SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. 3)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Equitex, Inc.
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(Name of Registrant as Specified in its Charter)
John W. Kellogg, Esq.
Gerald Raskin, Esq.
Friedlob Sanderson Raskin Paulson & Tourtillott, LLC
1400 Glenarm Place
Denver, Colorado 80111
(303) 571-1400
(303) 595-3970
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(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11
(1) Title of each class of securities to which transaction applies:
______________________________________________________________
(2) Aggregate number of securities to which transaction applies:
______________________________________________________________
(3) Per unit price or other underlying value of transaction computed
pursuat to Exchange Act Rule 0-11:____________________________
(4) Proposed Maximum aggregate value of transaction:______________
(5) Total Fee Paid:_______________________________________________
[ ] Fee previously paid with preliminary materials
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by regitration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:__________________________________
(2) Form, Schedule or Registration Statement No.:____________
(3) Filing Party:____________________________________________
(4) Date Filed:______________________________________________
Equitex, Inc.
7315 East Peakview Avenue
Englewood, Colorado 80111
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Notice of Special Meeting of Stockholders
To Be Held on __________ __, 2000
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________ __, 2000
To the Stockholders of Equitex, Inc.
A Special Meeting of Stockholders of Equitex, Inc., a Delaware corporation
(the "Company"), will be held at 2401 PGA Blvd., Suite 190, Palm Beach Gardens,
Florida 33410, on __________ __, 2000 at ___ a.m. Eastern Standard Time, to
consider and take action on:
1. A proposal to amend Paragraph 4 of the Certificate of Incorporation to
increase the number of authorized shares of the Company's common stock, $.02 par
value, from 7,500,000 shares to 50,000,000 shares. (Passage of this proposal
requires the affirmative vote of a majority of the outstanding stock entitled to
vote thereon, and a majority of the outstanding stock of each class entitled to
vote thereon as a class.)
2. Such other business as may properly come before the meeting, or any
adjournment or adjournments thereof.
The discussion of the proposal of the Board of Directors set forth above is
intended only as a summary, and is qualified in its entirety by the information
relating to the proposals set forth in the accompanying Proxy Statement.
Only holders of record of Common Stock at the close of business on January
___,2000 will be entitled to notice of and to vote at this Special Meeting, or
any postponements or adjournments thereof.
By Order of the Board of Directors:
Thomas B. Olson
Secretary
YOU ARE URGED TO DATE, SIGN AND PROMPTLY RETURN YOUR PROXY SO THAT YOUR
SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES. THE GIVING OF SUCH PROXY
DOES NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IF YOU ATTEND THE MEETING.
Your vote is important
Equitex, Inc.
7315 East Peakview Avenue
Englewood, Colorado 80111
Proxy Statement
Special Meeting of Stockholders
To Be Held On __________ __, 2000
___________ __, 2000
THIS PROXY STATEMENT IS FURNISHED IN CONNECTION WITH A SOLICITATION OF PROXIES
(IN THE FORM ENCLOSED) BY THE BOARD OF DIRECTORS OF EQUITEX, INC. (THE "COMPANY"
OR "EQUITEX") TO BE USED AT A SPECIAL MEETING OF STOCKHOLDERS AT ___ A.M.
EASTERN STANDARD TIME, ON __________ ___, 2000 AT 2401 PGA BLVD., SUITE 190,
PALM BEACH GARDENS, FLORIDA 33410. THE PROXY AND PROXY STATEMENT WILL BE MAILED
TO STOCKHOLDERS ON OR ABOUT ________ __, 2000.
FORWARD-LOOKING STATEMENTS
THIS PROXY STATEMENT MAY CONTAIN CERTAIN "FORWARD-LOOKING" STATEMENTS AS
SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 OR
BY THE SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND
RELEASES, WHICH REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEFS, INCLUDING BUT
NOT LIMITED TO, STATEMENTS CONCERNING THE COMPANY'S OPERATIONS, ECONOMIC
PERFORMANCE, FINANCIAL CONDITION, GROWTH AND ACQUISITION STRATEGIES,
INVESTMENTS, AND FUTURE OPERATIONAL PLANS. FOR THIS PURPOSE, ANY STATEMENTS
CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE
FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING,
WORDS SUCH AS "MAY," "WILL," "EXPECT," "BELIEVE," "ANTICIPATE," "INTEND,"
"COULD," "ESTIMATE," "MIGHT," OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS
THEREOF OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. THESE STATEMENTS, BY THEIR NATURE, INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND THE COMPANY'S CONTROL, AND ACTUAL
RESULTS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT FACTORS,
INCLUDING UNCERTAINTY RELATED TO ACQUISITIONS, GOVERNMENTAL REGULATION, MANAGING
AND MAINTAINING GROWTH, VOLATILITY OF STOCK PRICES AND ANY OTHER FACTORS
DISCUSSED IN THIS AND OTHER COMPANY FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and
other information filed with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, NW, Washington, DC 20549 or at the Regional Offices of the Commission
which are located as follows: Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th
Floor, New York, New York 10048. Copies of such material can also be obtained
from the Commission at prescribed rates. Written requests for such material
should be addressed to the Public Reference Section, Securities and Exchange
Commission, 450 Fifth Street, NW, Washington, DC 20549. The Commission maintains
a Web site that contains reports, proxy statements and other information filed
electronically by the Company with the Commission which can be accessed over the
internet at http://www.sec.gov.
DOCUMENTS INCORPORATED BY REFERENCE
THIS PROXY STATEMENT INCORPORATES BY REFERENCE DOCUMENTS RELATING TO THE
COMPANY WHICH ARE NOT INCLUDED IN OR DELIVERED WITH THESE PROXY MATERIALS.
DOCUMENTS RELATING TO THE COMPANY (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS
SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE) ARE AVAILABLE TO ANY
PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT IS
DELIVERED, ON WRITTEN OR ORAL REQUEST, WITHOUT CHARGE, FROM EQUITEX, INC., 7315
EAST PEAKVIEW AVENUE, ENGLEWOOD, COLORADO 80111, ATTENTION: SECRETARY, TELEPHONE
(303) 796-8940. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY SUCH
REQUEST SHOULD BE MADE BY _______________ ___, 2000. COPIES OF DOCUMENTS SO
REQUESTED WILL BE SENT BY FIRST CLASS MAIL, POSTAGE PAID WITHIN ONE BUSINESS DAY
OF THE RECEIPT OF SUCH REQUEST.
The following documents of the Company are incorporated by reference
herein:
1. Annual report on Form 10-KSB, as amended, for the year ended December
31, 1998;
2. Quarterly Report on Form 10-QSB for the quarter ended March 31, 1999;
3. Quarterly Report on Form 10-QSB for the quarter ended June 30, 1999;
4. Quarterly Report on Form 10-QSB for the quarter ended September 30,
1999; and
5. The description of Equitex, Inc. Common Stock contained in its
Registration Statement on Form 8-A (Commission File No. 0-12374) as filed
with the Commission on July 21, 1983.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act after the date hereof and prior
to the date of the Meeting shall be deemed to be incorporated by reference
herein and shall be a part hereof from the date of filing of such documents. Any
statements contained in a document incorporated by reference
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herein or contained in this Proxy Statement shall be deemed to be modified or
superseded for purposes hereof to the extent that a statement contained herein
(or in any other subsequently filed document which also is incorporated by
reference herein) modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed to constitute a part hereof except as
so modified or superseded.
REVOCABILITY OF PROXY
If the enclosed Proxy is executed and returned, it will be voted on the
proposals as indicated by the stockholder. The Proxy may be revoked by the
stockholder at any time prior to its use by notice in writing to the Secretary
of the Company, by executing a later dated proxy and delivering it to the
Company prior to the meeting or by voting in person at the meeting.
SOLICITATION
The cost of preparing, assembling and mailing the Notice of Meeting, Proxy
Statement and Proxy (the "Proxy Materials"), miscellaneous costs with respect to
the Proxy Materials and solicitation of the Proxies will be paid by the Company.
The Company also may use the services of its directors, officers and employees
to solicit Proxies, personally or by telephone and tele graph, but at no
additional salary or compensation. The Company intends to request banks,
brokerage houses and other custodians, nominees and fiduciaries to forward
copies of the Proxy Materials to those persons for whom they hold such shares
and request authority for the execution of the Proxies. The Company will
reimburse them for the reasonable out-of-pocket expenses incurred by them in so
doing.
VOTING SECURITIES
Holders of record of the Company's common stock, $.02 par value (the
"Common Stock"), at the close of business on January ____, 2000 (the "Record
Date") will be entitled to vote on all matters. On the Record Date, the Company
had outstanding _________ shares of Common Stock. The holders of all shares of
Common Stock are entitled to one vote per share. The Common Stock is the only
class of voting securities outstanding. One-third of the issued and outstanding
shares of the Common Stock entitled to vote, represented in person or by proxy,
constitutes a quorum at any stockholders' meeting. Passage of Proposal Number
One requires the affirmative vote of a majority of the outstanding stock
entitled to vote thereon, and a majority of the outstanding stock of each class
entitled to vote thereon as a class. Abstentions on a proposal will be counted
as votes against that proposal. Broker non-votes will not be counted as shares
represented at the meeting.
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SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
Set forth below is certain information as of December 31, 1999, with
respect to ownership of the Company's Common Stock held of record or
beneficially by (i) the Company's executive officers named in the summary
compensation table, (ii) each director of the Company, (iii) each person who
owns beneficially more than five percent of the Company's outstanding Common;
and (iv) all directors and executive officers as a group:
PERCENTAGE
NUMBER OF OWNED OF
NAME AND ADDRESS COMMON COMMON
OF BENEFICIAL OWNER STOCK OWNED (1) STOCK
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Henry Fong 1,154,544 (2) (3) 15.2%
7315 East Peakview Avenue
Englewood, Colorado 80111
Wayne W. Mills 475,000 (4) 6.7%
5020 Blake Road South
Edina, Minnesota 55436
Russell L. Casement 402,900 (5) 5.4%
1355 S. Colorado Blvd., Suite 320
Denver, Colorado 80222
Aaron L. Grunfeld 334,700 (6) 4.5%
10390 Santa Monica Blvd., Fourth Floor
Los Angeles, California 90025
All officers and directors
as a group (four persons) 1, 953,444 (7) 31.4%
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(1) The beneficial owners exercise sole voting and investment power.
(2) Includes 469,700 shares underlying options granted under the Company's 1999
Stock Option Plan.
(3) Includes 459,554 shares owned by a corporation in which Mr. Fong is an
officer and director.
(4) Based upon the stockholder's most recently filed Schedule 13G.
(5) Includes 36,400 shares underlying options granted under the Company's 1993
Stock Option Plan for Non- Employee Directors and 245,500 shares underlying
options granted under the Company's 1999 Stock Option Plan.
(6) Includes 50,000 shares underlying options granted under the Company's 1993
Stock Option Plan for Non- Employee Directors and 245,500 shares underlying
options granted under the Company's 1999 Stock Option Plan.
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(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 Company does not know of any arrangements, including the Company's
proposed acquisition of First TeleBanc Corp. as described under Proposal Number
One, the operation of which may, at a subsequent date, result in a change in
control of the Company.
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PROPOSAL NUMBER ONE
TO CHANGE PARAGRAPH 4 OF THE
CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK
NECESSARY TO COMPLETE THE PROPOSED TRANSACTIONS
The Board of Directors recommends an amendment to the Company's Certificate
of Incorporation to cause an increase in the number of authorized shares. A
condition to the completion of the proposed transactions with First TeleBanc
Corp. ("First TeleBanc"), described below, is approval of this proposal. In
connection with the First TeleBanc transactions, the Company anticipates issuing
approximately 9,100,000 shares of common stock in exchange for all of the
outstanding First TeleBanc shares. In addition, upon approval of this proposal,
the Company's Series E Convertible Preferred Stock issued in connection with the
acquisition of First Bankers Mortgage Services, Inc., described below, may
convert into approximately 1,000,000 shares of the Company's common stock .
The Certificate of Incorporation of the Company currently authorizes the
issuance of up to 7,500,000 shares of common stock with a par value of $0.02 per
share (the "Common Stock") and 2,000,000 shares of preferred stock with a par
value of $0.02 per share (the "Preferred Stock"). As of December 31, 1999, of
the 7,500,000 shares of common stock authorized, 7,090,293 shares were
outstanding and 1,306,400 shares of common stock are reserved for issuance upon
the exercise of outstanding options and warrants. See Options and Warrants on
page 10. As of December 31, 1999, of the 2,000,000 shares of preferred stock
authorized 1,200 shares of Series D 6% Convertible Preferred Stock and 250
shares of Series E Convertible Preferred Stock were outstanding.
The Board of Directors deems it advisable to amend the Certificate of
Incorporation to increase the number of authorized shares of Common Stock to
50,000,000 shares. A copy of Paragraph 4 of the Certificate of Incorporation as
it would read following adoption of this Proposal is included herewith as
Exhibit 1.
The additional shares of Common Stock would become part of the existing
class of Common Stock, and the additional shares, when issued, would have the
same rights and privileges as the shares of Common Stock now issued. There are
no preemptive rights relating to the Common Stock.
To the extent that any further issue of shares is made on other than a pro
rata basis to current stockholders, the present ownership of current
stockholders may be diluted.
If the proposed amendment is approved, the additional authorized shares
would be available for issuance by the Board of Directors for any proper
corporate purpose at any time
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without further stockholder approval except as otherwise required by applicable
law or securities exchange listing rules. Nonetheless, it is the intention of
the Board of Directors to use a portion of the additional shares to (i) be
issued in connection with the transactions with First TeleBanc Corp. and First
Bankers Mortgage Services, Inc., described below; (ii) for possible issuance in
connection with one or more equity financing; and, (iii) to issue shares
issuable pursuant to Company stock option plans.
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 on
Boca Raton, Florida, will 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 Boca Raton First National Bank, a
national banking association. As a result of the TeleBanc Merger, the Company
will issue to the First TeleBanc shareholders seven shares of Common Stock for
each outstanding share of First TeleBanc Class A Common Stock outstanding on the
closing date of the TeleBanc Merger, provided that neither the holders of the
Company's common stock nor the holders of the First TeleBanc Class A Common
Stock shall hold less than 42.5% of the number of shares of the Company's common
stock to be issued and outstanding immediately after the closing of the TeleBanc
Merger. Consummation of the TeleBanc Merger is subject to a number of
conditions, including: (i) approval by the Federal Reserve Bank of Atlanta,
Georgia of the Company's application to become a bank holding company under the
Bank Holding Company Act of 1956; (ii) the distribution of all of the Company's
business development company assets to a new wholly-owned subsidiary, Equitex
2000, Inc. ("E2000"), and the spin-off of E2000 to the Company's existing
shareholders as further described below (the "Spin-Off"); and (iii) the approval
of the TeleBanc Merger by the Company's shareholders. The Company will solicit
the approval of its shareholders for the TeleBanc Merger at a special meeting of
shareholders to be called later this year.
Financial statements of First TeleBanc as of and for the year ended
December 31, 1998 are attached hereto as Exhibit 2.
ACQUISITION OF FIRST BANKERS MORTGAGE SERVICES, INC.
On August 23, 1999, Company acquired First Bankers Mortgage Services, Inc.
("FBMS"). FBMS, a Florida corporation, is a full service mortgage banking
company headquartered in the Fort Lauderdale, Florida area. The Company acquired
all of the outstanding common stock of FBMS from its sole shareholder, Vincent
Muratore. The total aggregate purchase price for FBMS, was 1,000 shares of the
Company's Series E Convertible Preferred Stock (the "Series E Preferred Stock"),
250 shares of which were issued at closing and 750 shares of which are issuable
upon satisfaction of certain performance conditions. In addition, the purchase
price is subject to post-closing adjustments pursuant to the Agreement and Plan
of
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Reorganization, dated June 22, 1999, among, Equitex, Inc., First Bankers
Mortgage Services, Inc., Vincent Muratore and FBMS Acquisition Corp, as amended.
Under Delaware law the Company was not required to, and did not, seek
shareholder approval for this transaction.
The holders of the Series E Convertible Preferred Stock are not entitled to
dividends, do not have a liquidation preference and do not have voting rights.
Each outstanding share of Series E Convertible Preferred Stock automatically
converts to 1,000 shares of common stock upon (i) the approval of the increase
in the authorized shares of common stock from 7,500,000 shares to 50,000,000 or
the subsequent merger of the Company with or into another company or (ii) the
sale of substantially all the Company's assets.
In connection with the FBMS Transaction, the Company has invested, to date,
$4,700,000 in FBMS for working capital purposes (the "FBMS Investment").
Financial statements of FBMS as of and for the period ended June 30, 1999
and the year ended December 31, 1998 are attached hereto as Exhibit 3.
Subsequent to the Acquisition of FBMS, all outstanding shares of FBMS were
transferred to a new wholly owned subsidiary of the Company, nMortgage, Inc.
("nMortgage").
PROPOSED SALE OF NMORTGAGE
On December 31, 1999, the Company entered into 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
SmallCap 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 Company will receive not less than 75% of
the IGCA common stock outstanding after the Transaction on a fully-diluted
basis.
IGCA was formed in 1991 to develop, manufacture, market and distribute
specialty video gaming machines. As described below, 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 only business operation of IGCA.
There are a number of material conditions that must be satisfied prior to
the completion of the Proposed nMortgage Transaction, including:
o Approval of the Proposed nMortgage Transaction by the IGCA
shareholders;
o The disposal of IGCA's gaming assets;
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o Approval of the Proposed nMortgage Transaction from all governmental
bodies or agencies, regulatory authorities (including the gaming
authorities of Nevada and other applicable jurisdictions).
There is no assurance that the conditions summarized above will be
satisfied or that the Proposed nMortgage Transaction will be consummated on the
terms as outlined above.
SPIN-OFF OF E2000
Immediately prior to the TeleBanc Merger and the Proposed ICGA Transaction,
the Company 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 Company's Common Stock on the record date of the special meeting of
shareholders to be called later this year 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:
o all of the Company's cash in excess of $2,000,000, or such lesser
amount as the Company's Board of Directors may determine in its sole
discretion;
o all securities and investments owned by the Company in its investee
companies, except for any securities owned by the Company in First
TeleServices, Inc.;
o the FBMS Investment;
o If the conditions precedent to the proposed ICGA 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 Company
related to the Proposed ICGA Transaction
o all receivables of any nature, including accounts and notes
receivable;
o all furniture, fixtures and equipment of the Company; and
o any other assets that are related in any manner to the Company's
business development company assets.
E2000 will also assume all liabilities of the Company related to its
business development company assets and will indemnify the Company and assume
the prosecution or defense of the Company in the following lawsuits: THEOHAROUS,
ET AL. V. HENRY FONG, EQUITEX, INC., CHARLES E.
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SANDERS, AND METROMEDIA INTERNATIONAL GROUP, INC., Civil Action No. 1-98-CV-2366
(U.S.Dist. N. Ga.); LESLIE SCHUETTE, ET AL. V. HENRY FONG, EQUITEX, INC.,
CHARLES E. SANDERS, AND METROMEDIA INTERNATIONAL GROUP, INC., Civil Action No.
1-98-CV-2366 (U.S. Dist. N. Ga.); and EQUITEX, INC. AND HENRY FONG V. BERTRAND
T. UNGER, Case No. 98-CV-2437 (Dist. Ct. Arapahoe County, Colorado). Prior to
its distribution to the Company's shareholders, the E2000 Common Stock will be
registered pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of
1934 and E2000 shall have filed and sought to make effective an application for
the inclusion of the E2000 Common Stock on the NASDAQ Smallcap Market. The
Company intends to structure the Spin- Off as a tax-free distribution to the
Company's stockholders under Section 355 of the Internal Revenue Code of 1986,
as amended.
DESCRIPTION OF PREFERRED STOCK
The Preferred Stock is so-called "blank check" preferred since the Board of
Directors of the Company may fix or change the terms, including: (i) the
division of such shares into series; (ii) the dividend or distribution rate;
(iii) the dates of payment of dividends or distributions and the date from which
they are cumulative; (iv) liquidation price; (v) redemption rights and price;
(vi) sinking fund requirements; (vii) conversion rights; (viii) restrictions on
the issuance of additional shares of any class or series. As a result, the Board
of Directors of the Company are entitled to authorize the creation and issuance
of up to 2,000,000 shares of Preferred Stock in one or more series with such
terms, limitations and restrictions as may be determined in the Board's sole
discretion, with no further authorization by the Company's stockholders except
as may be required by applicable laws or securities exchange listing rules.
The Board has no present commitment, arrangement or plan that would require
the issuance of shares of Preferred Stock in connection with an equity offering,
merger, acquisition or otherwise.
The holders of shares of Preferred Stock have only such voting rights as
are granted by law and authorized by the Board of Directors with respect to any
series thereof. The Board of the Company has the right to establish the relative
rights of the Preferred Stock in respect of dividends and other distributions
and in the event of the voluntary or involuntary liquidation, dissolution or
winding up of affairs of the Company as compared with such rights applicable to
the Common Stock and any other series of Preferred Stock.
The effect of Preferred Stock upon the rights of holders of Common Stock
may include: (i) the reduction of amounts otherwise available for payment of
dividends on Common Stock to the extent that dividends are payable on any issued
shares of Preferred Stock; (ii) restrictions on dividends on Common Stock if
dividends on Preferred Stock are in arrears; (iii) dilution of the voting power
of the Common Stock and dilution of net income and net tangible book value per
share of Common Stock as a result of any such issuance, depending on the number
of shares of Common Stock not being entitled to share in the Company's assets
upon liquidation until
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satisfaction of any liquidation preference granted to shares of Preferred Stock.
It is not possible to state the effect that other series of Preferred Stock may
have upon the rights of the holder of Common Stock until the Board determines
the terms relating to those series of Preferred Stock.
Currently, the Company has the following series of Preferred Stock
outstanding:
o SERIES D 6% CONVERTIBLE PREFERRED STOCK , STATED VALUE, $1,000 PER
SHARE (THE "SERIES D PREFERRED STOCK"). The Series D Preferred Stock
ranks prior to the Company's common stock and pari passu with other
series of preferred stock issued prior to the Series D Preferred Stock
and senior to any series of Preferred stock issued after the Series D
Preferred Stock. The Series D Preferred entitles its holder to 6%
annual dividends, payable quarterly. The Series D liquidation
preference is equal to the sum of the stated value of each share plus
an amount equal to 30% of the stated value plus the aggregate of all
accrued and unpaid dividends on each share of Series D Preferred until
the most recent dividend payment date or date of liquidation,
dissolution or winding up of the Company. Lastly, the Series D
Preferred Stock is convertible at any time, and from time to time at a
conversion price per share of Common Stock equal to 65% of the market
price of the Common Stock. The number of shares of Common Stock due
upon conversion of each share of Series D Convertible Preferred Stock
is (i) the number of shares to be converted, multiplied by (ii) the
stated value of the Series D Preferred Stock and divided by (iii) the
applicable conversion price.
o SERIES E CONVERTIBLE PREFERRED STOCK (THE "SERIES E PREFERRED STOCK").
The Series E Preferred Stock is not entitled to dividends, does not
have a liquidation preference and does not have voting rights. The
Series E Preferred Stock automatically converts to 1,000,000 shares of
Common Stock upon (i) the approval if the increase in the authorized
shares of Common Stock from 7,500,000 shares to 50,000,000 or the
subsequent merger of the Company with or into another company or (iii)
the sale of substantially all the Company's assets.
OPTIONS AND WARRANTS
The 1,256,400 shares of Common Stock reserved for issuance upon the
exercise of outstanding warrants and options are comprised of the following:
o 86,400 shares are reserved for issuance upon the exercise of options
granted under the Company's 1993 Stock Option Plan exercisable until
July 4, 2005 at a price of $3.00 per option.
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o 1,000,000 shares are reserved for issuance upon the exercise of
options granted under the Company's 1999 Stock Option Plan. All
1,000,000 shares are exercisable until January 5, 2004 at an exercise
price of $6.75 per option.
o 60,000 shares are reserved for issuance upon the exercise of warrants
exercisable until January 20, 2002. Of this amount, 10,000 warrants
are exercisable at a price of $8.895 per warrant. The remaining
amount, 50,000 warrants, are exercisable at a price of $10.00 per
warrant.
o 50,000 shares are reserved for issuance upon the exercise of warrants
exercisable until April 30, 2002 at an exercise price of $9.875 per
warrant.
o 60,000 shares are reserved for issuance upon the exercise of warrants
exercisable until January 5, 2002 at an exercise price of $7.00 per
warrant.
VOTE REQUIRED
The affirmative vote of the majority of the outstanding shares entitled to
vote thereon, and a majority of the outstanding stock of each class entitled to
vote thereon as a class, at the stockholders' meeting will be required to adopt
the proposed amendment to Paragraph 4 of the Certificate of Incorporation. THE
BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO INCREASE THE NUMBER OF
SHARES OF COMMON STOCK.
FINANCIAL INFORMATION
A copy of the Company's Annual Report on Form 10-KSB, as amended, for the
year ended December 31, 1998 will be made available upon request. See Documents
Incorporated By Reference.
-12-
OTHER MATTERS
Management does not know of any other matters to be brought before the
meeting. However, if any other matters properly come before the meeting, it is
the intention of the appointee named in the enclosed form of Proxy to vote in
accordance with his best judgment on such matters.
By Order of the Board of Directors:
Equitex, Inc.
Date: ___________ __, 2000 Thomas B. Olson
Secretary
-13-
- --------------------------------------------------------------------------------
Proxy
- --------------------------------------------------------------------------------
Equitex, Inc.
7315 East Peakview Avenue
Englewood, Colorado 80111
Special Meeting of Stockholders
To Be Held On __________ ___, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Equitex, Inc. (the "Company") hereby
constitutes and appoints Henry Fong as attorney and proxy, to appear, attend and
vote all of the shares of the common stock of Equitex, Inc. standing in the name
of the undersigned at a Special Meeting of Stockholders of Equitex, Inc. to be
held at 2401 PGA Blvd, Suite 190, Palm Beach Gardens, Florida 33410, on _____
__, 2000, at ___ a.m. Eastern Standard Time, and at any postponements or
adjournments thereof:
1. To consider and vote upon an amendment to Paragraph 4 of the Certificate
of Incorporation to increase the number of authorized shares of the Company's
common stock, $.02 par value, from 7,500,000 shares to 50,000,000 shares.
FOR ______ AGAINST ______ ABSTAIN ______
2. To transact such other business as may properly come before the meeting.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS SPECIFIED HEREON WITH
RESPECT TO PROPOSAL ONE AND FOR PROPOSAL ONE IF NO SPECIFICATION IS MADE. THIS
PROXY WILL BE VOTED IN ACCORDANCE WITH THE DISCRETION OF THE PROXIES ON ANY
OTHER BUSINESS.
Please mark, date and sign your name exactly as it appears hereon and
return the Proxy in the enclosed envelope as promptly as possible. It is
important to return this Proxy properly signed in order to exercise your right
to vote if you do not attend the meeting and vote in person. When signing as
agent, partner, attorney, administrator, guardian, trustee or in any other
fiduciary or official capacity, please indicate your title. If stock is held
jointly, each joint owner must sign.
Date: ____________, 2000
------------------------------------
Signature(s)
Address if different from that on label:
------------------------------------
Street Address
------------------------------------
City, State and Zip Code
------------------------------------
Number of shares
Please check if you intend to be present at the meeting: ___________
EXHIBIT 1
The total number of shares of stock which the corporation shall have
authority to issue is fifty-two million (52,000,000) shares, of which fifty
million (50,000,000) shares shall be common stock having a par value of $.02 per
share, and two million (2,000,000) shares shall be preferred stock, having a par
value of $.01 per share (the "Preferred Stock").
The designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof are as follows:
(I) The Board of Directors is expressly authorized at any time, and from
time-to-time, to provide for the issuance of shares of Preferred Stock
in one or more series, with such voting powers, full or limited, or
without voting powers and with such designations, preferences and
relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, as shall be
stated and expressed in the resolution or resolutions providing for
the issue thereof adopted by the Board of Directors, and as are not
stated and expressed in these Articles of Incorporation, or any
amendment thereto, including (without limiting the generality of the
foregoing) the following:
(a) The designation of the number of shares of such series.
(b) The dividend rate of such series, the conditions and dates upon
which such dividends shall be payable, the preference or relation
which such dividends shall bear to the dividends payable on any
other class or classes or of any other series of capital stock,
whether such dividends may be paid in cash, shares of common
stock or Preferred Stock or in assets of the corporation, and
whether such dividends shall be cumulative or noncumulative.
(c) Whether the shares of such series shall be subject to redemption
by the corporation and, if made subject to such redemption, the
times, prices and other terms and conditions of such redemption.
(d) The terms and amount of any sinking fund provided for the
purchase or redemption of the shares of such series.
(e) Whether or not the shares of such series shall be convertible
into or exchangeable for any other class or classes or for any
other series of any class or classes or capital stock of the
Corporation and, if provision be made for conversion or exchange,
the times, prices, rates, adjustments and other terms and
conditions of such conversion or exchange.
(f) To the extent, if any, to which the holders of the shares of such
series shall be entitled to vote as a class or otherwise with
respect to the election of directors or otherwise.
(g) The restrictions, if any, on the issue or reissue of any
additional Preferred Stock.
(h) The rights of the holders of the shares of such series upon the
dissolution or winding up of, or upon the distribution of assets
of, the corporation.
(II) Except as otherwise required by law and except for such voting powers
with respect to the election of directors or other matters as may be
stated in the resolutions of the Board of Directors creating any
series of Preferred Stock, the holders of any such series shall have
no voting power whatsoever.
EXHIBIT 2
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
FIRST TELEBANC CORP. AND SUBSIDIARY
December 31, 1998 and 1997
INDEX TO FINANCIAL STATEMENTS
Page
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS............................................4
CONSOLIDATED STATEMENTS OF OPERATIONS..................................5
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIENCY) AND COMPREHENSIVE INCOME (LOSS)...............6
CONSOLIDATED STATEMENTS OF CASH FLOWS..................................7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.............................8
First TeleBanc Corp. and Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1998 1997
------------ ------------
Cash and cash equivalents
Cash and due from banks ........................................... $ 3,560,343 $ --
Federal funds sold ................................................ 5,380,000 --
------------ ------------
Total cash and cash equivalents ....................... 8,940,343 --
Stock subscriptions receivable ........................................ 3,014,000 --
Investment securities available for sale, at fair value ............... 3,060,186 --
Loans, net ............................................................ 5,516,034 --
Accrued interest receivable ........................................... 43,410 --
Federal Reserve Bank stock ............................................ 82,300 --
Premises and equipment, net ........................................... 58,911 --
Goodwill .............................................................. 3,294,189 --
Other assets .......................................................... 65,553 --
------------ ------------
Total assets .......................................... $ 24,074,926 $ --
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Liabilities
Deposits .......................................................... $ 13,734,300 $ --
Accrued interest payable .......................................... 214,537 --
Other liabilities ................................................. 311,827 --
Due to organizers ................................................. 508,739 220,001
Due under purchase contract ....................................... 4,672,683 --
------------ ------------
Total liabilities ..................................... 19,442,086 220,001
------------ ------------
Stockholders' equity (deficiency)
Preferred stock, $0.01 par value, 2,000,000 shares
authorized, no shares issued or outstanding .................... -- --
Common stock, Class A, $0.01 par value, 7,500,000 shares
authorized, 539,800 shares issued and outstanding at
December 31, 1998 .............................................. 5,398 --
Common stock, Class B, $0.01 par value, 500,000 shares
authorized, 150,000 shares issued and outstanding at
December 31, 1998 .............................................. 1,500 --
Stock subscriptions receivable .................................... (1,500) --
Additional paid-in capital ........................................ 5,114,602 --
Accumulated deficit ............................................... (489,142) (220,001)
Accumulated other comprehensive income ............................ 1,982 --
------------ ------------
Total stockholders' equity (deficiency) ............... 4,632,840 (220,001)
------------ ------------
Total liabilities and stockholders' equity (deficiency) $ 24,074,926 $ --
============ ============
The accompanying notes are an integral part of these statements.
4
First TeleBanc Corp. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
For the period
from March 6, 1997
(date of inception)
Year ended through
December 31, December 31,
1998 1997
------------ ------------
Interest income
Loans ............................................................. $ 7,311 $ --
Federal funds sold ................................................ 1,402 --
Other ............................................................. 3,047 --
------------ ------------
Total interest income ................................... 11,760 --
------------ ------------
Interest expense
Deposits .......................................................... 2,845 --
------------ ------------
Net interest income ..................................... 8,915 --
Provision for loan losses ............................................. -- --
------------ ------------
Net interest income after provision for loan losses ..... 8,915 --
------------ ------------
Non-interest income
Service charges and fees .......................................... 841 --
Other income ...................................................... 30 --
------------ ------------
Total non-interest income ............................... 871 --
------------ ------------
Non-interest expense
Salaries and employee benefits .................................... 66,649 --
Occupancy 2,926 ................................................... --
Amortization of goodwill .......................................... 915 --
Other expense ..................................................... 208,437 220,001
------------ ------------
Total non-interest expense .............................. 278,927 220,001
------------ ------------
Loss before income tax expense .......................... (269,141) (220,001)
Income tax expense .................................................... -- --
------------ ------------
Net loss ................................................ $ (269,141) $ (220,001)
============ ============
The accompanying notes are an integral part of these statements.
5
First TeleBanc Corp. and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
AND COMPREHENSIVE INCOME (LOSS)
Common stock Accumulated Total
Stock ----------------------- Additional other stockholders'
subscriptions Class A Class B paid-in Accumulated comprehensive equity Comprehensive
receivable Amount Amount capital deficit income (deficiency) loss
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, March 6, 1997 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Net loss for the period -- -- -- -- (220,001) -- (220,001) (220,001)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Comprehensive loss $ (220,001)
==========
Balance, December 31, 1997 -- -- -- -- (220,001) -- (220,001)
Issuance of Class A common
stock, net -- 5,398 -- 5,114,602 -- -- 5,120,000
Issuance of Class B common
stock (1,500) -- 1,500 -- -- -- --
Net loss for the year ended
December 31, 1998 -- -- -- -- (269,141) -- (269,141) $ (269,141)
Other comprehensive income,
net of reclassifications
and tax -- -- -- -- -- 1,982 1,982 1,982
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Comprehensive loss $ (267,159)
==========
Balance, December 31, 1998 $ (1,500) $ 5,398 $ 1,500 $5,114,602 $ (489,142) $ 1,982 $4,632,840
========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of this statement.
6
First TeleBanc Corp. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the period
from
March 6, 1997
(date of inception)
Year ended through
December 31, December 31,
1998 1997
----------- -----------
Operating activities
Net loss ................................................ $ (269,141) $ (220,001)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation and amortization ........................ 3,840 --
Increase in accrued interest receivable .............. (10,968) --
Decrease in other assets ............................. 19,055 --
Decrease in accrued interest payable ................. (47,488) --
Increase in other liabilities ........................ 253,876 --
Increase in due to organizers ........................ 288,738 220,001
Due under purchase contract .......................... 4,672,683 --
----------- -----------
Net cash provided by operating activities ..... 4,910,595 --
----------- -----------
Investing activities
Net (loan originations) paydowns and principal
collections on loans ................................. (37,322) --
Excess of cash acquired after payment to purchase company 1,843,449 --
----------- -----------
Net cash provided by investing activities ..... 1,806,127 --
----------- -----------
Financing activities
Net increase in deposits ................................ 117,621 --
Proceeds from issuance of common stock, net of costs .... 2,106,000 --
----------- -----------
Net cash provided by financing activities ..... 2,223,621 --
----------- -----------
Net increase in cash and cash equivalents ................... 8,940,343 --
Cash and cash equivalents, beginning of period .............. -- --
----------- -----------
Cash and cash equivalents, end of period .................... $ 8,940,343 $ --
=========== ===========
The accompanying notes are an integral part of these statements.
7
First TeleBanc Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE A - ORGANIZATION AND PLAN OF MERGER AND CAPITALIZATION
Organization
First TeleBanc Corp., a Florida Corporation, was incorporated on March 6,
1997 for the purpose of becoming a Bank Holding Company. On June 15, 1998,
First TeleBanc Corp. received regulatory approval from the Federal Reserve
Bank of Atlanta to become a Bank Holding Company and to acquire control of
Boca Raton First National Bank. The consolidated financial statements
include the accounts of First TeleBanc Corp. (First TeleBanc) and its wholly
owned subsidiary, Boca Raton First National Bank, (the Bank), (collectively
referred to as the Company). On June 4, 1999, the Board of Directors
approved changing the name of the Bank to Net 1st National Bank. The Bank
was established in 1986 as a nationally chartered bank with its office in
Boca Raton, Florida, concentrating on commercial business in Palm Beach and
Broward Counties.
The Bank operates as a commercial bank offering a wide variety of commercial
loans and, to a lesser degree, consumer loans. The Bank's primary future
strategic goal is to establish a reputation and market presence as the
"small and middle market business internet bank" in its markets. The Bank
funds its loans primarily by offering time, savings and money market, and
demand deposit accounts to both commercial enterprises and individuals.
Additionally, the Bank originates residential mortgage loans. Markets served
by the Bank include Palm Beach and Broward Counties in Florida. Loans are
originated and deposits are solicited throughout Florida and in selected
areas outside the state of Florida.
The Bank competes with other banking and financial institutions in its
markets. Commercial banks, savings banks, savings and loan associations,
mortgage bankers and brokers, and credit unions actively compete for
deposits and loans. Such institutions, as well as consumer finance, mutual
funds, insurance companies, and brokerage and investment banking firms may
be considered competitors of the Bank with respect to one or more of the
services the Bank renders.
The Bank is subject to regulations of certain federal agencies and,
accordingly, it is periodically examined by those regulatory authorities. As
a consequence of the extensive regulation of commercial banking activities,
the Bank's business is susceptible to state and federal legislation.
PLAN OF MERGER AND CAPITALIZATION
In September 1997, First TeleBanc entered into a Stock Purchase Agreement
(the First TeleBanc Agreement) with First Union Corporation (First Union)
for the purchase of Boca Raton First National Bank (Predecessor Bank). The
purchase and sale was consummated on December 29, 1998. Pursuant to the
terms of the First TeleBanc Agreement, First TeleBanc acquired 100% of the
outstanding shares of the Predecessor Bank's common stock for a purchase
price of $4,672,683. In connection with this transaction, the Predecessor
Bank became a wholly owned subsidiary of First TeleBanc.
(Continued)
8
First TeleBanc Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE A - ORGANIZATION AND PLAN OF MERGER AND CAPITALIZATION - Continued
This transaction was accounted for under the purchase method of accounting
and accordingly, the results of operations of First TeleBanc for the year
ended December 31, 1998, include only the results of operations of the
Predecessor Bank from the date of acquisition, December 30, 1998, through
December 31, 1998. The acquisition resulted in the recording of $3,295,104
of goodwill, which is being amortized on a straight-line basis over 20
years. Amortization expense for the year ended December 31, 1998, was $915.
The following represents the unaudited pro forma financial information of
First TeleBanc as if the acquisition occurred on the first date of the
periods indicated. The pro forma information should be read in conjunction
with the related historical information and is not necessarily indicative of
the results that would have been attained had the transaction actually taken
place. Earnings per share (EPS) calculations have not been presented because
the presentation is not meaningful.
Interest income $ 1,128,569
Interest expense 530,637
-----------
Net interest income 597,932
Provision for loan losses 71,223
Non-interest income 57,415
Non-interest expense 1,302,381
-----------
Net loss $ (718,257)
===========
The organizers of First TeleBanc capitalized the Company with $5,398,000 in
new capital raised through a private placement of 539,800 shares of the
Company's Class A Voting Common Stock. After giving effect to offering
expenses of $278,000, the new capital raised resulted in net cash proceeds
of $5,120,000. Subsequent to year end, First TeleBanc collected $3,014,000
of its stock subscriptions receivable as of December 31, 1998. Additionally,
subsequent to year end, First TeleBanc sold another 254,670 shares of its
Class A Voting Common Stock for $2,546,700.
During 1998 and 1997, First TeleBanc was advanced approximately $509,000
from certain organizers to pay for offering, organizational and start-up
expenses. Of this amount, $278,000 was incurred for offering expenses, which
are reflected net of capital, and $231,000 was incurred for organizational
and start-up expenses, which were expensed in 1998 and 1997.
(Continued)
9
First TeleBanc Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE A - ORGANIZATION AND PLAN OF MERGER AND CAPITALIZATION - Continued
Subsequent to year end, one organizer's aggregate advances of $275,500 were
settled for $120,000 in cash and 15,550 shares of Class A Voting Common
Stock valued at $10.00 per share. Additionally, another organizer's
aggregate advances of $233,500 were settled for 20,000 shares of Class B
Non-voting Common Stock as well as certain marketing rights for secured
credit cards and other sub-prime products.
In connection with the initial capital raising efforts of First TeleBanc,
certain organizers received 150,000 shares of Class B Non-voting Common
Stock for $1,500 of consideration.
Finally, on March 12, 1999, the Board of Directors approved the issuance of
an additional 150,000 shares of Class B Non-voting Common Stock to certain
individuals who contributed to the success of the acquisition and
development of the business plan. The value of these new 150,000 shares of
Class B Non-voting Common Stock is subject to an outside third-party
valuation, which has not yet been completed.
NOTE B - SUMMARY OF ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accounting policies of the Company conform with generally accepted
accounting principles and predominant practices within the banking industry.
All significant intercompany balances and transactions have been eliminated
in consolidation.
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. These estimates and assumptions also affect the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
The principal estimates that are particularly susceptible to significant
change in the near term are the allowance for loan losses and goodwill. The
evaluation of the adequacy of the allowance for loan losses includes, among
other factors, an analysis of historical loss rates by category applied to
current loan totals. However, actual losses may be higher or lower than
historical trends which vary. Actual losses on specific problem loans, which
also are provided for in the evaluation, may vary from estimated loss
percentages which are established based upon a limited number of potential
loss classifications. All of the outstanding goodwill as of December 31,
1998, resulted from the acquisition of the Bank on December 29, 1998.
Management reviews the realization of goodwill based upon the past and
expected performance of the entity acquired. If such benefits are not
achieved, the estimated amortization may increase and/or a charge for
impairment may be recognized.
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 131 defines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about the Company's operating segments. Under the current
conditions, the Company is reporting one segment.
(Continued)
10
First TeleBanc Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE B - SUMMARY OF ACCOUNTING POLICIES - Continued
INVESTMENT SECURITIES
The Bank accounts for its investment securities in accordance with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
This standard requires investments in securities to be classified in one of
three categories: held to maturity, trading, or available for sale.
Investments in debt securities for which management has both the ability and
intent to hold to maturity are carried at cost, adjusted for the
amortization of premiums and accretion of discounts computed by the interest
method. Investments in debt securities which management believes may be sold
prior to maturity due to changes in interest rates, prepayment risk and
equity, liquidity requirements or other factors are classified as available
for sale. As of December 31, 1998, the Bank's entire investment portfolio is
classified as available for sale. Net unrealized gains and losses for such
securities, net of tax effect, are required to be recognized as a separate
component of stockholders' equity and excluded from the determination of net
income. The Bank does not engage in security trading. Security transactions
are accounted for on a trade-date basis. Gains or losses on the disposition
of investment securities are based on the net proceeds, and the adjusted
carrying amount of the securities sold is calculated using the specific
identification method.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activity." SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments imbedded in other
contracts, and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Earlier application is permitted only as of the
beginning of any fiscal quarter. Management is in the process of reviewing
the provisions of SFAS No. 133.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoff are stated at the amount of unpaid
principal and are net of unearned discounts, unearned loan fees and an
allowance for loan losses. The allowance for loan losses is established
through a provision for loan losses charged to expense. Loan principal
considered to be uncollectible by management is charged against the
allowance for loan losses. The allowance is an amount that management
believes will be adequate to absorb possible losses on existing loans that
may become uncollectible based upon an evaluation of known and inherent
risks in the loan portfolio. Management takes into consideration factors
such as changes in the nature and size of the loan portfolio, overall
portfolio quality, specific problem loans and current and future economic
conditions that may affect the borrowers' ability to pay. The evaluation
details historical losses by loan category, the resulting loss rates for
which are projected at current loan total amounts. Loss estimates for
specific problem loans are also detailed.
(Continued)
11
First TeleBanc Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE B - SUMMARY OF ACCOUNTING POLICIES - Continued
Interest income is accrued as earned on a simple interest basis. Accrual of
interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that collection of interest is
doubtful. When a loan is placed on such non-accrual status, all accumulated
accrued interest receivable applicable to periods prior to the current year
is charged off to the allowance for loan losses. Interest which had accrued
in the current year is reversed out of current period income. Loans 90 days
or more past due and still accruing interest must have both principal and
accruing interest adequately secured and must be in the process of
collection.
The Bank accounts for its impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures." This standard requires that a creditor measure impairment
based on the present value of expected future cash flows discounted at the
loan's effective interest rate, except that as a practical expedient, a
creditor may measure impairment based on a loan's observable market price,
or the fair value of the collateral if the loan is collateral-dependent.
Regardless of the measurement method, a creditor must measure impairment
based on the fair value of the collateral when the creditor determines that
foreclosure is probable.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment, including leasehold improvements, are stated at
cost less accumulated depreciation. Depreciation expense is computed on the
straight-line method over the estimated useful lives of the assets.
Leasehold improvements are depreciated over the shorter of the estimated
useful lives of the improvements or the terms of the related leases.
LONG-LIVED AND INTANGIBLE ASSETS
The Bank accounts for long-lived and intangible assets in accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which provides guidance on when to
recognize and how to measure impairment losses of long-lived assets and
certain identifiable intangibles and how to value long-lived assets to be
disposed of.
GOODWILL
The 1998 acquisition resulted in the Bank recording $3,295,104 of goodwill,
which is being amortized on a straight-line basis over 20 years.
Amortization expense charged to operations for the two days during the year
ended December 31, 1998, was $915.
(Continued)
12
First TeleBanc Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE B - SUMMARY OF ACCOUNTING POLICIES - Continued
EARNINGS (LOSS) PER SHARE
The Company follows the provisions of SFAS No. 128, "Earnings Per Share,"
which eliminated primary and fully diluted EPS and requires presentation of
basic and diluted EPS in conjunction with the disclosure of the methodology
used in computing such EPS. While the Company has two classes of common
stock outstanding, the Class B Non-voting Common Stock will be considered a
Class A Common Stock equivalent for the purposes of diluted EPS (note H).
Basic EPS excludes dilution and is computed by dividing net income by the
weighted average number of common shares outstanding for the period. EPS
calculations of First TeleBanc for all periods have not been presented
because the presentation is not considered meaningful.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets
or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards to
provide prominent disclosure of comprehensive income items. Other
comprehensive income consists of net unrealized gains on investment
securities available for sale. The components of other comprehensive income
at December 31, 1998, are as follows:
Net of
Before tax Tax tax
amount expense amount
--------- ---------- ---------
Unrealized gains on securities
Unrealized holding losses
arising during period $ 3,178 $ (1,196) $ 1,982
Less reclassification
adjustment for losses
realized in net income - - -
--------- ---------- ---------
Other comprehensive income, net $ 3,178 $ (1,196) $ 1,982
========= ========== =========
STATEMENTS OF CASH FLOWS
Cash and cash equivalents are defined as cash on hand, cash items in the
process of collection, amounts due from banks and federal funds sold with an
original maturity of three months or less. There was no cash paid for income
taxes for the year ended December 31, 1998. Cash paid for interest was
approximately $2,900 for the year ended December 31, 1998.
13
First TeleBanc Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE C - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value of the
Bank's available for sale securities at December 31, 1998, are summarized as
follows:
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---------- ---------- ---------- ----------
U.S. Government and agency
securities $3,032,008 $ 3,178 $ - $3,035,186
Other securities 25,000 - - 25,000
---------- ---------- ---------- ----------
Total available for sale $3,057,008 $ 3,178 $ - $3,060,186
========== ========== ========== ==========
The amortized cost and estimated fair value of the Company's investment and
mortgage-backed securities by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
Available for sale
--------------------------
Amortized Fair
cost value
----------- -----------
Due from one year to five years $ 15,627 $ 15,627
Due after five years through ten years 1,094,380 1,094,380
Due after ten years 1,922,001 1,925,179
Other securities 25,000 25,000
----------- -----------
$ 3,057,008 $ 3,060,186
=========== ===========
There were no proceeds on sales of securities classified as available for
sale, and the Bank had no gross realized gains or losses for the year ended
December 31, 1998. There were no securities pledged to secure deposits or
for other purposes required or permitted by law at December 31, 1998.
14
First TeleBanc Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE D - LOANS
Major classification of loans at December 31, 1998, is as follows:
Real estate - Commercial mortgage $ 2,020,706
Real estate - Residential mortgage 1,459,490
Commercial and Industrial 1,376,751
Leases 614,529
Installment 189,965
Other, primarily overdrafts 1,398
-----------
5,662,839
Less
Allowance for loan losses (87,402)
Deferred loan origination fees (59,403)
-----------
Loans, net $ 5,516,034
===========
Changes in the allowance for loan losses at December 31, 1998, are as
follows:
Balance at beginning of year $ -
Loans charged off -
Provision for loan losses -
Allowance of acquired Bank 87,402
-----------
Balance at end of year $ 87,402
===========
The balance of impaired loans was approximately $28,500 at December 31,
1998. The Bank identifies a loan as impaired when it is probable that
interest and principal will not be collected according to the contractual
terms of the loan agreement. The allowance for loan losses associated with
impaired loans was approximately $1,500 at December 31, 1998. There was no
income recognized on impaired loans for the year ended December 31, 1998.
There was no cash collected on impaired loans for the year ended December
31, 1998, which would have been applied to interest and then to the
principal balance outstanding. The Bank recognizes income on non-accrual
loans under the cash basis when the loans are both current and the
collateral on the loan is sufficient to cover the outstanding obligation to
the Bank; if these factors do not exist, the Bank will not recognize income.
As of December 31, 1998, the Bank had approximately $24,000 of loans past
due 90 days or more with respect to interest or principal payments that were
still accruing interest. At December 31, 1998, there were no commitments to
lend additional funds to borrowers whose loans are classified as
non-accrual.
15
First TeleBanc Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE E - PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1998, are as follows:
Estimated
useful lives
--------------
Furniture, fixtures and equipment 3 - 25 years $ 482,260
Leasehold improvements 5 - 10 years 198,416
-----------
680,676
Accumulated depreciation and amortization (621,765)
-----------
$ 58,911
Depreciation and amortization charged to operations was approximately $2,900
for the year ended December 31, 1998.
NOTE F - DEPOSITS
Deposits at December 31, 1998, are as follows:
Non-interest bearing demand $ 2,797,531
NOW and money market 3,564,610
Savings 958,507
Time deposits, under $100,000 5,233,018
Time deposits, $100,000 and over 1,180,634
-----------
$13,734,300
===========
At December 31, 1998, the scheduled maturities of time deposits were as
follows:
1999 $ 1,228,240
2000 4,510,245
2001 545,295
2002 129,872
-----------
$ 6,413,652
===========
Interest expense on deposits at December 31, 1998, is as follows:
Now and money market $ 325
Savings 90
Time deposits under $100,000 2,229
Time deposits $100,000 and over 201
-----------
$ 2,845
===========
16
First TeleBanc Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE G - INCOME TAXES
The Bank did not record an income tax provision for the year ended December
31, 1998, because of its net operating loss carryforwards.
Net deferred tax assets at December 31, 1998, consist of the following:
Deferred tax assets (liabilities)
Net operating losses $ 1,393,472
Allowance for loan losses (8,162)
Accrual to cash adjustment 79,752
AMT credit carryforwards 7,442
Fixed assets (6,245)
Other 9,555
-----------
1,475,814
Valuation allowance (1,475,814)
-----------
Net deferred tax assets $ -
===========
At December 31, 1998, the Bank had unused net operating loss carryforwards
of approximately $3,700,000 for federal and Florida income tax purposes
expiring in various amounts from the years 2005 through 2018. The Bank
underwent an ownership change as defined in Section 382 of the Internal
Revenue Code (the Code) that limits the Bank's utilization of tax net
operating loss carryforwards generated prior to the ownership change. The
loss carryforwards reflect the maximum benefit that could be obtained from
the net operating losses due to limitations under Code Section 382.
A valuation allowance has been recorded to reflect a net deferred tax asset
that management believes is realizable in future tax years.
NOTE H - STOCKHOLDERS' EQUITY
First TeleBanc is authorized to issue 10,000,000 shares of capital stock
comprising 7,500,000 shares of Class A Voting Common Stock, 500,000 shares
of Class B Non-voting Common Stock, convertible into Class A Voting Common
Stock upon the occurrence of certain events, and 2,000,000 shares of
Preferred Stock.
CLASS A VOTING COMMON STOCK
Holders of Class A Voting Common Stock are entitled to one vote for each
share held and are entitled to such dividends as may be declared by the
Board of Directors, out of funds lawfully available for payment of such
dividends. Upon any liquidation, dissolution or winding up of the affairs of
the Company, Class A common stockholders are entitled to receive a pro-rata
distribution of the remaining assets of the Company after all claimants or
creditors have been paid in full. Class A common stockholders do not have
any preemptive rights to subscribe for shares of any stock of the Company or
any warrants, indebtedness or other securities of the Company.
(Continued)
17
First TeleBanc Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE H - STOCKHOLDERS' EQUITY - Continued
CLASS B NON-VOTING COMMON STOCK
Class B common stockholders do not have voting rights or liquidating rights,
are not entitled to receive dividends regardless of the form and do not have
preemptive rights except for the occurrence of certain events in which case
the shares of Class B Non-voting Common Stock shall be convertible into
shares of Class A Voting Common Stock on a one-to-one basis.
The Board of Directors elected to issue 150,000 shares of Class B Non-voting
Common Stock at $0.01 per share to the principal organizers of the Company
as compensation for certain capital raising activities of the Company.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by the law, to provide for the issuance of shares of Preferred Stock in
series, and to establish the number of shares to be included in each series
and fix the designation, powers, preferences and rights of each series and
any qualifications, limitations or restrictions thereof.
NOTE I - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Bank utilizes certain office space and equipment under operating leases
expiring through December 31, 1999. Total rent expense under such operating
leases included in occupancy expense was approximately $1,000 for the year
ended December 31, 1998. Approximate minimum payments under these
non-cancellable operating leases expiring December 31, 1999, total $75,000.
OTHER
The Bank is involved in certain litigation arising in the ordinary course of
business. In the opinion of management, the outcome of this litigation will
not have a significant effect on the accompanying consolidated financial
statements.
NOTE J - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATION
OF CREDIT RISK
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, standby
letters of credit and written financial guarantees. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the balance sheets. The contract or
notional amounts of those instruments reflect the extent of the Bank's
involvement in particular classes of financial instruments.
(Continued)
18
First TeleBanc Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE J - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATION
OF CREDIT RISK - Continued
The Bank's exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit and written financial guarantees is represented by
the contractual amount of those instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
The approximate contract amounts at December 31, 1998, are as follows:
Unfunded line of credit $ 113,000
Unfunded loan commitments 274,000
Standby letters of credit 17,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the agreement.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if it is deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, inventory,
property, plant and equipment, and income-producing commercial properties.
Standby letters of credit and written financial guarantees are conditional
commitments issued by the Bank to guarantee the performance of a customer to
a third party. These guarantees are primarily issued to support public and
private borrowing arrangements.
The Bank has not been required to perform on any financial guarantees during
the past year. The Bank has not incurred any losses on its commitments in
1998.
The Bank is a nationally chartered commercial bank headquartered in Boca
Raton, Florida. The Bank principally extends credit for commercial business
and commercial real estate loans, substantially all of which are located in
South Florida. Although the Bank maintains a diversified loan portfolio, a
substantial portion of its borrowers' abilities to repay loans is dependent
upon the economic condition of the South Florida region.
19
First TeleBanc Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE K - REGULATORY MATTERS
The Bank is subject to various regulatory and capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by the regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1998,
that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1998, the most recent notification from federal banking
agencies categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based and Tier I leverage as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------- ----- ------- -----
(in thousands, except per share data)
As of December 31, 1998
-----------------------
Total capital (to risk-
weighted assets)
Bank $1,896,000 26.18% $579,000 > 8.00% $724,000 >10.00%
- -
Tier I capital (to risk-
weighted assets)
Bank 1,809,000 24.98 290,000 > 4.00 435,000 > 6.00
- -
Tier I capital (to
average assets)
Bank 1,809,000 14.39 503,000 > 4.00 629,000 > 5.00
- -
The Bank, as a nationally chartered bank, is subject to statutory dividend
restrictions.
20
First TeleBanc Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE L - PENDING ACQUISITION
On April 12, 1999, First TeleBanc entered into an Agreement and Plan of
Reorganization (the Merger Agreement) with Equitex, Inc. (Equitex) which
provides for the merger of First TeleBanc and Equitex. The Agreement
provides that each share of First TeleBanc Class A Voting Common Stock will
be converted into and exchanged for Equitex Common Stock based upon factors
defined in the Merger Agreement. The Merger Agreement is subject to
regulatory and shareholder approval. As of December 31, 1998, Equitex owns
52,500 shares, or 9.7%, of First TeleBanc Class A Voting Common Stock.
21
EXHIBIT 3
First Bankers Mortgage Services, Inc.
Consolidated Financial Statements
for the year ended
December 31, 1998
and the period ended
June 30, 1999
First Bankers Mortgage
Services, Inc.
And Subsidiary
Consolidated Financial Statements
December 31, 1998 and 1997
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
Contents
- --------------------------------------------------------------------------------
Independent Auditors' Report ....................................... 3
Consolidated Financial Statements:
Balance Sheets ........................................... 4-5
Statements of Operations ................................... 6
Statements of Stockholders' Equity ......................... 7
Statements of Cash Flows ................................... 8
Summary of Significant Accounting Policies .............. 9-11
Notes to Financial Statements .......................... 12-19
2
DBC
DAVID B. COHEN & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS AND
MANAGEMENT CONSULTANTS
1771 SPRINGDALE ROAD 5762 OKEECHOBEE BLVD.
CHERRY HILL, NJ 08003 SUITE 405
TEL: (888) 424-1667 WEST PALM BEACH, FLA. 33417
FAX: (609) 424-1713
INDEPENDENT AUDITORS' REPORT
First Bankers Mortgage Services, Inc.
Fort Lauderdale, Florida
Marlton, New Jersey
We have audited the consolidated balance sheets of First Bankers Mortgage
Services, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Bankers
Mortgage Services, Inc. at December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
David B. Cohen and Company
Certified Public Accountants
West Palm Beach, Florida
March 18, 1999
3
First Bankers Mortgage
Services, Inc.
And Subsidiary
Consolidated Balance Sheets
December 31, 1998 1997
- --------------------------------------------------------------------------------
ASSETS
Cash ........................................ $ 403,294 $ 279,243
Mortgage loans held for sale ................ 60,407,432 59,711,231
Receivables due on mortgages sold ........... 1,011,868 1,232,150
Advances and other receivables .............. 1,723,460 1,232,519
Prepaid expenses and deferred charges ....... 154,777 136,658
Deferred income taxes (Note 4) .............. 25,628 10,000
Property and equipment, net (Note 1) ........ 922,389 911,589
Related party advances (Note 6) ............. 0 329,000
----------- -----------
$64,648,848 $63,842,390
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
First Bankers Mortgage
Services, Inc.
And Subsidiary
Consolidated Balance Sheets
December 31, 1998 1997
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Warehouse loans and other notes payable (Note 2) $54,616,448 $55,331,758
Accounts payable and accrued expenses ...... 5,011,976 4,680,841
Dividends payable .......................... 45,535 29,732
Customer deposits .......................... 1,084,493 395,902
Federal and state tax liablility (Note 4)
Current ........................... 283,725 20,000
Deferred .......................... 0 232,000
----------- -----------
Total Liabilities .............................. 61,042,177 60,690,233
----------- -----------
COMMITMENTS (Notes 5 and 8)
STOCKHOLDERS' EQUITY (Note 3)
Preferred stock, 12% cumulative,
callable at par value, $10 par;
1,000,000 shares authorized, 208,950
shares issued and outstanding ........... 2,089,500 1,752,000
Common stock, $.01 par; 10,000,000 shares
authorized, 3,000,000 shares issued
and outstanding ......................... 30,000 2,000
Additional paid-in capital ................. 1,351,687 1,379,687
Retained earnings .......................... 135,484 18,470
----------- -----------
Total Stockholders' Equity ..................... 3,606,671 3,152,157
----------- -----------
$64,648,848 $63,842,390
=========== ===========
The accompanying notes are an integral part of these financial statements.
5
First Bankers Mortgage
Services, Inc.
And Subsidiary
Consolidated Statements of Operations
Years ended December 31, 1998 1997
- --------------------------------------------------------------------------------
OPERATING REVENUES
Loan originations ....................... $ 3,461,348 $ 1,643,357
Sales of mortgage servicing rights ...... 23,449,275 12,761,948
Interest from mortgage operations ....... 5,061,693 2,717,380
Commercial income ....................... 223,464 0
Appraisal services ...................... 82,985 64,393
----------- -----------
TOTAL OPERATING REVENUES ................... 32,278,765 17,187,078
----------- -----------
OPERATING EXPENSES
Personel, including officers' salaries
and employee benefits ................ 6,743,825 5,205,653
Sales commissions and fees .............. 15,539,598 7,134,896
General and administrative .............. 4,961,827 1,906,198
Interest ................................ 4,434,843 2,578,007
----------- -----------
TOTAL OPERATING EXPENSES ................... 31,680,093 16,824,754
----------- -----------
Income from operations ..................... 598,672 362,324
Provision for income taxes (Note 4) ........ 173,465 165,000
----------- -----------
NET INCOME ................................. $ 425,207 $ 197,324
=========== ===========
The accompanying notes are an integral part of these financial statemants.
6
First Bankers Mortgage
Services, Inc.
And Subsidiary
Consolidated Statements of Stockholders' Equity
Additional
Preferred Stock Common Stock Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 56,500 $ 565,000 200,000 $ 2,000 $ 1,379,687 $ 106,476 $ 2,053,163
Capital contributions ...... 118,700 1,187,000 -- -- -- -- 1,187,000
Dividends declared ......... -- -- -- -- -- (285,330) (285,330)
Net income for the year .... -- -- -- -- -- 197,324 197,324
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 175,200 $ 1,752,000 200,000 $ 2,000 $ 1,379,687 $ 18,470 $ 3,152,157
Capital contributions ...... 33,750 337,500 2,800,000 28,000 (28,000) -- 337,500
Dividends declared ......... -- -- -- -- -- (308,193) (308,193)
Net income for the year .... -- -- -- -- -- 425,207 425,207
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 208,950 $ 2,089,500 3,000,000 $ 30,000 $ 1,351,687 $ 135,484 $ 3,606,671
=========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
7
First Bankers Mortgage
Services, Inc.
And Subsidiary
Consolidated Statements of Cash Flows
Years ended December 31, 1998 1997
- -------------------------------------------------------------------------------------
Operating Activities
Net income ........................................... $ 425,207 $ 197,324
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depreciation and amortization ............ 324,533 164,518
Deferred income taxes .................... (246,493) 296,000
Mortgage loan reserve .................... 94,217 249,073
Decrease (Increase) in:
Mortgage loans held for sale ........ (854,418) (37,887,521)
Advances and other receivables ...... (490,775) 190,868
Prepaid expenses and deferred charges (18,285) (6,460)
Receivables due on mortgages sold ... 220,282 (547,017)
Related party advances .............. 329,000 (329,000)
Increase in:
Accounts payable and accrued expenses 334,436 1,769,533
Customers deposits .................. 688,591 111,779
Income tax liability ................ 263,725 11,000
------------ ------------
Net cash provided (used) by operating activities ..... 1,070,020 (35,779,903)
------------ ------------
Investing Activities
Expenditures for property and equipment............ (239,691) (133,841)
------------ ------------
Net cash used by investing activities ................ (239,691) (133,841)
------------ ------------
Financing Activities
Borrowings under credit lines, net ................ (751,388) 35,075,689
Capital contributions ............................. 337,500 1,187,000
Capital distributions - cash ...................... (292,390) (255,598)
------------ ------------
Net cash (used) provided by financing activities .... (706,278) 36,007,091
------------ ------------
Net increase in cash ................................ 124,051 93,347
Cash, beginning of period ........................... 279,243 185,896
------------ ------------
Cash, end of period ................................. $ 403,294 $ 279,243
============ ============
Interest paid ...................................... $ 2,034,000 $ 2,025,000
============ ============
Income taxes paid .................................. 21,949 18,536
============ ============
Non Cash Investing and Financing Activities
Capital lease obligations incurred
For use of equipment ......................... $ 61,186 $ 411,188
============ ============
The accompanying notes are an integral part of these financial statements.
8
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
BUSINESS First Bankers Mortgage Services, Inc. (The "Company") is a
mortgage banker and is principally engaged in the
origination and sale of residential and commercial
mortgages. They are also a provider of FHA and VA assisted
mortgages under the United States HUD lending program. The
mortgages are classified as wholesale, retail, or commercial
and are originated through retail branches and wholesale
lending centers. In December 1997, the company's board of
directors adopted a plan to discontinue operations of its
Glastonbury Ct. branch office. Total operating revenues of
this branch office for the year ended December 31, 1998 were
$5,580,000. A loss of $174,537 was incurred from those
operations in 1998.
PRINCIPALS OF The accompanying consolidated financial statements include
CONSOLIDATION the accounts of the Company and its wholly owned subsidiary,
United Appraisal Services, Inc. All material intercompany
transactions and balances have been eliminated in
consolidations.
PROPERTY AND Property and equipment are recorded at cost. Depreciation
EQUIPMENT and amortization are computed using accelerated methods over
the estimated useful lives of the assets, generally three to
ten years.
LOAN ORIGINATIONS, Gain or loss on sale of loans is recognized at the time of
SALES AND SERVICING the sale. Origination fees and loan origination costs on
such loans are recognized when the mortgage is sold, which
is normally within 30 days of the origination of the loan.
Interest earned on these mortgages is recognized as income
from the time the mortgage is closed to the time the
mortgage is sold. At December 31, 1998 the Company had no
fixed rate loan commitments below prevailing market rates.
The Company generally sells the servicing rights on
mortgages. The Company has adopted the provisions of
Financial Accounting Standards No. 122, Accounting for
Mortgage Servicing Rights, and accordingly capitalizes the
fair value (quoted market prices) of retained mortgages
servicing rights on loans sold (none in 1998 or 1997).
9
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
LOAN ORIGINATIONS, Capitalized mortgage servicing rights on such loans will be
SALES AND SERVICING amortized in proportion to and over the period of estimated
(CONTINUED) net servicing income. The carrying amount of capitalized
mortgage servicing rights is evaluated for impairment based
upon quoted market prices of similar loans.
Mortgage loans held for sale are recorded at the lower of
aggregate cost or market value.
The Company finances certain mortgage originations pursuant
to a gestation program with an investment banking firm. Such
loan originations are immediately sold to the investment
banking firm in exchange for approximately 98% of the sales
amount, with the balance due upon resale to the investor. As
of December 31, 1998 and 1997, loans aggregating
approximately $20.4 million and $20.1 million, respectively,
were pending ultimate resale to investors by the mortgage
services firm. Estimated losses (none at December 31, 1998
and 1997) are provided on loans sold subject to repurchase
by the Company. However, an adequate provision is made by
way of a general loan loss reserve for any potential loss
that may result on loans for the periods reported.
INCOME TAXES The Company accounts for income taxes under the provisions
of Financial Accounting Standards No. 109, Accounting for
Income Taxes, which requires the recognition of deferred tax
assets and liabilities for the expected future tax
consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. Such
temporary differences arose principally from the use of the
cash basis of accounting for income tax purposes. For the
tax year ended 1998 the Company is required under provisions
of the Internal Revenue Code to file as an accrual basis
taxpayer.
10
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
ESTIMATES The preparation of financial statements in conformity with
gen- erally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the period reported. Estimates are used
when accounting for allowances for doubtful accounts,
accounts receivable, loan loss reserve, depreciation, taxes
and contingencies. Actual results could differ from those
estimates.
ADVERTISING Costs The Company expenses advertising costs when the
advertisement occurs. There were no capitalized advertising
costs at December 31, 1998 and 1997.
RECLASSIFICATIONS Certain reclassifications have been made to the 1997
financial statements to conform to the 1998 presentation.
11
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. PROPERTY AND Property and equipment consists of the following:
EQUIPMENT DECEMBER 31, 1998 1997
-----------------------------------------------------------
Furniture and fixtures $ 162,568 $ 116,090
Office equipment 235,770 241,838
Leasehold improvements 103,915 87,992
Computer software 58,973 39,402
Computer equipment 310,484 155,018
Telecommunication equipment 85,646 77,322
-----------------------------------------------------------
957,356 717,662
Accumulated depreciation (476,815) (297,759)
-----------------------------------------------------------
$ 480,541 $ 419,903
===========================================================
Capitalized Leases
------------------
In 1997, the Company entered into a capital lease to
purchase computer equipment for its various branch
locations. The term of the agreement does not exceed a four
year period and the asset is capitalized under the
provisions of Financial Accounting Standards No. 13.
Property acquired under capital
leases consists of the following:
DECEMBER 31, 1998 1997
-----------------------------------------------------------
Equipment $ 662,297 $ 601,111
Accumulated amortization (220,449) (109,425)
-----------------------------------------------------------
$ 441,848 $ 491,686
===========================================================
12
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. PROPERTY AND The company also has various equipment acquired under
EQUIPMENT capital lease agreements which require payments of
(CONTINUED) principal and interest. There were no capitalized interest
costs related to these transactions for either 1998 or 1997.
The total lease payments for 1998 and 1997 respectively were
$203,356 and $98,181 net of interest.
The future minimum lease payments under these financing
agreements are as follows:
Capital Leases
-----------------------------------------------------------
1999 $ 204,578
2000 122,205
2001 75,855
2002 39,791
-----------------------------------------------------------
Total minimum lease payment 442,429
Less: imputed interest 52,222
-----------------------------------------------------------
Present value of net minimum lease payments $ 390,207
===========================================================
2. BORROWINGS Borrowings consist of the following:
December 31, 1998 1997
-----------------------------------------------------------
Warehouse credit line,
$25,000,000 limit at December
31, 1998 bearing interest at
the federal funds rate plus
1.625% (8.750% December 31,
1998), matures in February 28,
1999 requires certain equity
and leverage ratios,
collateralized by first
mortgage loans with a carrying
value of $23,219,229 and
$29,119,936 for 1998 and
1997 respectively and is
guaranteed by the Company's
stockholders. $21,834,671 $27,383,526
13
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1998 1997
---- ----
2. BORROWINGS Loan financing credit line,
(CONTINUED) $30,000,000 limit at December
31, 1997, bearing interest at
the daily federal funds rate
(7.2168 at December 31, 1997),
due on demand, collateralized
by first mortgage loans with
a carrying value of
$27,846,089. This loan was
converted in 1998 to a repo
loan. $ - $27,563,736
Warehouse credit line,
$30,000,000 limit at December
31, 1998. Bearing interest at
the Cooper River Funding rate
plus 1.9625% (7.15% December
31, 1998) matures in February
1999 requires certain equity
and leverage ratios,
collateralized by first
mortgage loans with a carrying
value of $27,846,089 for 1998
and is guaranteed by the
Company's stockholders. 26,310,079 -
Working capital credit
facility at December 31, 1998,
interest payable monthly at an
annual rate equal to the
lender's prime rate plus 1%
uncollateralized line of
credit matures August 1999. 477,000 180,000
Warehouse credit line
$7,500,000 limit at December
31, 1998, bearing interest at
the federal funds rate plus
.50% requires certain equity
and leverage ratios,
collateralized by first
mortgage loans with a carrying
value of $5,722,509 and is
guaranteed by the Company's
stockholders. 5,398,593 -
Other notes payable at
December 31, 1998, consists of
bank debt and notes with
private investors, bearing
interest at rates of 10.25% to
15.00%, with interest payable
as agreed upon. 596,105 204,496
-----------------------------------------------------------
$54,616,448 $55,331,758
===========================================================
14
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. STOCKHOLDERS' The Company is required to maintain certain regulatory net
EQUITY worth requirements. These requirements prohibit the Company
from paying dividends or other distributions which would
reduce its regulatory net worth below standards set by
certain regulatory agencies. The Company's net worth at
December 31, 1998 and 1997 was in excess of the regulatory
requirements of $1,469,502 and $1,260,345 respectively.
Additionally, the company in accordance with requirements
under a warehouse loan agreement is required to maintain a
minimum adjusted tangable net worth of $2,500,000.
4. INCOME TAXES The Company's provision for income taxes was as follows:
1998 1997
-----------------------------------------------------------
Current $ 419,958 $ (131,000)
Deferred (246,493) 296,000
-----------------------------------------------------------
Total Provision for
Income Taxes $ 173,465 $ 165,000
===========================================================
The deferred tax consequences of temporary differences in
reporting items for financial statement and income tax
purposes are recognized if appropriate. Realization of the
future tax benefit of net operating loss carryforwards is
dependent on the Company's ability to generate taxable
income within the net operating loss carryforward period.
Management has considered this in reaching its conclusion
that no valuation allowance is necessary for financial
reporting purposes.
15
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INCOME TAXES The income tax effect of temporary differences comprising
(CONTINUED) the deferred tax assets (liabilities) on the accompanying
balance sheets is a result of the following:
1998 1997
-----------------------------------------------------------
Deferred tax assets:
Federal tax operating
Loss carry forwards $ 25,628 $ 10,000
Other - -
-----------------------------------------------------------
$ 25,628 $ 10,000
-----------------------------------------------------------
Deferred tax liabilities:
Federal - (152,000)
State - (80,000)
Valuation allowance - -
-----------------------------------------------------------
Net deferred tax asset
(liability) $ 25,628 $ (232,000)
===========================================================
A reconciliation between the statutory federal income tax
rate (34%) and the effective rate of income tax expense for
each of the two years during the period ended December 31,
1998 and 1997 follows:
1998 1997
-----------------------------------------------------------
Statutory federal income
tax rate 34% 34%
Increase/(decrease)in taxes
resulting from:
State tax average rates 9 9
Utilization of tax benefit
(costs) (14.0) (2.5)
-----------------------------------------------------------
Effective rate 29.0% 45.5%
===========================================================
16
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. COMMITMENTS The Company leases one of its facilities under the terms of
an operating lease from an entity in which the principal
stock- holders of the Company are partners. The lease
contains an escalatory clause which is tied to the consumer
price index. Additionally, the Company leases office
facilities and equip- ment under operating leases with
unrelated parties. Rent expense for 1998 and 1997 aggregated
$425,500 and $390,490 respectively, including $155,150 and
$121,430 on the related party lease.
The total future minimum lease commitments pursuant to these
leases are as follows:
Year ending December 31,
-----------------------------------------------------------
1999 $ 395,631
2000 212,069
2001 71,998
-----------------------------------------------------------
Minimum lease commitments terminate in year 2001.
6. RELATED PARTY Amounts due from an officer reflected as related party
TRANSACTIONS advances were repaid during 1998 by the issuance of
additional compensation to the officer.
17
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. FAIR VALUE OF Statement of Financial Accounting Standards No. 107,
FINANCIAL "Disclosure About Fair Value of Financial Instruments"
INSTRUMENTS ("SFAS No. 107"), requires that the Company disclose
estimated fair value for its financial instruments. Fair
value estimates, methods and assumptions are set forth below
for the Company's financial instruments:
December 31, 1998 December 31, 1997
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------------------------
Assets:
Mortgage
loans held
for Sale $60,407,432 $61,257,892 $59,711,231 $60,539,512
Liabilities:
Warehouse
Loans and
Other
Payables $54,616,448 $54,616,448 $55,331,758 $55,331,758
The fair value estimates are made at a distinct point in
time based on relevant market information and information
about the financial instruments. Because the Company's
financial instru- ments are not quoted on a specific market,
fair value estimates are based on judgements regarding
future expected loss experi- ence, current economic
conditions, risk characteristics of vari- ous financial
instruments and other factors. These estimates are
subjective in nature and involve uncertainties and matters
of sig- nificant judgement.
18
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. EMPLOYEE The Company has a defined contribution plan covering all
BENEFIT full-time employees of the company who have three months
PLAN(401-K) of service and are twenty-one years of age or older. For the
years ended December 31, 1998 and 1997, the employer's
matching contribution equals 50% of the portion of the
participant's salary reduction which does not exceed 2% of
the participant's compensation. The Company incurred a
contribution expense of $50,772 and $36,096 as of December
31, 1998 and 1997 respectively, representing the Company's
voluntary matching contribution to the plan.
19
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
AND
December 31, 1998
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
Contents
Financial Statements:
Balance Sheets.......................................................... 3 - 4
Statements of Operations................................................ 5
Statements of Stockholders' Equity...................................... 6
Statements of Cash Flows................................................ 7
Summary of Significant Accounting Policies.............................. 8 - 10
Notes to Financial Statements........................................... 11 - 18
Page 2
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
Assets
Cash ....................................... $ 822,101 $ 403,294
Mortgage loans held for sale ............... 61,169,957 60,758,903
less: Loan Loss Reserve Account .......... (1,118,564) (351,471)
Receivables due on mortgages sold .......... 545,006 1,011,868
Advances and other receivables ............. 1,905,099 1,723,460
Prepaid expenses and deferred charges ...... 408,268 154,777
Income taxes refund (Note 4) ............... 362,347 25,628
Property and equipment, net (Note 1) ....... 779,666 922,389
------------ ------------
$ 64,873,880 $ 64,648,848
============ ============
The accompanying notes are an integral part of these financial statements.
Page 3
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
Liabilities and Stockholders' Equity
Liabilities
Warehouse loans and other notes payable
(Note 2)................................. $ 55,995,837 $ 54,616,448
Accounts payable and accrued expenses .... 5,643,209 5,011,976
Customer deposits ........................ 1,405,392 1,084,493
Federal and state tax liability (Note 4)
Current .............................. 283,725 283,725
Deferred ............................. -- --
------------ ------------
Total Liabilities .......................... 63,328,163 60,996,642
------------ ------------
Commitments (Note 5 and 8)
Stockholders' Equity (Note 3)
Preferred Stock, 12% dividend payable
annually, cumulative, callable at
par value, $10 par; 1,000,000 shares
authorized, 286,000 shares issued and
outstanding at June 30, 1999, (208,950
shares at December 31, 1998) .......... 2,860,000 2,089,500
Common stock, $.01 par; 10,000,000 shares
authorized, 3,000,000 shares issued
and outstanding ....................... 30,000 30,000
Additional paid-in capital ............... 1,449,688 1,351,687
Retained earnings/(deficit) .............. (2,793,971) 181,019
------------ ------------
Total Stockholders' Equity ................. 1,545,717 3,652,206
------------ ------------
$ 64,873,880 $ 64,648,848
============ ============
The accompanying notes are an integral part of these financial statements.
Page 4
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Six months ended Six months ended Year ended
June 30, June 30, December 31,
1999 1998 1998
------------ ------------ ------------
(Unaudited) (Unaudited)
Operating Revenues
Loan originations ......................... $ 443,135 $ 1,135,539 $ 3,461,348
Sales of mortgage servicing rights ........ 7,568,128 8,693,790 23,449,275
Interest from mortgage operations ......... 1,797,071 2,089,542 5,061,693
Commercial income ......................... 57,004 98,522 223,464
Appraisal services ........................ -- 22,445 82,985
------------ ------------ ------------
Total Operating Revenues .................... 9,865,338 12,039,838 32,278,765
------------ ------------ ------------
Personnel, including officers' salaries and
employee benefits ........................ 2,768,851 3,194,355 6,743,825
Sales commissions and fees ................ 3,436,572 4,674,319 15,539,598
General and Administrative ................ 4,556,095 2,018,671 4,961,827
Interest .................................. 1,927,363 1,429,594 4,434,843
Corporate reorganization .................. 308,210 -- --
------------ ------------ ------------
Total Operating Expenses .................... 12,997,091 11,316,939 31,680,093
------------ ------------ ------------
Income/(loss) before Income Tax ............. (3,131,753) 722,899 598,672
Income Tax (Provision)/Benefit (Note 4) ..... 336,719 (124,254) (173,465)
------------ ------------ ------------
Net Income/(Loss) ........................... $ (2,795,034) $ 598,645 $ 425,207
============ ============ ============
The accompanying notes are an integral part of these financial statements.
Page 5
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional (Deficit)
Preferred Stock Common Stock Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 ....... 175,200 $ 1,752,000 200,000 $ 2,000 $ 1,379,687 $ 48,202 $ 3,181,889
Capital contributions .............. 33,750 337,500 2,800,000 28,000 (28,000) 337,500
Dividends - cash ................... (292,390) (292,390)
Net income ......................... 425,207 425,207
--------- ----------- ---------- ---------- ----------- ----------- -----------
Balance at December 31, 1998 ....... 208,950 $ 2,089,500 3,000,000 $ 30,000 $ 1,351,687 $ 181,019 $ 3,652,206
Capital contributions (unaudited) .. 77,050 770,500 -- -- 98,001 868,501
Dividends - cash (unaudited) ....... (179,956) (179,956)
Net loss (unaudited) ............... (2,795,034) (2,795,034)
--------- ----------- ---------- ---------- ----------- ----------- -----------
Balance at June 30, 1999 (unaudited) 286,000 $ 2,860,000 3,000,000 $ 30,000 $ 1,449,688 $(2,793,971) $ 1,545,717
========= =========== ========== ========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
Page 6
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended Six months ended Year ended
June 30, June 30, December 31,
1999 1998 1998
------------ ------------ ------------
(Unaudited) (Unaudited)
Operating Activities
Net Income/(loss) ........................... $ (2,795,034) $ 598,645 $ 425,207
Adjustments to reconcile net income to
net cash provided/(used) by operating
activities:
Depreciation and amortization ............ 127,099 83,567 324,533
Deferred income taxes .................... (336,719) -- (246,493)
Decrease/(Increase) in:
Mortgage loans held for sale ........... (411,054) 10,257,099 (854,418)
Loan Loss Reserve ...................... 767,093 11,714 94,217
Advances and other receivables ......... (181,639) (284,900) (490,775)
Prepaid expenses and deferred charges .. (253,491) (113,627) (18,285)
Receivables due on mortgages sold ...... 466,862 (62,230) 220,282
Related party advance .................. -- -- 329,000
Increase/(Decrease) in:
Accounts payable and accrued expenses .. 631,233 926,765 334,436
Customers deposits ..................... 320,899 (58,530) 688,591
Income tax liability ................... -- 263,725 263,725
------------ ------------ ------------
Net cash provided/(used) by operating
activities: ................................ (1,664,751) 11,622,228 1,070,020
------------ ------------ ------------
Investing Activities
Expenditures for property and equipment .. 15,624 (190,126) (239,691)
------------ ------------ ------------
Net cash used by investing activities ....... 15,624 (190,126) (239,691)
------------ ------------ ------------
Financing Activities
Borrowings under credit lines, net ....... 1,379,389 (11,308,941) (751,388)
Capital contributions .................... 868,501 17,500 337,500
Capital distributions - cash ............. (179,956) (140,180) (292,390)
------------ ------------ ------------
Net cash provided/(used) by financing
activities ................................. 2,067,934 (11,431,621) (706,278)
------------ ------------ ------------
Net increase in cash ........................ 418,807 481 124,051
Cash, Beginning of period ................... 403,294 279,243 279,243
------------ ------------ ------------
Cash, End of period ......................... $ 822,101 $ 279,724 $ 403,294
============ ============ ============
Interest Paid ............................... $ 2,585,920 $ 1,103,114 $ 2,034,000
Income Taxes Paid ........................... -- -- 21,949
============ ============ ============
Non Cash Investing and Financing Activities
Capital lease obligations incurred
For use of equipment .................... -- -- 61,186
============ ============ ============
The accompanying notes are an integral part of these financial statements.
Page 7
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
BUSINESS First Bankers Mortgage Services, Inc. (The "Company") is
a mortgage banker and is principally engaged in the
origination and sale of residential mortgages and
commercial loan properties. They are also a provider of
FHA and VA assisted mortgages under the United States
HUD lending program. The mortgages are classified as
wholesale, retail, or commercial and are originated
through retail branches and wholesale lending centers.
In December 1998, the company's board of directors
adopted a plan to discontinue operations of its
Glastonbury, CT. branch office. Total operating revenues
of this branch office for the year ended December 31,
1998 were $5,580,000. A loss of $174,534 was incurred
from those operations in 1998.
PRINCIPALS OF The accompanying consolidated financial statements
CONSOLIDATION include the accounts of the Company and its wholly owned
subsidiary, United Appraisal Services, Inc. All material
inter-company transactions and balances have been
eliminated in consolidations.
PROPERTY AND Property and equipment are recorded at cost.
EQUIPMENT Depreciation and amortization are computed using
accelerated methods over the estimated useful lives of
the assets, generally three to ten years.
LOAN ORIGINATION, Gain or loss on sale of loans is recognized at the time
SALES AND SERVICING of the sale. Origination fees and loan origination costs
on such loans are recognized when the mortgage is sold,
which is normally within 30 days of the origination of
the loan. Interest earned on these mortgages is
recognized as income from the time the mortgage is
closed to the time the mortgage is sold. At June 30,
1999 and December 31, 1998 the Company had no fixed rate
loan commitments below prevailing market rates.
The Company generally sells the servicing rights on
mortgages. The Company has adopted the provisions of
Financial Accounting Standards No. 122, Accounting for
Mortgage Servicing Rights, and accordingly capitalizes
the fair value (quoted market price) of retained
mortgages servicing rights on loans sold (none in 1999
and 1998).
Page 8
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
Capitalized mortgage servicing rights on such loans will
be amortized in proportion to and over the period of
estimated net servicing income. The carrying amount of
capitalized mortgage servicing rights is evaluated for
impairment based upon quoted market prices of similar
loans.
Mortgage loans held for sale are recorded at the lower
of aggregate cost or market value.
The Company finances certain mortgage origination
pursuant to a gestation program with an investment
banking firm. Such loan originations are immediately
sold to the investment banking firm in exchange for
approximately 98% of the sales amount, with the balance
due upon resale to the investor. As of June 30, 1999 and
December 31, 1998, loans aggregating aproximately $0 and
$20.4 million were pending ultimate resale to investors
by the mortgage services firm.
Estimated losses (none at June 30, 1999 and December 31,
1998) are provided on loans sold subject to repurchase
by the Company. However, an adequate provision is made
by way of a general loan losses reserve for any
potential loss that may result on loans for the periods
reported.
INCOME Taxes The Company accounts for income taxes under
provisions of Financial Accounting Standards No. 109,
Accounting for Income Taxes, which requires the
recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary
differences between the carrying amounts and the tax
bases of assets and liabilities. Such temporary
differences arose principally from the use of the cash
basis of accounting for income tax purposes. For the tax
year ended 1998 the Company is required under provisions
of the Internal Revenue Code to file as an accrual basis
taxpayer.
Page 9
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
ESTIMATES The preparation of financial statements in conformity
with gen- erally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
date of the financial statements and the reported
amounts of revenues and expenses during the period
reported. Estimates are used when accounting for
allowances for doubtful accounts, accounts receivable,
loan loss reserve, depreciation, taxes and
contingencies.
ADVERTISING Costs The Company expenses advertising costs when the
advertisement occurs. Advertising expenses amounted to
$41,950 for June 30, 1999. As of June 30, 1998 and
December 31, 1999 advertising expenses were $70,789 and
$151,851, respectively. No advertising expenses were
capitalized for the above mentioned periods.
RECLASSIFICATIONS Certain reclassifications have been made to the 1998
financial statements to conform to the 1999
presentation.
UNAUDITED The balance sheet as of June 30, 1999, the statement of
FINANCIAL operations and cash flows for the six months ended June
STATEMENTS 30, 1999 and 1998, and the statement of equity for the
six months ended June 30, 1999, have been prepared by
the Company without audit. In the opinion of management,
all adjustments (which include normal recurring
adjustments) necessary to present fairly the financial
positions, results of operations for the six months
ended June 30, 1999 and 1998 are not necessarily
indicative of the operating results for the full year.
Page 10
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PROPERTY AND Property and equipment consist of the following:
EQUIPMENT
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
Furniture and fixtures $ 172,071 $ 161,653
Office equipment 237,160 236,778
Leasehold improvements 56,172 103,915
Computer software 70,275 58,973
Computer equipment 318,360 310,391
Telecommunication equipment 85,646 85,646
------------ ------------
939,684 957,356
Accumulated depreciation (570,436) (476,815)
------------ ------------
$ 369,248 $ 480,541
============ ============
Capitalized Leases
------------------
In 1997, the Company entered into a capital lease to
purchase computer equipment for its various branch
locations. The term of the agreement does not exceed a four
year period and the asset is capitalized under the
provisions of Financial Accounting Standards No. 13.
Property acquired under capital leases consists of the
following:
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
Equipment $ 627,661 $ 662,297
Accumulated amortization (217,243) (220,449)
------------ ------------
$ 410,418 $ 441,848
============ ============
Page 11
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also has various equipment acquired under
capital lease agreements which require payments of principal
and interest. There were no capitalized interest costs
related to these transactions for either 1998 or 1999. The
total lease payments for 1999 and 1998 respectively were
$74,486 and $203,356 net of interest.
The future minimum lease payments under these financing
agreements at June 30, 1999 (unaudited) are as follows:
Capital Leases
1999 (remaining 6 months) $ 112,815
2000 177,497
2001 168,969
2002 29,978
------------
Total minimum lease payment 489,259
Less: imputed interest 78,841
------------
Present value of net minimum
lease payments $ 410,418
============
2. BORROWINGS Borrowings consist of the following:
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
Warehouse credit line,
$25,000,000 limit at June 30,
1999 (unaudited) bearing
interest at the federal funds
rate plus 1.625% (6.390% June
30, 1999), matures February
28, 2000, requires certain
equity and leverage ratios,
collateralized by first
mortgage loans with a carrying
value of $16,241,271 and
$23,219,229 for June 1999 and
December 1998, respectively,
and is guaranteed by the
Company's stockholders. $
15,885,690 $ 21,834,671
Page 12
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
Loan financing credit line,
$15,000,000 limit at June 30,
1999, bearing interest at
Libor plus 2% (7.030 at June
30, 1999), due on demand,
collateralized by first
mortgage loans with a carrying
value of $7,654,691. 7,484,285 --
-
Warehouse credit line,
$25,000,000 limit at June 30,
1999 ($30,000,000 limit at
December 31, 1998). Bearing
interest at the Cooper River
Funding rate plus 1.9625%
(6.76% June 30, 1999) matures
in February 2000, requires
certain equity and leverage
ratios, collateralized by
first mortgage loans with a
carrying value of $21,404,209
and $27,846,089 for 1999 and
1998 and is guaranteed by the
Company's stockholders. 21,079,287 26,310,079
Working capital credit
facility at June 30, 1999 and
December 31, 1998, interest
payable monthly at an annual
rate equal to the lender's
prime rate plus 1%
uncollateralized line of
credit matures November 1999. 477,000 477,000
Warehouse credit line
$7,500,000 limit at June 30,
1999 and December 31, 1998,
bearing interest at the
federal funds rate plus (.50%
December 31, 1998) requires
certain equity and leverage
ratios collateralized by first
mortgage loans. with a
carrying value of $7,229,571
and $5,722,509 for 1999 and
1998 and is guaranteed by the
Company's
stockholders. 7,155,277 5,398,593
Other notes payable at
December 31, 1998, consists of
bank debt and notes with
private investors, bearing
interest at rates of 10.25% to
15.00%, with interest payable
as agreed upon. 3,914,298 596,105
------------ ------------
$ 55,995,837 $ 54,616,448
Page 13
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. STOCKHOLDERS' The Company is required to maintain certain regulatory
EQUITY net worth requirements. These requirements prohibit the
Company from paying dividends or other distributions which
would reduce its regulatory net worth below standards set by
certain regulatory agencies. The company's net worth at June
30, 1999 and December 31, 1998 was $1,545,717 and $1,469,502
and is in excess of these regulatories and loan agreement
requirements.
4. INCOME TAXES The Company's provision/(benefit) for income taxes was as
follows:
June 30, June 30, December 31,
1999 1998 1998
-----------------------------------
(unaudited) (unaudited)
Current $ - $ 124,254 $ 419,958
Deferred (336,719) (10,000) (246,493)
---------- --------- ---------
Total Provision/
(Benefit) for
Income Taxes $ (336,719) $ 124,254 $ 173,465
========== ========= =========
The deferred tax consequences of temporary differences in
reporting items for financial statement and income tax
purposes are recognized if appropriate. Realization of the
future tax benefit of net operating loss carryforwards is
dependent on the Company's ability to generate taxable
income within the net operating loss carryforward period.
Management has considered this in reaching its conclusion
that no valuation allowance is necessary for financial
reporting purposes.
Page 14
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax effect of temporary differences comprising
the deferred tax assets/(liabilities) on the accompanying
balance sheets is a result of the following:
June 30, June 30, December 31,
1999 1998 1998
--------- --------- ---------
Deferred tax assets:
Federal tax operating
Loss carry forward $ 336,719 $ - $ 25,628
Other - - -
--------- --------- ---------
$ 336,719 $ - $ 25,628
--------- --------- ---------
Deferred tax liabilities:
Federal - - -
State - - -
Valuation allowance - - -
--------- --------- ---------
Net deferred tax asset/
(liability) $ 336,719 - $ 25,628
========= ========= =========
A reconciliation between the statutory federal income tax
rate (34%) and the effective rate income tax expense for
each of the two years during the period ended June 30, 1999
and December 31, 1998 follows:
June 30, June 30, December 31,
1999 1998 1998
--------- --------- ---------
Statutory federal
income tax rate 34% 34% 34%
Increase/(decrease)
in taxes resulting from:
State tax net of
federal benefit 4.0% 4% 4%
Increase in (utilization)
of net operating loss
carryforwards -2.3% -20.8% -9%
--------- --------- ---------
Effective rate 35.7% 17.2% 29%
========= ========= =========
The Company has available a minimal amount of the 1995 net
operating loss carry forward for tax purposes to offset
future taxable income. The net operating loss carryforward
expires principally in the year 2010.
Page 15
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. COMMITMENTS The Company leases one of its facilities under the terms of
an operating lease from an entity in which the principal
stock- holders of the Company are partners. The lease
contains an escalatory clause which is tied to the consumer
price index. Additionally, the Company leases office
facilities and equip- ment under operating leases with
unrelated parties. Rent expense for June 30, 1999, June 30,
1998 and December 31, 1998 aggregated $269,707, $216,237,
and $310,166, including $77,575, $77,575, and $155,150 on
the Related Party lease.
The total future minimum lease commitments pursuant to these
leases at June 30, 1999 are as follows:
Year ending December 31,
-----------------------------------------------------------
1999 (remaining 6 months) $ 241,961
2000 461,327
2001 376,913
2002 189,624
2003 103,433
-----------------------------------------------------------
Minimum lease commitments terminate in year 2003.
6. RELATED PARTY Amounts due from an officer reflected as related party
Transactions advances were repaid during 1998 by the
issuance of additional compensation to the officer.
Page 16
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FAIR VALUE OF Statement of Financial Accounting Standards No. 107,
FINANCIAL "Disclosure About Fair Value of Financial Instruments"
INSTRUMENTS ("SFAS No. 107"), requires that the Company disclose
estimated fair value for its financial instruments. Fair
value estimates, methods and assumptions are set forth below
for the Company's financial instruments:
June 30, 1999 December 31, 1998
------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Assets:
Mortgage
loans held
for sale $60,051,393 $60,976,595 $60,407,432 $61,257,892
----------- ----------- ----------- -----------
Liabilities:
Warehouse
loans and
other
payables $55,995,837 $55,995,837 $54,616,448 $54,616,448
----------- ----------- ----------- -----------
The fair value estimates are made at a discreet point in
time based on relevant market information and information
about the financial instruments. Because the Company's
financial instru- ments are not quoted on a specific market,
fair value estimates are based on judgements regarding
future expected loss experi- ence, current economic
conditions, risk characteristics of vari- ous financial
instruments and other factors. These estimates are
subjective in nature and involve uncertainties and matters
of sig- nificant judgement.
Page 17
FIRST BANKERS MORTGAGE
SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. EMPLOYEE The Company has a defined contribution plan covering all
BENEFIT full-time employees of the company who have three months of
(401-K) Plan service and are twenty-one years of age or older. For
the periods ended June 30, 1999 and December 31, 1998, the
employer's matching contribution equals 50% of the portion
of the participant's salary reduction which does not exceed
2% of the participant's compensation. The Company incurred a
contribution expense of $14,561, $22,533 and $50,772 for the
periods ended June 30, 1999, June 30, 1998 and December 31,
1998, respectively representing the Company's voluntary
matching contribution to the plan.
9. CORPORATE As a result of an increase in interest rates, the Company's
REORGANIZATION loan production fell from $356,199,032 as of June 30, 1998
to $225,684,474 as of June 30, 1999. The Company closed two
of its production offices and reduced its workforce.
The Company recorded a charge of $308,210 related to this
reorganization for the period ended June 30, 1999. As of
June 30, 1999 other liabilities includes $260,467 for costs
related to this reorganization.
10. SUBSEQUENT August 23, 1999, Equitex Inc. completed an acquisition of
EVENT the Company from the Company's shareholder. The total
aggregate purchase price for the Company, subject to the
Company meeting certain performance standards and is now up
to 1,000 shares of Equitex's Series E convertible preferred
stock. In addition, the purchase price is subject to
post-closing adjustment pursuant to the acquisition.
At June 30, 1999, the company owed Equitex $2,750,000
(included in notes payable on the accompanying consoladated
balance sheet), which was converted into a series of the
Company's preferred stock, the terms, dividends, relative
rights and preferences will be determined by Equitex at its
reasonable discretion.