U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended: DECEMBER 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For transition period from _______ to _______.
Commission File Number: 0-12374
EQUITEX, INC.
(Name of small business issuer in its charter)
DELAWARE 84-0905189
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7315 EAST PEAKVIEW AVENUE, ENGLEWOOD, COLORADO 80111
(Address of principal executive offices)(Zip Code)
Issuer's telephone number: (303) 796-8940
Securities registered under Section 12 (b) of the Exchange Act:
NONE
Securities registered under Section 12 (g) of the Exchange Act:
COMMON STOCK, $.02 PAR VALUE
(Title of Class)
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Exchange during the past 12 months
(or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
Days: Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained in this form, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB: /X/
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $51,466,792 based on the last sale price of the Registrant's
common stock on April 10, 2000, ($8.25 per share) as reported by the Nasdaq
Stock Market.
The issuer had 7,106,943 shares of common stock outstanding as of April 10,
2000.
Documents incorporated by reference: YES
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EQUITEX, INC.
FORM 10-K
THIS REPORT MAY CONTAIN CERTAIN "FORWARD-LOOKING" STATEMENTS AS SUCH TERM IS
DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 OR BY THE
SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND RELEASES, WHICH
REPRESENT THE REGISTRANT'S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED
TO, STATEMENTS CONCERNING THE REGISTRANT'S OPERATIONS, ECONOMIC PERFORMANCE,
FINANCIAL CONDITION, GROWTH AND ACQUISITION STRATEGIES, INVESTMENTS, AND FUTURE
OPERATIONAL PLANS. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE
NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS
"MAY", "WILL", "EXPECT", "BELIEVE", "ANTICIPATE", "INTENT", "COULD", "ESTIMATE",
"MIGHT", OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE
TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN
OF WHICH ARE BEYOND THE REGISTRANT'S CONTROL, AND ACTUAL RESULTS MAY DIFFER
MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT FACTORS, INCLUDING UNCERTAINTY
RELATED TO ACQUISITIONS, GOVERNMENTAL REGULATION, MANAGING AND MAINTAINING
GROWTH, THE VALUE OF THE REGISTRANT'S INVESTMENTS, THE OPERATIONS OF THE
REGISTRANT'S INVESTEE COMPANIES, VOLATILITY OF STOCK PRICE AND ANY OTHER FACTORS
DISCUSSED IN THIS AND OTHER REGISTRANT FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION.
PART I
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ITEM 1. DESCRIPTION OF BUSINESS.
(a) General development of business.
The Registrant was organized under the laws of the State of Delaware in
1983 and elected to become a business development company and be subject to the
applicable provisions of the Investment Company Act in 1984. Until January 4,
1999, Equitex, Inc. (the "Registrant") was a business development company
("BDC") which is a form of closed-end, non-diversified investment company under
the Investment Company Act of 1940 (the "Investment Company Act"). A BDC
generally must maintain 70% of its assets in new, financially troubled or
otherwise qualified companies, known as investee companies, and offers
significant managerial assistance to such companies. BDC's are not subject to
the full extent of regulation under the Investment Company Act. The Registrant
primarily was engaged in the business of investing in and providing managerial
assistance to developing companies which, in its opinion, would have a
significant potential for growth. The Registrant's investment objective was to
achieve long-term capital appreciation, rather than current income, on its
investments.
At a special stockholders meeting held on April 3, 1998, the Registrant's
stockholders authorized the Registrant to change the nature of its business and
withdraw its election as a BDC under the Investment Company Act. The withdrawal
would become effective only upon the Securities and Exchange Commission's
receipt of the Registrant's notice of election of withdrawal to be filed within
a period of one year from the date of vote. On January 4, 1999, the Registrant
filed its withdrawal and elected to be treated for a maximum period of one year
as a "transient investment company" as that term is defined under the Investment
Company Act. Following the withdrawal, the Registrant is no longer subject to
the regulatory provisions of the Investment Company Act for BDC's, such as
insurance, custody, composition of the board, affiliated transactions and
compensation arrangements. Despite the Registrant's withdrawal of its election
as a BDC, the Registrant continues to be subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Under
the Exchange Act, the Registrant continues to file periodic reports such as Form
10-K and Form 10-Q, as well as reports on Form 8-K, proxy statements and any
other reports required under the Exchange Act.
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The Registrant's Board of Directors adopted a plan which began with
stockholder approval for the Registrant to withdraw as a BDC, with the intent of
becoming an operating company. On August 13, 1998, the Registrant acquired all
of the outstanding stock of First TeleServices Corp. ("FTC") in exchange for
625,000 shares of the Registrant's common stock. As a result of the transaction,
FTC became a wholly owned subsidiary of the Registrant. As a marketing arm for
financial institutions, FTC's business plan calls for it to perform as a
consumer finance company, offering financial products and services to the
sub-prime market. These products will be developed through correspondent
relationships with companies specializing in the particular product offered.
During late 1998 and early 1999, the Registrant acquired shares totaling
7.5% of the outstanding common stock of First TeleBanc Corp. ("FTB"), a bank
holding company which operates through its wholly owned subsidiary, net First
National Bank, in Boca Raton, Florida ("net1st"). FTB intends to focus as a
`direct to the consumer bank' on a national level. It will use the Internet,
including electronic payment processing, to facilitate e-commerce transactions,
and call center technology to deliver its products and services to its customers
24 hours a day, 7 days a week. On April 9, 1999, the Registrant signed a letter
of intent to merge FTB with and into the Registrant. In August 1999, the
Registrant filed an application with the Federal Reserve Bank of Atlanta for
approval to become a bank holding company. Approval by the Federal Reserve is
necessary for the Registrant to complete its proposed acquisition of FTB. Since
the filing of the application, the Registrant has received and responded, most
recently in late March 2000, to numerous inquiries from the Federal Reserve for
more information as part of the ongoing application process. Once the
application is approved, of which there is no assurance, the Registrant will
commence the process necessary to hold a special meeting of stockholders to seek
approval of the transaction at the earliest possible date.
Consummation of the FTB merger is subject to a number of conditions,
including: (i) approval by the Federal Reserve Bank of Atlanta, Georgia of the
Registrant's application to become a bank holding company under the Bank Holding
Company Act of 1956; (ii) the distribution of all of the Registrant's business
development company assets to a new wholly owned subsidiary, Equitex 2000, Inc.
("E2000"), and the spin-off of E2000 to the Registrant's existing shareholders
(the "Spin-Off")(as explained more fully in (c) Narrative description of
business.); and (iii) the approval of the FTB merger by the Registrant's
shareholders. The Registrant will solicit the approval of its shareholders for
the FTB merger at a special meeting of shareholders to be called later this
year.
On August 23, 1999, the Registrant, through a newly formed wholly owned
subsidiary, nMortgage, Inc. ("nMortgage"), acquired First Bankers Mortgage
Services, Inc. ("FBMS"). FBMS, a Florida corporation, is a full service mortgage
banking company headquartered in the Fort Lauderdale, Florida. The Registrant
acquired all of the outstanding common stock of FBMS from its sole shareholder,
Vincent Muratore. The total aggregate purchase price for FBMS, is up to 1,000
shares of the Registrant's Series E Convertible Preferred Stock (the "Series E
Preferred Stock"). Of these shares, 250 shares valued at $2,531,000 were issued
at closing and 750 shares are issuable upon satisfaction of certain future
performance conditions. In addition, the purchase price is subject to
post-closing adjustments pursuant to the Agreement and Plan of Reorganization,
dated June 22, 1999.
The Series E Convertible Preferred Stock issued in connection with the FMBS
acquisition is not entitled to dividends, does not have a liquidation preference
and carries no voting rights. The Series E Convertible Preferred Stock, if fully
issued, automatically converts to 1,000,000 shares of common stock upon (i) the
approval of an increase in the authorized shares of common stock from 7,500,000
shares to 50,000,000 or the subsequent merger of the Company with or into
another company or (ii) the sale of substantially all the Registrant's assets.
On January 3, 2000, the Registrant announced that it had executed a
definitive agreement whereby all of the outstanding common stock of nMortgage
will be acquired by Innovative Gaming Corporation of America ("IGCA"), a
reporting company under the Securities Exchange Act of 1934, whose common stock
trades on the Nasdaq National Market under the symbol "IGCA" (the "Proposed
nMortgage Transaction"). Under the terms of the Proposed nMortgage Transaction,
in exchange for all outstanding shares of nMortgage, the Registrant and other
nMortgage shareholders will receive, in the aggregate, approximately 46,000,000
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shares of IGCA common stock, assuming that there will be approximately
16,000,000 shares of IGCA common stock outstanding on fully-diluted basis,
before the Proposed nMortgage Transaction. For accounting purposes the
transaction will be treated as an acquisition of IGCA by nMortgage and as a
recapitalization of nMortgage.
IGCA was formed in 1991 to develop, manufacture, market and distribute
specialty video gaming machines. As a condition of the Proposed nMortgage
Transaction, IGCA will dispose of all of its gaming assets. As a result, upon
completion of the transaction, the business of nMortgage will be the sole
business operation of IGCA. In February 2000, IGCA announced an agreement to
sell its gaming to an unaffiliated third party company to close simultaneously
with the Proposed nMortgage Transaction.
There are a number of additional customary conditions that must be
satisfied prior to the completion of the Proposed nMortgage Transaction,
including approval by the stockholders of both companies, if required, and any
necessary regulatory or governmental approval. On February 2, 2000, IGCA
announced that it had filed a preliminary proxy statement with the SEC for a
special meeting at which the Registrant will seek stockholder approval of the
transaction.
During 1999, the Registrant commenced a private placement offering of
nMortgage, Inc. securities through which 5,000,000 shares of Series A 5%
Convertible Preferred Stock ("nMortgage Preferred") was sold at $1.00 per share
for total proceeds of $5,000,000. Upon closing of the Proposed nMortgage
Transaction, each nMortgage Preferred share will convert into two shares of IGCA
common stock. If the Proposed nMortgage Transaction is terminated, each
nMortgage Preferred share will automatically convert on November 1, 2000 into
one share of nMortgage common stock. As a result of this offering, the
Registrant's ownership interest in nMortgage has been reduced to 67% on a fully
diluted basis prior to the Proposed nMortgage Transaction.
Both the Registrant and nMortgage continue to evaluate opportunities with
respect to possible mergers or acquisitions. Neither the Registrant nor
nMortgage have reached a level in their discussions that would lead either
company to believe any particular merger or acquisition is certain to occur and
have signed no binding agreements.
As an operating company, the nature of the Registrant's business will
change from investing in a portfolio of securities to achieve gains on
appreciation and dividend income, to becoming actively engaged in the management
of a business or businesses for the generation of income from those operations.
Thus, withdrawal of the Registrant's election as a BDC results in a significant
change in the Registrant's method of accounting from the value method of
accounting required of investment companies to either fair value or historical
cost accounting, depending on the classification of the investment and the
Registrant's intent with respect to the period it intends to hold the
investment.
Over the past several years as a BDC, the Registrant concentrated its
efforts in acquiring interests in more mature investee companies, in some cases,
through asset-based financing transactions. In that regard, the Registrant
devoted more of its time to providing managerial assistance to fewer companies,
most of which time during the last couple of years was devoted to investees RDM
Sports Group, Inc. and IntraNet Solutions, Inc., which constituted a significant
portion of the Registrant's investment portfolio. The President of the
Registrant was President and a director of RDM Sports Group from 1987 to June
1997 and was director of IntraNet Solutions and its predecessor from February
1991 to October 1997.
During the fourth quarter of 1997, the Registrant received 2,000,000 shares
of common stock of VP Sports, Inc. ("VP Sports") in payment for the transfer of
a letter of intent for the acquisition of an unrelated company involved in the
sporting goods business as well as merger and acquisition advisory services
rendered to VP Sports. The total value for the transfer and services was
$250,000 which represents the Registrant's cost basis for the shares.
On July 27, 1999 VP Sports completed an acquisition pursuant to which
Victoria Precision, Inc. ("Victoria"), a corporation incorporated under the laws
of the Province of Quebec, Canada, merged with and into a wholly owned
subsidiary of VP SPORTS. Victoria is a Canadian manufacturer and distributor of
a broad range of bicycles and tricycles. VP Sports acquired all of the capital
stock of Victoria resulting in ownership of all of its assets, liabilities and
business operations. The transaction included future rights to a four-year
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international consulting and non-compete agreement executed with an entity
affiliated with Victoria's former principal stockholder.
In June 1999, VP Sports commenced a private placement through which it
offered up to 40 units with each unit consisting of 100 shares of $1,000 per
share 8% preferred stock, 12,500 shares of common stock at $2.00 per share, and
287,500 warrants to purchase 287,500 shares of common stock at $.10 per share.
As of December 31, 1999, 36 units had been sold for total proceeds to VP Sports
of $4,500,000. The majority of these funds was used in connection with the
Victoria acquisition while the remainder was used for working capital purposes.
Given the increase in shares outstanding following the VP Sports private
placement, the Registrant's ownership percentage in VP Sports has been
substantially reduced resulting in Equitex presently owning approximately 36% of
VP Sports' outstanding common stock. For the first two quarter's of 1999, the
Registrant consolidated the operations of VP Sports with that of the Registrant
and its subsidiaries. Due to the changes in VP Sports' capital structure, for
the year ended December 31, 1999, the Registrant is utilizing the equity method
of accounting for its ownership in VP Sports.
During 1998, the Registrant received 1,500,000 shares of the common stock
of Triumph Sports, Inc. ("Triumph") in payment of merger and acquisition
advisory services totaling $375,000. During 1997, Triumph was unsuccessful in
its attempt to acquire a golf accessory manufacturer. During 1998, Triumph
acquired five health food, nutritional and supplement related retail outlets in
the South Florida area which it operated during 1999. Triumph is an authorized
franchisee of General Nutrition Centers ("GNC") with two of retail outlets. In
late 1999, Triumph received notice from GNC that it was operating in
contravention of clauses in its franchise agreement related to owning and
operating non-GNC franchised stores. As a result, in December 1999, the
Registrant sold one of its non-GNC franchised operations to a third party for
the value of the store's inventory plus a $200,000 five year promissory note.
During the year ended December 31, 1999, the Registrant was not involved in
any bankruptcy, receivership or similar proceedings. In addition, the Registrant
has not undergone material reclassification, merger or consolidation; has not
acquired or disposed of any material amount of assets otherwise than in the
ordinary course of business; and has not experienced any material change in its
mode of conducting business other than as explained above.
(b) Financial information about segments.
Information relating to the Registrant's operating segments can be found in
Note 17 to the Registrant's financial statements for the year ended December 31,
1999.
(c) Narrative description of business.
EQUITEX
As a result of the Registrant's decertification as a BDC on January 4,
1999, the Registrant is now a holding company operating through its wholly owned
subsidiary, FTC, and its majority owned subsidiaries nMortgage and Triumph. In
addition, the Registrant includes in its financial statements, on an equity
basis, its ownership interest in VP Sports.
During each of the past three years, on a stand-alone basis, the Registrant
has relied mainly on sales of investment securities for its revenues. During
1997 and 1998, while a BDC, the Registrant also received significant revenue
from consulting services related to its work with both Triumph and VP. As a
result of the Registrant's change from an investment company to an operating
company and the cessation of its investment activities, the Registrant will only
be able rely on sales of investments for its revenues until such time as its
investment portfolio has been liquidated. During 1999, the Registrant sold a
significant portion of its investment portfolio leaving only a small portion of
its investment in IntraNet Solutions, Inc. remaining. Further sales of IntraNet
Solutions common stock have been made during the first quarter of 1999. As of
the filing of this report, the Registrant holds approximately 15,000 shares of
IntraNet Solutions common stock. The amount and timing of past and future sales
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is primarily dependent upon the securities markets and the liquidity of each
investment.
In order to provide for future revenue streams and as part of the
Registrant's overall decertification plan, the Registrant is proceeding with the
TeleBanc Merger as described earlier in this section. Following the TeleBanc
Merger, if consummated, the Registrant will rely on the operations of its
operating subsidiaries, principally FTB, for its revenue.
While continuing to operate as a single branchless bank, net1st intends to
introduce during the second quarter of 2000 a full-service Internet banking web
site with a national focus. The web site, which is currently in the final stages
of development and beta testing, will provide a one-stop, full-service
interactive solution for both personal and business banking. In addition, net1st
maintains an active Small Business Administration ("SBA") loan program providing
SBA loans throughout the Southwestern United States.
To complement the products and services to be directly offered by net1st
including checking, savings and time deposit accounts, loans, credit cards and
other related products, FTB intends to develop correspondent relationships with
other Internet financial services providers in order to offer certain
non-banking financial services to its customers. These services may include
mortgage, insurance, stock brokerage and other financial related products.
Immediately prior to the TeleBanc Merger and the Proposed nMortgage
Transaction, the Registrant will distribute all of its business development
company assets to E2000, the shares of which will be distributed to all of the
holders of record of the Registrant's common stock on the record date of the
special meeting of shareholders to approve the Spin-Off, TeleBanc Merger and the
Proposed nMortgage Transaction. E2000 will file and seek to make effective an
application for the inclusion of the E2000 common stock on the Nasdaq SmallCap
Market. The assets to be transferred to E2000 will be comprised of the
following:
* all of the Registrant's cash in excess of $2,000,000, or such lesser
amount as the Registrant's Board of Directors may determine in its sole
discretion;
* all securities and investments owned by the Registrant in its investee
companies, except for any securities owned by the Registrant in First
TeleServices, Inc.;
* the FBMS Investment;
* If the conditions precedent to the Proposed nMortgage Transaction have
not been satisfied at the time the Spin-off is approved, all shares of nMortgage
and any and all rights and obligations of the Registrant related to the Proposed
nMortgage Transaction;
* all receivables of any nature, including accounts and notes receivable;
* all furniture, fixtures and equipment of the Registrant; and
* any other assets that are related in any manner to the Registrant's
business development Registrant assets.
E2000 will also assume all liabilities of the Registrant related to its BDC
assets and will indemnify the Registrant and assume the prosecution or defense
of the Registrant in the following lawsuits: Equitex, Inc. and Henry Fong v.
Bertrand T. Ungar, Case No. 98-CV-2437 (Dist. Ct. Arapahoe County, Colorado).
Prior to its distribution to the Registrant'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. The Registrant intends to structure the Spin-Off as a tax-free
distribution to the Registrant's stockholders under Section 355 of the Internal
Revenue Code of 1986, as amended.
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nMORTGAGE
nMortgage was formed to hold all of the outstanding shares of FBMS acquired
by the Registrant on August 23, 1999. nMortgage, through its wholly owned
operating subsidiary FBMS, is a business to consumer retail Internet mortgage
banking company which is developing its business to business mortgage services
technology. As discussed above, the Registrant has executed a definitive
agreement whereby, upon satisfaction of several conditions, all of the
outstanding common stock of nMortgage, including shares of common stock to be
issued upon the automatic conversion of its Series A Preferred Stock will be
acquired by IGCA.
nMortgage, licensed in 25 states, is engaged in the business of
originating, selling and brokering residential mortgage loans. Through a network
of loan originators and its Internet mortgage web site, nMortgage.com, FBMS
offers a broad array of residential mortgage products targeting a range of
customers from sub-prime to high-credit-quality borrowers. FBMS operates as both
(1) a mortgage banker; processing, underwriting, closing and funding loans, and
(2) a mortgage broker; selling the loan products of over 20 different secondary
lenders.
nMortgage is also developing, and intends to introduce during 2000, two
business to business Internet technology solutions for the mortgage industry.
The first site will be targeted to mortgage related businesses not currently
offering mortgage loans such as insurance brokers, stockbrokers, tax preparers,
financial planners, etc. This site will allow these businesses to leverage their
client databases by offering a private label solution offering Internet based
mortgage loans. Utilizing nMortgage's Internet mortgage technology, these
businesses will be able to submit loan applications, check interest rates and
loan status, receive updates on mortgage programs and access the latest industry
news. The second site will target individual mortgage and small mortgage brokers
as well as local savings banks that currently offer mortgage loans. Utilizing
the nMortgage Internet website, a suite of services including a private label
website, can be created for each business. This will allow mortgage
professionals to complete loan applications, access marketing materials and
investor rate sheets, lock rates directly with a mortgage investor, check loan
status, and link to other mortgage and financial related sites. Businesses will
be able to input loans and submit them directly to the nMortgage "back office"
where an assigned loan coordinator will expedite the process.
During 1999 as in past years, FBMS offered both retail and wholesale
lending operations and served primarily as a mortgage banker, processing,
underwriting, closing and funding loans. Loans were closed utilizing warehouse
lines of credit and subsequently sold to other lenders (an "Investor") within a
period averaging less than four weeks. FBMS currently maintains warehouse credit
lines of approximately $25 million to fund loans until their subsequent sale to
Investors. Inherent in this process are certain risks associated with defaults
on payment by borrowers during periods ranging from one to twelve months
depending on agreements with each Investor. In the event of default, FBMS may be
required to repurchase a loan from the Investor forcing FMBS to carry that loan
on its books causing considerable losses. Problems can also arise as a result of
errors or omissions made during the underwriting process, which may cause the
Investor to delay or refuse purchase of a particular loan incurring additional
fees and/or losses to FBMS.
Beginning in 2000, nMortgage intends to significantly alter its mortgage
closing procedure by utilizing the "table" loan process for a majority of its
retail mortgage loans. With the "table" loan process, nMortgage processes a
borrower's application and prepares the file for underwriting. The file is then
offered to an Investor fitting the borrower's lending profile who accepts the
file for underwriting either directly or through its third party underwriting
agent. The process is then taken over by that Investor or its agent who carries
the loan through closing and funding. By employing this design, nMortgage is no
longer responsible for funding these loans utilizing its lines of credit and
thereby mitigates its exposure to interest expense, default events or
underwriting difficulties.
As part of this change in closing strategy, nMortgage intends to leverage
its currently operating Internet web site, nMortgage.com, and capture an early
market share of mortgage products through the Internet. nMortgage.com is a
state-of-the-art online mortgage services system offering both cutting edge
technology and a personal focus. The strategy that nMortgage is pursuing is
two-fold: (1) offer an interactive instant approval business to consumer retail
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page; and (2) provide a business to business private label technology offering
for third party originators. The company is developing for introduction during
the summer of 2000 a business to business Internet solution whereby mortgage
professionals including mortgage bankers, mortgage brokers, financial
institutions, home builders, realtors and other mortgage related businesses will
have access to FBMS's online mortgage technology either as a private label
service or as a hyperlink to the nMortgage web site.
nMortgage believes its retail Internet strategy is on the leading edge of
the online mortgage providers. Utilizing its second generation Internet web site
set for introduction in the second quarter of 2000, nMortgage will conditionally
approve the borrower by credit scoring the data provided by the borrower. The
borrower will have an opportunity to complete the data themselves or connect
with a customer representative who will complete the data for them. While many
online mortgage providers are developing a totally automated online mortgage
system, nMortgage believes a majority of borrowers are attracted by the ease and
convenience of one-stop Internet shopping, but are unwilling to give control of
their personal financial and other information to a computer. nMortgage believes
that a majority of Internet consumers are impatient with, or distrustful of, the
automated Internet application process. nMortgage is currently developing its
next generation web site that will provide a real-time "interactive" application
process with a live human being assisting each borrower through the application
should they so desire.
When using nMortgage.com, the borrower is provided with the information
needed to decide on a loan product and then allowed to apply online for that
loan via the web site. The borrower will be afforded the opportunity to inspect
rates, identify how much they can afford and pre-qualify themselves for a loan.
Once they understand the product and the amount they want or need, the borrower
can submit a loan application online, with or without live company assistance,
and receive an automated underwriting decision instantly. Telephone support to
answer questions or guide them through the application process will be available
around the clock. Once the loan is in process, the borrower can lock in the
interest rate over the Internet and receive real-time status updates on the
loan. If more information is required from the borrower, an email is sent
requesting the necessary information. Conceivably, a loan can be processed in
its entirety online. Personal service, however, is emphasized and always
available.
Low cost, high tech and low touch is essential to success. Ease of
operation is required at both the borrower level as well as the internal
operations level. Being able to fully utilize the technological tools available
to devise, produce, distribute and support the programs is essential. The cost
to generate the business is typically lower than traditional mortgage channels
of business due to the volume capability. Forecasting, capacity management and
capital markets management are essential for this endeavor due to the potential
of wide fluctuations in volume.
The nMortgage Internet web site provides the borrower a constant direct
link to the nMortgage which can serve as the initial contact point between the
borrower and the nMortgage, or as a follow up site for the borrower. nMortgage
will make use of more global applications already available to provide the
borrower access to the nMortgage products and services. Getting the borrower to
the nMortgage.com web site is crucial. In addition to registering with the
various search engines, Internet portals and participating in a number of
multi-vendor sites, nMortgage intends to establish referral links with several
services that are related but do not offer mortgages themselves, such as realtor
networks or financial advisory companies. An integral part of nMortgage's
customer service initiative involves the integration of the Internet mortgage
process with 24 hour, seven days a week call center support.
nMortgage believes its approach will set a high service standard in the
industry. nMortgage's "high tech/high touch" approach will enable it to lock the
loan faster than its competitors, thus lessening the impact of shoppers that use
the Internet as a research vehicle but do not complete a loan transaction
online. nMortgage has completed the initial phase of its Internet web site and
is continuing its development to provide increased user interactivity by
offering a single source for every aspect of the mortgage loan process from
application to closing. nMortgage anticipates that retail loan volume in the
next twenty-four months will shift from retail originators to Internet based
originators.
The business to business private label strategy will leverage off
nMortgage's experience with brokers, community banks and credit unions as well
-7-
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as its second generation web site technology. The goal is to place a customized
Internet program with third parties that will receive a home page at a nominal
price and "back office" support by nMortgage for all loans originated. nMortgage
will not only earn fees from the mortgage loans but will become a fee based
Internet Service Provider to third parties. This allows the loan originator to
offer an efficient online mortgage solution without the significant time and
expense involved in setting up and maintaining their own Internet web site and
related infrastructure. Once an application is submitted through the web site
either by the loan originator on behalf of the client or by the client himself,
nMortgage handles processing the application on behalf of the loan originator
and offers it for underwriting to either FBMS preferred lenders or lenders used
by the loan originator.
nMortgages's business to business strategy involves fully utilizing
technology to enhance the efforts of its current retail distribution channels,
while continuing to build its Internet direct to consumer business. Utilizing
nMortgage's Internet technology wholesale brokers or retail loan officers will
be able to communicate directly with nMortgage via the Internet to transmit loan
applications, perform automated underwriting submissions, receive status
information, receive rate and product information, lock loans, as well as other
ancillary services, including scheduling a closing agent.
The technological enhancements being introduced by nMortgage during the
year 2000 will allow nMortgage to develop new non-traditional distribution
channels. In view of the simplicity developed in the application process,
nMortgage will be introducing an Internet driven origination system to
accountants, lawyers, financial planners, small banks, and credit unions that
wish to participate in the loan origination process.
By focusing on the fulfillment issues surrounding the mortgage process,
nMortgage has adopted an aggressive integration strategy to simplify the
mortgage process as well as provide exceptional service. This strategy will
allow the borrower or loan originator to electronically complete the application
with instant underwriting approval provided by an automated system, order their
title search and appraisal, and determine closing location and date, as well as
other mortgage related services.
The nMortgage business strategy involves an operationally integrated
approach with Internet direct sales gradually taking market share from other
more traditional distribution systems. The Internet will serve as the
communications backbone to the nMortgage origination network. nMortgage operates
a mortgage processing system that is Internet enabled. The system is scalable,
offering process scalability for the foreseeable future and offers integrated
web technology that will allow:
Customer Benefits
- -----------------
* importing data from the web site to the system
* electronic notification to the borrower of all necessary disclosure
information
* an electronic or email response within two minutes of the underwriting
decision
* borrower inquiry status of the loan as well as regular email status
messaging
* rules based filtering of product and pricing information for best-fit
products
* multiple products displayed allowing borrower choice
* mortgage calculators including APR, rate comparisons, credit grade and
refinance analysis
* online rate lock capabilities
* general mortgage education information
* rate and fee information
* credit card processing
* the ability to pull credit reports
* submission of completed mortgage application (1003)
* user-friendly applications that only ask for information pertinent to the
applicant
* disbursement of closing documents to borrower designated closing agent
* links to other ancillary services
* online assistance from a live service representative via phone or email
* secure transmission of borrower data
* 24 hour access to all mortgage services
-8-
<PAGE>
Company Benefits
- ----------------
* products and services offered around the clock
* ability to maximize number of applicants with minimal staffing
* reduced transcription errors
* receipt of income to cover costs at time of application
* ability to cut time between application and loan closing
* capability to broaden marketplace without costly facilities or manpower
* submission of data formatted to allow automated underwriting
With very little modification, nMortgage can provide web sites unique to
each third party originator, realizing the majority of the benefits listed above
regardless of the origination source. The fundamental concept is consistent:
* capture mortgage required data from the originator's web site
* import data to the mortgage processing system
* perform automated underwriting
* export status/underwriting results to originator's web site
* order and receive ancillary services from the web site or processing
system
* perform lock in/registration function with Investors
* transmit data to closing agent to print closing package remotely
To support its growth, nMortgage has five principal business strategy
elements. First, nMortgage will focus primarily on the retail channel utilizing
the "table" funding concept. This channel allows nMortgage to control the loan
origination process and provides direct access to the consumer. Second,
nMortgage will leverage the banker/broker structure in order to consistently
offer consumers low rates on a broad array of mortgage products. Third,
nMortgage will provide consumers a "one-stop" source of mortgage-related
products. These mortgage-related product sales allow nMortgage to increase
revenues without significant capital investment. Fourth, nMortgage will employ a
commission and incentive system for the nMortgage loan originators and an
incentive compensation system for the operations employees that is designed to
motivate them to maximize loan volume and profitability while simultaneously
creating a variable cost structure which is adaptable to changes in origination
volume. Last, nMortgage will recruit highly skilled employees with mortgage
industry experience and seek technologies and process improvements that
streamline the origination process to ensure the continuous delivery of superior
customer service.
In 1998, mortgage origination volume in the U.S. reached a record high of
$1.5 trillion, compared to $834 billion for 1997. Demand for mortgage products
in recent years has been favorably affected by low interest rates, low
unemployment rates, increasing wages, high consumer confidence and strong
housing starts and home sales. The retail origination market of the mortgage
banking industry is highly fragmented. According to the National Association of
Mortgage Brokers, approximately 20,000 mortgage brokers were operating in the
U.S. in 1998. During the past 18 months, the Internet has been emerging as a
major source of mortgage originations. Industry analysts predict that Internet
mortgage originations will grow from over $4.0 billion in 1998 to nearly $100.0
billion by 2003 as borrowers recognize the convenience and benefits of shopping
for a mortgage from the comfort of their home or office. Capturing market share
on the Internet will be dependent upon access to consumers and the ability to
consistently provide broad product offerings at competitive rates.
For its retail business to consumer mortgage banking and brokering
activities, nMortgage competes with both traditional mortgage bankers and
brokers as well as other Internet based mortgage companies. These companies
range in size from large nationally recognized financial institutions to
individual mortgage brokers and bankers offering consumer mortgage products. As
nMortgage seeks to become a technology driven mortgage provider to both
businesses and consumers, nMortgage faces competition mainly from other Internet
focused mortgage companies such as Mortgage.com and eLoan, among others. Many of
these competitors are much larger and posses significantly greater financial
resources than those of nMortgage.
nMortgage currently is licensed to offer mortgages in 25 states. Most
states have laws and regulations governing the registration or licensing and
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<PAGE>
conduct of persons providing mortgage brokerage services. Such laws and
regulations also typically require certain consumer protection disclosures and
compliance with loan solicitation procedures and a variety of other practices,
throughout the various stages of the mortgage solicitation, application and
approval process. In addition to state law, mortgage brokerage services are
heavily regulated by federal law. nMortgage is subject to regulations of various
federal entities including the Department of Housing and Urban Development,
Veterans Administration, Federal Housing Administration, Federal National
Mortgage Association, Government National Mortgage Association, Federal Home
Loan Mortgage Corporation and other agencies. These agencies impose various
rules and regulations which may include licensing and financial requirements,
discrimination policies and underwriting guidelines, among others. Failure to
comply with these requirements can lead to civil and/or criminal liability, loss
of approved status, demands for indemnification or loan repurchases from buyers
in the secondary market, rights of rescission for mortgage loans, class action
lawsuits and administrative and enforcement actions.
FIRST TELESERVICES CORP.
FTC only recently began operations and has not yet generated significant
income. As a marketing arm for financial institutions, FTC's business plan calls
for it to perform as a consumer finance company, offering a broad array of
financial products and services to the sub-prime market. These products will be
developed and serviced through correspondent relationships with companies
specializing in those particular products which may include:
* debt transfer servicing
* balance transfer servicing
* secured credit cards
* sub-prime mortgage loans
* sub-prime auto loans
* prepaid calling cards
* prepaid residential long distance service
* prepaid cellular service
* insurance products
* other selected products and services
The calling center will be the engine that drives the product delivery
system with the capability to handle tens of thousands of inbound and outbound
calls monthly. The inbound calls will be the result of various targeted media
programs and the by-product of FTC's customer base. The outbound calls will be
the result of cross selling large data bases of customers a variety of products
and services offered on a brokered basis through FTC's strategic alliances.
Through interactive voice response technology, the latest call center software
and hardware, and a well-trained staff of customer service representatives,
telemarketers and telebankers, FTC will be able to turn these calls into revenue
while operating at the highest level of efficiency.
Initially, FTC will offer secured credit cards to large data bases of
customers through its debt transfer servicing program. "Debt transfer servicing"
is a term used in the collection industry which means using a new loan account
number to service and collect debt purchased in the secondary market. As
customers continue to make payments on their new accounts, thereby
rehabilitating their credit, the Registrant will begin cross selling other
financial and telecommunications products on a fee basis without the risk of
extending credit.
FTC believes that it differs from other financial services organizations in
that it understands and will specialize in handling the sub-prime consumer and
offer that consumer only those products and services they need. FTC will target
those financial institutions which recognize the potential in the sub-prime
market and have relationships with strategic alliances already working in this
market.
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FTC's business is dependent upon the alliance partnerships it maintains
with other organizations for referral of debt portfolios which generate new
customers. Because FTC's business is ultimately dependent upon the quantity and
quality of these alliance partnerships, FTC must actively seek out new
partnerships while maintaining and evaluating its current relationships. If any
of these alliance partners fail to deliver quality products or services on a
timely basis, and if FTC is unable to develop alternative sources as required,
dissatisfied clients may turn to other sources to provide the products or
services they desire which may adversely affect FTC's business.
TRIUMPH SPORTS
Triumph Sports owns and operates a total of four vitamin and nutritional
supplement related retail stores in the Palm Beach and Boca Raton, Florida area.
Triumph is a registered franchisee of General Nutrition Centers ("GNC") with two
retail outlets. The remaining two stores are located in Bally's fitness centers
in the area. During 1999, Triumph also operated a fifth location which was sold
in the beginning of 2000 as explained more fully in Part I Item 1. Business. The
Triumph GNC franchises run for a period of ten years expiring in 2008 and
include renewals for two consecutive five-year terms contingent upon GNC
conditions and approval.
Each location typically employs one full-time manager and one to four
part-time employees. The GNC stores offer a wide-array of vitamins, nutritional
supplements, meal replacement products and other health and fitness products
targeted to a large consumer demographic seeking today's healthy and active
lifestyle. From children to senior citizens looking for vitamins, supplements,
books and advice for healthy living to triathletes and body builders seeking
nutritional supplements and meal replacements for their workout regimes, GNC
offers recognized high-quality branded products for all ages and fitness levels.
A majority of the products sold in the GNC outlets are GNC branded products with
additional offerings consisting mainly of meal replacement and nutritional
supplement products from popular major suppliers. The two smaller stores located
in Bally's fitness center mainly offer meal replacement bars, shakes, drinks,
nutritional supplements, workout supplies and magazines targeted to the Bally's
consumers for their pre and post-workout convenience.
VP SPORTS
VP Sports, through its operating subsidiary Victoria Precision
("Victoria"), is a leading Canadian manufacturer and distributor of a broad
range of bicycles and tricycles. Victoria is headquartered in Montreal, Quebec,
and maintains sales offices in Edmonton, Winnipeg, Toronto and Quebec City.
Victoria is one of only a few companies in North America that both manufactures
and distributes bicycles on a large scale. Victoria targets the low to middle
price ranges of the bicycle market, manufacturing durable, precision crafted
bicycles and tricycles priced to retail at up to CDN $1,000. Victoria has a
product assortment of 100 models of bicycles ranging from adult mountain and
hybrid bicycles to juvenile and children's bicycles, BMX bikes and tricycles.
Victoria markets its products to independent bicycle dealers under the
Leader(R), Minelli(R) and Precision(R) brand names and to wholesale distributors
under the Precision brand name and to merchants as private label brands.
On March 24, 2000, VP Sports, through Victoria, completed the acquisition
of Torpedo, Inc. of Montreal, Quebec, Canada ("Torpedo"). Torpedo manufactures
sporting goods, toys and recreational products in plants located in St. Narcisse
and Montreal, Quebec. Sales and distribution to the United States market are
made from sales offices and a warehouse location in South Paris, Maine. Torpedo
is a leading supplier to both the Canadian and United States markets for sleds,
toboggans, entry level snow boards and poly snow toys. Torpedo, operating as a
division of VP Sports, will aggressively pursue sales to the sporting goods and
toy markets in the United States and Canada.
Victoria's management estimates that bicycles are sold in over 2,500 retail
outlets throughout Canada. Victoria sells to a network of approximately 430
dealers and approximately 30 mass merchandisers throughout Canada. To date,
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almost all of Victoria's bicycles have been sold to customers who retail the
bicycles within Canada. Export sales have been only occasional over the years
and did not account for any sales in fiscal 1999. Victoria's management believes
that the export market, primarily to the U.S., represents a significant growth
opportunity. In addition to distributing bicycles that it manufactures, Victoria
maintains a complete aftermarket parts, accessories and service program. The
parts and accessories are sold primarily to independent bicycle dealers.
Most of the Victoria's bicycles are manufactured, assembled and packaged at
its 175,000 square foot production facility in Montreal. Victoria has the
capacity to produce approximately 750,000 bicycles per year. Victoria has
developed and utilizes an advanced and efficient production process, which
utilizes precision robotics and machinery. Victoria's bicycle manufacturing
process includes multiple production phases beginning with cutting and welding
tubes for frame construction to final assembly. All of Victoria's bicycles
utilize steel tubing purchased from Canadian and U.S. suppliers and components
purchased from around the world. Victoria's purchasing cycle generally begins in
August and runs through April. Production begins in November, reaches its peak
during January, February, March and April, and continues into or through May
depending on orders and reorders. By the end of May the majority of assembled
bikes have been shipped to customers. Current production reflects the
seasonality of the Canadian market. Victoria's management views exports as the
means to exploit under-utilized capacity.
In fiscal 1998, Victoria estimates it manufactured about 12% of the total
number of units sold in the mass merchant market in Canada. Victoria believes
that it has a very strong position with independent bicycle dealers in Canada
and that it manufactures approximately 25% of the total units sold through these
stores. Competition in the Canadian market is based primarily on perceived
value, brand-image, performance features, product innovation and price. The two
primary Canadian domestic competitors in Canada are Raleigh-Canada and
Pro-Cycle. A smaller Canadian domestic competitor is Norco, primarily a
distributor of high-end mountain bikes to independent bicycle dealers.
Victoria's management believes that its primary foreign competition is from
Asian imports.
Victoria's four sales offices in Toronto, Quebec City, Winnipeg and
Edmonton support the dealer network in Canada by taking orders, providing
technical assistance, resolving problems and providing aftermarket parts and
accessories. All major mass merchandiser accounts are serviced from Victoria's
headquarters in Montreal.
Under the North American Free Trade Agreement ("NAFTA"), Victoria enjoyed a
preferential environment with its North American trading partners. Pursuant to
NAFTA, trade between Canada and the U.S. was tariff free in 1998. In the early
1990's, the Canadian Bicycle Manufactures Association brought to the attention
of the Canadian trade authorities details of perceived unfair trading practices
in the bicycle industry originating in China and Taiwan. Subsequently, Canadian
authorities imposed a tariff of approximately 30% on bicycles imported from
China and a tariff of approximately 13% on bicycles imported from Taiwan. Both
tariffs apply to bicycles having 16" or greater wheel size and priced under CDN
$325 F.O.B. port of shipment. The Canadian International Trade Tribunal,
extended these tariffs through 2003. The tariffs provide domestic manufacturers
like Victoria with a competitive advantage over Chinese or Taiwanese competitors
that target the lower end of the mass merchant market.
EMPLOYEES
The Registrant currently employs five full-time employees. In addition, FTC
employs two full-time employees and Triumph Sports employs 10 full and part-time
employees. nMortgage has no full-time employees while its operating subsidiary,
FBMS employs approximately 30 people.
VP Sports has two full-time employees. Due to the nature of Victoria's
production cycle, direct labor is seasonal. Victoria employs approximately 50
year-round workers in its office and production facilities in Montreal. There
are approximately 220 permanent full-time plant employees who are employed
during Victoria's production cycle year-to-year. Victoria also adds
approximately 130 temporary and part-time employees during its peak production
and shipping season. Bicycle production employees are unionized and entered into
a collective agreement with Victoria on December 6, 1997, which expired on
September 30, 1999. In December 1999, Victoria experienced a work stoppage
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lasting one month at its Montreal plant. A new union contract was ratified on
January 24, 2000. The work stoppage did not have a material effect on the
operations of the company.
(d) Financial information about geographic areas.
Not applicable.
ITEM 2. PROPERTIES.
The Registrant's principal executive office is located in Englewood,
Colorado. The Registrant leases this space, consisting of approximately 1,800
square feet, on a month to month basis for $2,500 per month, from a partnership
in which the Registrant's president is the partner. The Registrant believes
these terms to be no less favorable than those which could be obtained from a
non-affiliated party for similar facilities in the same area.
The Registrant also leases in Palm Beach Gardens, Florida an executive
office consisting of approximately 980 square feet. The term of this lease
expires on February 1, 2004 and includes annual rent of $24,500 for the first
year and increases $980 in each of years two through five. The Registrant and
its subsidiaries, nMortgage, Triumph Sports and VP Sports, utilize this space.
In addition to the above referenced property, the Registrant's subsidiary,
nMortgage, through its operating subsidiary, FBMS, leases office space in Ft.
Lauderdale, Florida housing the FBMS corporate office. This lease expires on
August 31, 2003 and includes a monthly payment of $12,929 over the term of the
lease. In addition, FBMS leases space for its branch offices as follows:
Branch Monthly Payment Term
- ------ --------------- ----
New Jersey 10,342 2/28/2001
Jacksonville 14,354 2/29/2001
17,237 2/28/2002
Delaware 900 11/30/2000
Pennsylvania 1,053 11/30/2000
Pennsylvania 5,035 11/30/2000
The Registrant's subsidiary, FTC, leases approximately 931 square feet of
executive office space in Atlanta, Georgia. This lease runs through December 31,
2000 and includes a monthly payment of $1,595 over the lease term.
VP Sports, through Victoria, owns a manufacturing facility at in Montreal,
Quebec. The brick building originally constructed on this site in 1947 was
expanded in 1983 by the addition of an adjoining concrete structure containing
office premises, showroom and manufacturing facilities. Part of the property is
subject to ground leases granted by the City of Montreal which terminate in 2013
but which may be renewed until 2023. The property is mortgaged to secure
Victoria's bank and long term debt. Victoria leases approximately 100,000 square
feet of warehouse space for the purpose of inventory storage during the
inventory build-up period.
ITEM 3. LEGAL PROCEEDINGS.
The Registrant is a plaintiff in a declaratory judgement action, EQUITEX,
INC. AND HENRY FONG V. BERTRAND T. UNGAR, Case No. 98 CV 2437 (District Court,
Arapahoe County, Colorado), commenced in July 1998, asserting that the
Registrant has no obligation to Mr. Ungar for indemnification and defense claims
which Ungar had previously asserted against the Registrant. Ungar filed
counter-claims which alleged that while acting as an attorney and business
advisor for Equitex, he had incurred tort liabilities to third parties, and that
Registrant, as his client, owed him a fiduciary duty and other alleged duties,
and therefore should indemnify and reimburse him for his losses and costs of
defense in the actions with third parties, an amount allegedly in excess of
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$1,000,000. The Registrant is vigorously pursuing its claims and will defend the
counterclaims.
On March 10, 2000, the US District Court for the North District of Georgia
granted Motions to Dismiss filed by the Registrant and its President in the
cases of THEOHAROUS, ET AL. V. HENRY FONG, EQUITEX, INC., CHARLES E. SANDERS AND
METROMEDIA INTERNATIONAL GROUP, INC., Civil Action No. 1-98-CV-2366 (U.S.
District Court for the Northern District of Georgia), and LESLIE SCHUETTE, ET
AL. V. HENRY FONG, EQUITEX, INC., CHARLES E. SANDERS AND METROMEDIA
INTERNATIONAL GROUP, INC., Civil Action No. 1-98-CV-3034 (U.S. District Court
for the Northern District of Georgia). These alleged class actions on behalf of
a purported class of stockholders of RDM Sports Group, Inc. ("RDM") were filed
on August 19, 1998, and October 19, 1998, respectively. Both cases asserted that
during 1996 and 1997, the defendants (including the Registrant) made numerous
allegedly false statements and overly optimistic predictions regarding the
business and financial condition of RDM in the press releases and public filings
of RDM, with knowledge of their falsehood, thereby misleading RDM stockholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 27, 1999, the Registrant held its Annual Meeting of
Stockholders. The stockholders re-elected each of the Registrant's three
directors to serve until the next Annual Meeting of Stockholders and the votes
were cast as follows:
For Withhold Authority
--- ------------------
Henry Fong 5,147,328 62,281
Russell L. Casement 5,148,233 61,376
Aaron Grunfeld 5,148,391 61,218
Additionally, the following proposal was presented and voted upon at the
meeting and the votes were cast as follows:
To ratify the appointment of Gelfond Hochstadt Pangburn, P.C. as the
independent auditor of the Registrant for the year ending December 31, 1999.
For Against Abstain Non-Voted
--- ------ ------- ---------
Shares voted 5,168,678 22,865 18,066 0
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PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information
The principal market in which the Registrant's common stock is traded is
the over-the-counter market.
In November 1997, the Registrant was notified by the Nasdaq Stock Market
that the Registrant failed to meet the minimum maintenance requirements for
continued listing on the Nasdaq National Market. As a result of this
notification and subsequent review by Nasdaq of materials provided by the
Registrant, on February 19, 1998, a hearing was held to consider the
Registrant's plan for continued compliance with the maintenance requirements and
a determination was made to move trading of the Registrant's common stock to the
Nasdaq SmallCap Market effective March 13, 1998.
The Registrant's common stock trades on the Nasdaq Stock Market under the
symbol EQTX. The table below states the quarterly high and low last sale prices
for the Registrant's common stock as reported by The Nasdaq Stock Market, and
represent actual high and low last sale prices.
Last Sale
Quarter ended High Low
- ------------- ---- ---
1998
- ----
March 31, 1998 $3.57 $0.81
June 30, 1998 $5.31 $3.00
September 30, 1998 $7.13 $4.50
December 31, 1998 $7.50 $6.50
1999
- ----
March 31, 1999 $12.44 $6.75
June 30, 1999 $41.88 $9.50
September 30, 1999 $13.38 $9.50
December 31, 1999 $10.00 $8.00
(b) Holders
The number of record holders of the Registrant's common stock as of March
27, 2000, was 2,460 according to the Registrant's transfer agent. This figure
excludes an indeterminate number of shareholders whose shares are held in
"street" or "nominee" name.
(c) Dividends
The Registrant has not declared or paid cash dividends on its common stock,
nor does it anticipate paying any cash dividends in the foreseeable future. The
Registrant currently intends to retain any future earnings to fund operations
and for the continued development of its business. While a BDC, the Registrant
made an in-kind distribution of its larger investment positions to its
stockholders. Any further in-kind distribution will be made only when, in the
judgment of the Registrant's Board of Directors, it is in the best interest of
the Registrant's stockholders to do so. It is possible that the Registrant may
make an in-kind distribution of securities, which have appreciated or
depreciated from the time of purchase depending upon the particular
distribution. The Registrant has not established a policy as to the frequency or
size of distributions and indeed there can be no assurance that any future
distributions will be made. To date, only one such distribution has been
approved by the Board of Directors and was distributed in April 1988.
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ITEM 6. SELECTED FINANCIAL DATA.
The following tables contain selected financial data of the Registrant for
the previous five years. As a result of the Registrant's change in accounting
method from that of an investment company to that of an operating company
following the Registrant's decertification as a BDC on January 4, 1999, as
described more fully in Part I Item 1. Business, the following information is
being presented in two separate tables. For the year ended December 31, 1999, a
single table reflecting the Registrant's consolidated selected financial data as
an operating company is being furnished. The selected financial data presented
in the second table represents the Registrant's operations as an investment
company for each of the fiscal years ended December 31, 1998, 1997, 1996 and
1995, respectively.
- --------------------------------------------- ----------------
1999
- --------------------------------------------- ----------------
Revenues $2,419,264
- --------------------------------------------- ----------------
Net loss 7,716,559
- --------------------------------------------- ----------------
Net loss per common share 1.09
- --------------------------------------------- ----------------
Total assets 41,744,937
- --------------------------------------------- ----------------
Total long-term liabilities 0
- --------------------------------------------- ----------------
Redeemable preferred stock 0
- --------------------------------------------- ----------------
Cash dividends 0
- --------------------------------------------- ----------------
<TABLE>
<CAPTION>
- --------------------------------------------- ------------ ------------ ------------ ------------
1998 1997 1996 1995
- --------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $447,840 $378,391 $632,765 $308,190
- --------------------------------------------- ------------ ------------ ------------ ------------
Realized gain from sales of investments 1,108,340 1,003,951 1,226,190 31,232
- --------------------------------------------- ------------ ------------ ------------ ------------
Net investment (loss) and realized gain on (925,245) (401,649) 639,874 (1,038,298)
investments after income taxes
- --------------------------------------------- ------------ ------------ ------------ ------------
Increase (decrease) in unrealized (1,056,054) (3,521,718) (5,206,732) (736,710)
appreciation on investments net of deferred
income taxes
- --------------------------------------------- ------------ ------------ ------------ ------------
Net increase (decrease) in net assets $(1,981,299) $(3,923,367) $(4,566,858) $(1,775,008)
resulting from operations
- --------------------------------------------- ------------ ------------ ------------ ------------
Net increase (decrease) in net assets $(0.45) $(1.25) $(1.42) $(0.55)
resulting from operation per share
- --------------------------------------------- ------------ ------------ ------------ ------------
Total assets $5,859,075 $5,038,425 $10,478,003 $19,056,458
- --------------------------------------------- ------------ ------------ ------------ ------------
Total long-term liabilities 0 0 0 0
- --------------------------------------------- ------------ ------------ ------------ ------------
Cash dividends 0 0 0 0
- --------------------------------------------- ------------ ------------ ------------ ------------
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This report may contain certain "forward-looking" statements as such term is
defined in the Private Securities Litigation Reform Act of 1995 or by the
Securities and Exchange Commission in its rules, regulations and releases, which
represent the Registrant's expectations or beliefs, including but not limited
to, statements concerning the Registrant's operations, economic performance,
financial condition, growth and acquisition strategies, investments, and future
operational plans. For this purpose, any statements contained herein that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words such as
"may", "will", "expect", "believe", "anticipate", "intent", "could", "estimate",
"might", or "continue" or the negative or other variations thereof or comparable
terminology are intended to identify forward-looking statements. These
statements by their nature involve substantial risks and uncertainties, certain
of which are beyond the Registrant's control, and actual results may differ
materially depending on a variety of important factors, including uncertainty
related to acquisitions, governmental regulation, managing and maintaining
growth, the value of the Registrant's investments, the operations of the
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Registrant's investee companies, volatility of stock price and any other factors
discussed in this and other Registrant filings with the Securities and Exchange
Commission.
The following discussion and analysis of the Registrant's financial condition
and results of operations should be read in conjunction with the consolidated
financial statements and notes thereto for the years ended December 31, 1999,
1998 and 1997. As a result of the Registrant's change from a BDC to an operating
company as of January 4, 1999 effective January 1, 1999, the Registrant is
required for the year ended December 31, 1999 to present its financial
statements consistent with those of an operating company as opposed to the
investment company presentation utilized in prior years. Accordingly, the
Consolidated balance sheet, Consolidated statement of operations and
Consolidated statement of cash flows for the year ended December 31, 1999 are
presented for the Registrant as an operating company. These statements include
the accounts of the Registrant, its wholly owned subsidiary FTC and majority
owned subsidiary Triumph for the entire year ended December 31, 1999. The 1999
statements also include the accounts of majority owned subsidiary nMortgage and
the Registrant's 35.7% investment in VP Sports for September through December
1999 following nMortgage's acquisition of FBMS and VP Sports' acquisition of
Victoria Precision both in August 1999. The financial statements for the years
ended December 31, 1998 and 1997 continue to be presented in the investment
company format as audited in those years.
(a) Liquidity.
(b) Capital Resources.
As a result of the Registrant's restructuring during 1999 and its change from a
BDC to an operating company, the amount and sources of the Registrant's
liquidity changed significantly. Prior to 1999 while operating as a BDC, the
Registrant primarily relied on sales of portfolio securities to fund its
operations as well as fees charged to investees for various services. During
1999, as the Registrant restructured its business, the Registrant relied
primarily on private placements of equity securities to fund its operations and
acquisitions as it sought to become an operating entity. However, as in past
years, during 1999, the Registrant continued to divest certain of its portfolio
securities. For the year 2000, the Registrant, prior to consolidation of any
subsidiaries, anticipates that its liquidity and capital resources are
sufficient to funds its operations as it works toward completing its merger with
First TeleBanc Corp. Presently, all of the Registrant's subsidiaries operate on
a stand-alone basis and each are individually responsible for their own
liquidity. However, the Registrant may need to assist its subsidiaries from
time-to-time should unforeseen liquidity issues arise. Should additional
liquidity be necessary to fund the operations of its subsidiaries or to complete
any merger or acquisition, the Registrant believes it has sources available,
including the sales of certain investments or the private placement of equity
securities, to cover any such needs.
Following the acquisition of FBMS through nMortgage in August 1999, the
Registrant began a major restructuring at nMortgage. The purpose of this
restructuring is to significantly reduce nMortgage's operating overhead as it
transitions from a traditional brick and mortar mortgage banker to a technology
driven mortgage banker, broker and Internet solution provider to the mortgage
industry. As described more fully in Part I, Item 1 Business, as part of this
restructuring, nMortgage is also seeking to mitigate the risk associated with
the warehouse funding and subsequent sale of its mortgage portfolios by
employing the table funding method for its retail mortgage loans. As a result of
this restructuring, nMortgage sustained significant losses during the final four
months of 1999 following its purchase by the Registrant as it works to
fundamentally change the way it operates its business. Additional capital
expenditures were incurred as nMortgage continued developing its information
technology in connection with its Internet-based product offerings. During the
fourth quarter of 1999, nMortgage completed a $5,000,000 private placement of
preferred stock to provide the liquidity necessary to fund the company during
the restructuring period.
Beginning in the second quarter of 2000, as nMortgage completes the first phase
of this restructuring, the company will initially rely primarily on origination
and other loan related fees from lenders to whom it brokers mortgage loans. As
nMortgage rolls out its business to business Internet solutions during the
second and third quarters of 2000, additional fees will be recognized as the
company institutes a fee-based program for private labeling third party website
solutions. This will generate additional loan related as well as service related
fees.
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While nMortgage has created the infrastructure necessary to operate its Internet
related business strategies, further information technology expenditures will be
necessary to continue developing and refining its hardware and software as the
company positions itself to become a provider of Internet solutions to the
mortgage industry. In connection with nMortgage's proposed merger with IGCA
described in Part I, Item 1, Business, nMortgage will receive approximately $2
million in cash and an additional $2 million in future cash consideration should
the merger be consummated. This capital infusion is an integral part of
nMortgage's future plans, the loss of which would require additional capital
resources from unknown sources. Additionally, as a publicly traded entity with
access to public capital markets, nMortgage would have a broader array of
financing options at its disposal should further funding be necessary. nMortgage
anticipates it has the liquidity and capital resources necessary to fund the
company during 2000 from the internal and external sources described above.
For most of 1999, FTC relied exclusively on the Registrant for operating funds
as the company continued to develop its business plan. In the latter portion of
1999, as FTC implemented its business plan, the company began relying on
internal sources of funds generated through cash flows from operations for its
liquidity and capital resources. As FTC implements its business plan and begins
operations, it is anticipated the company will be less dependent upon the
Registrant for funds. While future capital infusions by the Registrant may be
necessary, it is anticipated the amounts can be absorbed by the Registrant given
the relatively low overhead requirements at FTC. Given the low overhead and in
light of the fact FTC should begin generating revenues, FTC believes it has
sufficient liquidity and capital resources to fund its operations from internal
resources during 2000.
Triumph and VP Sport both rely primarily on cash flows from operations for their
working capital. In addition, during 1999 and 2000, Triumph recorded a
considerable gain on the sale of an investment providing additional cash to
operate its business. The Registrant anticipates Triumph's liquidity and capital
resources will be sufficient to fund its operations during the year 2000. While
VP Sports is dependent upon debt instruments from time-to-time in order to build
its inventory in preparation its selling season, it anticipates its liquidity
and capital resources are sufficient to fund its continuing operations for the
foreseeable future.
(c) Results of operations.
Because of the fundamental change in the Registrant's operations and financial
presentation for 1999, the comparison to prior years is difficult. As a result,
the discussion and analysis of the Registrant's results of operations while
containing year over year financial comparisons have been analyzed with a view
toward the Registrant's current and future business operations.
REVENUES: Consolidated revenues for the year ended December 31, 1999 were
$2,419,264 for the Registrant and its subsidiaries. Revenues for the Registrant
as a BDC were $447,840 in the year ended December 31, 1998 and $378,391 in the
year ended December 31, 1997. Of the 1999 revenues, $1,547,754 are attributable
to nMortgage with $738,456 from Triumph and the balance of $133,054 from the
Registrant itself.
For 1999, nMortgage recorded revenues from its retail and wholesale mortgage
operations in the form of origination and other loan fees, secondary marketing
revenues and interest income. Following the Registrant's acquisition of FBMS by
nMortgage, the Registrant instituted a restructuring program to completely the
change the way FBMS conducts its mortgage operations. As discussed more fully in
Part I. Item 1, Business, nMortgage, while continuing to offer retail mortgages
through both traditional as well as Internet oriented channels, is minimizing
its practice of warehouse funding a majority of its mortgage loans in favor of
the table funding concept. This change results in the need for significantly
fewer employees as the responsibilities for underwriting, post closing, closing,
auditing and disbursing loans are transferred from nMortgage to the investors
underwriting and funding the originations. As a result of these restructuring
activities, nMortgage experienced an overall decrease in loan originations
during the period as the company trimmed its work force in anticipation of this
change, thereby reducing overhead costs. In addition, nMortgage saw an overall
decrease in mortgage originations due to increasing interest rates. Financings
of new home purchases while down slightly remained relatively stable. nMortgage
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did, however, experience a significant decrease in home refinancings during the
period as interest rates reached levels at which many consumers chose not to
refinance.
As nMortgage completes its restructuring program and fully integrates the table
funding concept for its mortgage originations, a majority of nMortgage's
revenues for the year 2000 will be derived from origination fees. Once a
mortgage originated by nMortgage is closed and funded by the lender, nMortgage
will be paid its fee directly from that lender. nMortgage is continuing its
restructuring program and anticipates it will not be fully completed until the
second quarter of 2000. As a result, first and second quarter loan originations
are expected to be down until nMortgage fully implements its plan. nMortgage
expects to debut its second generation business to consumer website during the
second quarter and is continuing development of its business to business
strategies. As nMortgage's Internet business to consumer and business to
business technologies are introduced, nMortgage anticipates an increase in loan
originations during the latter portion of 2000, compared to the first half of
2000.
Triumph, the second largest contributor to the Registrant's revenues, derived
those revenues from product sales at its five retail locations, one of which was
divested at the end of 1999. The year ended 1999 was the first full year of
operations for Triumph and sales were down slightly as compared to
pre-acquisition periods. As a result, Triumph replaced its senior management in
charge of store operations. For the year 2000, Triumph has instituted tighter
inventory and sales audit controls while installing point-of-sale computer
systems to aid in inventory tracking. These systems will allow Triumph to better
distinguish sales trends, provide greater information with respect to inventory
management and assist in determining appropriate profit margins. Triumph
believes these initiatives will provide greater sales while containing costs in
an effort to return to profitability.
The Registrant's revenues for 1999 on a stand-alone basis consisted of interest
income and transaction fees related to long-term and short-term loans. As a
holding company, the Registrant has no significant sources of revenue other than
those of its operating subsidiaries. In addition, as the Registrant only became
an operating company at the beginning of 1999, the Registrant's revenues on a
consolidated basis were significantly lower that can be expected during 2000 as
the Registrant's subsidiaries record a full year of operations. The Registrant
partially offset its operating overhead during 1999 utilizing approximately
$800,000 from the sales of certain investments which is not considered revenue.
For the year 2000, the Registrant anticipates it will continue to divest certain
of its investments to cover its operating overhead as it continues to work
toward completion of its merger with FTB.
EXPENSES: The Registrant's total expenses on a consolidated basis for 1999 were
$8,350,797. The Registrant's expenses as a BDC for the year ended 1998 were
$2,418,245 as compared to $1,813,926 for the same period in 1997. The expenses
for 1999 consisted of the following: cost of product sales related to Triumph of
$488,767; loan production and processing expense of $728,501 for nMortgage;
selling, general and administrative expenses for all consolidated accounts; and
an officer's bonus of $883,164 for the Registrant. Of the total expenses,
nMortgage accounts for $4,485,588, Equitex $2,422,813, FTC $402,061, and Triumph
$1,040,335.
Of the selling, general and administrative expenses, $3,716,059 is attributable
to nMortgage and its operating subsidiary FBMS. In the typical warehouse lending
scenario, FBMS closes and funds a particular loan utilizing available credit on
one of its warehouse lending facilities. Within a period usually less than four
weeks, FBMS then sells that loan to an Investor and receives revenue from the
sale in the form of premiums paid by the Investor over and above the amount
funded. In addition, FBMS may receive additional revenue on the "credit spread"
if it is able to sell the loan at a lower interest rate than offered to the
borrower. Conversely, if the loan is sold at an interest rate higher than
offered to the borrower, a loss will occur. Additionally, events of default
occasionally occur which can cause considerable expense to FBMS. FBMS is
required to sign agreements with its Investors guaranteeing the mortgage loans
it sells for a period from six months to typically one year. During the
guarantee period, if a borrower fails to make a first payment, has one or more
late payments in an agreed upon period, or if the paperwork associated with a
particular loan is incorrect or incomplete, an Investor can make a demand upon
FBMS to repurchase a loan. As a result of this loan repurchase, FBMS may be
required to seek payment and/or foreclose on a loan, sell the loan to another
Investor at a discount to value or at an inferior interest rate, or lose certain
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revenues associated with the original loan sale. During the latter part of 1999
following the Registrant's acquisition of FBMS, FBMS experienced a higher that
normal number of loan repurchase events that negatively impacted expenses during
the period.
In order to eliminate these expenses and considerably lower the risk associated
with warehouse funding, beginning in the second quarter of 2000, nMortgage will
table fund a majority of the loans it originates. Under the table funding
method, nMortgage originates the loan and then offers it to an Investor for
underwriting through funding. As the Investor is responsible for the
underwriting through funding process, the risks associated with defaults events,
interest rate spreads and underwriting difficulties is reduced or eliminated.
nMortgage simply originates the loan and receives a fee from the Investor upon
funding.
In addition to the decreased risk associated with table funding, operating
overhead is considerably reduced with the elimination of as many as five layers
of employees. This enables nMortgage to originate loans at or above historical
levels utilizing a considerably smaller staff. In addition, by offering a
majority of nMortgage's employees a commission or incentive program, their
success is directly related to that of the company thereby reducing nMortgage's
exposure in the event of an economic downturn. Lower operating overhead also has
the obvious effect of lowering the amount of revenues necessary to achieve
profitability.
The Registrant on a stand alone basis accounts for $1,539,649 of the selling,
general and administrative expenses and an additional expense of $883,164
related to an officer's bonus. These amounts relate to operation of the holding
company during 1999. These costs have remained relatively stable versus past
years in which there were $2,418,245 and $1,813,926 total expenses for the years
ended December 31, 1998 and 1997 while operating as a BDC. Included in these
expenses are legal and accounting fees associated with the transition from a BDC
to an operating company as well as typical expenses involved in operating a
publicly traded company. In 1998, the Registrant changed the bonus program for
its president to one primarily based on appreciate in the market price of the
Registrant's common stock as described more fully in Part III. Item 11
Compensation. As a result, a majority of the bonus expense resulted from the
increase in the market value of the Registrant's common stock in 1999.
Of Triumph's expense, $551,568 is attributable to selling, general and
administrative expenses associated with operation of the company's five retail
outlets during 1999 and $488,767 is from the cost of sales. FTC recorded
$402,061 in selling, general and administrative expense during the year as it
continued to develop its business plan.
OTHER INCOME (EXPENSES): Other income (expense) includes investment loss, net of
$571,267 equity in loss of affiliates of $418,209, and interest expense totaling
$795,550.
During 1999, the Registrant recorded investment income of $797,516 from the
sales of investments. At December 31, 1999, the Registrant recorded a realized
loss of $1,368,783 on trading securities resulting in the investment loss, net
of $571,267. A majority of this loss totaling $1,201,355 related to the
Registrant's investment in RDM Sports Group, Inc. had previously been recorded
as an unrealized loss in the stockholder's equity section of the Registrant's
financial statements. However, the Registrant has determined the decline in the
value of the RDM common stock is other than temporary, and therefore recorded
the charge as a realized loss and charge to the statement of operations. This
adjustment of the Registrant's investment in RDM from unrealized to realized
while contributing to the net loss for the year, only decreased stockholders'
equity by $167,428.
Equity in net losses of affiliates corresponds to the Registrant's 35.7%
ownership interest in VP Sports which is accounted for on an equity basis. These
results for the period beginning September 1, 1999 and ending December 31, 1999
following VP Sports' acquisition of Victoria Precision are not indicative of
future results or the year on the whole. Due to the seasonality of VP Sports'
business, the period from September through December of each year is
traditionally the slowest for product sales as VP Sports increases inventory and
begins its production cycle for the coming year. As a result, the Registrant
anticipates that increased sales during the peak periods in the first and second
quarters of 2000 will favorably impact VP Sports' results of operations in
future periods.
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A majority of the interest expense is related to the warehouse loan facilities
of nMortgage. These warehouse credit lines carry interest rates which at year
end were between 9.5% and 10.5%. FBMS pays this rate of interest during the
typical one to four week period any loan is carried on the line. During this
period, FMBS is receiving interest from the borrower at rates that could be 1%
to 3% less than those paid on the warehouse lines based on the market rates for
mortgage loans at the time of funding. This results in significant interest
expense to FBMS based on the unfavorable interest rate spread. With nMortgage's
change from warehouse funding to table funding described above, the interest
expense related to this unfavorable spread should be greatly reduced so as not
to be a material factor in FMBS' future business operations.
NET LOSS: Net loss for the year ended December 31, 1999 was $7,716,559. As a
BDC, the Registrant recorded net investment loss and net realized gain on
investments after income taxes of $(925,245) and $(401,649) and net decrease in
net assets resulting from operations of $1,981,299 and $3,923,367 for the years
ended December 31, 1998 and 1997, respectively. As described more fully above,
this loss includes $1,368,783 from the write-down of certain of the Registrant's
investments which amount includes $1,201,355 in unrealized loss that had
previously been written down on the Registrant's balance sheet. The Registrant
does not feel this loss is indicative of future results given the changes in the
Registrant's business operations during 1999. As the Registrant completes its
restructuring to become a fully operating company, restructures and integrates
the operations of its newly acquired subsidiaries, and completes its proposed
merger with FTB, the Registrant believes future results will better reflect its
plans and objectives to become a profitable financial services technology
company.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS: Net loss applicable to common
stockholders was $10,985,572 for the year ended December 31, 1999. This amount
gives effect to the amortization of the discount on the preferred stock of the
Registrant if the preferred stockholders had converted their shares to common
stock at year end. This amount does not reflect an actual loss at year end over
and above the net loss figure presented above.
YEAR 2000 ISSUE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process date fields containing a
two-digit year is commonly referred to as the "Year 2000 Issue" ("Y2K"). The
Registrant reviewed its computer systems in order to evaluate necessary
modifications for Y2K readiness and communicated with others with whom it does
significant business to determine their Y2K readiness status and the extent to
which the Registrant could have been affected by any third party Y2K readiness
issues. The Registrant experienced no Y2K related problems or expenses. The
Registrant estimates that total expenses incurred in preparation for Y2K were
less than $1,000.
OTHER ISSUES
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement, as
amended by SFAS No. 137, is effective for fiscal years beginning after June 15,
2000. Currently, the Company does not have any derivative financial instruments
and does not participate in hedging activities. Therefore, management believes
that SFAS No. 133 will not have an impact on its financial position or results
of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements are listed under Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On August 20, 1999, Equitex, Inc. (the "Registrant") dismissed Davis & Co.,
CPA's, P.C. as its independent certified public accountant. There have been no
adverse opinions, disclaimers of opinion or qualifications or modifications as
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to uncertainty, audit scope or accounting principles regarding the reports of
Davis & Co., CPA's, P.C. on the Registrant's financial statements for each of
the fiscal years ended December 31, 1998 and 1997, or any subsequent interim
period. The Audit Committee of the Registrant's Board of Directors approved the
change of accountants and the Board of Directors of the Registrant ratified that
action. There were no disagreements with Davis & Co., CPA's, P.C. on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures leading to their dismissal.
There were no reportable events, in each case, during either of the
Registrant's two most recent fiscal years or any subsequent interim period.
Simultaneously with the dismissal of its former accountants, the
Registrant approved and engaged Gelfond Hochstadt Pangburn, P.C. to act as it
independent certified public accountant as successor to Davis & Co., CPA's, P.C.
During the Registrant's two most recent fiscal years or subsequent interim
periods the Registrant has not consulted Gelfond Hochstadt Pangburn, P.C.
regarding the application of accounting principles to a specified transaction,
either completed or proposed; or the type of audit opinion that might be
rendered on the Registrant's financial statements, or any matter that was the
subject of a disagreement or a reportable event.
PART III
--------
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
(a)(b)(c) Identification of directors, executive officers and certain
significant persons
Length of
Name Age Offices held Service
- ---- --- ------------ -------
Henry Fong 64 President, Treasurer, Since Inception
Principal Executive
Financial and Accounting
Officer and Director
Thomas B. Olson 34 Secretary Since 1988
Russell L. Casement 56 Director Since 1989
Aaron A. Grunfeld 53 Director Since 1991
John Cahill 63 President - First Since 1998
TeleServices Corp.
The directors of the Registrant are elected to hold office until the next
annual meeting of the stockholders and until their respective successors have
been elected and qualified. Officers of the Registrant are elected by the Board
of Directors and hold office until their successors are duly elected and
qualified.
No arrangement exists between any of the above officers and directors
pursuant to which any one of those persons were elected to such office or
position.
The Registrant has appointed an audit committee currently consisting of Dr.
Casement as chairman and Mr. Grunfeld and a compensation committee currently
consisting of Mr. Grunfeld as chairman and Dr. Casement.
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(d) Family relationships.
Not applicable.
(e) Business experience.
HENRY FONG
Mr. Fong has been the President, Treasurer and a director of the Company since
inception. From 1987 to June 1997, Mr. Fong was chairman of the board and chief
executive officer of RDM Sports Group, Inc. (f/k/a Roadmaster Industries, Inc.)
a publicly held investee of the Company and was its president and treasurer from
1987 to 1996. Subsequent to Mr. Fong's departure from RDM, it filed on 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."
THOMAS B. OLSON
Mr. Olson has been Secretary of the Registrant since January 1988. 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.
RUSSELL L. CASEMENT
Dr. Casement has been a director of the Registrant since February 1989. Since
1969, Dr. Casement has been the president of his own private dental practice,
Russell Casement, D.D.S., P.C., in Denver, Colorado. Dr. Casement earned a
Doctor of Dental Science degree from Northwestern University in 1967. Dr.
Casement is a member of the American Dental Association, the Colorado Dental
Association and the Metro Denver Dental Association.
AARON A. GRUNFELD
Mr. Grunfeld has been a director of the Registrant since November 1991. Mr.
Grunfeld has been engaged in the practice of law for the past 28 years and has
been of counsel to the firm of Resch, Polster, Alpert, and Berger, LLP, Los
Angeles, California since November 1995. From April 1990 to November 1995, Mr.
Grunfeld was a member of the firm of Spensley Horn Jubas & Lubitz, Los Angeles,
California. Mr. Grunfeld received an A.B. in Political Science from UCLA in 1968
and a J.D. from Columbia University in 1971. He is a member of the California
Bar Association.
JOHN CAHILL
Mr. Cahill has been President of the Registrant's wholly owned subsidiary, FTC,
since June 1, 1998. From 1992 to April 1998 Mr. Cahill was Senior Vice President
of First Data Card Services Group. Mr. Cahill has over twenty years of
experience in the bank card/credit card industry.
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(f) Involvement in certain legal proceedings.
Not applicable.
(g) Promoters and control persons.
Not applicable.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
- -------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 ("Section 16")
requires the Registrant's officers, directors and persons who own more than ten
percent of the Registrant's voting securities to file reports of their ownership
and changes in such ownership with the Securities and Exchange Commission (the
"Commission"). Commission regulations also require that such persons provide the
Registrant with copies of all Section 16 reports they file. Based solely upon
its review of such reports received by the Registrant, or written
representations from certain persons that they were not required to file any
reports under Section 16, the Registrant believes that, during 1998, its
officers and directors have complied with all Section 16 filing requirements.
ITEM 11. EXECUTIVE COMPENSATION.
(a) General.
Henry Fong, the President of the Registrant and the only officer of the
Registrant whose total compensation exceeded $100,000 for the fiscal year ended
December 31, 1999, received an annual salary of $183,013. In January, 1998, the
Compensation Committee of the Registrant's board of directors retained an
independent consultant to review the President's compensation. As a result of
that review, a new compensation arrangement was instituted based on
recommendations made by the independent consultant. In addition to Mr. Fong's
annual salary, beginning January 1, 1998, Mr. Fong receives an annual bonus
equaling 1% of the Registrant's total assets combined with 5% of the increase in
the market value of the Company's common stock, excluding shares owned by the
President, calculated quarterly from January 1 to December 31 of any fiscal
year. If there is a negative computation in any given quarter, no bonus is paid
and that negative amount is carried forward to offset the subsequent quarter's
bonus during the fiscal year. Negative amounts will not be accumulated nor
carried into subsequent fiscal years. During the year ended December 31, 1999,
this bonus totaled $883,164. This new compensation arrangement replaces the
previous bonus of 3% of the Registrant's total assets at year-end, which totaled
$151,153 for the year ended December 31, 1997.
On April 1, 1992, the Registrant obtained a life insurance policy with
retirement benefits for Mr. Fong, which pays his beneficiary $2,600,000 in the
event of Mr. Fong's death or provides for retirement benefits for Mr. Fong upon
his retirement at or after age 65 utilizing the cash value of the policy at that
time. This benefit is being provided to Mr. Fong in consideration of his
seventeen years of service to the Registrant and in anticipation of his serving
the Registrant until retirement. The Registrant has no other retirement or
pension plan for Mr. Fong. The annual premium on this policy is $105,414 per
year for seven years until March 30, 1999, or such other period as may be
necessary to fully fund the policy, and may be considered other future
compensation to Mr. Fong. For the year ended December 31, 1999, $105,414 was
paid toward the policy and an additional $59,586 was paid to Mr. Fong for
deferred income taxes on the policy. Concurrently, the Registrant obtained a
Key-man Life Insurance policy which pays the Registrant $3,000,000 in the event
of Mr. Fong's death. The Registrant paid $23,937 on this policy in 1999 which is
not considered compensation to Mr. Fong.
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(b) Summary compensation table.
The following table sets forth information regarding compensation paid to
the officers of the Registrant during the years ended December 31, 1999, 1998
and 1997:
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
---------------------------- ------
(a) (b) (c) (d) (e) (g) (i)
Other All
Name & Annual Other
Principal Salary Bonus Compensation Options Compensation
Position Year ($) ($) ($) & SARs(#) ($)
- -------- ---- --- --- --- --------- ---
Henry Fong 1999 183,013 883,164 -0- 469,700 165,000(1)
President,
Treasurer
Principal
Executive
Officer and
Accounting
Officer
Henry Fong 1998 183,013 1,208,042 -0- 469,655 165,000(1)
Henry Fong 1997 183,013 151,153 -0- -0- 165,000(1)
- ----------
(1) Includes payments and tax liability on the life insurance policy as
explained more fully in "Item 10 (a) General" above.
(c) Option/SAR grants table.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
GRANT DATE
INDIVIDUAL GRANTS VALUE
(a) (b) (c) (d) (e) (f)
Number of
Securities Percent of total
Underlying options/ SARs Exercise Grant
Options/ granted to of Base Date
SARs employees in Price Expiration Present
Name Granted (#) Fiscal Year ($/Sh) Date Value($)
- ---- ----------- ----------- ------ ---- --------
Henry Fong 469,700 47% $6.75 1/4/2004 3,170,475
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<PAGE>
(d) Aggregated Option/SAR exercises and fiscal year-end Option/SAR value table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End (#) at FY-End (#)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- ------------ ------------ ------------- -------------
Henry Fong 602,200 12,093,316 469,700/-0- $587,125/-0-
(e) Long Term Incentive Plans -- awards in last fiscal year.
Not applicable
(f) Defined benefit or actuarial plan disclosure.
Not applicable.
(g) Compensation of directors.
(1)Standard Arrangements
Each independent member of the Registrant's Board of Directors, Messrs.
Russell L. Casement and Aaron A. Grunfeld, receive $10,000 per year payable
monthly and $500 for each Board of Director's meeting attended either in person
or by telephone. For the year ended December 31, 1999, Messrs. Casement and
Grunfeld each received a total of $13,000. Members of the Board of Directors
also receive reimbursement for expenses incurred in attending board meetings.
(2) Other Arrangements
The Registrant adopted the 1993 Stock Option Plan for Non-Employee
Directors (the "Directors' Plan") reserving an aggregate of 250,000 shares of
Common Stock for issuance pursuant to the exercise of stock options (the
"Options") which may be granted to non-employee directors of the Registrant. On
July 5, 1995, an order was issued by the Securities and Exchange Commission
authorizing the Directors' Plan and the options granted thereunder. The
Directors' Plan was for a ten-year term commencing July 5, 1995 (the "Effective
Date"). Each non-employee director automatically, as of the Effective Date, was
granted an option to purchase 50,000 shares of common stock at $3.00 per share.
This plan was terminated effective with the creation of the 1999 Stock Option
Plan described below.
On June 2, 1998, the Registrant's board of directors authorized the
granting of 75,000 options to purchase common stock of the Registrant to each of
the Registrant's two independent directors at $3.19 per share for a period of
five years. The grant of these options was contingent upon the Company's
successful withdrawal as a BDC. On January 4, 1999 the Registrant filed for
withdrawal as a BDC [see Part I, Item 1 (a) Business for a description of the
Registrant's withdrawal of its election as a BDC].
On January 5, 1999, the Registrant's board of directors adopted a new stock
option plan, the 1999 Stock Option Plan. On January 5, 1999, the Registrant's
two independent directors each received options to purchase 158,700 shares of
the Registrant's common stock at an exercise price of $6.75 per share expiring
-26-
<PAGE>
on January 5, 2004. These options were granted in lieu of the 75,000 options at
$3.19 per share authorized on June 2, 1998, which were canceled. In addition,
each director received 86,800 options to purchase 86,800 shares of the
Registrant's common stock at an exercise price of $6.75 per share under the 1999
Plan.
(h) Employment contracts and termination of employment and change-in-control
arrangements.
On April 1, 1992, the Registrant obtained a life insurance policy on the
Registrant's President, Henry Fong, which policy provides for a payment to Mr.
Fong's beneficiary of $2,600,000 in the event of his death or a retirement
benefit to Mr. Fong consisting of the cash value of the policy upon Mr. Fong's
retirement from the Registrant at or after age 65 [See-Item 11. (a) "General."
above]. The Registrant has no other compensation plan or arrangement with
respect to any executive officer which plan or arrangement results or will
result from the resignation, retirement or any other termination of such
individual's employment with the Registrant. The Registrant has no plan or
arrangement with respect to any such persons, which will result from a change in
control of the Registrant or a change in the individual's responsibilities
following a change in control.
(i) Report on repricing of Options/SARs
Not applicable.
(j) Additional information with respect to Compensation Committee Interlocks and
Insider Participation in compensation decisions.
The Registrant's Compensation Committee for the year ended December 31,
1999 consisted of Mr. Grunfeld as chairman and Dr. Casement both of whom
continue to serve in that capacity. No member of the Compensation Committee was
an officer or employee of the Registrant or any of its subsidiaries during the
year. No executive officer of the Registrant served on the board of directors of
any other entity with either member of the Compensation Committee.
(k) Board compensation committee report on executive compensation.
In January, 1998, the Compensation Committee of the Registrant's board of
directors retained an independent consultant to review the President's
compensation. The compensation committee directed the consultant to review both
the President's salary and bonus structure. The independent consultant analyzed
the compensation structure of the Registrant and compared it to the compensation
structures of companies similar to the Registrant. The consultant recommended no
change in the President's salary. The consultant did recommend a change in the
bonus component of the President's compensation from one based solely on the
assets of the Registrant, to one based primarily on increases in the market
value of the Registrant's common stock. The Compensation committee agreed and
directed the consultant to provide a recommendation, based on their research,
for a bonus plan tied to the Registrant's market performance.
As a result of that further review, the consultant recommended an annual
bonus plan equaling 1% of the Registrant's total assets combined with 5% of the
increase in the market value of the Registrant's common stock not held by the
Registrant's President. The bonus is calculated and paid quarterly from January
1 to December 31 of any fiscal year based on a formula provided by the
consultant. The Compensation Committee feels this compensation arrangement, tied
primarily to the market performance of the Registrant's common stock while
including incentives for increases in assets, is the most equitable method for
compensating the Registrant's President. This provides a quantitative measure on
which to reward the President's performance, by directly emphasizing market
performance, which correlates directly with the expectations and goals of the
Registrant and its stockholders.
During 1999, the Compensation Committee reviewed the compensation structure
and determined no changes should be made. Although this plan was instituted
during the period in which the Registrant was operating as an investment
company, the Compensation Committee feels it is no less valid under the
operating company structure. In reviewing any issues related to that change, the
Committee determined the 1% bonus based on total assets would be paid based upon
The Registrant's assets prior to consolidation with any subsidiary. No further
refinements were warranted.
-27-
<PAGE>
Compensation Committee
- ----------------------
Russell L. Casement
Aaron A. Grunfeld
(i) Performance graph.
12/30/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
-------- -------- -------- -------- -------- --------
Nasdaq US 100.00 141.33 173.89 231.07 300.25 542.43
Nasdaq Financial 100.00 145.68 187.03 286.11 277.73 274.63
Equitex 100.00 133.33 92.09 41.30 349.21 406.35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) (b) Security Ownership of Certain Beneficial Owners and Security Ownership
of Management.
The following table contains information at March 31, 2000, as to the
beneficial ownership of shares of the Registrant's common stock by each person
who, to the knowledge of the Registrant at that date, was the beneficial owner
of five percent or more of the outstanding shares of the class, each person who
is a director or executive officer of the Registrant and all persons as a group
who are executive officers and directors of the Registrant and as to the
percentage of outstanding shares so held by them at March 31, 2000.
Name and address Amount and Nature of
of beneficial owner Beneficial Ownership (1) Percent of Class
- ------------------- ------------------------ ----------------
Henry Fong 1,154,544 (2)(3) 15.2%
7315 East Peakview Avenue
Englewood, Colorado 80111
Russell L. Casement 402,900 (4) 5.5%
1355 S. Colorado Blvd.
Suite 320
Denver, Colorado 80222
Aaron A. Grunfeld 328,200 (5) 4.4%
10390 Santa Monica Blvd
Fourth Floor
Los Angeles, California 90025
All officers and directors 1,946,944 (2)(3)(6)(7) 23.8%
as a group (four persons)
-28-
<PAGE>
(1) The beneficial owners exercise sole voting and investment power.
(2) Includes 469,700 shares underlying options granted under the Registrant'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 Registrant's
1993 Stock Option Plan for Non- Employee Directors and 245,500 shares underlying
options granted under the Registrant's 1999 Stock Option Plan.
(5) Includes 50,000 shares underlying options granted under the Registrant's
1993 Stock Option Plan for Non- Employee Directors and 245,500 shares underlying
options granted under the Registrant's 1999 Stock Option Plan.
(7) Includes 86,400 shares underlying options granted under the Company's 1993
Stock Option Plan for Non- Employee Directors and 1,000,000 shares underlying
options granted under the Company's 1999 Stock Option Plan.
The Registrant's does not know of any arrangements, including the
Registrant's proposed acquisition of First TeleBanc Corp. as described under
Part I, Item 1. Business, the operation of which may, at a subsequent date,
result in a change in control of the company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(a) Transactions with Management and Others.
The Registrant currently leases approximately 1,800 square feet of office
space in Greenwood Executive Park, 6400 South Quebec, Englewood, Colorado from a
partnership in which its President is the sole partner, on terms comparable to
the existing market for similar facilities.
During 1998, a company in which the Registrant's President is an officer
and director loaned the Registrant a total of $165,000 which is due on demand
and bears interest at 8% per annum. Of that amount, $22,672 was repaid during
1998 and the balance of $142,328 was repaid in November 1999.
In addition, a related entity loaned the Registrant $100,000 in August
1997. This loan carried an interest rate of 12% per annum, was due on demand and
was collateralized by 25,000 shares of the Registrant's investment in an
investee company's common stock. The Registrant paid $30,000 in principal due on
this note during 1998 and paid the balance of $70,000 in April 1999.
The Registrant has placed members of its Board and its officers on the
boards of directors of certain investee companies and other companies in which
it has obtained an equity interest or to which it has made loans or guarantees.
In most instances, the board representation was subsequent to these
acquisitions, loans or guarantees. The Registrant may be considered to be in
control of certain of its investee companies.
(b) Certain business relationships.
Not applicable.
(c) Indebtedness of management.
During 1998, Aaron Grunfeld, a director of the Registrant, purchased 39,200
shares of common stock of the Registrant pursuant to a private placement at
$1.16 per share. In payment of the shares, Mr. Grunfeld executed a note payable
to the Registrant in the amount of $45,472, which was due on December 15, 1998
-29-
<PAGE>
and carried interest at 8% per annum. The due date on this note was subsequently
extended to February 15, 1999. All principal and interest due was paid on this
note prior to the extended expiration date.
In August 1999, the Registrant loaned a director, Aaron Grunfeld, $180,000.
The note bears interest at 9.75% annually, is collateralized by 39,200 shares of
the Registrant's common stock, and was originally due on November 18, 1999. The
note has been extended to June 30, 2000. On January 10, 2000 Mr. Grunfeld paid
all accrued interest through December 31, 1999. On April 4, 2000, Mr. Grunfeld
paid $80,000 in principal and all accrued interest through March 31, 1999
leaving an unpaid principal balance of $100,000 as of that date.
(d) Transactions with promoters.
Not applicable
-30-
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report immediately
following the signature page.
Page
----
1. Financial Statements and Supplementary Data
Independent auditors' report - Gelfond Hochstadt Pangburn, P.C. F-1
- -------------------------------------------------------------------- -----------
Report of Independent Certified Public Accountants -
Davis & Co. CPA's. P.C. F-2
- -------------------------------------------------------------------- -----------
Consolidated balance sheet - December 31, 1999 F-3
- -------------------------------------------------------------------- -----------
Statement of assets and liabilities - December 31, 1998 F-4
- -------------------------------------------------------------------- -----------
Schedule of investments - December 31, 1998 F-5
- -------------------------------------------------------------------- -----------
Consolidated statement of operations - year ended December 31, 1999 F-8
- -------------------------------------------------------------------- -----------
Statements of operations - years ended December 31, 1998 and 1997 F-9
- -------------------------------------------------------------------- -----------
Statements of stockholders' equity - years ended December 31, 1999,
1998 and 1997 F-10
- -------------------------------------------------------------------- -----------
Consolidated statement of cash flows - year ended December 31, 1999 F-14
- -------------------------------------------------------------------- -----------
Statements of cash flows - years ended December 31, 1998 and 1997 F-16
- -------------------------------------------------------------------- -----------
Notes to consolidated financial statements F-18
- -------------------------------------------------------------------- -----------
2. Financial Statements Schedules.
Schedule II - Valuation and Qualifying Accounts and Reserves S-1
- -------------------------------------------------------------------- -----------
3. Exhibits.
3.1 Articles of Incorporation (1)
- ------- ------------------------------------------------------------------------
3.2 Bylaws (1)
- ------- ------------------------------------------------------------------------
10.1 1993 Stock Option Plan (2)
- ------- ------------------------------------------------------------------------
10.2 1993 Stock Option Plan for Non-Employee Directors (2)
- ------- ------------------------------------------------------------------------
10.3 Custody Agreement between Colorado National Bank and the Registrant (2)
- ------- ------------------------------------------------------------------------
10.4 1999 Stock Option Plan. (3).
- ------- ------------------------------------------------------------------------
21 List of Subsidiaries. Filed Herewith.
- ------- ------------------------------------------------------------------------
27.1 Financial Data Schedule. Filed Herewith
- ------- ------------------------------------------------------------------------
(1) Incorporated by reference from the like numbered exhibits filed with the
Registrant's Registration Statement on Form S-18, No. 2-82104-D effective April
11, 1983.
(2) Incorporated by reference form the like numbered exhibits filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.
(3) Incorporated by reference form the like numbered exhibits filed with the
Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1998.
(b) Reports on Form 8-K.
On October 12, 1999, the Registrant filed a report on Form 8-K/A relating
to Items 2 and 7 amending the 8-K filed on August 12, 1999, to include financial
statements of the business acquired (Victoria Precision Inc.) and pro forma
financial information.
On November 4, 1999, the Registrant filed a report on Form 8-K/A relating
to Items 2 and 7 amending the 8-K filed on September 8, 1999, to include
financial statements of the business acquired (First Bankers Mortgage Services,
Inc. and subsidiary) and pro forma financial information.
-31-
<PAGE>
(c) Exhibits required by Item 601 of Regulation S-K
See Item 14(a)(3) above.
(d) Financial statement schedules required by Regulation S-X
Not applicable.
-32-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: April 13, 2000 EQUITEX, INC.
(Registrant)
By /S/ HENRY FONG
-----------------------------------
Henry Fong, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: April 13, 2000 /S/ HENRY FONG
-----------------------------------
Henry Fong, President,
Treasurer and Director
(Principal Executive, Financial,
and Accounting Officer)
Date: April 13, 2000 /S/ RUSSELL L. CASEMENT
-----------------------------------
Russell L. Casement, Director
Date: April 13, 2000 /S/ AARON A. GRUNFELD
-----------------------------------
Aaron A. Grunfeld, Director
-33-
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent auditors' report - Gelfond Hochstadt Pangburn, P.C. F-1
Report of Independent Certified Public Accountants -
Davis & Co., CPA's, P.C. F-2
Financial statements:
Consolidated balance sheet - December 31, 1999 F-3
Statement of assets and liabilities - December 31, 1998 F-4
Schedule of investments - December 31, 1998 F-5 - F-7
Consolidated statement of operations - year ended
December 31, 1999 F-8
Statements of operations - years ended December 31, 1998
and 1997 F-9
Statements of stockholders' equity - years ended
December 31, 1999, 1998, and 1997 F-10 - F-13
Consolidated statement of cash flows - year ended
December 31, 1999 F-14 - F-15
Statements of cash flows - years ended December 31, 1998 and 1997 F-16 - F-17
Notes to consolidated financial statements F-18 - F- 46
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Equitex, Inc.
We have audited the accompanying consolidated balance sheet of Equitex, Inc. and
subsidiaries as of December 31, 1999, and the related consolidated statements of
operations, stockholders' equity 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Equitex, Inc. and
subsidiaries as of December 31, 1999, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1999, the Company changed its method of accounting for its
majority-owned subsidiaries, its equity investments, and its investments in debt
and equity securities.
Our audit referred to above included an audit of the 1999 financial statement
schedule listed under Item 14.2. In our opinion, this 1999 financial statement
schedule presents fairly, in all material respects, the 1999 information stated
therein, when considered in relation to the 1999 information required to be
stated therein.
GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
April 10, 2000
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Equitex, Inc.
We have audited the accompanying statement of assets and liabilities and
schedule of investments of Equitex, Inc. as of December 31, 1998, and the
related statements of changes in stockholders' equity, operations and cash flows
for each of the years in the two-year period ended 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 1998 and 1997 financial statements referred to above present
fairly, in all material respects, the financial position of Equitex, Inc. as of
December 31, 1998, and the results of its operations and its cash flows each of
the years in the two-year period ended December 31, 1998 in conformity with
generally accepted accounting principles.
As explained more fully in Note 2, the financial statements at December 31, 1998
include securities and receivables, valued at $2,799,145 (68.2% of net assets)
whose values have been estimated by the Board of Directors in the absence of
readily attainable market values. We have reviewed the procedures used by the
Board of Directors in arriving at its estimate of value of such securities and
receivables and have inspected underlying documentation, and, in the
circumstances, we believe the procedures are reasonable and the documentation
appropriate. However, because of the inherent uncertainty of valuation of
restricted securities and receivables, those estimated values may differ
significantly from the values that would have been used had a ready market for
the restricted securities and receivables existed, and had the precise
recoverability of the receivables been determinable; and the differences could
be material.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule on S-1 is presented for the
purpose of complying with the Securities and Exchange Commission's rules and is
not a required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, fairly states in all material respects the 1998
and 1997 financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
Davis & Co., CPAs, P.C.
Certified Public Accountants
Englewood, Colorado
March 27, 1999
F-2
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
ASSETS
Cash and cash equivalents ...................................... $ 783,606
Mortgage loans held for sale, net .............................. 14,787,080
Receivables, net:
Related parties ........................................... 958,810
Other ..................................................... 504,571
Inventories .................................................... 167,346
Investments
Equity investments ........................................ 1,707,898
Other investments ......................................... 1,767,537
Furniture, fixtures and equipment, net ......................... 1,058,032
Intangible and other assets, net ............................... 20,010,057
------------
$ 41,744,937
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse loans ........................................... $ 18,582,351
Accounts payable .......................................... 1,584,926
Accrued liabilities:
Related parties ......................................... 454,235
Others .................................................. 2,773,989
Notes and advances payable:
Related parties ......................................... 832,000
Others .................................................. 1,941,954
------------
Total liabilities .............................................. 26,169,455
------------
Minority interest .............................................. 6,473,070
------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock; par value $1,000;
4,500 shares authorized:
Series D, 6%, 1,200 shares issued and outstanding;
liquidation preference $1,585,000 ................... 1,200,000
Series E, 250 shares issued and outstanding ........... 250,000
Common stock, par value $.02; 7,500,000
shares authorized; 7,140,293 shares issued;
7,106,943 shares outstanding ........................... 142,806
Additional paid-in capital ................................ 18,820,223
Accumulated deficit ....................................... (11,196,580)
Less treasury stock at cost (33,350 shares) ............... (114,037)
------------
Total stockholders' equity ..................................... 9,102,412
------------
$ 41,744,937
============
See notes to consolidated financial statements.
F-3
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
ASSETS
Investments, at fair value:
Securities (cost of $4,917,848) ........................... $ 4,226,541
Notes receivable, net of allowance for
uncollectible accounts of $100 .......................... 1,225,232
Accrued interest receivable, net of
allowance for uncollectible interest of $1,830 .......... 32,134
Trade receivables, net of allowance for
uncollectible accounts of $57,705 ....................... 108,286
------------
5,592,193
Cash ........................................................... 32,490
Accounts receivable - brokers .................................. 22,798
Contract deposit receivable, net of allowance for
uncollectibility of $150,000 ................................. 150,000
Income taxes refundable ........................................ 2,150
Furniture and equipment, net ................................... 26,220
Other assets ................................................... 33,224
------------
$ 5,859,075
============
LIABILITIES AND NET ASSETS
Liabilities:
Notes payable - officer ................................... $ 142,328
Notes payable - others .................................... 220,000
Accounts payable and other accrued liabilities ............ 76,290
Accounts payable to brokers ............................... 656,060
Accrued bonus to officer .................................. 676,168
------------
1,770,846
------------
Net assets:
Preferred stock, par value $.01; 2,000,000 shares
authorized; no shares issued
Common stock, par value $.02; 7,500,000 shares authorized;
5,417,665 shares issued; 5,384,315 shares outstanding ... 108,353
Additional paid-in capital ................................ 7,368,624
Retained earnings
Accumulated deficit prior to becoming a BDC ............. (118,874)
Accumulated net investment loss ......................... (15,698,055)
Accumulated net realized gains from sales and permanent
write-downs of investments ............................. 13,233,525
Unrealized net gains (losses) on investments .............. (691,307)
Less treasury stock (33,350 shares) ....................... (114,037)
------------
4,088,229
------------
$ 5,859,075
============
See notes to consolidated financial statements.
F-4
<PAGE>
EQUITEX, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Number Cost
of and/or Fair
Company shares owned equity value
- ------------------------------ ------------ ------ -----
<S> <C> <C> <C>
CONTROLLED COMPANIES
COMMON STOCKS - PRIVATE
MARKET METHOD OF VALUATION (a)(d):
VP Sports, Inc.
Entity formed to seek acquisitions in the
manufacturing segment of the sporting
goods and leisure-time industry 2,000,000 $ 250,000 $ 1,000,000
COMMON STOCKS - BOARD APPRAISAL
METHOD OF VALUATION (a):
First TeleServices Corporation
Fee-based financial services 1,000 565,639 565,639
COMMON STOCKS - COST METHOD OF
VALUATION:
Triumph Sports Group
Entity formed to seek acquisitions in the
non-manufacturing licensed and supplemental
segments of the sporting goods and leisure-
time industry 1,500,000 375,000 375,000
First TeleBanc Corporation
Bank holding company 40,000 400,000 350,000
AFFILIATED COMPANIES
COMMON STOCKS - PUBLIC MARKET
METHOD OF VALUATION (c)(d):
RDM Sports Group
Manufacturer of fitness equipment and
juvenile products 4,979,437 1,088,815 8,963
OTHER-PUBLIC MARKET METHOD OF
VALUATION:
RDM Sports Group 8% Convertible
Manufacturer of fitness equipment and Subordinated
juvenile products Debentures 50,681 -
---------- -----------
Sub-total, controlled and affiliated companies 2,730,135 2,299,602
---------- -----------
</TABLE>
(Continued)
F-5
<PAGE>
EQUITEX, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Number Cost
of and/or Fair
Company shares owned equity value
- ------------------------------ ------------ ------ -----
<S> <C> <C> <C>
UNAFFILIATED COMPANIES
COMMON STOCKS - PUBLIC MARKET
METHOD OF VALUATION:
Intranet Solutions, Inc. (formerly MacGregor
Sports & Fitness, Inc.)
Document management services, web-
based internet software, electronic docu-
ment management and demand printing 188,585 1,053,200 919,351
Zamba (formerly Racotek)
Medical technology 275,000 961,013 532,813
NevStar Gaming Corporation
Gaming development 7,000 38,500 6,562
COMMON STOCKS - PRIVATE MARKET
METHOD OF VALUATION (a)(d):
All Systems Go
Software development 20,000(b) 25,000 25,000
Ocean Power Technology
Alternative energy 35,714(b) 40,000 98,213
research and development 100,000 - 275,000
Gain, Inc.
Male vascular devices 20,000(b) 50,000 50,000
Juice Island
Health food stores 10,000(b) 20,000 20,000
WARRANTS (e)(d):
Juice Island
Health food stores 2,500 - -
---------- -----------
Sub-total, unaffiliated companies 2,187,713 1,926,939
---------- -----------
Total, all companies $4,917,848 $ 4,226,541
========== ===========
</TABLE>
(Continued)
F-6
<PAGE>
EQUITEX, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1998
Restriction as to resale:
(a) Non-public company whose securities are privately owned. The Board of
Directors determines fair value in good faith using cost information, but
also taking into consideration the impact of such factors as available
financial information of the investee, the nature and duration of any
restrictions on resale, and other factors which influence the market in
which a security is purchased and sold.
(b) May be sold under the provisions of Rule 144 of the Securities Act of 1933
after an initial holding period expires.
(c) Since the Company is an affiliate, it may be affected by sales limitations
of one percent of the investee's outstanding common stock during any
three-month period, or four-week average trading volume during any
three-month period.
(d) Since certain of these securities have certain restrictions as to resale,
the Board of Directors determines fair value in good faith using public
market information, but also taking into consideration the impact of such
factors as a available financial information of the investee, the nature
and duration of restrictions on the disposition of securities, and other
factors which influence the market in which a security is purchased and
sold.
(e) Valued at higher of cost or fair market value of underlying stock less
exercise price, subject to valuation adjustments as determined in good
faith by the Board of Directors, taking into consideration the impact of
such factors as available financial information of the investee, the nature
and duration of any restrictions on resale, and other factors which
influence the market in which a security is purchased and sold.
See notes to consolidated financial statements.
F-7
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
Revenues:
Product sales ............................................. $ 738,456
Loan production and processing revenues ................... 302,811
Secondary marketing revenues, net ......................... 395,034
Interest and dividend income .............................. 878,998
Other ..................................................... 103,965
------------
2,419,264
------------
Expenses:
Cost of product sales ..................................... 488,767
Loan production and processing ............................ 728,501
Selling, general and administrative:
Officer's bonus ......................................... 883,164
Other ................................................... 6,250,365
------------
8,350,797
------------
(5,931,533)
------------
Other income (expenses):
Investment loss, net ...................................... (571,267)
Equity in losses of affiliates ............................ (418,209)
Interest expense:
Related parties ......................................... (10,357)
Other ................................................... (785,193)
------------
(1,785,026)
------------
Net loss ....................................................... (7,716,559)
------------
Amortization of discount on preferred stock .................... (3,217,713)
Deemed preferred stock dividends ............................... (51,300)
------------
Net loss applicable to common shareholders ..................... $(10,985,572)
============
Basic and diluted net loss per common share .................... $ (1.64)
============
Weighted average number of common shares outstanding ........... 6,718,170
============
See notes to consolidated financial statements.
F-8
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Interest and dividends ........................... $ 70,445 $ 34,784
Consulting and transaction fees .................. 375,000 250,000
Administrative fees .............................. 2,371 26,495
Miscellaneous .................................... 24 67,112
----------- -----------
447,840 378,391
----------- -----------
Expenses:
Salaries and consulting fees ..................... 300,613 300,164
Officers' bonus .................................. 1,208,042 151,153
Office rent ...................................... 31,188 38,575
Advertising and promotion ........................ 48,612 2,951
Legal and accounting ............................. 276,359 69,502
Loss on indemnity agreement ...................... 509,054
Other general and administrative ................. 266,129 190,261
Interest ......................................... 101,002 87,005
Bad debt expense ................................. (34,435) 240,991
Depreciation and amortization .................... 12,833 11,388
Employee benefits ................................ 207,902 212,882
----------- -----------
2,418,245 1,813,926
----------- -----------
Net investment (loss) ................................. (1,970,405) (1,435,535)
----------- -----------
Net realized gain on investments and
net unrealized gain on investments:
Proceeds from sales of investments ............... 1,712,802 1,508,629
Less: cost of investments sold ................... (604,462) (504,678)
----------- -----------
Realized gain from sales of investments ........ 1,108,340 1,003,951
Permanent write down of investments .............. -- --
----------- -----------
Realized gain on investments before income taxes 1,108,340 1,003,951
----------- -----------
Net investment (loss) and realized gain on
investments before income taxes ................ (862,065) (431,584)
Less: income taxes (provision) benefit
Current ........................................ -- (56,307)
Deferred ....................................... (63,180) 86,242
----------- -----------
(63,180) 29,935
Income tax benefit of NOL carryforward ........... -- --
----------- -----------
Net investment (loss) and realized gain
on investments after income taxes .............. (925,245) (401,649)
(Decrease) in unrealized appreciation of investments .. (1,056,054) (5,773,305)
Less: income tax benefit applicable to (decrease)
in unrealized appreciation of investments ........... 431,361 2,251,587
Add: allowance for income tax benefit ................. (431,361) --
----------- -----------
(1,056,054) (3,521,718)
----------- -----------
Net (decrease) in net assets resulting from operations $(1,981,299) $(3,923,367)
=========== ===========
(Decrease) in net assets per share - primary .......... $ (.45) $ (1.25)
=========== ===========
Weighted average number of common shares .............. 4,416,988 3,192,600
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
EQUITEX, INC., AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
Convertible preferred Common stock
stock
------------------------ ------------------------- Additional
Treasury paid in
Shares Amount Shares Amount stock capital Deficit
----------- ---------- ----------- ----------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996 3,224,465 $ 64,489 $ (114,037) $ 4,447,175 $ (118,874)
Common stock sold to
officer/director at $.75
per share 270,000 5,400 197,100
Net investment (loss)
Net realized gain on
investments
Unrealized gain (loss) on
investmentments
----------- ---------- ----------- ----------- ----------- -------------- --------------
Balance at December 31,
1997 3,494,465 69,889 (114,037) 4,644,275 (118,874)
Common stock sold to
officer at $1.16 per share 10,000 200 11,400
Common stock sold to o/s
directors at $1.16 per
share 139,200 2,784 158,688
Common stock sold to
officers pursuant to
option conversions at:
$3.00 per share 74,000 1,480 220,520
$3.19 per share 29,000 580 91,930
Common stock sold to
others at :
$ .75 per share 330,000 6,600 240,900
$1.16 per share 350,000 7,000 399,000
$3.25 per share 366,000 7,320 1,182,180
Stock issued in exchange
for First TeleServices
Corporation 625,000 12,500 553,139
Commissions/fees paid
on 1998 private placement
sales (133,408)
Net investment (loss)
Net realized gain (loss)
on investments
Unrealized gain (loss) on
investments
----------- ---------- ----------- ----------- ----------- -------------- --------------
</TABLE>
(Continued)
F-10
<PAGE>
EQUITEX, INC., AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
Accumulated
Accumulated appreciation on
realized investments (1998,
net gains 1997) other Total
Accumulated net from sales comprehensive stockholders'
investment loss of investment income (1999) equity
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance at December 31,
1996 $(12,025,669) $11,121,234 $3,886,465 $7,260,783
Common stock sold to
officer/director at $.75
per share 202,500
Net investment (loss) (1,405,600) (1,405,600)
Net realized gain on
investments 1,003,951 1,003,951
Unrealized gain (loss)
investments (3,521,718) (3,521,718)
--------------- ---------------- --------------- ---------------
Balance at December 31,
1997 (13,431,269) 12,125,185 364,747 3,539,916
Common stock sold to
officer at $1.16 per share 11,600
Common stock sold to o/s
directors at $1.16 per
share 161,472
Common stock sold to
officers pursuant to
option conversions at:
$3.00 per share 222,000
$3.19 per share 92,510
Common stock sold to
others at :
$ .75 per share 247,500
$1.16 per share 406,000
$3.25 per share 1,189,500
Stock issued in exchange
for First TeleServices
Corporation 565,639
Commissions/fees paid
on 1998 private placement
sales (133,408)
Net investment (loss) (2,266,786) (2,266,786)
Net realized gain (loss)
on investments 1,108,340 1,108,340
Unrealized gain (loss) on
investments (1,056,054) (1,056,054)
--------------- ---------------- --------------- ---------------
</TABLE>
(Continued)
F-11
<PAGE>
EQUITEX, INC., AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Convertible preferred Common stock
stock
------------------------ ------------------------- Additional
Treasury paid in
Shares Amount Shares Amount stock capital Deficit
----------- ---------- ----------- ----------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 5,417,665 108,353 (114,037) 7,368,624 (118,874)
31, 1998
Cumulative effect of
accounting change (3,361,147)
Reclassification adjustment
on unrealized loss on
investments
Issuance of Series A
preferred stock (net
of offering costs) 900 9 769,991
Issuance of Series B
preferred stock (net
of offering costs) 600 6 521,994
Issuance of Series C
preferred stock (net
of offering costs) 600 6 509,994
Private placement of common
stock (net
of offering costs) 350,312 7,006 936,984
Conversion of Series
A, B and C preferred stock
to common stock (2,100) (21) 320,528 6,411 (6,390)
Conversion of note payable
and accrued interest to
common stock 48,688 974 157,262
Exercises of stock options
issued to employees 665,600 13,312 2,081,234
Exercises of warrants 337,500 6,750 2,606,925
Issuance of warrants
for services 150,000
Issuance of Series D
preferred stock 1,200 1,200,000 (180,000)
Issuance of Series E
preferred stock 250 250,000 2,281,000
Subsidiary stock
transactions 1,622,605
Net loss (7,716,559)
----------- ---------- ----------- ----------- ----------- -------------- --------------
Balances, at December 31,
1999 1,450 $1,450,000 7,140,293 $ 142,806 $ (114,037) $ 18,820,223 $ (11,196,580)
=========== ========== =========== =========== =========== ============== ==============
</TABLE>
(Continued)
F-12
<PAGE>
EQUITEX, INC., AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated
Accumulated appreciation on
realized investments (1998,
net gains 1997) other Total
Accumulated net from sales comprehensive stockholders'
investment loss of investment income (1999) equity
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balances, December
31, 1998 (15,698,055) 13,233,525 (691,307) 4,088,229
Cumulative effect of
accounting change 15,698,055 (13,233,525) (896,617)
Reclassification adjustment
on unrealized loss on
investments 691,307 691,307
Issuance of Series A
preferred stock (net
of offering costs) 770,000
Issuance of Series B
preferred stock (net
of offering costs) 522,000
Issuance of Series C
preferred stock (net
of offering costs) 510,000
Private placement of
common stock (net of
offering costs) 943,990
Conversion of Series
A, B and C preferred stock
to common
Conversion of note payable
and accrued interest into
common stock 158,236
Exercises of stock options
issued to employees 2,094,546
Exercises of warrants 2,613,675
Issuance of warrants
for services 150,000
Issuance of Series D
preferred stock 1,020,000
Issuance of Series E
preferred stock 2,531,000
Subsidiary stock
transactions 1,622,605
Net loss (7,716,559)
--------------- ---------------- --------------- ---------------
Balances, at December 31,
1999 $9,102,412
=============== =============== =============== ===============
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
Cash flows used in operating activities:
Net loss ....................................................... $ (7,716,559)
------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ............................. 838,359
Warrants issued for services .............................. 150,000
Provision for bad debts on notes receivable ............... 19,248
Investment loss, net ...................................... 571,267
Equity in losses of affiliates ............................ 418,209
Changes in assets and liabilities, net of business acquisitions:
Investments in trading securities............................ 852,128
Receivables ................................................. 40,500
Mortgage loans held for sale ................................ 3,545,354
Inventories ................................................. (109,797)
Other assets ................................................ 1,093,098
Accounts payable and accrued liabilities .................... (3,961,145)
------------
Total adjustments ........................................... 3,457,221
------------
Net cash used in operating activities .......................... (4,259,338)
------------
Cash flows from investing activities:
Purchase of other investments ............................... (410,000)
Cash used in business acquisition ........................... (2,327,500)
Purchase of furniture fixtures and equipment................. (278,025)
Repayment of loans and notes receivable ..................... 1,017,630
Issuance of loans and notes receivable ...................... (2,903,242)
------------
Net cash used in investing activities .......................... (4,901,137)
------------
Cash flows from financing activities:
Common stock issued for cash ................................ 5,652,211
Preferred stock issued for cash ............................. 2,822,000
Issuance of notes payable ................................... 758,897
Repayment of warehouse lines and other notes payable ........ (2,826,517)
Proceeds from subsidiary stock transactions ................. 3,505,000
------------
Net cash provided by financing activities ...................... 9,911,591
------------
(Continued)
F-14
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
Increase in cash and cash equivalents .......................... 751,116
Cash and cash equivalents, beginning of year ................... 32,490
------------
Cash and cash equivalents, end of year ......................... $ 783,606
============
Supplemental disclosure of cash flow information:
Cash paid for interest: ..................................... $ 2,939,873
============
Supplemental disclosure of non-cash investing and
financing activities:
Common stock issued in satisfaction of
note payable and accrued interest ......................... $ 158,236
============
Conversion of preferred stock to common
stock ..................................................... $ 1,802,000
============
Amortization of discount on preferred
stock ..................................................... $ 3,217,713
============
Subsidiary stock transactions ............................... $ 1,622,605
============
Purchase of FBMS, net of cash acquired:
Fair value of assets acquired ............................. $ 12,392,600
Intangible assets ......................................... 18,900,000
Liabilities assumed ....................................... (29,541,600)
Fair value of Series E preferres stock .................... (2,531,000)
------------
Cash acquired ............................................. $ (780,000)
============
Purchase of Victoria Precision, Inc.:
Fair value of assets acquired ............................. $ 5,769,500
Intangible assets ......................................... 3,166,000
Liabilities assumed ....................................... (4,969,000)
Fair value of assets exchanged ............................ (859,000)
------------
Cash paid ................................................. $ 3,107,500
============
See notes to consolidated financial statements.
F-15
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows used in operating activities:
Net loss ............................................. $(1,981,299) $(3,923,367)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization ................... 12,833 11,388
Provision for bad debts on notes receivable ..... (40,193) 40,193
Realized gain on sale of investments ............ (1,108,340) (1,003,951)
Unrealized loss on investments .................. 1,056,054 5,773,305
Donation of stock of investee company ........... 4,136
Proceeds form sales of investments ................... 1,712,802 1,508,629
Purchases of investments ............................. (1,388,626) (309,551)
Issuance of notes receivable ......................... (943,365) (458,402)
Collections of notes receivable ...................... 177,083 20,250
Changes in assets and liabilities:
(Increase) in interest receivable ................. (26,433) (3,799)
(Increase) decrease in accounts receivable - broker 50,943 (68,975)
(Increase) decrease in other assets ............... (23,119) (3,671)
(Increase) decrease in trade receivables .......... 2,668 (71,331)
(Increase) in contract deposit receivable ......... (150,000)
Decrease in income taxes refundable ............... 164,459
Increase (decrease) in accounts payable and other
accrued expenses ................................ (45,059) 65,908
(Decrease) increase in accounts payable to brokers 5,758 (88,721)
(Decrease) increase in deferred income taxes ...... 63,180 (2,337,830)
Increase in bonus due to officer .................. 376,909 151,153
----------- -----------
Net cash (used) by operating activities .............. (2,098,204) (672,835)
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets .......................... (10,396) (1,872)
----------- -----------
Net cash (used) by investing activities .............. (10,396) (1,872)
----------- -----------
Cash flows from financing activities:
Common stock issued for cash ...................... 2,197,174 202,500
Issuance of notes payable - officer ............... 165,000 531,000
Issuance of notes payable - other ................. 250,000 250,000
Repayment of notes payable ........................ (480,271) (353,401)
----------- -----------
Net cash provided by financing activities ............ 2,131,903 630,099
----------- -----------
</TABLE>
(Continued)
F-16
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Change in cash and cash equivalents .................. 23,303 (44,608)
Cash and cash equivalents, beginning of
period ............................................. 9,187 53,795
----------- -----------
Cash and cash equivalents, end of period ............. $ 32,490 $ 9,187
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid ..................................... $ 95,677 $ 79,305
=========== ===========
Interest received ................................. $ 42,217 $ 30,985
=========== ===========
Income taxes paid (refunded) ...................... $ -- $ (116,496)
=========== ===========
Non-cash financing activities:
Common stock issued for common stock of
previously unrelated entity ..................... $ 565,639 $ --
=========== ===========
</TABLE>
Supplemental disclosure of non-cash investing
activities:
On August 13, 1998, the Company acquired all of the
outstanding stock of First TeleServices Corp. in
exchange for 625,000 shares of the Company's common
stock.
See notes to consolidated financial statements.
F-17
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. Organization:
Business history:
Equitex, Inc. (the "Company"), a Delaware Corporation, was incorporated on
January 19, 1983. On July 30, 1984, the Company elected to become a
"Business Development Company", as defined in the Small Business
Investment Incentive Act of 1980, an amendment to the Investment Company
Act of 1940. This change resulted in the Company becoming a specialized
type of investment company.
Decertification as a Business Development Company ("BDC"):
On January 4, 1999, the Company withdrew its election to be treated as a
BDC subject to the Investment Company Act. As a result of this
withdrawal, the Company is now required to present its financial
statements consistent with those of a normal operating company as opposed
to a BDC. Because the Company was a BDC during the years ended December
31, 1998 and 1997, the 1998 and 1997 financial statements reflect the BDC
format.
Accounting change:
In connection with the Company's January 4, 1999 withdrawal of its election
to be treated as a BDC, effective January 1, 1999, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 115, ACCOUNTING
FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIEs, Accounting
Principles Board ("APB") Opinion No. 18, THE EQUITY METHOD OF ACCOUNTING
FOR INVESTMENTS IN COMMON STOCK, and SFAS No. 94, CONSOLIDATION OF ALL
MAJORITY-OWNED SUBSIDIARIES. The cumulative effect of the accounting
change was to decrease stockholders' equity by $896,617. There was no
effect on the 1999 Consolidated statement of operations. These standards
were not applicable to the Company is prior years, operating as a BDC.
SFAS No. 115 requires that certain debt and equity securities be carried at
market value and requires management to re-evaluate the appropriate
classification of securities at each balance sheet date, based on its
intent to trade or hold the securities. APB 18 requires the use of the
equity method of accounting for investments in which the investor has the
ability to exercise significant influence over operating and financial
policies of the investee enterprise. That ability is presumed to exist
for investments of 20% or more and is presumed not to exist for
investments of less than 20%. SFAS No. 94 provides that consolidated
financial statements generally shall include enterprises in which the
parent has a controlling financial interest.
Principles of consolidation:
The consolidated financial statements as of December 31, 1999 include the
accounts of Equitex, Inc., and the following significant subsidiaries;
all significant intercompany accounts and transactions have been
eliminated in consolidation:
Financial services segment:
NMORTGAGE, INC. ("nMortgage"); a Delaware corporation formed in
September 1999 to acquire First Bankers Mortgage Services, Inc.
and its wholly-owned subsidiary, United Appraisal Services, Inc.
F-18
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
1. Organization (continued):
Principles of consolidation (continued):
Financial services segment (continued):
FIRST BANKERS MORTGAGE SERVICES, INC. ("FBMS"); a Florida
corporation incorporated in 1990 and acquired by the Company on
August 23, 1999 (Note 3). FBMS, a mortgage banking company, is
wholly-owned by the Company and engages in the origination and
sale of residential mortgages. In addition to conventional
mortgage products, FBMS also provides FHA and VA assisted
mortgages under the U.S. HUD lending program. Mortgages are
originated through retail branches and wholesale lending centers
located principally in Florida.
FIRST TELESERVICES CORPORATION ("FTC"); a Florida corporation
incorporated in 1997 and acquired by the Company in August 1998
(Note 3). FTC, wholly-owned by the Company, is a consumer finance
company offering financial products and services to the sub-prime
market
Sporting goods/product related segment:
TRIUMPH SPORTS GROUP, INC. ("Triumph"); a Florida corporation
formed in January 1998 for the purpose of acquiring operating
entities in the non-manufacturing licensed and supplemental
segments of the sporting goods and leisure-time industry. Between
February and June of 1998, the Company acquired an 88% ownership
interest in Triumph (Note 3). Triumph owns and operates four
retail vitamin/health supplement centers in south Florida.
VP SPORTS, INC. ("VP Sports"); a Delaware corporation formed in
December 1997 for the purpose of acquiring an operating entity in
the sporting goods/recreation industry. In December 1997, the
Company acquired an 88% ownership interest in VP Sports (Notes 3
and 6). Effective July 27, 1999, VP Sports acquired all of the
outstanding common shares of Victoria Precision Inc. ("Victoria
Precision"), a Canadian bicycle manufacturer. In connection with
a private placement of VP Sports' common stock, the Company's
ownership interest in VP Sports was reduced from approximately
88% at December 31, 1998 to approximately 35.7% at December 31,
1999. Due to the change in ownership percentage, the Company
changed its method of accounting for its investment in VP Sports
in 1999 from consolidation to the equity method of accounting.
Minority interest at December 31, 1999, represents preferred stock of FBMS
and nMortgage (Note 17). During the year ended December 31, 1999, net
losses incurred by the Company's majority-owned subsidiaries exceeded the
minority interest in the common equity (deficiency) of the subsidiaries.
As a result, the excess of losses applicable to the minority interest
have been charged against the Company, and no minority interest is
reflected in the Company's 1999 statement of operations.
F-19
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
2. Significant accounting policies:
Use of accounting estimates in financial statement preparation:
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 revenues and expenses
during the reporting periods. Actual results could differ from those
estimates, and it is reasonably possible that significant changes could
occur in the near term.
Cash and cash equivalents:
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with an original maturity date of three months
or less to be cash equivalents.
Mortgage loans held for sale, net:
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the aggregate.
Net unrealized losses, if any, are recognized through a valuation
allowance by charges to income. Gain or loss on sales of loans is
recognized at the time of the sale. Origination fees and loan origination
costs on such loans are recognized when the mortgage is sold, which is
normally within 30 days of the origination of the loan. Interest earned
on these mortgages is recognized as income from the time the mortgage is
closed to the time the mortgage is sold.
The Company generally sells the servicing rights on mortgages. The Company
has adopted the provisions of SFAS No. 122, ACCOUNTING FOR MORTGAGE
SERVICING RIGHTS, and accordingly capitalizes the fair value (quoted
market price) of retained mortgage servicing rights on loans sold.
Capitalized mortgage servicing rights on such loans are amortized in
proportion to and over the period of estimated net servicing income. The
carrying amount of capitalized mortgage servicing rights is evaluated for
impairment based upon quoted market prices of similar loans. At December
31, 1999, there were no retained mortgage servicing rights.
Mortgage loans:
The Company periodically grants mortgage loans to customers. Loans that
management has the intent and ability to hold for the foreseeable future
or until maturity or pay-off generally are reported at their outstanding
unpaid principal balances adjusted for charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans. Interest
income is accrued on the unpaid principal balance. Loan origination fees,
net of certain direct origination costs, are deferred and recognized as
an adjustment to the related loan yield using the interest method.
F-20
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
2. Significant accounting policies (continued):
Mortgage loans (continued):
The accrual of interest on mortgage and commercial loans is discontinued at
the time the loan is 90 days delinquent unless the credit is well-secured
and in process of collection. Loans are placed on non-accrual or
charged-off status at an earlier date if collection of principal or
interest is considered doubtful. All interest accrued but not collected
for loans that are placed on non-accrual or charged-off status is
reversed against interest income. The interest on these loans is
accounted for on the cash-basis or cost-recovery method, until qualifying
for return to accrual status. Loans are returned to accrual status when
all the principal and interest amounts contractually due are brought
current and future payments are reasonably assured.
Allowance for loan losses:
The allowance for loan losses is evaluated on a regular basis by management
and is based upon management's periodic review of the collectibility of
the loans in light of historical experience, the nature and volume of the
loan portfolio, adverse situations that may affect the borrower's ability
to repay, estimated value of any underlying collateral and prevailing
economic conditions. This evaluation is inherently subjective as it
requires estimates that are susceptible to significant revision as more
information becomes available. Loan losses are charged against the
allowance when management believes the uncollectibility of a loan balance
is confirmed. Subsequent recoveries, if any, are credited to the
allowance.
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and
the probability of collecting scheduled principal and interest payments
when due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay,
the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and
construction loans by either the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.
Inventories:
Inventories consist primarily of vitamin and health supplement products
held for sale by Triumph and are valued at the lower of cost (first-in,
first-out) or market value.
F-21
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
2. Significant accounting policies (continued):
Investment valuation in 1998 and 1997 as a BDC:
Investments at December 31, 1998 consist of holdings of securities in and
receivables of publicly and privately held companies. The Company had
representation on the boards of directors of four of its investee
companies during 1998, and several investments were in companies in which
there was either direct or indirect ownership or control of 5% or more of
the outstanding voting shares. Through December 31, 1998, as a BDC, the
Company utilized the fair value method adopted in 1984, which provides
for the Company's Board of Directors to be responsible for the valuation
of the Company's investments, including notes receivable and interest
receivable. Fair value is the value which could reasonably be expected to
be realized in a current arms-length sale. Investments through December
31, 1998 were carried at fair value using the following four basic
methods of valuation:
1. Cost - The cost method is based on the original cost to the
Company adjusted for amortization of original issue discounts,
accrued interest for certain capitalized expenditures of the
corporation, and other adjustments as determined to be
appropriate by the Board of Directors in good faith taking into
consideration such factors as available financial information of
the investee, the nature of and duration of any restriction as to
resale, and other factors which influence the market in which a
security is purchased and sold. Such method is to be applied in
the early stages of an investee's development until significant
positive or adverse events subsequent to the date of the original
investment require a change to another method.
2. Private market - The private market method uses actual or
proposed third party transactions in the investee's securities as
a basis of valuation, utilizing actual firm offers as well as
historical transactions, provided that any offer used is
seriously considered and well documented by the investee, and
adjusted (if applicable) by the Board of Directors in good faith
taking into consideration such factors as available financial
information of the investee, the nature and duration of any
restrictions as to resale, and other factors which influence the
market in which a security is purchased and sold.
3. Public market - The public market method is the preferred method
of valuation when there is an established public market for the
investee's securities. In determining whether the public market
method is sufficiently established for valuation purposes, the
Company examines the trading volume, the number of shareholders
and the number of market makers in the investee's securities,
along with the trend in trading volume as compared to the
Company's proportionate share of the investee's securities.
Investments in unrestricted securities that are traded in the
over-the-counter market are generally valued at the high bid
price on the last day of the year. If the security is restricted
as to resale or has significant escrow provisions or other
significant restrictions, appropriate adjustments are determined
in good faith by the Board of Directors taking into consideration
such factors as available financial information of the investee,
the nature and duration of restrictions on the ultimate
disposition of securities, and other factors which influence the
market in which security is purchased and sold.
4. Appraisal - The appraisal method is used to value an investment
position after analysis of the best available outside information
where there is not established public or private market in the
investee's securities.
F-22
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
2. Significant accounting policies (continued):
Investment valuation in 1998 and 1997 as a BDC (continued):
Purchases and sales of securities transactions are accounted for on the
trade date which is the date the securities are purchased or sold. The
cost of securities sold is reported on the first-in first-out cost basis
for financial statement purposes.
Furniture, fixtures, equipment and depreciation:
Furniture, fixtures, and equipment are stated at cost, and depreciation is
provided by use of the straight-line method over the estimated useful
lives of the assets. The cost of leasehold improvements is depreciated
over the estimated useful lives of the assets or the length of the
respective leases, whichever period is shorter. Estimated useful lives of
furniture, fixtures and equipment are as follows:
Vehicle 5 years
Office equipment and furniture 3 to 7 years
Computer hardware and software 3 to 5 years
Leasehold improvements 7 years
Impairment of long-lived assets:
The Company reviews long-lived assets, goodwill and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to future net cash flows expected to
be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Based
on management's review, the Company does not believe that any impairments
have occurred on long-lived assets during 1999.
Revenue recognition, product sales:
Product sales represent retail sales of vitamin/health supplement products.
Sales are recognized at the time of the sales transaction with the
customer.
Comprehensive income:
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, establishes requirements for
disclosure of comprehensive income which includes certain items
previously not included in the statements of operations, including
unrealized gains and losses on certain investments in debt and equity
securities, among others. In 1999, net income and comprehensive income
were the same. In 1998 and 1997, SFAS No. 130 had no effect on the
Company since it was following the fair value accounting guidelines
required for BDC's.
F-23
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
2. Significant accounting policies (continued):
Recently issued accounting standards:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This
statement, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. Currently, the Company does not have any
derivative financial instruments and does not participate in hedging
activities. Therefore, management believes that SFAS No. 133 will not
have an impact on its financial position or results of operations.
Stock-based compensation:
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION defines a fair-value
based method of accounting for stock-based employee compensation plans
and transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees, and encourages but does not
require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to
account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB No. 25") and related interpretations.
Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the
stock.
Net loss per share (net assets per share in 1998 and 1997):
In 1999, in connection with the Company's withdrawal as a BDC, the Company
adopted the provisions of SFAS No. 128, EARNINGS PER SHARE. SFAS No. 128
requires dual presentation of basic and diluted earnings per share (EPS)
for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS
computation. Basic EPS excludes dilution; diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings
of the entity.
Basic loss per share is computed by dividing net loss applicable to common
shareholders by the weighted-average number of common shares outstanding
for the year. In arriving at net loss applicable to common shareholders,
amortization of the beneficial conversion features related to the
preferred stock and dividends on the preferred stock (Note 18) increased
this amount. Diluted loss per share reflects the potential dilution that
could occur if dilutive securities and other contracts to issue common
stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the Company,
unless the effect is to reduce a loss or increase earnings per share. The
Company had no potential common stock instruments which would result in
diluted loss per share in 1999, 1998 and 1997. At December 31, 1999 and
1998, the total number of common shares issuable under the exercise of
outstanding options and warrants and upon the conversion of convertible
preferred stock was 1,370,281 and 749,000, respectively.
F-24
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
2. Significant accounting policies (continued):
Net loss per share (net assets per share in 1998 and 1997 (Continued):
In 1998 and 1997, in accordance with the fair value accounting method used
by regulated investment companies, net assets (total stockholders'
equity) per share at December 31, 1998 and 1997 were as follows:
Number of shares
Basis 1998 1997 1998 1997
----- ---------------------- ----------------------
Primary 5,384,315 3,461,115 $ .74 $ 1.03
========= ========= ========= =========
Fully diluted 6,156,015 3,772,660 $ .65 $ .95
========= ========= ========= =========
3. Business acquisitions:
Acquisition of FBMS:
On August 23, 1999, the Company, through its wholly-owned subsidiary FBMS
Acquisition Corp., entered into an Agreement and Plan of Reorganization
(the "Acquisition Agreement") with FBMS to acquire all of the outstanding
common stock of FBMS in exchange for 250 shares of the Company's Series E
convertible preferred stock (the "Series E Preferred Stock") valued at
approximately $2,531,000, and contingent consideration consisting of up
to 750 shares of Series E Preferred Stock, which include potential "Bonus
Shares" issuable by the Company, as specified in the Acquisition
Agreement. The transaction was accounted for as a purchase, and the
results of operations of FBMS are included in the Company's 1999
consolidated statement of operations from the date of acquisition. The
total purchase price was allocated to the assets and liabilities acquired
based on their estimated fair values, including goodwill of approximately
$18,900,000 (Note 20), which is being amortized by the use of the
straight-line method over ten years.
In accordance with the terms of the Acquisition Agreement, FBMS Acquisition
Corp. was merged into FBMS. Subsequent to the merger, the Company formed
nMortgage, Inc. as the Company's subsidiary holding company for FBMS.
Investment in VP Sports:
Effective July 27, 1999, the Company, through its majority-owned subsidiary
VP Sports and VP Sports' wholly-owned subsidiary, 9066-8609 Quebec Inc.,
a Canadian corporation, acquired all of the outstanding common shares of
Victoria Precision Inc. ("Victoria Precision"), also a Canadian
corporation, as well as the future rights to a four-year international
consulting and non-compete agreement. The transaction was accounted for
as a purchase. Total consideration of approximately $3,966,600
($6,000,000 CDN) was required. The purchase price for the common stock
was $2,000,000 Canadian and was allocated to the assets and liabilities
acquired based on their estimated fair values, including intangible
assets of approximately $3,166,000, which are being amortized by the use
of the straight-line method over two to ten years.
F-25
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
3. Business acquisitions (continued):
Investment in VP Sports (continued):
In order to finance the acquisition, in 1999 VP Sports completed a
$4,500,000 private placement of 36 units; each unit consisting of 100
shares of $1,000 per share, 8% convertible preferred stock, 12,500 shares
of VP Sports common shares, and warrants to purchase 287,500 shares of VP
Sports common stock at $.10 per share. As a result of the placement of
units, the Company's ownership interest in VP Sports was reduced from
approximately 88% at December 31, 1998 to approximately 35.7% at December
31, 1999.
Pro forma financial information:
The following unaudited pro forma financial information for the years ended
December 31, 1999 and 1998, give effect to the above acquisitions as if
they had occurred at the beginning of each respective period.
Years ended December 31,
---------------------------
1999 1998
------------ ------------
Revenue $ 10,678,000 $ 22,933,000
Net loss $(14,372,000) (12,021,000)
Net loss applicable to common shareholders $(17,641,000) $(12,021,000)
Basic and diluted loss per common share $ (2.63) $ (2.72)
Shares used in per share calculation 6,718,170 4,416,988
The unaudited pro forma financial information above does not purport to
represent the results which would actually have been obtained if the
acquisitions had been in effect during the periods covered or any future
results which may in fact be realized.
Acquisitions of FTC and Triumph:
In August 1998, the Company acquired all of FTC's outstanding common stock
in exchange for 625,000 shares of the Company's common stock valued at
$565,639. In February and June 1998, the Company acquired a total of
1,500,000 shares of Triumph common stock in exchange for consulting
services valued at $375,000, which represented an ownership interest of
approximately 88% at December 31, 1998. Both of these investments were
accounted for and presented as investments in controlled companies as of
and for the year ended December 31, 1998. At December 31, 1998, the fair
value of these investments was $940,639. In 1999, in connection with the
Company's change from a BDC to an operating company, the Company changed
its method of accounting for FTC and Triumph to consolidation.
4. Mortgage loans held for sale, net:
The inventory of mortgage loans consists primarily of first trust deed
mortgages on residential properties located throughout the United States.
As of December 31, 1999, the Company has mortgage loans held for sale of
$14,787,080, which is net of an allowance for loan losses of $1,386,000.
All mortgage loans are pledged as collateral for the warehouse loans at
December 31, 1999 (Note 9).
F-26
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
5. Receivables:
Receivables at December 31, 1999 consist of the following:
Related parties:
Notes receivable from officers of the
Company; interest rates ranging from 8.25%
to 10%; notes collateralized in part by
shares of the Company's stock; maturing at
various dates through October 2001 $ 577,800
Note receivable from affiliate; interest at
8%; unsecured; due on demand at December
31, 1999 300,000
Advances receivable from employees and
affiliates; non- interest bearing;
unsecured 81,010
----------
958,810
----------
Other:
Accounts receivable, trade; non-interest
bearing; unsecured 167,390
Mortgage loans receivable from customers;
interest rates ranging from 7.25% to
13.75%, maturing at various dates through
2030; collateralized by real estate 374,500
Notes receivable; interest at 10%; unsecured;
due on demand 125,017
----------
666,907
Less allowance for uncollectible receivables (162,336)
----------
504,571
----------
$1,463,381
==========
Receivables at December 31, 1998, are due from the following types
of companies:
Controlled Affiliated Other Total
---------- ---------- ---------- ----------
Notes receivable $1,123,284 $ 56,575 $ 45,473 $1,225,332
Interest receivable 29,843 1,829 2,292 33,964
Trade receivables 111,287 11,427 43,277 165,991
Less allowances
for uncollectible
receivables (5,527) (7,685) (46,423) (59,635)
---------- ---------- ---------- ----------
$1,258,887 $ 62,146 $ 44,619 $1,365,652
========== ========== ========== ==========
F-27
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
5. Receivables (continued):
Sources of revenue during 1998 and 1997 are from the following types of
companies:
Controlled Affiliated Other Total
---------- ---------- ---------- ----------
1998
----
Interest and other
income $ 68,043 $ 10 $ 2,416 $ 70,469
Consulting/transaction
fees 375,000 375,000
Administrative fees 2,371 2,371
---------- ---------- ---------- ----------
$ 443,043 $ 2,381 $ 2,416 $ 447,840
========== ========== ========== ==========
1997
----
Interest and other
income $ 3,917 $ 88,967 $ 9,012 $ 101,896
Consulting/transaction
fees 250,000 250,000
Administrative fees 26,176 319 26,495
---------- ---------- ---------- ----------
$ 253,917 $ 115,143 $ 9,331 $ 378,391
========== ========== ========== ==========
During 1998, one investee company accounted for 96% of the Company's total
revenues of $447,840.
6. Investments:
At December 31, 1999, the Company's investments consist of the following:
Investment
Investment balance
------------------------ ------------
Equity investments:
V.P. Sports [A] $ 1,472,898
Net 1 Capital, LLC [B] 235,000
------------
$ 1,707,898
============
Other Investments:
Trading securities:
Intranet Solutions, Inc. [C] $ 786,250
Other 116,287
------------
902,537
------------
Cost basis investments:
First TeleBanc Corporation [D] 800,000
Other 65,000
------------
865,000
------------
$ 1,767,537
============
F-28
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
6. Investments (continued):
[A] Investment in VP Sports
In December 1997, the Company received 2,000,000 shares (88%) of
the common stock of VP Sports. The stock was received in exchange
for consulting services and an acquisition letter of intent valued
at $250,000. At December 31, 1998, these common shares were valued
using the private market valuation method. The valuation reflected
the price at which the most recent common stock sales occurred in
1998. The Company's president is also the President and a director
of VP Sports. During 1998, the Company loaned $103,131 to VP
Sports for working capital purposes, of which $38,865 was repaid.
Effective January 1, 1999, the Company began consolidating VP
Sports. In connection with a private placement of VP Sports'
common stock, the Company's ownership interest in VP Sports was
reduced from approximately 88% at December 31, 1998 to
approximately 35.7% at December 31, 1999. Due to the change in
ownership percentage, the Company changed its method of accounting
for its investment in VP Sports in 1999 from consolidation to the
equity method of accounting. During 1999, the receivable of
$64,266 at December 31, 1998 was repaid.
[B] Investment in Net 1 Capital, LLC
In March 1999, FTC entered into a joint-venture agreement with Net
1 Capital, LLC ("Net 1 Capital"), a Florida Limited Liability
Company, formed for the purpose of acquiring pre-existing
portfolios of consumer debt and servicing and/or marketing these
portfolios. The Company invested $250,000 for a 50% interest in
Net 1 Capital. The Company also loaned Net 1 Capital $317,629,
which was repaid in 1999. The Company is accounting for Net 1
Capital under the equity method of accounting.
[C] Investment in Intranet Solutions, Inc. ("Intranet", formerly
MacGregor Sports & Fitness, Inc.)
On July 31, 1996, MacGregor Sports & Fitness, Inc. merged with
Technical Publishing Solutions, Inc. (TPSI) through a tax-free
exchange of common stock. As part of the merger agreement, the
Company agreed to indemnify the new entity up to a maximum limit
of $2,000,000 against any subsequent claims relating to MacGregor
(pre-merger).
On October 31, 1997, the Company entered into an agreement with
IntraNet relative to this indemnification agreement whereby the
Company agreed to purchase a note receivable of $564,755 which
IntraNet was owned by a subsidiary of RDM Sports Group, Hutch
Sports USA (Hutch). Hutch had filed for bankruptcy on August 29,
1997. The Company paid $414,755 of the purchase amount to IntraNet
during 1997. The remaining balance of $150,000 was paid on January
21, 1998. Also, the Company's President agreed to resign from the
Board of IntraNet and both IntraNet and the Company agreed to
terminate the indemnification agreement under which the Company's
maximum exposure was $2,000,000, and agreed to mutually release
each other from any claims relating to this agreement and certain
other items.
During 1997, the Company sold and/or forfeited 171,835 shares of
IntraNet common stock for $814,653 used to pay the above mentioned
indemnity settlement and also raise working capital, resulting in
an ownership position of 473,250 shares (or 5.7%) at December 31,
1997. During 1998, the Company sold 284,665 shares of IntraNet for
proceeds of $1,240,613, which was used to provide working capital
and resulted in an ownership position of 188,585 shares (less than
5%) at December 31, 1998. These shares were valued using the
public market valuation method at December 31, 1998.
F-29
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
6. Investments (continued):
[C] Investment in Intranet Solutions, Inc. ("Intranet", formerly
MacGregor Sports & Fitness, Inc.) (continued):
Effective January 1, 1999, the Company classified its investment
in IntraNet as a trading security pursuant to SFAS No. 115. As of
December 31, 1999, the fair value of the IntraNet investmet, based
on quoted market prices is $786,250 and the cost of the IntraNet
investment is $216,159 (an unrealized gain of $570,091). During
1999, the Company realized gains on the sale of IntraNet
securities of $638,764.
[D] During 1998, the Company acquired a 9.9% interest in First
TeleBanc Corporation ("First TeleBanc"), a closely-held Florida
corporation, for $300,000. First TeleBanc was incorporated in
March 1997 for the purpose of becoming a one-bank holding company
and to acquire 100% of the outstanding stock of Boca Raton First
National Bank. The acquisition by First TeleBanc of all of the
outstanding stock of Boca Raton First National Bank was completed
on December 30, 1998. As a one-bank holding company, First
TeleBanc may engage in any activity which the Board of Governors
of the Federal Reserve System has previously approved or approves
subsequent to an application.
During 1999, the Company continued to account for its investment
in First TeleBanc at cost. The Company's total investment of
$800,000 includes FTC's $500,000 investment balance.
The Company's equity in the net losses of its equity investments was
$418,209 for the year ended December 31, 1999. Summarized unaudited
combined financial information for these investments as of and for the
year ended December 31, 1999, is as follows:
Current assets $ 6,834,574
Non-current assets 7,552,862
------------
Total assets $ 14,387,436
============
Current liabilities $ 6,070,949
Non-current liabilities 2,144,775
------------
Total liabilities 8,215,724
Total equity 6,171,712
------------
Total liabilities and equity $ 14,387,436
============
Revenues $ 4,142,540
Gross profit $ 611,100
Operating losses $ (1,134,212)
Net loss $ (1,026,292)
Investment in RDM Sports Group (formerly Roadmaster Industries):
On August 29, 1997, RDM Sports Group (RDM) and all of its operating
subsidiaries filed concurrent Chapter 11 petitions with the U.S.
Bankruptcy Court. As a result of this, the fair market value (as measured
using the public market valuation method) of this investee company
dropped to near $0 as reflected in the December 31, 1998 schedule of
Investments. The company also reserved 100% of its $7,685 trade
receivable from RDM at December 31, 1998. During July 1997, prior to the
bankruptcy filing, the Company sold 127,600 shares of RDM on the open
market for cash proceeds of $126,366.
F-30
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
6. Investments (continued):
Investment in RDM Sports Group (formerly Roadmaster Industries)(continued):
During 1998 and 1997, the Company recorded administrative fees from RDM
totaling $25,893 and $649, respectively. At December 31, 1998, the
Company held a note receivable from Hutch Sports USA (an RDM subsidiary)
with a face value of $564,755. At December 31, 1998, the note was
recorded at an estimated net realizable value from bankruptcy proceeds of
$56,475.
Effective January 1, 1999, the Company classified its investment in RDM as
an available for sale security pursuant to SFAS No. 115. During 1999, in
connection with the Company's evaluation of investments for impairment,
management determined that the decline in the value of its investment in
RDM was other than temporary. As a result, the Company adjusted the
unrealized loss on this investment of $1,201,355, previously recorded
as a component of stockholders' equity, to a realized loss, and fully
reserved the note receivable from RDM. These adjustments resulted in a
charge to the 1999 statement of operations of $1,233,209 (Note 20).
Investment in FTC and Triumph:
On August 13, 1998, the Company acquired all of the outstanding stock of
FTC in exchange for 625,000 shares of the Company's common stock. As a
result of this transaction, FTC became a wholly-owned subsidiary of the
Company. The Board of Directors used the Board appraisal method of
valuation for this investment and recorded FTC at $565,639, which was the
net asset value of FTC's underlying assets and liabilities at the
acquisition date. From the date of the acquisition through December 31,
1998, the Company loaned $160,000 to FTC for working capital purposes.
During 1998, the Company received 1,500,000 shares of the common stock of
Triumph in exchange for consulting services valued at $375,000. The
Company's president was also the President and a director of Triumph. At
December 31 1998, the investment was valued using the cost valuation
method because no more recent common stock sales had occurred. During
1997 and 1998, the Company loaned $401,927 and $561,569, respectively, to
Triumph, which was used by Triumph primarily to acquire four retail
vitamin/health supplement centers in south Florida. Triumph repaid
$64,478 of these notes and $39,939 of interest during 1998, resulting in
balances due the Company at December 31, 1998 of $899,018 and $23,088 for
note principal and accrued interest, respectively.
Effective January 1, 1999, and through December 31, 1999, the Company has
consolidated FTC and Triumph pursuant to SFAS No. 94.
Other investments:
During 1999, the Company determined that two investments which were
accounted for at cost basis and which totaled $70,000 at December 31,
1998 were impaired, and were written off in the 1999 statement of
operations (Note 20).
Other trading securities at December 31, 1999 were recorded at estimated
fair value, based on quoted market prices, of $116,287, which is
$38,517 less than cost. During 1999, the Company realized gains of
$158,752 from the sale of certain other trading securities held by the
Company.
F-31
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
7. Furniture, fixtures and equipment:
Furniture, fixtures, and equipment are stated at cost and consist of the
following at December 31, 1999 and 1998:
1999 1998
----------- -----------
Vehicle $ 30,542 $ 30,542
Office equipment and furniture 1,410,699 120,608
Computer hardware and software 430,082
Leasehold improvements 76,759 4,994
----------- -----------
1,948,082 156,144
Less accumulated depreciation (890,050) (129,924)
----------- -----------
$ 1,058,032 $ 26,220
=========== ===========
8. Intangible and other assets:
Intangible and other assets consist of the following at December 31, 1999
and 1998:
1999 1998
----------- -----------
Goodwill $19,072,300
Foreclosed assets 299,400
Tradename and franchise rights 172,800
Restricted cash 269,263
Deposits 395,000 $ 23,750
Other 472,872 9,474
----------- -----------
20,681,635 33,224
Less accumulated amortization (671,578)
----------- -----------
$20,010,057 $ 33,224
=========== ===========
Goodwill represents the cost of the Company's investments in subsidiaries
in excess of the net tangible assets acquired, and is amortized on the
straight-line method over ten years. Foreclosed assets acquired through,
or in lieu of, loan foreclosure are held for sale by FBMS and are
initially recorded at fair value at the date of foreclosure, establishing
a new cost basis. Tradename and franchise rights are related to Triumph
and are amortized on the straight-line method over ten years.
Restricted cash primarily consists of funds held in escrow in connection
with certain contingent matters. Deposits include a contract deposit
receivable whereby the Company is the plaintiff in an action in which it
is seeking to recover $300,000 deposited into an escrow account pending
the receipt of documentation needed pursuant to a contractual agreement.
The defendant has not delivered the required documents. This deposit has
been recorded at an estimated net realizable value of $150,000 at
December 31, 1999 and 1998.
F-32
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
9. Warehouse loans:
Under the terms of the Company's warehouse agreements, all mortgage loans
held for sale are pledged as collateral for the warehouse notes payable.
The weighted average interest rate for total warehouse loans was 9.7%.
Warehouse loans consist of the following as of December 31, 1999:
Warehouse line with a mortgage lending group;
total line, $15,000,000; advances under the
line bear interest at the Wall Street
Journal published prime rate of U.S. money
center commercial banks plus 1.5% (9.5% at
December 31, 1999); the Company is required
to maintain a cash pledging account;
restricted cash at December 31, 1999 under
the pledge agreement was $210,169 $ 13,014,121
Warehouse line with a bank; total line,
$15,000,000; advances under the line bear
interest at the one month LIBOR rate plus
4% (10.48% at December 31, 1999); maturity
date May 15, 2000; renewable annually at
the lender's discretion 1,627,393
Warehouse line with a bank; total line,
$500,000; advances under the line bear
interest at the note rate of the
originated mortgage (7.25% to 8.37% at
December 31, 1999); this facility matures
March 2000 481,723
Warehouse line with a bank; total line,
$400,000; advances under the line bear
interest at the note rate of the originated
mortgage (8.5% at December 31, 1999); this
facility matures May 2000 84,211
Warehouse line with a bank; total line
$10,000,000; advances under the line bear
interest at the lender's prime rate plus a
margin determined by the lender's fee and
cost schedule in effect on the closing date
of the advance (9.75% at December 31,
1999); line may be terminated by bank at
bank's discretion 488,569
Warehouse line with a bank; total line
$2,886,334; advances under the line bear
interest at the lender's prime rate plus
the applicable margin determined by the
lender's fee schedule (10.5% at December
31, 1999); due on demand 2,886,334
------------
$ 18,582,351
============
F-33
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
10. Notes and advances payable:
At December 31, 1999 and 1998, notes and advances payable consist of the
following:
1999 1998
---------- ----------
Related parties:
Notes payable to affiliates; interest at 8%;
unsecured; notes mature at various dates
through December 2000 $ 542,000
Advances payable to affiliate, non-interest
bearing, due on demand 240,000
Notes payable to officers; interest at 12%;
unsecured; due on demand 50,000 $ 142,328
---------- ----------
832,000 142,328
---------- ----------
Others:
Note payable to bank; interest at 18%;
unsecured; originally due November 1999;
due on demand 477,000
Notes payable to individuals; interest rates
ranging from 8% to 18%, unsecured; notes
mature at various dates through August
2000; at December 31, 1999, $454,473 of the
notes payable were in default 723,160 220,000
Note payable to bank; interest at 1.5% over
bank's prime rate (10% at December 31,
1999) loan is collateralized by property
and equipment 250,000
Capital lease obligations, maturities at
various dates through October 2002 398,391
Other 93,403
---------- ----------
1,941,954 220,000
---------- ----------
$2,773,954 $ 362,328
========== ==========
F-34
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
11. Commitments and contingencies:
Leases:
The Company leases its Florida corporate facilities from a related entity
under a non-cancelable operating lease which expires in September 2003.
The Company also leases production offices in other states under
non-cancellable operating leases which expire through February 2004.
Future minimum lease payments under these operating leases are as
follows:
Year ending Related
December 31, parties Others Total
----------- ----------- ----------- -----------
2000 $ 155,000 $ 335,000 $ 490,000
2001 155,000 181,000 336,000
2002 104,000 81,000 185,000
2003 47,000 47,000
2004 3,000 3,000
----------- ----------- -----------
$ 414,000 $ 647,000 $ 1,061,000
=========== =========== ===========
In addition, the Company leases office space in Colorado on a
month-to-month basis for $2,500 per month from Beacon Investments, a
partnership owned by the Company's president.
Total rent expense for the years ended December 31, 1999, 1998 and 1997 was
approximately $272,000, $30,000 and $30,000, respectively.
The Company has also entered into certain capital lease agreements. The
capitalized cost of all assets under capital lease obligations is
$766,609, less accumulated depreciation of $277,552 at December 31, 1999,
and is included in furniture, fixtures and equipment in the accompanying
financial statements. Deprecation expense incurred on these leased assets
during the year ended December 31, 1999 was $68,500.
The future minimum lease payments under capital leases and the net present
value of the future minimum lease payments are as follows:
Year ending
December 31,
------------
2000 $ 225,000
2001 205,000
2002 39,000
-----------
Total lease payments 469,000
Amount representing interest (71,000)
-----------
$ 398,000
===========
F-35
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
11. Commitments and contingencies:
Litigation:
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse impact
either individually or in the aggregate on consolidated results of
operations, financial position or cash flows of the Company.
Indemnification and mortgage loan repurchases:
Under the terms of the Company's various agreements with third party
investors who purchase mortgage loans from the Company in the secondary
market, the Company may be required to indemnify the investor for certain
losses as a result of the mortgage loan borrower's non-performance.
Additionally, under certain circumstances, the Company may be required to
repurchase loans previously sold. Management believes it has made
adequate provision for these items, which is included in the mortgage
loans held for sale less the loan loss reserve.
Minimum regulatory capital requirements:
FBMS is subject to various regulatory capital requirements administered by
the various state banking agencies in certain states in which the Company
is licensed to do business. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material
effect on the Company's consolidated results of operations, financial
position and/or cash flows. At December 31, 1999, FBMS is not in
compliance with all regulatory requirements in certain states.
12. Off-balance sheet risk and concentrations of credit risk:
During 1998 and 1997, the Company was party to financial instruments with
off-balance-sheet risk in the normal course of business to meet financing
needs of the portfolio companies. These financial instruments consisted
primarily of financial guarantees including pledges of the Company's
investment portfolio. These instruments involved, to varying degrees,
elements of credit risk in excess of the amount recognized in the
financial statements.
At December 31, 1998, the Company's primary concentration of credit risk
related to its investments in certain portfolio companies, certain of
which were highly leveraged companies within the United States and which
were involved in the sporting goods and manufacturing industries.
Consideration was given to the financial position of these portfolio
companies when determining the appropriate fair values at December 31,
1998 and 1997.
13. Income taxes:
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
F-36
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
13. Income taxes (continued):
The Company did not incur income tax expense for the year ended December
31, 1999. The difference between the expected tax benefit computed at the
federal statutory income tax rate of 34% and the effective tax rate for
the year ended December 31, 1999 was due primarily to the tax effect of
the valuation allowance. The provision (benefit) for income taxes for the
years ended December 31, 1998, and 1997 is as follows:
1998 1997
----------- -----------
Current:
Federal and state $ - $ (56,307)
----------- -----------
Deferred:
Accrued unpaid bonus (48,930)
Bad debt expense 93,948
Other 63,180 41,224
----------- -----------
63,180 86,242
----------- -----------
Net tax provision $ 63,180 $ 29,935
=========== ===========
The following is a summary of the Company's deferred tax assets and
liabilities at December 31, 1999 and 1998:
1998 1997
----------- -----------
Deferred tax assets:
Accrued items not currently deductible $ 281,260 $ 263,140
Tax benefit of unrealized loss
on investments 465,390 431,361
Allowance for loan losses 592,690
Net operating loss carryforwards 2,531,000
----------- -----------
Total deferred tax assets 3,870,340 694,501
Valuation allowance (3,870,340) (694,501)
----------- -----------
Net deferred tax asset (liability) $ - $ -
=========== ===========
Net operating loss carryforwards of approximately $7,444,000 are
available to offset future taxable income, if any, through 2019. The
net operating loss carryforwards may be subject to certain limitations
due to the FBMS acquisition and other transactions. A valuation
allowance has been provided to reduce the deferred tax assets, as
realization of the assets is not assured.
F-37
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
14. Related party transactions:
Bonuses to officers:
In November 1989, the Board of Directors adopted a bonus arrangement
whereby the Company's President is entitled to an annual bonus equal to
3% of the Company's total assets as of each year end. All bonuses are
paid out of the Company's cash flow. In August 1998, the Company's Board
of Directors approved a new bonus arrangement with the Company's
president, with the annual bonus to be calculated quarterly based on a
combination of 1% of the Company's assets and 5% of the increase in the
market value of the Company's common stock each quarter. The new bonus
arrangement is effective January 1, 1998. The bonus accrual at December
31, 1998 was adjusted to reflect the terms of the new bonus arrangement.
The unpaid portion of these bonuses was $454,235 and $676,168 at December
31, 1999 and 1998, respectively. During 1997, the Company's corporate
secretary received a bonus of $6,744.
Directors' fees:
During 1999, 1998 ,and 1997, the Company paid $12,500 to each of its two
outside directors for their attendance at meetings held each year.
15. Benefit plans:
Officer retirement plan:
As part of the President's total compensation package, the Company
purchased a whole life insurance policy on April 1, 1992 in order to
provide for the President's retirement. The Company pays an annual
premium on behalf of the President and also reimburses the President each
year for the personal income tax on this additional compensation. Should
the Present die prior to age sixty-five, the policy pays a $2,600,000
death benefit to his beneficiary. Upon retirement, provided the president
is at least sixty-five, the cash surrender value and death benefit rider
become the President's property. For the years ended December 31, 1999,
1998, and 1997, the Company paid $105,413 per year in premiums and
$59,586 per year of additional compensation to the President for related
income taxes.
Employee benefit plan:
FBMS has a defined contribution plan covering all full-time employees of
FBMS who have three months of service and are at least twenty-one years
of age. For the period ended December 31, 1999, the FBMS matching
contribution equaled 50% of the portion of the participant's salary
reduction which does not exceed 2% of the participant's compensation .
The Company incurred contribution expense of $21,200 for the period ended
December 31, 1999.
F-38
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
16. Fair value of financial instruments:
The fair value of a financial instrument is the current amount that would
be exchanged between willing parties, other than in a forced liquidation.
Fair value is best determined based upon quoted market prices. However,
in many instances, there are no quoted market prices for the Company's
various financial instruments. In cases where quoted market prices are
not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected
by the assumptions used, including the discount rate and estimates of
future cash flows. Accordingly, the fair value estimates may not be
realized in an immediate settlement of the instrument. SFAS No. 107
excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate fair value
amounts presented may not necessarily represent the underlying fair value
of the Company.
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
Mortgage loans held for sale:
The fair value of mortgage loans held for sale is based on commitments on
hand from investors or prevailing market prices. For variable-rate loans
that re-price frequently and with no significant change in credit risk,
fair values are based on carrying values. Fair values for certain
mortgage loans are based on quoted market prices of similar loans sold
(adjusted for differences in loan characteristics). Fair values for
non-performing loans are estimated using discounted cash flow analyses or
underlying collateral values, where applicable. The fair value of
mortgage loans held for sale at December 31, 1999 was $14,923,000
(carrying value of $14,787,080).
Receivables:
The fair values of notes receivable from non-related parties approximates
their carrying values because of the short maturities of the notes. The
fair values of notes receivable from related parties are not practicable
to estimate, based upon the related party nature of the underlying
transactions.
Warehouse and other notes and advances payable:
The fair values of warehouse notes payable and notes payable to
non-related parties approximates their carrying values because of the
short maturities of the notes. The fair values of notes payable to
related parties are not practicable to estimate, based upon the related
party nature of the underlying transactions.
Other financial instruments:
The fair value of other financial instruments (cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses) approximate
their carrying amount because of the short maturity of those instruments.
F-39
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
17. Subsidiary stock transactions:
During 1999, in connection with the Company's acquisition of FBMS,
nMortgage issued 35,050 shares of its Series A , 5% convertible preferred
stock and 400 shares of Series B, 5% convertible preferred stock for
$3,966,070. The amounts recorded as subsidiary preferred stock have been
presented as minority interest at December 31, 1999. Minority interest
also includes shares of FBMS, 12% cumulative, callable preferred stock of
$2,507,000.
In connection with VP Sports' private placement of common stock, the
Company's underlying equity in its investment increased by $1,622,605,
which was accounted for as an increase to paid-in capital in 1999.
18. Stockholders' equity:
Series A, B, and C convertible preferred stock:
In January and February 1999, the Company issued a total of 2,100 shares of
6% Series A, B, and C convertible preferred stock for $1,000 cash per
share, which is the stated value per share. Each series of stock was
convertible into common stock at any time by the holders at a conversion
price equal to 65% of the average closing bid price of the Company's
common stock as specified in the agreement.
Because this preferred stock contained an immediate beneficial conversion
feature, both additional paid-in capital and the accumulated deficit were
increased by $1,333,098, the amount of the discount due to this
beneficial conversion feature. The holders were entitled to receive a
cumulative annual dividend of $60 per share, payable quarterly, and had
preference to any other dividends which might have been paid by the
Company. The dividend was payable either in cash or in shares of the
Company's common stock, at the Company's option. The preferred
stockholders also received warrants to purchase a total of 250,000 shares
of the Company's common stock at 120% of the market price as of the grant
date. In addition, the placement agent was issued 20,000 shares of the
Company's common stock, valued at $200,000 in exchange for services in
connection with the preferred stock sales.
In April 1999 all 2,100 shares of the Series A, B and C convertible
preferred stock, plus accrued dividends on those shares, were converted
into approximately 320,528 shares of common stock, at an average
conversion price of $6.63 per share.
Series D convertible preferred stock:
In May 1999, the Company reached an agreement with an accredited investor
to sell 3,500 shares of Series D, 6% convertible preferred stock (the
"Series D Preferred Stock") for $1,000 cash per share, which is the
stated value per share. In August 1999, the Company issued a total of
1,200 shares of the Series D Preferred Stock in consideration for
$1,200,000. The balance of $2,300,000 for the remaining 2,300 shares of
Series D Preferred Stock is being held in escrow pending authorization by
the Company's stockholders of a sufficient number of shares of the
Company's common stock to cover those shares underlying the Series D
Preferred Stock.
The holder of the Series D Preferred Stock is entitled to 6% annual
dividends, payable quarterly. The Series D Preferred Stock contains a
liquidation preference equal to the sum of the stated value of each share
plus an amount equal to 30% of the stated value plus the aggregate of all
accrued and unpaid dividends on each share of Series D Preferred Stock
until the most recent dividend payment date or date of liquidation,
dissolution or winding up of the Company.
F-40
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
18. Stockholders' equity (continued):
Series D convertible preferred stock (continued):
The Series D Preferred Stock is convertible into common stock at any time
at a conversion price per share of common stock, equal to 65% of the
average closing bid price of the Company's common stock as specified in
the agreement. Because this preferred stock contained an immediate
beneficial conversion feature, both additional paid-in capital and the
accumulated deficit were increased by $1,884,615, the amount of discount
resulting form the beneficial conversion feature. The holder is entitled
to receive a cumulative annual dividend of $60 per share, payable
quarterly, and has preference to any other dividends which might be paid
by the Company. The dividend is payable either in cash or in shares of
the Company's common stock, at the discretion of the Company.
Series E convertible preferred stock:
In connection with the FBMS acquisition, the Company issued 250 shares of
Series E Convertible Preferred Stock (the "Series E Preferred Stock")
valued at approximately $2,531,000, and contingent consideration
consisting of up to 750 shares of Series E Preferred Stock, which include
potential "Bonus Shares" issuable by the Company, as specified in the
Acquisition Agreement.
The holders of the Series E Preferred Stock are not entitled to dividends,
do not have a liquidation preference and do not have voting rights. The
Series E Preferred stock, if fully issued, automatically converts to
1,000,000 shares of common stock upon the approval of an increase in the
authorized shares of common stock from 7,500,000 shares to 50,000,000
shares, or the subsequent merger of the Company with or into another
company, or the sale of substantially all the Company's assets.
Common stock:
During 1999, the Company sold 350,312 shares of common stock in a private
placement for cash of $3.25 per share. In addition a note holder
exchanged a note and accrued interest totaling $158,236 for 48,688 shares
of the Company's common stock.
During 1999, employees and officers of the Company exercised options to
purchase 665,600 shares of common stock for $2,094,546. In addition,
337,500 shares were issued pursuant to warrant exercises for $2,613,675.
F-41
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
18. Stockholders' equity (continued):
Common stock (continued):
During 1998, the Company sold to an officer, 10,000 shares of common stock
at $1.16 per share. Another 139,200 shares were sold to outside directors
at $1.16 per share. Common stock sales to unrelated individuals during
1998 were as follows:
Share price Number sold
----------- -----------
$ .75 330,000
$1.16 350,000
$3.25 306,000
In March 1998, the Company's Board of Directors authorized a private
placement offering of up to 500,000 shares of the Company's common stock
at $1.16 per share. As of the close of the private placement on May 21,
1998, 499,200 shares were sold.
On June 29, 1998, the Company's Board of Directors authorized an additional
private placement of up to 750,000 shares of the Company's common stock
at $3.25 per share. As of December 31, 1998, 306,000 shares were sold
under this placement.
During December of 1997, the Company's president purchased 270,000 shares
of common stock at $.75 each.
Stock options and warrants:
In 1993, the Company adopted two stock option plans: the 1993 Stock option
Plan (the "Option Plan") and the 1993 Stock Option Plan for Non-Employee
Directors (the "Directors' Plan"). In January 1999, the Company's Board
of Directors adopted an incentive stock option plan covering up to
1,000,000 shares of the Company's common stock. During the year ended
December 31, 1999, the Company granted incentive stock options for 29,000
shares and 8,000 shares to the Company's officers and employees,
respectively. In addition, non-statutory stock options for 472,000 and
491,000 shares were granted to officers and directors, respectively. All
options were granted at a price of $6.75 per share which represents fair
market value at the grant date.
F-42
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
18. Stockholders' equity (continued):
Stock options and warrants:
In 1999 and 1998, the Board of Directors granted the following stock
options to officers and employees of the Company:
Number Option
Option type Grantee of shares price
----------- -------- --------- ------
1999: Inventive Officers 477,700 $ 6.75
Non-qualified Officers 522,300 $ 6.75
---------
1,000,000
=========
1998: Incentive Officer 62,000 $ 3.19
Non-qualified Officers 447,655 $ 3.19
Non-qualified Employees 28,800 $ 3.19
----------
538,455
==========
A summary of the status of the Company's stock options and weighted average
exercise prices is as follows:
1993 Plans 1999 Plan Total
-------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
-------------------------------------------------------------------------
January 1, 1997 311,545 $3.00 311,545 $3.00
Granted
Exercised
Canceled/expired
-------- ----- --------- ----- --------- -----
December 31, 1997 311,545 3.00 311,545 3.00
Granted 538,455 3.19 538,455 3.19
Exercised (98,000) 3.05 (98,000) 3.05
Canceled/expired
-------- ----- --------- ----- --------- -----
December 31, 1998 752,000 3.13 752,000 3.13
Granted 1,000,000 $6.75 1,000,000 6.75
Exercised (665,600) 3.19 (665,600) 3.19
Canceled/expired
-------- ----- --------- ----- --------- -----
December 31, 1999 86,400 $3.19 1,000,000 $6.75 1,086,400 $6.46
======== ===== ========= ===== ========= =====
Options outstanding and exercisable at:
December 31, 1998 749,000 $3.13
December 31, 1999 1,086,400 $6.46
F-43
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
18. Stockholders' equity (continued):
Stock options and warrants (continued):
Options exercisable at December 31, 1999 expire from 2004 through 2005. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates consistent with the
provisions of SFAS No. 123, the Company's net loss and net loss per
common share would have increased to the pro forma amounts indicated
below:
1999 1998
------------ ------------
Net loss applicable to common stockholders/
decrease in net assets, as reported $(10,985,572) $(1,981,299)
Net loss applicable to common stockholders/
decrease in net assets, pro forma $(14,416,572) $(2,724,153)
Net loss/decrease in net assets per
share, as reported $ (1.64) $ (.45)
Net loss/decrease in net assets per
share, pro forma $ (2.15) $ (.62)
The fair value of each option granted during 1999 was estimated on the date
of grant using the Black-Scholes option-pricing model. The following
assumptions were utilized:
1999 1998
----------- -----------
Expected dividend yield 0 0
Expected stock price volatility 71% 83%
Risk-free interest rate 6% 6.5%
Expected life of options 3 years 5 years
In connection with the Company's private placements of common and preferred
stock in 1999, the Company issued warrants to purchase 397,500 shares of
common stock at a weighted average exercise price of $7.99 per share.
During 1999, 337,500 of these warrants were exercised, and 60,000
warrants remain outstanding and exercisable at a weighted average
exercise price of $9.82 at December 31, 1999. These warrants expire in
February 2002.
In 1999, a warrant to purchase 50,000 shares of the Company's common stock
at $3.75 per share was granted to an unrelated entity for services valued
at $150,000.
F-44
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
19. Operating segments:
In 1999, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, which establishes reporting and
disclosure standards for an enterprise's operating segments. Operating
segments are defined as components of an enterprise for which separate
financial information is available and regularly reviewed by the
Company's senior management.
Beginning in 1999, in connection with the Company's acquisitions, the
Company has three reportable segments: The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. The Company evaluates performance based on operating
earnings of the respective business units. As of and during the year
ended December 31, 1999, the segment results were as follows:
<TABLE>
<CAPTION>
Sporting
goods/ Corporate activities
Financial product ------------------------
services related Investments Other Total
----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $ 1,547,754 $ 738,456 $ 133,054 $ 2,419,264
Segment loss (4,153,125) (800,997) $ (571,257) (2,191,180) (7,716,559)
Total assets 35,851,114 1,211,539 2,915,435 1,619,349 41,744,937
Capital
expenditures 135,329 122,335 20,361 278,025
Depreciation and
amortization 737,629 87,954 12,776 838,359
</TABLE>
20. Fourth-quarter adjustments:
During the fourth quarter of 1999, in connection with the Company's
evaluation of its investments in available-for-sale securities,
management determined that a decline in the value of its investment in
RDM Sports Group, Inc. was other than temporary. As a result of this
determination, the Company recorded an adjustment to decrease the
unrealized loss of $1,201,355 on this investment, previously recorded as
a component of stockholders' equity, and recorded a realized loss of
$1,201,355 in the 1999 statement of operations. The Company also recorded
a $70,000 impairment charge related to cost basis investments in the
fourth quarter
In addition, management became aware of certain loan losses that had not
been adequately provided for by FBMS at the date of acquisition the
allocation of the FBMS purchase price during the fourth quarter of 1999,
and determined that an adjustment was necessary to more reasonably
allocate the excess of consideration over the net tangible assets
acquired. The Company recorded an adjustment to increase goodwill by
approximately $9,700,000 and decrease the amount of net tangible assets
acquired.
F-45
<PAGE>
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
21. Proposed business transactions:
Proposed sale of nMortgage, Inc.:
On September 22, 1999, the Company entered into a letter of intent, whereby
all of the outstanding common stock of nMortgage is to be acquired by
Innovative Gaming Corporation of America ("IGCA"), an SEC reporting
company whose common stock trades on the Nasdaq SmallCap Market. Under
the terms of this proposed transaction, in exchange for all outstanding
shares of nMortgage, Inc., the Company and the other nMortgage
shareholders are to receive approximately 46,000,000 shares of IGCA
common stock, assuming that there will be approximately 16,000,000 shares
of IGCA common stock outstanding on a fully-diluted basis, before the
transaction.
IGCA was formed in 1991 to develop, manufacture, market and distribute
specialty video gaming machines. As a condition of the proposed
transaction, IGCA is to dispose of its gaming assets, resulting in
nMortgage as the sole business operation of IGCA.
There are a number of material conditions that must be satisfied prior to
the completion of this transaction, including any required approval by
the Company's shareholders, the disposal of IGCA's gaming assets, the
negotiation and execution of a definitive agreement between the Company
and IGCA, and approval from all governmental bodies or agencies and
regulatory authorities. There is no assurance that the conditions
summarized above will be satisfied, or that the transaction will occur
consistent with the terms outlined above.
Proposed transactions with First TeleBanc Corp.:
On May 4, 1999, the Company entered into a definitive agreement whereby
First TeleBanc Corp. ("First TeleBanc"), a single bank holding company
based in Boca Raton, Florida, is to merge with and into the Company, with
the Company being the surviving corporation (the "TeleBanc Merger").
First TeleBanc owns all of the issued and outstanding stock of 1st
National Bank, a national banking association. Consummation of the
TeleBanc Merger is subject to a number of conditions, including approval
by the Federal Reserve Bank of Atlanta, Georgia, the distribution of
certain of the Company's assets to a new wholly-owned subsidiary and the
"spin-off" of that subsidiary, and the approval of the TeleBanc Merger by
the Company's shareholders.
F-46
<PAGE>
EQUITEX, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II
Column A Column B Column C Column D Column E
Charged
Balance Charged to other Balance
beginning to costs/ accounts- at end
of period expenses describe Deductions of period
--------- -------- -------- ---------- ---------
FOR THE YEAR ENDED
DECEMBER 31, 1999:
Allowance for
uncollectible
accounts:
Mortgage loans held
for sale $1,386,000 - - - $1,386,000
Mortgage loans
receivable 57,500 - - - 57,500
Notes receivable 100 45,601 10,874(*) - 56,575
Interest receivable 1,830 - - (1,765) 65
Accounts receivable 57,705 - - (9,109) 48,596
FOR THE YEAR ENDED
DECEMBER 31, 1998:
Allowance for
uncollectible
accounts:
Notes receivable $ 40,293 $ - $ - $ (40,193) $ 100
Interest receivable 35 1,795 - - 1,830
Accounts receivable 53,742 3,936 - - 57,705
FOR THE YEAR ENDED
DECEMBER 31, 1997:
Allowance for
uncollectible
accounts:
Notes receivable $ 100 $ 40,193 $ - $ - $ 40,293
Interest receivable 35 - - - 35
Accounts receivable 2,943 50,799 - - 53,742
(*) Amount was reclassified between the allowance for uncollectible interest and
accounts receivable.
S-1
<PAGE>
EQUITEX, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated balance sheet and statements of
operations present the pro forma consolidated financial position and operations
of Equitex, Inc. at December 31,1998 and for the year then ended. Because the
Company withdrew its election to be a BDC on January 4, 1999, this unaudited pro
forma information reflects the December 31, 1998 financial information as if the
Company were an operating company rather thana BDC for all of 1998. As a result
of being an operating company, the 1998 pro forma unaudited financial
information is presented on a consolidated basis and includes the accounts of
Equitex, Inc., its wholly-owned subsidiary First Teleservices Corporation, which
was acquired in August 1998 and two majority-owned subsidiaries, VP Sports, Inc.
and Triumph Sports, Inc., which were formed in December 1997 and January 1998,
respectively. Pro forma adjustments were made for revaluing certain investments
from fair market value to cost, consolidating three entities versus carrying
them as investments at fair value, eliminating all intercompany receivables,
payables, income and expense, and recording gains and losses on trading
securities.
EQUITEX, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998 (UNAUDITED)
(As if operating company)
ASSETS
Current assets:
Receivables ............................................. $ 71,090
Inventories ............................................. 119,698
Other current assets .................................... 5,530
Notes receivable ........................................ 101,948
Investments ............................................. 1,467,689
-----------
1,765,955
Net fixed assets ............................................. 153,876
Other assets:
Investment in First TeleBanc ............................ 725,000
Other investments ....................................... 195,000
Intangible assets ....................................... 975,746
Deposits and other ...................................... 196,619
-----------
$ 4,012,196
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable ........................................... $ 411,575
Accounts payable and other accrued liabilities .......... 996,552
Accrued bonus to officer ................................ 676,168
-----------
2,084,295
Minority interest ............................................ 215,429
STOCKHOLDERS' EQUITY
Common stock ............................................ 108,353
Additional paid-in capital .............................. 7,368,624
Accumulated comprehensive other income .................. 2,732
Accumulated deficit ..................................... (5,653,200)
Less: treasury stock at cost ............................ (114,037)
-----------
$ 4,012,196
===========
<PAGE>
EQUITEX, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 (UNAUDITED)
(As if operating company)
REVENUES
Sales, consulting and other fees ........................ $ 574,425
Interest and dividend income ............................ 7,052
Gain (loss) on trading securities ....................... 105,367
-----------
686,844
EXPENSES
Cost of goods sold ...................................... 201,898
Advertising and promotion ............................... 54,088
Interest ................................................ 112,040
Bad debt expense ........................................ (34,435)
Depreciation and amortization ........................... 37,512
General and administrative .............................. 3,178,710
-----------
3,549,813
-----------
Income (loss) before minority interest
and taxes ............................................. (2,862,969)
Minority interest in income (loss) ...................... 34,571
-----------
Income (loss) before income taxes ....................... (2,828,398)
Provision for income taxes - deferred ................... (63,180)
-----------
Net income (loss) ....................................... (2,891,578)
Other comprehensive income, net of tax
Unrealized holding gains (losses) on
securities arising during period ..................... 2,732
-----------
Comprehensive income (loss) ............................. $(2,888,846)
===========
Basic and diluted net income (loss) per
common share .......................................... $ (.65)
===========
Weighted average number of common shares ................ 4,416,988
===========
SUBSIDIARIES OF EQUITEX, INC.
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
nMortgage, Inc. Delaware
First TeleServices Corp. Delaware
Triumph Sports Group, Inc. Delaware
VP Sports, Inc. Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1999, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 783,606
<SECURITIES> 1,767,537
<RECEIVABLES> 1,625,717
<ALLOWANCES> 162,336
<INVENTORY> 167,346
<CURRENT-ASSETS> 0
<PP&E> 1,948,082
<DEPRECIATION> 890,050
<TOTAL-ASSETS> 41,744,937
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
1,450,000
<COMMON> 142,806
<OTHER-SE> 7,759,606
<TOTAL-LIABILITY-AND-EQUITY> 41,744,937
<SALES> 738,456
<TOTAL-REVENUES> 2,419,264
<CGS> 0
<TOTAL-COSTS> 8,350,767
<OTHER-EXPENSES> 984,476
<LOSS-PROVISION> 45,601
<INTEREST-EXPENSE> 795,550
<INCOME-PRETAX> (7,716,559)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,716,559)
<EPS-BASIC> (1.64)
<EPS-DILUTED> (1.64)
</TABLE>
