UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to_________
Commission File No. 0-12374
EQUITEX, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 84-0905189
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7315 East Peakview Avenue
Englewood, Colorado 80111
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(Address of principal executive offices) (Zip code)
(303) 796-8940
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(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Number of shares of common stock outstanding at November 14, 2000: 7,106,943
EQUITEX, INC. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION Page
----
Item 1. Financial statements:
Independent accountants' report 3
Condensed consolidated balance sheets - September
30, 2000 and December 31, 1999 4
Condensed consolidated statements of operations-
three and nine months ended September 30, 2000 and 1999 5
Condensed consolidated statement of changes in
stockholders' equity - nine months ended
September 30, 2000 6-7
Condensed consolidated statements of cash
flows - nine months ended September 30, 2000, and 1999 8-10
Notes to condensed consolidated financial statements 11-18
Item 2. Management's discussion and analysis of financial
condition and results of operations 19-23
Item 3. Quantitative and qualitative disclosures of market risk 24
PART II OTHER INFORMATION
Item 1. Legal proceedings 24
Item 2. Changes in securities and use of proceeds 24
Item 3. Defaults upon senior securities 24
Item 4. Submission of matters to a vote of security holders 24
Item 5. Other information 24
Item 6. Exhibits and reports on Form 8-K 25
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Equitex, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Equitex, Inc. and subsidiaries as of September 30, 2000, and the related
condensed consolidated statements of operations for the three-month and
nine-month periods then ended, and the condensed consolidated statements of
stockholders' equity and cash flows for the nine-month period then ended. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended (not presented herein); and in our report dated
April 10, 2000, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1999, is
fairly stated, in all material respects, in relation to the balance sheet from
which it has been derived.
GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
November 14, 2000
3
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2000 1999
------------ ------------
(Unaudited)
Cash and cash equivalents .......................................... $ 342,652 $ 783,606
Mortgage loans held for sale, net .................................. 14,787,080
Receivables, net:
Related parties ............................................... 864,597 958,810
Other ......................................................... 773,622 504,571
Inventories ........................................................ 88,978 167,346
Investments:
Equity investments ............................................ 615,500 1,707,898
Other investments ............................................. 1,423,385 1,767,537
Furniture, fixtures, and equipment, net ............................ 267,840 1,058,032
Technological and intellectual property rights ..................... 3,141,667
Goodwill and other assets, net ..................................... 3,996,948 20,010,057
------------ ------------
$ 11,515,189 $ 41,744,937
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse loans ............................................... $ 18,582,351
Accounts payable .............................................. $ 346,840 1,584,926
Accrued liabilities:
Related parties ............................................. 611,460 454,235
Others ...................................................... 113,878 2,773,989
Notes and advances payable:
Related parties ............................................. 1,275,550 832,000
Others ...................................................... 117,575 1,941,954
------------ ------------
Total liabilities ......................................... 2,465,303 26,169,455
------------ ------------
Minority interest .................................................. 5,593,070 6,473,070
------------ ------------
Commitments and contingencies
Mandatory redeemable Series G, 6% preferred stock;
1,300 shares issued and
outstanding, liquidation
preference, $ 1,690,000.......................................... 1,240,000
------------ ------------
Stockholders' equity:
Convertible preferred stock; 4,500 shares authorized:
Series D, 6%; stated value $1000 per share; 1,200 shares
issued and outstanding; liquidation preference $1,585,000 . 1,200,000 1,200,000
Series E, stated value $1,000 per share; 250 shares
issued and outstanding .................................... 250,000 250,000
Series F, 460,000 shares issued and outstanding,
liquidation preference $3,864,000 .......................... 3,162,500
Common stock, par value $.02; 7,500,000
shares authorized; 7,140,293 shares issued;
7,106,943 shares outstanding ................................ 142,806 142,806
Additional paid-in capital .................................... 19,152,634 18,820,223
Accumulated deficit ........................................... (21,577,087) (11,196,580)
Less treasury stock at cost (33,350 shares) ................... (114,037) (114,037)
------------ ------------
Total stockholders' equity ................................ 2,216,816 9,102,412
------------ ------------
$ 11,515,189 $ 41,744,937
============ ============
See notes to condensed consolidated financial statements.
4
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months Nine months
ended September 30, ended September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Revenues:
Product sales ........................... $ 84,808 $ 162,744 $ 305,396 $ 572,433
Loan production and processing revenues . 263,877 293,065 263,877
Secondary marketing revenues, net ....... 38,985 871,134 38,985
Interest and dividend income ............ 22,510 79,240 357,165 154,169
Other ................................... 90,095 83,379 149,373 103,939
------------ ------------ ------------ ------------
197,413 628,225 1,976,133 1,133,403
------------ ------------ ------------ ------------
Expenses:
Cost of product sales ................... 51,498 99,721 187,819 342,273
Loan production and processing .......... 153,440 739,735 153,440
Selling, general and administrative ..... 1,218,124 1,148,781 5,749,244 2,975,075
Loss on FBMS rescission (Note 3) ........ 3,979,000
------------ ------------ ------------ ------------
1,269,622 1,401,942 10,655,798 3,470,788
------------ ------------ ------------ ------------
Loss from operations ....................... (1,072,209) (773,717) (8,679,665) (2,337,385)
------------ ------------ ------------ ------------
Other income (expenses):
Investment gains, net ................... 126,494 55,266 23,704 332,616
Equity in (losses) earnings of affiliates (529,500) (19,586) (1,092,398) 131,914
Interest expense:
Related parties ....................... (21,233) (221,264) (275,726) (283,085)
Other ................................. (429,900)
Other, net .............................. 73,478
------------ ------------ ------------ ------------
(424,239) (185,584) (1,700,842) 181,445
------------ ------------ ------------ ------------
Loss before income taxes ................... (1,496,448) (959,301) (10,380,507) (2,155,940)
Provision for income taxes ................. 41,964 41,968
------------ ------------ ------------ ------------
Net loss ................................... (1,496,448) (1,001,265) (10,380,507) (2,197,908)
Other comprehensive income, unrealized
holding gains (losses) on investments ..... (39,835) 21,391
------------ ------------ ------------ ------------
Comprehensive loss ......................... $ (1,496,448) $ (1,041,110) $(10,380,507) $ (2,176,517)
============ ============ ============ ============
Net loss ................................... $ (1,496,448) $ (1,001,265) $(10,380,507) $ (2,197,908)
Amortization of discount on preferred stock (700,000) (1,884,615) (700,000) (3,217,713)
Deemed preferred stock dividends ........... (23,500) (6,700) (59,400) (33,000)
------------ ------------ ------------ ------------
Net loss applicable to common
shareholders ............................. $ (2,219,948) $ (2,892,580) $(11,139,907) $ (5,448,621)
============ ============ ============ ============
Basic and diluted net loss per common
share .................................... $ (0.31) $ (0.40) $ (1.56) $ (0.83)
============ ============ ============ ============
Weighted average number of common
shares outstanding ....................... 7,140,293 7,152,823 7,140,293 6,542,114
============ ============ ============ ============
See notes to condensed consolidated financial statements.
5
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
Convertible preferred stock Common stock
---------------------------- ----------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
Balances, January 1, 2000 .......... 1,450 $ 1,450,000 7,140,293 $ 142,806
Subsidiary equity transaction
Issuance of Series F Preferred Stock 460,000 3,162,500
Net loss
------------ ------------ ------------ ------------
Balances, September 30, 2000 ....... 461,450 $ 4,612,500 7,140,293 $ 142,806
============ ============ ============ ============
(Continued)
6
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
Additional
Treasury paid-in Accumulated
stock capital deficit Total
------------ ------------ ------------ ------------
Balances, January 1, 2000 .......... $ (114,037) $ 18,820,223 $(11,196,580) $ 9,102,412
Subsidiary equity transactions ..... 345,904 345,904
Issuance of Series F Preferred Stock (13,493) 3,149,007
Net loss ........................... (10,380,507) (10,380,507)
------------ ------------ ------------ ------------
Balances, September 30, 2000 ....... $ (114,037) $ 19,152,634 $(21,577,087) $ 2,216,816
============ ============ ============ ============
See notes to condensed consolidated financial statements.
7
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2000 1999
------------ ------------
Cash flows used in operating activities:
Net loss ........................................................... $(10,380,507) $ (2,197,908)
------------ ------------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ................................. 1,630,487 101,115
Loss on FBMS rescission ....................................... 3,979,000
Gain on sale of subsidiary assets ............................. (76,620)
Stock issued for services ..................................... 200,000
Provision for bad debts ....................................... 172,628
Investment gains, net ......................................... (23,704) (332,616)
Equity in losses (earnings) of affiliates ..................... 1,092,398 (131,914)
Changes in assets and liabilities, net of business
acquisitions and FBMS rescission:
Decrease in investments in trading securities ............... 448,199
Increase in receivables ..................................... (99,229) (473,578)
Decrease (increase) in mortgage loans held for sale ......... 13,838,929 (4,525,207)
Decrease (increase) in inventories .......................... 10,306 (36,685)
Increase in other assets .................................... (42,717) (583,584)
Increase (decrease) in accounts payable and
accrued liabilities ........................................ 1,463,183 (1,851,824)
------------ ------------
Total adjustments ........................................... 22,392,860 (7,634,293)
------------ ------------
Net cash provided by (used in) operating activities ................ 12,012,353 (9,832,201)
------------ ------------
Cash flows from investing activities:
Cash acquired on business acquisition ......................... (256,000) (2,327,500)
Purchase of other investments ................................. (12,471) (6,231)
Purchase of intellectual property rights ...................... (850,000)
Sales of other investments .................................... 278,032
Purchases of furniture, fixtures and equipment ................ (20,487) (76,323)
Repayment of loans and notes receivable ....................... 133,298
Issuance of loans and notes receivable ........................ (2,986,575)
Increase in other assets ...................................... (256,488)
------------ ------------
Net cash used in investing activities .............................. (3,714,203) (2,666,542)
------------ ------------
(Continued)
8
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2000 1999
------------ ------------
Cash flows from financing activities:
Preferred stock issued for cash ............................... 1,240,000 5,819,965
Preferred stock dividends paid ................................ 3,300,000
Contribution from minority interest ........................... (26,509)
Issuance of notes payable ..................................... 3,431,432 298,624
Repayment of notes payable .................................... (131,292) (132,601)
Warehouse loans and other notes payable ....................... (14,906,244) 4,148,093
Proceeds from subsidiary stock transactions ................... 1,627,000
------------ ------------
Net cash (used in) provided by financing activities ................ (8,739,104) 13,407,572
------------ ------------
(Decrease) increase in cash and cash equivalents ................... (440,954) 908,829
Cash and cash equivalents, beginning ............................... 783,606
------------ ------------
Cash and cash equivalents, ending .................................. $ 342,652 $ 908,829
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest: ....................................... $ 538,028
============
Supplemental disclosure of non-cash investing and financing activities:
Rescission and divestiture of FBMS:
Assets $ .................................................... 22,133,000
Liabilities ................................................. (15,654,000)
Intangible assets acquired .................................. (2,500,000)
------------
Loss on FBMS rescission ................................... $ 3,979,000
============
Sale of subsidiary assets:
Equipment ................................................... $ 38,500
Intangible assets ........................................... 84,800
Inventory ................................................... 68,142
Note receivable issued in exchange .......................... (268,062)
------------
Gain on sale of subsidiary assets ......................... $ (76,620)
============
Purchase of Meridian Residential Group, Inc, net of cash acquired:
Fair value of assets acquired ............................... $ 130,000
Intangible assets ........................................... 2,581,000
Liabilities assumed ......................................... (45,000)
Fair value of common stock issued ........................... (2,922,000)
------------
Cash acquired ................................................. $ (256,000)
============
(Continued)
9
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2000 1999
------------ ------------
Common stock issued in satisfaction of note payable
and accrued interest ............................................. $ 158,236
============
Amortization of discount on preferred stock ........................ $ 700,000 $ 1,333,098
============ ============
Conversion of preferred stock to common stock ...................... $ 2,142,459
============
Common stock issued for services ................................... $ 200,000
============
Purchase of FBMS, net of cash acquired:
Fair value of assets acquired ................................. $ 26,920,000
Intangible assets ............................................. 7,828,000
Liabilities assumed ........................................... (32,997,000)
Fair value of assets exchanged ................................ (2,531,000)
------------
Cash acquired ................................................. $ (780,000)
============
Purchase of Victoria Precision, Inc.:
Fair value of assets acquired ................................. $ 5,769,000
Intangible assets ............................................. 3,166,000
Liabilities assumed ........................................... (4,969,000)
Fair value of assets exchanged ................................ (859,000)
------------
Cash paid ..................................................... $ 3,107,000
============
See notes to condensed consolidated financial statements.
10
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
1. Basis of presentation:
The condensed consolidated financial statements of Equitex, Inc. and
subsidiaries (the "Company") for the three-month and nine-month periods
ended September 30, 2000 and 1999, have been prepared by the Company,
without audit by the Company's independent auditors. In the opinion of
the Company's management, all adjustments necessary to present fairly the
financial position, results of operations, and cash flows of the Company
as of September 30, 2000, and for the periods then ended have been made.
Those adjustments consist only of normal and recurring adjustments,
except for those described in Note 3. The condensed consolidated balance
sheet as of December 31, 1999, has been derived from the audited
consolidated balance sheet of the Company as of that date.
Certain information and note disclosures normally included in the Company's
annual financial statements prepared in accordance with generally
accepted accounting principals have been condensed or omitted. These
condensed consolidated financial statements should be read in conjunction
with a reading of the financial statements and notes thereto included in
the Company's Form 10-K annual report for 1999, filed with the Securities
and Exchange Commission. The results of operations for the nine months
ended September 30, 2000 and 1999, are not necessarily indicative of the
results to be expected for the full year.
The condensed consolidated financial statements as of and for the periods
ended September 30, 2000, include the accounts of Equitex, Inc. and the
following significant subsidiaries: nMortgage, Inc. ("nMortgage") and
through June 27, 2000, its wholly-owned subsidiary First Bankers Mortgage
Services, Inc. ("FBMS") (Note 3), First Teleservices Corporation ("FTC"),
Triumph Sports Group, Inc. ("Triumph"), and beginning September 27, 2000,
GR.com, Inc. "GR.com" and its wholly-owned subsidiary The Meridian
Residential Group, Inc. (Note 2). All significant intercompany accounts
and transactions have been eliminated in consolidation.
Minority interest at September 30, 2000, represents issued and outstanding
preferred stock of nMortgage. During the nine months ended September 30,
2000, nMortgage issued 1,627,000 additional shares of Series A preferred
stock for $1,627,000, and as a result of the FBMS divestiture (Note 3),
minority interest was reduced by $2,507,000 during the nine months ended
September 30, 2000, the amount of the FBMS preferred stock issued and
outstanding. During the nine months ended September 30, 2000, net losses
incurred by the Company's majority-owned subsidiaries exceeded the
minority interest in the common equity (deficiency) of the subsidiaries.
As a result, the excess of losses applicable to the minority interest
have been charged against the Company and no minority interest is
reflected in the Company's statement of operations for the nine months
ended September 30, 2000.
11
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
2. Acquisition of Meridian Residential Group, Inc.:
On September 27, 2000, the Company, through a newly-formed subsidiary,
GR.com, acquired all of the issued and outstanding common stock of The
Meridian Residential Group, Inc. ("MRG") in exchange for 425,000 shares
of Series F participating, convertible preferred stock valued at
approximately $2,922,000. The value of the Series F Preferred Stock was
based upon the quoted market price of the Company's common stock
underlying the Series F Preferred Stock at the date of acquisition. In
addition, Equitex 2000, Inc. (Note 9) is to issue additional shares of
common stock to the MRG shareholders having a market value, at the time
of issuance, equal to 20% of the annual increase in pre-tax net earnings
compared to the immediately preceding year of the MRG business for each
of the five years subsequent to closing, commencing with the year ending
December 31, 2000, subject to certain limitations, as defined.
The transaction was accounted for as a purchase, and the results of
operations of MRG are included in the Company's 2000 condensed
consolidated statement of operations from the date of acquisition. The
total purchase price was allocated to the assets and liabilities acquired
based on their estimated fair values, including goodwill of approximately
$2,581,000, which is being amortized by the use of the straight-line
method over ten years.
The Company, through its subsidiary nMortgage, Inc., also acquired the
proprietary business model, website, trademarks, corporate names and all
intellectual property rights related to the Meridian GreatRate.com
business, including the names GreatRate.com and GreatRate Mortgage.com
from Meridian Capital Group, LLC ("MCG)", a company affiliated with MRG
through common ownership, for $850,000 cash. The intellectual property
rights are being amortized by use of the straight-line method over a
three-year period.
The following pro forma information has been prepared assuming the
acquisition of MRG and the intellectual property rights from MCG had
taken place at the beginning of the respective periods. The pro forma
information includes adjustments to include the operating results of MRG,
and related amortization of goodwill arising from the acquisition of MRG
and amortization of the intellectual property acquired from MCG.
The pro forma financial information is not necessarily indicative of the
results of operations as they would have been had the transaction been
effected on the assumed date.
Nine months ended September 30,
2000 1999
------------ -----------
Revenues $ 3,771,000 $ 2,816,000
Net loss $(10,374,000) $(2,445,000)
Net loss applicable to common shareholders $(11,133,000) $(6,395,000)
Basic and diluted loss per common share $ (1.56) $ (.89)
Shares used in per share calculation 7,140,293 6,542,114
12
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
3. Rescission of August 23, 1999, FBMS Agreement and Plan of Reorganization
and divestiture of FBMS:
On August 23, 1999, the Company acquired all of the outstanding common
stock of FBMS in exchange for 250 shares of the Company's Series E
Convertible Preferred Stock valued at approximately $2,531,000. The
transaction was accounted for as a purchase. The total purchase price was
allocated to the assets and liabilities acquired based on their estimated
fair values, including goodwill of approximately $18,900,000, which has
been amortized by use of the straight line method over ten years.
Effective June 28, 2000, the Company entered into a rescission agreement
with the previous owner of FBMS, in which the Company and the previous
owner agreed to rescind the terms of the August 23, 1999 FBMS Agreement
and Plan of Reorganization (the "August 23, 1999 Agreement"). Under the
terms of the rescission agreement, all assets and liabilities of FBMS as
of June 28, 2000 were returned to the previous owner of FBMS.
Pursuant to the terms of the settlements relating to the rescission
agreement, the parties have agreed that nMortgage is to retain certain
technological rights which were developed since August 23, 1999, and
which were funded through the Company's investment. In addition, as part
of the settlement, the Company has agreed to issue up to 50 additional
shares of Series E Preferred Stock (Note 7) to fund the resolution of
certain claims. The technological rights that were retained have been
valued at approximately $2,500,000, which are being amortized over a
three-year period.
As a result of the rescission agreement, the Company divested itself of the
assets, liabilities, and operations of FBMS as of June 28, 2000, and as a
result, recorded a loss of $3,979,000, which represents the write off of
the Company's investment in FBMS, which includes remaining goodwill as of
the date of the rescission, net of technological rights retained. The
operating results of FBMS have been included in the consolidated
statements of operations from the date of acquisition through the date of
rescission.
The following pro forma information has been prepared assuming the
rescission of FBMS had taken place at the beginning of the respective
periods. The pro forma information includes adjustments to remove the
operating results of FBMS, related amortization of goodwill arising from
the acquisition of FMBS, and the loss on the FBMS rescission, and to
include amortization expense related to the technological rights retained
in the rescission transaction.
The pro forma financial information is not necessarily indicative of the
results of operations as they would have been had the transaction been
effected on the assumed date.
Nine months ended September 30,
2000 1999
------------ -----------
Revenues $ 543,000 $ 774,000
Net loss $ (4,360,000) $ (2,033,000)
Net loss applicable to common shareholders $ (5,120,000) $ (5,284,000)
Basic and diluted loss per common share $ (.72) $ (.81)
Shares used in per share calculation 7,140,293 6,542,114
13
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
4. Subsidiary transactions:
Effective January 1, 2000, Triumph sold the assets of one of its four
retail stores in exchange for a $268,000 note receivable. In connection
with this transaction, Triumph recorded a gain on the sale of
approximately $76,600, which is presented as other income in the
accompanying statement of operations.
During the nine months ended September 30, 2000, an officer/shareholder of
the Company sold marketable securities to Triumph at a cost of $10,000.
Triumph subsequently sold a portion of these marketable securities for
approximately $278,000. The market value of the remaining securities held
by the Company at September 30, 2000, was approximately $5,700. The
difference between the cost and market value of these securities of
$345,904 was recorded as an increase in additional paid-in capital during
the nine-months ended March 31, 2000.
5. Equity investment:
During the nine-months ended September 30, 2000, VP Sports, Inc. ("VP
Sports") issued additional shares of its common stock in exchange for the
exercise of warrants, which resulted in a decrease in the Company's
ownership interest in VP Sports from approximately 36% at January 1,
2000, to approximately 15% at September 30, 2000.
6. Litigation:
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse impact
either individually or in the aggregate on consolidated results of
operations, financial position or cash flows of the Company.
7. Stockholders' equity:
Series A, B, and C convertible preferred stock:
In January and February 1999, the Company issued a total of 2,100 shares of
6%, Series A, B, and C convertible preferred stock for $1,000 cash per
share, which is the stated value per share. Each series of stock was
convertible into common stock at any time by the holders at a conversion
price equal to 65% of the average closing bid price of the Company's
common stock as specified in the agreement.
14
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
7. Stockholders' equity (continued):
Series A, B, and C convertible preferred stock (continued):
Because this preferred stock contained an immediate beneficial conversion
feature, both additional paid-in capital and the accumulated deficit were
increased by $1,333,098 during the first quarter of 1999, the amount of
the discount due to this beneficial conversion feature. The holders were
entitled to receive a cumulative annual dividend of $60 per share,
payable quarterly, and had preference to any other dividends which might
have been paid by the Company. The dividend was payable either in cash or
in shares of the Company's common stock, at the Company's option. The
preferred stockholders also received warrants to purchase a total of
250,000 shares of the Company's common stock at 120% of the market price
as of the grant date. In addition, the placement agent was issued 20,000
shares of the Company's common stock, valued at $200,000 in exchange for
services in connection with the preferred stock sales.
In April 1999, all 2,100 shares of Series A, B and C convertible preferred
stock, plus accumulated dividends on those shares, were converted into
320,528 shares of common stock, at an average conversion price of $6.63
per share.
Series D convertible preferred stock:
In May 1999, the Company reached an agreement with an accredited investor
to sell up to 3,500 shares of Series D, 6% convertible preferred stock
(the "Series D Preferred Stock") for $1,000 cash per share, which is the
stated value per share. In August 1999, the Company issued a total of
1,200 shares of the Series D Preferred Stock in consideration for
$1,200,000. No further shares of Series D Preferred Stock are to be
issued.
The holder of each share of Series D Preferred Stock is entitled to a 6%
cumulative annual dividend, payable quarterly. The dividend is payable
either in cash or in shares of the Company's common stock, at the
discretion of the Company. The Series D Preferred Stock contains a
liquidation preference equal to the sum of the stated value of each share
plus an amount equal to 100% of the stated value plus the aggregate of
all accrued and unpaid dividends on each share of Series D Preferred
Stock until the most recent dividend payment date or date of liquidation,
dissolution or winding up of the Company.
The Series D Preferred Stock is convertible into common stock at any time,
at a conversion price per share of common stock equal to 65% of the
average closing bid price of the Company's common stock as specified in
the agreement. Because this preferred stock contained an immediate
beneficial conversion feature, both additional paid-in capital and the
accumulated deficit were increased by $1,884,615 during the third quarter
of 1999, the amount of the discount due to this beneficial conversion
feature.
15
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
7. Stockholders' equity (continued):
Series E convertible preferred stock:
The holders of the Series E Preferred Stock are not entitled to dividends,
do not have a liquidation preference and do not have voting rights. The
Series E Preferred stock, if fully issued, automatically converts to
1,000,000 shares of common stock upon the approval of an increase in the
authorized shares of common stock from 7,500,000 shares to 50,000,000
shares, or the subsequent merger of the Company with or into another
company, or the sale of substantially all the Company's assets.
Series F convertible preferred stock:
In connection with the Company's acquisition of MRG, in September 2000, the
Company issued a total of 460,000 shares of Series F convertible
preferred stock (the "Series F Preferred Stock") for $6.875 per share.
The Series F Preferred Stock includes a stated value of $8.00 per share
and contains a liquidation preference in the amount of 105% of the stated
value. Series F shareholders are entitled to dividends in the amount
declared with respect to the Company's common stock. The Series F
Preferred Stock may be converted into shares of the Company's common
stock at any time following the date of issuance until forty-two months
following the issue date at a conversion price per share of common stock
equal to $7.00 per share. Forty-two months after issue, the Series F
Preferred Stock outstanding is subject to mandatory conversion into
shares of the Company's common stock, utilizing the stated value per
share.
8. Series G mandatory convertible preferred stock:
In September 2000, the Company issued 1,300 shares of 6%, Series G
convertible preferred stock (the "Series G Preferred Stock") for $1,000
per share, which is the stated value per share. The Series G Preferred
Stock is convertible, together with any accrued but unpaid dividends, at
any time into shares of the Company's common stock at a conversion price
per share equal to the lesser of $6.50 or 65% of the average closing bid
price of the Company's common stock as specified in the agreement.
Because this preferred stock contained an immediate beneficial conversion
feature, both additional paid-in capital and the accumulated deficit were
increased by $700,000 during the third quarter of 2000, the amount of the
discount due to the beneficial conversion feature. The Series G Preferred
Stock holders are entitled to cumulative dividends at 6% per annum,
payable quarterly commencing September 30, 2000. Dividends in cash or, at
the Company's option, in shares of the Company's common stock. All
outstanding Series G Preferred Stock shall be automatically converted
into common stock on August 31, 2003. The Series G Preferred Stock is
redeemable at the Company's option at any time at a redemption price
equal to $1,350 per share plus any accrued but unpaid dividends. The
Company is required to redeem the Series G Preferred Stock if its
shareholders have not approved an increase in the number of shares of
authorized common stock from 7,500,000 to 50,000,000 effective on or
before March 4, 2001 or a registration statement relating to the resale
of certain shares of the Company's common stock underlying the Series G
Preferred Stock is not declared effective on or before 180 days of its
filing.
16
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
9. Proposed business transactions:
Proposed sale of nMortgage, Inc.:
On December 31, 1999, the Company entered into an agreement and plan of
merger, whereby all of the outstanding common stock of nMortgage was to
be acquired by Innovative Gaming Corporation of America ("IGCA"), an SEC
reporting company whose common stock trades on the Nasdaq SmallCap
Market. Under the terms of this proposed transaction, in exchange for all
outstanding shares of nMortgage, Inc., the Company and the other
nMortgage shareholders were to receive approximately 46,000,000 shares of
IGCA common stock, assuming that there would be approximately 16,000,000
shares of IGCA common stock outstanding on a fully-diluted basis, before
the transaction. On September 21, 2000 the previous agreement was
mutually terminated by both parties.
Acquisition of Nova Financial Systems, Inc. and Key Financial Systems,
Inc.:
On June 29, 2000, the Company signed a definitive agreement with Nova
Financial Systems, Inc. ("Nova") and Key Financial Systems, Inc. ("Key")
to acquire all the outstanding capital stock of Nova and Key in exchange
for the greater of 7,140,000 shares of the Company's common stock, or 50%
of the post-acquisition outstanding common stock of the Company, and cash
of $5,000,000. Nova and Key are both financial companies which specialize
in selling credit card programs designed for sub-prime high credit risk
clients.
Consummation of the Nova and Key acquisitions is subject to a number of
conditions, including (i) the distribution of the Company's business
development assets, net of liabilities assumed, to a new wholly-owned
subsidiary, Equitex 2000, Inc. ("E2000"), and the spin-off of E2000 to
existing shareholders; (ii) the approval of the Nova and Key mergers by
the Company's stockholders; and (iii) stockholder approval of the
increase in the authorized shares of common stock from 7,500,000 to
50,000,000 shares.
Proposed transactions with First TeleBanc Corp.:
On May 4, 1999, the Company entered into a definitive agreement whereby
First TeleBanc Corp. ("First TeleBanc"), a single bank holding company
based in Boca Raton, Florida, was to merge with the Company, with the
Company being the surviving corporation (the "TeleBanc Merger"). First
TeleBanc owns all of the issued and outstanding stock of 1st National
Bank, a national banking association.
This agreement expired on July 31, 2000, and the Company has withdrawn its
application to become a Bank Holding Company. The Company and First
TeleBanc are continuing discussions, which may result in a new agreement
and submission of a revised application with the Federal Reserve.
17
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
10. Operating segments:
As of and during the three and nine month periods ended September 30, 2000,
and 1999, the segment results were as follows:
Three months ended September 30,:
---------------------------------
2000:
Sporting
goods/ Corporate activities
Financial product -------------------------
services related Investments Other Total
----------- ----------- ----------- ----------- ------------
Revenues $ 86,930 $ 96,012 $ 11,306 $ 3,165 $ 197,413
Segment loss (867,060) (115,640) (331,338) (182,410) (1,496,448)
1999:
Sporting
goods/ Corporate activities
Financial product -------------------------
services related Investments Other Total
----------- ----------- ----------- ----------- ------------
Revenues $ 302,862 $ 162,744 $ 79,240 $ 83,379 $ 628,225
Segment loss (260,512) (107,327) (95,064) (538,362) (1,001,265)
Nine months ended September 30,:
--------------------------------
2000:
Sporting
goods/ Corporate activities
Financial product -------------------------
services related Investments Other Total
----------- ----------- ----------- ----------- ------------
Revenues $ 1,579,205 $ 334,078 $ 59,207 $ 3,643 $ 1,976,133
Segment gain loss (4,334,188) (259,393) (902,012) (4,884,914) (10,380,507)
Total assets 3,024,652 1,503,922 1,590,708 5,395,907 11,515,189
1999:
Sporting
goods/ Corporate activities
Financial product -------------------------
services related Investments Other Total
----------- ----------- ----------- ----------- ------------
Revenues $ 302,862 $ 572,433 $ 154,169 $ 103,939 $ 1,133,403
Segment gain loss (339,982) (227,545) (232,819) (1,397,562) (2,197,908)
18
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD LOOKING STATEMENTS
THIS REPORT MAY CONTAIN CERTAIN "FORWARD-LOOKING" STATEMENTS AS SUCH TERM IS
DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 OR BY THE
SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND RELEASES, WHICH
REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED TO,
STATEMENTS CONCERNING THE COMPANY'S OPERATIONS, ECONOMIC PERFORMANCE, FINANCIAL
CONDITION, GROWTH AND ACQUISITION STRATEGIES, INVESTMENTS, AND FUTURE
OPERATIONAL PLANS. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE
NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS
"MAY", "WILL", "EXPECT", "BELIEVE", "ANTICIPATE", "INTENT", "COULD", "ESTIMATE",
"MIGHT", OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE
TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN
OF WHICH ARE BEYOND THE COMPANY'S CONTROL, AND ACTUAL RESULTS MAY DIFFER
MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT FACTORS, INCLUDING UNCERTAINTY
RELATED TO THE COMPANY'S OPERATIONS, MERGERS OR ACQUISITIONS, GOVERNMENTAL
REGULATION, THE VALUE OF THE COMPANY'S ASSETS AND ANY OTHER FACTORS DISCUSSED IN
THIS AND OTHER COMPANY FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
(a) Liquidity.
(b) Capital Resources.
During 1999, as the Registrant restructured its business from an investment
company to an operating company, the Registrant relied primarily on private
placements of equity securities to fund its operations and acquisitions as it
sought to become a fully operating entity. Also during 1999, the Registrant
divested certain of its portfolio securities providing additional liquidity to
fund its operations. These trends have continued during 2000 as the Registrant
continues to fully implement this transition. Presently, all of the Registrant's
subsidiaries operate on a stand-alone basis and each is individually responsible
for its own liquidity. However, the Registrant may need to assist its
subsidiaries from time-to-time should liquidity issues arise. Should additional
liquidity be necessary to fund the operations of its subsidiaries or to complete
any merger or acquisition, the Registrant believes it has sources available,
including the sales of certain investments or the private placement of equity
securities, to cover any such needs.
On August 23, 1999, the Registrant through its majority owned subsidiary,
nMortgage, Inc., acquired First Bankers Mortgage Services, Inc. ("FBMS") a
mortgage banking company headquartered in Ft. Lauderdale, Florida in exchange
for 250 shares of the Registrant's Series E Convertible Preferred Stock. On
August 15, 2000, the Registrant reached an agreement in principal to rescind the
acquisition of FBMS, effective June 28, 2000. Under the terms of the agreement,
all assets and liabilities of FBMS were returned to the previous owner effective
June 28, 2000. Pursuant to the terms of the settlements relating to the
rescission agreement, the parties have agreed that the Registrant, through
nMortgage, is to retain certain technological rights which were developed after
August 23, 1999, funded by the Registrant's investment. These technological
rights are valued at approximately $2.3 million, net of accumulated depreciation
at September 30, 2000. Also as part of the settlement, the Registrant has agreed
19
to issue up to 50 additional shares of its Series E Convertible Preferred Stock
bringing the total Series E shares outstanding to 300. As a result of the
rescission, the Registrant divested itself of the assets, liabilities and
operations of FBMS as of June 28, 2000 and the Registrant's investment in FBMS
was written-off as of June 28, 2000 resulting in a loss of $3,979,000.
On September 7, 2000, effective September 27, 2000, Equitex acquired by merger
of all of the issued and outstanding common stock of the Meridian Residential
Group, Inc. ("Meridian") through its wholly-owned subsidiary, GR.com, Inc., in
exchange for 425,000 shares of the Registrant's Series F Convertible Preferred
Stock. In connection with the Meridian acquisition, nMortgage acquired from
Meridian Capital Group, LLC, the proprietary business model, website,
trademarks, corporate names and all related intellectual property rights related
to Meridian Capital Group's GreatRate.com business, including the names
GreatRate.com and GreatRateMortgage.com for a cash purchase price of $850,000.
The Registrant issued 1,300 shares of its Series G Convertible Preferred Stock
for net proceeds of $1,240,000 to fund the acquisition of GreatRate.com. The
remaining funds were utilized for working capital needs.
Meridian was established to become a mortgage banker, however, over time it
became a provider of mortgage management services and E-commerce infrastructure
platforms to the mortgage industry. As a result, Meridian set out to create a
strategic alliance with an entity that could provide technology compatible with
its net stream lined virtual back office. Since March 1, 2000, Meridian has laid
the groundwork for a new business model. Through the GreatRate.com site,
Meridian is developing web based mortgage products that will allow the
Registrant to capitalize on a streamlined back office operation to expand its
business nationwide. The goal of the new business plan is to create a B2B
platform for Meridian to reach out to small banks and financial institutions
allowing them to utilize Meridian's/nMortgage's technology and infrastructure.
This will enable the financial institution to enter into the business of
providing residential and small commercial mortgages to their clientele with
almost no startup costs.
Meridian recently announced that it has signed a letter of intent with Situs
Technologies for exclusive licensing and technology development rights to the
Virtual Backroom Mortgage Origination System ("VBS") created by Situs. Subject
to the execution of a definitive agreement, Situs has been selected to serve as
the exclusive E-Mortgage Platform for all mortgage business originated by
Meridian and its affiliates. The Situs technology will provide secure fully
interactive web-based e-mortgage systems and connectivity between Meridian and
its lenders, vendors and customers.
nMortgage continues to offer its loan products through the Internet. Customers
accessing the nmortgage.com website are being redirected to the GreatRate.com
website which currently operates in the states of New York, New Jersey and
Connecticut. In addition, nMortgage continues to derive revenues from consulting
services provided to the mortgage industry.
Following the acquisition of FBMS through nMortgage in August 1999, the
Registrant began incorporating major operational changes at nMortgage. The
purpose of these changes was to significantly reduce nMortgage's operating
overhead as it attempted to transition from a traditional brick and mortar
mortgage banker to a technology driven mortgage banker, broker and Internet
solution provider to the mortgage industry. This restructuring continued during
the first half of 2000 until the Registrant rescinded the FBMS transaction.
Prior to the rescission, additional capital expenditures were incurred during
the first half of 2000 as nMortgage further developed its information technology
in connection with its Internet-based product offerings. Following the closing
of the Meridian transaction GR.com has become the operating unit of nMortgage
which plans to move forward with its business plan and continue the roll out of
its business to consumer and business to business mortgage programs. As
nMortgage moves forward with its business plan, it will initially rely primarily
on origination and other loan related fees from lenders to whom it brokers
20
mortgage loans. As nMortgage continues to develop its business to business
Internet solutions, additional fees will be recognized from fee-based programs
for private labeling third party website solutions. This should generate
additional loan-related as well as service-related fees.
Triumph and VP Sports both rely primarily on cash flows from operations for
their working capital. In addition, during 1999 and 2000, Triumph received a
cash infusion from the sale of an investment purchased from an officer of
Triumph considerably below market value. This capital infusion provided
additional cash of approximately $270,000 to operate its business and was
considered a contribution of capital. The Registrant anticipates Triumph's
liquidity and capital resources will be sufficient to fund its operations during
the year 2000.
On June 29, 2000, the Registrant announced that it had executed a definitive
agreement for the acquisitions of Key Financial Systems, Inc. ("Key") and Nova
Financial Systems, Inc. ("Nova") based in Clearwater, Florida. Key is a three
year old financial services call center organization that markets and services
credit card programs and provides customer service support for online
applications. Under the agreement, Key and Nova's current stockholders will
receive a combination of cash and stock of the Registrant. The Registrant
presently believes that it will have sources of cash available to complete the
Key acquisition through the private offering of equity securities of the
Registrant.
On August 2, 2000, the Registrant announced its agreement for the acquisition of
First TeleBanc Corp. ("First TeleBanc") had expired on July 31, 2000. In
addition, as a result of certain deficiencies noted in the operations of First
TeleBanc's operating bank, Net 1st National Bank, following an examination
performed by the Office of the Comptroller of the Currency ("OCC"), the
Registrant withdrew its application with the Federal Reserve to become a bank
holding company. The Registrant is engaged in discussions with First TeleBanc
which, although there is no assurance, may result in a new agreement and
submission of application to the Federal Reserve.
(c) Results of operations.
The Registrant has divested itself of the assets and operations of FBMS
effective June 28, 2000. The FBMS results of operations have been included in
the Registrant's consolidated statement of operations during the period from
August 23, 1999 through June 28, 2000.
The Registrant fundamentally changed its operations during 1999 most notably
with the acquisition of FBMS in August 1999. As a result, comparison of the
results of operations for the first nine months of 1999 as compared to the same
2000 period would not provide for a meaningful analysis. The discussion and
analysis of the Registrant's results of operations have been analyzed with a
view toward the Registrant's current and future business operations.
REVENUES: The Registrant's consolidated revenues for the nine months ended
September 30, 2000 increased significantly when compared to September 30, 1999
as a result of the addition of nMortgage and more specifically FBMS during the
first six months of 2000. Of the total consolidated revenues of $1,976,133 for
the nine months ended September 30, 2000, approximately $1,500,000 is
attributable to nMortgage, most of which was recorded in the first quarter. For
the three months ended September 30, 2000, total revenues were $197,413. Of this
amount, approximately $87,000 is attributable to nMortgage and First
TeleServices, approximately $96,000 to Triumph Sports, and approximately $14,000
to the Registrant itself. Revenues were significantly lower for the quarter
ended September 30, 2000 when compared to the two previous quarters in 2000 as a
result of the FBMS rescission and the resulting decrease in mortgage
originations.
21
As discussed above, during the first nine months of 2000, nMortgage continued to
implement changes in its operations. During the second quarter of 2000,
nMortgage materially completed its transition from warehouse funding to table
funding a majority of its mortgage loans. As a result of this change, nMortgage
consolidated its operations and decreased its operating overhead resulting in
certain write-offs and severance costs during the first six months of the year.
Given these operational changes, nMortgage experienced an overall decrease in
loan originations during the period both in the quarter ended June 30, 2000 as
it changed its loan funding method, and in the quarter ended September 30, 2000
as it ceased operations following the FBMS rescission and began discussions with
Meridian. In addition, nMortgage saw a decrease in mortgage originations due to
higher interest rates affecting both new home purchases and more notably
refinancings as most consumers chose not to refinance at the higher rates.
With the merger of GR.com and Meridian complete, the combined companies intend
to seek an agreement with a compatible financial institution allowing them to
operate in a greater number of jurisdictions. When nMortgage completely resumes
operations, a majority of its revenues should be derived from origination fees.
Under the table funding concept, once a mortgage originated by nMortgage is
closed and funded by the lender, nMortgage will be paid its fee directly from
that lender. In addition to limiting overhead costs, management believes the
table funding concept is more advantageous as, among other things, it minimizes
the necessity to maintain warehouse lines of credit and reduces the potential
for repurchasing loans.
Triumph, the second largest contributor to the Registrant's revenues, derived
those revenues from product sales at its three retail locations. Total sales
were down as compared to the prior year as a result of the sale of one of its
retail locations. Triumph experienced a slight decrease in third quarter sales
as compared to the first and second quarters of 2000. The sale of a retail
location resulted in a gain of approximately $73,000, which is presented as
other income recorded during the first quarter. Triumph expects total revenues
will be lower for the entire year 2000 given the sale of this location.
The Registrant's revenues for the quarter and nine months ended September 30,
2000 on a stand-alone basis consisted primarily of interest income related to
certain long-term and short-term loans to non-affiliated entities. As a holding
company, the Registrant has no significant sources of revenue other than those
of its operating subsidiaries. During both 1999 and 2000 the Registrant
partially funded its operations from the sales of certain investments, which is
considered other income not revenue. For the remainder of year 2000, the
Registrant may continue to divest certain of its investments to cover its
operating overhead as it continues to work toward completion of its contemplated
acquisition and merger transactions.
EXPENSES: Of the Registrant's total expenses on a consolidated basis for the
nine months ended September 30, 2000, approximately $4,697,000 are attributable
to nMortgage, $1,137,000 to Equitex, $334,000 to First TeleServices and $509,000
to Triumph. In addition, a one time loss of $3,979,000 representing the write
off of the Registrant's investment in FBMS and related goodwill, net of
technological rights was recorded. This is an increase of approximately 200%
when compared to the previous year which did not include the operations of
nMortgage. Total expenses for the third quarter of 2000 were marginally lower as
compared to the second quarter of 2000 while both the second and third quarters
were significantly lower when compared to the first quarter of this year.
A majority of the total expenses are selling, general and administrative
expenses with nMortgage accounting for approximately $4,000,000 of the nearly
$5,750,000 total. nMortgage's operating overhead following the FBMS rescission
and divestiture is significantly lower which translated to significantly lower
expenses incurred in the second and third quarters of 2000 as compared to the
22
first quarter of 2000. The remaining portion of expenses attributable to
Equitex, Triumph and First TeleServices were slightly lower when compared to the
previous year's quarter and nine month period. First TeleServices, however, saw
a significant increase in its expenses during the third quarter of 2000 as a
result of the write-down of $150,000 on a note receivable.
OTHER INCOME (EXPENSES): Other income (expense) includes a net investment gain
of approximately $23,700 for the nine months ended September 30, 2000, which
accounts for the realized and unrealized gain on certain of the Registrant's
investments, equity in losses of affiliates of $1,092,000, interest expense of
approximately $706,000 and other income of approximately $73,000 from Triumph's
sale of assets.
Of the total interest expense, approximately $680,000 is attributable to
nMortgage. This expense is related to nMortgage's warehouse lines of credit. As
a result of the rescission of the FBMS transaction this expense will
significantly decrease in future periods as nMortgage discontinues the use of
warehouse lines of credit to fund its loans. Interest expense recorded in the
third quarter ended September 30, 2000 was significantly lower when compared to
the first and second quarters of 2000.
Equity in loss of affiliates corresponds to the Registrant's approximately 15%
ownership interest in VP Sports which is accounted for based on the equity
method. VP Sports' business is seasonal and traditionally, the first and second
calendar quarters are the peak sales periods for VP Sports with the latter
portion of the year being the slowest. However, at the end of the first quarter
2000, VP Sports acquired certain assets of Torpedo, Inc. ("Torpedo") of
Montreal, Canada. Assimilating the operations of Torpedo with the operations of
VP Sports contributed to the losses for the third quarter. Torpedo is a
manufacturer of children's winter toy products and accordingly has peak sales in
the fourth quarter. In addition, due to the exercise of certain warrants in VP
Sports during the third quarter by unaffiliated third parties, Equitex's
ownership was reduced from approximately 24% to approximately 15% which
accounted for an unrealized loss on the Registrant's investment further
contributing to the equity in losses of affiliates. Also included in equity in
losses of affiliates is a loss of $117,500 by First TeleServices on one of its
equity investments.
NET LOSS: Of the net loss for the nine months ended September 30, 2000,
approximately $3,861,000 is attributable to nMortgage, approximately $1,808,000
to Equitex, approximately $473,000 to First TeleServices and approximately
$259,000 to Triumph. Additionally, $3,979,000 is attributable to the loss on the
FBMS divestiture. This compares to a net loss of approximately $2,198,000 for
the nine months ended September 30, 1999 which included only one month of the
operations of nMortgage. The net loss for the third quarter ended September 30,
2000 was approximately $1,496,000 as compared to approximately $6,975,000 for
the second quarter ended June 30, 2000 and approximately $1,909,000 for the
first quarter ended March 31, 2000.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS: Net loss applicable to common
stockholders was approximately $11,140,000 for the nine months ended September
30, 2000 This amount includes deemed preferred stock dividends on the
Registrant's outstanding preferred stock of $59,400 and the amortization of
discount on preferred stock of $700,000 for the nine months ended September 30,
2000.
23
ITEM THREE
QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
Not applicable
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
On September 6, 2000 the Registrant issued 1,300 shares of its Series G
Convertible Preferred Stock (the "Series G Preferred Stock") for cash
consideration of $1,300,000 to an accredited investor. The Series G Preferred
Stock is convertible into common stock at the lesser of $6.50 per share or 65%
of the average closing bid price of the Registrant's common stock as reported by
the Nasdaq Stock Market for the five days immediately preceding conversion,
including interest due and payable. The Registrant relied on the exemptions from
registration provided by Sections 4(2) and/or 4(6) of the Securities Act of
1933, as amended (the "Act) and/or Rule 506 promulgated thereunder.
On September 6, 2000 the Registrant issued 31,250 shares of its Series F
Convertible Preferred Stock (the "Series F Preferred Stock") valued at $250,000
to an accredited investor. The Series F Preferred Stock is convertible into
common stock at $7.00 per share. The Registrant relied on the exemptions from
registration provided by Sections 4(2) and/or 4(6) of the Act and/or Rule 506
promulgated thereunder.
On September 7, 2000 the Registrant issued 425,000 shares of its Series F
Preferred Stock to Meridian Residential Group, LLC in consideration for the
acquisition of all of the issued and outstanding common stock of The Meridian
Residential Group, Inc. The Series F Preferred Stock is convertible into common
stock at $7.00 per share. The Registrant relied on the exemptions from
registration provided by Sections 4(2) and/or 4(6) of the Act and/or Rule 506
promulgated thereunder.
On September 21, 2000 the Registrant issued 3,750 shares of its Series F
Preferred Stock in exchange for legal services in the amount of $30,000 to a
creditor. The Series F Preferred Stock is convertible into common stock at $7.00
per share. The Registrant relied on the exemptions from registration provided by
Sections 4(2) and/or 4(6) of the Act and/or Rule 506 promulgated thereunder.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
24
Item 6. Exhibits and Reports on Form 8-K
(a) Financial Data Schedule for SEC Registrants
(b) On August 30, 2000 the Registrant filed a Current Report on
Form 8-K reporting the Rescission of the acquisition of First
Bankers Mortgage Services, Inc. ("FBMS") under Items 2 and 7
which included pro forma financial information prepared
assuming the rescission of FBMS had taken place on January 1,
2000 and January 1, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Equitex, Inc.
(Registrant)
Date: November 16, 2000 By:/s/ Henry Fong
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Henry Fong
President, Treasurer and
Chief Financial Officer
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