe that his conduct was unlawful.
Indemnification may be made only if ordered by a court or if authorized in a
specific case upon a determination that the applicable standard of conduct has
been met. Such a determination may be made by a majority of the disinterested
directors, by independent legal counsel or by the shareholders. In order to
obtain reimbursement for expenses in advance of the final disposition of any
action, the individual must provide an undertaking to repay the amount if it is
ultimately determined that his is not entitled to be indemnified.
In general, Delaware law requires that all expenses, including attorney's
fees, incurred by a director in defending any action, suit or proceeding be paid
by the corporation as they are incurred in advance of final disposition if the
director agrees to repay such amounts if it is proved by clear and convincing
evidence that his action or omission was undertaken with deliberate intent to
cause injury to the corporation or with reckless disregard for the best
interests of the corporation and if the director reasonably cooperated with the
corporation concerning the action, suit or proceeding.
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<PAGE>
PROPOSAL NUMBER ONE
TO CHANGE PARAGRAPH 4 OF THE
CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK
NECESSARY TO COMPLETE THE PROPOSED TRANSACTIONS
The Board of Directors recommends an amendment to the Company's Certificate
of Incorporation to cause an increase in the number of authorized shares. A
condition to the completion of several proposed transactions described below is
approval of this proposal. In exchange for all of the outstanding capital stock
of Nova Financial Systems, Inc. and Key Financial Systems, Inc., the Company
intends to issue 7,140,000 shares of Common Stock. The Company's Series F
Convertible Preferred Stock issued in connection with the acquisition of The
Meridian Residential Group, Inc., described below, may convert into
approximately 65,000 shares of the Company's Common Stock. Upon approval of this
proposal, the Company's Series E Convertible Preferred Stock issued in
connection with the acquisition and recission of First Bankers Mortgage
Services, Inc., described below, may convert into approximately 300,000 shares
of the Company's Common Stock. The Company's Series G Convertible Preferred
Stock issued in connection with a private placement may convert into
approximately 300,000 shares of the Company's Common Stock.
The Certificate of Incorporation of the Company currently authorizes the
issuance of up to 7,500,000 shares of Common Stock and 2,000,000 shares of
preferred stock with a par value of $0.02 per share (the "Preferred Stock"). As
of August 30, 2000, of the 7,500,000 shares of Common Stock authorized,
7,140,293 shares were outstanding and 1,786,400 shares of Common Stock are
reserved for issuance upon the exercise of outstanding options and warrants. See
Options and Warrants on page 28. As of September 15, 2000, of the 2,000,000
shares of Preferred Stock authorized 1,200 shares of Series D 6% Convertible
Preferred Stock, 300 shares of Series E Convertible Preferred Stock, 460,000
shares of Series F Convertible Preferred Stock and 1,300 shares of Series G
Convertible Preferred Stock were outstanding.
The Board of Directors deems it advisable to amend the Certificate of
Incorporation to increase the number of authorized shares of Common Stock to
50,000,000 shares. A copy of Paragraph 4 of the Certificate of Incorporation as
it would read following adoption of this Proposal is included herewith as
Exhibit 1.
The additional shares of Common Stock would become part of the existing
class of Common Stock, and the additional shares, when issued, would have the
same rights and privileges as the shares of Common Stock now issued. There are
no preemptive rights relating to the Common Stock.
To the extent that any further issue of shares is made on other than a pro
rata basis to current stockholders, the present ownership of current
stockholders may be diluted.
If the proposed amendment is approved, the additional authorized shares
would be available for issuance by the Board of Directors for any proper
corporate purpose at any time without further stockholder approval except as
otherwise required by applicable law or securities exchange listing rules.
Nonetheless, it is the intention of the Board of Directors to use a portion of
the additional shares to: (i) be issued in connection with the Acquisitions, the
Meridian Residential Group, Inc. and First Bankers Mortgage Services, Inc.,
described below; (ii) for possible issuance in connection with one or more
equity financing; and (iii) to issue shares issuable pursuant to Company stock
option plans.
ACQUISITION OF NOVA FINANCIAL SYSTEMS, INC. AND KEY FINANCIAL SYSTEMS, INC.
As described more fully under Proposal Number Three of this Proxy
Statement, the Company signed a definitive agreement with Nova and Key to
acquire all the outstanding capital stock of Nova and Key in exchange for the
greater of 7,140,000 shares, or 50%, of the outstanding Common Stock of the
Company on a post acquisition basis and cash consideration of $5 million.
Consummation of the Nova and Key mergers is subject to a number of conditions,
-23-
<PAGE>
including the approval of the increase in the authorized shares of Common Stock
from 7,500,000 shares to 50,000,000 shares. Nova and Key may waive the approval
of the increase in authorized shares if the Company's shareholder meeting has
not been held prior to the closing of the mergers or the closing may be
postponed until the Company's shareholder meeting has been held and an amended
Certificate of Incorporation has been filed in Delaware.
Financial statements of Nova as of and for the periods June 30, 2000,
December 31, 1999 and December 31, 1998 are attached hereto as Exhibit 2.
Financial statements of Key as of and for the periods June 30, 2000,
December 31, 1999 and December 31, 1998 are attached hereto as Exhibit 3.
ACQUISITION OF THE MERIDIAN RESIDENTIAL GROUP, INC.
The Company closed on September 7, 2000, effective September 27, 2000, the
acquisition by merger of all of the issued and outstanding common stock of the
Meridian Residential Group, Inc. ("Meridian") through its wholly-owned
subsidiary, GR.com, Inc., in exchange for 425,000 shares of our Series F
Convertible Preferred Stock (the "Series F Preferred Stock"). The Series F
Preferred Stock has a stated value of $8.00 per share and is convertible into
shares of the Company's common stock any time and from time to time at the
option of the holder until March 7, 2004, at a conversion price of $7.00 per
share. On March 7, 2004, all remaining outstanding Series F Preferred Stock
shall be automatically converted into shares of the Company's common stock. To
the extent that the holders realize proceeds from the sale of the shares of
common stock in an amount that is less than conversion price, we have agreed to
issue the holders additional shares of our common stock having a market value
equal to any such deficiency.
In addition, E2000 agreed to issue additional shares of common stock to the
Meridian shareholders having a market value, at the time of issuance, equal to
20% of the annual increase in pre-tax net earnings compared to the immediately
preceding year of the Meridian business for each of the five years subsequent to
closing, commencing with the year ending December 31, 2000. The aggregate market
value of the additional shares of the Company's common stock cannot exceed (i)
$3,440,000 and (ii) without shareholder approval, 19.9% of the Company's
currently outstanding common stock.
In connection with the Meridian acquisition, nMortgage acquired from
Meridan Capital Group, LLC, the proprietary business model, website, trademarks,
corporate names and all related intellectual property rights related to the
Meridian GreatRate.com business, including the names GreatRate.com and
GreatRateMortgage.com for a cash purchase price of $850,000.
The Meridian shareholders have the right at any time and from time to time
prior to March 7, 2004, to exchange up to 50% of the shares of the Company's
common stock received upon conversion of the Series F Preferred Stock or in
connection with the merger for shares of nMortgage common stock. Each share of
the Company's common stock will be exchange for shares of nMortgage common stock
in accordance with the ratio determined by dividing (i) the greater of the then
market price of the Company's common stock or $8.00 by (i) the lesser of the
market price of the nMortgage common stock or $1.00.
BUSINESS OF MERIDIAN RESIDENTIAL GROUP, INC.
Meridian Residential Group, Inc. ("MRG") was established on February 28,
1996. In its intial Phase MRG set out to become a mortgage banker, in order to
capitalizeon the experience and vast client base of its principals. Over time
MRG became a provider of mortgage management services and E commerce
infrastructure platforms to the mortgage industry. As a result, MRG set out to
create a strategic alliance with an entity that could provide technology
compatible with its net stream lined virtual back office. Details of the new
business model and sstrategic alliance partner are detailed below.
-24-
<PAGE>
Since March 1, 2000, Meridian has laid the groundwork for a new business
model. It has developed a web-based strategy called GreatRate.com with the web
address bearing the same name www. GreatRate.com. Through its site, Meridian is
developing web based mortgage products that will allow it to capitalize on its
streamlined back office operation to expand its business nationwide. The goal of
the new business plan is to create a B2B platform for Meridian to reach out to
small banks and financial institutions allowing them to utilize
Meridian's/nMortgage's technology and infrastructure. This will enable the
financial institution to enter into the business of providing residential and
small commercial mortgages to their clientele with almost no startup costs.
Meridian was recently merged with GR.com, a newly formed subsidiary of
Equitex, Inc. As a result, MR will take its streamlined virtual back
office and join it with Equitex' mortgage technology subsidiary, nMortgage.
Meridian should benefit strongly from the technology already developed by
nMortgage.
MERIDIAN'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This section containing Meridian's Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction with
the financial statements of MRG as of and for the year ended February 29,
2000 and as of and for the four months ended June 30, 2000 and 1999, attached
as Exhibit 4 to this proxy statement.
Fiscal year ending February 1999 vs. February 2000
--------------------------------------------------
REVENUE
Revenue in fiscal year ending February 2000 increased to $2,244,550 from
$2,069,045 in fiscal year ending February 1999. Volume of closed loan
origination grew to $155,000,000 vs. $122,000,000, representing an increase of
20%. This is despite an 8% volume decline in the mortgage origination industry.
Volume and income increases can be attributed to several factors, however the
most substantial factor is MRG's ability to maintain its foothold in the
purchase mortgage market as opposed to the more volatile refinance market. MRG
had the identical expenditures in regard to its advertising as the previous year
and relied on its ability to maintain a strong referral base with realtors,
attorneys, financial planners and most importantly previous clients, to create a
steady flow of business.
OPERATING EXPENSES
Operating expenses for year-ended February 29, 2000 were $2,212,286,
compared with $1,961,086 for the year ended February 28, 1999. MRG changed its
compensation policy during the fiscal year ending February 28, 2000, from
salaried employees to a commissioned sales force. This policy change decreased
salaries by approximately $300,000, auto expenses by $12,000 and employee
benefits by $68,000. Accordingly, commission expense increased by $600,000. In
addition, the new compensation method reduced fixed costs for MRG and created
greater incentive for the MRG's sales force.
Four months ended June 30, 1999 vs. June 30, 2000
-------------------------------------------------
REVENUES
Fees generated for the four months ended June 30, 2000 were $728,713 down
from revenues of $881,309 for the four month's ended June 30 1999. Closed
mortgage volume for MRG through June 30, 2000 was $57,482,243. Mortgage
applications in the active pipeline were in excess of $45,000,000 most of which
is anticipated to close in the next three months.
The industry as a whole estimates a decline of 18% for the year. The slight
drop in volume for MRG can be attributed to the slowdown in the market as a
whole and the extensive travel and focus of MRG's management in regard to the
new business model.
-25-
<PAGE>
OPERATING EXPENSES
As a result of the change in MRG's compensation method, the decrease in
revenue caused an overall decrease in expenses for the period. Salaries
decreased by $37,436 and commissions decreased by $67,297. These decreases were
offset by increases in professional fees and computer services by $9,505 and
$6,133, respectively.
ACQUISITION OF FIRST BANKERS MORTGAGE SERVICES, INC. AND RECISSION
On August 23, 1999, Company acquired First Bankers Mortgage Services, Inc.
("FBMS"). FBMS, a Florida corporation, is a full service mortgage banking
company headquartered in the Fort Lauderdale, Florida area. The Company acquired
all of the outstanding common stock of FBMS from its sole shareholder, Vincent
Muratore. The total aggregate purchase price for FBMS, was 1,000 shares of the
Company's Series E Convertible Preferred Stock (the "Series E Preferred Stock"),
250 shares of which were issued at closing and 750 shares of which were issuable
upon satisfaction of certain performance conditions. In addition, the purchase
price was subject to post-closing adjustments pursuant to the Agreement and Plan
of Reorganization, dated June 22, 1999, among, the Company, FBMS, Vincent
Muratore and FBMS Acquisition Corp., as amended. Under Delaware law, the Company
was not required to, and did not, seek shareholder approval for this
transaction.
In connection with the FBMS Transaction, the Company invested approximately
$4,700,000 in FBMS for working capital purposes (the "FBMS Investment").
Subsequent to the Acquisition of FBMS, all outstanding shares of FBMS were
transferred to a new wholly owned subsidiary of the Company, nMortgage, Inc.
("nMortgage").
On August 15, 2000, the Company reached an agreement in principal to
rescind the acquisition of FBMS effective June 28, 2000. Under the terms of the
recission agreement, all assets and liabilities of FBMS as of June 28, 2000 were
returned to the former owner of FBMS. The Company retained certain
intellectual property rights valued at approximately $2,500,000 related to the
Internet-based mortgage banking business of nMortgage. As part of the
settlement, the Company has agreed to issue up to 50 additional shares of its
Series E Convertible Preferred Stock to fund the resolution of certain claims
against FBMS resulting in an aggregate of 300 shares of Series E Convertible
Preferred Stock being issued. As a result of the recission, the Company divested
itself of the assets, liabilities, and operations of FMBS as of June 28, 2000
and the Company's investment in FBMS was written-off as of June 28, 2000,
resulting a loss of $4,439,000.
The holders of the Series E Convertible Preferred Stock are not entitled to
dividends, do not have a liquidation preference and do not have voting rights.
Each outstanding share of Series E Convertible Preferred Stock automatically
converts to 1,000 shares of Common Stock upon (i) the approval of the increase
in the authorized shares of Common Stock from 7,500,000 shares to 50,000,000;
(ii) the subsequent merger of the Company with or into another company; or (iii)
the sale of substantially all the Company's assets. The 300 outstanding shares
of Series E Convertible Preferred Stock will convert into 300,000 shares of
Common Stock.
SALE OF SERIES G CONVERTIBLE PREFERRED STOCK
On September 6, 2000, the Company completed the private placement of 1,300
shares of the Company's Series G 6% Convertible Preferred Stock (the "Series G
Preferred Stock"), receiving net proceeds of $1,240,000. The proceeds from this
transaction were used in connection with the Meridian acquisition, the purchase
of the GreatRate.com intellectual property by nMortgage and general working
capital purposes. The Series G Preferred Stock has a stated value of $1,000 per
share and bears dividends at 6% per annum, payable quarterly commencing
September 30, 2000, when, as and if declared by the Company's Board of
Directors. Dividends may be payable by the Company in cash or, at the Company's
option, shares of common stock. The Series G Preferred Stock is convertible,
together with any accrued but unpaid dividends, at any time and from time to
time into shares of the Company's common stock at a conversion price per share
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<PAGE>
equal to the lesser of $6.50 or 65% of the market price upon the occurrence of
certain material events. All outstanding Series G Preferred Stock shall be
automatically converted into common stock on August 31, 2003.
The Series G Preferred Stock is redeemable at the Company's option at any
time at a redemption price equal to $1,350 per share plus any accrued but unpaid
dividends. The Company is required to redeem the Series G Preferred Stock if its
shareholders have not approved an increase in the number of shares of authorized
common stock from 7,500,000 to 50,000,000 effective on or before March 4, 2001
or a registration statement relating to the resale of certain shares of the
Company's common stock underlying the Series G Preferred Stock is not declared
effective on or before 180 days of its filing.
DESCRIPTION OF PREFERRED STOCK
The Company's preferred stock is so-called "blank check" preferred since
the Board of Directors of the Company may fix or change the terms, including:
(i) the division of such shares into series; (ii) the dividend or distribution
rate; (iii) the dates of payment of dividends or distributions and the date from
which they are cumulative; (iv) liquidation price; (v) redemption rights and
price; (vi) sinking fund requirements; (vii) conversion rights; (viii)
restrictions on the issuance of additional shares of any class or series. As a
result, the Board of Directors of the Company are entitled to authorize the
creation and issuance of up to 2,000,000 shares of Preferred Stock in one or
more series with such terms, limitations and restrictions as may be determined
in the Board's sole discretion, with no further authorization by the Company's
stockholders except as may be required by applicable laws or securities exchange
listing rules.
The holders of shares of Preferred Stock have only such voting rights as
are granted by law and authorized by the Board of Directors with respect to any
series thereof. The Board of the Company has the right to establish the relative
rights of the Preferred Stock in respect of dividends and other distributions
and in the event of the voluntary or involuntary liquidation, dissolution or
winding up of affairs of the Company as compared with such rights applicable to
the Common Stock and any other series of Preferred Stock.
The effect of Preferred Stock upon the rights of holders of Common Stock
may include: (i) the reduction of amounts otherwise available for payment of
dividends on Common Stock to the extent that dividends are payable on any issued
shares of Preferred Stock; (ii) restrictions on dividends on Common Stock if
dividends on Preferred Stock are in arrears; (iii) dilution of the voting power
of the Common Stock and dilution of net income and net tangible book value per
share of Common Stock as a result of any such issuance, depending on the number
of shares of Common Stock not being entitled to share in the Company's assets
upon liquidation until satisfaction of any liquidation preference granted to
shares of Preferred Stock. It is not possible to state the effect that other
series of Preferred Stock may have upon the rights of the holder of Common Stock
until the Board determines the terms relating to those series of Preferred
Stock.
Currently, the Company has the following series of Preferred Stock
outstanding and the Board has no present commitment, arrangement or plan that
would require the issuance of shares of Preferred Stock, in connection with an
equity offering, merger, acquisition or otherwise:
o SERIES D 6% CONVERTIBLE PREFERRED STOCK , STATED VALUE, $1,000 PER
SHARE (the "Series D Preferred Stock"). The Series D Preferred Stock
ranks prior to the Company's common stock and pari passu with other
series of preferred stock issued prior to the Series D Preferred Stock
and senior to any series of Preferred stock issued after the Series D
Preferred Stock. The Series D Preferred entitles its holder to 6%
annual dividends, payable quarterly. The Series D liquidation
preference is equal to the sum of the stated value of each share plus
an amount equal to 30% of the stated value plus the aggregate of all
accrued and unpaid dividends on each share of Series D Preferred until
the most recent dividend payment date or date of liquidation,
dissolution or winding up of the Company. Lastly, the Series D
Preferred Stock is convertible at any time, and from time to time at a
conversion price per share of Common Stock equal to 65% of the market
price of the Common Stock. The number of shares of Common Stock due
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<PAGE>
upon conversion of each share of Series D Convertible Preferred Stock
is (i) the number of shares to be converted, multiplied by (ii) the
stated value of the Series D Preferred Stock and divided by (iii) the
applicable conversion price.
o SERIES E CONVERTIBLE PREFERRED STOCK (the "Series E Preferred Stock").
The Series E Preferred Stock is not entitled to dividends, does not
have a liquidation preference and does not have voting rights. The
outstanding shares of Series E Preferred Stock automatically converts
to 300,000 shares of Common Stock upon (i) the approval if the
increase in the authorized shares of Common Stock from 7,500,000
shares to 50,000,000 or the subsequent merger of the Company with or
into another company or (iii) the sale of substantially all the
Company's assets.
o SERIES F CONVERTIBLE PREFERRED STOCK (the "Series F Preferred Stock").
The Series F Preferred Stock has a stated value of $8.00 per share and
each share is convertible into shares of the Company's common stock
any time and from time to time at the option of the holder until March
7, 2004, at a conversion price of $7.00 per share. On March 7, 2004,
all remaining outstanding shares of Series F Preferred Stock shall be
automatically converted into shares of the Company's common stock. To
the extent that the holders realize proceeds from the sale of the
shares of common stock in an amount that is less than conversion
price, we have agreed to issue the holders additional shares of our
common stock having a market value equal to any such deficiency.
o SERIES G CONVERTIBLE PREFERRED STOCK (the "Series G Preferred Stock").
The Series G Preferred Stock has a stated value of $1,000 per share
and bears dividends at 6% per annum, payable quarterly commencing
September 30, 2000, when, as and if declared by the Company's Board of
Directors. Dividends may be payable by the Company in cash or, at the
Company's option, shares of common stock. The Series G Preferred Stock
is convertible, together with any accrued but unpaid dividends, at any
time and from time to time into shares of the Company's common stock
at a conversion price per share equal to the lesser of $6.50 or 65% of
the market price upon the occurrence of certain material events. All
outstanding shares of Series G Preferred Stock shall be automatically
converted into common stock on August 31, 2003. The Series G Preferred
Stock are redeemable at the Company's option at any time at a
redemption price equal to $1,350 per share plus any accrued but unpaid
dividends. The Company is required to redeem the Series G Preferred
Stock if its shareholders have not approved an increase in the number
of shares of authorized common stock from 7,500,000 to 50,000,000
effective on or before March 4, 2001 or a registration statement
relating to the resale of certain shares of the Company's common stock
underlying the Series G Preferred Stock is not declared effective on
or before 180 days of its filing.
OPTIONS AND WARRANTS
The 2,326,400 shares of Common Stock reserved for issuance upon the
exercise of outstanding warrants and options are comprised of the following:
o 86,400 shares are reserved for issuance upon the exercise of options
granted under the Company's 1993 Stock Option Plan exercisable until
July 4, 2005 at a price of $3.00 per option.
o 1,700,000 shares are reserved for issuance upon the exercise of
options granted under the Company's 1999 Stock Option Plan. 1,000,000
shares are exercisable until January 5, 2004 at an exercise price of
$6.75 per option and 700,000 shares are exercisable until April 17,
2005 at an exercise price of $5.50 per option.
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o 60,000 shares are reserved for issuance upon the exercise of warrants
exercisable until January 20, 2002. Of this amount, 10,000 warrants
are exercisable at a price of $8.895 per warrant. The remaining
amount, 50,000 warrants, are exercisable at a price of $10.00 per
warrant.
o 50,000 shares are reserved for issuance upon the exercise of warrants
exercisable until April 30, 2002 at an exercise price of $9.875 per
warrant.
o 60,000 shares are reserved for issuance upon the exercise of warrants
exercisable until April 17, 2005 at an exercise price of $5.50 per
warrant.
o 120,000 shares are reserved for issuance upon the exercise of warrants
exercisable until August 31, 2002 at an exercise price of $5.50 per
warrant.
o 100,000 shares are reserved for issuance upon the exercise of warrants
exercisable until April 17, 2005 at an exercise price of $5.50 per
warrant.
o 50,000 shares are reserved for issuance upon the exercise of warrants
exercisable until April 17, 2005 at an exercise price of $5.50 per
warrant.
o 75,000 shares are reserved for issuance upon the exercise of warrants
exercisable until September 2, 2003 at an exercise price of $5.05 per
warrant.
o 25,000 shares are reserved for issuance upon the exercise of warrants
exercisable until September 2, 2003 at an exercise price of $5.05 per
warrant.
VOTE REQUIRED
The affirmative vote of the majority of the outstanding stock of each class
entitled to vote thereon as a class, at the stockholders' meeting will be
required to adopt the proposed amendment to Paragraph 4 of the Certificate of
Incorporation. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO
INCREASE THE NUMBER OF SHARES OF COMMON STOCK.
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PROPOSAL NUMBER TWO
TO DISTRIBUTE ALL OF THE COMPANY'S
ASSETS TO EQUITEX 2000, INC. AND
TO DISTRIBUTE ALL OF ITS
OUTSTANDING SHARES OF COMMON STOCK
OF EQUITEX 2000, INC. TO SHAREHOLDERS
OF THE COMPANY.
The Board of Directors recommends the distribution of the Company's assets,
net of all liabilities assumed, to E2000 (the "Distribution") and to distribute
all of its outstanding shares of common stock of E2000 to shareholders of the
Company on the basis of one share of common stock of E2000 for each share of
common stock of the Company (the "Spin-Off") prior to the acquisitions of Nova
and Key.
RISK FACTORS
You should be aware that the Distribution and Spin-Off involves certain
risks, including those described under "Risk Factors," that could adversely
affect the value of your holdings.
BACKGROUND AND REASONS FOR THE DISTRIBUTION AND SPIN-OFF
The Company's Board believes that the Distribution and Spin-Off will serve
a number of purposes, including:
o increasing the ability of both companies to improve the corporate fit
and focus of their respective businesses;
o facilitating acquisitions by both companies by improving the
attractiveness of their respective capital stock as acquisition
currency; and
o allowing both companies to effectively motivate and enhance management
performance by providing equity compensation and incentives more
closely tied to the businesses in which the employees work.
THE DISTRIBUTION AND SPIN-OFF
If the Company's shareholders approve the Distribution and Spin-Off,
Equitex anticipates that the Company's Board will authorize the various
components of the Distribution and declare a special dividend payable in E2000
common stock and set a record date for that dividend. The Distribution would
involve the actions described below.
Equitex will contribute the following to E2000:
o all of the Company's cash, or such lesser amount as the Company's
Board of Directors may determine in its sole discretion;
o all securities and investments owned by the Company in its investee
companies;
o the rights of the Company to acquire the Meridian Residential Group,
the Company's wholly-owned mortgage banking subsidiary;
o any residual rights of the Company related to the FBMS Investment;
o all shares of nMortgage, the Company's Internet based mortgage banking
subsidiary;
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o all receivables of any nature, including accounts and notes
receivable;
o all furniture, fixtures and equipment of the Company; and
o any other assets that are related in any manner to the Company.
E2000 will assume all liabilities of the Company and will indemnify the
Company and assume the prosecution or defense of the Company in the following
lawsuits:WILLIAM G. HAYES, JR. LIQUIDATING AGENT FOR RDM SPORTS GROUP, INC. AND
RELATED DEBTORS V. EQUITEX, INC., SMITH, GAMBRELL, RUSSELL, L.L.P., DAVID J.
HARRIS, P.C., AND DAVID J. HARRIS, INDIVIDUALLY, Adversary Proceeding No.,
00-1065 (U.S. Bankruptcy Court for the Northern District of Georgia, Newnan
Division); and EQUITEX, INC. AND HENRY FONG V. BERTRAND T. UNGAR, Case No.
98-CV-2437 (Dist. Ct. Arapahoe County, Colorado).
Equitex then will distribute, in the form of a special dividend, all of the
outstanding shares of common stock of E2000, on a pro rata basis, to the holders
of Equitex' common stock as of a record date for the special dividend. In the
special dividend contemplated by the Distribution and Spin-Off, each shareholder
of Equitex will retain its shares of Equitex common stock, and for each share of
Equitex common stock held by it on the record date for the special dividend
contemplated by the Distribution and Spin-Off, will be entitled to receive one
share of E2000 common stock.
Prior to its distribution to the Company's shareholders, the E2000 common
stock will be registered pursuant to Section 12(b) or 12(g) of the Securities
Exchange Act of 1934 and E2000 shall have filed and sought to make effective an
application for the inclusion of the E2000 common stock on the Nasdaq SmallCap
Market. If E2000's application is not approved, its common stock may be traded
on either the electronic bulletin board or the National Quotation Bureau, Inc.'s
"Pink Sheets."
Following the Distribution, the Company is expected to close on its
acquisitions of Nova and Key as discussed under proposal number three below.
FEDERAL INCOME TAX CONSEQUENCES RELATED TO THE DISTRIBUTION AND SPIN-OFF
While the Spin-Off will be a taxable distribution to the Company's
stockholders, because the Company has no current and post-1913 accumulated
earnings and profits, the distribution will be applied against, and reduce the
adjusted basis of the stockholder's stock. If the distribution is greater than
the adjusted basis of the stock, the excess is treated as gain from the sale or
exchange of property.
CONDITIONS TO THE DISTRIBUTION AND SPIN-OFF
The Distribution and Spin-Off are conditioned upon, among other things:
(i) approval of the Distribution and Spin-Off by the holders of a
majority of the outstanding stock of each class entitled to vote
thereon as a class;
(ii) if holders of no more than 1% of Equitex' outstanding common stock
exercise dissenters' rights; and
(iii) there not being in effect any statute, rule, regulation or order of
any court, governmental or regulatory body that prohibits or makes
illegal the transaction contemplated by the distribution.
The Equitex Board has retained discretion, even if all conditions to
the Distribution and Spin-Off are satisfied, to abandon, defer or modify the
Distribution and/or Spin-Off.
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E2000 BUSINESS AFTER THE DISTRIBUTION AND SPIN-OFF
After the Distribution and Spin-Off, E2000 will own and operate
Equitex's assets contributed to it.
PRINCIPAL OFFICE OF E2000
Equitex 2000, Inc.
2401 PGA Boulevard, Suite 190
Palm Beach Gardens, Florida 33410
DESCRIPTION OF E2000 CAPITAL STOCK
E2000 has the authority to issue 52,000,000 shares of capital stock,
consisting of 50,000,000 shares of common stock, $.01 par value and 2,000,000
shares of preferred stock, $.01 par value.
E2000 DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS
The directors, executive officers, and control persons of E2000 are as
follows:
LENGTH OF
NAME AGE OFFICES HELD SERVICE
---- --- ------------ -------
Henry Fong 64 President, Treasurer Since inception
and Director
Thomas B. Olson 34 Secretary Since inception
Aaron A. Grunfeld 53 Director Since inception
Russell L. Casement 56 Director Since inception
HENRY FONG. Mr. Fong has been the President, Treasurer and a director of
E2000 since its inception. Mr. Fong is currently the president, treasurer and
director of Equitex. 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 Company and was its president
and treasurer from 1987 to 1996. Subsequent to Mr. Fong's departure from RDM, it
filed Chapter 11 bankruptcy petitions for RDM and all of its subsidiaries
with the U.S. Bankruptcy Court for the Northern District of Georgia on August
29, 1997. 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 has passed the uniform certified public
accountant exam. 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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THOMAS B. OLSON. Mr. Olson has been Secretary of E2000 since its inception.
Mr. Olson is currently the Secretary of Equitex. From February 1990 to February
2000, Mr. Olson was a director, and from May 1994 to February 2000 secretary, of
Immune Response, Inc. a publicly held investee of the Registrant which was
recently merged with an unaffiliated third party company. Mr. Olson has attended
Arizona State University and the University of Colorado at Denver.
AARON A. GRUNFELD. Mr. Grunfeld has been a director of E2000 since its
inception. Mr. Gunfeld is currently a director of Equitex. Mr. Grunfeld has been
engaged in the practice of law for the past 28 years and has been of counsel to
the firm of Resch Polster Alpert & 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.
RUSSELL L. CASEMENT. Dr. Casement has been a director of E2000 since its
inception. Mr. Casement is currently a director of Equitex. 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.
VOTE REQUIRED
The affirmative vote of the outstanding stock of each class entitled to
vote thereon as a class, at the stockholders' meeting will be required to
approve the proposal to distribute all of the Company's assets to Equitex 2000,
Inc. and to distribute all of its outstanding shares of common stock of Equitex
2000, Inc. to shareholders of the Company. THE BOARD OF DIRECTORS RECOMMENDS A
VOTE FOR THE PROPOSAL TO DISTRIBUTE ALL OF THE COMPANY'S ASSETS TO EQUITEX 2000,
INC. AND TO DISTRIBUTE ALL OF ITS OUTSTANDING SHARES OF COMMON STOCK OF EQUITEX
2000, INC. TO SHAREHOLDERS OF THE COMPANY.
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PROPOSAL NUMBER THREE
TO ACQUIRE ALL OF THE OUTSTANDING CAPITAL
STOCK OF NOVA FINANCIAL SYSTEMS, INC.
AND KEY FINANCIAL SYSTEMS, INC. IN
EXCHANGE FOR THE GREATER OF 7,140,000 SHARES,
OR 50%, OF THE OUTSTANDING COMMON STOCK OF THE COMPANY
ON A POST ACQUISITION BASIS AND CASH CONSIDERATION OF $5 MILLION.
THIS PROPOSAL IS SUBJECT TO THE APPROVAL OF PROPOSAL NUMBER ONE
The Board of Directors recommends the approval of the acquisition of Nova
Financial Systems, Inc. and Key Financial Systems, Inc.
On June 29, 2000 the Company signed a definitive agreement with Nova
Financial Systems, Inc. ("Nova") and Key Financial Systems, Inc. ("Key") to
acquire all the outstanding capital stock of Nova and Key in exchange for the
greater of 7,140,000 shares, or 50% of the outstanding Common Stock of the
Company on a post acquisition basis and cash consideration of $5 million. While
these transactions are structured as reverse subsidiary mergers of the Company's
acquisition subsidiaries which do not require the approval of the Company's
shareholders, because more than 20% of the Company's outstanding common stock
will be issued in the transaction, the stock exchange requires approval by the
Company's shareholders. The Company would operate Nova and Key as subsidiaries.
Nova and Key are both financial companies which specialize in selling credit
card programs designed for high credit risk clients. Consummation of the Nova
and Key mergers is subject to a number of conditions, including: (i) the
distribution of all of the Company's assets, net of all liabilities assumed, to
E2000 and the Spin-Off; (ii) the approval of the Nova and Key mergers by our
stockholders; and (iii) the approval of the increase in the authorized shares of
Common Stock from 7,500,000 shares to 50,000,000 shares. Nova and Key may waive
the approval of the increase in authorized shares if the Company's shareholder
meeting has not been held prior to the closing of the mergers or the closing may
be postponed until the Company's shareholder meeting has been held and an
amended Certificate of Incorporation has been filed in Delaware.
BUSINESS OF NOVA FINANCIAL SYSTEMS, INC. AND KEY FINANCIAL SYSTEMS, INC.
Key was established in Clearwater, Florida in June 1997 to design, market
and service credit card products aimed at the sub-prime credit market. In late
1998, a sister company, Nova, was formed to provide the same services as Key for
Key's second bank client. Key is currently marketing for Net 1st National Bank
and Key and Nova have 100 percent loan participation interest in three
portfolios owned by Key Bank & Trust, Merrick Bank and Net 1st National Bank. As
of August 31, 2000, Key and Nova have processed over 772,000 credit card
applications and currently have 88,947 active credit card accounts.
Together, Key and Nova are a full service organization, operating from
17,000 square feet with 118 employees. They provide credit card portfolio
management services including:
APPLICATION PROCESSING. Key and Nova provide automated application
processing services with a proprietary software system including application
entry by data file or paper, underwriting and data edits, processing fee payment
processing by ACH or check, and return item processing. Key and Nova generate
files for uploading new credit card account records to Equifax and FDR.
CUSTOMER SERVICE. Key and Nova handle inbound customer service calls and
written correspondence from customers concerning their application or credit
card account. They have access to Equifax and FDR for card servicing and use
their in-house application processing system for access to application
information. They also provide customers the ability to make payments over the
telephone.
MEDIATION. Key and Nova have designated specialists to provide mediation
between their Bank clients and their customers. They have established formal
procedures for managing customer complaints and have a formal reporting process
to their client Banks.
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COLLECTIONS. Key and Nova provide collection services for their portfolios.
They use proprietary dialing software and collections management techniques to
effectively collect sub-prime credit card accounts.
RISK MANAGEMENT. Key and Nova monitor suspect authorization activity and
unusually large or suspicious payment activity. They provide all account control
functions to minimize loss exposure from payment and sales activity.
ACCOUNTING. Key and Nova process exception payments and all payment
returns. They control and process fee adjustments pursuant to the client Bank's
policy. They perform the daily settlement accounting for the credit card
portfolio. They have developed a proprietary commission accounting system to
track compensation due their marketing vendors.
MANAGEMENT INFORMATION SYSTEMS. Key and Nova use cutting-edge technologies
in hardware and software and have their own internal software development
capabilities. Their technology resources include:
o Proprietary application processing system;
o Proprietary ACD (Automated Call Distribution) telephone system;
o Proprietary dialing systems using Dialogic hardware;
o Customized reporting from any application system;
o FoxPro, Sequel Server and Microsoft Access Databases; and
o NT Network with interfaces to FDR and Equifax.
Support equipment includes:
o 8 servers;
o 250 personal computers; and
o DS3 (576 incoming and outbound telephone lines).
PRODUCT. Key currently offers an innovative product to customers with poor
or little credit histories. There are no credit checks or credit turndowns. Key
designed a "Pay-As-You-Go" credit card that is issued with a $500 credit limit,
with zero availability at issuance. The customers must make payments to have
available credit on their account. This is accomplished by charging the
customer's account at issuance, with a fully refundable "Reservation Fee" of
$500. The fee is refunded as a credit to the customer's account at closure,
either at the customer's request or if the account is charged-off. There is an
$8 monthly membership fee and the balance is not subject to any interest charge.
The account requires a minimum payment of 3%, or $15 for each billing statement.
KEY AND NOVA TARGET MARKET. The opinions on the size of the sub-prime
market vary depending on the particular label described, however, a 1996 survey
from Faulkner and Gray, a respected research firm, estimated the size of this
market in the U.S. at 30 million and growing. More recent surveys by MasterCard
International indicate the number to be at least twice as large. There are two
basic segments in this market:
1. EMERGING/THIN FILES - includes ethnic/immigrants groups, youth,
elderly on fixed income, divorced, widows/widowers; and
2. RECOVERING/CREDIT IMPAIRED - includes credit abusers with a history of
credit problems including bankruptcies and those who have experienced
a catastrophic one-time life event that destroyed their credit, such
as death, illness or divorce.
According to MasterCard International, this large underdeveloped segment
includes 25-30% of U.S. households. This market has continuous segment growth
and a 50% higher profit potential than the industry average (i.e. interest
rates, processing fees, annual/membership fees, ancillary fees, etc.).
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COMPETITION. Today, sub-prime credit cards continue to be marketed
successfully to consumers throughout the U.S. with poor or limited credited
histories. Generally, four types of credit cards are offered to sub-prime
consumers in the marketplace:
1. Fully secured;
2. Partially secured;
3. High fee unsecured; and
4. Low limit unsecured.
The fully secured credit card is collateralized by a savings account equal
to the credit limit. This type of credit card is difficult to sell and therefore
not marketed as aggressively today. The fully secured card has low risk but has
a high acquisition cost since a deposit has to be collected up front, which
creates a challenging marketing hurdle. Most of the major issuers of traditional
unsecured cards offer fully secured credit cards through their branch systems
and as an alternative to the unsuccessful applicants for a regular card.
The partially secured credit card requires a collateral savings account but
is issued with some unsecured credit - usually $50 - $300. The major issuers of
these types of cards are Capital One, Providian, First National Bank of Marin,
First Consumers National Bank, Sterling Bank, and most others in the sub-prime
segment. The product is offered through all major distribution channels,
including direct mail, television and the Internet. While the credit exposure
per account is limited, issuers use credit based underwriting and decline
applicants for card issuance.
The high fee unsecured credit card generally has less credit exposure than
partially secured credit cards. A high non-refundable fee is charged on the card
in order to limit the amount of available credit. Most of these card programs do
not collect a up front processing fee. The high fee card programs are usually
offered by banks that specialize in arranging relationships with marketing
companies that sell the product and purchase the receivable from the issuing
banks.
Many issuers, based on credit scoring models that have been developed in
recent years, are now offering a low limit unsecured product. They are targeting
the "improving" segment of the sub-prime customer base. Most have annual fees
and many charge an application processing fee. Providian, Capital One, First
Consumers National Bank, First Premier Bank, NA and many others are aggressively
marketing this product. These programs have a significant number of declined
applications as a large segment of the sub-prime market will not qualify.
The Pay As You Go credit card was designed with the purpose of having a low
risk profile for Key and Nova while being more competitive than most other
sub-prime credit cards in the market. All the other programs charge a high
interest rate with an annual fee. In most cases, Key's membership fee is less
costly than the interest and annual fee charged on other programs. Key and Nova
have no credit turn downs, which significantly improves response rates and the
financial effectiveness of their marketing efforts. There will always be a
significant number of consumers that will not qualify for the other sub-prime
products or do not want to invest in a collateral savings account.
MARKETING. Key and Nova have developed strategic relationships with
companies that have significant marketing abilities in the major distribution
channels, including inbound/outbound telesales, direct mail, television, and the
Internet. Key and Nova manage and control all marketing programs related to the
products offered by them. In addition, Key and Nova have access to proprietary
methods of managing lists to identify the best potential customers from lists
available in the market.
Currently Key and Nova's most active distribution channel is the Internet.
Key markets through alliances with a number of popular Internet web sites
including: Creditland.com, uproar.com, Mail.com, Spinway.com, GetSmart.com,
NetCreations.com, Lendingtree.com, winvite.com and USA.net. The Pay As You Go
card was recently ranked as the number two most popular credit card site on the
Internet by top9.com which reported over four million unique visitors during the
month of July.
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DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS OF KEY AND NOVA. The
directors, executive officers, and control persons of Key and Nova are as
follows:
LENGTH OF
NAME AGE OFFICES HELD SERVICE
---- --- ------------ -------
Charles R. Darst 53 Director, Secretary Since inception
as a director,
since September
2000 as secretary
Scott A. Lucas 49 President, Chief Financial Since inception as
Officer and Director a director, since
1998 as president
CHARLES R. DARST. Mr. Darst has been a board director and Director of
Marketing of the Key and Nova from their inception. He has been an owner,
partner, and operating manager of several businesses over 25 years, including:
Quintel Cellular, LC (a joint venture with a public company to market prepaid
cellular); Big Dog Management (list brokerage); Account Services, Inc.
(electronic funds transfer ACH and SEAs); Direct Sources, Inc. (membership
buying clubs); US Power Corp. (solar energy); and Airport Flea Market. Mr. Darst
serves as Chairman of the Ethics Committee on National Automated Payment
Associated Board of Directors.
SCOTT A. LUCAS. Mr. Lucas has been a director of Key and Nova since their
inception. Since September of 1998 he has served as President of Key. He has
served in the same capacities for Nova since its inception. From 1993 through
1997 Mr. Lucas held various executive management positions with First National
Bank of Marin and its affiliates. In all, Mr. Lucas has more than 26 years
experience in the financial services industry, where he has held positions as
President, COO, CFO, Vice President and other management positions in banking
and insurance. Mr. Lucas received a B.S. in Business Administration from the
University of California, Berkeley in 1973.
PRINCIPAL OFFICE OF KEY
Key Financial Systems, Inc.
5770 Roosevelt Blvd, Suite 410
Clearwater, Florida 33760-3431
(727) 524-8410
PRINCIPAL OFFICE OF NOVA
Nova Financial Systems, Inc.
5770 Roosevelt Blvd, Suite 410
Clearwater, Florida 33760-3431
(727) 524-8410
KEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This section containing Key Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction with
the Financial Statements of Key as of and for the periods ended June 30, 2000,
December 31, 1999 and December 31, 1998 attached as Exhibit 3 to this proxy
statement.
INTRODUCTION
Key designs and markets credit card products aimed at the sub-prime market.
The credit card products are marketed for unaffiliated banks under agreements
that provide Key with a 100% participation interest in the receivables and
related rights associated with credit cards issued and requires the payment of
monthly servicing fees to the client banks. Key provides collection, customer
service and other portfolio management services to the credit cards issued.
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RESULTS OF OPERATIONS
1999 vs. 1998
-------------
CREDIT CARD INCOME
Credit card servicing fees, Key's principal source of earnings, are credit
card fees accessed on credit card accounts owned by Key's client bank. These
include monthly membership fees, late charges, overlimit fees, and return check
fees. The fees are paid to Key under a 100% loan participation agreement with
the client bank. Credit card servicing fees increased 229% to $11,628,340 over
1998 as a result of an increase in active credit card accounts. The average
number of active accounts was 107,068 in 1999 versus 42,741 in 1998, a 151%
increase. This increase in average active accounts was due to the majority of
the new account volume in 1998 occurring in the second half of the year, 83% of
the total annual volume of 142,116, and the 105,806 new accounts booked in the
first four months of 1999.
PROVISION FOR LOSSES
The provision for loan losses is the charge to operating earnings that
management feels is necessary to maintain the reserve for possible loan losses
at an adequate level. The provision in 1999 increased 97% over 1998. This
increase was due to the higher number of active accounts in 1999 versus 1998.
The reserve balance at 12/31/99 is 72% lower than December 31, 1998 due to the
reduction in credit card receivables of $30,047,059 or 57%, versus December 31,
1998. The provision is determined based on growth of the loan portfolio, the net
amount of loan losses incurred, and management's estimation of potential future
loan losses based on an evaluation of the loan portfolio risks, adequacy of
underlying collateral, and economic conditions. At December 31, 1999 and 1998,
Key's allowance for loan losses was $60,466 or 10.42% of loans, net of unearned
income, compared to $217,872 or 16.27% of loans, net of unearned income.
Management believes that the reserve for possible loan losses was adequate to
provide for potential loan losses at December 31, 1999 and 1998.
OTHER INCOME
Other income increased 198% to $4,827,558 over 1998 primarily due to
servicing fee charges paid by an affiliate of Key for credit card processing
services provided during 1999 that did not occur in 1998. The other significant
component of other income is applications fees, which declined 26% between 1999
and 1998. This decline was due to the cessation of new card marketing during
1999. Key began marketing with a new client bank in January of 2000.
OPERATING EXPENSES
During 1999 operating expenses increased $6,319,547 to $10,806,166. The
increase is due to a significant increase in personnel related costs of
$3,447,910, payments to third party service providers of $1,942,711, occupancy
and equipment of $290,514, and other operating expenses of $638,412. The
increase in personnel related expenses is due to the increase in staff levels
for servicing support for Key's credit card portfolio and the other portfolio
that is serviced on behalf of our affiliate. The payment to third party vendors
is for data processing and other portfolio services provided on Key's behalf.
The increase in these costs is related to the growth in active credit card
accounts. The increase in occupancy and equipment is directly related to the
increase in staff. The increase in other operating expenses is due to the
increase in the serviced portfolios, with the largest increase in
telecommunications expense. These increases in operating expenses are partially
offset by the increase in other income representing the portfolio servicing fee
charges to our affiliate.
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<PAGE>
Six months ended June 30, 2000 vs. 1999
---------------------------------------
CREDIT CARD INCOME
Credit card servicing fees decreased 55% to $3,478,308 from 1999 as a
result of the decrease in active credit card accounts, which was due to Key
ceasing new credit card marketing from April 1999 to January of 2000. Key agreed
to cease marketing of new accounts in April of 1999 at the request of our
initial client bank. The new card volume was transferred to the client bank of
Key's affiliate company, Nova Financial Systems, Inc. The average number of
active accounts during the first six months of 2000 was 50,352 versus 131,453 in
the same period of 1999, a 62% decrease. The new account volume in 2000 was
30,205 compared to 110,821 for the first six months of 1999, a 73% decrease.
PROVISION FOR LOSSES
The provision for the first six months of 2000 was a net credit of $14,955
versus a charge to income of $610,935 for the first six months of 1999. This
decrease was due to a significant reduction in actual losses in 2000 and
required reserve levels at June 30, 2000. The reserve balance at June 30, 2000
is 87% lower than the same period in 1999 due to the reduction in credit card
receivables of $31,844,126 or 56%, versus June 30, 1999 and the lower actual
loss experience in 2000. At June 30, 2000 and 1999, Key's allowance for loan
losses was $38,845 or 8.20% of loans, net of unearned income, compared to
$300,250 or 13.137% of loans, net of unearned income. Management believes that
the reserve for possible loan losses was adequate to provide for potential loan
losses at June 30, 2000 and 1999.
OTHER INCOME
Other income decreased 47% to $1,375,359 versus the first six months of
1999 primarily due to lower servicing fee charges paid by an affiliate of Key
for credit card processing services. Application processing fee income declined
42% to $654,547. This decline was due to higher new application volume in the
first six months of 1999 versus 2000.
OPERATING EXPENSES
Operating expenses for the six months ended June 30, 2000 decreased
$2,383,058 to $3,298,398. The decrease is due to a 37% reduction in personnel
related costs of $844,033, 55% lower payments to third party service providers
of $1,556,653, and 14% lower other operating expenses of $61,975. The decrease
in personnel related expenses is due to the lower staff levels for servicing
support for Key's credit card portfolio and the other portfolio that is serviced
on behalf of our affiliate. The decrease in third party servicing fees is
related to the reduction in active credit card accounts. The increase in
occupancy and equipment is due to additional space acquired in June of 1999 that
is reflected in the 2000 expenses. The decrease in other operating expenses is
due to the decrease in the serviced portfolios, with the largest decrease in
telecommunications expense.
LIQUIDITY FOR 1999 VS. 1998 AND THE SIX MONTHS ENDED JUNE 30, 2000 VS.
JUNE 30, 1999
Cash flow provided by operations from 1998 to 1999 increased 27% to
3,507,625 from $2,763,534. Cash flow provided by operations for the first six
months of 2000 was $2,260,809, an 11% decrease compared to the same period in
1999. Key is debt free and funds operating expenses and capital expenditures
from current operating cash flow. Funds due under the loan participation
agreements are received on a monthly basis shortly after each month end.
Dividends made to shareholders are paid net of projected required cash flows for
operating expenses for the period to the next receipt of the monthly income
distribution from the client banks.
-39-
<PAGE>
INFLATION
The amounts presented in the financial statements do not provide for the
effect of inflation on Key's operations or its financial position. Key's assets
and liabilities are primarily monetary in nature. However, the majority of the
assets and liabilities are interest free and not subject to any effect from
increases or decreases in market interest rates due to external economic
factors.
NOVA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This section containing Nova Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction with
the Financial Statements of Key as of and for the periods ended June 30, 2000,
December 31, 1999 and December 31, 1998 attached as Exhibit 2 to this proxy
statement.
INTRODUCTION
Nova designs and markets credit card products aimed at the sub-prime
market. The credit card products were marketed for a unaffiliated bank under an
agreement that provides Nova with a 100% participation interest in the
receivables and related rights associated with credit cards issued and requires
the payment of monthly servicing fees to the client bank. Nova ceased marketing
new credit cards in August of 1999. The current revenues of Nova are the result
of the participation interest in the credit card portfolio. Most of Nova's
expenses are variable, related to the number of active credit card accounts in
the portfolio.
RESULTS OF OPERATIONS
1999 vs. 1998
-------------
CREDIT CARD INCOME
Credit card servicing fees, Nova's principal source of earnings, are credit
card fees accessed on credit card accounts owned by Nova's client bank. These
include monthly membership fees, late charges, overlimit fees, and return check
fees. The fees are paid to Nova under a 100% loan participation agreement with
the client bank. Credit card servicing fees increased to $7,278,767 over $1,102
for 1998 as a result of an increase in active credit card accounts. The average
number of active accounts was 76,623 in 1999 versus 20 for 1998.
PROVISION FOR LOSSES
The provision for loan losses is the charge to operating earnings that
management feels is necessary to maintain the reserve for possible loan losses
at an adequate level. The provision in 1999 increased to $676,343 versus $192
for 1998. This increase was due to the higher number of active accounts in 1999
versus 1998. The provision is determined based on growth of the loan portfolio,
the net amount of loan losses incurred, and management's estimation of potential
future loan losses based on an evaluation of the loan portfolio risks, adequacy
of underlying collateral, and economic conditions. At December 31, 1999 and
1998, Nova's allowance for loan losses was 469,032 or 43.10% of loans, net of
unearned income, compared to $192 or 17.60% of loans, net of unearned income.
Management believes that the reserve for possible loan losses was adequate to
provide for potential loan losses at December 31, 1999 and 1998.
OTHER INCOME
Other income increased to $1,942,520 over the $2,751 in 1998 due to the
increase in application fees received on new credit card accounts in 1999.
-40-
<PAGE>
OPERATING EXPENSES
During 1999, operating expenses increased from $7,377 to $8,349,475. The
increase is due to the costs associated with the new credit card volume in 1999.
This included $2,112,092 in payments to Nova's affiliate for Application
processing services, payments to third party vendors of $5,934,125, for data
processing and other portfolio services, and other operating expenses of
$303,258.
Six months ended June 30, 2000 vs. 1999
---------------------------------------
CREDIT CARD INCOME
Credit card servicing fees increased 212% to $2,859,448 from the first six
months of 1999 as a result of the increase in active credit card accounts. The
average number of active accounts during the first six months of 2000 was 62,735
versus 20,859 in the same period of 1999, a 201% increase.
PROVISION FOR LOSSES
The provision for the first six months of 2000 was a net credit of $221,622
versus a charge of $95,463 for the first six months of 1999. The actual
principal loss experience for 2000 has been significantly less than the
projected loss exposure recorded at 12/31/99. Some of the reduction in principal
losses in 2000 was offset by an increase in the fee reversals per account at
charge-off. The reserve balance at June 30, 2000 is 15% lower than the same
period in 1999 due to the reduction in credit card receivables. At June 30, 2000
and 1999, Nova's allowance for loan losses was $77,495 or 13.91% of loans, net
of unearned income, compared to $91,158 or 9.20% of loans, net of unearned
income. The higher reserve percentage at June 30, 2000 is due to the larger
percentage of newer accounts at June 30, 1999, many which are charged-off with
little or no principal loss. Management believes that the reserve for possible
loan losses was adequate to provide for potential loan losses at June 30, 2000
and 1999.
OTHER INCOME
Other income was a net charge of $2,403 for the first six months of 2000,
as the result of refunds of application fees. There were no new application fees
in 2000. Nova established 75,052 new credit card accounts in the first six
months of 1999.
OPERATING EXPENSES
Operating expenses for the six months ended June 30, 2000 increased to
$2,558,026, a 25.6% increase over the same period in 1999. The increase is due
to higher third party servicing fees and an increase in collection fees paid to
Nova's affiliate. The increase in operating expenses is directly related to the
higher level of active credit cards. In 1999, Nova incurred new account
processing costs that did not occur in 2000.
LIQUIDITY FOR 1999 VS. 1998 AND THE SIX MONTHS ENDED JUNE 30, 2000 VS.
JUNE 30, 1999
Cash flow provided by operations from 1998 to 1999 increased to $1,301,349.
Cash flow provided by operations for the first six months of 2000 was $81,125
compared to cash provided of $1,075,679 for the same period in 1999. Nova is
debt free and funds operating expenses and capital expenditures from current
operating cash flow. Funds due under the loan participation agreements are
received on a monthly basis shortly after each month end. Dividends made to
shareholders are paid net of projected required cash flows for operating
expenses for the period to the next receipt of the monthly income distribution
from the client banks.
-41-
<PAGE>
INFLATION
The amounts presented in the financial statements do not provide for the
effect of inflation on Nova's operations or its financial position. Nova's
assets and liabilities are primarily monetary in nature. However, the majority
of the assets and liabilities are interest free and not subject to any effect
from increases or decreases in market interest rates due to external economic
factors.
EQUITEX, INC. AND E2000 PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information sets forth summary
condensed consolidated historical and pro forma financial data of Equitex and
E2000. The summary historical data has been derived from and should be read in
conjunction with the audited consolidated financial statements included in
Equitex's Annual Report on Form 10-K for the year ended December 31, 1999 and
unaudited financial data included in Equitex's Quarterly Reports on Form 10-Q
for the quarterly periods ended March 31, 2000 and June 30, 2000, all of which
are incorporated herein by reference. The summary pro forma financial data has
been derived from Equitex's unaudited pro forma condensed financial statements
for the six month period ended June 30, 2000 and for the year ended December 31,
1999 included in this proxy statement. You should read the following table in
conjunction with the other financial information included and incorporated into
this proxy statement.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
On June 29, 2000, Equitex, Inc. and subsidiaries (the "Company", or
"Equitex"), a publicly traded company, signed a definitive agreement with Key
Financial Systems, Inc. ("Key") and Nova Financial Systems, Inc. ("Nova") to
acquire all of the outstanding capital stock of Key and Nova in exchange for the
greater of 7,140,000 shares of Equitex common stock or 50% of the Company's
post-acquisition common stock outstanding and $5 million cash. Key and Nova are
both financial services companies, which specialize in selling credit card
programs designed for high credit risk clients. Prior to the Company's
acquisition of Key and Nova, the Company has completed, or intends to complete,
the following transactions:
1. Effective September 27, 2000, the Company, through a newly-formed
subsidiary, GR.com, Inc., acquired all of the issued and outstanding common
stock of the Meridian Residential Group, Inc. ("MRG") in exchange for
425,000 shares of Series F participating convertible preferred stock. In
addition, Equitex 2000, Inc. ("E2000" discussed below) is to issue
additional shares of common stock to the MRG shareholders having a market
value, at the time of issuance, equal to 20% of the annual increase in
pre-tax net earnings compared to the immediately preceding year of the MRG
business for each of the five years subsequent to closing, commencing with
the year ending December 31, 2000, subject to certain limitations as
defined.
The Company, through its subsidiary nMortgage, Inc., also acquired the
proprietary business model, website, trademarks, corporate names and all
intellectual property rights related to the Meridian GreatRate.com
business, including the names GreatRate.com and GreatRate Mortgage.com from
Meridian Capital Group, LLC ("MCG"), a company affiliated with MRG through
common ownership, for $850,000 cash.
2. The Company intends to increase the number of authorized shares of the
Company's common stock from 7,500,000 shares to 50,000,000 shares, subject
to shareholder approval. Subsequent to an increase in the Company's
authorized shares of the Company's common stock, the Company intends to
issue 50 shares of Series E convertible preferred sock, valued at $353,000
in consideration for services received and issue 1,300 shares of Series G,
6% cumulative, convertible preferred stock for cash of $1,300,000.
-42-
<PAGE>
3. Subsequent to the transactions described above, the Company intends to
distribute all of its assets (which primarily consist of its investments in
subsidiaries) to Equitex 2000, Inc. ("E2000"), a newly formed subsidiary of
the Company. E2000 also is to assume all liabilities of the Company. The
outstanding common shares of E2000 are then to be distributed to the
shareholders of the Company based on proportional ownership of the shares
held by the Company's shareholders in a spin-off transaction.
As a result of the transactions described above, the Company will be a
publicly traded, non-operating entity immediately prior to the date of the
Company's acquisition of Key and Nova. The Company plans to record the
acquisitions of Key and Nova as an acquisition of Equitex, Inc. and a
recapitalization of Key and Nova.
4. In order to finance the Company's acquisition of Key and Nova, the Company
intends to issue up to 5,500 shares of Series H, 6% cumulative convertible
preferred stock for net proceeds of $5,000,000 (net of $500,000 issue
costs).
The following unaudited pro forma condensed statements of operations for
Equitex and E2000 for the year ended December 31, 1999, and the six months ended
June 30, 2000, give effect to the transactions as if they had occurred on
January 1, 1999 and January 1, 2000, respectively. The following unaudited pro
forma condensed balance sheets of Equitex and E2000 as of June 30, 2000, give
effect to the transactions as if they had occurred on June 30, 2000.
These unaudited pro forma condensed financial statements do not purport to
present results which would actually have been obtained if the transactions had
been in effect during the periods covered or any future results which may in
fact be realized. These unaudited pro forma condensed financial statements
should be read in conjunction with the accompanying notes and the separate
historical financial statements of the companies referred to above.
-43-
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED BALANCE SHEET
June 30, 2000
<TABLE>
<CAPTION>
Pro forma Distribution Acquisition
Preferred combined of assets/ Pro forma of
Equitex, Inc. stock prior to assumption of combined Key/Nova
and transactions distribution liabilities prior to (combined
subsidiaries and Meridian to Equitex to/by Equitex Key/Nova balance Pro forma
ASSETS Historical acquisition 2000, Inc. 2000, Inc. acquisition sheets) combined
----------- ---------- ----------- ------------ ------------ ----------- -----------
(See B)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 220,161 $1,300,000 A2) $ 670,161 $ (670,161) $ $ 5,000,000 C1) $ 165,165
(850,000) A3) 165,165 C2)
(5,000,000) C2)
Receivables 1,476,237 1,476,237 (1,476,237) 7,868,851 C2) 7,868,851
Inventories 103,615 103,615 (103,615)
Investments 2,542,214 2,542,214 (2,542,214)
Investment in Meridian 3,248,000 A3) 3,248,000 (3,248,000)
Residential Group, Inc. 280,208 C2) 280,208
Fixed assets, net 162,260 162,260 (162,260)
Intangible and other
assets 3,776,653 850,000 A3) 4,626,653 (4,626,653) 17,317 C2) 17,317
----------- ---------- ----------- ------------ ------------ ----------- -----------
Total assets $ 8,281,140 $4,548,000 $12,829,140 $(12,829,140) $ 0 $8,331,541 $8,3331,541
=========== ========== =========== ============ ============ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 779,912 $ 779,912 $ (779,912) $ 1,560,624 C2) $ 1,560,624
Accrued expenses
and other liabilities 77,804 77,804 (77,804) 900,367 C2) 900,367
Notes payable 1,371,097 1,371,097 (1,371,097)
Due to cardholders 4,691,825 C2) 4,691,825
----------- ---------- ----------- ------------ ------------ ----------- -----------
Total liabilities 2,228,813 2,228,813 (2,228,813) 7,152,816 7,152,816
----------- ---------- ----------- ------------ ------------ ----------- -----------
Minority interest 5,488,070 5,488,070 (5,488,070)
----------- ---------- ----------- ------------ ------------ ----------- -----------
Stockholders' equity:
Preferred stock-Series D 1,200,000 1,200,000 $ 1,200,000 1,200,000
Preferred stock-Series E 250,000 $ 50,000 A1) 300,000 300,000 300,000
Preferred stock-Series F 3,248,000 A3) 3,248,000 3,248,000 3,248,000
Preferred stock-Series G 1,300,000 A2) 1,300,000 1,300,000 1,300,000
Preferred stock-Series H 0 0 5,000,000 C1) 5,000,000
Common stock 142,806 142,806 142,806 142,806 C2) 285,612
Additional paid-in
capital 19,166,127 303,000 A1) 19,469,127 (5,112,257) 14,356,870 (25,291,737) C2) (10,934,867)
Treasury stock (114,037) (114,037) (114,037) 114,037 C2)
Retained earnings (loss) (20,080,639) (353,000) A1) (20,433,639) (20,433,639) 21,213,619 C2) 779,980
----------- ---------- ----------- ------------ ------------ ----------- -----------
Total liabilities and
stockholders' equity $ 8,281,140 $4,548,000 $12,829,140 $(12,829,140) $ 0 $ 8,331,541 $ 8,331,541
=========== ========== =========== ============ ============ =========== ===========
</TABLE>
See notes to unaudited proforma condensed financial statements.
-44-
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED STATEMENT OF
OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Adjustments Adjustments to reflect
to reflect the acquisitions of
Equitex, Inc. distribution Key and Nova
and of assets/ --------------------------------------
subsidiaries Preferred liabilities Adjustments
------------ stock to Equitex Key Nova and Pro forma
Historical transactions 2000, Inc. historical historical Eliminations combined
------------ ----------- ----------- --------------------------------------- -----------
(See B) (See C1) (See C1)
<S> <C> <C> <C> <C> <C> <C> <C>
Product sales $ 220,588 $ (220,588)
Credit card income $ 3,564,673 $2,968,998 $ 6,533,671
Interest and dividend
income 334,655 (334,655)
Loan production and
processing 293,065 (293,065)
Secondary market, net 871,134 (871,134)
Application fees, net of
direct marketing costs 654,547 (2,403) 652,144
Servicing fee income 672,420 (672,420)
Other 59,278 (59,278) 48,892 48,892
------------ ----------- ----------- -------------------------------------- -----------
Total income 1,778,720 (1,778,720) 4,940,532 2,966,595 (672,420) 7,234,707
Cost of sales 136,321 (136,321)
------------ ----------- ----------- -------------------------------------- -----------
Gross profit 1,642,399 (1,642,399) 4,940,532 2,966,595 (672,420) 7,234,707
------------ ----------- ----------- -------------------------------------- -----------
Selling, general and
administrative 4,071,188 $ 353,000 A1) (4,071,188) 2,016,794 290,869 2,660,663
Loan production and
processing 739,735 (739,735)
Application processing
fees and third party
servicing fees 1,281,604 2,267,157 (672,420) 2,876,341
Provision for credit card
losses (14,955) (221,622) (236,577)
Unrealized holding (gains)
losses on trading
securities 40,261 (40,261)
Realized (gains) losses on
investment sales 62,529 (62,529)
Equity in (earnings)
losses of affiliates 562,898 (562,898)
Interest expense 684,393 (684,393)
Loss on First Bankers
Mortgage Services, Inc.
recission 4,438,932 (4,438,932)
Other (income) expense (73,478) 73,478
------------ ----------- ----------- -------------------------------------- -----------
Total operating expenses 10,526,458 353,000 (10,526,458) 3,283,443 2,336,404 (672,420) 5,300,427
------------ ----------- ----------- -------------------------------------- -----------
Income (loss) before
income taxes (8,884,059) (353,000) 8,884,059 1,657,089 630,191 1,934,280
Provision for income taxes 891,000 C3) 891,000
------------ ----------- ----------- -------------------------------------- -----------
Net income (loss) (8,884,059) (353,000) 8,884,059 1,657,089 630,191 (891,000) 1,043,280
Amortization of discount
on Series G and H
preferred stock (700,000) A2) (2,692,000) C1) (3,392,000)
Deemed preferred stock
dividends, Series D, G
and H (35,900) (39,000) A2) (150,000) C1) (224,900)
------------ ----------- ----------- -------------------------------------- -----------
Net income (loss)
applicable to common
shareholders $ (8,919,959) $(1,092,000) $ 8,884,059 $ 1,657,089 $ 630,191 $(3,733,000) $(2,573,620)
============ =========== =========== ====================================== ===========
Basic and diluted net
income (loss) per common
share $ (1.25) $ (0.18)
============ ===========
Weighted average number of
common shares outstanding 7,140,293 14,280,586
============ ===========
</TABLE>
See notes to unaudited proforma condensed financial statements.
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<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Adjustments
to Adjustments to reflect
reflect the acquisitions of
Equitex, Inc. distribution Key and Nova
and of assets/ ---------------------------------------
subsidiaries Preferred liabilities Adjustments
------------ stock to Equitex Key Nova and Pro forma
Historical transactions 2000, Inc. historical historical Eliminations combined
------------ ----------- ----------- --------------------------------------- -----------
(See B) (See C1) (See C1)
<S> <C> <C> <C> <C> <C> <C> <C>
Product sales $ 738,456 $ (738,456)
Credit card income $11,875,107 $7,405,882 $19,280,989
Interest and dividend
income 878,998 (878,998)
Loan production and
processing 302,811 (302,811)
Secondary market, net 395,034 (395,034)
Application fees, net of
direct marketing costs 935,015 1,942,520 2,877,535
Servicing fee income 3,832,736 $(3,832,736)
Other 103,965 (103,965) 59,807 59,807
------------ ----------- ----------- -------------------------------------- -----------
Total income 2,419,264 (2,419,264) 16,702,665 9,348,402 (3,832,736) 22,218,331
Cost of sales 488,767 (488,767)
------------ ----------- ----------- -------------------------------------- -----------
Gross profit 1,930,497 (1,930,497) 16,702,665 9,348,402 (3,832,736) 22,218,331
------------ ----------- ----------- -------------------------------------- -----------
Selling, general and
administrative 7,133,529 $ 353,000 A1) (7,133,529) 5,827,887 303,258 6,484,145
Loan production and
processing 728,501 (728,501)
Application processing
fees and servicing fees 4,978,279 8,046,217 (3,832,736) 9,191,760
Provision for credit card
losses 511,645 676,343 1,187,988
Unrealized holding (gains)
losses on trading
securities 1,368,783 (1,368,783)
Realized (gains) losses on
investment sales (797,516) 797,516
Equity in (earnings)
losses of affiliates 418,209 (418,209)
Interest expense 795,550 (795,550)
------------ ----------- ----------- -------------------------------------- -----------
Total operating expenses 9,647,056 353,000 (9,647,056) 11,317,811 9,025,818 (3,832,736) 16,863,893
------------ ----------- ----------- -------------------------------------- -----------
Income (loss) before
income taxes (7,716,559) (353,000) 7,716,559 5,384,854 322,584 5,354,438
Provision for income taxes 117,500 2,108,400 C3) 2,225,900
------------ ----------- ----------- -------------------------------------- -----------
Net income (loss) (7,716,559) (353,000) 7,716,559 5,384,854 205,084 (2,108,400) 3,128,538
Amortization of discount
on Series A, B, C, D, G
and H preferred stock (3,217,713) (700,000) A2) (2,692,000) C1) (6,609,713)
Deemed preferred stock
dividends, Series A, B,
C, D, G and H (51,300) (78,000) A2) (300,000) C1) (429,300)
------------ ----------- ----------- -------------------------------------- -----------
Net income (loss)
applicable to common
shareholders $(10,985,572) $(1,131,000) $ 7,716,559 $ 5,384,854 $ 205,084 $(5,100,400) $(3,910,475)
============ =========== =========== ====================================== ===========
Basic and diluted net
income (loss) per common
share $ (1.64) $ (0.28)
============ ===========
Weighted average number of
common shares outstanding 6,718,170 13,858,463
============ ===========
</TABLE>
See notes to unaudited proforma condensed financial statements.
-46-
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2000,
AND THE YEAR ENDED DECEMBER 31, 1999
1. Description of Equitex, Inc. transactions:
On June 29, 2000, Equitex, Inc. and subsidiaries (the "Company", or
"Equitex"), a publicly traded company, signed a definitive agreement with
Key Financial Systems, Inc. ("Key") and Nova Financial Systems, Inc.
("Nova") to acquire all of the outstanding capital stock of Key and Nova in
exchange for the greater of 7,140,000 shares of Equitex common stock or 50%
of the Company's post-acquisition common stock outstanding, and $5 million
cash. Key and Nova are both financial services companies, which specialize
in selling credit card programs designed for high credit risk clients.
Prior to the Company's acquisition of Key and Nova, the Company has
completed or intends to complete the following transactions:
A. Effective September 27, 2000, the Company, through a newly-formed
subsidiary, GR.com, Inc., acquired all of the issued and outstanding
common stock of The Meridian Residential Group, Inc. ("MRG") in
exchange for 425,000 shares of Series F participating, convertible
preferred stock. In addition, Equitex 2000, Inc. ("E2000" discussed
below) is to issue additional shares of common stock to the Meridian
shareholders having a market value, at the time of issuance, equal to
20% of the annual increase in pre-tax net earnings compared to the
immediately preceding year of the MRG business for each of the five
years subsequent to closing, commencing with the year ending December
31, 2000, subject to certain limitations as defined.
In addition, the Company, through its subsidiary nMortgage, Inc.,
acquired the proprietary business model, website, trademarks,
corporate names and all intellectual property rights related to the
Meridian GreatRate.com business, including the names GreatRate.com and
GreatRate Mortgage.com from Meridian Capital Group, LLC ("MCG"), a
company affiliated with MRG through common ownership, for $850,000
cash.
B. The Company intends to increase the number of authorized shares of the
Company's common stock from 7,500,000 shares to 50,000,000 shares,
subject to shareholder approval. Subsequent to an increase in the
Company's authorized shares of the Company's common stock, the Company
intends to issue 50 shares of Series E convertible preferred stock,
valued at $353,000 in consideration for services received and issue
1,300 shares of Series G, 6% cumulative, convertible preferred stock
for cash of $1,300,000.
-47-
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2000,
AND THE YEAR ENDED DECEMBER 31, 1999
C. Subsequent to the transactions described above, the Company intends to
distribute all of its assets (which primarily consists of its
investments in subsidiaries) to Equitex 2000, Inc. ("E2000"), a
newly-formed subsidiary of the Company. E2000 also is to assume all
liabilities of the Company. The outstanding common shares of E2000 are
then to be distributed to the shareholders of the Company based on
proportional ownership of the shares held by the Company's
shareholders in a spin-off transaction.
As a result of the transactions described above, the Company will be a
publicly traded, non-operating entity immediately prior to the date of
the Company's acquisition of Key and Nova. The Company plans to record
the acquisitions of Key and Nova as an acquisition of Equitex, Inc.
and a recapitalization of Key and Nova.
D. In order to finance the Company's acquisition of Key and Nova, the
Company intends to issue up to 5,500 shares of Series H, 6%,
cumulative, convertible preferred stock for net proceeds of $5,000,000
(net of $500,000 issue costs).
The following unaudited pro forma condensed statements of operations for
the year ended December 31, 1999 and the six months ended June 30, 2000,
give effect to the transactions as if it had occurred effective January 1,
1999 and January 1, 2000, respectively. The following unaudited pro forma
condensed balance sheet as of June 30, 2000 gives effect to the
transactions as if it had occurred on June 30, 2000.
2. Description of Equitex pro forma adjustments:
(A1) To reflect issuance of 50 shares of Series E convertible preferred
stock, convertible into 50,000 shares of the Company's common stock,
valued at approximately $353,000, which is based on the underlying
market value of the Company's common stock at June 30, 2000. In
connection with this transaction, $353,000 of administrative expense
has been reflected in the pro forma statements of operations for the
six-months ended June 30, 2000 and the year ended December 31, 1999.
(A2) To reflect the issuance of 1,300 shares of Series G, 6%, cumulative
convertible preferred stock for cash of $1,300,000. The Series G
preferred stock contains a beneficial conversion feature in which the
preferred stock may be converted at any time at a price per share of
common stock equal to the lesser of (a) $6.50 or (b) 65% of the market
price of the Company's common stock. The pro forma statements of
operations for the six months ended June 30, 2000 and the year ended
December 31, 1999, reflect a discount due to this beneficial
conversion feature of $700,000.
-48-
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2000,
AND THE YEAR ENDED DECEMBER 31, 1999
In addition, deemed dividends of $39,000 and $78,000 have been
reflected in the June 30, 2000 and December 31, 1999 statements of
operations, respectively.
(A3) To reflect the acquisition of Meridian Residential Group, Inc. ("MRG")
in exchange for 425,000 shares of Series F participating, convertible
preferred stock valued at approximately $3,248,000. Of the 460,000
Series F preferred shares issued, 425,000 shares were issued to the
former MRG shareholders and 35,000 shares were issued to
third-parties. Also reflected is the Company's purchase of certain
intellectual property owned by an entity related to MRG, Meridian
Capital Group, LLC (MCG) for cash of $850,000.
The Series F preferred stock may be converted to common stock at any
time following the date of issuance until 42 months following the
issue date at a conversion price per share of common stock equal to
$7.00 per share. The holders of the Series F preferred stock are
entitled to dividends declared in the amount declared with respect to
the Company's common stock.
(B) To reflect the distribution of certain assets of the Company, net of
certain related liabilities to E-2000.
(C1) To reflect the issuance of up to 5,500 shares of Series H preferred
stock in exchange for net proceeds of $5,000,000 (net of $500,000
issue costs), which is to be used to finance the Company's acquisition
of Key Financial Systems, Inc. ("Key") and Nova Financial Systems,
Inc. ("Nova").
The Series H preferred stock contains a beneficial conversion feature
in which the preferred stock may be converted at any time at a price
per share of common stock equal to the lesser of (a)$6.50 or (b) 65%
of the market price of the Company's common stock. The pro forma
statements of operations for the six months ended June 30, 2000 and
the year ended December 31, 1999, reflect a discount due to this
beneficial conversion feature of $2,692,000.
In addition, deemed dividends of $150,000 and $300,000 have been
reflected in the June 30, 2000, and December 31, 1999, statements of
operations, respectively.
-49-
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2000,
AND THE YEAR ENDED DECEMBER 31, 1999
(C2) To reflect the acquisition of all of the outstanding common shares of
Key and Nova, and consolidation of Key and Nova. The purchase price
consists of $5,000,000 cash and 7,140,000 shares of the Company's
common stock (which represents 50% of the outstanding common shares of
the Company, after giving effect to the consummation of the merger),
and warrants for the purchase of the Company's common stock equal to
50% of any warrants, options, preferred stock or other convertible
securities outstanding at the date of the purchase.
The transaction is recorded as a reverse acquisition. The purchase
price applied to the reverse acquisition has been based on the net
book value of the underlying assets of Equitex prior to the
transaction (approximately $2,777,000) plus $5,000,000 cash paid in
connection with the acquisition of Key and Nova.
(C3) To reflect estimated federal and state income tax effects of the
transactions described above.
-50-
<PAGE>
EQUITEX 2000, INC. AND SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED BALANCE SHEET
June 30, 2000
<TABLE>
<CAPTION>
Contribution
of
Equitex
assets and Adjustments
assumed and Pro forma
liabilities Eliminations combined
-------------- -------------- --------------
(See AA) (See BB)
ASSETS
<S> <C> <C> <C>
Cash and cash equivalents ....................... $ 670,161 $ 254,361 $ 924,522
Receivables ..................................... 1,476,237 19,957 1,496,194
Prepaid expenses ................................ 37,774 37,774
Inventories ..................................... 103,615 103,615
Investments ..................................... 2,542,214 2,542,214
Loan - Merid
Investment in Meridian Residential Group, Inc. .. 3,248,000 (3,248,000)
Loan - Meridian Capital Funding, Inc. ........... 101,145 101,145
Fixed assets, net ............................... 162,260 116,272 278,532
Intangible and other assets:
Intellectual property acquired from MRG, Inc. 850,000 850,000
Goodwill and other .......................... 3,776,653 2,800,082 6,578,813
2,078
-------------- -------------- --------------
Total assets .................................... $ 12,829,140 $ 83,669 $ 12,912,809
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ................................ $ 779,912 $ 37,989 $ 817,901
Accrued expenses and other liabilities .......... 77,804 10,000 87,804
Income tax payable .............................. 35,680 35,680
Notes payable ................................... 1,371,097 1,371,097
-------------- -------------- --------------
Total liabilities ............................... 2,228,813 83,669 2,312,482
-------------- -------------- --------------
Minority interest ............................... 5,488,070 5,488,070
-------------- -------------- --------------
Stockholders' equity ............................ 5,112,257 5,112,257
-------------- -------------- --------------
Total liabilities and stockholders' equity ...... $ 12,829,140 $ 83,669 $ 12,912,809
============== ============== ==============
</TABLE>
See notes to unaudited proforma condensed financial statements.
-51-
<PAGE>
EQUITEX 2000, INC. AND
SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Equitex, Inc.
and
subsidiaries Meridian Adjustments
-------------- Residential and Pro forma
Historical Group, Inc. Eliminations combined
-------------- -------------- -------------- --------------
(See BB) (See CC)
<S> <C> <C> <C> <C>
Product sales ............................. $ 220,588 $ 220,588
Interest and dividend income .............. 334,655 $ 3,641 338,296
Loan production and processing ............ 293,065 1,084,220 1,377,285
Secondary market, net ..................... 871,134 871,134
Other ..................................... 59,278 59,278
-------------- -------------- -------------- --------------
Total income .............................. 1,778,720 1,087,861 2,866,581
Cost of sales ............................. 136,321 136,321
-------------- -------------- -------------- --------------
Gross profit .............................. 1,642,399 1,087,861 2,730,260
-------------- -------------- -------------- --------------
Selling, general and administrative ....... 4,071,188 1,054,184 $ 93,333 5,360,372
141,667
Loan production and processing ............ 739,735 739,735
Unrealized holding (gains) losses on
trading securities ...................... 40,261 40,261
Realized (gains) losses on investment sales 62,529 62,529
Equity in (earnings) losses of affiliates . 562,898 562,898
Interest expense .......................... 684,393 684,393
Loss on First Banker's Mortgage Services,
Inc. recission ........................... 4,438,932 4,438,932
Other (income) expense .................... (73,478) (73,478)
-------------- -------------- -------------- --------------
Total operating expenses .................. 10,526,458 1,054,184 235,000 11,815,642
-------------- -------------- -------------- --------------
Income (loss) before income taxes ......... (8,884,059) 33,677 (235,000) (9,085,382)
Provision for income taxes ................ 14,770 14,770
-------------- -------------- -------------- --------------
Net income (loss) applicable to common
shareholders ............................. $ (8,884,059) $ 18,907 $ (235,000) $ (9,100,152)
============== ============== ============== ==============
Basic and diluted net income (loss)
per common share ......................... $ (1.24) $ (1.27)
============== ==============
Weighted average number of common
shares outstanding....................... $ 7,140,293 $ 7,140,293
============== ==============
</TABLE>
See notes to unaudited proforma condensed financial statements.
-52-
<PAGE>
EQUITEX 2000, INC. AND SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED STATEMENT OF
OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Meridian
Equitex, Inc. Residential
and Group, Inc.
subsidiaries -------------- Adjustments
-------------- Year ended and Pro forma
Historical February 29, 2000 Eliminations combined
-------------- -------------- -------------- --------------
(See BB) (See CC)
<S> <C> <C> <C> <C>
Product sales ............................. $ 738,456 $ 738,456
Interest and dividend income .............. 878,998 $ 6,387 885,385
Loan production and processing ............ 302,811 2,244,550 2,547,361
Secondary market, net ..................... 395,034 395,034
Other ..................................... 103,965 103,965
-------------- -------------- -------------- --------------
Total income .............................. 2,419,264 2,250,937 4,670,201
Cost of sales ............................. 488,767 488,767
-------------- -------------- -------------- --------------
Gross profit .............................. 1,930,497 2,250,937 4,181,434
-------------- -------------- -------------- --------------
Selling, general and administrative ....... 7,133,529 2,212,286 $ 186,666 9,815,814
283,333
Loan production and processing ............ 728,501 728,501
Unrealized holding (gains) losses on
trading securities ...................... 1,368,783 1,368,783
Realized (gains) losses on investment sales (797,516) (797,516)
Equity in (earnings) losses of affiliates . 418,209 418,209
Interest expense .......................... 795,550 725 796,275
-------------- -------------- -------------- --------------
Total operating expenses .................. 9,647,056 2,213,011 469,999 12,330,066
-------------- -------------- -------------- --------------
Income (loss) before income taxes ......... (7,716,559) 37,926 (469,999) (8,148,632)
Provision for income taxes ................ 29,241 29,241
-------------- -------------- -------------- --------------
Net income (loss) applicable to
common shareholders ...................... $ (7,716,559) $ 8,685 $ (469,999) $ (8,177,873)
============== ============== ============== ==============
Basic and diluted net income (loss)
per common share ......................... $ (1.08) $ (1.14)
============== ==============
Weighted average number of common
shares outstanding....................... $ 7,140,293 $ 7,140,293
============== ==============
</TABLE>
See notes to unaudited proforma condensed financial statements.
-53-
<PAGE>
EQUITEX 2000, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999, AND
THE SIX MONTHS ENDED JUNE 30, 2000
1. Description of Equitex 2000, Inc. transactions:
Upon the successful completion of certain transactions (described in the
notes to the unaudited pro forma condensed financial statements for
Equitex, Inc.) Equitex, Inc. ("Equitex") intends to distribute all of its
assets (which primarily consist of its investments in subsidiaries) to
Equitex 2000, Inc. ("E2000"), a newly-formed subsidiary of Equitex. E2000
also is to assume all liabilities of Equitex. The outstanding common shares
of E2000 are to then be distributed to the shareholders of Equitex based on
proportional ownership of the shares held by the Equitex shareholders in a
spin-off transaction.
The following unaudited pro forma condensed statements of operations for
the year ended December 31, 1999, and the six months ended June 30, 2000,
give effect to the transactions as if it they occurred on January 1, 1999
and January 1, 2000, respectively. The following unaudited pro forma
condensed balance sheet as of June 30, 2000 gives effect to the
transactions as if they had occurred on June 30, 2000.
2. Description of E2000 pro forma adjustments:
(AA) To reflect the contribution of Equitex operating assets to E2000,
and E2000's assumption of Equitex liabilities.
(BB) To reflect the elimination and consolidation of E2000's investment
in Meridian Residential Group, Inc. ("MRG"), contributed by Equitex.
The excess of the purchase price over the fair value of the MRG net
assets acquired of approximately $2,800,000 was allocated to
goodwill, which is to be amortized over a 15-year period. In
connection with Equitex's MRG acquisition, Equitex acquired certain
intellectual property rights from Meridian Capital Group, LLC (MCG)
for $850,000, which was also contributed to E2000. This asset is
being amortized over 3 years.
(CC) To reflect amortization related to goodwill and intellectual
property rights recorded in connection with the MRG acquisition and
the acquisition of intellectual property rights by Equitex from MRG.
-54-
<PAGE>
FINANCIAL STATEMENTS
Financial statements of Nova as of and for the periods ended June 30, 2000,
December 31, 1999 and December 31, 1998 are attached hereto as Exhibit 2.
Financial statements of Key as of and for the periods ended June 30, 2000,
December 31, 1999 and December 31, 1998 are attached hereto as Exhibit 3.
VOTE REQUIRED
The affirmative vote of the majority of the total votes cast on the
proposal in person or by proxy at the stockholders' meeting will be required to
approve the proposal to acquire all the outstanding capital stock of Nova and
Key in exchange for the greater of 7,140,000 shares, or 50%, of the outstanding
Common Stock of the Company on a post acquisition basis and cash consideration
of $5 million. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO
ACQUIRE ALL THE OUTSTANDING CAPITAL STOCK OF NOVA AND KEY IN EXCHANGE FOR THE
GREATER OF 7,140,000 SHARES, OR 50%, OF THE OUTSTANDING COMMON STOCK OF THE
COMPANY ON A POST ACQUISITION BASIS AND CASH CONSIDERATION OF $5 MILLION.
FINANCIAL INFORMATION
A copy of the Company's Annual Report on Form 10-K, for the year ended
December 31, 1999 will be made available upon request. See Documents
Incorporated By Reference.
OTHER MATTERS
Management does not know of any other matters to be brought before the
meeting. However, if any other matters properly come before the meeting, it is
the intention of the appointee named in the enclosed form of Proxy to vote in
accordance with his best judgment on such matters.
By Order of the Board of Directors:
Equitex, Inc.
Date: ___________ __, 2000 Thomas B. Olson
Secretary
-55-
<PAGE>
EXHIBIT 1
The total number of shares of stock which the corporation shall have
authority to issue is fifty-two million (52,000,000) shares, of which fifty
million (50,000,000) shares shall be common stock having a par value of $.02 per
share, and two million (2,000,000) shares shall be preferred stock, having a par
value of $.01 per share (the "Preferred Stock").
The designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof are as follows:
(I) The Board of Directors is expressly authorized at any time, and from
time-to-time, to provide for the issuance of shares of Preferred Stock
in one or more series, with such voting powers, full or limited, or
without voting powers and with such designations, preferences and
relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, as shall be
stated and expressed in the resolution or resolutions providing for
the issue thereof adopted by the Board of Directors, and as are not
stated and expressed in these Articles of Incorporation, or any
amendment thereto, including (without limiting the generality of the
foregoing) the following:
(a) The designation of the number of shares of such series.
(b) The dividend rate of such series, the conditions and dates upon
which such dividends shall be payable, the preference or relation
which such dividends shall bear to the dividends payable on any
other class or classes or of any other series of capital stock,
whether such dividends may be paid in cash, shares of common
stock or Preferred Stock or in assets of the corporation, and
whether such dividends shall be cumulative or noncumulative.
(c) Whether the shares of such series shall be subject to redemption
by the corporation and, if made subject to such redemption, the
times, prices and other terms and conditions of such redemption.
(d) The terms and amount of any sinking fund provided for the
purchase or redemption of the shares of such series.
(e) Whether or not the shares of such series shall be convertible
into or exchangeable for any other class or classes or for any
other series of any class or classes or capital stock of the
Corporation and, if provision be made for conversion or exchange,
the times, prices, rates, adjustments and other terms and
conditions of such conversion or exchange.
(f) To the extent, if any, to which the holders of the shares of such
series shall be entitled to vote as a class or otherwise with
respect to the election of directors or otherwise.
(g) The restrictions, if any, on the issue or reissue of any
additional Preferred Stock.
(h) The rights of the holders of the shares of such series upon the
dissolution or winding up of, or upon the distribution of assets
of, the corporation.
(II) Except as otherwise required by law and except for such voting powers
with respect to the election of directors or other matters as may be
stated in the resolutions of the Board of Directors creating any
series of Preferred Stock, the holders of any such series shall have
no voting power whatsoever.
<PAGE>
EXHIBIT 2
Nova Financial Systems, Inc.
Financial Statements
for the year ended
December 31, 1999, the period from
inception October 10, 1998 through December 31, 1998,
and the six months ended
June 30, 2000 and June 30, 1999
<PAGE>
NOVA FINANCIAL SYSTEMS, INC.
FINANCIAL REPORT
<PAGE>
CONTENTS
--------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 1
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Balance sheets 2
Statements of operations 3
Statements of stockholders' equity 4
Statements of cash flows 5
Notes to financial statements 6 - 10
--------------------------------------------------------------------------------
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Nova Financial Systems, Inc.
Clearwater, Florida
We have audited the accompanying balance sheets of Nova Financial Systems, Inc.
as of December 31, 1999 and 1998, and the related statements of income,
stockholders' equity, and cash flows for the year ended December 31, 1999 and
for the period from inception, October 10, 1998 through December 31, 1998. 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nova Financial Systems, Inc. as
of December 31, 1999 and 1998, and the results of its operations and its cash
flows for the year ended December 31, 1999, and for the period from inception,
October 10, 1998 through December 31, 1998 in conformity with generally accepted
accounting principles.
McGladrey & Pullen, LLP
Fort Lauderdale, Florida
July 12, 2000
1
<PAGE>
NOVA FINANCIAL SYSTEMS, INC.
BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 2000 1999 1998
-------------------------------------------------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Cash ............................................. $ 3,065 $ 26,756 $ 20,000
Credit card receivables, net (Note 2) ............ 479,587 619,149 899
Due from Merrick Bank ............................ 2,514,864 2,580,665 19
Due from affiliate ............................... -- -- 22,761
Due from shareholders ............................ 606,500 -- --
Deferred tax asset ............................... -- 606,500 --
---------- ---------- ----------
$3,604,016 $3,833,070 $ 43,679
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable .............................. 645,166 265,197 22,387
Due to cardholders ............................ 1,786,804 1,921,769 --
Due to affiliate (Note 3) ..................... 52,479 685,464 --
Accrued expenses and other liabilities ........ 729,000 734,264 --
---------- ---------- ----------
3,213,449 3,606,694 22,387
---------- ---------- ----------
Commitments and contingencies (Note 4)
Stockholders' equity:
Common stock, par value $1 per share,
authorized 7,500 shares; issued 1,000 shares 1,000 1,000 1,000
Additional paid-in capital .................... 24,000 24,000 24,000
Retained earnings (deficit) ................... 365,567 201,376 (3,708)
---------- ---------- ----------
390,567 226,376 21,292
---------- ---------- ----------
$3,604,016 $3,833,070 $ 43,679
========== ========== ==========
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
NOVA FINANCIAL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
inception
October 10,
Six months ended June 30, Year ended 1998 through
-------------------------- December 31, December 31,
2000 1999 1999 1998
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Credit card income:
Servicing fees ............................. $ 2,859,448 $ 916,124 $ 7,278,767 $ 1,102
Other ...................................... 109,550 20,180 127,115 8
----------- ----------- ----------- -----------
2,968,998 936,304 7,405,882 1,110
Provision for losses (Note 2) ................. (221,622) 95,463 676,343 192
----------- ----------- ----------- -----------
Net credit card income after
provision for losses ............. 3,190,620 840,841 6,729,539 918
----------- ----------- ----------- -----------
Other income:
Application fees, net of direct marketing
costs six months ended June 30, 2000 and
1999, $(9,945) and $6,543,265 (unaudited);
period ended December 31, 1999 and 1998,
$11,307,984 and $32,653 (Note 3) ........... (2,403) 903,665 1,942,520 2,751
----------- ----------- ----------- -----------
Operating expenses:
Application processing fees (Note 3) ....... -- 1,226,758 2,112,092 --
Third party servicing fees (Note 3) ........ 2,267,157 653,224 5,934,125 580
Other operating expenses (Note 6) .......... 290,869 156,965 303,258 6,797
----------- ----------- ----------- -----------
2,558,026 2,036,947 8,349,475 7,377
----------- ----------- ----------- -----------
Income (loss) before income taxes 630,191 (292,441) 322,584 (3,708)
Provision for income taxes (credits) (Note 5) . -- (110,000) 117,500 --
----------- ----------- ----------- -----------
Net income (loss) ............... $ 630,191 $ (182,441) $ 205,084 $ (3,708)
=========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
NOVA FINANCIAL SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED) AND YEAR ENDED
DECEMBER 31, 1999 AND PERIOD FROM INCEPTION OCTOBER 10, 1998
THROUGH DECEMBER 31, 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Retained
Common Paid In Earnings
Stock Capital (Deficit) Total
-----------------------------------------------------------------------------------
Issuance of shares at inception,
<S> <C> <C> <C> <C>
October 10, 1998 .............. 1,000 $ 24,000 -- $ 25,000
Net loss ...................... -- -- $ (3,708) (3,708)
--------- --------- --------- ---------
Balance, December 31, 1998 ....... 1,000 24,000 (3,708) 21,292
Net income .................... -- -- 205,084 205,084
--------- --------- --------- ---------
Balance, December 31, 1999 ....... 1,000 24,000 201,376 226,376
Net income (unaudited) ....... -- -- 630,191 630,191
Dividends (unaudited) ........ -- -- (466,000) (466,000)
--------- --------- --------- ---------
Balance, June 30, 2000 (unaudited) 1,000 $ 24,000 $ 365,567 $ 390,567
========= ========= ========= =========
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
NOVA FINANCIAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
inception
October 10,
Six months ended June 30, Year ended 1998 through
-------------------------- December 31, December 31,
2000 1999 1999 1998
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Cash Flows From Operating Activities
<S> <C> <C> <C> <C>
Net income (loss) ............................. $ 630,191 $ (182,441) $ 205,084 $ (3,708)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Provision for (recovery of) losses ......... (221,622) 95,463 676,343 192
Deferred income taxes ...................... 606,500 (246,000) (606,500) --
Decrease (increase) in other receivables ... 65,801 (1,868,632) (2,580,646) (19)
Decrease (increase) decrease in due from
affiliates ................................. -- 22,761 22,761 (22,761)
Decrease (increase) in due from shareholders (606,500) -- -- --
(Decrease) increase in accounts payable and
accrued expenses ........................... (374,705) 1,495,543 977,074 22,387
(Decrease) increase in due to cardholders .. (134,965) 1,320,707 1,921,769 --
(Decrease) increase in due to affiliates ... (632,985) 438,278 685,464 --
----------- ----------- ----------- -----------
Net cash provided by (used in)
Operating activities ................ (81,125) 1,075,679 1,301,349 (3,909)
----------- ----------- ----------- -----------
Cash Flows Provided By (Used In) Investing
Activities
Net (increase) decrease in credit card
receivables ................................ 361,184 (1,090,136) (1,294,593) (1,091)
----------- ----------- ----------- -----------
Cash Flows From Financing Activities
Dividends paid ................................ (466,000) -- -- --
Capital contributed ........................... -- -- -- 25,000
----------- ----------- ----------- -----------
Net Cash Provided By (Used In)
Financing Activities ................ (466,000) -- -- 25,000
----------- ----------- ----------- -----------
Net increase (decrease) in cash ..... (23,691) (14,457) 6,756 20,000
Cash:
Beginning ..................................... 26,756 20,000 20,000 --
----------- ----------- ----------- -----------
Ending ........................................ $ 3,065 $ 5,543 $ 26,756 $ 20,000
=========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
NOVA FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended June 30, 2000 and June 30, 1999 is
unaudited)
--------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Nova Financial Systems, Inc. (the "Company") designs and
markets credit card products aimed at the sub-prime market. The credit card
products are marketed for an unaffiliated bank under an agreement that provides
the Company with a 100% participation interest in the credit cards issued and
requires the payment of monthly servicing fees to the bank. The Company provides
collection and customer service for the purchased credit card portfolios through
an affiliated entity.
BASIS OF FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING ESTIMATES: The
accounting and reporting policies of the Company conform to generally accepted
accounting principles and general practices within the financial services
industry. In preparing the accompanying financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the balance sheet and the reported amounts of revenue and expenses
for the period. Actual results could differ from those estimates.
UNAUDITED FINANCIAL STATEMENTS: The balance sheet as of June 30, 2000, the
statements of operations and cash flows for the six months ended June 30, 2000
and 1999, and the statement of stockholders' equity for the six months ended
June 30, 2000, have been prepared by the Company without audit. In the opinion
of management, all adjustments (which include normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows for all such periods have been made. The results of operations for
the six months ended June 30, 2000, are not necessarily indicative of the
operating results for the full year.
PRESENTATION OF CASH FLOWS: Cash flows from credit card receivables are reported
net.
CREDIT CARD RECEIVABLES: Credit card receivables are stated at the balance
reported to customers, reduced by allowances for refundable fees and losses.
Fees are accrued monthly on active credit card accounts and included in credit
card receivables. Accrual of income is discontinued on credit card accounts that
have been closed or charged off. Accrued fees on credit card loans are charged
off with the card balance, generally when the account becomes 90 days past due.
The allowance for losses is established through a provision for losses charged
to expense. Credit card receivables are charged against the allowance for losses
when management believes that collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
estimated losses on existing receivables, based on evaluation of the
collectibility of the accounts and prior loss experience. This evaluation also
takes into consideration such factors as changes in the volume of the loan
portfolio, overall portfolio quality and current economic conditions that may
affect the borrowers' ability to pay. While management uses the best information
available to make its evaluation, this estimate is susceptible to significant
change in the near term.
DUE TO AFFILIATES: The Company receives credit card marketing, customer service
and collection services from Key Financial Systems, Inc. ("Key"), a company
affiliated through common ownership, in exchange for a fee. The amount due to
affiliate in the accompanying balance sheets represents fees payable in
connection with Nova's card activity that has been collected by Nova's bank
client but not yet paid to Nova.
6
<PAGE>
NOVA FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended June 30, 2000 and June 30, 1999 is
unaudited)
--------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER RECEIVABLES AND DUE TO CARDHOLDERS: The Company charges a fully refundable
reservation fee equal to each cardholder's borrowing limit upon issuance of a
credit card. The amount due to cardholders represents the balance of reservation
fees that would have to be refunded to cardholders should they close their
accounts at the balance sheet date. Funds held in trust to secure payment of
this liability are reflected in due from Merrick Bank in the accompanying
balance sheets.
INCOME TAXES: The Company, with the consent of its stockholders, elected to be
taxed under the provisions of Subchapter S of the Internal Revenue Code
effective January 1, 2000, which provides that in lieu of corporate tax the
stockholders separately account for their pro rata shares of the Company's items
of income, deductions, losses and credits. As of June 30, 2000, the Company's
reported net assets exceed their tax bases by approximately $233,000
(unaudited). Accordingly, if the election was terminated on that date, a
deferred tax liability of approximately $87,000 would be recognized by a charge
to income tax expense.
NOTE 2. CREDIT CARD RECEIVABLES
The composition of credit card receivables at June 30, 2000, and at December 31,
1999 and 1998 is as follows:
2000 1999 1998
------------ ------------ ------------
(Unaudited)
Credit card receivables ... $ 11,414,212 $ 29,407,412 $ 121,091
Refundable reservation fees (10,857,130) (28,319,231) (120,000)
------------ ------------ ------------
557,082 1,088,181 1,091
Less allowance for losses . 77,495 469,032 192
------------ ------------ ------------
$ 479,587 $ 619,149 $ 899
============ ============ ============
Changes in the allowance for losses for the six-month periods ended June 30,
2000 and 1999, and the periods ended December 31, 1999 and 1998 are as follows:
June 30, December 31,
---------------------- ----------------------
2000 1999 1999 1998
--------- --------- --------- ---------
(Unaudited) (Unaudited)
Balance, beginning ..... $ 469,032 $ -- $ 192 $ --
Provision for losses (221,622) 95,463 676,343 192
Recoveries of amounts
charged-off ........ -- -- -- --
Amounts charged-off . (169,915) (4,305) (207,503) --
--------- --------- --------- ---------
Balance, ending ........ $ 77,495 $ 91,158 $ 469,032 $ 192
========= ========= ========= =========
7
<PAGE>
NOVA FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended June 30, 2000 and June 30, 1999 is
unaudited)
--------------------------------------------------------------------------------
NOTE 3. TRANSACTIONS WITH RELATED PARTIES
The Company had an informal agreement with Key under which Key provided
marketing and preprocessing of credit card applications, customer service and
collection services for Nova. Expenses were charged to the Company for
application processing and customer service based on set fee per application
processed and for collections based on a set fee per delinquent account on file.
The Company believes the method and per unit price charged was consistent with
the methods and rates of similar third party credit card processors. The Company
recognized processing fee and servicing expense of $3,832,736 and $10,266
associated with Key's activities during 1999 and 1998, respectively, and
$672,420, and $1,304,636 (unaudited) during the six month periods ended June 30,
2000 and 1999, respectively. As of June 30, 2000, and December 31, 1999 and
1998, the Company owed Key $52,479 (unaudited), $685,464, and $-0-,
respectively, in connection with services performed by Key. Effective July 1,
2000, all such services from Key were terminated.
The Company has entered into an agreement with Paragon Water Services, Inc.
(Paragon), a company affiliated through common ownership, whereby Paragon
provides credit card marketing services for the Company. Paragon earns
commissions for card applications that are not subsequently refunded. The
Company paid Paragon approximately $6,631,608 and $-0- in commissions during
1999 and 1998, respectively and $0 and $3,185,291 (unaudited) during the
six-month periods ended June 30, 2000 and 1999.
NOTE 4. COMMITMENTS, CONTINGENCIES AND CREDIT RISK
A credit limit has been established for each card holder account acquired by the
Company. By agreement, the credit limit can be terminated at any time for any
reason. Because the initial reservation fee charged to all account holders is
fully refundable, the total of accounts with credit limits in excess of
cardholder balances is reflected as a liability in the amount of $1,786,804
(unaudited), $1,921,769, and $-0- as of June 30, 2000, and December 31, 1999 and
1998, respectively, in the accompanying balance sheets.
Contingencies: In the normal course of business, the Company is involved in
various legal proceedings. In the opinion of management, any liability resulting
from such proceedings would not have a material adverse effect on the Company's
financial statements.
Credit card loans are issued throughout the United States to customers that are
considered high credit risks. The Company evaluates each customer's credit
worthiness on a case-by-case basis. Because of the reservation fee charged upon
issuance of credit cards, charges for purchases or cash advances are generally
limited to the amount of payments collected from each customer less fees
charged.
The Company issues its credit cards under membership terms with VISA.
Modification of these terms by VISA could adversely affect operating results.
8
<PAGE>
NOVA FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended June 30, 2000 and June 30, 1999 is
unaudited)
--------------------------------------------------------------------------------
NOTE 5. INCOME TAXES
All active card accounts are charged monthly membership fees, late charges,
overlimit fees and other charges according to the card agreements. The Company
has not recognized certain of these monthly charges as income for financial
reporting purposes because the charges are not believed to be collectible. A
deferred tax asset in the amount of $606,500 has been recognized as of December
31, 1999 ($246,000 at June 30, 1999), related to the excess of the estimated tax
basis of credit card receivables over the reported receivables.
The provision for income taxes charged to operations consist of the following:
Six months ended Periods ended
June 30, December 31,
--------------------- -----------------------
2000 1999 1999 1998
--------- --------- --------- ----------
(Unaudited) (Unaudited)
Currently payable or paid:
Federal ................ $ -- 116,100 $ 618,000 $ --
State .................. -- 19,900 106,000 --
Deferred income taxes .. -- $(246,000) (606,500) --
--------- --------- --------- ----------
$ -- $(110,000) $ 117,500 $ --
========= ========= ========= ==========
The income tax provision differs from the amount of income tax determined by
applying the U. S. federal income tax rate to pretax income for the following
periods due to the following:
Six months ended Periods ended
June 30, December 31,
-------------------- --------------------
2000 1999 1999 1998
--------- --------- --------- ---------
(Unaudited)(Unaudited)
Computed "expected" tax expense
(benefit) ........................ $ -- $ (99,430) $ 109,679 $ (1,261)
Increase resulting from state income
taxes, net of federal tax benefit -- (10,616) 11,710 --
Effect of lower tax brackets and
other ............................ 46 (3,889) 1,261
--------- --------- --------- ---------
$ -- $(110,000) $ 117,500 $ --
========= ========= ========= =========
The Company elected S Corporation status effective January 1, 2000. Upon
converting to S Corporation status, the Company eliminated deferred tax assets
in the amount of $606,500 as a charge against income from operations. This
charge against income was offset by the recognition of a receivable from
shareholders in the amount of $606,500 due to a commitment from the shareholders
to reimburse the Company for income taxes paid by the Company related to losses
recognized by the Company for financial reporting purposes in 1999, but passed
through to the shareholders in years subsequent to 1999 for income tax purposes.
9
<PAGE>
NOVA FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended June 30, 2000 and June 30, 1999 is
unaudited)
--------------------------------------------------------------------------------
NOTE 6. OTHER OPERATING EXPENSES
Six months ended Periods ended
June 30, December 31,
----------------------- -----------------------
2000 1999 1999 1998
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Cardholder expense-other $ 72,258 $ 2,820 $ 96,206 $ --
Professional fees ...... 198,657 5,088 20,128 1,121
Printing and supplies .. -- 18,817 21,742 676
Other .................. 19,954 130,240 165,182 5,000
---------- ---------- ---------- ----------
$ 290,869 $ 156,965 $ 303,258 $ 6,797
========== ========== ========== ==========
NOTE 7. PLAN OF REORGANIZATION
The Company has entered into an Agreement and Plan of Reorganization with
Equitex, Inc. (Equitex) under which the Company's stockholders would exchange
all of the issued and outstanding shares of the Company for a) 25% of the
outstanding common shares of Equitex, after giving effect to the consummation of
this merger and a similar planned merger of Key, b) warrants for the purchase of
common stock of Equitex equal to 50% of any warrants, options, preferred stock
or other securities outstanding at the closing date and exchangeable for or
convertible into Equitex common shares, and c) $2,500,000.
10
<PAGE>
EXHIBIT 3
Key Financial Systems, Inc.
Financial Statements
for the years ended
December 31, 1999 and 1998, the period from
inception June 12, 1997 through December 31, 1997,
and the six months ended
June 30, 2000 and June 30, 1999
<PAGE>
KEY FINANCIAL SYSTEMS, INC.
FINANCIAL REPORT
<PAGE>
CONTENTS
--------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 1
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Balance sheets 2
Statements of operations 3
Statements of stockholders' equity 4
Statements of cash flows 5
Notes to financial statements 6 - 11
--------------------------------------------------------------------------------
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Key Financial Systems, Inc.
Clearwater, Florida
We have audited the accompanying balance sheets of Nova Financial Systems, Inc.
as of December 31, 1999 and 1998, and the related statements of income,
stockholders' equity, and cash flows for the years then ended and for the period
from inception, June 12, 1997 through December 31, 1997. 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Key Financial Systems, Inc. as
of December 31, 1999 and 1998, and the results of its operations and its cash
flows for the years ended and for the period from inception, June 12, 1997
through December 31, 1997 in conformity with generally accepted accounting
principles.
McGladrey & Pullen, LLP
Fort Lauderdale, Florida
July 12, 2000
1
<PAGE>
KEY FINANCIAL SYSTEMS, INC.
BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
June 30, --------------------------
2000 1999 1998
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash ............................................. $ 162,100 $ 30,908 $ 316,830
Credit card receivables, net (Note 2) ............ 434,847 519,929 1,121,397
Other receivables (Note 3) ....................... 3,780,574 2,874,293 372,713
Advances to shareholders ......................... -- -- 288,888
Due from affiliates (Note 5) ..................... 52,479 685,464 --
Leaseholds and equipment, net (Note 4) ........... 280,208 303,976 212,955
Other assets ..................................... 17,317 17,917 39,877
----------- ----------- -----------
$ 4,727,525 $ 4,432,487 $ 2,352,660
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Due to cardholders (Note 6) ................... $ 2,905,021 $ 2,402,377 $ 1,408,693
Accounts payable (Note 5) ..................... 862,979 311,029 1,011,413
Accrued expenses and other liabilities ........ 171,367 379,012 13,451
----------- ----------- -----------
3,939,367 3,092,418 2,433,557
----------- ----------- -----------
Commitments and contingencies (Note 4)
Stockholders' equity:
Common stock, par value $1 per share,
authorized 7,500 shares; issued 2,000 shares 2,000 2,000 2,000
Additional paid-in capital .................... 371,835 371,835 271,835
Retained earnings (deficit) ................... 414,323 966,234 (354,732)
----------- ----------- -----------
788,158 1,340,069 (80,897)
----------- ----------- -----------
$ 4,727,525 $ 4,432,487 $ 2,352,660
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
KEY FINANCIAL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
inception June
12, 1997
Six months ended through
June 30, Years ended December 31, December 31,
-------------------------- ------------------------- -----------
2000 1999 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Credit card income:
Card servicing fees ................. $ 3,478,308 $ 7,654,809 $11,628,340 $ 3,529,187 --
Other ............................... 86,365 112,522 246,767 51,283 --
----------- ----------- ----------- ----------- -----------
3,564,673 7,767,331 11,875,107 3,580,470 --
Provision for losses (Note 2) .......... (14,955) 610,935 511,645 260,332 --
----------- ----------- ----------- ----------- -----------
Net credit card income after
provision for losses ...... 3,579,628 7,156,396 11,363,462 3,320,138 --
----------- ----------- ----------- ----------- -----------
Other income:
Application fees, net of direct
marketing costs; six months ended
June 30, 2000 and 1999, $3,424,947
and $6,912,174 (unaudited); years
ended December 31, 1999 and 1998,
$7,153,144 and $9,721,837 (Note 5) .. 654,547 1,132,658 935,015 1,621,815
Servicing fee income (Note 5) ...... 672,420 1,455,567 3,832,736 -- --
Other .............................. 48,892 41,784 59,807 -- --
----------- ----------- ----------- ----------- -----------
1,375,859 2,630,009 4,827,558 1,621,815 --
----------- ----------- ----------- ----------- -----------
Operating expenses:
Salaries and wages .................. 1,237,197 2,010,850 3,997,724 1,015,019 --
Employee benefits ................... 176,930 247,310 466,540 1,335 --
Third party servicing fees (Note 8) . 1,281,604 2,838,257 4,978,279 3,035,568 --
Occupancy and equipment (Note 6) .... 206,120 126,517 351,647 61,133 8,091
Other operating expenses (Note 7) ... 396,547 458,522 1,011,976 373,564 3,863
----------- ----------- ----------- ----------- -----------
3,298,398 5,681,456 10,806,166 4,486,619 11,954
----------- ----------- ----------- ----------- -----------
Net income (loss) ........ $ 1,657,089 $ 4,104,949 $ 5,384,854 $ 455,334 $ (11,954)
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
KEY FINANCIAL SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1999 AND 1998 AND PERIOD FROM INCEPTION JUNE 12, 1997
THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
Additional Retained
Common Paid In Earnings
Stock Capital (Deficit) Total
--------------------------------------------------------------------------------------------
Issuance of shares at inception,
<S> <C> <C> <C> <C>
June 12, 1997 ................. $ 1,000 $ 22,835 $ 23,835
Net loss ...................... -- -- $ (11,954) (11,954)
----------- ----------- ----------- -----------
Balance, December 31, 1997 ....... 1,000 22,835 (11,954) 11,881
Net income .................... -- -- 455,334 455,334
Issuance of 1,000 shares ..... 1,000 249,000 -- 250,000
Dividends paid ............... -- -- (798,112) (798,112)
----------- ----------- ----------- -----------
Balance, December 31, 1998 ....... 2,000 271,835 (354,732 (80,897)
Net income ................... -- -- 5,384,854 5,384,854
Capital contributed .......... -- 100,000 -- 100,000
Dividends paid ............... -- -- (4,063,888) (4,063,888)
----------- ----------- ----------- -----------
Balance, December 31, 1999 ....... 2,000 371,835 966,234 1,340,069
Net income (unaudited) ....... -- -- 1,657,089 1,657,089
Dividends paid (unaudited) ... -- -- (2,209,000) (2,209,000)
----------- ----------- ----------- -----------
Balance, June 30, 2000 (unaudited) $ 2,000 $ 371,835 $ 414,323 $ 788,158
=========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
KEY FINANCIAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
inception June
12, 1997
Six months ended through
June 30, Years ended December 31, December 31,
-------------------------- -------------------------- -----------
2000 1999 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) ....................... $ 1,657,089 $ 4,104,949 $ 5,384,854 $ 455,334 $ (11,954)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Provision for (recovery of) losses .. (14,955) 610,935 511,645 260,332 --
Depreciation and amortization ....... 44,422 29,666 117,349 23,597 8,755
Increase in other receivables ....... (906,281) (3,540,770) (2,501,580) (372,713) --
Decrease (increase) in due from
affiliates ........................ 632,985 (438,278) (685,464) -- --
(Increase) decrease in other assets . 600 21,371 21,960 (34,573) (5,968)
Increase in due to cardholders ...... 502,644 1,978,292 993,684 1,408,693 --
Increase (decrease) in accounts
payable, accrued expenses and
other liabilities ................. 344,305 (201,776) (334,823) 1,022,864 2,000
----------- ----------- ----------- ----------- -----------
Net cash provided by (used
in) operating activities ...... 2,260,809 2,564,389 3,507,625 2,763,584 (7,167)
----------- ----------- ----------- ----------- -----------
Cash Flows From Investing Activities
Net (increase) decrease in credit card
receivables .......................... 100,037 (1,475,937) (89,823) (1,381,729) --
Advances to stockholders ............... -- -- -- (288,888) --
Collection of advances to stockholders . -- 288,888 288,888 -- --
Purchase of property and equipment ..... (20,654) (114,605) (208,370) (228,308) --
----------- ----------- ----------- ----------- -----------
Net cash provided by (used
in) financing actvities ....... 79,383 (1,301,654) 170,341 (1,898,925) --
----------- ----------- ----------- ----------- -----------
Cash Flows From Financing Activities
Capital contributions .................. -- -- 100,000 250,000 7,500
Dividends paid ......................... (2,209,000) (1,550,138) (4,063,888) (798,112) --
----------- ----------- ----------- ----------- -----------
Net cash provided by (used
in) financing ............... (2,209,000) (1,550,138) (3,963,888) (548,112) 7,500
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash
131,192 (287,403) (285,922) 316,497 333
Cash:
Beginning .............................. 30,908 316,830 316,830 333 --
----------- ----------- ----------- ----------- -----------
Ending ................................. $ 162,100 $ 29,427 $ 30,908 $ 316,830 $ 333
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
KEY FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended June 30, 2000 and June 30, 1999
is unaudited)
--------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Key Financial Systems, Inc. (the "Company") designs and
markets credit card products aimed at the sub-prime market. The credit card
products are marketed for an unaffiliated bank under an agreement that provides
the Company with a 100% participation interest in the receivables and related
rights associated with credit cards issued and requires the payment of monthly
servicing fees to the bank. The Company provides collection and customer service
related to the credit cards issued.
BASIS OF FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING ESTIMATES: The
accounting and reporting policies of the Company conform to generally accepted
accounting principles and general practices within the financial services
industry. In preparing the accompanying financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the balance sheet and the reported amounts of revenue and expenses
for the period. Actual results could differ from those estimates.
UNAUDITED FINANCIAL STATEMENTS: The balance sheet as of June 30, 2000, the
statements of operations and cash flows for the six months ended June 30, 2000
and 1999, and the statement of stockholders' equity for the six months ended
June 30, 2000, have been prepared by the Company without audit. In the opinion
of management, all adjustments (which include normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows for all such periods have been made. The results of operations for
the six months ended June 30, 2000, are not necessarily indicative of the
operating results for the full year.
PRESENTATION OF CASH FLOWS: Cash flows from credit card receivables are reported
net.
CREDIT CARD RECEIVABLES: Credit card receivables are stated at the balance
reported to customers, reduced by allowances for refundable fees and losses.
Fees are accrued monthly on active credit card accounts and included in credit
card receivables. Accrual of income is discontinued on credit card accounts that
have been closed or charged off. Accrued fees on credit card loans are charged
off with the card balance, generally when the account becomes 90 days past due.
The allowance for losses is established through a provision for losses charged
to expense. Receivables are charged against the allowance for losses when
management believes that collectibility of principal is unlikely. The allowance
is an amount that management believes will be adequate to absorb estimated
losses on existing accounts, based on evaluation of the collectibility of the
accounts and prior loss experience. This evaluation also takes into
consideration such factors as changes in the volume of the credit card
receivable portfolio, overall portfolio quality, and current economic conditions
that may affect the borrowers' ability to pay. While management uses the best
information available to make its evaluation, this estimate is susceptible to
significant change in the near term.
DUE FROM AFFILIATES: The Company provides credit card marketing, customer
service and collection services for Nova Financial Systems, Inc. ("Nova"), a
company affiliated though common ownership, in exchange for a fee. The amount
due from affiliate in the accompanying balance sheets represents the balance of
unpaid servicing fees receivable in connection with Nova's card activity.
6
<PAGE>
KEY FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended June 30, 2000 and June 30, 1999
is unaudited)
--------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER RECEIVABLES AND DUE TO CARDHOLDERS: The Company charges a fully refundable
reservation fee equal to each cardholder's borrowing limit upon issuance of a
credit card. The amount due to cardholders represents the balance of reservation
fees that would have to be refunded to cardholders should they close their
accounts at the balance sheet date. Funds held in trust at Key Bank & Trust to
secure payment of this liability are reflected in other receivables in the
accompanying balance sheets.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost less
accumulated depreciation. Depreciation is computed principally by the double
declining-balance method over the assets' estimated useful lives.
INCOME TAXES: The Company, with the consent of its stockholders, elected to be
taxed under the provisions of Subchapter S of the Internal Revenue Code
effective January 1, 1998, which provides that in lieu of corporate income tax
the stockholders separately account for their pro rata shares of the Company's
items of income, deductions, losses and credits. As a result of this election,
no income taxes have been recognized in the accompanying financial statements.
As of December 31, 1999, the Company's reported net assets exceed their tax
bases by approximately $327,000 ($131,000 at June 30, 2000, unaudited).
Accordingly, if the election was terminated on that date, a deferred tax
liability of approximately $122,000 ($49,000 at June 30, 2000, unaudited) would
be recognized by a charge to income tax expense.
NOTE 2. CREDIT CARD RECEIVABLES
The composition of credit card receivables at June 30, 2000, and at December 31,
1999 and 1998 is as follows:
2000 1999 1998
------------ ------------ ------------
(Unaudited)
Credit card receivables ... $ 25,025,171 $ 22,274,017 $ 52,321,076
Refundable reservation fees (24,551,479) (21,693,622) (50,981,807)
------------ ------------ ------------
473,692 580,395 1,339,269
Less allowance for losses . 38,845 60,466 217,872
------------ ------------ ------------
$ 434,847 $ 519,929 $ 1,121,397
============ ============ ============
Changes in the allowance for losses for the six-month periods ended June 30,
2000 and 1999, and the years ended December 31, 1999 and 1998 are as follows:
June 30, December 31,
---------------------- ----------------------
2000 1999 1999 1998
--------- --------- --------- ---------
(Unaudited) (Unaudited)
Balance, beginning ..... $ 60,466 $ 217,872 $ 217,872 $ --
Provision for losses (14,955) 610,935 511,645 260,332
Recoveries of amounts
charged-off ........ -- -- 4,231 67,274
Amounts charged-off . (6,666) (528,557) (673,282) (109,734)
--------- --------- --------- ---------
Balance, ending ........ $ 38,845 $ 300,250 $ 60,466 $ 217,872
========= ========= ========= =========
7
<PAGE>
KEY FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended June 30, 2000 and June 30, 1999
is unaudited)
--------------------------------------------------------------------------------
NOTE 2. CREDIT CARD RECEIVABLES (CONTINUED)
There were no credit card receivables acquired through December 31, 1997 and
therefore no allowance for losses was required during 1997.
NOTE 3. OTHER RECEIVABLES
The composition of other receivables at June 30, 2000, and at December 31, 1999
and 1998 is as follows:
2000 1999 1998
------------ ------------ ------------
(Unaudited)
Due from Key Bank & Trust . $ 2,458,188 $ 2,785,624 $ 150,245
Due from Net 1st National Bank 1,321,371 -- --
Other ..................... 1,015 88,669 222,468
------------ ------------ ------------
$ 3,780,574 $ 2,874,293 $ 372,713
============ ============ ============
The amount due from Key Bank and Trust is held in a trust account by the bank.
NOTE 4. LEASEHOLDS AND EQUIPMENT
The major classes of property and equipment and total accumulated depreciation
at June 30, 2000, and at December 31, 1999 and 1998, are as follows:
2000 1999 1998
------------ ------------ ------------
(Unaudited)
Leasehold improvements .... $ 113,419 $ 104,304 $ 50,344
Furniture and equipment ... 343,558 332,019 177,605
------------ ------------ ------------
456,977 436,323 227,949
Less accumulated depreciation 176,769 132,347 14,994
------------ ------------ ------------
$ 280,208 $ 303,976 $ 212,955
============ ============ ============
NOTE 5. TRANSACTIONS WITH RELATED PARTIES
The Company had an informal agreement with Nova under which the Company agreed
to provide marketing and preprocessing of credit card applications, customer
service and collection services for Nova. Expenses were charged to Nova for
application processing and customer service based on set fee per application
processed and for collections based on a set fee per delinquent account on file.
The Company believes the method and per unit price charged was consistent with
the methods and rates of similar third party credit card processors. The Company
recognized processing fee and servicing income of $3,832,736 associated with
Nova's activities during the year ended December 31, 1999 ($672,420 and
$1,304,636 during the six month periods ended June 30, 2000 and 1999,
unaudited). These amounts are included in other operating income. No significant
services were provided for Nova in 1998 or 1997. As of June 30, 2000 and
December 31, 1999, Nova owed the Company $52,479 (unaudited) and $685,464 in
connection with services performed by the Company. Effective July 1, 2000, all
such services for Nova were terminated.
8
<PAGE>
KEY FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended June 30, 2000 and June 30, 1999
is unaudited)
--------------------------------------------------------------------------------
NOTE 5. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
The Company has entered into an agreement with Paragon Water Member Services
("Paragon"), a company affiliated through common ownership, whereby Paragon
provides credit card marketing services for the Company and for Nova. Paragon
earns commissions for card applications that are not subsequently refunded. In
addition, during 1998, Paragon provided operating space and personnel to the
Company. The Company paid Paragon $5,662,026 and $8,626,699 in commissions
during the years ended December 31, 1999 and 1998, respectively, ($5,888,157
during the six months ended June 30, 1999, unaudited) and paid $963,174 for
other services in 1998. No services were provided by Paragon in 1997 or during
the six months ended June 30, 2000 (unaudited). As of December 31, 1998, the
Company owed Paragon $266,000 in commissions for cards originated in 1998. No
amount was due to Paragon at December 31, 1999 or at June 30, 2000 (unaudited).
NOTE 6. COMMITMENTS, CONTINGENCIES AND CREDIT RISK
A credit limit has been established for each card holder account acquired by the
Company. By agreement, the credit limit can be terminated at any time for any
reason. Because the initial reservation fee charged to all account holders is
fully refundable, the total of accounts with credit limits in excess of
cardholder balances is reflected as a liability in the amount of $2,905,021
(unaudited), $2,402,377 and $1,408,693 as of June 30, 2000, December 31, 1999
and 1998, respectively, in the accompanying balance sheets.
LEASE COMMITMENTS: The Company rents office space under an operating lease with
initial terms through September 30, 2004. The office lease has a five year
renewal option. The future minimum rental payments due under the lease is as
follows:
Year Ending
December 31, Amount
-------------------------------------------------------------------------------
2000 $ 278,200
2001 292,100
2002 306,700
2003 322,100
2004 250,500
------------------
$ 1,449,600
==================
Total rent expense under operating leases was approximately $229,000 and $36,000
for the years ended December 31, 1999 and 1998, respectively, and $147,000
(unaudited) and $94,000 (unaudited) for the six months ended June 30, 2000 and
1999, respectively. There was no property leased in 1997.
CONTINGENCIES: In the normal course of business, the Company is involved in
various legal proceedings. In the opinion of management, any liability resulting
from such proceedings would not have a material adverse effect on the Company's
financial statements.
Credit cards are issued throughout the United States to customers that are
considered high credit risks. The Company evaluates each customer's credit
worthiness on a case-by-case basis. Because of the reservation fee charged upon
issuance of credit cards, changes for purchases or cash advances are generally
limited to the amount of payments collected from each customer less fees
charged.
9
<PAGE>
KEY FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended June 30, 2000 and June 30, 1999
is unaudited)
--------------------------------------------------------------------------------
NOTE 6. COMMITMENTS, CONTINGENCIES AND CREDIT RISK (CONTINUED):
The Company's credit card receivables were initiated under membership terms with
VISA or MasterCard. Modification of these terms by VISA and MasterCard could
adversely affect operating results.
NOTE 7. OTHER OPERATING EXPENSES
Six months ended Periods ended
June 30, December 31,
---------------------------------- ----------------------
2000 1999 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Telecommunications .. $ 168,175 $ 321,842 $ 648,111 $ 259,105 $ --
Professional fees ... 105,806 47,203 166,005 2,869 --
Printing and supplies 7,880 22,489 41,461 63,049 --
Other ............... 114,686 66,988 156,399 48,541 3,863
---------- ---------- ---------- ---------- ----------
$ 396,547 $ 458,522 $1,011,976 $ 373,564 $ 3,863
========== ========== ========== ========== ==========
NOTE 8. SETTLEMENT WITH BANK
In April 1999, the Company reached a settlement with Key Bank & Trust that
resulted in a) a significant increase in the amount of collected funds held in
trust by the Bank pending payment to the Company, b) the cessation of marketing
credit cards for the Bank, c) a reduction in the monthly fees charged by the
Bank to the Company, and d) mutual releases from any and all claims against each
other through the date of the release. In connection with the settlement, the
Bank paid the Company $1,016,928, which has been recognized as a reduction in
third party servicing fees for the six months ended June 30, 1999 and the year
ended December 31, 1999 in the accompanying statements of operations.
The Bank also paid the Company $250,000 which was recognized as a receivable at
December 31, 1998 in connection with card activity in 1998.
NOTE 9. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1999 1998 1997
---------------------------------
Supplemental Schedule of Noncash Investing
and Financing Activities
Equipment contributed in exchange for stock $ - $ - $ 16,335
=================================
10
<PAGE>
KEY FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended June 30, 2000 and June 30, 1999
is unaudited)
--------------------------------------------------------------------------------
NOTE 10. PLAN OF REORGANIZATION
The Company has entered into an Agreement and Plan of Reorganization with
Equitex, Inc. (Equitex) under which the Company's stockholders would exchange
all of the issued and outstanding shares of the Company for a) 25% of the
outstanding common shares of Equitex, after giving effect to the consummation of
this merger and a similar planned merger of Nova, b) warrants for the purchase
of common stock of Equitex equal to 50% of any warrants, options, preferred
stock or other securities outstanding at the closing date and exchangeable for
or convertible into Equitex common shares, and c) $2,500,000.
11
<PAGE>
EXHIBIT 4
The Meridian Residential Group, Inc.
Financial Statements
for the year ended
February 29, 2000
and the four months ended
June 30, 2000 and 1999
<PAGE>
THE MERIDIAN RESIDENTIAL GROUP, INC.
FINANCIAL STATEMENTS
FEBRUARY 29, 2000
<PAGE>
THE MERIDIAN RESIDENTIAL GROUP, INC.
FINANCIAL STATEMENTS
FEBRUARY 29, 2000
Table of Contents
-----------------
Page
----
Independent Accountants' Audit Report . . . . . . . . . . . 2
Financial Statements:
Balance Sheet . . . . . . . . . . . . . . . . . . . . 3
Statement of Income and Retained Earnings . . . . . . 4
Statement of Cash Flows . . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . 6-8
Supporting Schedule of Operating Expenses . . . . . . 9
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO: Board of Directors
The Meridian Residential Group, Inc.
2636 Nostrand Avenue
Brooklyn, NY 11210
Gentlemen:
We have audited the accompanying balance sheet of The Meridian Residential
Group, Inc., a New York Corporation, as of February 29, 2000, and the related
statements of income, retained earnings, and cash flows, for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Meridian Residential
Group, Inc., as of February 29, 2000, and the results of its operations and its
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
Hirsch, Oelbaum, Bram & Hanover
Certified Public Accountants, P.C.
New York, New York
May 24, 2000
("Note 6" Exclusively - September 6, 2000)
<PAGE>
THE MERIDIAN RESIDENTIAL GROUP, INC.
BALANCE SHEET
FEBRUARY 29, 2000
Assets
------
CURRENT ASSETS:
Cash ........................................ $ 389,405
Accounts Receivable ......................... 13,040
---------
TOTAL CURRENT ASSETS .................... $ 402,445
FIXED ASSETS:
Furniture and Equipment ..................... 191,822
Accumulated Depreciation .................... (67,952)
---------
TOTAL FIXED ASSETS ...................... 123,870
OTHER ASSETS:
Security Deposit ............................ 2,078
Prepaid Insurance ........................... 2,429
---------
4,507
---------
TOTAL ASSETS ............................ $ 530,822
=========
Liabilities and Stockholders' Equity
------------------------------------
LIABILITIES:
Accounts Payable ............................ $ 62,984
Accrued Expenses ............................ 10,000
Income Tax Payable .......................... 26,526
---------
TOTAL CURRENT LIABILITIES ............... $ 99,510
STOCKHOLDERS' EQUITY:
Common Stock - No Par Value;
200 Shares Authorized, 100
Shares Issued and Outstanding ............. $ 260,850
Retained Earnings ........................... 170,462
---------
TOTAL STOCKHOLDERS' EQUITY .............. 431,312
---------
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY .................. $ 530,822
=========
SEE INDEPENDENT AUDITORS' REPORT AND
NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
THE MERIDIAN RESIDENTIAL GROUP, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED FEBRUARY 29, 2000
REVENUE:
Origination Fee ....................................... $ 2,244,550
Operating Expenses (See Schedule) ..................... 2,212,286
-----------
NET OPERATING INCOME (LOSS) ....................... 32,264
OTHER INCOME AND EXPENSE:
Interest Income ....................................... 6,387
Interest Expense ...................................... (725)
-----------
NET INCOME (LOSS) BEFORE
INCOME TAXES .................................... 37,926
Provision for Income Taxes ............................ 29,241
-----------
NET INCOME (LOSS) ................................. $ 8,685
Retained Earnings - March 1, (Restated) ................... 161,777
-----------
Retained Earnings - February 29, 2000 ..................... $ 170,462
===========
SEE INDEPENDENT AUDITORS' REPORT AND
NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
THE MERIDIAN RESIDENTIAL GROUP, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED FEBRUARY 29, 2000
Cash Flows from Operating Activities:
Net Income (Loss) ........................... $ 8,685
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating
Activities:
Depreciation and Amortization ............... $ 22,798
Changes in Assets:
Decrease in Accounts Receivable ............. 64,708
Increase in Security Deposit ................ (1,000)
Decrease in Prepaid Insurance ............... 12,603
Increase in Accounts Payable ............... 33,508
Increase in Corporate Taxes Payable ......... 13,559
Decrease in Loan Payable - Chase
Manhattan Bank ........................ (17,420)
---------
TOTAL ADJUSTMENTS ....................... 128,756
---------
Net Cash Provided by Operating Activities ....... 137,441
Cash Flows Used in Investing Activities:
Purchase of Equipment ...................... (4,989)
---------
Net Cash Used in Investing Activities ........... (4,989)
---------
Net Increase in Cash and Cash Equivalents ....... $ 132,452
Cash and Equivalents - March 1, 1999
(Restated) ..................................... 256,953
---------
Cash and Equivalents - February 29, 2000 ........ $ 389,405
=========
Interest Paid for the Year ...................... $ 725
=========
Taxes Paid for the Year ......................... $ 17,226
=========
SEE INDEPENDENT AUDITORS' REPORT AND
NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
THE MERIDIAN RESIDENTIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
NOTE 1. ORGANIZATION
The Meridian Residential Group, Inc. was incorporated in the State of
New York on February 28, 1996 to operate as a mortgage banking company. The
Company is also licensed to do business in the States of New Jersey and
Connecticut.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Cash and Equivalents
--------------------
For purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments with a maturity of three months or
less as cash equivalents.
Revenue Recognition
-------------------
Revenue primarily consisting of Loan Origination Fees is earned upon
the completion and closing of the mortgage. Certain related expenses
such as Postage and Appraisal Costs offset related revenue. An allowance
for doubtful accounts is provided when and if a particular receivable
evidences a collection problem. As of February 29, 2000, management
considered all receivables to be collectible, accordingly, no allowance
has been set up.
Concentration of Credit Risk
----------------------------
The Company maintains their cash accounts at various financial
institutions. The balances, at times may exceed federally insured
limits. At February 29, 2000 the Company had no cash on deposit
exceeding the insured limit.
Advertising
-----------
The Company expenses Advertising Costs as they are incurred. For the
period ended February 29, 2000 these expenses amounted to $33,972.
6
<PAGE>
THE MERIDIAN RESIDENTIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
Fixed Assets
------------
Fixed assets are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
All Leasehold Improvements are depreciated over the term of the lease.
Revenue was charged with depreciation expense of 22,798 for the period
ended February 29, 2000.
Assumptions
-----------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
NOTE 3. LOAN PAYABLE - CHASE MANHATTAN BANK
The Corporation had a $150,000 Revolving Line of Credit. At February 29,
2000, the Corporation was obligated for 0, and canceled the credit line.
NOTE 4. COMMITMENTS
The Company leases space in New York and New Jersey. A lease on the
original New Jersey location was terminated by paying $18,000 to the
landlord.
The lease in New York is for 6 years terminating August 31, 2005. The
following are the annual minimum rental payments:
2000 $ 45,000
2001 45,000
2002 48,000
2003 51,000
2004 51,000
2005 25,500
7
<PAGE>
THE MERIDIAN RESIDENTIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
The Corporation currently leases two locations in New Jersey.
1) Perth Amboy - $700 per month through August 31, 2000
and 2) Woodridge - $852.75 per month through April 30, 2001.
In addition, there are rent escalations for real estate tax, which at
this time are unknown.
NOTE 5. INCOME TAXES
The Corporation has elected to be taxed on the cash basis. The accrual
for Income Taxes payable and the expense related, reflect the taxes due on
the net income for cash basis.
Temporary differences between the recognition of certain income and
expense items for income tax purposes and financial reporting purposes are
as follows:
Federal Tax $ 14,337
State & City Tax 11,290
--------
Total 25,627
NOTE 6. PRIOR PERIOD ADJUSTMENT
Certain errors resulting in understatement of previously reported assets
and income of prior years were corrected and resulted in the following
changes to Retained Earnings as of February 28, 1999:
Retained Earnings Previously Reported 2/28/99 $ 93,102
Understatement of Accounts Receivable
and Income 68,675
---------
Retained Earnings as Adjusted 2/28/99 $ 161,777
=========
This income was accounted for on the February 28, 1999 cash basis income
tax return, and therefore, does not effect the Income Tax calculation.
8
<PAGE>
THE MERIDIAN RESIDENTIAL GROUP, INC.
SUPPORTING SCHEDULE OF OPERATING EXPENSES
FOR THE YEAR ENDED FEBRUARY 29, 2000
Operating Expenses:
Salaries .............................................. $ 572,772
Commissions ........................................... 1,204,920
Advertising ........................................... 33,972
Office ................................................ 47,416
Automobile ............................................ 16,232
Postage ............................................... 6,247
Rent .................................................. 87,224
Telephone ............................................. 18,579
Travel and Shows ...................................... 29,416
Computer .............................................. 21,175
Insurance ............................................. 22,319
Medical Insurance and Employee Benefits ............... 34,591
Dues and Subscriptions ................................ 7,424
Equipment Leases ...................................... 13,577
Professional Fees ..................................... 20,345
Payroll Taxes ......................................... 33,568
Depreciation .......................................... 22,798
Utilities ............................................. 12,600
Maintenance ........................................... 7,111
-----------
TOTAL OPERATING EXPENSES .......................... $ 2,212,286
===========
SEE INDEPENDENT AUDITORS' REPORT AND
NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
THE MERIDIAN RESIDENTIAL GROUP, INC.
INTERIM FINANCIAL STATEMENTS
FOR THE FOUR MONTHS ENDED JUNE 30, 2000
<PAGE>
THE MERIDIAN RESIDENTIAL GROUP, INC.
FINANCIAL STATEMENTS
JUNE 30, 2000
Table of Contents
-----------------
Page
----
Independent Accountants' Compilation Report . . . . . . . 2
Financial Statements:
Balance Sheet . . . . . . . . . . . . . . . . . . . . 3
Statement of Income and Retained Earnings . . . . . . 4
Statement of Cash Flows . . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . 6-9
Supporting Schedule of Operating Expenses . . . . . . 10
<PAGE>
INDEPENDENT ACCOUNTANTS' COMPILATION REPORT
TO: The Board of Directors
The Meridian Residential Group, Inc.
2636 Nostrand Avenue
Brooklyn, NY 11210
Gentlemen:
We have compiled the accompanying balance sheet of The Meridian Residential
Group, Inc., as of June 30, 2000, and the related statements of income, retained
earnings, and cash flows for the four month periods ended June 30, 2000 and
1999, in accordance with the Statements on Standards for Accounting and Review
Services, issued by the American Institute of Certified Public Accountants. All
information in these financial statements is the representation of the
management of The Meridian Residential Group, Inc.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. We have not audited or
reviewed the accompanying financial statements and, accordingly, do not express
an opinion, or any other form of assurance on them.
Hirsch, Oelbaum, Bram & Hanover
Certified Public Accountants, P.C.
New York, New York
September 22, 2000
<PAGE>
THE MERIDIAN RESIDENTIAL GROUP, INC.
BALANCE SHEET
JUNE 30, 2000
Assets
------
Current Assets:
Cash ........................................ $ 254,361
Accounts Receivable ......................... 19,957
Prepaid Expenses ............................ 37,774
Loan - Meridian Capital Funding Inc. ........ 101,145
---------
TOTAL CURRENT ASSETS .................... $ 413,237
Fixed Assets:
Furniture and Equipment ..................... 191,822
Accumulated Depreciation .................... (75,550)
---------
TOTAL FIXED ASSETS ...................... 116,272
Other Assets:
Security Deposit ............................ 2,078
---------
TOTAL ASSETS ............................ $ 531,587
=========
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities:
Accounts Payable ............................ $ 37,989
Accrued Expenses ............................ 10,000
Income Tax Payable .......................... 35,680
---------
TOTAL CURRENT LIABILITIES ............... $ 83,669
Stockholders' Equity:
Common Stock - No Par Value;
200 Shares Authorized, 100
Shares Issued and Outstanding ............. $ 260,850
Retained Earnings ........................... 187,068
---------
TOTAL STOCKHOLDERS' EQUITY .............. 447,918
---------
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY .................. $ 531,587
=========
SEE ACCOUNTANTS' COMPILATION REPORT AND
NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
THE MERIDIAN RESIDENTIAL GROUP, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE FOUR MONTHS ENDED JUNE 30, 2000 and 1999
2000 1999
--------- ---------
Revenue:
Origination Fee ............................. $ 728,713 $ 881,309
Operating Expenses (See Schedule) ........... 700,405 819,038
--------- ---------
NET OPERATING INCOME (LOSS) ............. 28,308 62,271
Other Income:
Interest Income ............................. 2,518 1,983
--------- ---------
NET INCOME (LOSS) BEFORE
INCOME TAXES .......................... 30,826 64,254
Provision for Income Taxes .................. 14,220 16,081
--------- ---------
NET INCOME (LOSS) ....................... $ 16,606 48,173
Retained Earnings - March 1, (Restated) ......... 170,462 161,777
--------- ---------
Retained Earnings - June 30, .................... $ 187,068 $ 209,950
========= =========
SEE ACCOUNTANTS' COMPILATION REPORT AND
NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
THE MERIDIAN RESIDENTIAL GROUP, INC.
STATEMENT OF CASH FLOWS
FOR THE FOUR MONTHS ENDED JUNE 30, 2000 and 1999
2000 1999
--------- ---------
Cash Flows from Operating Activities:
Net Income (Loss) ........................... $ 16,606 $ 48,173
Adjustments to Reconcile Net Income
(Loss) to Net Cash Provided by
Operating Activities:
Depreciation ................................ 7,599 6,688
Changes in Assets:
Accounts Receivable ......................... (6,918) 49,604
Prepaid Expenses ............................ (35,345) 5,800
Accounts Payable ........................... (24,995) 48,846
Corporate Taxes Payable ..................... 9,154 9,899
Loan - Capital Funding Inc. ................. (101,145) 0
--------- ---------
TOTAL ADJUSTMENTS ....................... (151,650) 120,837
--------- ---------
Net Cash Provided (Used) by Operating
Activities .................................... (135,044) 169,010
Cash Flows from Financing Activities:
Payoff Bank Loan ............................ 0 (17,420)
--------- ---------
Net Increase (Decrease) in Cash and Cash
Equivalents ................................... $(135,044) $ 151,590
Cash and Equivalents - March 1,
(Restated) .................................... 389,405 256,953
--------- ---------
Cash and Equivalents - June 30, ................. $ 254,361 $ 408,543
========= =========
Interest Paid for the Period .................... $ 0 $ 725
========= =========
Taxes Paid for the Period ....................... $ 5,067 $ 6,082
========= =========
SEE ACCOUNTANTS' COMPILATION REPORT AND
NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
THE MERIDIAN RESIDENTIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 1. ORGANIZATION
The Meridian Residential Group, Inc. was incorporated in the State of
New York on February 28, 1996 to operate as a mortgage banking company. The
Company is also licensed to do business in the States of New Jersey and
Connecticut.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Cash and Equivalents
--------------------
For purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments with a maturity of three months or
less as cash equivalents.
Revenue Recognition
-------------------
Revenue primarily consisting of Loan Origination Fees is earned upon
the completion and closing of the mortgage. Certain related expenses
such as Postage and Appraisal Costs offset related revenue. An allowance
for doubtful accounts is provided when and if a particular receivable
evidences a collection problem. As of June 30, 2000, management
considered all receivables to be collectible, accordingly, no allowance
has been set up.
Concentration of Credit Risk
----------------------------
The Company maintains their cash accounts at various financial
institutions. The balances, at times may exceed federally insured
limits. At June 30, 2000 the Company had cash on deposit exceeding the
insured limit by approximately $11,850.
Advertising
-----------
The Company expenses Advertising Costs as they are incurred. For the
period ended June 30, 2000 these expenses amounted to $8,713.
6
<PAGE>
THE MERIDIAN RESIDENTIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000
Fixed Assets
------------
Fixed assets are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
All Leasehold Improvements are depreciated over the term of the lease.
Revenue was charged with depreciation expense of $7,599 for the period
ended June 30, 2000.
Assumptions
-----------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
NOTE 3. LOAN PAYABLE - CHASE MANHATTAN BANK
The Corporation had a $150,000 Revolving Line of Credit. At February 29,
2000, the Corporation was obligated for 0, and canceled the credit line.
NOTE 4. COMMITMENTS
The Company leases space in New York and New Jersey.
The lease in New York is for 6 years terminating August 31, 2005. The
following are the annual minimum rental payments:
2000 $ 45,000
2001 45,000
2002 48,000
2003 51,000
2004 51,000
2005 25,500
7
<PAGE>
THE MERIDIAN RESIDENTIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000
The Corporation leases two locations in New Jersey.
1) Perth Amboy - $700 per month through August 31, 2000
and 2) Woodridge - $852.75 per month through April 30, 2001.
In addition, there are rent escalations for real estate tax, which at
this time are unknown.
NOTE 5. INCOME TAXES
The Corporation has elected to be taxed on the cash basis. The accrual
for Income Taxes payable and the expense related, reflect the taxes due on
the net income for cash basis.
Temporary differences between the recognition of certain income and
expense items for income tax purposes and financial reporting purposes are
as follows:
Federal Tax $ 7,034
State & City 5,112
-----
Total 12,146
NOTE 6. PRIOR PERIOD ADJUSTMENT
Certain errors resulting in understatement of previously reported assets
and income of prior years were corrected during the current period
resulting in the following changes to Retained Earnings as of February 28,
1999:
8
<PAGE>
THE MERIDIAN RESIDENTIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000
Retained Earnings Previously Reported 2/28/99 $ 93,102
Understatement of Accounts Receivable
and Income 68,675
---------
Retained Earnings as Adjusted 2/28/99 $ 161,777
=========
Retained Earnings Previously
Reported 2/29/00 $ 21,872
Understatement of Accounts Receivable
and Income from 2/28/99 68,675
---------
Retained Earnings as Adjusted 2/29/00 $ 90,547
=========
This income was accounted for on the February 28, 1999 cash basis income
tax return, and therefore, does not effect the Income Tax calculation.
NOTE 7. PROPOSED MERGER
In July 2000, The Meridian Residential Group Inc. ("The Company") signed
an agreement and plan of merger with Equitex Corp. in which The Company
will exchange all of its common stock for 425,000 preferred shares of
Equitex Corp. convertible into 425,000 shares of Equitex Corp. common
stock. Furthermore, there is a contingent consideration based upon
performance, in which Equitex Corp. will issue to The Company additional
shares of its common stock.
Prepaid expenses for the period ended June 30, 2000, are approximately
$37,000 for travel and professional fees directly related to the merger
negotiation.
9
<PAGE>
THE MERIDIAN RESIDENTIAL GROUP, INC.
SCHEDULE OF OPERATING EXPENSES
FOR THE FOUR MONTHS ENDED JUNE 30, 2000 and 1999
2000 1999
--------- ---------
Operating Expenses:
Salaries .................................... $ 178,291 $ 215,727
Commissions ................................. 370,742 438,039
Advertising and Promotion ................... 8,713 14,837
Office ...................................... 16,425 19,792
Automobile .................................. 4,581 2,948
Postage ..................................... 320 1,074
Rent ........................................ 21,394 30,600
Telephone ................................... 14,763 16,480
Travel and Shows ............................ 14,852 14,532
Computer .................................... 7,314 1,181
Insurance ................................... 5,246 8,948
Medical Insurance and Employee Benefits ..... 12,107 15,889
Dues and Subscriptions ...................... 3,348 1,715
Equipment Leases ............................ 2,562 5,802
Professional Fees ........................... 14,805 5,300
Payroll Taxes ............................... 11,852 12,688
Depreciation ................................ 7,599 6,688
Utilities ................................... 4,243 3,455
Maintenance ................................. 1,248 3,343
--------- ---------
TOTAL OPERATING EXPENSES ................ $ 700,405 $ 819,038
========= =========
SEE ACCOUNTANTS' COMPILATION REPORT AND
NOTES TO FINANCIAL STATEMENTS
10
