SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. 1)
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 Kellogg, Esq.
RaLea Sluga, Esq.
Friedlob Sanderson Paulson & Tourtillott, LLC
1400 Glenarm Place
Denver, Colorado 80111
(303) 571-1400
(303) 595-3970
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(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required
[ ] 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:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
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(4) Proposed Maximum aggregate value of transaction:
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(5) Total Fee Paid:
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[X] 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 registration 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 __________ __, 2001
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________ __, 2001
To the Stockholders of Equitex, Inc.
A Special Meeting of Stockholders of Equitex, Inc., a Delaware corporation,
will be held at 2401 PGA Blvd., Suite 190, Palm Beach Gardens, Florida 33410, on
__________ __, 2001 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 Equitex, Inc.'s common stock, $.02
par value, from 7,500,000 shares to 50,000,000 shares. Passage of this proposal
requires the affirmative vote of a majority of the outstanding stock of each
class entitled to vote thereon as a class.
2. A proposal to provide for the following actions:
o the distribution by Equitex, Inc. of all of its assets and
liabilities to Equitex 2000, Inc., a wholly-owned and
Delaware-chartered subsidiary of Equitex, Inc.; and
o the distribution by Equitex, Inc. of all of the outstanding
shares of common stock of Equitex 2000, Inc. to the stockholders
of Equitex, Inc. on the basis of one share of common stock of
Equitex 2000, Inc. for each share of common stock of Equitex,
Inc., as further described in the attached proxy statement.
Passage of this proposal requires the affirmative vote of a majority of the
outstanding stock of each class entitled to vote thereon as a class.
3. A proposal to acquire all of the outstanding capital stock of Nova
Financial Systems, Inc. and Key Financial Systems, Inc. in exchange for the
greater of 7,140,000 shares or 50% of the outstanding common stock of Equitex,
Inc. on a post acquisition basis plus cash consideration of $5 million. This
proposal is subject to the approval of proposal number one. Passage of this
proposal requires the affirmative vote of a majority of the total votes cast on
the proposal in person or by proxy.
4. Such other business as may properly come before the meeting, or any
adjournment or adjournments thereof.
The discussion of the proposals by the board of directors set forth above
is intended only as a summary, and is qualified in its entirety by the
information relating to the proposals set forth in the accompanying proxy
statement.
Only holders of record of Equitex, Inc.'s common stock at the close of
business on ________ ___,2001 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
________________________________________________________________________________
Proxy
________________________________________________________________________________
Equitex, Inc.
7315 East Peakview Avenue
Englewood, Colorado 80111
Special Meeting of Stockholders
To Be Held On __________ ___, 2001
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Equitex, Inc. hereby constitutes and
appoints Henry Fong or Thomas B. Olson 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 _____
__, 2001, 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 Equitex, Inc.'s
common stock, $.02 par value, from 7,500,000 shares to 50,000,000 shares.
FOR ______ AGAINST ______ ABSTAIN ______
2. To consider and vote upon the distribution by Equitex, Inc. of all of
its assets and liabilities to Equitex 2000, Inc., a wholly-owned and
Delaware-chartered subsidiary of Equitex, Inc., and the distribution by Equitex,
Inc. of all of the outstanding shares of common stock of Equitex 2000, Inc. to
the stockholders of Equitex, Inc. on the basis of one share of common stock of
Equitex 2000, Inc. for each share of common stock of Equitex, Inc.
FOR ______ AGAINST ______ ABSTAIN ______
3. To consider and vote upon the acquisition all of the outstanding capital
stock of Nova Financial Systems, Inc. and Key Financial Systems, Inc. in
exchange for the greater of 7,140,000 shares or 50% of the outstanding common
stock of Equitex, Inc. on a post acquisition basis plus cash consideration of $5
million. This proposal is subject to the approval of proposal number one.
FOR ______ AGAINST ______ ABSTAIN ______
4. To transact such other business as may properly come before the meeting.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS SPECIFIED HEREON WITH
RESPECT TO EACH PROPOSAL AND FOR ALL OF THE PROPOSALS IF NO SPECIFICATION IS
MADE. THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE DISCRETION OF THE PROXIES
ON ANY OTHER BUSINESS PROPERLY BROUGHT BEFORE THE SPECIAL MEETING.
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: ____________, 2001 ____________________________________
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: ___________
TABLE OF CONTENTS
Questions and Answers about the Proposals .....................................1
Who Can Help Answer Your Questions ............................................2
Proxy Statement Summary .......................................................3
The Special Meeting .....................................................3
The Increase in Authorized Shares of Common Stock .......................3
The Distribution and Spin-Off ...........................................5
The Acquisitions of Nova Financial Systems, Inc. and Key Financial
Systems, Inc. .........................................................9
Corporate Structure ..........................................................11
Risk Factors .................................................................12
Forward Looking Statements ...................................................17
The Special Meeting ..........................................................17
Available Information ........................................................19
Documents Incorporated by Reference ..........................................20
Revocability of Proxy ........................................................20
Solicitation .................................................................20
Voting Securities ............................................................21
Dividend Policy ..............................................................21
Price Range of Equitex Common Stock ..........................................22
Selected Financial Data ......................................................23
Security Ownership of Principal Stockholders and Management ..................25
Liability and Indemnification of Directors and Officers ......................25
Proposal Number One: Increase in Common Stock ...............................27
Acquisition of Nova Financial Systems, Inc.
and Key Financial Systems, Inc. .......................................28
Acquisition of the Meridian Residential Group, Inc. ...................29
Acquisition of First Bankers Mortgage Services, Inc. and Rescission ...32
Summary of Securities Authorized and Issued in Association
with the Acquisitions ...............................................33
Accretion and Dilution ................................................34
Sale of Series G Convertible Preferred Stock ..........................35
Description of Preferred Stock ........................................35
Options and Warrants ..................................................37
Proposal Number Two: The Distribution and Spin-Off ..........................38
The Distribution and Spin-Off .........................................38
Equitex 2000, Inc.'s Business After the Distribution and Spin-Off .....39
Proposal Number Three: The Acquisition of Nova Financial Systems, Inc
and Key Financial Systems, Inc. .......................................42
Business of Nova Financial Systems, Inc
and Key Financial Systems, Inc. .....................................42
Key Financial Systems, Inc. Management's Discussion and
Analysis of Financial Condition and Results of Operation ............48
Nova Financial Systems, Inc. Management's Discussion and
Analysis of Financial Condition and Results of Operation ............51
Equitex, Inc. and Equitex 2000, Inc.
Pro Forma Financial Information .....................................53
Financial Information ........................................................65
Stockholder Proposals ........................................................65
Other Matters ................................................................65
Exhibit 1 - Revised Paragraph 4 of Certificate of Incorporation ...............
Exhibit 2 - Financial Statements of Nova Financial Systems, Inc. ..............
Exhibit 3 - Financial Statements of Key Financial Systems, Inc. ...............
Exhibit 4 - Financial Statements of The Meridian Residential Group, Inc. ......
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QUESTIONS AND ANSWERS ABOUT THE PROPOSALS
Q1: WHAT ARE THE PRACTICAL EFFECTS OF THE DISTRIBUTION AND SPIN-OFF?
A1: After the distribution by Equitex of all of its assets and liabilities
(listed under proposal number two to this proxy statement), such assets
& liabilities will be owned by Equitex 2000, Inc. After the spin-off of
Equitex 2000, Inc. common stock is completed, Equitex's stockholders
will own all of the outstanding shares of Equitex 2000 and, therefore,
a direct interest in the assets of Equitex existing before the
acquisitions discussed in proposal number three. You will own the same
number of shares of Equitex 2000, Inc. that you own of Equitex as of
the close of business on ______, 2001.
Q2: WHY DO A DISTRIBUTION AND SPIN-OFF?
A2: Equitex has been engaged, through its subsidiaries, in the active
conduct of two principal lines of business:
o Consumer financial service business; and
o Retail and commercial mortgage banking business.
The distribution by Equitex of all of its assets and liabilities to
Equitex 2000 and spin-off of Equitex 2000 common stock are to separate
the two principal lines of business. Equitex believes that, after
completing the distribution and spin-off, Equitex 2000 will have an
enhanced ability to focus more directly on the mortgage banking
business and Equitex will be able to focus more directly on its
consumer financial service business.
The spin-off of Equitex 2000 common stock will give you a direct
investment in Equitex and Equitex 2000. Equitex believes that,
following the distribution and spin-off, the financial markets will be
able to focus on the individual strengths of Equitex and Equitex 2000
and more accurately evaluate the performance of each distinct business
compared to companies in the same or similar businesses.
Q3: WILL SHARES TRADE ANY DIFFERENTLY AS A RESULT OF THE SPIN-OFF?
A3: YES. Because there is no public market for the new Equitex 2000 common
stock, its stock cannot be traded until the application for trading of
its common stock on the Nasdaq SmallCap Market is approved. If
Equitex's application is not approved, its common stock may be traded
on either the electronic bulletin board or the National Quotation
Bureau, Inc.'s "Pink Sheets." Equitex's common stock will continue to
trade on a regular basis on the Nasdaq SmallCap Market.
Q4: IS THE DISTRIBUTION AND SPIN-OFF TAXABLE FOR U.S. TAX PURPOSES?
A4: YES, but because Equitex has no current and post-1913 accumulated
earnings and profits, the distribution will be applied against, and
reduce the adjusted basis of your stock in Equitex as a return of
capital. If the distribution is greater than the adjusted basis of your
Equitex stock, the excess will be treated as a capital gain. The value
of the distribution will be equal to the fair market value of the
assets distributed by Equitex to Equitex 2000.
Q5: WHAT DO I NEED TO DO NOW?
A5: You should vote your shares by mailing your signed proxy card in the
enclosed return envelope as soon as possible so that your shares will
be represented at the special meeting. If you do not vote your shares,
it will be the same as a vote against adoption of the proposal to amend
Equitex's articles of incorporation and proposal number two to approve
the distribution and spin-off.
Q6: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
VOTE MY SHARES FOR ME?
A6: Your broker will vote your shares only if you instruct your broker how
to vote. Your broker should mail information to you that will explain
how to give voting instructions to your broker. Please provide
instructions to your broker on how to vote your shares. If you do not
instruct your broker how to vote, your shares will not be voted. This
will be same as a vote against adoption of the proposal to amend
Equitex's articles of incorporation and proposal number two to approve
the distribution and spin-off.
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Q7: WHAT IF I WANT TO CHANGE MY VOTE?
A7: You can change your vote at any time before your proxy is voted at the
special meeting. If you hold your shares directly, you can do this in
one of three ways:
o You can send a written notice to the Secretary of Equitex stating
that you would like to revoke your proxy.
o You can complete and submit a new proxy card.
o You can attend the special meeting and request to vote in person.
Your attendance at the special meeting alone will not, however,
revoke your proxy.
If you have instructed a broker to vote your shares, you must follow
directions received from your broker to change those instructions.
Q8: SHOULD I SEND IN MY STOCK CERTIFICATES?
A8: No. After the spin-off by Equitex of all of the Equitex 2000 common
stock, if you are a holder of record of Equitex's common stock as of
the record date, you will receive a separate stock certificate for your
Equitex 2000 common stock.
WHO CAN HELP ANSWER YOUR QUESTIONS?
If you would like additional copies of this proxy statement or if you have
questions about the proposals to be acted on at the special meeting, you should
contact:
Equitex, Inc.
Attn: Thomas B. Olson, Secretary
7315 W. Peakview Avenue
Englewood, Colorado 80111
(303) 796-8940
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SUMMARY
This summary highlights selected information from this document, but does
not contain all the details about Equitex or the proposals to be acted on at the
special meeting, including information that may be important to you. To better
understand the proposals to be acted on at the special meeting, you should
carefully review this entire document, including exhibits and documents
incorporated by reference.
THE SPECIAL MEETING
DATE, TIME AND PLACE
Equitex is providing this proxy statement in connection with its
solicitation of proxies from you for use at a special meeting of stockholders of
Equitex to be held at 2401 PGA Blvd., Suite 190, Palm Beach Gardens, Florida
33410 at _____ a.m. Eastern Standard Time on ________, 2001 and at any
adjournments of that meeting.
MATTERS FOR CONSIDERATION
INCREASE IN AUTHORIZED SHARES OF COMMON STOCK
At the special meeting, you will be asked to consider and vote upon a
proposal providing for an amendment of paragraph 4 of the Certificate of
Incorporation to increase the number of authorized shares of Equitex's common
stock, $.02 par value, from 7,500,000 shares to 50,000,000 shares. By approving
this proposal, our stockholders will not be allowed a separate opportunity to
vote upon the following transactions:
1) The issuance of our Series F Convertible Preferred Stock in connection
with the acquisition of The Meridian Residential Group, Inc. which may
convert into approximately 525,000 shares of our common stock;
2) The issuance of our Series E Convertible Preferred Stock in connection
with the acquisition and rescission of First Bankers Mortgage
Services, Inc. which may convert into approximately 300,000 shares of
our common stock; and
3) The issuance of our Series G Convertible Preferred Stock in connection
with a private placement which may convert into approximately 300,000
shares of our common stock.
Each of the above series of preferred stock was issued subject to the
approval of the increase in the number of authorized shares of our common stock.
Until the approval of proposal number one, these series of preferred stock are
not convertible into our common stock. If we fail to obtain approval of proposal
number one on or before March 4, 2001, we will be required to redeem for cash
each series of preferred stock.
The stockholders should be aware that approval of this proposal may ratify
the board of directors' prior actions regarding these transactions and the
ratification could be used as an affirmative defense against future shareholder
suits.
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The following table summarizes information regarding the estimated fair
values and summaried financial information regarding the companies we have
acquired or will acquire upon approval of proposals one and three:
The Meridian
Nova Financial Key Financial Residential
Systems, Inc. Systems, Inc. Group, Inc.
--------------- --------------- ---------------
(pending) (pending) (completed)
ESTIMATED FAIR VALUE .................... $ 28,059,000(1) $ 28,059,000(1) $ 3,772,000(2)
NET INCOME (LOSS)
For the year ended December 31, 1999 .... $ 205,000 $ 5,384,900 $ 8,700(3)
For the quarter ended September 30, 2000 $ (44,427) $ 1,203,011 $ 12,400
For the quarter ended June 30,2000 ...... $ 255,326 $ 710,826 $ (98,800)
For the quarter ended March 31, 2000 ... $ 374,865 $ 946,263 $ 93,300(3)
CONSIDERATION ISSUED/PAID
Stock options to be issued (shares) ..... 893,200 893,200 0
Warrants to be issued (shares) .......... 285,000 285,000 0
Proceeds received through equity
financing .............................. $ 2,500,000 $ 2,500,000 $ 1,300,000
Cash .................................... $ 2,500,000 $ 2,500,000 $ 850,000
Common stock (shares) ................... 3,570,000 3,570,000 425,000
Estimated fair value of options and
warrants to be issued .................. $ 2,800,000(6) $ 2,800,000(6)
Market value of common stock issued/to be
issued .................................. $ 22,759,000(4) $ 22,759,000(4) $ 2,922,000(5)
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(1) Acquisitions are to be accounted for as reverse acquisitions. See Pro Forma
Financial Information appearing elsewhere in this proxy statement.
(2) Acquisition occurred September 27, 2000. Acquisition accounted for as a
purchase.
(3) Fiscal year-ended and fiscal quarter ended February 29, 2000.
(4) Market value based on the price of our common stock at September 30, 2000
($6.375 per share).
(5) Market value based on the price of our common stock at September 27, 2000
($6.875 per share).
(6) Estimated fair value of options and warrants to be issued based upon
Black-Scholes option pricing model, utilizing a 0% expected dividend
yield, a 6% risk-free interest rate, an expected volatility of 48% and
expected lives of the options and warrants of three years.
Background and Reasons for the Increase in Authorized Shares
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The increase in authorized shares will allow us to issue shares of our
common stock and common stock underlying our convertible preferred stock
issuances in connection with the following:
o common stock issued in the proposed Nova Financial Systems, Inc. and
Key Financial Systems, Inc. acquisitions;
o preferred stock which may be issued to raise the cash consideration
for the Nova Financial Systems, Inc. and Key Financial Systems, Inc.
acquisitions;
o preferred stock issued in connection with the Meridian Residential
Group, Inc. acquisition; and
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o preferred stock issued in connection with the First Bankers Mortgage
Services, Inc. acquisition and rescission.
In addition, the increase in authorized shares will facilitate the
following:
o the possible issuance of common stock in connection with one or more
equity financing; and
o issue common stock issuable pursuant to our stock option plans and
outstanding warrants.
Condition to the Increase in Common Stock
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The increase in common stock is conditioned upon the approval of the
increase in common stock by the holders of a majority of the outstanding stock
entitled to vote and a majority of the outstanding stock of each class entitled
to vote as a class.
Risk Factors
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You should be aware that the increase in the number of authorized shares
involves certain risks, including those described under "Risk Factors," that
could adversely affect the value of your holdings.
The Distribution and Spin-off
At the special meeting, you will also be asked to consider and vote upon a
proposal providing for the distribution by us of all of our assets and
liabilities to Equitex 2000, our wholly-owned and Delaware-chartered subsidiary
and the distribution by us of all of the outstanding shares of Equitex 2000
common stock to our stockholders on the basis of one share of common stock of
Equitex 2000 for each share of our common stock, as further described in this
proxy statement.
If our stockholders approve the distribution and spin-off, we anticipate
that our board of directors will authorize the various components of the
distribution and declare a special dividend payable in Equitex 2000 common stock
and set a record date for that dividend. The distribution would involve the
actions described below.
We will contribute the following to Equitex 2000:
o all of our cash, or such lesser amount as our board of directors may
determine in its sole discretion;
o all securities and investments owned by us in our investee companies;
o all shares of the Meridian Residential Group, our wholly-owned
mortgage banking subsidiary;
o any residual rights related to the First Bankers Mortgage Services,
Inc. investment;
o all shares of nMortgage, Inc., our Internet based mortgage banking
subsidiary;
o all receivables of any nature, including accounts and notes
receivable;
o all furniture, fixtures and equipment; and
o any other assets that are related in any manner to the mortgage
banking and other business of Equitex.
Equitex 2000 will assume all of our liabilities and will indemnify us and
assume our prosecution or defense in the following lawsuits: WILLIAM G. HAYES,
JR. LIQUIDATING AGENT FOR RDM SPORTS GROUP, INC. AND RELATED DEBTORS V. EQUITEX,
INC., SMITH, GAMBRELL, RUSSELL, L.L.P., DAVID J. HARRIS, P.C., AND DAVID J.
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HARRIS, INDIVIDUALLY, Adversary Proceeding No., 00-1065 (U.S. Bankruptcy Court
for the Northern District of Georgia, Newnan Division); and EQUITEX, INC. AND
HENRY FONG V. BERTRAND T. UNGER, Case No. 98-CV-2437 (Dist. Ct. Arapahoe County,
Colorado).
Federal Income Tax Consequences Related to the Distribution and Spin-Off
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While the spin-off of shares of Equitex 2000 will be a taxable distribution
to our stockholders, because we have no current and post-1913 accumulated
earnings and profits, the distribution will be applied against, and reduce the
adjusted basis of our common stock owned by the stockholder as a return of
capital. If the value distribution is greater than the adjusted basis of the
stockholder's Equitex stock, the excess is treated as a capital gain. The
value of the distribution will be equal to the fair market value of the assets
distributed by Equitex to Equitex 2000.
What Our Stockholders Will Receive in the Distribution and Spin-Off
-------------------------------------------------------------------
We will distribute, in the form of a special dividend, all of the
outstanding shares of common stock of Equitex 2000, on a pro rata basis, to our
holders of common stock as of a record date for the special dividend. In the
special dividend, each shareholder will retain its shares of Equitex common
stock, and for each share of Equitex common stock held by it on the record date
for the special dividend, will be entitled to receive one share of Equitex 2000
common stock.
Prior to our distribution to our stockholders, the Equitex 2000 common
stock will be registered pursuant to Section 12(b) or 12(g) of the Securities
Exchange Act of 1934 and Equitex 2000 shall have filed and sought to make
effective an application for the inclusion of the Equitex 2000 common stock on
the Nasdaq SmallCap Market. If Equitex 2000's application is not approved, its
common stock may be traded on either the electronic bulletin board or the
National Quotation Bureau, Inc.'s "Pink Sheets."
Following the distribution and spin-off, we are expected to close on our
acquisitions of Nova Financial Systems, Inc. and Key Financial Systems, Inc.
Our board of directors has retained discretion, even if all conditions to
the distribution of its assets and liabilities and spin-off of Equitex 2000
common stock are satisfied, to abandon, defer or modify the distribution of its
assets and liabilities and/or spin-off of shares of Equitex 2000.
Assets and Liabilities Distributed
----------------------------------
The following table summarizes the carrying values of the assets and
liabilities by subsidiary to be transferred to Equitex 2000 at their net
carrying values utilizing September 30, 2000 carrying values:
GR.com
and Total assets
The distributed/
Triumph First Meridian liabilities
Sports, Teleservices, nMortgage Residential assumed by
Equitex Inc. Inc. Inc. Group, Inc. Equitex 2000
---------- ---------- ---------- ---------- ---------- ----------
Assets Distributed:
Receivables ......... $ 788,000 $ 583,000 $ 150,000 $ 115,000 $ 2,000 $1,638,000
Investments ......... 1,591,000 6,000 442,000 -- -- 2,039,000
Intangible and other
assets .............. 999,000 689,000 -- 2,314,000 3,836,000 7,838,000
-6-
LIABILITIES ASSUMED:
Payables and other
liabilities ......... 656,000 81,000 134,000 156,000 45,000 1,072,000
Notes payable -- 483,000 -- 910,000 -- 1,393,000
Minority interest -- -- -- 5,593,000 -- 5,593,000
NET INCOME (LOSS):
For the year ended
December 31, 1999 ... (2,721,000) (388,000) (502,000) (4,106,000) 9,000
For the quarter ended
March 31, 2000 ...... (139,000) (16,000) (34,000) (1,729,000) 93,000
For the quarter ended
June 30, 2000 ....... (1,051,000) (145,000) (92,000) (5,676,000) (99,000)
For the quarter ended
September 30, 2000 .. (625,000) (98,000) (347,000) (428,000) 12,000
Equitex Pre and Post Distribution and Spin-Off
----------------------------------------------
We have been engaged, through our subsidiaries, in the active conduct of
two principal lines of business, the consumer financial service business and the
retail and commercial mortgage banking business. The distribution by us of all
of our assets and liabilities to Equitex 2000 and spin-off of Equitex 2000
common stock will separate the two principal lines of business and allow Equitex
2000 the ability to focus more directly on the mortgage banking business and us
to focus more directly on our consumer financial service business.
The following table summarizes the balance sheet and income statement
information for us as of and for the nine months ended September 30, 2000 and on
a historical basis and on a pro-forma basis reflecting the distribution,
spin-off and the acquisitions of Nova Financial Systems, Inc. and Key Financial
Systems, Inc. as discussed under proposal number three.
Equitex and subsidiaries
----------------------------------
pre-distribution post-distribution
/spin off /spin-off
--------------- ---------------
Historical Pro forma
--------------- ---------------
As of September 30, 2000
----------------------------------
Assets:
Cash and cash equivalents ................ $ 343,000 $ 555,000
Receivables .............................. 1,638,000 7,206,000
Inventories .............................. 89,000 --
Investments .............................. 2,039,000 --
Fixed assets, net ........................ 268,000 285,000
Intangible and other assets .............. 7,138,000 17,000
--------------- ---------------
Total assets ............................. $ 11,515,000 $ 8,063,000
=============== ===============
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LIABILITIES AND EQUITY:
Accounts payable and accrued expenses .... $ 1,072,000 $ 2,210,000
Notes payable ............................ 1,393,000 --
Due to cardholders ....................... 4,697,000
--------------- ---------------
Total liabilities ........................ 2,465,000 6,907,000
--------------- ---------------
Minority interest
5,593,000
Mandatory redeemable preferred stock ..... 1,240,000 1,240,000
--------------- ---------------
Stockholders equity (deficit) ............ 2,217,000 (84,000)
--------------- ---------------
Total liabilities and stockholders equity .. $ 11,515,000 $ 8,063,000
=============== ===============
STATEMENT OF OPERATIONS DATA:
Revenue .................................. $ 1,976,000 $ 12,086,000
--------------- ---------------
Gross profit ............................. 1,788,000 12,086,000
--------------- ---------------
Total operating expenses ................. 12,169,000 9,052,000
--------------- ---------------
Income (loss) before income taxes ........ (10,381,000) 3,034,000
Provision for income taxes ............... 1,235,000
--------------- ---------------
Net income (loss) ........................ (10,381,000) 1,799,000
Amortization of preferred stock discounts .. (700,000) (3,392,000)
Deemed preferred stock dividends ......... (112,000) (338,000)
--------------- ---------------
Net income (loss) applicable to
common stockholders ...................... $ (11,193,000) $ (1,931,000)
=============== ===============
Basic and diluted net income (loss)
per share ................................ $ (1.57) $ (0.14)
=============== ===============
Weighted average number of common
shares outstanding ....................... 7,140,293 14,280,586
=============== ===============
Background and Reasons for the Distribution and Spin-off
--------------------------------------------------------
Our board or directors believes that the distribution of our assets and
liabilities to Equitex 2000 and the spin-off of shares of Equitex 2000 common
stock will serve a number of purposes, including:
o increasing the ability of both companies to improve the corporate fit
and focus of their respective businesses;
o facilitating acquisitions by both companies by improving the
attractiveness of their respective capital stock as acquisition
currency; and
o allowing both companies to effectively motivate and enhance management
performance by providing equity compensation and incentives more
closely tied to the businesses in which the employees work.
-8-
Conditions to the Distribution and Spin-Off
-------------------------------------------
The distribution by us of all of our assets and liabilities to Equitex 2000
and spin-off of Equitex 2000 common stock are conditioned upon, among other
things:
(i) approval of the distribution and spin-off by the holders of a
majority of the outstanding stock of each class entitled to vote
thereon as a class; and
(ii) there not being in effect any statute, rule, regulation or order
of any court, governmental or regulatory body that prohibits or
makes illegal the transaction contemplated by the distribution.
The conditions listed above cannot be waived. Our board of directors has
reserved the right to abandon the distribution and spin-off even if all
conditions are satisfied.
Principal Office After the Distribution and Spin-Off
----------------------------------------------------
Equitex 2000, Inc.
2401 PGA Boulevard, Suite 190
Palm Beach Gardens, Florida 33410
Risk Factors
------------
You should be aware that the distribution by us of all of our assets and
liabilities to Equitex 2000 and spin-off of all outstanding shares of Equitex
2000 common stock involves certain risks, including those described under "Risk
Factors," that could adversely affect the value of your holdings.
ACQUISITIONS OF NOVA AND KEY
At the special meeting, you will also be asked to consider and vote upon a
proposal providing for the acquisition all of the outstanding capital stock of
Nova Financial Systems, Inc. and Key Financial Systems, Inc. in exchange for the
greater of (i) 7,140,000 shares or (ii) 50% of our outstanding common stock on a
post-acquisition basis plus cash consideration of $5 million. Nova Financial
Systems, Inc. and Key Financial Systems, Inc. are both financial companies which
specialize in selling credit card programs designed for high risk clients. This
proposal is subject to the approval of proposal number one.
Background and Reasons for the Acquisitions
-------------------------------------------
Our board of directors believes that the acquisitions of Nova Financial
Systems, Inc. and Key Financial Systems, Inc. will serve a number of purposes,
including:
o adding an ongoing, profitable, business to our operations;
o adding a business which complements our plans and objectives relative
to Internet financial services;
o provide us with additional revenues and resources with the potential
for future growth; and
o to create the potential for increased stockholder value.
Conditions to the Acquisitions
------------------------------
Consummation of the acquisitions of Nova Financial Systems, Inc. and Key
Financial Systems, Inc. is subject to a number of conditions, including:
-9-
(i) the distribution by us of all of our assets and liabilities to
Equitex 2000 and the spin-off of Equitex 2000 common stock;
(ii) the approval of the acquisitions of Nova Financial Systems, Inc.
and Key Financial Systems, Inc. by our stockholders; and
(iii) the approval of the increase in our authorized shares of common
stock from 7,500,000 shares to 50,000,000 shares.
Nova Financial Systems, Inc. and Key Financial Systems, Inc. may waive the
approval of the increase in authorized shares if our stockholder meeting has not
been held prior to the closing of the mergers or the closing may be postponed
until our stockholder meeting has been held and an amended Certificate of
Incorporation has been filed in Delaware.
Risk Factors
------------
You should be aware that these acquisitions involve certain risks,
including those described under "Risk Factors," that could adversely affect the
value of your holdings.
OTHER MATTERS
You may also be asked to act on other business that properly comes before
the special meeting.
NO RIGHT OF APPRAISAL
Our stockholders will not be entitled to appraisal rights under the
Delaware General Corporation Law in connection with the distribution and
spin-off.
SPECIAL MEETING RECORD DATE
Our board of directors has fixed the close of business on ______, 2001 as
the record date for the special meeting.
VOTING AND QUORUM
Holders of record of our common stock at the record date are entitled to
notice of, and to vote at, the special meeting. Each share of our common stock
outstanding at the close of business on the record date is entitled to one vote
on each matter presented at the special meeting. The presence in person or by
proxy of the stockholders holding a majority of the outstanding shares of our
common stock on the record date will constitute a quorum for the transaction of
business at the special meeting.
VOTE REQUIRED
o Proposal number one - approval of the adoption of the amendment of
paragraph 4 of the Certificate of Incorporation to increase the number
of authorized shares of our common stock, $.02 par value, from
7,500,000 shares to 50,000,000 shares will require the affirmative
vote of a majority of the outstanding stock of each class entitled to
vote thereon as a class;
o Proposal number two - approval of the distribution by us of all of our
assets and liabilities to Equitex 2000 and the distribution by us of
all of the outstanding shares of common stock of Equitex 2000 to our
stockholders on the basis of one share of common stock of Equitex 2000
for each share of our common stock, as further described in this proxy
statement will require the affirmative vote of a majority of the
outstanding stock of each class entitled to vote thereon as a class;
and
-10-
o Proposal number three - approval of the acquisition all of the
outstanding capital stock of Nova Financial Systems, Inc. and Key
Financial Systems, Inc. in exchange for the greater of (i) 7,140,000
shares or (ii) 50% of our outstanding common stock on a post
acquisition basis plus cash consideration of $5 million will require
the affirmative vote of a majority of the total votes cast on the
proposal in person or by proxy.
BOARD RECOMMENDATIONS
Our board of directors unanimously recommends that the stockholders vote
"FOR" each of the proposals.
CORPORATE STRUCTURE
The following chart illustrates the current Equitex, Inc. corporate
structure:
Equitex Stockholders
own 100% of common stock
|
Equitex, Inc.
|
-----------------------------------------------------------------
| | | |
Own 79% of stock First TeleServices nMortgage The Meridian
of Triumph Sports Residential Group
Assuming the Equitex stockholders approve each of the proposals to be voted
upon at the meeting and the proposed transactions are completed, the following
chart illustrates the future corporate structure of Equitex and Equitex 2000:
EQUITEX, INC.
- -------------
Equitex Stockholders Nova and Key Stockholders
own 50% of Common Stock own 50% of Common Stock
| |
----------------------------------------
|
Equitex, Inc.
|
----------------------------------------
| |
Key Financial Systems, Inc. Nova Financial Systems, Inc.
100% wholly-owned 100% wholly owned
EQUITEX 2000, INC.
- ------------------
Equitex Stockholders
own 100% of common stock
|
Equitex 2000, Inc.
|
-----------------------------------------------------------------
| | | |
Own 79% of stock First TeleServices nMortgage The Meridian
of Triumph Sports Residential Group
-11-
RISK FACTORS
You should be aware that the distribution by us of all of our assets and
liabilities to Equitex 2000, the spin-off of Equitex 2000 common stock, the
ownership of Equitex 2000 common stock and the proposed acquisition of Key
Financial Systems, Inc. and Nova Financial Systems, Inc. involve risks,
including those described below and elsewhere in this proxy statement, that
could adversely affect the value of your holdings. You are also urged to review
the risk factors included in our Form 10-K for the fiscal year ended December
31, 1999. We are not making, and no other person is authorized to make, any
representation as to the future market value of Equitex 2000 common stock.
RISKS REGARDING OUR HISTORY
WE HAVE HAD NET LOSSES IN THE PAST TWO YEARS AND THERE IS NO ASSURANCE WE WILL
HAVE A PROFIT THIS YEAR
We incurred a net loss of approximately $10.4 million (a loss applicable to
common stockholders of $11.1 million) for the nine months ended September 30,
2000, compared to both a net loss and a net loss applicable to common
stockholders of approximately $2.1 million for the nine months ended September
30, 1999. We lost approximately $7.7 million (a loss applicable to common
stockholders of approximately $11 million) for the year ended December 31, 1999
and recorded a net decrease in net assets resulting from operations of
approximately $2 million for the year ended December 31, 1998 as a business
development company. There is no assurance that we will have a profit for the
years ended December 31, 2000 or 2001.
WE HAVE NOT CONSUMMATED CERTAIN RECENT MERGERS AND ACQUISITIONS AND WE CAN
PROVIDE NO ASSURANCE THAT WE WILL CONSUMMATE THE PROPOSED ACQUISITIONS
We recently failed to consummate two acquisitions and one merger. On August
2, 2000, we announced that our agreement for the acquisition of First TeleBanc
Corp had expired. In addition, as a result of certain deficiencies noted in the
operations of First TeleBanc Corp.'s operating bank, Net 1st National Bank, we
withdrew our application with the Federal Reserve to become a bank holding
company. On September 21, 2000, we agreed to terminate our agreement and plan of
merger with Innovative Gaming Corporation of America. While we acquired First
Bankers Mortgage Services, Inc. on August 23, 1999, we reached an agreement to
rescind the acquisition on August 15, 2000, effective June 28, 2000. We can
provide no assurance that we will consummate the proposed acquisitions with Key
and Nova or that if consummated, the acquisitions will prove to be successful.
RISKS ARISING FROM THE DISTRIBUTION AND SPIN-OFF
AN ACTIVE TRADING MARKET MIGHT NOT DEVELOP FOR THE EQUITEX 2000 COMMON STOCK AND
TRADING PRICES ARE UNCERTAIN
Equitex 2000 intends to apply to list the shares of its common stock to be
distributed in the spin-off on the Nasdaq SmallCap Market. There is no assurance
this application will be approved. If Equitex 2000's application is not
approved, its common stock may be traded on either the electronic bulletin board
or the National Quotation Bureau, Inc.'s "Pink Sheets." However, there is
presently no public market for the Equitex 2000 common stock and an active
market may not develop following the distribution and spin-off. There can be no
assurance regarding the prices at which the Equitex 2000 common stock will trade
on or after the spin-off of Equitex 2000 common stock. Until the Equitex 2000
common stock is fully distributed and an orderly market develops, the prices at
which the stock trades may fluctuate significantly. Prices for the Equitex 2000
common stock will be determined in the marketplace and may be influenced by many
factors, including, without limitation, (1) the depth and liquidity of the
market for the Equitex 2000 common stock; (2) investors' perceptions of Equitex
2000, Inc. and the industries in which it participates; (3) Equitex 2000's
dividend policy; and (4) changes in government regulation and general economic
and market conditions.
EQUITEX 2000 WILL INDEMNIFY US IN LITIGATION
As part of the distribution of all of our assets and liabilities, Equitex
2000 will assume all of our liabilities and will indemnify us and assume our
prosecution or defense in the following lawsuits: WILLIAM G. HAYES, JR.
-12-
LIQUIDATING AGENT FOR RDM SPORTS GROUP, INC. AND RELATED DEBTORS V. EQUITEX,
INC., SMITH, GAMBRELL, RUSSELL, L.L.P., DAVID J. HARRIS, P.C., AND DAVID J.
HARRIS, INDIVIDUALLY, Adversary Proceeding No., 00-1065 (U.S. Bankruptcy Court
for the Northern District of Georgia, Newnan Division); and EQUITEX, INC. AND
HENRY FONG V. BERTRAND T. UNGER, Case No. 98-CV-2437 (Dist. Ct. Arapahoe County,
Colorado). Although we believe these lawsuits are without merit, there is no
assurance of a favorable outcome. The costs to defend these matters may be
material and an unfavorable outcome of either or both on both matters may have a
material adverse effect on Equitex 2000.
EQUITEX 2000 MAY NOT PAY DIVIDENDS AFTER THE DISTRIBUTION AND SPIN-OFF
The dividend policy of Equitex 2000 after the distribution by us of all of
our assets and liabilities to Equitex 2000 and spin-off of Equitex 2000 common
stock will be determined by its board of directors. The future payment of
dividends by Equitex 2000 will be based on the results of operations and
financial condition of Equitex 2000 and other business considerations that its
board of directors considers relevant. We cannot assure you that Equitex 2000
will pay any dividends after the distribution and spin-off of Equitex 2000
common stock.
EQUITEX 2000'S ABSENCE OF HISTORY AS AN INDEPENDENT COMPANY MAKES IT DIFFICULT
TO PREDICT FUTURE PERFORMANCE
Equitex 2000's proposed business has historically been conducted by us as
part of our overall operations. Therefore, Equitex 2000 does not have an
operating history as an independent company. Equitex 2000 was recently formed
solely for the purpose of effecting the distribution by us of all of our assets
and liabilities to Equitex 2000 and spin-off of Equitex 2000 common stock.
Therefore, the financial information included in this proxy statement does not
necessarily reflect the financial position, results of operations and cash flows
of Equitex 2000 had Equitex 2000 been operated independently during the periods
presented. As a stand-alone company, Equitex 2000's results of operations may or
may not continue at a level similar to its results of operations while a part of
us. In addition, we have not been profitable in these operations. We also
believe that Equitex 2000's general and administrative expenses will be higher
than the expenses reflected in our historical financial statements of our
businesses.
EQUITEX 2000 MAY NOT BE ABLE TO CONSUMMATE OR INTEGRATE EFFECTIVELY ACQUISITIONS
AND ITS RESULTS MAY BE ADVERSELY AFFECTED
We have completed several acquisitions and the business strategy of Equitex
2000 contemplates continued expansion, including growth through future
acquisitions. However, the ability of Equitex 2000 to consummate and integrate
effectively the completed and any future acquisitions on terms that are
favorable to them may be limited. Equitex 2000 may not have adequate financial
resources to consummate any acquisitions. In addition, the ability of Equitex
2000 to issue additional equity securities to raise capital or consummate
acquisitions may be impaired, for a period of time after the distribution by us
of all of our assets and liabilities to Equitex 2000 and spin-off of Equitex
2000 common stock.
ANTI-TAKEOVER PROVISIONS MAY AFFECT THE MARKETABILITY AND MARKET PRICE OF
EQUITEX 2000 COMMON STOCK
The articles of incorporation of Equitex 2000, as well as Delaware
statutory law, contain provisions that may have the effect of discouraging an
acquisition of control of Equitex 2000 not approved by its board of directors.
These provisions may also have the effect of discouraging third parties from
making proposals involving an acquisition or change of control of Equitex 2000,
although any proposals, if made, might be considered desirable by a majority of
Equitex 2000's stockholders. These provisions could also have the effect of
making it more difficult for third parties to replace current management of
Equitex 2000, Inc. without the concurrence of Equitex 2000's board of directors.
The existence of these provisions may adversely affect the marketability and
market price of Equitex 2000 common stock.
-13-
RISKS RELATED TO THE BUSINESS OF
NOVA FINANCIAL SYSTEMS, INC. AND KEY FINANCIAL SYSTEMS, INC.
IF THE ACQUISITIONS OF NOVA FINANCIAL SYSTEMS, INC. AND KEY FINANCIAL
SYSTEMS, INC. ARE APPROVED AND COMPLETED, WE WILL BE SUBJECT TO THE FOLLOWING
RISKS:
SOCIAL, ECONOMIC AND GEOGRAPHIC FACTORS AFFECT RETENTION OF CREDIT CARD ACCOUNTS
The ability or willingness of cardholders to prepay credit cards may change
from a variety of social, economic and geographic factors. Social factors
include changes in consumer confidence levels, the public's perception of the
use of credit cards and changing attitudes about incurring debt and the stigma
of personal bankruptcy. Economic factors include the rates of inflation,
unemployment rates and relative interest rates offered for various types of
loans. As a result of these factors, our rate of retention of credit card
accounts may vary.
CONSUMER PROTECTION LAWS MAY RESTRICT OUR ABILITY TO COLLECT RECEIVABLES AND
MAINTAIN YIELD ON PORTFOLIO
Federal and state consumer protection laws regulate the creation and
enforcement of consumer loans. Congress and the states may enact additional laws
and amend existing laws to regulate further the credit card and consumer
revolving loan industry or to reduce finance charges or other fees or charges.
These laws, as well as many new laws, regulations or rulings which may be
adopted, may materially adversely affect our ability to collect the receivables
or to maintain previous levels of finance charges or fees.
Receivables also may be written off as uncollectible if a debtor seeks
relief under federal or state bankruptcy laws.
ABILITY TO GENERATE CREDIT CARD REVENUE IS DEPENDENT UPON RETAINING OLD
CUSTOMERS AND OBTAINING NEW CUSTOMERS
A significant portion of our revenue will be derived from credit card fees
charged on accounts. This revenue is directly tied to the number of active
accounts in the portfolio. Continued generation of new fee revenue depends, in
part, on the number of accounts or account balances lost to competing card
issuers and our ability to designate new accounts. The credit card industry is
highly competitive and we will compete with numerous other credit card providers
for new accounts and for use of the credit cards.
Credit card customers choose their credit card issuers largely on the basis
of price, credit limit and other product features and once an account is
originated, customer loyalty may be limited. Customers can and frequently do
move accounts from one credit card issuer to another, or cease or limit use of
one credit card in favor of another.
The credit card and consumer revolving loan industry is highly competitive
and operates in a legal and regulatory environment increasingly focused on the
cost of services charged to consumers. There is increased use of advertising,
target marketing, pricing competition, incentive programs and new credit card
issuers seeking to expand or to enter the market and compete for customers. In
addition, some of our competitors are now attempting to employ programs similar
to the specialized marketing programs and information based strategies through
which we have has solicited new accounts.
MARKETING OF THE PAY AS YOU GO CREDIT CARD AND NET 1ST NATIONAL BANK WAS
SUSPENDED FOR ONE MONTH
On November 15, 2000, Key Financial Systems, Inc. temporarily suspended
marketing for Net 1st National Bank. This suspension was at the request of Net
1st National Bank to conform to the requirements of a Consent Order between
Net 1st National Bank and the Office of the Comptroller of the Currency. Net
1st National Bank was required to obtain legal opinions that Key Financial
Systems, Inc.'s credit cards marketing and the Pay As You Go program conform
to all applicable federal and state laws. The necessary opinions have been
prepared and have been forwarded to the Office of the Comptroller of the
Currency. On December 15, 2000, Net 1st National Bank notified Key Financial
Systems, Inc. to resume marketing the Pay As You Go credit card program.
Despite Net 1st National Bank's compliance with all requirements, there is no
assurance that the Office of the Comptroller of the Currency will not suspend
marketing of this product in the future.
-14-
OUR EARNINGS ARE DEPENDENT UPON THE MARKETING AND ACCEPTANCE OF ONE PRODUCT.
Nova Financial Systems, Inc. and Key Financial Systems, Inc. currently
market one product, the Pay As You Go credit card. Our product may not be able
to be successfully marketed or achieve customer acceptance. If revenue from new
products or enhancements does not replace declining revenues from existing
products, we may experience lower operating revenues, lower net revenues, lower
cash flows and less liquidity.
TIMING OF PAYMENTS IS NOT CERTAIN
The receivables may be paid at any time. We cannot assure you that any
particular pattern of accountholder payments will occur. In addition to other
factors discussed above in this "Risk Factors" section, changes in finance
charges can alter the monthly payment rates of accountholders.
ABILITY TO CHANGE TERMS OF THE CREDIT CARD ACCOUNTS COULD ALTER PAYMENT PATTERNS
As owner of a participation interest in the accounts, we will have the
right to change various account terms, including the fees and the required
monthly minimum payment. If any fees are reduced, there could be a corresponding
decrease in the collection of finance charges. In addition, changes in the
account terms may alter payment patterns.
We ordinarily will not reduce any fees, unless the an issuing bank of our
cards is required by law to do so or it determines that such reduction is
necessary to maintain its credit card business on a competitive basis.
We may change the terms of the accounts or our servicing practices,
including the reduction of the required minimum monthly payment and the
calculation of the amount or the timing of fees and charge offs, if we take the
same action on our other substantially similar accounts.
We have no restrictions on our ability to change the terms of the accounts
except as described above. Changes in relevant law, changes in the marketplace,
or prudent business practices could impel us to change account terms.
INTENSE COMPETITION
We will face intense and increasingly aggressive competition from other
consumer lenders in all of our product lines. Many competitors are substantially
larger and have greater financial resources than us, and customer loyalty is
often limited. Competitive practices, such as the offering of lower interest
rates and fees and the offering of incentives to customers, could hurt our
ability to attract and retain customers.
The Gramm-Leach- Bliley Act of 1999, which permits the affiliation of
commercial banks, securities firms and insurance companies, may increase the
number of competitors in the banking industry and the level of competition in
providing banking products, including credit cards. To the extent that the
Gramm-Leach-Bliley Act of 1999 promotes competition or consolidation among
financial service providers active in the consumer credit market, we could
experience increased competition for customers, employees and funding. However,
we are unable to predict at this time the scope or extent of any such impact.
In October 1998, the U.S. Justice Department filed a complaint against
MasterCard International Incorporated, Visa U.S.A., Inc. and Visa International,
Inc., asserting that the overlapping ownership and control of both the
MasterCard and Visa associations by the same group of banks restrains
competition between Visa and MasterCard in the market for general purpose credit
card products and networks in violation of the antitrust laws. The government
seeks as relief that only member banks "dedicated" to one association be
permitted to participate in the governance of that association. In addition, the
complaint challenges the rules adopted by both MasterCard and Visa that restrict
member banks from joining American Express, Discover/Novus or other competing
networks. MasterCard and Visa have stated that they consider the suit without
merit and have denied the allegations of the complaint. Neither the ultimate
outcome of this litigation nor its effect on the competitive environment in the
credit card industry if the lawsuit succeeds can be predicted with any
certainty.
INCREASED DELINQUENCIES AND CREDIT LOSSES
The delinquency rate on our consumer loans, as well as the rate at which
our consumer loans are charged off as uncollectible, which are referred to as
-15-
the "credit loss rate", may increase, depending on a number of factors,
including (i) an increase in new accounts, which generally experience higher
delinquency and credit loss rates, and (ii) an increase in the number of
customers seeking protection under the bankruptcy laws. Increased delinquencies
and credit losses could also occur in the event of a national or regional
economic downturn or recession, or for other reasons. Unlike a traditional
credit card portfolio, sub prime portfolios experience higher initial
delinquency and first payment default rates. An increase in new accounts can
significantly increase delinquency and loss rates.
VENDOR RELATIONSHIPS
Our business will depend on a number of services provided by third parties,
including marketing and data processing, nationwide credit bureaus, postal and
telephone service, bankcard associations and transaction processing services. A
major disruption in one or more of these services could significantly hurt our
operations.
GOVERNMENT POLICY AND REGULATION
Federal and state laws significantly limit the types of activities in which
we and/or our subsidiaries will be permitted to engage. In addition, consumer
protection and debtor relief laws limit the manner in which we may offer,
extend, manage and collect loans. Congress, the States, and other jurisdictions
in which we operate may enact new laws and amendments to existing laws that
further restrict consumer lending, including changes to the laws governing
bankruptcy, which could make it more difficult or expensive for us to collect
loans, or impose limits on the interest and fees that we may charge our
customers. Our earnings could also be hurt by changes in government fiscal or
monetary policies, including changes in capital requirements and rates of
taxation, and by changes in general social and economic conditions.
MANAGEMENT AND OPERATIONS
Our growth and profitability will depend on its ability to retain key
executives and managers, attract capable employees, maintain and develop the
systems necessary to operate our businesses and control the rate of growth of
our expenses. Expenses could significantly increase due to acquisition-related
expenses, new product development, facilities expansions, increased funding or
staffing costs and other internal and external factors.
OTHER INDUSTRY RISKS
We will face the risk of fraud by accountholders and third parties, as well
as the risk that increased criticism from consumer advocates and the media could
hurt consumer acceptance of our products. The financial services industry as a
whole is characterized by rapidly changing technologies. System disruptions and
failures may interrupt or delay our ability to provide services to our
customers. In particular, we face technological challenges in the developing
online credit card market. The secure transmission of confidential information
over the Internet is essential to maintain consumer confidence in the products
and services offered by e-commerce business. Security breaches, acts of
vandalism, and developments in computer capabilities could result in a
compromise or breach of the technology we use to protect customer transaction
data. Consumers generally are concerned with security breaches and privacy on
the Internet, and Congress, individual States and other jurisdictions could
enact new laws regulating the electronic commerce market that could adversely
affect us.
IN CONJUNCTION WITH THE ACQUISITIONS, WE MAY ISSUE PREFERRED STOCK TO RAISE CASH
In conjunction with the acquisitions of Nova Financial Systems, Inc. and
Key Financial Systems, Inc. we may issue preferred stock to raise cash for
payment of the cash portion of the purchase price. While the terms of this
preferred stock are unknown at this time and subject to market conditions at the
time of issuance, the preferred stock will cause dilution to all existing
holders of our common stock.
-16-
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 OUR EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED
TO, STATEMENTS CONCERNING OUR 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 OUR 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
OUR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
THE SPECIAL MEETING
PURPOSE OF THE SPECIAL MEETING
THE INCREASE IN COMMON STOCK
At the special meeting, the stockholders will be asked to approve the
increase in common stock which involves the following:
o An amendment of paragraph 4 of the Certificate of Incorporation to
increase the number of authorized shares of our common stock, $.02 par
value, from 7,500,000 shares to 50,000,000 shares.
The increase in authorized common stock is conditioned upon approval of the
increase in common stock by the holders of a majority of the outstanding stock
entitled to vote and a majority of the outstanding stock of each class entitled
to vote as a class. The increase in common stock will not occur if this
condition is not satisfied.
THE DISTRIBUTION AND SPIN-OFF
At the special meeting, the stockholders will be asked to approve the
distribution and spin-off of Equitex 2000 common stock which involves the
following:
o The distribution by us of all of our assets and liabilities to Equitex
2000 and the distribution by us of all of the outstanding shares of
common stock of Equitex 2000 to our stockholders on the basis of one
share of common stock of Equitex 2000 for each share of our common
stock, as further described in this proxy statement.
If our stockholders approve the distribution by us of all of our assets and
liabilities to Equitex 2000 and spin-off of Equitex 2000 common stock, and the
other conditions to the distribution and spin-off of Equitex 2000 common stock
are satisfied or waived, we anticipate that our board of directors will
authorize the various components of the distribution and spin-off of Equitex
2000 common stock and declare a special dividend payable in Equitex 2000 common
stock and set a record date for that dividend. Each holder of record of our
common stock on the record date for the special dividend will be entitled to
-17-
receive one share of Equitex 2000 common stock for each share of our common
stock held on the record date for the spin-off of Equitex 2000 common stock. No
consideration will be paid by the holders of our common stock for the Equitex
2000 common stock.
Our board of directors has conditioned the distribution by us of all of our
assets and liabilities to Equitex 2000 and spin-off of Equitex 2000 common stock
upon, among other things:
(i) approval of the distribution and spin-off of Equitex 2000 common stock
by the holders of a majority of the outstanding stock of each class
entitled to vote thereon as a class; and
(ii) there not being in effect any statute, rule, regulation or order of
any court, governmental or regulatory body that prohibits or makes
illegal the transaction contemplated by the distribution.
The distribution of all of our assets and liabilities and spin-off of
Equitex 2000 common stock will not occur if the conditions described above are
not satisfied.
Our board of directors has retained discretion, even if all conditions to
the distribution of its assets and liabilities and spin-off of Equitex 2000
common stock are satisfied, to abandon, defer or modify the distribution of its
assets and liabilities and/or the spin-off of Equitex 2000 common stock.
The distribution of our assets and liabilities and spin-off of Equitex 2000
common stock will separate us into two publicly owned companies. After the
distribution of Equitex assets and liabilities and spin-off of Equitex 2000
common stock, Equitex 2000 will primarily operate in the mortgage banking
industry.
The Acquisitions
----------------
At the special meeting, the stockholders will be asked to approve the
acquisitions which involves the following:
o The acquisition all of the outstanding capital stock of Nova Financial
Systems, Inc. and Key Financial Systems, Inc. in exchange for the
greater of 7,140,000 shares or 50% of our outstanding common stock on
a post acquisition basis plus cash consideration of $5 million.
Our board of directors has conditioned the acquisitions Nova Financial
Systems, Inc. and Key Financial Systems, Inc. upon, among other things:
(i) the distribution by us of all of our assets and liabilities to Equitex
2000 and the spin-off of Equitex 2000 common stock;
(ii) the approval of the acquisitions of Nova Financial Systems, Inc. and
Key Financial Systems, Inc. by our stockholders; and
(iii) the approval of the increase in the authorized shares of common stock
from 7,500,000 shares to 50,000,000 shares pursuant to proposal number
one.
The acquisitions of Nova Financial Systems, Inc. and Key Financial Systems,
Inc. will not occur if the conditions described above are not satisfied.
Our board of directors has retained discretion, even if all conditions to
the acquisitions of Nova Financial Systems, Inc. and Key Financial Systems, Inc.
are satisfied, to abandon, defer or modify the acquisitions.
VOTE REQUIRED
The proposals to be acted on at the meeting require the following votes:
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o Approval of the adoption of the amendment of paragraph 4 of the
Certificate of Incorporation to increase the number of authorized
shares of our common stock, $.02 par value, from 7,500,000 shares to
50,000,000 shares will require the affirmative vote of a majority of
the outstanding stock of each class entitled to vote thereon as a
class;
o Approval of the distribution by us of all of our assets and
liabilities to Equitex 2000 and our distribution of all of the
outstanding shares of common stock of Equitex 2000 to our stockholders
on the basis of one share of common stock of Equitex 2000 for each
share of our common stock will require the affirmative vote of a
majority of the outstanding stock of each class entitled to vote
thereon as a class; and
o Approval of the acquisition all of the outstanding capital stock of
Nova Financial Systems, Inc. and Key Financial Systems, Inc. in
exchange for the greater of 7,140,000 shares or 50% of our outstanding
common stock on a post acquisition basis plus cash consideration of $5
million will require the affirmative vote of a majority of the total
votes cast on the proposal in person or by proxy.
PROXIES
All shares of our common stock represented by properly executed proxies
will, unless the proxies have previously been revoked, be voted at the special
meeting in accordance with the directions on the proxies. If no direction is
indicated on a properly executed proxy, the shares will be voted in favor of
each of the proposals. If any other matters are properly presented at the
special meeting for action, which is not anticipated, the proxy holders will
vote the proxies which confer authority to such holders to vote on such matters
in accordance with their judgment. A shareholder returning a proxy may revoke it
at any time before it is voted by communicating the revocation in writing to our
Secretary or by executing and delivering a later-dated proxy. In addition, any
person who has executed a proxy and is present at the special meeting may vote
in person instead of by proxy, thereby canceling any proxy previously given,
whether or not written revocation of the proxy has been given. Any written
notice revoking a proxy should be sent to Equitex, Inc., 7315 East Peakview
Avenue, Englewood, Colorado 80111, Attention: Secretary.
NO RIGHT OF APPRAISAL
Our stockholders will not be entitled to appraisal rights under the
Delaware General Corporation Law in connection with the distribution and
spin-off.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities and
Exchange Act of 1934, as amended, and in accordance therewith file reports,
proxy statements and other information with the Securities and Exchange
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 Securities and Exchange Commission at Room 1024, 450 Fifth
Street, NW, Washington, DC 20549 or at the Regional Offices of the Securities
and Exchange 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 Securities and Exchange 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 Securities and Exchange Commission maintains a Web
site that contains reports, proxy statements and other information filed
electronically by us with the Securities and Exchange Commission which can be
accessed over the Internet at http://www.sec.gov.
-19-
DOCUMENTS INCORPORATED BY REFERENCE
THIS PROXY STATEMENT INCORPORATES BY REFERENCE DOCUMENTS RELATING TO US
WHICH ARE NOT INCLUDED IN OR DELIVERED WITH THESE PROXY MATERIALS. DOCUMENTS
RELATING TO US (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE) ARE AVAILABLE TO ANY PERSON, INCLUDING
ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT IS DELIVERED, UPON WRITTEN OR
ORAL REQUEST, WITHOUT CHARGE, FROM US AT 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
_______________ ___, 2001. COPIES OF DOCUMENTS SO REQUESTED WILL BE SENT BY
FIRST CLASS MAIL, POSTAGE PAID WITHIN ONE BUSINESS DAY OF THE RECEIPT OF SUCH
REQUEST.
Our following documents are incorporated by reference herein:
1. Annual report on Form 10-K and 10-K/A, for the year ended December 31,
1999;
2. Quarterly Report on Form 10-Q for the quarter ended March 31, 2000;
3. Quarterly Report on Form 10-Q for the quarter ended June 30, 2000;
4. Quarterly Report on Form 10-Q for the quarter ended September 30, 2000;
5. Current Report on Form 8-K dated August 30, 2000;
6. Current Report on Form 8-K dated October 12, 2000;
7. Current Report on Form 8-K dated December 12, 2000; and
8. The description of our common stock contained in its Registration
Statement on Form 8-A (Commission File No. 0-12374) as filed with the
Securities and Exchange Commission on July 21, 1983.
All documents filed by us with the Securities and Exchange Commission
pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Securities and Exchange
Act of 1934, as amended, after the date hereof and prior to the date of the
special meeting shall be deemed to be incorporated by reference herein and shall
be a part hereof from the date of filing of such documents. Any statements
contained in a document incorporated by reference herein or contained in this
proxy statement shall be deemed to be modified or superseded for purposes hereof
to the extent that a statement contained herein (or in any other subsequently
filed document which also is incorporated by reference herein) modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed to constitute a part hereof except as so modified or superseded.
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 our Secretary,
by executing a later dated proxy and delivering it to us 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, miscellaneous costs with respect to the materials and
solicitation of the proxies will be paid by us. We also may use the services of
our directors, officers and employees to solicit proxies, personally or by
telephone, mail, telefax or telegraph, but at no additional salary or
compensation. We intend to request banks, brokerage houses and other custodians,
nominees and fiduciaries to forward copies of the materials to those persons for
whom they hold such shares and request authority for the execution of the
proxies. We will reimburse them for the reasonable out-of-pocket expenses
incurred by them in so doing.
-20-
VOTING SECURITIES
Holders of record of our common stock, $.02 par value, at the close of
business on ________ ____, 2001 will be entitled to vote on all matters. On
December 31, 2000, we had outstanding 7,106,943 shares of common stock. The
holders of all shares of common stock are entitled to one vote per share. The
common stock is the only class of voting securities outstanding. One-third of
the issued and outstanding shares of the common stock entitled to vote,
represented in person or by proxy, constitutes a quorum at any stockholders'
meeting. Passage of proposal number one requires the affirmative vote of a
majority of the outstanding stock of each class entitled to vote thereon as a
class. Abstentions on a proposal will be counted as votes against that proposal.
Broker non-votes will not be counted as shares represented at the meeting.-
DIVIDEND POLICY
The payment and level of cash dividends by us is subject to the discretion
of our board of directors. Dividend decisions are based on a number of factors,
including the future operating results and financial requirements of us, state
law requirements and other factors. No dividends have been declared.
-21-
PRICE RANGE OF EQUITEX COMMON STOCK
Our common stock is listed and traded on the Nasdaq SmallCap Market under
the symbol "EQTX." The following table reflect the high and low sales prices per
share of our common stock, as reported on the Nasdaq SmallCap Market for the
fiscal period indicated.
PRICE RANGE
HIGH LOW
---- ---
1998:
First Quarter $ 3.6250 $ 0.8125
Second Quarter 5.6250 3.0000
Third Quarter 7.1250 4.3750
Fourth Quarter 7.5625 6.4375
1999:
First Quarter $ 12.7500 $ 6.7500
Second Quarter 48.8125 9.0000
Third Quarter 14.2500 8.5000
Fourth Quarter 10.5625 7.6250
2000:
First Quarter $ 11.7500 $ 6.4062
Second Quarter 9.3906 4.6250
Third Quarter 8.4375 5.6250
Fourth Quarter 6.3750 3.8750
2001:
First Quarter (through January 17) $ 5.7188 $ 3.9062
The stockholders are urged to obtain current trading price information
before voting on the distribution by us of all of our assets and liabilities to
Equitex 2000 and spin-off of Equitex 2000 common stock.
There is no established a public trading market for Equitex 2000 common
stock.
-22-
SELECTED FINANCIAL DATA
The selected financial data set forth below as of and for the year ended
December 31, 1999, has been derived from our consolidated financial statements
which have been audited by Gelfond Hochstadt Pangburn, P.C. The selected
financial data as of and for each of the years in the four-year period ended
December 31, 1998, has been derived from our financial statements which have
been audited by Davis & Co., CPAs, P.C. Balance sheet data and statement of
operations data as of and for the nine-month periods ended September 30, 2000
and September 30, 1999, has been derived from our unaudited interim financial
statements.
Because of recent changes in our business, the historical information
reflected below may not be a good basis for evaluating our current and future
performance. You should read this information, together with the financial
statements and related notes, and the information under the heading
"Management's discussion and analysis of financial condition and results of
operations."
Balance Sheet Data
(in thousands)
As of
September 30, As of December 31,
------------- -----------------------------------------------
2000 1999 1998 1997 1996 1995
------- ------- ------- ------- ------- -------
(Note 1) (Note 1) (Note 1) (Note 1)
Assets:
Cash and cash equivalents .. $ 343 $ 784 $ 32 $ 9 $ 54 $ 177
Mortgage loans held for sale 0 14,787 0 0 0 0
Investments ................ 2,039 3,475 5,592 4,701 10,200 18,682
Property, plant and
equipment (net) ........... 268 1,058 26 29 39 21
Intangible assets .......... 7,139 20,010 0 0 0 0
Total assets ............... 11,515 41,745 5,859 5,039 10,478 19,057
Liabilities:
Warehouse loans ............ 0 18,582 0 0 0 0
Total liabilities .......... 2,465 26,170 1,771 1,499 3,217 7,140
Mandatory redeemable preferred
stock .......................... 1,240 0 0 0 0 0
Minority interest ............... 5,593 6,473 0 0 0 0
Stockholders' equity ............ 2,217 9,102 4,088 3,540 7,261 11,917
- -------------
1. On January 4, 1999, we withdrew our election to be treated as a
Business Development Company subject to the Investment Company Act 0f
1940. As a result of this withdrawal, we are is now required to
present our financial statements consistent with those of a normal
operating company as opposed to a Business Development Company.
Because we were a Business Development Company during the years ended
December 31, 1995 through December 31, 1998, the 1998, 1997, 1996 and
1995 financial statements reflect the Business Development Company
format.
-23-
Statement of Operations Data
(in thousands, except per share data)
For the nine months
ended September 30, For the year ended December 31,
---------------------- -------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
--------- --------- --------- --------- --------- --------- ---------
(Note 1) (Note 1) (Note 1) (Note 1)
Revenues .................. $ 1,976 $ 1,133 $ 2,419 $ 448 $ 378 $ 633 $ 308
Expenses .................. (6,677) (3,470) (8,351) (2,418) (1,814) (1,153) (1,500)
Loss on First Bankers
Mortgage Services, Inc. ...
rescission ................ (3,979)
Other income (expense) (1,701) 139 (1,785) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net loss .................. (10,381) (2,198) (7,717) (1,970) (1,436) (520) (1,192)
Net investment (loss) ..... -- -- -- (2,267) (1,406) (586) (1,070)
Net realized gain (loss) on
investments .......... -- -- -- 1,108 1,004 1,226 31
Unrealized gain (loss) on
investments .......... -- 21 -- (1,056) (3,522) (5,207) (737)
Amortization of discount on
preferred stock ...... (700) (3,218) (3,218) -- -- -- --
Deemed preferred stock
dividends ............ (113) (33) (51) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net loss applicable to
common stockholders .. $ (11,194) $ (5,449) $ (10,986) $ (4,185) $ (5,360) $ (5,087) $ (2,968)
========= ========= ========= ========= ========= ========= =========
Net loss per common share . $ (1.57) $ (0.83) $ (1.64)
========= ========= =========
Decrease in net assets per
share - primary ...... $ (0.45) $ (1.25) $ (1.42) $ (0.55)
========= ========= ========= =========
Decrease in net assets per
share fully diluted .. $ (1.26) $ (0.49)
========= =========
Weighted average common
share outstanding .... 7,140,293 6,542,114 6,718,170 4,416,988 3,192,600 3,214,708 3,217,615
========= ========= ========= ========= ========= ========= =========
- ---------
1. On January 4, 1999, we withdrew our election to be treated as a
Business Development Company subject to the Investment Company Act of
1940. As a result of this withdrawal, we are now required to present
our financial statements consistent with those of a normal operating
company as opposed to a Business Development Company. Because we were
a Business Development Company during the years ended December 31,
1995 through December 31, 1998, the 1998, 1997, 1996 and 1995
financial statements reflect the Business Development Company format.
-24-
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
Set forth below is certain information as of December 15, 2000, with
respect to ownership of our common stock held of record or beneficially by (i)
our executive officers, (ii) each of our directors, (iii) each person who owns
beneficially more than five percent of our outstanding common stock; and (iv)
all directors and executive officers as a group:
Shares of Shares of Common Shares of
Shares of Common Stock Stock underlying Other Common Percentage
Name and Address of Common Stock underlying Warrants/Preferred Stock Owned of Common
Beneficial Owner Owned (1) Options (1) Stock (1) (1) Stock Owned
Henry Fong
7315 East Peakview Ave.
Englewood, CO 80111 215,300 945,700 (2) 0 459,044 (3) 20.0%
Russell L. Casement
1355 S. Colorado Blvd., Suite
320
Denver, CO 80222 121,000 365,900 (4) 0 0 6.5%
Aaron A. Grunfeld
10390 Santa Monica Blvd.,
Fourth Floor
Los Angeles, CA 90025 32,700 379,500 (5) 0 0 5.5%
All officers and directors as
a group (four persons) 399,000 1,757,400 (6) 0 459,044 29.4%
1. The beneficial owners exercise sole voting and investment power.
2. Includes 945,700 shares underlying options granted under our 1999 Stock
Option Plan.
3. Includes 459,044 shares owned by a corporation in which Mr. Fong is an
officer and director.
4. Includes 36,400 shares underlying options granted under our 1993 Stock
Option Plan for Non-Employee Directors and 329,500 shares underlying
options granted under our 1999 Stock Option Plan.
5. Includes 50,000 shares underlying options granted under our 1993 Stock
Option Plan for Non-Employee Directors and 329,500 shares underlying
options granted under our 1999 Stock Option Plan.
6. Includes 86,400 shares underlying options granted under our 1993 Stock
Option Plan for Non-Employee Directors and 1,671,000 shares underlying
options granted under our 1999 Stock Option Plan.
The issuance of 7,140,000 shares of our common stock in the acquisitions of
Nova Financial Systems, Inc. and Key Financial Systems, Inc., as described under
proposal number one, may, at a subsequent date, result in a change in control of
our company.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Generally, a director of a Delaware corporation will not be found to have
violated his fiduciary duties unless there is proof by clear and convincing
evidence that the director has not acted in good faith, in a manner he
reasonably believes to be in or not opposed to the best interests of the
corporation, or with the care that an ordinarily prudent person in a like
position would use under similar circumstances. In general, a director is liable
for monetary damages for any action or omission as a director only if it is
proved by clear and convincing evidence that such act or omission was undertaken
either with deliberate intent to cause injury to the corporation or with
reckless disregard for the best interest of the corporation.
Under Delaware law, a corporation must indemnify its directors, as well as
its officers, employees and agents, against expenses where any such person is
-25-
successful on the merits or otherwise in defense of an action, suit or
proceeding. A corporation may indemnify such persons in actions, suits and
proceeds (including derivative suits) if the individual has acted in good faith
and in a manner that he believes to be in or not opposed to the best interests
of the corporation. In the case of a criminal proceeding, the individual must
also have no reasonable cause to believe that his conduct was unlawful.
Indemnification may be made only if ordered by a court or if authorized in a
specific case upon a determination that the applicable standard of conduct has
been met. Such a determination may be made by a majority of the disinterested
directors, by independent legal counsel or by the stockholders. In order to
obtain reimbursement for expenses in advance of the final disposition of any
action, the individual must provide an undertaking to repay the amount if it is
ultimately determined that his is not entitled to be indemnified.
In general, Delaware law requires that all expenses, including attorney's
fees, incurred by a director in defending any action, suit or proceeding be paid
by the corporation as they are incurred in advance of final disposition if the
director agrees to repay such amounts if it is proved by clear and convincing
evidence that his action or omission was undertaken with deliberate intent to
cause injury to the corporation or with reckless disregard for the best
interests of the corporation and if the director reasonably cooperated with the
corporation concerning the action, suit or proceeding.
-26-
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 our Certificate of
Incorporation to cause an increase in the number of authorized shares of common
stock. The increase is needed to issue approximately 8,808,575 shares of common
stock in the following transactions:
o the acquisition of Nova Financial Systems, Inc. and Key Financial
Systems, Inc.;
o the acquisition of The Meridian Residential Group, Inc.; and
o the acquisition of First Bankers Mortgage Services, Inc. and
Rescission.
In addition, shares of common stock may be issued in future transactions of
which none are planned at this time. As of December 31, 2000, there were only
393,057 shares of common stock available for issuance. We should maintain a
reserve of shares of common stock to be issued under our stock option plans and
in line with good corporate practices to maintain a number of authorized but
unissued shares.
A condition to the completion of several proposed transactions described
below is approval of this proposal. In exchange for all of the outstanding
capital stock of Nova Financial Systems, Inc. and Key Financial Systems, Inc.,
we intend to issue 7,140,000 shares of common stock and warrants for the
purchase of our common stock equal to 100% of any warrants, options, preferred
stock or other convertible securities outstanding at the closing date and
exchangeable for or convertible into our common stock. Our Series F Convertible
Preferred Stock issued in connection with the acquisition of the Meridian
Residential Group, Inc., described below, may convert into approximately 525,000
shares of our common stock. Upon approval of this proposal, our Series E
Convertible Preferred Stock issued in connection with the acquisition and
rescission of First Bankers Mortgage Services, Inc., described below, may
convert into approximately 300,000 shares of our common stock. Our Series G
Convertible Preferred Stock issued in connection with a private placement may
convert into approximately 464,000 shares of our common stock. In addition, we
may issue another series of preferred stock to raise the cash consideration of
up to $5,000,000 for the acquisitions of Nova Financial Systems, Inc. and Key
Financial Systems, Inc.
Our Certificate of Incorporation currently authorizes the issuance of up to
7,500,000 shares of common stock and 2,000,000 shares of preferred stock with a
par value of $0.02 per share. As of December 31, 2000, of the 7,500,000 shares
of common stock authorized, 7,106,943 shares were outstanding and 1,786,400
shares of common stock are reserved for issuance upon the exercise of
outstanding options and warrants. See Options and Warrants on page 28. As of
December 31, 2000, of the 2,000,000 shares of preferred stock authorized 1,200
shares of Series D 6% Convertible Preferred Stock, 250 shares of Series E
Convertible Preferred Stock, 460,000 shares of Series F Convertible Preferred
Stock and 1,300 shares of Series G Convertible Preferred Stock were outstanding.
Our board of directors deems it advisable to amend the Certificate of
Incorporation to increase the number of authorized shares of common stock to
50,000,000 shares. A copy of paragraph 4 of the Certificate of Incorporation as
it would read following adoption of this proposal is included herewith as
Exhibit 1.
The additional shares of common stock would become part of the existing
class of common stock, and the additional shares, when issued, would have the
same rights and privileges as the shares of common stock now issued. There are
no preemptive rights relating to the common stock.
To the extent that any further issue of shares is made on other than a pro
rata basis to current stockholders, the present ownership of current
stockholders may be diluted.
If the proposed amendment is approved, the additional authorized shares
would be available for issuance by the board of directors for any proper
corporate purpose at any time without further stockholder approval except as
otherwise required by applicable law or securities exchange listing rules.
Nonetheless, it is the intention of the board of directors to use a portion of
the additional shares to: (i) be issued in connection with the acquisitions of
Key Financial Systems, Inc., Nova Financial Systems, Inc., the Meridian
Residential Group, Inc. and First Bankers Mortgage Services, Inc., described
below; (ii) for possible issuance in connection with one or more equity
-27-
financing, including, but not limited to 1,300 shares of Series G Convertible
Preferred Stock and the underlying common stock; and (iii) to issue shares
issuable pursuant to our stock option plans and outstanding warrants.
The board of directors believes the increase is necessary to allow us to
raises necessary financing and complete the expansion of our business. As
described above, the increase is a condition to the completion of several
proposed transactions.
In addition, the increase in authorized shares will facilitate the
following:
o the possible issuance of common stock in connection with one or more
equity financing; and
o issue common stock issuable pursuant to our stock option plans and
outstanding warrants.
ACQUISITION OF NOVA FINANCIAL SYSTEMS, INC. AND KEY FINANCIAL SYSTEMS, INC.
As described more fully under proposal number three of this proxy
statement, we signed a definitive agreement with Nova Financial Systems, Inc.
and Key Financial Systems, Inc. to acquire all the outstanding capital stock of
Nova Financial Systems, Inc. and Key Financial Systems, Inc. in exchange for the
greater of 7,140,000 shares or 50%, of our outstanding common stock on a post
acquisition basis plus cash consideration of $5 million. Consummation of the
Nova Financial Systems, Inc. and Key Financial Systems, Inc. mergers is subject
to a number of conditions, including the approval of the increase in the
authorized shares of common stock from 7,500,000 shares to 50,000,000 shares.
Nova Financial Systems, Inc. and Key Financial Systems, Inc. may waive the
approval of the increase in authorized shares if our shareholder meeting has not
been held prior to the closing of the mergers or the closing may be postponed
until our shareholder meeting has been held and an amended Certificate of
Incorporation has been filed in Delaware. We may issue an additional series of
preferred stock to raise the cash consideration of up to $5,000,000.
The transaction will be accounted for as a reverse acquisition. The
purchase price applied to the reverse acquisition has been based on the net book
value of our underlying assets prior to the transaction plus $5,000,000 cash
paid in connection with the acquisition of Key Financial Systems, Inc. and Nova
Financial Systems, Inc.
Our board of directors considered the following factors both positive and
negative in determining whether the increase in authorized shares is necessary
and in the best interest of our company and our stockholders:
COMPLEMENTARY BUSINESS LINES. We have sought to position ourselves as an
Internet-based consumer financial services company. The acquisition of Nova
Financial Systems, Inc. and Key Financial Systems, Inc. provides for the
addition of a complementary line of business to our online mortgage operations.
One of our goals was to create a database of loyal sub-prime consumers for
cross-marketing a variety of financial products and services. Nova Financial
Systems, Inc. and Key Financial Systems, Inc. provide a significant source for
this database.
SIZE AND SCOPE OF TARGET MARKET. With estimates as high as 60 million
consumers considered sub-prime, the size of the market to be targeted by Nova
Financial Systems, Inc. and Key Financial Systems, Inc. is estimated as high as
25-30% of all U.S. households. In addition, the market has shown continuous
growth with a higher than average profit potential when compared to the consumer
credit industry as a whole.
SUCCESSFUL OPERATING HISTORY. With over 889,000 applications processed and
over 85,000 active credit card accounts, Nova Financial Systems, Inc. and Key
Financial Systems, Inc. have demonstrated their ability to be successful despite
being in business for only two and three years, respectively. Nova Financial
Systems, Inc. and Key Financial Systems, Inc. have developed their business
including significant technology infrastructure in a short period of time and on
a profitable basis.
STATE-OF-THE-ART CALL CENTER. Nova Financial Systems, Inc. and Key
Financial Systems, Inc. have built and maintain a 17,000 square foot call center
employing state-of-the-art technology which can be utilized for other financial
product offerings. This center is used for both outbound marketing as well as a
service center handling customer service calls and written correspondence for
both telemarketing and Internet customers.
-28-
EXPERIENCE OF PRINCIPALS. With a combined fifty years of experience in
business, more than half of which is in the financial services industry, the two
Nova Financial Systems, Inc. and Key Financial Systems, Inc. principals bring a
wealth of knowledge and experience in financial services to us.
COMPETITION. Competition in the credit card industry is intense and Nova
Financial Systems, Inc. and Key Financial Systems, Inc. compete with many
significantly larger financial institutions. However, the board of directors
feels there is significant opportunity for companies such as Nova Financial
Systems, Inc. and Key Financial Systems, Inc. given the size of the market,
their past success, and the uniqueness of the product offered.
RELIANCE ON THIRD PARTIES. Nova Financial Systems, Inc. and Key Financial
Systems, Inc. must rely on third party partner banks in marketing their
products. Nova Financial Systems, Inc. and Key Financial Systems, Inc. must
attract additional partner banks in order to continue to be successful and to
mitigate the risk associated with reliance on third party partners which Nova
Financial Systems, Inc. and Key Financial Systems, Inc. do not control. The
board of directors believes that Nova Financial Systems, Inc. and Key Financial
Systems, Inc. can be successful in obtaining additional partner banks.
DILUTION TO PRESENT STOCKHOLDERS. While the acquisition of Nova Financial
Systems, Inc. and Key Financial Systems, Inc. will result in significant
dilution to our present stockholders, our board of directors feels the dilution
effect is outweighed by the positive effect the acquisition of a profitable
growing business should provide us. In addition, the shares will be issued to a
small group of stockholders many of which will have a vested interest in the
operation and stockholder value of us in the future.
Financial statements of Nova Financial Systems, Inc. as of and for the
periods September 30, 2000, December 31, 1999 and December 31, 1998 are attached
hereto as Exhibit 2.
Financial statements of Key Financial Systems, Inc. as of and for the
periods September 30, 2000, December 31, 1999 and December 31, 1998 are attached
hereto as Exhibit 3.
ACQUISITION OF THE MERIDIAN RESIDENTIAL GROUP, INC.
Effective September 27, 2000, we completed the acquisition by merger of all
of the issued and outstanding common stock of the Meridian Residential Group,
Inc. through our wholly-owned subsidiary, GR.com, Inc., in exchange for 425,000
shares of our Series F Convertible Preferred Stock. The Series F Convertible
Preferred Stock has a stated value of $8.00 per share and is convertible into
shares of our common stock any time and from time to time at the option of the
holder until March 7, 2004, at a conversion price of $7.00 per share. On March
7, 2004, all remaining outstanding Series F Preferred Stock shall be
automatically converted into shares of our common stock. To the extent that the
holders realize proceeds from the sale of the shares of common stock in an
amount that is less than conversion price, we have agreed to issue the holders
additional shares of our common stock having a market value equal to any such
deficiency.
The transaction was accounted for as a purchase, and the results of
operations of Meridian Residential Group, Inc. are included in Equitex 2000's
unaudited proforma condensed consolidated statement of operations for the year
ended December 31, 1999 and the nine months ended September 30, 2000. The total
purchase price was allocated to the assets and liabilities acquired based on
their estimated fair values, including goodwill of approximately $2,600,000,
which is being amortized by the use of the straight-line method over fifteen
years.
In addition, in connection with the distribution and spin-off Equitex 2000
will agree to issue additional shares of common stock to the Meridian
Residential Group, Inc. stockholders having a market value, at the time of
issuance, equal to 20% of the annual increase in pre-tax net earnings compared
to the immediately preceding year of the Meridian Residential Group, Inc.
business for each of the five years subsequent to closing, commencing with the
year ending December 31, 2000. The aggregate market value of the additional
shares of Equitex 2000's common stock cannot exceed (i) $3,440,000 and (ii)
without shareholder approval, 19.9% of Equitex 2000's currently outstanding
common stock.
In connection with the Meridian Residential Group, Inc. acquisition,
nMortgage acquired from Meridian Capital Group, LLC, the proprietary business
model, website, trademarks, corporate names and all related intellectual
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property rights related to the Meridian Residential Group, Inc. GreatRate.com
business, including the names GreatRate.com and GreatRateMortgage.com .for a
cash purchase price of $850,000.
The Meridian Residential Group, Inc. stockholders have the right at any
time and from time to time prior to March 7, 2004, to exchange up to 50% of the
shares of our common stock received upon conversion of the Series F Preferred
Stock or in connection with the merger for shares of nMortgage common stock.
Each share of our common stock will be exchanged for shares of nMortgage common
stock in accordance with the ratio determined by dividing (i) the greater of the
then market price of our common stock or $8.00 by (i) the lesser of the market
price of the nMortgage common stock or $1.00.
Our board of directors considered the following factors both positive and
negative in determining whether the increase in authorized shares is necessary
and in the best interest of our company and our stockholders:
SUCCESSFUL OPERATING HISTORY. The Meridian Residential Group, Inc. has been
in business since 1996 and has been profitable for the past three years. The
company funded over $500 million in mortgage loans during that period and has
generated increasing gross revenues each year since inception.
COMPLEMENTARY LINE OF BUSINESS. The Meridian Residential Group, Inc. began
to transition from traditional mortgage lending to an Internet direct lending
platform in 1998 and conducts its business in a very similar fashion to our
Internet mortgage company nMortgage, Inc. Given the Meridian Residential Group,
Inc.'s proven track record with traditional mortgage lending as well as its
focus on Internet mortgage lending, the board of directors feels the Meridian
Residential Group, Inc. is a natural fit to complement our present mortgage
operations.
NO SIGNIFICANT DEBT. Our board of directors recognizes the dangers inherent
in traditional mortgage lending utilizing warehouse lines of credit to initially
fund and later sell mortgage loans. The Meridian Residential Group, Inc.
utilizes the table funding method to originate its mortgage loans which
transfers the risks associated with funding the loan to the lender. The Meridian
Residential Group, Inc. maintains no significant debt or warehouse lines of
credit. This method of funding loans makes the acquisition of the Meridian
Residential Group, Inc. much more attractive when compared to other mortgage
operations.
SUSCEPTIBILITY TO THE ECONOMY AND ASSOCIATED INTEREST RATE FLUCTUATIONS. As
with any mortgage company, the Meridian Residential Group, Inc. is susceptible
to fluctuations in the economy and the corresponding changes in interest rates.
These are the risks associated with operating in the mortgage industry. Our
board of directors is of the opinion that like nMortgage, the Meridian
Residential Group, Inc. operates its business in an efficient manner which
mitigates certain risks associated with fluctuating economic trends.
LIMITED MARKET. Presently, the Meridian Residential Group, Inc. operates
only in the states of New York, New Jersey and Connecticut. Our board of
directors is confident, however, that nMortgage and the Meridian Residential
Group, Inc. will be able to locate and complete an agreement with a suitable
financial institution partner which will enable the companies to operate in
additional states.
BUSINESS OF MERIDIAN RESIDENTIAL GROUP, INC.
Meridian Residential Group, Inc. was established on February 28, 1996. In
its initial Phase Meridian Residential Group, Inc. set out to become a mortgage
banker, in order to capitalize on the experience and vast client base of its
principals. Over time Meridian Residential Group, Inc. became a provider of
mortgage management services and E commerce infrastructure platforms to the
mortgage industry. As a result, Meridian Residential Group, Inc. began to seek a
strategic alliance with an entity that could provide technology compatible with
its net stream lined virtual back office. Details of the new business model and
strategic alliance partner are detailed below.
Since March 1, 2000, Meridian Residential Group, Inc. has laid the
groundwork for a new business model. It has developed a web-based strategy
called GreatRate.com with the web address bearing the same name
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www.GreatRate.com. Through its site, Meridian Residential Group, Inc. is
developing web based mortgage products that will allow it to capitalize on its
streamlined back office operation to expand its business nationwide. The goal of
the new business plan is to create a Business-to-Business platform for Meridian
Residential Group, Inc. to reach out to small banks and financial institutions
allowing them to utilize Meridian Residential Group, Inc.'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 Residential Group, Inc. was recently merged with GR.com, our newly
formed subsidiary. As a result, Meridian Residential Group, Inc. will take its
streamlined virtual back office and join it with our mortgage technology
subsidiary, nMortgage. Meridian Residential Group, Inc. should benefit from the
technology already developed by nMortgage.
MERIDIAN RESIDENTIAL GROUP, INC.'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section containing Meridian Residential Group, Inc.'s Management's
Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with the financial statements of Meridian Residential
Group, Inc. as of and for the year ended February 29, 2000 and as of and for the
seven months ended September 30, 2000 and 1999, attached as Exhibit 4 to this
proxy statement.
Fiscal year ending February 1999 vs. February 2000
- --------------------------------------------------
REVENUE
Revenue in fiscal year ending February 2000 increased to $2,244,550 from
$2,069,045 in fiscal year ending February 1999. Volume of closed loan
origination grew to $155,000,000 vs. $122,000,000, representing an increase of
20%. This is despite an 8% volume decline in the mortgage origination industry.
Volume and income increases can be attributed to several factors, however the
most substantial factor is Meridian Residential Group, Inc.'s ability to
maintain its foothold in the purchase mortgage market as opposed to the more
volatile refinance market. Meridian Residential Group, Inc. had the identical
expenditures in regard to its advertising as the previous year and relied on its
ability to maintain a strong referral base with realtors, attorneys, financial
planners and most importantly previous clients, to create a steady flow of
business.
OPERATING EXPENSES
Operating expenses for year-ended February 29, 2000 were $2,212,286,
compared with $1,961,086 for the year ended February 28, 1999. Meridian
Residential Group, Inc. changed its compensation policy during the fiscal year
ending February 28, 2000, from salaried employees to a commissioned sales force.
This policy change decreased salaries by approximately $300,000, auto expenses
by $12,000 and employee benefits by $68,000. Accordingly, commission expense
increased by $600,000. In addition, the new compensation method reduced fixed
costs for Meridian Residential Group, Inc. and created greater incentive for
Meridian Residential Group, Inc.'s sales force.
Seven months ended September 30, 1999 vs. September 30, 2000
- ------------------------------------------------------------
REVENUES
Fees generated for the seven months ended September 30, 2000 were
$1,435,858 up from revenues of $1,398,317 for the seven month's ended September
30 1999. Closed mortgage volume for Meridian Residential Group, Inc. through
September 30, 2000 was $96,385,161. Mortgage applications in the active pipeline
were in excess of $45,000,000 most of which is anticipated to close in the next
three months.
The industry as a whole estimates a decline of 18% for the year. The slight
drop in volume for Meridian Residential Group, Inc. can be attributed to the
slowdown in the market as a whole and the extensive travel and focus of Meridian
Residential Group, Inc.'s management in regard to the new business model.
-31-
OPERATING EXPENSES
For the seven months ended September 30, 2000 operating expenses increased
to $1,425,017 from $1,353,086. The increase of $71,931 was the result of
increases in commissions ($12,859) due to higher mortgage closings, advertising
and promotion ($9,273), travel and shows ($7,952) due to the GR.com merger, and
professional fees ($73,421) due to legal and accounting expenses related to the
GR.com merger. These increases were offset by decreases in rent ($15,408) and
telephone ($7,395) as Meridian Residential Group consolidated satellite offices.
ACQUISITION OF FIRST BANKERS MORTGAGE SERVICES, INC. AND RESCISSION
On August 23, 1999, we acquired First Bankers Mortgage Services, Inc. First
Bankers Mortgage Services, Inc., a Florida corporation, is a full service
mortgage banking company headquartered in the Fort Lauderdale, Florida area. We
acquired all of the outstanding common stock of First Bankers Mortgage Services,
Inc. from its sole shareholder, Vincent Muratore. The total aggregate purchase
price for First Bankers Mortgage Services, Inc., was 1,000 shares of our Series
E Convertible Preferred Stock, 250 shares of which were issued at closing and
750 shares of which were issuable upon satisfaction of certain performance
conditions. In addition, the purchase price was subject to post-closing
adjustments pursuant to the Agreement and Plan of Reorganization, dated June 22,
1999, among us, First Bankers Mortgage Services, Inc., Vincent Muratore and FBMS
Acquisition Corp., as amended. Under Delaware law, we were not required to, and
did not, seek shareholder approval for this transaction.
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 was being
amortized by use of the straight line method over ten years prior to the
rescission.
In connection with the First Bankers Mortgage Services, Inc. transaction,
we and our subsidiaries invested approximately $10.7 million in First Bankers
Mortgage Services, Inc. for working capital purposes.
Subsequent to the acquisition of First Bankers Mortgage Services, Inc., all
outstanding shares of First Bankers Mortgage Services, Inc. were transferred to
our new wholly owned subsidiary, nMortgage, Inc.
On August 15, 2000, we reached an agreement in principal to rescind the
acquisition of First Bankers Mortgage Services, Inc. effective June 28, 2000.
Under the terms of the rescission agreement, all assets and liabilities of First
Bankers Mortgage Services, Inc. as of June 28, 2000 were returned to the former
owner of First Bankers Mortgage Services, Inc. We retained certain intellectual
property rights valued at approximately $2,500,000 related to the Internet-based
mortgage banking business of nMortgage. Although all of the performance
conditions were not met, we intend to issue an additional 50 shares of Series E
Convertible Preferred Stock as part of the agreement and rescission related to
those conditions that were satisfied. As part of the settlement, we have agreed
to issue up to 50 additional shares of its Series E Convertible Preferred Stock
to fund the resolution of certain claims against First Bankers Mortgage
Services, Inc. resulting in an aggregate of 300 shares of Series E Preferred
Stock. As a result of the rescission, we were divested of the assets,
liabilities, and operations of First Bankers Mortgage Services, Inc. as of June
28, 2000 and as a result, recorded a loss of $3,979,000, which represents the
write off of our investment in First Bankers Mortgage Services, Inc., including
remaining goodwill as of the date of the rescission, net of technological rights
retained. The operating results of First Bankers Mortgage Services, Inc. have
been included in the consolidated statement of operations from the date of
acquisition through the date of rescission.
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 our common stock upon (i) the approval of proposal
number one, the increase in the authorized shares of common stock from 7,500,000
shares to 50,000,000; (ii) our subsequent merger with or into another company;
or (iii) the sale of substantially all of our assets.
-32-
SUMMARY OF SECURITIES AUTHORIZED AND ISSUED IN ASSOCIATION WITH THE ACQUISITIONS
Number of Shares
of Common Stock
Amount Outstanding or
Issued Underlying
Purpose or or to be Amount Preferred
Title of Securities Acquisition Issued Authorized Stock(1)
- ------------------- ----------- -------- ---------- ----------
Series D 6% convertible Acquisition of
preferred stock First Bankers
Mortgage Services,
Inc. 1,200(2) 3,500 428,570
Series E convertible Acquisition of
preferred stock First Bankers
Mortgage Services,
Inc. 250(3) 1,093 250,000
Series F convertible Acquisition of
preferred stock The Meridian
Residential
Group, Inc. 460,000(4) 460,000 525,715
Series G convertible Acquisition of
preferred stock The Meridian
Residential
Group, Inc. 1,300(5) 1,300 464,290
New series of preferred Acquisition of
stock Key Financial
Systems, Inc. and
Nova Financial
Systems, Inc. (6) 5,500(6) (6)
Common Stock Acquisition of
Key Financial
Systems, Inc. and
Nova Financial
Systems, Inc. 7,140,000(7) (7) 7,140,000
---------
Total 8,808,575
=========
(1) The number of shares of common stock is estimated for the Series D and G
convertible preferred stock based upon the recent price of our common
stock.
(2) Number of shares issued in association with the private placement to raise
proceeds for the acquisition of First Bankers Mortgage Services, Inc. and
general working capital purposes.
(3) Number of shares issued in association with the acquisition of First
Bankers Mortgage Services, Inc.
(4) 425,0000 shares issued in association with the acquisition of The Meridian
Residential Group, Inc., remaining 35,000 shares issued for other purposes.
(5) Number of shares issued in association with the private placement to raise
proceeds for the acquisition of The Meridian Residential Group, Inc. and
the purchase of the GreatRate.com intellectual property by nMortgage and
general working capital purposes.
(6) We may issue up to 5,500 shares of a new series of preferred stock in
exchange for net proceeds of $5,000,000 (net of $500,000 issue costs),
which is to be used to finance our acquisition of Key Financial Systems,
Inc. and Nova Financial Systems, Inc. No shares have been issued yet. The
new series of preferred stock will contain a beneficial conversion feature
similar to the Series G preferred stock in which the preferred stock may be
converted at any time at a price per share of common stock equal to the
lesser of (a) $6.50 or (b) 65% of the market price of our common stock.
(7) The number of shares of common stock issued will be the greater of
7,140,000 or 50% of our outstanding common stock on a post acquisition
basis. The issuance of common stock is conditioned upon the approval of the
increase in authorized shares from 7,500,000 to 50,000,000.
-33-
The following table summarizes the comparative ownership and capital
contributions of our stockholders prior to and after the issuance of common
stock and warrants in the acquisition of Key Financial Systems, Inc. and Nova
Financial Systems, Inc.
ACCRETION AND DILUTION
(in thousands, except per share data)
Nine months ended
September 30, Year Ended December 31,
-------------------- --------------------------------
Historical 2000 1999 1999 1998 1997
- ---------- -------- -------- -------- -------- --------
Net loss ................................. (10,380) (2,198) (7,717) (1,981) (3,923)
Less amortization of discount
on preferred stock ....................... (700) (3,217) (3,218)
Less deemed preferred stock dividends
(113) (33) (51)
-------- -------- -------- -------- --------
Net loss available to common
stockholders ............................. $(11,193) $ (5,448) $(10,986) $ (1,981) $ (3,923)
======== ======== ======== ======== ========
Weighted average number of shares
outstanding during the period ............ 7,140 6,542 6,718 4,417 3,193
======== ======== ======== ======== ========
Basic and diluted net loss per share ..... $ (1.57) $ (0.83) $ (1.64) $ (0.45) $ (1.25)
======== ======== ======== ======== ========
AGGREGATE ACCRETION/DILUTION PER SHARE
Net loss available to common
stockholders (historical) ................ $(11,193) $ (5,448) $(10,986) $ (1,981) $ (3,923)
======== ======== ======== ======== ========
Weighted average number of shares
outstanding during the period (historical) 7,140 6,542 6,718 4,417 3,193
Net number of shares to be issued on
the assumed issuance of shares in
Key/Nova transaction ..................... 7,140 6,542 6,718 4,417 3,193
Net number of shares to be issued on the
assumed exercise of stock options
and warrants ............................. 2,356 1,266 1,266 749 312
Net number of shares to be issued on
the assumed exercise of stock options
and warrants in the Key/Nova transaction . 2,356 1,266 1,266 749 312
Shares issued on the assumed conversion
of convertible preferred stock ........... 2,756 2,121 2,364 3,063 19,749
-------- -------- -------- -------- --------
Number of shares used in the computation
of diluted earnings per share ............ 21,748 17,737 18,332 13,395 26,759
======== ======== ======== ======== ========
Diluted net income (loss) per share ...... $ (0.51) $ (0.31) $ (0.60) $ (0.15) $ (0.15)
======== ======== ======== ======== ========
-34-
SALE OF SERIES G CONVERTIBLE PREFERRED STOCK
On September 6, 2000, we completed the private placement of 1,300 shares of
our Series G 6% Convertible Preferred Stock, receiving net proceeds of
$1,240,000. The proceeds from this transaction were used in connection with the
Meridian Residential Group, Inc. acquisition, the purchase of the GreatRate.com
intellectual property by nMortgage and general working capital purposes. The
Series G Preferred Stock has a stated value of $1,000 per share and bears
dividends at 6% per annum, payable quarterly commencing September 30, 2000,
when, as and if declared by our board of directors. Dividends may be payable by
us in cash or, at our option, shares of common stock. The Series G 6%
Convertible Preferred Stock is convertible, together with any accrued but unpaid
dividends, at any time and from time to time into shares of our common stock at
a conversion price per share equal to the lesser of $6.50 or 65% of the market
price upon the occurrence of certain material events. All outstanding Series G
6% Convertible Preferred Stock shall be automatically converted into common
stock on August 31, 2003.
The Series G 6% Convertible Preferred Stock is redeemable at our option at
any time at a redemption price equal to $1,350 per share plus any accrued but
unpaid dividends. We are required to redeem the Series G 6% Convertible
Preferred Stock if our stockholders 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 our common stock underlying the Series G 6% Convertible
Preferred Stock is not declared effective on or before 180 days of its filing.
DESCRIPTION OF PREFERRED STOCK
Our preferred stock is so-called "blank check" preferred since our board of
directors 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, our board of
directors 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 our board of director's sole discretion,
with no further authorization by our stockholders except as may be required by
applicable laws or securities exchange listing rules.
The holders of shares of preferred stock have only such voting rights as
are granted by law and authorized by the board of directors with respect to any
series thereof. Our board of directors 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 our affairs 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 our assets upon
liquidation until satisfaction of any liquidation preference granted to shares
of preferred stock. It is not possible to state the effect that other series of
preferred stock may have upon the rights of the holder of common stock until the
board of directors determines the terms relating to those series of preferred
stock.
Currently, we have the following series of preferred stock outstanding and
the board of directors has no present commitment, arrangement or plan that would
require the issuance of shares of preferred stock in connection with an equity
offering, merger, acquisition or otherwise:
o SERIES D 6% CONVERTIBLE PREFERRED STOCK, STATED VALUE, $1,000 PER
SHARE. The Series D 6% Convertible Preferred Stock ranks prior to our
common stock and pari passu with other series of preferred stock
-35-
issued prior to the Series D 6% Convertible Preferred Stock and senior
to any series of preferred stock issued after the Series D 6%
Convertible Preferred Stock. The Series D 6% Convertible Preferred
Stock entitles its holder to 6% annual dividends, payable quarterly.
The Series D6% Convertible Preferred Stock 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 6% Convertible Preferred
Stock until the most recent dividend payment date or date of our
liquidation, dissolution or winding up. Lastly, the Series D 6%
Convertible 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 6%
Convertible Preferred Stock is (i) the number of shares to be
converted, multiplied by (ii) the stated value of the Series D 6%
Convertible Preferred Stock and divided by (iii) the applicable
conversion price. As of December 15, 2000, 1,200 shares of Series D 6%
Convertible Preferred Stock were outstanding.
o SERIES E CONVERTIBLE PREFERRED STOCK. The Series E Convertible
Preferred Stock is not entitled to dividends, does not have a
liquidation preference and does not have voting rights. The
outstanding shares of Series E Convertible Preferred Stock
automatically converts to 300,000 shares of common stock upon (i) the
approval if the increase in the authorized shares of common stock from
7,500,000 shares to 50,000,000 or our subsequent merger with or into
another company or (iii) the sale of substantially all of our assets.
As of December 15, 2000, 250 shares of Series E Convertible Preferred
Stock were outstanding.
o SERIES F CONVERTIBLE PREFERRED STOCK. The Series F Convertible
Preferred Stock has a stated value of $8.00 per share and each share
is convertible into shares of our common stock any time and from time
to time at the option of the holder until March 7, 2004, at a
conversion price of $7.00 per share. On March 7, 2004, all remaining
outstanding shares of Series F Convertible Preferred Stock shall be
automatically converted into shares of our common stock. To the extent
that the holders realize proceeds from the sale of the shares of
common stock in an amount that is less than conversion price, we have
agreed to issue the holders additional shares of our common stock
having a market value equal to any such deficiency. As of December 15,
2000, 460,000 shares of Series F Convertible Preferred Stock were
outstanding.
o SERIES G CONVERTIBLE PREFERRED STOCK. The Series G Convertible
Preferred Stock has a stated value of $1,000 per share and bears
dividends at 6% per annum, payable quarterly commencing September 30,
2000, when, as and if declared by our board of directors. Dividends
may be payable by us in cash or, at our option, shares of common
stock. The Series G Convertible Preferred Stock is convertible,
together with any accrued but unpaid dividends, at any time and from
time to time into shares of our common stock at a conversion price per
share equal to the lesser of $6.50 or 65% of the market price upon the
occurrence of certain material events. All outstanding shares of
Series G Convertible Preferred Stock shall be automatically converted
into common stock on August 31, 2003. The Series G Convertible
Preferred Stock are redeemable at our option at any time at a
redemption price equal to $1,350 per share plus any accrued but unpaid
dividends. We are required to redeem the Series G Convertible
Preferred Stock if our stockholders 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 our common stock
underlying the Series G Convertible Preferred Stock is not declared
effective on or before 180 days of its filing. As of December 15,
2000, 1,300 shares of Series G Convertible Preferred Stock were
outstanding.
-36-
OPTIONS AND WARRANTS
The 2,356,400 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 our 1993 Stock Option Plan exercisable until July 4,
2005 at a price of $3.00 per option.
o 1,700,000 shares are reserved for issuance upon the exercise of
options granted under our 1999 Stock Option Plan. 1,000,000 shares are
exercisable until January 5, 2004 at an exercise price of $6.75 per
option and 700,000 shares are exercisable until April 17, 2005 at an
exercise price of $5.50 per option.
o 60,000 shares are reserved for issuance upon the exercise of warrants
exercisable until January 20, 2002. Of this amount, 10,000 warrants
are exercisable at a price of $8.895 per warrant. The remaining
amount, 50,000 warrants, are exercisable at a price of $10.00 per
warrant.
o 50,000 shares are reserved for issuance upon the exercise of warrants
exercisable until April 30, 2002 at an exercise price of $9.875 per
warrant.
o 60,000 shares are reserved for issuance upon the exercise of warrants
exercisable until April 17, 2005 at an exercise price of $5.50 per
warrant.
o 120,000 shares are reserved for issuance upon the exercise of warrants
exercisable until August 31, 2002 at an exercise price of $5.50 per
warrant.
o 100,000 shares are reserved for issuance upon the exercise of warrants
exercisable until April 17, 2005 at an exercise price of $5.50 per
warrant.
o 50,000 shares are reserved for issuance upon the exercise of warrants
exercisable until April 17, 2005 at an exercise price of $5.50 per
warrant.
o 130,000 shares are reserved for issuance upon the exercise of warrants
exercisable until September 5, 2003 at an exercise price of $6.64 per
warrant.
In addition, pursuant to the anti-dilution provisions in the agreement for
the acquisitions of Nova Financial Systems Inc. and Key Financial Systems, Inc.,
we must issue at the closing of these transactions a warrant which equals on a
one for one basis all outstanding options and warrants then exercisable into our
common stock. Presently, this would constitute a warrant allowing the holder to
purchase 2,356,400 shares of our common stock at an exercise price of $6.60 per
share which is the weighted average exercise price of all warrant sand options
currently outstanding. The exact terms of the warrant may change based upon any
changes in outstanding options or warrants to purchase our common stock which
take place prior to closing.
VOTE REQUIRED
The affirmative vote of the majority of the outstanding stock of each class
entitled to vote thereon as a class, at the stockholders' meeting will be
required to adopt the proposed amendment to paragraph 4 of the Certificate of
Incorporation. 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. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO INCREASE
THE NUMBER OF SHARES OF COMMON STOCK.
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PROPOSAL NUMBER TWO
TO DISTRIBUTE ALL OF OUR ASSETS AND LIABILITIES TO EQUITEX 2000 AND
TO DISTRIBUTE ALL OF THE OUTSTANDING SHARES OF COMMON STOCK
OF EQUITEX 2000 TO OUR STOCKHOLDERS
Our board of directors recommends the distribution of all of our assets and
liabilities to Equitex 2000 and to distribute all of the outstanding shares of
common stock of Equitex 2000 to our stockholders on the basis of one share of
common stock of Equitex 2000 for each share of our common stock.
RISK FACTORS
You should be aware that the distribution by us of all of our assets and
liabilities to Equitex 2000 and spin-off of Equitex 2000 common stock involves
certain risks, including those described under "Risk Factors," that could
adversely affect the value of your holdings.
BACKGROUND AND REASONS FOR THE DISTRIBUTION AND SPIN-OFF
Our board of directors believes that the distribution of all of our assets
and liabilities to Equitex 2000 and the spin-off of Equitex 2000 common stock
will serve a number of purposes, including:
o increasing the ability of both companies to improve the corporate fit
and focus of their respective businesses;
o facilitating acquisitions by both companies by improving the
attractiveness of their respective capital stock as acquisition
currency; and
o allowing both companies to effectively motivate and enhance management
performance by providing equity compensation and incentives more
closely tied to the businesses in which the employees work.
THE DISTRIBUTION AND SPIN-OFF
If our stockholders approve the distribution by us of all of our assets and
liabilities to Equitex 2000 and spin-off of Equitex 2000 common stock, we
anticipate that its board of directors will authorize the various components of
the distribution and declare a special dividend payable in Equitex 2000 common
stock and set a record date for that dividend. The distribution would involve
the actions described below.
We will contribute the following to Equitex 2000:
o all of our cash, or such lesser amount as our board of directors may
determine in its sole discretion;
o all securities and investments owned by us in our investee companies
including our interests in First TeleServices, Inc. and First TeleBank
Corp.;
o all shares of Meridian Residential Group, our wholly-owned mortgage
banking subsidiary;
o any residual rights related to the First Bankers Mortgage Services,
Inc. acquisition and rescission;
o all shares of nMortgage, our Internet based mortgage banking
subsidiary;
o all receivables of any nature, including accounts and notes
receivable;
o all furniture, fixtures and equipment; and
o any other assets that are related in any manner to our company.
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Equitex 2000 will assume all of our liabilities and will indemnify us and
assume our prosecution or defense in the following lawsuits: WILLIAM G. HAYES,
JR. LIQUIDATING AGENT FOR RDM SPORTS GROUP, INC. AND RELATED DEBTORS V. EQUITEX,
INC., SMITH, GAMBRELL, RUSSELL, L.L.P., DAVID J. HARRIS, P.C., AND DAVID J.
HARRIS, INDIVIDUALLY, Adversary Proceeding No., 00-1065 (U.S. Bankruptcy Court
for the Northern District of Georgia, Newnan Division); and EQUITEX, INC. AND
HENRY FONG V. BERTRAND T. UNGER, Case No. 98-CV-2437 (Dist. Ct. Arapahoe County,
Colorado).
We will distribute, in the form of a special dividend, all of the
outstanding shares of common stock of Equitex 2000, on a pro rata basis, to the
holders of our common stock as of a record date for the special dividend. Each
of our shareholders will retain his shares of our common stock, and for each
share of our common stock held by him on the record date for the special
dividend contemplated by the distribution and spin-off, will be entitled to
receive one share of Equitex 2000 common stock.
Prior to its distribution to our stockholders, the Equitex 2000 common
stock will be registered pursuant to Section 12(b) or 12(g) of the Securities
Exchange Act of 1934 and Equitex 2000 shall have filed and sought to make
effective an application for the inclusion of the Equitex 2000 common stock on
the Nasdaq SmallCap Market. If Equitex 2000's application is not approved, its
common stock may be traded on either the electronic bulletin board or the
National Quotation Bureau, Inc.'s "Pink Sheets."
Following the distribution and spin-off, we are expected to close on the
acquisitions of Nova Financial Systems, Inc. and Key Financial Systems, Inc. as
discussed under proposal number three below.
NO RIGHT OF APPRAISAL
Our stockholders will not be entitled to appraisal rights under the
Delaware General Corporation Law in connection with the distribution and
spin-off.
FEDERAL INCOME TAX CONSEQUENCES RELATED TO THE DISTRIBUTION AND SPIN-OFF
While the spin-off of Equitex 2000 common stock will be a taxable
distribution to our stockholders, because we have no current and post-1913
accumulated earnings and profits, the distribution will be applied against, and
reduce the adjusted basis of our common stock owned by the stockholder. If the
distribution is greater than the adjusted basis of the stock, the excess is
treated as gain from the sale or exchange of property.
CONDITIONS TO THE DISTRIBUTION AND SPIN-OFF
The distribution and spin-off of Equitex 2000 common stock are conditioned
upon, among other things:
(i) approval of the distribution by us of all of our assets and
liabilities to Equitex 2000 and spin-off of Equitex 2000 common stock
by the holders of a majority of the outstanding stock of each class
entitled to vote thereon as a class; and
(ii) there not being in effect any statute, rule, regulation or order of
any court, governmental or regulatory body that prohibits or makes
illegal the transaction contemplated by the distribution.
Our board of directors has retained discretion, even if all conditions to
the distribution and spin-off of Equitex 2000 common stock are satisfied, to
abandon, defer or modify the distribution and/or spin-off of Equitex 2000 common
stock.
EQUITEX 2000'S BUSINESS AFTER THE DISTRIBUTION AND SPIN-OFF
After the distribution by us of all of our assets and liabilities to
Equitex 2000 and spin-off of Equitex 2000 common stock, Equitex 2000 will own
and operate all of our assets distributed to it.
PRINCIPAL OFFICE OF EQUITEX 2000
Equitex 2000, Inc.
2401 PGA Boulevard, Suite 190
Palm Beach Gardens, Florida 33410
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DESCRIPTION OF EQUITEX 2000 CAPITAL STOCK
Equitex 2000 has the authority to issue 52,000,000 shares of capital stock,
consisting of 50,000,000 shares of common stock, $.01 par value and 2,000,000
shares of preferred stock, $.01 par value.
EQUITEX 2000 DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS
The directors, executive officers, and control persons of Equitex 2000 are
as follows:
Name Age Offices Held Length of Service
- ---- --- ------------ -----------------
Henry Fong 64 President, Treasurer Since inception
and Director
Thomas B. Olson 34 Secretary Since inception
Aaron A. Grunfeld 53 Director Since inception
Russell L. Casement 56 Director Since inception
HENRY FONG. Mr. Fong has been the President, Treasurer and a director of
Equitex 2000 since its inception. Mr. Fong is currently the president, treasurer
and director of us. From 1987 to June 1997, Mr. Fong was chairman of the board
and chief executive officer of RDM Sports Group, Inc. (f/k/a Roadmaster
Industries, Inc.) a publicly held investee of us and was its president and
treasurer from 1987 to 1996. Subsequent to Mr. Fong's departure from RDM, it
filed Chapter 11 bankruptcy petitions for RDM and all of its subsidiaries with
the U.S. Bankruptcy Court for the Northern District of Georgia on August 29,
1997. From July 1996 to October 1997, Mr. Fong was a director of IntraNet
Solutions, Inc., a publicly-held investee company which provides
internet/intranet solutions to Fortune 1000 companies and was the chairman of
the board and treasurer of its predecessor company, MacGregor Sports and
Fitness, Inc. from February 1991 until the two companies merged in July 1996.
From January 1993 to January 20, 1999, Mr. Fong was chairman of the board and
Chief Executive Officer of California Pro Sports, Inc., a publicly traded
manufacturer and distributor of in-line skates, hockey equipment and related
accessories. From 1959 to 1982 Mr. Fong served in various accounting, finance
and budgeting positions with the Department of the Air Force. During the period
from 1972 to 1981 he was assigned to senior supervisory positions at the
Department of the Air Force headquarters in the Pentagon. In 1978, he was
selected to participate in the Federal Executive Development Program and in
1981, he was appointed to the Senior Executive Service. In 1970 and 1971, he
attended the Woodrow Wilson School, Princeton University and was a Princeton
Fellow in Public Affairs. Mr. Fong received the Air Force Meritorious Civilian
Service Award in 1982. Mr. Fong has passed the uniform certified public
accountant exam. In March 1994, Mr. Fong was one of twelve CEOs selected as
Silver Award winners in FINANCIAL WORLD magazine's corporate American "Dream
Team."
THOMAS B. OLSON. Mr. Olson has been Secretary of Equitex 2000 since its
inception. Mr. Olson is currently our Secretary. From February 1990 to February
2000, Mr. Olson was a director, and from May 1994 to February 2000 secretary, of
Immune Response, Inc. a publicly held investee of the Registrant which was
recently merged with an unaffiliated third party company. Mr. Olson has attended
Arizona State University and the University of Colorado at Denver.
AARON A. GRUNFELD. Mr. Grunfeld has been a director of Equitex 2000 since
its inception. Mr. Grunfeld is currently a director of us. Mr. Grunfeld has been
engaged in the practice of law for the past 28 years and has been of counsel to
the firm of Resch Polster Alpert & Berger, LLP, Los Angeles, California since
November 1995. From April 1990 to November 1995, Mr. Grunfeld was a member of
the firm of Spensley Horn Jubas & Lubitz, Los Angeles, California. Mr. Grunfeld
received an A.B. in Political Science from UCLA in 1968 and a J.D. from Columbia
University in 1971. He is a member of the California Bar Association.
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RUSSELL L. CASEMENT. Dr. Casement has been a director of Equitex 2000 since
its inception. Mr. Casement is currently a director of us. Since 1969, Dr.
Casement has been the president of his own private dental practice, Russell
Casement, D.D.S., P.C., in Denver, Colorado. Dr. Casement earned a Doctor of
Dental Science degree from Northwestern University in 1967. Dr. Casement is a
member of the American Dental Association, the Colorado Dental Association and
the Metro Denver Dental Association.
VOTE REQUIRED
The affirmative vote of the majority of the outstanding stock of each class
entitled to vote thereon as a class, at the stockholders' meeting will be
required to approve the proposal to distribute all of our assets and liabilities
to Equitex 2000 and to distribute all of the outstanding shares of common stock
of Equitex 2000 to our stockholders. 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. The board of directors recommends a vote FOR the
proposal to distribute all of our assets and liabilities to Equitex 2000 and to
distribute all of the outstanding shares of common stock of Equitex 2000 to our
stockholders.
-41-
PROPOSAL NUMBER THREE
TO ACQUIRE ALL OF THE OUTSTANDING CAPITAL
STOCK OF NOVA FINANCIAL SYSTEMS, INC.
AND KEY FINANCIAL SYSTEMS, INC. IN
EXCHANGE FOR THE GREATER OF 7,140,000 SHARES,
OR 50%, OF OUR OUTSTANDING
COMMON STOCK ON A POST ACQUISITION BASIS PLUS
CASH CONSIDERATION OF $5 MILLION.
THIS PROPOSAL IS SUBJECT TO THE APPROVAL OF PROPOSAL NUMBER ONE.
Our board of directors recommends the approval of the acquisition of Nova
Financial Systems, Inc. and Key Financial Systems, Inc.
On June 29, 2000 we signed a definitive agreement with Nova Financial
Systems, Inc. and Key Financial Systems, Inc. to acquire all the outstanding
capital stock of Nova Financial Systems, Inc. and Key Financial Systems, Inc. in
exchange for the greater of 7,140,000 shares or 50% of our outstanding common
stock on a post acquisition basis plus cash consideration of $5 million. While
these transactions are structured as reverse subsidiary mergers of our
acquisition subsidiaries which do not require the approval of our stockholders,
because more than 20% of our outstanding common stock will be issued in the
transaction, the rules of the Nasdaq SmallCap Market require approval by our
stockholders. We would operate Nova Financial Systems, Inc. and Key Financial
Systems, Inc. as subsidiaries. Nova Financial Systems, Inc. and Key Financial
Systems, Inc. are both financial companies which specialize in selling credit
card programs designed for high credit risk clients. Consummation of the Nova
Financial Systems, Inc. and Key Financial Systems, Inc. mergers is subject to a
number of conditions, including: (i) the distribution of all of our assets and
liabilities to Equitex 2000 and the spin-off of Equitex 2000 common stock; (ii)
the approval of the Nova Financial Systems, Inc. and Key Financial Systems, Inc.
mergers by our stockholders; and (iii) the approval of the increase in the
authorized shares of common stock from 7,500,000 shares to 50,000,000 shares.
Nova Financial Systems, Inc. and Key Financial Systems, Inc. may waive the
approval of the increase in authorized shares if our shareholder meeting has not
been held prior to the closing of the mergers or the closing may be postponed
until our shareholder meeting has been held and an amended Certificate of
Incorporation has been filed in Delaware.
BUSINESS OF NOVA FINANCIAL SYSTEMS, INC. AND KEY FINANCIAL SYSTEMS, INC.
Key Financial Systems, Inc. was established in Clearwater, Florida in June
1997 to design, market and service credit card products aimed at the sub-prime
credit market. In late 1998, a sister company, Nova Financial Systems, Inc., was
formed to provide the same services as Key Financial Systems, Inc. for Key
Financial Systems, Inc.'s second bank client. Key Financial Systems, Inc.
marketed the Pay As You Go credit card program for Key Bank & Trust until April
of 1999 and is actively marketing the Pay As You Go credit card program with Net
1st National Bank. Nova Financial Systems, Inc. marketed the Pay As You Go
program for Merrick Bank until September of 1999. Under its contracts with Key
Bank & Trust and Net 1st National Bank, Key Financial Systems, Inc. has 100
percent loan participation interest in the Pay As You Go portfolios. The net
loan balances on each portfolio is recorded by Key Financial Systems, Inc. and
all credit card income associated with each portfolio flows to Key Financial
Systems, Inc. under the agreement. Key Financial Systems, Inc. is responsible
for all losses and servicing costs including processing costs incurred on the
portfolio with third party service providers and the bank client. Nova Financial
Systems, Inc. has the same type of relationship with Merrick Bank. As of
December 31, 2000, Key Financial Systems, Inc. and Nova Financial Systems, Inc.
have processed over 897,000 credit card applications and currently have 81,799
active credit card accounts.
Together, Key Financial Systems, Inc. and Nova Financial Systems, Inc. are
a full service organization, operating from 17,000 square feet with 102
employees. They provide credit card portfolio management services including:
APPLICATION PROCESSING. Key Financial Systems, Inc. and Nova Financial
Systems, Inc. provide automated application processing services with a
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proprietary software system including application entry by data file or paper,
underwriting and data edits, processing fee payment processing by ACH or check,
and return item processing. Key Financial Systems, Inc. and Nova Financial
Systems, Inc. generate files for uploading new credit card account records to
Equifax and FDR.
CUSTOMER SERVICE. Key Financial Systems, Inc. and Nova Financial Systems,
Inc. handle inbound customer service calls and written correspondence from
customers concerning their application or credit card account. They have access
to Equifax and FDR for card servicing and use their in-house application
processing system for access to application information. They also provide
customers the ability to make payments over the telephone.
MEDIATION. Key Financial Systems, Inc. and Nova Financial Systems, Inc.
have designated specialists to provide mediation between their bank clients and
their customers. They have established formal procedures for managing customer
complaints and have a formal reporting process to their client banks.
COLLECTIONS. Key Financial Systems, Inc. and Nova Financial Systems, Inc.
provide collection services for their portfolios. They use proprietary dialing
software and collections management techniques to effectively collect sub-prime
credit card accounts.
RISK MANAGEMENT. Key Financial Systems, Inc. and Nova Financial Systems,
Inc. monitor suspect authorization activity and unusually large or suspicious
payment activity. They provide all account control functions to minimize loss
exposure from payment and sales activity.
ACCOUNTING. Key Financial Systems, Inc. and Nova Financial Systems, Inc.
process exception payments and all payment returns. They control and process fee
adjustments pursuant to the client Bank's policy. They perform the daily
settlement accounting for the credit card portfolio. They have developed a
proprietary commission accounting system to track compensation due their
marketing vendors.
MANAGEMENT INFORMATION SYSTEMS. Key Financial Systems, Inc. and Nova
Financial Systems, Inc. use cutting-edge technologies in hardware and software
and have their own internal software development capabilities. Their technology
resources include:
o Proprietary application processing system;
o Proprietary ACD (Automated Call Distribution) telephone system; o
Proprietary dialing systems using Dialogic hardware;
o Customized reporting from any application system;
o FoxPro, Sequel Server and Microsoft Access Databases; and
o NT Network with interfaces to FDR and Equifax.
Support equipment includes:
o 8 servers;
o 250 personal computers; and
o DS3 (576 incoming and outbound telephone lines).
PRODUCT. Key Financial Systems, Inc. currently offers an innovative product
to customers with poor or little credit histories. There are no credit checks or
credit turndowns. Key Financial Systems, Inc. designed a "Pay-As-You-Go" credit
card that is issued with a $500 credit limit, with zero availability at
issuance. The customers must make payments to have available credit on their
account. This is accomplished by charging the customer's account at issuance,
with a fully refundable "Reservation Fee" of $500. The fee is refunded as a
credit to the customer's account at closure, either at the customer's request or
if the account is charged-off. There is an $8 monthly membership fee and the
balance is not subject to any interest charge. The account requires a minimum
payment of 3%, or $15 for each billing statement.
KEY FINANCIAL SYSTEMS, INC. AND NOVA FINANCIAL SYSTEMS, INC. TARGET MARKET.
The opinions on the size of the sub-prime market vary depending on the
particular label described, however, a 1996 survey from Faulkner and Gray, a
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respected research firm, estimated the size of this market in the U.S. at 30
million and growing. More recent surveys by MasterCard International indicate
the number to be at least twice as large. There are two basic segments in this
market:
1. EMERGING/THIN FILES - includes ethnic/immigrants groups, youth,
elderly on fixed income, divorced, widows/widowers; and
2. RECOVERING/CREDIT IMPAIRED - includes credit abusers with a history of
credit problems including bankruptcies and those who have experienced
a catastrophic one-time life event that destroyed their credit, such
as death, illness or divorce.
According to MasterCard International, this large underdeveloped segment
includes 25-30% of U.S. households. This market has continuous segment growth
and a 50% higher profit potential than the industry average (i.e. interest
rates, processing fees, annual/membership fees, ancillary fees, etc.).
COMPETITION. Today, sub-prime credit cards continue to be marketed
successfully to consumers throughout the U.S. with poor or limited credit
histories. Generally, four types of credit cards are offered to sub-prime
consumers in the marketplace:
1. Fully secured;
2. Partially secured;
3. High fee unsecured; and
4. Low limit unsecured.
The fully secured credit card is collateralized by a savings account equal
to the credit limit. This type of credit card is difficult to sell and therefore
not marketed as aggressively today. The fully secured card has low risk but has
a high acquisition cost since a deposit has to be collected up front, which
creates a challenging marketing hurdle. Most of the major issuers of traditional
unsecured cards offer fully secured credit cards through their branch systems
and as an alternative to the unsuccessful applicants for a regular card.
The partially secured credit card requires a collateral savings account but
is issued with some unsecured credit - usually $50 - $300. The major issuers of
these types of cards are Capital One, Providian, First National Bank of Marin,
First Consumers National Bank, Sterling Bank, and most others in the sub-prime
segment. The product is offered through all major distribution channels,
including direct mail, telemarketing, television and the Internet. While the
credit exposure per account is limited, issuers use credit based underwriting
and decline applicants for card issuance.
The high fee unsecured credit card generally has less credit exposure than
partially secured credit cards. A high non-refundable fee is charged on the card
in order to limit the amount of available credit. Most of these card programs do
not collect a up front processing fee. The high fee card programs are usually
offered by banks that specialize in arranging relationships with marketing
companies that sell the product and purchase the receivable from the issuing
banks.
Many issuers, based on credit scoring models that have been developed in
recent years, are now offering a low limit unsecured product. They are targeting
the "improving" segment of the sub-prime customer base. Most have annual fees
and many charge an application processing fee. Providian, Capital One, First
Consumers National Bank, First Premier Bank, NA and many others are aggressively
marketing this product. These programs have a significant number of declined
applications as a large segment of the sub-prime market will not qualify.
The Pay As You Go credit card was designed with the purpose of having a low
risk profile for Key Financial Systems, Inc. and Nova Financial Systems, Inc.
while being more competitive than most other sub-prime credit cards in the
market. All the other programs charge a high interest rate with an annual fee.
In most cases, Key Financial Systems, Inc.'s membership fee is less costly than
the interest and annual fee charged on other programs. Key Financial Systems,
Inc. and Nova Financial Systems, Inc. have no credit turn downs, which
significantly improves response rates and the financial effectiveness of their
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marketing efforts. There will always be a significant number of consumers that
will not qualify for the other sub-prime products or do not want to invest in a
collateral savings account.
The Pay As You Go credit card has been marketed by First National Bank of
Brookings, S.D. and is currently being marketed by Affinity Marketing and Sales,
Inc. for the Bank of Hoven, S.D. under a licensing arrangement with Key
Financial Systems, Inc. Key Financial Systems, Inc. shall receive a monthly fee
equal to $.50 per active account on file for all Pay As You Go credit cards
issued by the Bank of Hoven from the marketing efforts of Affinity Marketing.
MARKETING. Key Financial Systems, Inc. and Nova Financial Systems, Inc.
have developed strategic relationships with companies that have significant
marketing abilities in the major distribution channels, including
inbound/outbound telesales, direct mail, television, and the Internet. Key
Financial Systems, Inc. and Nova Financial Systems, Inc. manage and control all
marketing programs related to the products offered by them. In addition, Key
Financial Systems, Inc. and Nova Financial Systems, Inc. have access to
proprietary methods of managing lists to identify the best potential customers
from lists available in the market.
Currently Key Financial Systems, Inc. and Nova Financial Systems, Inc.'s
most active distribution channel is the Internet. Key Financial Systems, Inc.
markets through alliances with a number of popular Internet web sites including:
Creditland.com, uproar.com, Mail.com, Spinway.com, GetSmart.com,
NetCreations.com, Lendingtree.com, winvite.com and USA.net. Internet customers
are directed to the Net 1st site by a combination of banner links displayed on
thousands of web sites, including those listed above, and approved e-mail
programs. The Pay As You Go card was recently ranked as the number five most
popular credit card site on the Internet by top9.com which reported over four
million unique visitors during the month of November 2000.
On November 15, 2000, Key Financial Systems, Inc. temporarily suspended
marketing, including the Internet site, for Net 1st National Bank. This
suspension was at the request of the Bank to conform to the requirements of a
Consent Order between Net 1st National Bank and Office of the Comptroller of the
Currency. Net 1st National Bank was required to obtain legal opinions that Key
Financial Systems, Inc.'s credit card marketing and the Pay As You Go program
conforms to all applicable federal and state laws. The necessary opinions have
been prepared and have been forwarded to the Office of the Comptroller of the
Currency. On December 15, 2000, Net 1st National Bank notified Key Financial
Systems, Inc. to resume marketing the Pay As You Go credit card on its behalf.
DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS OF KEY FINANCIAL SYSTEMS,
INC. AND NOVA FINANCIAL SYSTEMS, INC. The directors, executive officers, and
control persons of Key Financial Systems, Inc. and Nova Financial Systems, Inc.
are as follows:
Name Age Offices Held Length of Service
Charles R. Darst 53 Director, Secretary Since inception as a
director, since September
2000 as secretary
Scott A. Lucas 49 President, Chief Financial Since inception as a
Officer and Director director, since 1998 as
president
CHARLES R. DARST. Mr. Darst has been a board director and Director of
Marketing of the Key Financial Systems, Inc. and Nova Financial Systems, Inc.
from their inception. He has been an owner, partner, and operating manager of
several businesses over 25 years, including: Quintel Cellular, LC (a joint
venture with a public company to market prepaid cellular); Big Dog Management
(list brokerage); Account Services, Inc. (electronic funds transfer ACH and
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SEAs); Direct Sources, Inc. (membership buying clubs); US Power Corp. (solar
energy); and Airport Flea Market. Mr. Darst serves as Chairman of the Ethics
Committee on National Automated Payment Associated Board of Directors.
SCOTT A. LUCAS. Mr. Lucas has been a director of Key Financial Systems,
Inc. and Nova Financial Systems, Inc. since their inception. Since September of
1998 he has served as President of Key Financial Systems, Inc. He has served in
the same capacities for Nova Financial Systems, Inc. since its inception. From
1993 through 1997 Mr. Lucas held various executive management positions with
First National Bank of Marin and its affiliates. In all, Mr. Lucas has more than
26 years experience in the financial services industry, where he has held
positions as President, COO, CFO, Vice President and other management positions
in banking and insurance. Mr. Lucas received a B.S. in Business Administration
from the University of California, Berkeley in 1973.
SECURITY OWNERSHIP OF DIRECTORS, OFFICERS AND AFFILIATES OF KEY FINANCIAL
SYSTEMS, INC.
Set forth below is certain formation as of November 30, 2000, with respect
to ownership of Key Financial Systems, Inc.'s common stock held of record or
beneficially by (i) Key Financial Systems, Inc.'s executive officers, (ii) each
director of Key Financial Systems, Inc., (iii) any affiliates; and (iv) all
directors and executive officers as a group:
NAME AND ADDRESS NUMBER OF COMMON PERCENTAGE OWNED OF
OF BENEFICIAL OWNER STOCK OWNED COMMON STOCK
Charles R. Darst
734 Weedon Drive NE
St. Petersburg, FL 33702 388 19.4%
Scott A. Lucas
3406 Primrose Way
Palm Harbor, FL 34683 240 12.0%
All officers an directors
as a group (two persons) 628 31.4%
SECURITY OWNERSHIP OF DIRECTORS, OFFICERS AND AFFILIATES OF NOVA FINANCIAL
SYSTEMS, INC.
Set forth below is certain formation as of November 30, 2000, with respect
to ownership of Nova Financial Systems, Inc.'s common stock held of record or
beneficially by (i) Nova Financial Systems, Inc.'s executive officers, (ii) each
director of Nova Financial Systems, Inc., (iii) any affiliates; and (iv) all
directors and executive officers as a group:
NAME AND ADDRESS NUMBER OF COMMON PERCENTAGE OWNED OF
OF BENEFICIAL OWNER STOCK OWNED COMMON STOCK
Charles R. Darst
734 Weedon Drive NE
St. Petersburg, FL 33702 194 19.4%
Scott A. Lucas
3406 Primrose Way
Palm Harbor, FL 34683 120 12.0%
All officers an directors
as a group (two persons) 314 31.4%
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PRINCIPAL OFFICE OF KEY FINANCIAL SYSTEMS, INC.
Key Financial Systems, Inc.
5770 Roosevelt Blvd., Suite 410
Clearwater, Florida 33760-3431
(727) 524-8410
PRINCIPAL OFFICE OF NOVA FINANCIAL SYSTEMS, INC.
Nova Financial Systems, Inc.
5770 Roosevelt Blvd., Suite 410
Clearwater, Florida 33760-3431
(727) 524-8410
SELECTED FINANCIAL DATA
The selected combined financial data set forth below as of and for the
periods ended December 31, 1999, 1998 and 1997 have been derived from the
financial statements of Key Financial Systems, Inc. and Nova Financial Systems,
Inc. which have been audited by McGladrey & Pullen, LLP. Combined balance sheet
data and statement of operations data as of and for the nine-month periods ended
September 30, 2000 and September 30, 1999, have been derived from their
unaudited interim financial statements.
COMBINED BALANCE SHEET DATA (NOTE 1)
(IN THOUSANDS)
AS OF
SEPTEMBER
30, AS OF DECEMBER 31,
2000 1999 1998 1997
------- ---------------------------
(NOTE 2) (NOTE 2)
Assets:
Cash and cash equivalents ........... $ 555 $ 58 $ 337 $ --
Receivables ......................... 7,206 6,595 1,806 --
Property, plant and equipment (net) . 285 304 213 34
Other ............................... 17 624 40 5
Total assets ........................ 8,063 7,581 2,396 39
Liabilities:
Accounts payable and accrued expenses 2,279 1,691 1,047 2
Due to cardholders .................. 4,697 4,324 1,409 --
Total liabilities ................... 6,976 6,015 2,456 2
Stockholders' equity (deficit) ....... 1,087 1,566 (60) 37
NOTE 1: The combined balance sheet data and statement of operations data
represents financial information from Key Financial Systems, Inc. and
Nova Financial Systems, Inc. on a combined basis. Intercompany balances
have been eliminated in combination.
NOTE 2: Key Financial Systems, Inc.'s date of inception was June 12, 1997 and
Nova Financial Systems, Inc.'s date of inception was October 10, 1998.
COMBINED STATEMENT OF OPERATIONS DATA (NOTE 1)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
(NOTE 2) (NOTE 2)
Revenues .............. $ 11,413 $ 17,797 $ 22,218 $ 5,205 $ --
Expenses 8,057 11,461 15,440 4,494 12
Provision for losses
(recoveries) ......... (90) 1,088 1,188 260 --
-------- -------- -------- -------- --------
Net income (loss)...... $ 3,446 $ 5,248 $ 5,590 $ 451 $ (12)
NOTE 1: The combined balance sheet data and statement of operations data
represents financial information from Key Financial Systems, Inc. and
Nova Financial Systems, Inc. on a combined basis. Intercompany
transactions have been eliminated in combination.
NOTE 2: Key Financial Systems, Inc.'s date of inception was June 12, 1997 and
Nova Financial Systems, Inc.'s date of inception was October 10, 1998.
-47-
KEY FINANCIAL SYSTEMS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This section containing Key Financial Systems, Inc. Management's Discussion
and Analysis of Financial Condition and Results of Operations should be read in
conjunction with the financial statements of Key Financial Systems, Inc. as of
and for the periods ended September 30, 2000, December 31, 1999 and December 31,
1998 attached as Exhibit 3 to this proxy statement.
INTRODUCTION
Key Financial Systems, Inc. designs and markets credit card products aimed
at the sub-prime market. Key Financial Systems, Inc. marketed a Pay As You Go
credit card program for Key Bank & Trust until April of 1999 and has an active
contract with Net 1st National Bank. The credit cards are marketed under
agreements that provide Key Financial Systems, Inc. with a 100% participation
interest in the receivables and related rights associated with credit cards
issued and requires the payment of monthly servicing fees to the client banks.
Key Financial Systems, Inc. provides collection, customer service and other
portfolio management services for the credit cards issued.
RESULTS OF OPERATIONS
1999 vs. 1998
- -------------
CREDIT CARD INCOME
Credit card servicing fees, Key Financial Systems, Inc.'s principal source
of earnings, are credit card fees accessed on credit card accounts owned by Key
Financial Systems, Inc.'s client bank. These include monthly membership fees,
late charges, overlimit fees, and return check fees. The fees are paid to Key
Financial Systems, Inc. under a 100% loan participation agreement with the
client bank. Credit card servicing fees increased 229% to $11,628,340 over 1998
as a result of an increase in active credit card accounts. The average number of
active accounts was 107,068 in 1999 versus 42,741 in 1998, a 151% increase. This
increase in average active accounts was due to the majority of the new account
volume in 1998 occurring in the second half of the year, 83% of the total annual
volume of 142,116, and the 105,806 new accounts booked in the first four months
of 1999.
PROVISION FOR LOSSES
The provision for loan losses is the charge to operating earnings that
management feels is necessary to maintain the reserve for possible loan losses
at an adequate level. The provision in 1999 increased 97% over 1998. This
increase was due to the higher number of active accounts in 1999 versus 1998.
The reserve balance at December 31, 1999 is 72% lower than December 31, 1998 due
to the reduction in credit card receivables of $30,047,059 or 57%, versus
December 31, 1998. The provision is determined based on growth of the loan
-48-
portfolio, the net amount of loan losses incurred, and management's estimation
of potential future loan losses based on an evaluation of the loan portfolio
risks, adequacy of underlying collateral, and economic conditions. At December
31, 1999 and 1998, Key Financial Systems, Inc.'s allowance for loan losses was
$60,466 or 10.42% of loans, net of unearned income, compared to $217,872 or
16.27% of loans, net of unearned income. Management believes that the reserve
for possible loan losses was adequate to provide for potential loan losses at
December 31, 1999 and 1998.
OTHER INCOME
Other income increased 298% to $4,827,558 over 1998 primarily due to
servicing fee charges paid by an affiliate of Key Financial Systems, Inc. for
credit card processing services provided during 1999 that did not occur in 1998.
The other significant component of other income is applications fees, which
declined 42% between 1999 and 1998. This decline was due to the cessation of new
card marketing during 1999. Key Financial Systems, Inc. began marketing with a
new client bank in January of 2000.
OPERATING EXPENSES
During 1999 operating expenses increased $6,319,547 to $10,806,166. The
increase is due to significant increases in personnel related costs of
$3,447,910, payments to third party service providers of $1,942,711, occupancy
and equipment of $290,514, and other operating expenses of $638,412. The
increase in personnel related expenses is due to the increase in staff levels
for servicing support for Key Financial Systems, Inc.'s credit card portfolio
and the other portfolio that is serviced on behalf of our affiliate. The payment
to third party vendors is for data processing and other portfolio services
provided on Key Financial Systems, Inc.'s behalf. The increase in these costs is
related to the growth in active credit card accounts. The increase in occupancy
and equipment is directly related to the increase in staff. The increase in
other operating expenses is due to the increase in the serviced portfolios, with
the largest increase in telecommunications expense. These increases in operating
expenses are partially offset by the increase in other income representing the
portfolio servicing fee charges to our affiliate.
Nine months ended September 30, 2000 vs. 1999
- ---------------------------------------------
CREDIT CARD INCOME
Credit card servicing fees decreased 47% to $5,089,512 from 1999 as a
result of the decrease in active credit card accounts, which was due to Key
Financial Systems, Inc. ceasing new credit card marketing from April 1999 to
January 2000. Key Financial Systems, Inc. agreed to cease marketing of new
accounts in April 1999 at the request of our initial client bank. The new
card volume was transferred to the client bank of Key Financial Systems, Inc.'s
affiliate company, Nova Financial Systems, Inc. The average number of active
accounts during the first nine months of 2000 was 52,271 versus 117,063 in 1999,
a 55% decrease. The new account volume in 2000 was 45,627 compared to 112,605
for the first nine months of 1999, a 60% decrease.
The new application volume for the third quarter of 2000 is 59% higher than
the first six months of 2000 (141,567 versus 89,072). While the application
volumes have increased significantly, Key Financial Systems, Inc. expects that
new credit card account volume will increase at a much lower rate for the
balance of the year. Key implemented in June 2000 a new account activation
procedure that will greatly reduce the number of credit cards issued to
individuals that historically never activate their accounts. This will result in
much lower closure, delinquency and charge-off rates on new accounts issued. The
limited data since the new procedure was implemented supports the expected
result. Of the 1,655 accounts booked in June under the new procedure, 82.7% are
still active at the end of October 2000, as compared to 50.4% of the May 2000
sales that were still active at the end of September 2000.
An additional benefit of the new procedure is significantly reduced new
account and portfolio servicing costs. The historically high level of
"non-activated" accounts results in significant expenditures for new account
set-up, data processing, customer service and collections associated with
accounts that Key Financial Systems, Inc. received no credit card revenue.
-49-
On November 15, 2000 Key Financial Systems, Inc. temporarily suspended
marketing for Net 1st National Bank. This suspension was at the request of the
Net 1st National Bank to conform to the requirements of a Consent Order between
Net 1st National Bank and the Office of the Comptroller of the Currency. Net 1st
National Bank was required to obtain legal opinions that Key Financial Systems,
Inc.'s credit card marketing and the Pay As You Go program conform to all
applicable federal and state laws. The necessary opinions have been prepared and
have been forwarded to the Office of the Comptroller of the Currency. On
December 15, 2000, Net 1st National Bank notified Key Financial Systems, Inc. to
resume marketing the Pay As You Go credit card program.
PROVISION FOR LOSSES
The provision for the first nine months of 2000 decreased 95.2% compared to
the same period in 1999. This decrease was due to a significant reduction in
actual losses in 2000 and required reserve levels at September 30, 2000. The
reserve balance at September 30, 2000 is 59.0% lower than the balance at
September 30, 1999 due to the reduction in credit card receivables of $8,798,207
or 26.9%, versus September 30, 1999 and the lower actual loss experience in
2000. At September 30, 2000 and 1999, Key Financial Systems, Inc.'s allowance
for loan losses was $59,898 or 9.5% of loans, net of unearned income, compared
to $146,172 or 13.0% of loans, net of unearned income. Management believes that
the reserve for possible loan losses was adequate to provide for potential loan
losses at September 30, 2000 and 1999.
OTHER INCOME
Other income decreased 32.2% to $2,973,157 versus the first nine months of
1999 primarily due to lower servicing fee charges paid by an affiliate of Key
Financial Systems, Inc. for credit card processing services. Application
processing fee income increased 86.3% to $2,191,907. This increase was due to
higher new application volume in the first nine months of 2000 versus 1999.
OPERATING EXPENSES
Operating expenses for the nine months ended September 30, 2000 decreased
$3,321,032 to $5,322,556. The decrease is due to a 37.9% reduction in personnel
related costs to $2,183,286, a 48.8% reduction in payments to third party
service providers to $2,118,165, and a 9.0% reduction in other operating
expenses to $708,402. The decrease in personnel related expenses is due to the
lower staff levels for servicing support for Key Financial Systems, Inc.'s
credit card portfolio and the other portfolio that is serviced on behalf of our
affiliate. The decrease in third party servicing fees is related to the
reduction in active credit card accounts. The increase in occupancy and
equipment expense is due to additional space acquired in June of 1999 that is
reflected in the 2000 expenses. The decrease in other operating expenses is due
to the decrease in the serviced portfolios, with the largest decrease in
telecommunications expense.
LIQUIDITY FOR 1999 VS. 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 VS.
SEPTEMBER 30, 1999
Cash flow provided by operations from 1998 to 1999 increased 27% to
3,507,625 from $2,763,534. Cash flow provided by operations for the first nine
months of 2000 was $3,907,758, a 78% increase compared to the same period in
1999. Key Financial Systems, Inc. is debt free and funds operating expenses and
capital expenditures from current operating cash flow. Funds due under the loan
participation agreements are received on a monthly basis shortly after each
month end. Dividends made to the stockholders are paid net of projected required
cash flows for operating expenses for the period to the next receipt of the
monthly income distribution from the client banks.
INFLATION
The amounts presented in the financial statements do not provide for the
effect of inflation on Key Financial Systems, Inc.'s operations or its financial
position. Key Financial Systems, Inc.'s assets and liabilities are primarily
monetary in nature. However, the majority of the assets and liabilities are
interest free and not subject to any effect from increases or decreases in
market interest rates due to external economic factors.
-50-
NOVA FINANCIAL SYSTEMS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This section containing Nova Financial Systems, Inc. Management's
Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with the financial statements of Key Financial Systems,
Inc. as of and for the periods ended September 30, 2000, December 31, 1999 and
December 31, 1998 attached as Exhibit 2 to this proxy statement.
INTRODUCTION
Nova Financial Systems, Inc. designs and markets credit card products aimed
at the sub-prime market. Nova Financial Systems, Inc. marketed a Pay As You Go
credit card program for Merrick Bank until September of 1999. The credit cards
were marketed under an agreement that provides Nova Financial Systems, Inc. with
a 100% participation interest in the receivables and related rights associated
with credit cards issued and requires the payment of monthly servicing fees to
the client bank. Nova Financial Systems, Inc. ceased marketing new credit cards
in August of 1999. The current revenues of Nova Financial Systems, Inc. are the
result of the participation interest in the credit card portfolio. Most of Nova
Financial Systems, Inc.'s expenses are variable, related to the number of active
credit card accounts in the portfolio.
RESULTS OF OPERATIONS
1999 vs. 1998
- -------------
CREDIT CARD INCOME
Credit card servicing fees, Nova Financial Systems, Inc.'s principal source
of earnings, are credit card fees accessed on credit card accounts owned by Nova
Financial Systems, Inc.'s client bank. These include monthly membership fees,
late charges, overlimit fees, and return check fees. The fees are paid to Nova
Financial Systems, Inc. under a 100% loan participation agreement with the
client bank. Credit card servicing fees increased to $7,278,767 over $1,102 for
1998 as a result of an increase in active credit card accounts. The average
number of active accounts was 76,623 in 1999 versus 20 for 1998.
PROVISION FOR LOSSES
The provision for loan losses is the charge to operating earnings that
management feels is necessary to maintain the reserve for possible loan losses
at an adequate level. The provision in 1999 increased to $676,343 versus $192
for 1998. This increase was due to the higher number of active accounts in 1999
versus 1998. The provision is determined based on growth of the loan portfolio,
the net amount of loan losses incurred, and management's estimation of potential
future loan losses based on an evaluation of the loan portfolio risks, adequacy
of underlying collateral, and economic conditions. At December 31, 1999 and
1998, Nova Financial Systems, Inc.'s allowance for loan losses was $469,032 or
43.10% of loans, net of unearned income, compared to $192 or 17.60% of loans,
net of unearned income. Management believes that the reserve for possible loan
losses was adequate to provide for potential loan losses at December 31, 1999
and 1998.
OTHER INCOME
Other income increased to $1,942,520 over the $2,751 in 1998 due to the
increase in application fees received on new credit card accounts in 1999.
-51-
OPERATING EXPENSES
During 1999, operating expenses increased from $7,377 to $8,349,475. The
increase is due to the costs associated with the new credit card volume in 1999.
This included $2,112,092 in payments to Nova Financial Systems, Inc.'s affiliate
for application processing services, payments to third party vendors of
$5,934,125 for data processing and other portfolio services, and other operating
expenses of $303,258.
Nine months ended September 30, 2000 vs. 1999
- ---------------------------------------------
CREDIT CARD INCOME
Credit card servicing fees decreased 21.0% to $3,725,268 from 1999 as a
result of the decrease in active credit card accounts. The average number of
active accounts during the first nine months of 2000 was 51,765 versus 59,434 in
the same period of 1999, a 12.9% decrease.
PROVISION FOR LOSSES
The provision for the first nine months of 2000 was a net credit of
$118,596 versus a charge of $500,543 for the first nine months of 1999. The
actual principal loss experience for 2000 has been significantly less than the
projected loss exposure recorded at December 31, 1999. Some of the reduction in
principal losses in 2000 was offset by an increase in the fee reversals per
account at charge-off. The reserve balance at September 30, 2000 is 74.2% lower
than the balance at September 30, 1999 due to the reduction in credit card
receivables. At September 30, 2000 and 1999, Nova Financial Systems, Inc.'s
allowance for loan losses was $117,721 or 23.6% of loans, net of unearned
income, compared to $456,182 or 22.7% of loans, net of unearned income.
Management believes that the reserve for possible loan losses was adequate to
provide for potential loan losses at September 30, 2000 and 1999.
OTHER INCOME
Other income was a net charge of $2,581 for the first nine months of 2000,
as the result of refunds of application fees. There were no new application fees
in 2000. Nova Financial Systems, Inc. established 153,598 new credit card
accounts in the first nine months of 1999.
OPERATING EXPENSES
Operating expenses for the nine months ended September 30, 2000 decreased
to $3,407,526, a 41.3% decrease over the same period in 1999. The decrease is
due to lower third party servicing fees and a decrease in collection fees paid
to Nova Financial Systems, Inc.'s affiliate. The decrease in operating expenses
is directly related to the lower level of active credit cards. In 1999, Nova
Financial Systems, Inc. incurred new account processing costs that did not occur
in 2000.
LIQUIDITY FOR 1999 VS. 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2000 VS.
SEPTEMBER 30, 1999
Cash flow provided by operations increased to $1,301,349 from 1998 to 1999.
Cash flow provided by operations for the first nine months of 2000 was $283,351
compared to $2,400,966 for the same period in 1999. Nova Financial Systems, Inc.
is debt free and funds operating expenses and capital expenditures from current
operating cash flow. Funds due under the loan participation agreements are
received on a monthly basis shortly after each month end. Dividends made to the
stockholders are paid net of projected required cash flows for operating
expenses for the period to the next receipt of the monthly income distribution
from the client banks.
INFLATION
The amounts presented in the financial statements do not provide for the
effect of inflation on Nova Financial Systems, Inc.'s operations or its
financial position. Nova Financial Systems, Inc.'s assets and liabilities are
-52-
primarily monetary in nature. However, the majority of the assets and
liabilities are interest free and not subject to any effect from increases or
decreases in market interest rates due to external economic factors.
EQUITEX AND EQUITEX 2000 PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information sets forth summary
condensed consolidated historical and pro forma financial data of Equitex and
Equitex 2000. The summary historical data has been derived from and should be
read in conjunction with the audited consolidated financial statements included
in our Annual Report on Form 10-K for the year ended December 31, 1999 and
unaudited financial data included in our Quarterly Reports on Form 10-Q for the
quarterly periods ended March 31, 2000, June 30, 2000 and September 30, 2000,
all of which are incorporated herein by reference. The summary pro forma
financial data has been derived from our unaudited pro forma condensed financial
statements for the nine month period ended September 30, 2000 and for the year
ended December 31, 1999 included in this proxy statement. You should read the
following table in conjunction with the other financial information included and
incorporated into this proxy statement.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
On June 29, 2000, Equitex, Inc. and subsidiaries, a publicly traded
company, signed a definitive agreement with Key Financial Systems, Inc. and Nova
Financial Systems, Inc. to acquire all of the outstanding capital stock of Key
Financial Systems, Inc. and Nova Financial Systems, Inc. in exchange for the
greater of 7,140,000 shares of Equitex, Inc. common stock or 50% of Equitex,
Inc.'s post-acquisition common stock outstanding and $5 million cash. Key
Financial Systems, Inc. and Nova Financial Systems, Inc. are both financial
services companies, which specialize in selling credit card programs designed
for high credit risk clients. Prior to Equitex, Inc.'s acquisition of Key
Financial Systems, Inc. and Nova Financial Systems, Inc., Equitex, Inc. has
completed, or intends to complete, the following transactions:
1. Effective September 27, 2000, Equitex, Inc., through a newly-formed
subsidiary, GR.com, Inc., acquired all of the issued and outstanding
common stock of the Meridian Residential Group, Inc. 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 Equitex,
Inc.'s common stock underlying the Series F preferred stock at the
date of the acquisition, which was $6.875 per share at September 27,
2000. In addition, Equitex 2000, Inc., discussed below, is to issue
additional shares of common stock to the Meridian Residential Group,
Inc. the stockholders having a market value, at the time of issuance,
equal to 20% of the annual increase in pre-tax net earnings compared
to the immediately preceding year of the Meridian Residential Group,
Inc. business for each of the five years subsequent to closing,
commencing with the year ending December 31, 2000, subject to certain
limitations as defined.
Equitex, Inc., 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, a company
affiliated with Meridian Residential Group, Inc. through common
ownership, for $850,000 cash.
2. In September 2000, Equitex, Inc. issued 1,300 shares of 6% Series G
redeemable convertible 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 Equitex, Inc.'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.
The Series G preferred stock is redeemable at Equitex, Inc.'s option
at any time at a redemption price equal to $1,350 per share plus any
accrued but unpaid dividends. Equitex, Inc. is required to redeem the
Series G preferred stock if its stockholders 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
-53-
registration statement relating to the resale of certain shares of
Equitex, Inc.'s common stock underlying the Series G preferred stock
is not declared effective on or before 180 days of its filing.
3. Equitex, Inc. intends to increase the number of authorized shares of
its common stock from 7,500,000 shares to 50,000,000 shares, subject
to shareholder approval. Equitex, Inc. also intends to issue 50 shares
of Series E convertible preferred stock, convertible into 50,000
shares of Equitex, Inc.'s common stock, valued at $319,000, based upon
the quoted market price of Equitex, Inc.'s common stock underlying the
Series E preferred stock, which was $6.375 per share at September 30,
2000, in consideration for services received. In connection with this
transaction, $412,000 and $350,000 of administrative expense has been
reflected in the pro forma statements of operations for the
nine-months ended September 30, 2000 and the year ended December 31,
1999 based on the underlying market value per share of $8.25 at
January 1, 2000 and $7.00 per share at January 1, 1999, respectively.
4. Subsequent to the transactions described above, Equitex, Inc. intends
to distribute all of its assets (which primarily consist of its
investments in subsidiaries) to Equitex 2000, Inc., a newly formed
subsidiary of Equitex, Inc. Equitex 2000, Inc. also is to assume all
liabilities of Equitex, Inc. The outstanding common shares of Equitex
2000, Inc. are then to be distributed to the stockholders of Equitex,
Inc. based on proportional ownership of the shares held by Equitex,
Inc.'s stockholders in a spin-off transaction.
As a result of the transactions described above, Equitex, Inc. will be
a publicly traded, non-operating entity immediately prior to the date
of Equitex, Inc.'s acquisition of Key Financial Systems, Inc. and Nova
Financial Systems, Inc. Equitex, Inc. plans to record the acquisitions
of Key Financial Systems, Inc. and Nova Financial Systems, Inc. as an
acquisition of Equitex, Inc. and a recapitalization of Key Financial
Systems, Inc. and Nova Financial Systems, Inc.
5. In order to finance Equitex, Inc.'s acquisition of Key Financial
Systems, Inc. and Nova Financial Systems, Inc., Equitex, Inc. may
issue a new series of preferred stock for net proceeds of
$5,000,000 (net of $500,000 issue costs). Although the terms of this
new stock have not been negotiated, Equitex, Inc. expects it to be
similar to the Series G preferred stock.
The following unaudited pro forma condensed statements of operations
for Equitex, Inc. and Equitex 2000, Inc. for the year ended December 31, 1999,
and the nine months ended September 30, 2000, give effect to the transactions as
if they had occurred on January 1, 1999 and January 1, 2000, respectively. The
following unaudited pro forma condensed balance sheets of Equitex, Inc. and
Equitex 2000, Inc. as of September 30, 2000, give effect to the transactions as
if they had occurred on September 30, 2000.
These unaudited pro forma condensed financial statements do not
purport to present results which would actually have been obtained if the
transactions had been in effect during the periods covered or any future results
which may in fact be realized. These unaudited pro forma condensed financial
statements should be read in conjunction with the accompanying notes and the
separate historical financial statements of the companies referred to above.
-54-
EQUITEX, INC. AND SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED BALANCE SHEET
September 30, 2000
Pro forma Distribution Acquisition
combined of assets/ Pro forma of
Equitex, Inc. prior to assumption of combined Key/Nova
and Preferred distribution liabilities prior to (combined
subsidiaries stock to Equitex to/by Equitex Key/Nova balance Pro forma
ASSETS Historical transactions 2000, Inc. 2000, Inc. acquisition sheets) combined
------------ ------------ ----------- ------------ ----------- ----------- -----------
Cash and cash
equivalents $ 342,652 $ 342,652 $ (342,652) $ 5,000,000 C1) $ 555,018
555,018 C2)
(5,000,000) C1)
Receivables 1,638,219 1,638,219 (1,638,219) 7,205,677 C2) 7,205,677
Inventories 88,978 88,978 (88,978)
Investments 2,038,885 2,038,885 (2,038,885)
Fixed assets, net 267,840 267,840 (267,840) 285,161 C2) 285,161
Intangible and other
assets 7,138,615 7,138,615 (7,138,615) 17,017 C2) 17,017
------------ ------------ ----------- ------------ ----------- ----------- -----------
Total assets $ 11,515,189 $11,515,189 $(11,515,189) $ 0 $ 8,062,873 $ 8,062,873
============ ============ =========== ============ =========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accounts payable $ 346,840 $ 346,840 $ (346,840) $ 1,403,275 C2) $ 1,403,275
Accrued expenses and
other liabilities 725,338 725,338 (725,338) 875,120 C2) 875,120
Notes payable 1,393,125 1,393,125 (1,393,125)
Due to cardholders 4,697,169 C2) 4,697,169
------------ ------------ ----------- ------------ ----------- ----------- -----------
Total liabilities 2,465,303 2,465,303 (2,465,303) 6,975,564 6,975,564
------------ ------------ ----------- ------------ ----------- ----------- -----------
Minority interest 5,593,070 5,593,070 (5,593,070)
------------ ------------ ----------- ------------ ----------- ----------- -----------
Mandatory redeemable
Series G preferred
stock 1,240,000 1,240,000 1,240,000
------------ ------------ ----------- ------------ ----------- ----------- -----------
Stockholders' equity:
Preferred stock-
Series D 1,200,000 1,200,000 $1,200,000 1,200,000
Preferred stock-
Series E 250,000 $ 50,000 A1) 300,000 300,000 300,000
Preferred stock-
Series F 3,162,500 3,162,500 3,162,500 3,162,500
Preferred stock-
designation to
be determined 5,000,000 C1) 5,000,000
Common stock 142,806 142,806 142,806 142,806 C2) 285,612
Additional paid-in
capital 19,152,634 269,000 A1) 19,421,634 (3,456,816) 15,964,818 (26,754,095) C2) (10,789,277)
Treasury stock (114,037) (114,037) (114,037) 114,037 C2)
Retained earnings
(loss) (21,577,087) (319,000) A1) (21,896,087) (21,896,087) 22,584,561 C2) 688,474
------------ ------------ ----------- ------------ ----------- ----------- -----------
Total stockholders'
equity (deficit) 2,216,816 0 2,216,816 (3,456,816) (1,240,000) 1,087,309 (152,691)
------------ ------------ ----------- ------------ ----------- ----------- -----------
Total liabilities and
stockholders' equity $ 11,515,189 0 $11,515,189 $(11,515,189) $ 0 $ 8,062,873 $ 8,062,873
============ ============ =========== ============ =========== =========== ===========
See notes to unaudited proforma condensed financial statements.
-55-
EQUITEX, INC. AND SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000
Adjustments Adjustments to reflect
to reflect the acquisitions of
distribution Key and Nova
Equitex, Inc. of assets/ --------------------------------------
and Preferred liabilities Adjustments
subsidiaries stock to Equitex Key Nova and Pro forma
Historical transactions 2000, Inc. historical historical Eliminations combined
------------ ----------- ----------- --------------------------------------- -----------
(See C1) (See C1)
Product sales $ 305,396 $ (305,396)
Credit card income $ 5,237,828 $3,877,275 $ 9,115,103
Interest and dividend
income 357,165 (357,165)
Loan production and
processing 293,065 (293,065)
Secondary market, net 871,134 (871,134)
Application fees, net of
direct marketing costs 2,191,907 (2,581) 2,189,326
Servicing fee income 672,420 672,420
Other 149,373 (149,373) 108,830 108,830
------------ ----------- ----------- -------------------------------------- -----------
Total income 1,976,133 (1,976,133) 8,210,985 3,874,694 12,085,679
Cost of sales 187,819 (187,819)
------------ ----------- ----------- -------------------------------------- -----------
Gross profit 1,788,314 (1,788,314) 8,210,985 3,874,694 12,085,679
------------ ----------- ----------- -------------------------------------- -----------
Selling, general and
administrative 5,749,244 $ 412,000 A1) (5,749,244) 3,204,391 507,042 4,123,433
Loan production and
processing 739,735 (739,735)
Application processing
fees and third party
servicing fees 2,900,484 5,018,649
Provision for credit card
losses 2,118,165 (118,596) (90,267)
Unrealized holding (gains)
losses on trading
securities 2,447 (2,447)
Realized (gains) losses on
investment sales (26,151) 26,151
Equity in (earnings)
losses of affiliates 1,092,398 (1,092,398)
Interest expense 705,626 (705,626)
Loss on First Bankers
Mortgage Services, Inc.
rescission 3,979,000 (3,979,000)
Other (income) expense (73,478) 73,478
------------ ----------- ----------- -------------------------------------- -----------
Total operating expenses 12,168,821 412,000 (12,168,821) 5,350,885 3,288,930 9,051,815
------------ ----------- ----------- -------------------------------------- -----------
Income (loss) before
income taxes (10,380,507) (412,000) 10,380,507 2,860,100 585,764 3,033,864
Provision for income taxes 1,235,000 C3) 1,235,000
------------ ----------- ----------- -------------------------------------- -----------
Net income (loss) (10,380,507) (412,000) 10,380,507 2,860,100 585,764 (1,235,000) 1,798,864
Amortization of discount
on Series G and other
preferred stock (700,000) (2,692,000) C1) (3,392,000)
Deemed preferred stock
dividends, Series D, G
and other (112,600) (225,200) C1) (337,800)
------------ ----------- ----------- -------------------------------------- -----------
Net income (loss)
applicable to common
stochholders $(11,193,107) $ (412,000) $10,380,507 $ 2,860,100 $ 585,764 $(4,152,200) $(1,930,936)
============ =========== =========== ====================================== ===========
Basic and diluted net
income (loss) per common
share $ (1.57) $ (0.14)
============ ===========
Weighted average number of
common shares outstanding 7,140,293 14,280,586
============ ===========
See notes to unaudited proforma condensed financial statements.
-56-
EQUITEX, INC. AND SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
Adjustments
to Adjustments to reflect
reflect the acquisitions of
distribution Key and Nova
Equitex, Inc. of assets/ ---------------------------------------
and Preferred liabilities Adjustments
subsidiaries stock to Equitex Key Nova and Pro forma
historical transactions 2000, Inc. historical historical Eliminations combined
------------ ----------- ----------- --------------------------------------- -----------
(See C1) (See C1)
Product sales $ 738,456 $ (738,456)
Credit card income $11,875,107 $7,405,882 $19,280,989
Interest and dividend
income 878,998 (878,998)
Loan production and
processing 302,811 (302,811)
Secondary market, net 395,034 (395,034)
Application fees, net of
direct marketing costs 935,015 1,942,520 2,877,535
Servicing fee income 3,832,736 $(3,832,736)
Other 103,965 (103,965) 59,807 59,807
------------ ----------- ----------- -------------------------------------- -----------
Total income 2,419,264 (2,419,264) 16,702,665 9,348,402 (3,832,736) 22,218,331
Cost of sales 488,767 (488,767)
------------ ----------- ----------- -------------------------------------- -----------
Gross profit 1,930,497 (1,930,497) 16,702,665 9,348,402 (3,832,736) 22,218,331
------------ ----------- ----------- -------------------------------------- -----------
Selling, general and
administrative 7,133,529 $ 350,000 A1) (7,133,529) 5,827,887 303,258 6,481,145
Loan production and
processing 728,501 (728,501)
Application processing
fees and servicing fees 4,978,279 8,046,217 (3,832,736) 9,191,760
Provision for credit card
losses 511,645 676,343 1,187,988
Unrealized holding (gains)
losses on trading
securities 1,368,783 (1,368,783)
Realized (gains) losses on
investment sales (797,516) 797,516
Equity in (earnings)
losses of affiliates 418,209 (418,209)
Interest expense 795,550 (795,550)
------------ ----------- ----------- -------------------------------------- -----------
Total operating expenses 9,647,056 350,000 (9,647,056) 11,317,811 9,025,818 (3,832,736) 16,860,893
------------ ----------- ----------- -------------------------------------- -----------
Income (loss) before
income taxes (7,716,559) (350,000) 7,716,559 5,384,854 322,584 5,357,438
Provision for income taxes 117,500 2,108,400 C3) 2,225,900
------------ ----------- ----------- -------------------------------------- -----------
Net income (loss) (7,716,559) (350,000) 7,716,559 5,384,854 205,084 (2,108,400) 3,131,538
Amortization of discount
on Series A, B, C, D, G
and other preferred stock (3,217,713) (700,000) A2) (2,692,000) C1) (6,609,713)
Deemed preferred stock
dividends, Series A, B,
C, D, G and other (51,300) (78,000) A2) (300,000) C1) (429,300)
------------ ----------- ----------- -------------------------------------- -----------
Net income (loss)
applicable to common
stockholders $(10,985,572) $(1,128,000) $ 7,716,559 $ 5,384,854 $ 205,084 $(5,100,400) $(3,907,475)
============ =========== =========== ====================================== ===========
Basic and diluted net
income (loss) per common
share $ (1.64) $ (0.28)
============ ===========
Weighted average number of
common shares outstanding 6,718,170 13,858,463
============ ===========
See notes to unaudited proforma condensed financial statements.
-57-
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000,
AND THE YEAR ENDED DECEMBER 31, 1999
1. Description of Equitex, Inc. transactions:
On June 29, 2000, Equitex, Inc. and subsidiaries, a publicly traded
company, signed a definitive agreement with Key Financial Systems, Inc. and
Nova Financial Systems, Inc. to acquire all of the outstanding capital
stock of Key Financial Systems, Inc. and Nova Financial Systems, Inc. in
exchange for the greater of 7,140,000 shares of Equitex, Inc. common stock
or 50% of Equitex, Inc.'s post-acquisition common stock outstanding, and $5
million cash. Key Financial Systems, Inc. and Nova Financial Systems, Inc.
are both financial services companies, which specialize in selling credit
card programs designed for high credit risk clients. Prior to Equitex,
Inc.'s acquisition of Key Financial Systems, Inc. and Nova Financial
Systems, Inc., Equitex, Inc. has completed or intends to complete the
following transactions:
A. Effective September 27, 2000, Equitex, Inc., through a newly-formed
subsidiary, GR.com, Inc., acquired all of the issued and outstanding
common stock of The Meridian Residential Group, Inc. 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 Equitex,
Inc.'s common stock underlying the Series F preferred stock at the
date of acquisition, which was $6.875 per share at September 27, 2000.
In addition, Equitex 2000, Inc., discussed below, is to issue
additional shares of common stock to the Meridian Residential Group,
Inc. stockholders having a market value, at the time of issuance,
equal to 20% of the annual increase in pre-tax net earnings compared
to the immediately preceding year of the Meridian Residential Group,
Inc. business for each of the five years subsequent to closing,
commencing with the year ending December 31, 2000, subject to certain
limitations as defined.
In addition, Equitex, Inc., through its subsidiary nMortgage, Inc.,
acquired the proprietary business model, website, trademarks,
corporate names and all intellectual property rights related to the
Meridian GreatRate.com business, including the names GreatRate.com and
GreatRate Mortgage.com from Meridian Capital Group, LLC, a company
affiliated with Meridian Residential Group, Inc. through common
ownership, for $850,000 cash.
B. In September 2000, Equitex, Inc. issued 1,300 shares of 6% Series G
redeemable convertible 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 Equitex, Inc.'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.
The Series G preferred stock is redeemable at Equitex, Inc.'s option
at any time at a redemption price equal to $1,350 per share plus any
accrued but unpaid dividends. Equitex, Inc. is required to redeem the
Series G preferred stock if its stockholders 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
Equitex, Inc.'s common stock underlying the Series G preferred stock
is not declared effective on or before 180 days of its filing.
C. Equitex, Inc. intends to increase the number of authorized shares of
its common stock from 7,500,000 shares to 50,000,000 shares, subject
to shareholder approval. Equitex, Inc. also intends to issue 50 shares
of Series E convertible preferred stock, convertible into 50,000
shares of Equitex, Inc.'s common stock, valued at $319,000, based upon
the quoted market price of Equitex, Inc.'s common stock underlying the
Series E preferred stock, which was $6.375 per share at September 30,
2000, in consideration for services received. In connection with this
transaction, $412,000 and $350,000 of administrative expense has been
reflected in the pro forma statements of operations for the
nine-months ended September 30, 2000 and the year ended December 31,
1999 based on the underlying market value per share of $8.25 at
January 1, 2000 and $7.00 per share at January 1, 1999, respectively.
-58-
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000,
AND THE YEAR ENDED DECEMBER 31, 1999
D. Subsequent to the transactions described above, Equitex, Inc. intends
to distribute all of its assets (which primarily consists of its
investments in subsidiaries) to Equitex 2000, Inc., a newly-formed
subsidiary of Equitex, Inc. Equitex 2000, Inc. also is to assume all
liabilities of Equitex, Inc. The outstanding common shares of Equitex
2000, Inc. are then to be distributed to the stockholders of Equitex,
Inc. based on proportional ownership of the shares held by Equitex,
Inc.'s the stockholders in a spin-off transaction.
As a result of the transactions described above, Equitex, Inc. will be
a publicly traded, non-operating entity immediately prior to the date
of Equitex, Inc.'s acquisition of Key Financial Systems, Inc. and Nova
Financial Systems, Inc. Equitex, Inc. plans to record the acquisitions
of Key Financial Systems, Inc. and Nova Financial Systems, Inc. as an
acquisition of Equitex, Inc. and a recapitalization of Key Financial
Systems, Inc. and Nova Financial Systems, Inc.
E. In order to finance Equitex, Inc.'s acquisition of Key Financial
Systems, Inc. and Nova Financial Systems, Inc., Equitex, Inc. may
issue a new series of preferred stock for net proceeds of
$5,000,000 (net of $500,000 issue costs). Although the terms of this
new stock have not been negotiated, Equitex, Inc. expects it to be
similar to the Series G preferred stock.
The following unaudited pro forma condensed statements of operations for
the year ended December 31, 1999 and the nine months ended September 30,
2000, give effect to the transactions as if it had occurred effective
January 1, 1999 and January 1, 2000, respectively. The following unaudited
pro forma condensed balance sheet as of September 30, 2000 gives effect to
the transactions as if it had occurred on September 30, 2000.
2. Description of Equitex, Inc. pro forma adjustments:
(A1) To reflect issuance of 50 shares of Series E convertible preferred
stock, convertible into 50,000 shares of Equitex, Inc.'s common stock,
valued at approximately $319,000, which is based on the underlying
market value of Equitex, Inc.'s common stock at September 30, 2000,
which was $6.375 per share at September 30, 2000 in consideration for
services received. In connection with this transaction, $412,000 and
$350,000 of administrative expense has been reflected in the pro forma
statements of operations for the nine-months ended September 30, 2000
and the year ended December 31, 1999 based on the underlying market
value per share of $8.25 at January 1, 2000 and $7.00 per share at
January 1, 1999, respectively.
(A2) The Series G preferred stock contains a beneficial conversion feature
in which the preferred stock may be converted at any time at a price
per share of common stock equal to the lesser of (a) $6.50 or (b) 65%
of the market price of Equitex, Inc.'s common stock. The pro forma
statements of operations for the year ended December 31, 1999, reflect
a discount due to this beneficial conversion feature of $700,000. In
addition, deemed dividends of $78,000 have been reflected in the
December 31, 999 statement of operations.
For the year ended September 30, 2000, the beneficial conversion
feature of $700,000 and deemed dividends of $112,600 are included in
Equitex, Inc.'s historical financial statements.
(B) To reflect the distribution of certain assets of Equitex, Inc., net of
certain related liabilities to Equitex, 2000, Inc.
(C1) To reflect the issuance of up to 5,500 shares of a new series of
preferred stock in exchange for net proceeds of $5,000,000 (net of
$500,000 issue costs), which is to be used to finance Equitex, Inc.'s
acquisition of Key Financial Systems, Inc. and Nova Financial Systems,
Inc.
-59-
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000,
AND THE YEAR ENDED DECEMBER 31, 1999
The new series of preferred stock will contain a beneficial conversion
feature similar to the Series G preferred stock in which the preferred
stock may be converted at any time at a price per share of common
stock equal to the lesser of (a) $6.50 or (b) 65% of the market price
of Equitex, Inc.'s common stock. The pro forma statements of
operations for the nine months ended September 30, 2000 and the year
ended December 31, 1999, reflect a discount due to this beneficial
conversion feature of $2,692,000.
In addition, deemed dividends of $225,200 and $300,000 have been
reflected in the September 30, 2000, and December 31, 1999, statements
of operations, respectively.
(C2) To reflect the acquisition of all of the outstanding common shares of
Key Financial Systems, Inc. and Nova Financial Systems, Inc., and a
consolidation of Key Financial Systems, Inc. and Nova Financial
Systems, Inc. The purchase price consists of $5,000,000 cash and
7,140,000 shares of Equitex, Inc.'s common stock (which represents 50%
of the outstanding common shares of Equitex, Inc, after giving effect
to the consummation of the merger), and warrants for the purchase of
common stock of Equitex, Inc. equal to 100% of any warrants, options,
preferred stock or other securities outstanding at the closing date
and exchangeable for or convertible into Equitex, Inc.'s common
shares.
The transaction is recorded as a reverse acquisition. The purchase
price applied to the reverse acquisition has been based on the net
book value of the underlying assets of Equitex, Inc. prior to the
transaction plus $5,000,000 cash paid in connection with the
acquisition of Key Financial Systems, Inc. and Nova Financial Systems,
Inc.
(C3) To reflect estimated federal and state income tax effects of the
transactions described above.
-60-
EQUITEX 2000 AND SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED BALANCE SHEET
September 30, 2000
Contribution
of Equitex
assets and
assumed
liabilities
-----------
(See AA)
ASSETS
Cash and cash equivalents .................................. $ 342,652
Receivables ................................................ 1,638,219
Prepaid expenses
Inventories ................................................ 88,978
Investments ................................................ 2,038,885
Fixed assets, net .......................................... 267,840
Intangible and other assets:
Intellectual property acquired .......................... 3,141,667
Goodwill and other ...................................... 3,996,948
-----------
Total assets ............................................... $11,515,189
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ........................................... $ 346,840
Accrued expenses and other liabilities ..................... 725,338
Notes payable .............................................. 1,393,125
-----------
Total liabilities .......................................... 2,465,303
-----------
Minority interest .......................................... 5,593,070
-----------
Stockholders' equity ....................................... 3,456,816
-----------
Total liabilities and stockholders' equity ................. $11,515,189
===========
See notes to unaudited proforma condensed financial statements.
-61-
EQUITEX 2000 AND SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000
Equitex, Inc.
and Meridian Adjustments
subsidiaries Residential and Proforma
Historical Group, Inc. Eliminations combined
------------ ------------ ------------ ------------
(See BB) (See CC)
Product sales ................................ $ 305,396 $ 305,396
Interest and dividend income ................. 357,165 $ 3,653 360,818
Loan production and processing ............... 293,065 1,791,363 2,084,428
Secondary market, net ........................ 871,134 871,134
Other 149,373 149,373
------------ ------------ ------------ ------------
Total income ................................. 1,976,133 1,795,016 3,771,149
Cost of sales ................................ 187,819 187,819
------------ ------------ ------------ ------------
Gross profit ................................. 1,788,314 1,795,016 3,583,330
------------ ------------ ------------ ------------
Selling, general and administrative .......... 5,749,244 1,779,196 $ 213,000 7,871,440
130,000
Loan production and processing ............... 739,735 739,735
Unrealized holding (gains) losses
on trading securities ........................ 2,447 2,447
Realized (gains) losses on investment sales .. (26,151) (26,151)
Equity in (earnings) losses of affiliates .... 1,092,398 1,092,398
Interest expense ............................. 705,626 705,626
Loss on First Banker's Mortgage Services,
Inc. rescission .............................. 3,979,000 3,979,000
Other (income) expense ....................... (73,478) (73,478)
------------ ------------ ------------ ------------
Total operating expenses ..................... 12,168,821 1,779,196 343,000 14,291,017
------------ ------------ ------------ ------------
Income (loss) before income taxes ............ (10,380,507) 15,820 (343,000) (10,707,687)
Provision for income taxes ................... 8,917 8,917
------------ ------------ ------------ ------------
Net income (loss) applicable to common
stockholders ................................. $(10,380,507) $ 6,903 $ (343,000) $(10,716,604)
============ ============ ============ ============
Basic and diluted net income (loss) per common
share ........................................ $ (1.45) $ (1.50)
============ ============
Weighted average number of common shares
outstanding .................................. 7,140,293 7,140,293
============ ============
See notes to unaudited proforma condensed financial statements.
-62-
EQUITEX 2000 AND SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
Meridian
Residential
Equitex, Inc. Group, Inc.
and Year ended Adjustments
subsidiaries February 29, and Proforma
Historical 2000 Eliminations combined
------------ ------------ ------------ ------------
(See BB) (See CC)
Product sales ................................ $ 738,456 $ 738,456
Interest and dividend income ................. 878,998 $ 6,387 885,385
Loan production and processing ............... 302,811 2,244,550 2,547,361
Secondary market, net ........................ 395,034 395,034
Other ........................................ 103,965 103,965
------------ ------------ ------------ ------------
Total income ................................. 2,419,264 2,250,937 4,670,201
Cost of sales ................................ 488,767 488,767
------------ ------------ ------------ ------------
Gross profit ................................. 1,930,497 2,250,937 4,181,434
------------ ------------ ------------ ------------
Selling, general and administrative .......... 7,133,529 2,212,286 $ 173,000 9,801,815
283,000
Loan production and processing ............... 728,501 728,501
Unrealized holding (gains) losses on trading
securities ................................... 1,368,783 1,368,783
Realized (gains) losses on investment sales .. (797,516) (797,516)
Equity in (earnings) losses of affiliates .... 418,209 418,209
Interest expense ............................. 795,550 725 796,275
------------ ------------ ------------ ------------
Total operating expenses ..................... 9,647,056 2,213,011 456,000 12,316,067
------------ ------------ ------------ ------------
Income (loss) before income taxes ............ (7,716,559) 37,926 (456,000) (8,134,633)
Provision for income taxes ................... 29,241 29,241
------------ ------------ ------------ ------------
Net income (loss) applicable to common ....... $ (7,716,559) $ 8,685 $ (456,000) $ (8,163,874)
============ ============ ============ ============
stockholders
Basic and diluted net income (loss) per common
share ........................................ $ (1.08) $ (1.14)
============ ============
Weighted average number of common shares
outstanding .................................. 7,140,293 7,140,293
============ ============
See notes to unaudited proforma condensed financial statements.
-63-
EQUITEX 2000, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999, AND
THE NINE MONTHS ENDED SEPTEMBER 30, 2000
1. Description of Equitex 2000, Inc. transactions:
Upon the successful completion of certain transactions (described in the
notes to the unaudited pro forma condensed financial statements for
Equitex, Inc.) Equitex, Inc. intends to distribute all of its assets (which
primarily consist of its investments in subsidiaries) to Equitex 2000,
Inc., a newly-formed subsidiary of Equitex, Inc. Equitex 2000, Inc. also is
to assume all liabilities of Equitex, Inc. The outstanding common shares of
Equitex 2000, Inc. are to then be distributed to the stockholders of
Equitex, Inc. based on proportional ownership of the shares held by the
Equitex stockholders in a spin-off transaction.
The following unaudited pro forma condensed statements of operations for
the year ended December 31, 1999, and the nine months ended September 30,
2000, give effect to the transactions as if it they occurred on January 1,
1999 and January 1, 2000, respectively. The following unaudited pro forma
condensed balance sheet as of September 30, 2000 gives effect to the
transactions as if they had occurred on September 30, 2000.
2. Description of Equitex 2000, Inc. pro forma adjustments:
(AA) To reflect the contribution of Equitex, Inc. operating assets to
Equitex 2000, Inc., and Equitex 2000, Inc.'s assumption of Equitex,
Inc. liabilities.
(BB) To reflect the consolidation of Meridian Residential Group, Inc.,
contributed by Equitex, Inc. as if the transactions occurred on
January 1, 1999 and January 1, 2000, respectively. The excess of the
purchase price over the fair value of the Meridian Residential Group,
Inc. net assets acquired of approximately $2,600,000 was allocated to
goodwill, which is to be amortized over a 15-year period. In
connection with Equitex, Inc.'s Meridian Residential Group, Inc.
acquisition, Equitex, Inc. acquired certain intellectual property
rights from Meridian Capital Group, LLC for $850,000, which was also
contributed to Equitex 2000, Inc. This asset is being amortized over 3
years.
(CC) To reflect amortization related to goodwill and intellectual property
rights recorded in connection with the Meridian Residential Group,
Inc. acquisition and the acquisition of intellectual property rights
by Equitex, Inc. from Meridian Residential Group, Inc.
-64-
FINANCIAL STATEMENTS
Financial statements of Nova Financial Systems, Inc. as of and for the
periods ended September 30, 2000, December 31, 1999 and December 31, 1998 are
attached hereto as Exhibit 2.
Financial statements of Key Financial Systems, Inc. as of and for the
periods ended September 30, 2000, December 31, 1999 and December 31, 1998 are
attached hereto as Exhibit 3.
VOTE REQUIRED
The affirmative vote of the majority of the total votes cast on the
proposal in person or by proxy, at the stockholders' meeting will be required to
approve the proposal to acquire all the outstanding capital stock of Nova
Financial Systems, Inc. and Key Financial Systems, Inc. in exchange for the
greater of 7,140,000 shares or 50%, of our outstanding common stock on a post
acquisition basis plus cash consideration of $5 million. 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. THE BOARD OF DIRECTORS
RECOMMENDS A VOTE FOR THE PROPOSAL TO ACQUIRE ALL THE OUTSTANDING CAPITAL STOCK
OF NOVA FINANCIAL SYSTEMS, INC. AND KEY FINANCIAL SYSTEMS, INC. IN EXCHANGE FOR
THE GREATER OF 7,140,000 SHARES OR 50%, OF OUR OUTSTANDING COMMON STOCK ON A
POST ACQUISITION BASIS PLUS CASH CONSIDERATION OF $5 MILLION.
FINANCIAL INFORMATION
A copy of our Annual Report on Form 10-K, for the year ended December 31,
1999 will be made available upon request. See Documents Incorporated By
Reference.
STOCKHOLDER PROPOSALS
Any stockholder proposing to have any appropriate matter brought before the
2001 Annual Meeting of Stockholders, tentatively scheduled for July 27, 2001,
must submit such proposal in accordance with the proxy rules of the Securities
and Exchange Commission. Such proposals should be sent to Thomas B. Olson,
Secretary, Equitex, Inc., 7315 East Peakview Avenue, Englewood, Colorado 80111,
for receipt no later than March 31, 2001.
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: ___________ __, 2001 Thomas B. Olson
Secretary
-65-
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
Nova Financial Systems, Inc.
Financial Statements
for the year ended
December 31, 1999, the period from
inception October 10, 1998 through December 31, 1998
and the nine months ended
September 30, 2000 and September 30, 1999
NOVA FINANCIAL SYSTEMS, INC.
FINANCIAL REPORT
CONTENTS
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 1
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Balance sheets 2
Statements of operations 3
Statements of stockholders' equity 4
Statements of cash flows 5
Notes to financial statements 6 - 10
- --------------------------------------------------------------------------------
Independent Auditor's Report
To the Board of Directors
Nova Financial Systems, Inc.
Clearwater, Florida
We have audited the accompanying balance sheets of Nova Financial Systems, Inc.
as of December 31, 1999 and 1998, and the related statements of income,
stockholders' equity, and cash flows for the year ended December 31, 1999 and
for the period from inception, October 10, 1998 through December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nova Financial Systems, Inc. as
of December 31, 1999 and 1998, and the results of its operations and its cash
flows for the year ended December 31, 1999, and for the period from inception,
October 10, 1998 through December 31, 1998 in conformity with generally accepted
accounting principles.
McGladrey & Pullen, LLP
Fort Lauderdale, Florida
July 12, 2000
NOVA FINANCIAL SYSTEMS, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
September 30, December 31,
2000 1999 1998
----------- ----------- -----------
(Unaudited)
ASSETS
Cash ............................................. $ 1,645 $ 26,756 $ 20,000
Credit card receivables, net (Note 2) ............ 380,207 619,149 899
Due from Merrick Bank ............................ 1,651,962 2,580,665 19
Due from affiliate ............................... -- -- 22,761
Due from shareholders ............................ 606,500 -- --
Deferred tax asset ............................... -- 606,500 --
----------- ----------- -----------
$ 2,640,314 $ 3,833,070 $ 43,679
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable .............................. 179,460 265,197 22,387
Due to cardholders ............................ 1,506,629 1,921,769 --
Due to affiliate (Note 3) ..................... 15,316 685,464 --
Accrued expenses and other liabilities ........ 792,769 734,264 --
----------- ----------- -----------
2,494,174 3,606,694 22,387
----------- ----------- -----------
Commitments and contingencies (Note 4)
Stockholders' equity:
Common stock, par value $1 per share,
authorized 7,500 shares; issued 1,000 shares 1,000 1,000 1,000
Additional paid-in capital .................... 24,000 24,000 24,000
Retained earnings (deficit) ................... 121,140 201,376 (3,708)
----------- ----------- -----------
146,140 226,376 21,292
----------- ----------- -----------
$ 2,640,314 $ 3,833,070 $ 43,679
=========== =========== ===========
See Notes to Financial Statements.
NOVA FINANCIAL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Period from
inception
Nine months ended October 10,
September 30, Year ended 1998 through
-------------------------- December 31, December 31,
2000 1999 1999 1998
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Credit card income:
Servicing fees ........................... $ 3,725,268 $ 4,714,008 $ 7,278,767 $ 1,102
Other .................................... 152,007 60,172 127,115 8
----------- ----------- ----------- -----------
3,877,275 4,774,180 7,405,882 1,110
Provision for (recovery of) losses (Note 2).. (118,596) 500,543 676,343 192
----------- ----------- ----------- -----------
NET CREDIT CARD INCOME AFTER
PROVISION FOR LOSSES ................ 3,995,871 4,273,637 6,729,539 918
----------- ----------- ----------- -----------
Other income:
Application fees, net of direct
marketing costs nine months ended
September 30, 2000 and 1999,
$(9,945) and $11,330,327 (unaudited);
period ended December 31, 1999
and 1998, $11,307,984
and $32,653 (Note 3) ..................... (2,581) 1,956,204 1,942,520 2,751
----------- ----------- ----------- -----------
Operating expenses:
Application processing fees (Note 3) ..... -- 2,105,219 2,112,092 --
Third party servicing fees (Note 3) ...... 2,900,484 3,482,066 5,934,125 580
Other operating expenses (Note 6) ........ 507,042 217,872 303,258 6,797
----------- ----------- ----------- -----------
3,407,526 5,805,157 8,349,475 7,377
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME
TAXES ............................... 585,764 424,684 322,584 (3,708)
Provision for income taxes (credits)(Note 5) -- 159,700 117,500 --
----------- ----------- ----------- -----------
NET INCOME (LOSS) ................... $ 585,764 $ 264,984 $ 205,084 $ (3,708)
=========== =========== =========== ===========
See Notes to Financial Statements.
NOVA FINANCIAL SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED) AND YEAR ENDED
DECEMBER 31, 1999 AND PERIOD FROM INCEPTION OCTOBER 10, 1998
THROUGH DECEMBER 31, 1998
Additional Retained
Common Paid In Earnings
Stock Capital (Deficit) Total
- -------------------------------------------------------------------------------------------------------
Issuance of shares at inception,
October 10, 1998 ......................... 1,000 $ 24,000 -- $ 25,000
Net loss ................................. -- -- $ (3,708) (3,708)
----------- ----------- ----------- -----------
Balance, December 31, 1998 .................. 1,000 24,000 (3,708) 21,292
Net income ............................... -- -- 205,084 205,084
----------- ----------- ----------- -----------
Balance, December 31, 1999 .................. 1,000 24,000 201,376 226,376
Net income (unaudited) .................. -- -- 585,764 585,764
Dividends (unaudited) ................... -- -- (666,000) (666,000)
----------- ----------- ----------- -----------
Balance, September 30, 2000 ................. 1,000 $ 24,000 $ 121,140 $ 146,140
=========== =========== =========== ===========
(unaudited)
See Notes to Financial Statements.
NOVA FINANCIAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Period from
inception
Nine months ended October 10,
September 30, Year ended 1998 through
-------------------------- December 31, December 31,
2000 1999 1999 1998
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Cash Flows From Operating Activities
Net income (loss) ........................ $ 585,764 264,984 $ 205,084 $ (3,708)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Provision for (recovery of) losses .... (118,596) 500,543 676,343 192
Deferred income taxes ................. 606,500 (684,800) (606,500) --
Decrease (increase) in other receivables 928,703 (2,841,023) (2,580,646) (19)
Decrease (increase) decrease in due
from affiliates ....................... -- 22,761 22,761 (22,761)
Decrease (increase) in due from
shareholders .......................... (606,500) -- -- --
(Decrease) increase in accounts payable
and accrued expenses .................. (27,232) 1,631,031 977,074 22,387
(Decrease) increase in due to
cardholders ........................... (415,140) 2,037,980 1,921,769 --
(Decrease) increase in due to affiliates (670,148) 1,469,490 685,464 --
----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ........... 283,351 2,400,966 1,301,349 (3,909)
----------- ----------- ----------- -----------
Cash Flows Provided By (Used In) Investing
Activities
Net (increase) decrease in credit card
receivables 357,538 (2,064,645) (1,294,593) (1,091)
----------- ----------- ----------- -----------
Cash Flows From Financing Activities
Dividends paid ........................... (666,000) -- -- --
Capital contributed ...................... -- -- -- 25,000
----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ........... (666,000) -- -- 25,000
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (25,111) 336,321 6,756 20,000
Cash:
Beginning ................................ 26,756 20,000 20,000 --
----------- ----------- ----------- -----------
Ending ................................... $ 1,645 $ 356,321 $ 26,756 $ 20,000
=========== =========== =========== ===========
See Notes to Financial Statements.
NOVA FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended September 30, 2000 and September 30,
1999 is unaudited)
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Nova Financial Systems, Inc. (the "Company") designs and
markets credit card products aimed at the sub-prime market. The credit card
products are marketed for an unaffiliated bank under an agreement that provides
the Company with a 100% participation interest in the credit cards issued and
requires the payment of monthly servicing fees to the bank. The Company provides
collection and customer service for the purchased credit card portfolios through
an affiliated entity.
BASIS OF FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING ESTIMATES: The
accounting and reporting policies of the Company conform to generally accepted
accounting principles and general practices within the financial services
industry. In preparing the accompanying financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the balance sheet and the reported amounts of revenue and expenses
for the period. Actual results could differ from those estimates.
UNAUDITED FINANCIAL STATEMENTS: The balance sheet as of September 30, 2000, the
statements of operations and cash flows for the nine months ended September 30,
2000 and 1999, and the statement of stockholders' equity for the nine months
ended September 30, 2000, have been prepared by the Company without audit. In
the opinion of management, all adjustments (which include normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows for all such periods have been made. The results of
operations for the nine months ended September 30, 2000, are not necessarily
indicative of the operating results for the full year.
PRESENTATION OF CASH FLOWS: Cash flows from credit card receivables are reported
net.
CREDIT CARD RECEIVABLES: Credit card receivables are stated at the balance
reported to customers, reduced by allowances for refundable fees and losses.
Fees are accrued monthly on active credit card accounts and included in credit
card receivables. Accrual of income is discontinued on credit card accounts that
have been closed or charged off. Accrued fees on credit card loans are charged
off with the card balance, generally when the account becomes 90 days past due.
The allowance for losses is established through a provision for losses charged
to expense. Credit card receivables are charged against the allowance for losses
when management believes that collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
estimated losses on existing receivables, based on evaluation of the
collectibility of the accounts and prior loss experience. This evaluation also
takes into consideration such factors as changes in the volume of the loan
portfolio, overall portfolio quality and current economic conditions that may
affect the borrowers' ability to pay. While management uses the best information
available to make its evaluation, this estimate is susceptible to significant
change in the near term.
DUE TO AFFILIATES: The Company receives credit card marketing, customer service
and collection services from Key Financial Systems, Inc. ("Key"), a company
affiliated through common ownership, in exchange for a fee. The amount due to
affiliate in the accompanying balance sheets represents fees payable in
connection with Nova's card activity that has been collected by Nova's bank
client but not yet paid to Nova.
NOVA FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended September 30, 2000 and September 30,
1999 is unaudited)
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER RECEIVABLES AND DUE TO CARDHOLDERS: The Company charges a fully refundable
reservation fee equal to each cardholder's borrowing limit upon issuance of a
credit card. The amount due to cardholders represents the balance of reservation
fees that would have to be refunded to cardholders should they close their
accounts at the balance sheet date. Funds held in trust to secure payment of
this liability are reflected in due from Merrick Bank in the accompanying
balance sheets.
INCOME TAXES: The Company, with the consent of its stockholders, elected to be
taxed under the provisions of Subchapter S of the Internal Revenue Code
effective January 1, 2000, which provides that in lieu of corporate tax the
stockholders separately account for their pro rata shares of the Company's items
of income, deductions, losses and credits. As of September 30, 2000, the
Company's reported net assets exceed their tax bases by approximately $189,000
(unaudited). Accordingly, if the election was terminated on that date, a
deferred tax liability of approximately $70,000 would be recognized by a charge
to income tax expense.
NOTE 2. CREDIT CARD RECEIVABLES
The composition of credit card receivables at September 30, 2000, and at
December 31, 1999 and 1998 is as follows:
2000 1999 1998
------------ ------------ ------------
(Unaudited)
Credit card receivables $ 8,485,299 $ 29,407,412 $ 121,091
Refundable reservation fees (7,987,371) (28,319,231) (120,000)
------------ ------------ ------------
497,928 1,088,181 1,091
Less allowance for losses 117,721 469,032 192
------------ ------------ ------------
$ 380,207 $ 619,149 $ 899
============ ============ ============
Changes in the allowance for losses for the nine-month periods ended September
30, 2000 and 1999, and the year ended December 31, 1999 and the period ended
December 31, 1998 are as follows:
September 30, December 31,
-------------------- --------------------
2000 1999 1999 1998
--------- --------- --------- ---------
(Unaudited) (Unaudited)
Balance, beginning $ 469,032 $ 192 $ 192 $ -
Provision for (recovery of) losses (118,596) 500,543 676,343 192
Recoveries of amounts charged-off - - - -
Amounts charged-off (232,715) (44,553) (207,503) -
--------- --------- --------- ---------
Balance, ending $ 117,721 $ 456,182 $ 469,032 $ 192
========= ========= ========= =========
NOVA FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended September 30, 2000 and September 30,
1999 is unaudited)
- --------------------------------------------------------------------------------
NOTE 3. TRANSACTIONS WITH RELATED PARTIES
The Company had an informal agreement with Key under which Key provided
marketing and preprocessing of credit card applications, customer service and
collection services for Nova. Expenses were charged to the Company for
application processing and customer service based on set fee per application
processed and for collections based on a set fee per delinquent account on file.
The Company believes the method and per unit price charged was consistent with
the methods and rates of similar third party credit card processors. The Company
recognized processing fee and servicing expense of $3,832,736 and $10,266
associated with Key's activities during 1999 and 1998, respectively, and
$672,420, and $2,996,381 (unaudited) during the nine month periods ended
September 30, 2000 and 1999, respectively. As of September 30, 2000, and
December 31, 1999 and 1998, the Company owed Key $15,316 (unaudited), $685,464,
and $-0-, respectively, in connection with services performed by Key. Effective
July 1, 2000 all such services from Key were terminated.
The Company has entered into an agreement with Paragon Water Services, Inc.
(Paragon), a company affiliated through common ownership, whereby Paragon
provides credit card marketing services for the Company. Paragon earns
commissions for card applications that are not subsequently refunded. The
Company paid Paragon approximately $6,631,608 and $-0- in commissions during
1999 and 1998, respectively and $0 and $6,585,446 (unaudited) during the
nine-month periods ended September 30, 2000 and 1999.
NOTE 4. COMMITMENTS, CONTINGENCIES AND CREDIT RISK
A credit limit has been established for each card holder account acquired by the
Company. By agreement, the credit limit can be terminated at any time for any
reason. Because the initial reservation fee charged to all account holders is
fully refundable, the total of accounts with credit limits in excess of
cardholder balances is reflected as a liability in the amount of $1,506,629
(unaudited), $1,921,769, and $-0- as of September 30, 2000, and December 31,
1999 and 1998, respectively, in the accompanying balance sheets.
Contingencies: In the normal course of business, the Company is involved in
various legal proceedings. In the opinion of management, any liability resulting
from such proceedings would not have a material adverse effect on the Company's
financial statements.
The attorney general of the State of New York has alleged that Merrick Bank
improperly marketed credit cards, including cards marketed by Nova and in which
Nova has a participation interest. Without admitting any wrongdoing, Merrick
Bank is negotiating an agreement that would require Merrick Bank to offer
certain customers a refund of the initial application fee paid by those
customers. Merrick Bank is seeking indemnification from Nova for any refunds
that eventually paid as well as related legal and administrative costs. The
Company will not agree to indemnify Merrick Bank until an agreement has been
reached between Merrick Bank and the State of New York that is deemed acceptable
by the Company. Management anticipated that total costs incurred under any
indemnification agreed to by the Company will not exceed $150,000. A liability
of $68,769 (unaudited) has been included in accrued expenses and other
liabilities in the accompanying balance sheet at September 30, 2000, as
management's best estimate of the total costs to be incurred by the Company.
Credit card loans are issued throughout the United States to customers that are
considered high credit risks. The Company evaluates each customer's credit
worthiness on a case-by-case basis. Because of the reservation fee charged upon
issuance of credit cards, charges for purchases or cash advances are generally
limited to the amount of payments collected from each customer less fees
charged.
NOVA FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended September 30, 2000 and September 30,
1999 is unaudited)
- --------------------------------------------------------------------------------
NOTE 4. COMMITMENTS, CONTINGENCIES AND CREDIT RISK (CONTINUED)
The Company issues its credit cards under membership terms with VISA.
Modification of these terms by VISA could adversely affect operating results.
NOTE 5. INCOME TAXES
All active card accounts are charged monthly membership fees, late charges,
overlimit fees and other charges according to the card agreements. The Company
has not recognized certain of these monthly charges as income for financial
reporting purposes because the charges are not believed to be collectible. A
deferred tax asset in the amount of $606,500 has been recognized as of December
31, 1999 ($0 at September 30, 2000), related to the excess of the estimated tax
basis of credit card receivables over the reported receivables.
The provision for income taxes charged to operations consist of the following:
Year Period
Nine months ended ended ended
June 30, December December
----------------------- 31, 31,
2000 1999 1999 1998
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Currently payable or paid:
Federal $ - $ 721,000 $ 618,000 $ -
State - 123,500 106,000 -
Deferred income taxes - (684,800) (606,500) -
---------- ---------- ---------- ----------
$ - $ 159,700 $ 117,500 $ -
========== ========== ========== ==========
The income tax provision differs from the amount of income tax determined by
applying the U. S. federal income tax rate to pretax income for the following
periods due to the following:
Year Period
Nine months ended ended ended
June 30, December December
----------------------- 31, 31,
2000 1999 1999 1998
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Computed "expected" tax
expense (benefit) $ - $ 144,393 $ 109,679 $ (1,261)
Increase resulting from
state income taxes,
net of federal tax
benefit - 15,289 11,710 -
Effect of lower tax
brackets and other - 19 (3,889) 1,261
---------- ---------- ---------- ----------
$ - $ 159,700 $ 117,500 $ -
========== ========== ========== ==========
The Company elected S Corporation status effective January 1, 2000. Upon
converting to S Corporation status, the Company eliminated deferred tax assets
in the amount of $606,500 as a charge against income from operations. This
charge against income was offset by the recognition of a receivable from
shareholders in the amount of $606,500 due to a commitment from the shareholders
to reimburse the Company for income taxes paid by the Company related to losses
recognized by the Company for financial reporting purposes in 1999, but passed
through to the shareholders in years subsequent to 1999 for income tax purposes.
NOVA FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended September 30, 2000 and September 30,
1999 is unaudited)
- --------------------------------------------------------------------------------
Note 6. Other Operating Expenses
Year Period
Nine months ended ended ended
June 30, December December
----------------------- 31, 31,
2000 1999 1999 1998
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Cardholder expense-other $ 105,809 $ 55,122 $ 96,206 $ -
Professional fees 312,097 5,911 20,128 1,121
Printing and supplies - 21,742 21,742 676
Settlement expense 68,769 - - -
Other 20,367 135,097 165,182 5,000
---------- ---------- ---------- ----------
$ 507,042 $ 217,872 $ 303,258 $ 6,797
========== ========== ========== ==========
NOTE 7. PLAN OF REORGANIZATION
The Company has entered into an Agreement and Plan of Reorganization with
Equitex, Inc. (Equitex) under which the Company's stockholders would exchange
all of the issued and outstanding shares of the Company for a) 25% of the
outstanding common shares of Equitex, after giving effect to the consummation of
this merger and a similar planned merger of Key, b) warrants for the purchase of
common stock of Equitex equal to 50% of any warrants, options, preferred stock
or other securities outstanding at the closing date and exchangeable for or
convertible into Equitex common shares, and c) $2,500,000.
EXHIBIT 3
Key Financial Systems, Inc.
Financial Statements
for the years ended
December 31, 1999 and 1998, the period from
inception June 12, 1997 through December 31, 1997,
and the nine months ended
September 30, 2000 and September 30, 1999
KEY FINANCIAL SYSTEMS, INC.
FINANCIAL REPORT
CONTENTS
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 1
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Balance sheets 2
Statements of operations 3
Statements of stockholders' equity 4
Statements of cash flows 5
Notes to financial statements 6 - 11
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Key Financial Systems, Inc.
Clearwater, Florida
We have audited the accompanying balance sheets of Key Financial Systems, Inc.
as of December 31, 1999 and 1998, and the related statements of income,
stockholders' equity, and cash flows for the years then ended and for the period
from inception, June 12, 1997 through December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Key Financial Systems, Inc. as
of December 31, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended and for the period from inception, June 12, 1997
through December 31, 1997 in conformity with generally accepted accounting
principles.
Fort Lauderdale, Florida
July 12, 2000
KEY FINANCIAL SYSTEMS, INC.
BALANCE SHEETS
-------------------------------------------------------------------------------
September December 31,
30, --------------------------
2000 1999 1998
----------- ----------- -----------
(Unaudited)
ASSETS
Cash ............................................. $ 553,373 $ 30,908 $ 316,830
Credit card receivables, net (Note 2) ............ 568,568 519,929 1,121,397
Other receivables (Note 3) ....................... 3,983,124 2,874,293 372,713
Advances to shareholders ......................... -- -- 288,888
Due from affiliates (Note 5) ..................... 15,316 685,464 --
Leaseholds and equipment, net (Note 4) ........... 285,161 303,976 212,955
Other assets ..................................... 17,017 17,917 39,877
----------- ----------- -----------
$ 5,422,559 $ 4,432,487 $ 2,352,660
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Due to cardholders (Note 6) ................... $ 3,190,540 $ 2,402,377 $ 1,408,693
Accounts payable (Note 5) ..................... 1,208,499 311,029 1,011,413
Accrued expenses and other liabilities ........ 82,351 379,012 13,451
----------- ----------- -----------
4,481,390 3,092,418 2,433,557
----------- ----------- -----------
Commitments and contingencies (Note 4)
Stockholders' equity:
Common stock, par value $1 per share,
authorized 7,500 shares; issued 2,000 shares 2,000 2,000 2,000
Additional paid-in capital .................... 371,835 371,835 271,835
Retained earnings (deficit) ................... 567,334 966,234 (354,732)
----------- ----------- -----------
941,169 1,340,069 (80,897)
----------- ----------- -----------
$ 5,422,559 $ 4,432,487 $ 2,352,660
=========== =========== ===========
See Notes to Financial Statements.
KEY FINANCIAL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
-------------------------------------------------------------------------------
Period from
inception, June
12, 1997
Nine months ended through
September 30, Years ended December 31, December 31,
2000 1999 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Credit card income:
Card servicing fees ................. $ 5,089,512 $ 9,654,615 $11,628,340 $ 3,529,187 --
Other ............................... 148,316 173,133 246,767 51,283 --
----------- ----------- ----------- ----------- -----------
5,237,828 9,827,748 11,875,107 3,580,470 --
Provision for losses (Note 2) .......... 28,329 587,849 511,645 260,332 --
----------- ----------- ----------- ----------- -----------
NET CREDIT CARD INCOME
AFTER PROVISION FOR LOSSES 5,209,499 9,239,899 11,363,462 3,320,138 --
----------- ----------- ----------- ----------- -----------
Other income:
Application fees, net of direct
marketing costs; nine months ended
September 30, 2000 and 1999,
$8,245,744 and $6,906,593
(unaudited); years ended December
31, 1999 and 1998, $7,153,144 and
$9,721,837 (Note 5) ................. 2,191,907 1,176,633 935,015 1,621,815 --
Servicing fee income (Note 5) ...... 672,420 3,147,312 3,832,736 -- --
Other .............................. 108,830 62,452 59,807 -- --
----------- ----------- ----------- ----------- -----------
2,973,157 4,386,397 4,827,558 1,621,815 --
----------- ----------- ----------- ----------- -----------
Operating expenses:
Salaries and wages .................. 1,923,859 3,143,365 3,997,724 1,015,019 --
Employee benefits ................... 259,427 373,007 466,540 1,335 --
Third party servicing fees (Note 8) . 2,118,165 4,140,366 4,978,279 3,035,568 --
Occupancy and equipment (Note 6) .... 312,703 208,724 351,647 61,133 8,091
Other operating expenses (Note 7) ... 708,402 778,126 1,011,976 373,564 3,863
----------- ----------- ----------- ----------- -----------
5,322,556 8,643,588 10,806,166 4,486,619 11,954
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) ........ $ 2,860,100 $ 4,982,708 $ 5,384,854 $ 455,334 $ (11,954)
=========== =========== =========== =========== ===========
See Notes to Financial Statements.
KEY FINANCIAL SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 2000 (Unaudited) And Years Ended
December 31, 1999 And 1998 And Period From Inception, June 12, 1997,
Through December 31, 1997
Additional Retained
Common Paid In Earnings
Stock Capital (Deficit) Total
------------------------------------------------------------------------------------------------
Issuance of shares at inception,
June 12, 1997 ...................... $ 1,000 $ 22,835 $ -- $ 23,835
Net loss ........................... -- -- (11,954) (11,954)
----------- ----------- ----------- -----------
Balance, December 31, 1997 ............ 1,000 22,835 (11,954) 11,881
Net income ......................... -- -- 455,334 455,334
Issuance of 1,000 shares .......... 1,000 249,000 -- 250,000
Dividends paid .................... -- (798,112) (798,112)
----------- ----------- ----------- -----------
Balance, December 31, 1998 ............ 2,000 271,835 (354,732) (80,897)
Net income ........................ -- -- 5,384,854 5,384,854
Capital contributed ............... -- 100,000 -- 100,000
Dividends paid .................... -- -- (4,063,888) (4,063,888)
----------- ----------- ----------- -----------
Balance, December 31, 1999 ............ 2,000 371,835 966,234 1,340,069
Net income (unaudited) ............ -- -- 2,860,100 2,860,100
Dividends paid (unaudited) ........ -- -- (3,259,000) (3,259,000)
----------- ----------- ----------- -----------
Balance, September 30, 2000 (unaudited) $ 2,000 $ 371,835 $ 567,334 $ 941,169
=========== =========== =========== ===========
See Notes to Financial Statements.
KEY FINANCIAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Period from
inception, June
12, 1997
Nine months ended through
September 30, Years ended December 31, December 31,
2000 1999 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Cash Flows From Operating Activities
Net income (loss) .................... $ 2,860,100 $ 4,982,708 $ 5,384,854 $ 455,334 $ (11,954)
Adjustments to reconcile net income .. --
(loss) to net cash provided by (used
in) operating activities:
Provision for losses ............. 28,329 587,849 511,645 260,332 --
Depreciation and amortization .... 68,140 49,401 117,349 23,597 8,755
Increase in other receivables .... (1,108,831) (3,062,865) (2,501,580) (372,713) --
Decrease (increase) in due from
affiliates ..................... 670,148 (1,469,490) (685,464) -- --
(Increase) decrease in other assets 900 21,671 21,960 (34,573) (5,968)
Increase in due to cardholders ... 788,163 1,509,560 993,684 1,408,693 --
Increase (decrease) in accounts
payable, accrued expenses and
other liabilities .............. 600,809 (425,060) (334,823) 1,022,864 2,000
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED
IN) OPERATING ACTIVITIES ..... 3,907,758 2,193,774 3,507,625 2,763,534 (7,167)
----------- ----------- ----------- ----------- -----------
Cash Flows From Investing Activities
Net (increase) decrease in credit card
Receivables ....................... (76,968) (441,666) 89,823 (1,381,729) --
Advances to stockholders ............ -- -- -- (288,888) --
Collection of advances to stockholders -- 288,888 288,888 -- --
Purchase of property and equipment .. (49,325) (188,023) (208,370) (228,308) --
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED
IN) FINANCING ACTIVITIES ..... (126,293) (340,801) 170,341 (1,898,925) --
----------- ----------- ----------- ----------- -----------
Cash Flows From Financing Activities
Capital contributions ............... -- 100,000 100,000 250,000 7,500
Dividends paid ...................... (3,259,000) (2,063,888) (4,063,888) (798,112) --
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED
IN) FINANCING ............... (3,259,000) (1,963,888) (3,963,888) (548,112) 7,500
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN
CASH ........................ 522,465 (110,915) (285,922) 316,497 333
Cash:
Beginning .......................... 30,908 316,830 316,830 333 --
----------- ----------- ----------- ----------- -----------
Ending ............................. $ 553,373 $ 205,915 $ 30,908 $ 316,830 $ 333
=========== =========== =========== =========== ===========
See Notes to Financial Statements.
KEY FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended September 30, 2000 and September 30,
1999 is unaudited)
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Key Financial Systems, Inc. (the "Company") designs and
markets credit card products aimed at the sub-prime market. The credit card
products are marketed for an unaffiliated bank under an agreement that provides
the Company with a 100% participation interest in the receivables and related
rights associated with credit cards issued and requires the payment of monthly
servicing fees to the bank. The Company provides collection and customer service
related to the credit cards issued.
BASIS OF FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING ESTIMATES: The
accounting and reporting policies of the Company conform to generally accepted
accounting principles and general practices within the financial services
industry. In preparing the accompanying financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the balance sheet and the reported amounts of revenue and expenses
for the period. Actual results could differ from those estimates.
UNAUDITED FINANCIAL STATEMENTS: The balance sheet as of September 30, 2000, the
statements of operations and cash flows for the nine months ended September 30,
2000 and 1999, and the statement of stockholders' equity for the nine months
ended September 30, 2000, have been prepared by the Company without audit. In
the opinion of management, all adjustments (which include normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows for all such periods have been made. The results of
operations for the nine months ended September 30, 2000, are not necessarily
indicative of the operating results for the full year.
PRESENTATION OF CASH FLOWS: Cash flows from credit card receivables are reported
net.
CREDIT CARD RECEIVABLES: Credit card receivables are stated at the balance
reported to customers, reduced by allowances for refundable fees and losses.
Fees are accrued monthly on active credit card accounts and included in credit
card receivables. Accrual of income is discontinued on credit card accounts that
have been closed or charged off. Accrued fees on credit card loans are charged
off with the card balance, generally when the account becomes 90 days past due.
The allowance for losses is established through a provision for losses charged
to expense. Receivables are charged against the allowance for losses when
management believes that collectibility of principal is unlikely. The allowance
is an amount that management believes will be adequate to absorb estimated
losses on existing accounts, based on evaluation of the collectibility of the
accounts and prior loss experience. This evaluation also takes into
consideration such factors as changes in the volume of the credit card
receivable portfolio, overall portfolio quality, and current economic conditions
that may affect the borrowers' ability to pay. While management uses the best
information available to make its evaluation, this estimate is susceptible to
significant change in the near term.
DUE FROM AFFILIATES: The Company provides credit card marketing, customer
service and collection services for Nova Financial Systems, Inc. ("Nova"), a
company affiliated though common ownership, in exchange for a fee. The amount
due from affiliate in the accompanying balance sheets represents the balance of
unpaid servicing fees receivable in connection with Nova's card activity.
KEY FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended September 30, 2000 and September 30,
1999 is unaudited)
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER RECEIVABLES AND DUE TO CARDHOLDERS: The Company charges a fully refundable
reservation fee equal to each cardholder's borrowing limit upon issuance of a
credit card. The amount due to cardholders represents the balance of reservation
fees that would have to be refunded to cardholders should they close their
accounts at the balance sheet date. Funds held in trust at Key Bank & Trust to
secure payment of this liability are reflected in other receivables in the
accompanying balance sheets.
LEASEHOLDS AND EQUIPMENT: Leaseholds and equipment are stated at cost less
accumulated depreciation. Depreciation is computed principally by the double
declining-balance method over the assets' estimated useful lives.
INCOME TAXES: The Company, with the consent of its stockholders, elected to be
taxed under the provisions of Subchapter S of the Internal Revenue Code
effective January 1, 1998, which provides that in lieu of corporate income tax
the stockholders separately account for their pro rata shares of the Company's
items of income, deductions, losses and credits. As a result of this election,
no income taxes have been recognized in the accompanying financial statements.
As of December 31, 1999, the Company's reported net assets exceed their tax
bases by approximately $327,000 ($236,000 at September 30, 2000, unaudited).
Accordingly, if the election was terminated on that date, a deferred tax
liability of approximately $122,000 ($89,000 at September 30, 2000, unaudited)
would be recognized by a charge to income tax expense.
NOTE 2. CREDIT CARD RECEIVABLES
The composition of credit card receivables at September 30, 2000, and at
December 31, 1999 and 1998 is as follows:
2000 1999 1998
------------ ------------ ------------
(Unaudited)
Credit card receivables $ 23,906,926 $ 22,274,017 $ 52,321,076
Refundable reservation fees (23,278,460) (21,693,622) (50,981,807)
------------ ------------ ------------
628,466 580,395 1,339,269
Less allowance for losses 59,898 60,466 217,872
------------ ------------ ------------
$ 568,568 $ 519,929 $ 1,121,397
============ ============ ============
Changes in the allowance for losses for the nine-month periods ended September
30, 2000 and 1999, and the years ended December 31, 1999 and 1998 are as
follows:
September 30, December 31,
-------------------- --------------------
2000 1999 1999 1998
--------- --------- --------- ---------
(Unaudited) (Unaudited)
Balance, beginning $ 60,466 $ 217,872 $ 217,872 $ -
Provision for losses 28,329 587,849 511,645 260,332
Recoveries of amounts charged-off - 4,231 4,231 67,274
Amounts charged-off (28,897) (663,780) (673,282) (109,734)
--------- --------- --------- ---------
Balance, ending $ 59,898 $ 146,172 $ 60,466 $ 217,872
========= ========= ========= =========
KEY FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended September 30, 2000 and September 30,
1999 is unaudited)
- --------------------------------------------------------------------------------
NOTE 2. CREDIT CARD RECEIVABLES (CONTINUED)
There were no credit card receivables acquired through December 31, 1997 and
therefore no allowance for losses was required during 1997.
NOTE 3. OTHER RECEIVABLES
The composition of other receivables at September 30, 2000, and at December 31,
1999 and 1998 is as follows:
2000 1999 1998
------------ ------------ ------------
(Unaudited)
Due from Key Bank & Trust $ 1,995,694 $ 2,785,624 $ 150,245
Due from Net 1st National Bank 1,967,172 - -
Other 20,258 88,669 222,468
------------ ------------ ------------
$ 3,983,124 $ 2,874,293 $ 372,713
============ ============ ============
The amount due from Key Bank and Trust is held in a trust account by the bank.
NOTE 4. LEASEHOLDS AND EQUIPMENT
The major classes of leaseholds and equipment and total accumulated depreciation
at September 30, 2000, and at December 31, 1999 and 1998, are as follows:
2000 1999 1998
------------ ------------ ------------
(Unaudited)
Leasehold improvements $ 116,202 $ 104,304 $ 50,344
Furniture and equipment 369,446 332,019 177,605
------------ ------------ ------------
485,648 436,323 227,949
Less accumulated depreciation 200,487 132,347 14,994
------------ ------------ ------------
$ 285,161 $ 303,976 $ 212,955
============ ============ ============
NOTE 5. TRANSACTIONS WITH RELATED PARTIES
The Company had an informal agreement with Nova under which the Company agreed
to provide marketing and preprocessing of credit card applications, customer
service and collection services for Nova. Expenses were charged to Nova for
application processing and customer service based on a set fee per application
processed and for collections based on a set fee per delinquent account on file.
The Company believes the method and per unit price charged was consistent with
the methods and rates of similar third party credit card processors. The Company
recognized processing fee and servicing income of $3,832,736 associated with
Nova's activities during the year ended December 31, 1999 ($672,420 and
$2,996,381 during the nine month periods ended September 30, 2000 and 1999,
unaudited). These amounts are included in other operating income. No significant
services were provided for Nova in 1998 or 1997. As of September 30, 2000 and
December 31, 1999, Nova owed the Company $15,316 (unaudited) and $685,464 in
connection with services performed by the Company. Effective July 1, 2000, all
such services for Nova were terminated.
KEY FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended September 30, 2000 and September 30,
1999 is unaudited)
- --------------------------------------------------------------------------------
NOTE 5. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
The Company has entered into an agreement with Paragon Water Member Services
("Paragon"), a company affiliated through common ownership, whereby Paragon
provides credit card marketing services for the Company and for Nova. Paragon
earns commissions for card applications that are not subsequently refunded. In
addition, during 1998, Paragon provided operating space and personnel to the
Company. The Company paid Paragon $5,662,026 and $8,626,699 in commissions
during the years ended December 31, 1999 and 1998, respectively, ($318,799
during the nine months ended September 30, 2000 and $5,652,692 through September
30, 1999, unaudited) and paid $963,174 for other services in 1998. No services
were provided by Paragon in 1997. As of December 31, 1998, the Company owed
Paragon $266,000 in commissions for cards originated in 1998. No amount was due
to Paragon at December 31, 1999 and $230,049 was due at September 30, 2000
(unaudited).
NOTE 6. COMMITMENTS, CONTINGENCIES AND CREDIT RISK
A credit limit has been established for each card holder account acquired by the
Company. By agreement, the credit limit can be terminated at any time for any
reason. Because the initial reservation fee charged to all account holders is
fully refundable, the total of accounts with credit limits in excess of
cardholder balances is reflected as a liability in the amount of $3,190,540
(unaudited), $2,402,377 and $1,408,693 as of September 30, 2000, December 31,
1999 and 1998, respectively, in the accompanying balance sheets.
LEASE COMMITMENTS: The Company rents office space under an operating lease with
initial terms through September 30, 2004. The office lease has a five year
renewal option. The future minimum rental payments due under the lease is as
follows:
Year Ending
December 31, Amount
- --------------------------------------------------------------------------------
2000 $ 278,200
2001 292,100
2002 306,700
2003 322,100
2004 250,500
------------------
$ 1,449,600
==================
Total rent expense under operating leases was approximately $229,000 and $36,000
for the years ended December 31, 1999 and 1998, respectively, and $221,972
(unaudited) and $155,599 (unaudited) for the nine months ended September 30,
2000 and 1999, respectively. There was no property leased in 1997.
CONTINGENCIES: In the normal course of business, the Company is involved in
various legal proceedings. In the opinion of management, any liability resulting
from such proceedings would not have a material adverse effect on the Company's
financial statements.
KEY FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended September 30, 2000 and September 30,
1999 is unaudited)
- --------------------------------------------------------------------------------
NOTE 6. COMMITMENTS, CONTINGENCIES AND CREDIT RISK (CONTINUED):
Credit cards are issued throughout the United States to customers that are
considered high credit risks. The Company evaluates each customer's credit
worthiness on a case-by-case basis. Because of the reservation fee charged upon
issuance of credit cards, charges for purchases or cash advances are generally
limited to the amount of payments collected from each customer less fees
charged.
The Company's credit card receivables were initiated under membership terms with
VISA and MasterCard. Modification of these terms by VISA or MasterCard could
adversely affect operating results.
NOTE 7. OTHER OPERATING EXPENSES
Nine months ended Periods ended
September 30, December 31,
-------------------- ---------------------------------
2000 1999 1999 1998 1997
--------- --------- ----------- --------- ---------
(Unaudited) (Unaudited)
Telecommunications $ 295,856 $ 542,246 $ 648,111 $ 259,105 $ -
Professional fees 168,070 94,301 166,005 2,869 -
Printing and supplies 12,400 38,286 41,461 63,049 -
Other 232,076 103,293 156,399 48,541 3,863
--------- --------- ----------- --------- ---------
$ 708,402 $ 778,126 $ 1,011,976 $ 373,564 $ 3,863
========= ========= =========== ========= =========
NOTE 8. SETTLEMENT WITH BANK
In April 1999, the Company reached a settlement with Key Bank & Trust that
resulted in a) a significant increase in the amount of collected funds held in
trust by the Bank pending payment to the Company, b) the cessation of marketing
credit cards for the Bank, c) a reduction in the monthly fees charged by the
Bank to the Company, and d) mutual releases from any and all claims against each
other through the date of the release. In connection with the settlement, the
Bank paid the Company $1,016,928, which has been recognized as a reduction in
third party servicing fees for the nine months ended September 30, 1999 and the
year ended December 31, 1999 in the accompanying statements of operations.
The Bank also paid the Company $250,000 which was recognized as a receivable at
December 31, 1998 in connection with card activity in 1998.
KEY FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended September 30, 2000 and September 30,
1999 is unaudited)
- --------------------------------------------------------------------------------
NOTE 9. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental Schedule of Noncash Investing and Financing Activities
Nine months ended Periods ended
September 30, December 31,
--------------------- ---------------------------------
2000 1999 1999 1998 1997
--------- --------- --------- --------- ---------
(Unaudited) (Unaudited)
Equipment contributed
in exchange for stock $ - $ - $ - $ - $ 16,335
========= ========= ========= ========= =========
NOTE 10. PLAN OF REORGANIZATION
The Company has entered into an Agreement and Plan of Reorganization with
Equitex, Inc. (Equitex) under which the Company's stockholders would exchange
all of the issued and outstanding shares of the Company for a) 25% of the
outstanding common shares of Equitex, after giving effect to the consummation of
this merger and a similar planned merger of Nova, b) warrants for the purchase
of common stock of Equitex equal to 50% of any warrants, options, preferred
stock or other securities outstanding at the closing date and exchangeable for
or convertible into Equitex common shares, and c) $2,500,000.
EXHIBIT 4
The Meridian Residential Group, Inc.
Financial Statements for the year ended February 29, 2000
and the seven months ended
September 30, 2000 and 1999
THE MERIDIAN RESIDENTIAL GROUP, INC.
INTERIM FINANCIAL STATEMENTS
FOR THE SEVEN MONTHS ENDED SEPTEMBER 30, 2000
THE MERIDIAN RESIDENTIAL GROUP, INC.
FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
Table of Contents
-----------------
Page
----
Independent Accountants' Compilation Report . . . . . . . 2
Financial Statements:
Balance Sheet . . . . . . . . . . . . . . . . . . . . 3
Statement of Income and Retained Earnings . . . . . . 4
Statement of Cash Flows . . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . 6-8
Schedule of Operating Expenses . . . . . . . . . . . . 9
INDEPENDENT ACCOUNTANTS' COMPILATION REPORT
TO: The Board of Directors
The Meridian Residential Group, Inc.
2636 Nostrand Avenue
Brooklyn, NY 11210
Gentlemen:
We have compiled the accompanying balance sheet of THE MERIDIAN
RESIDENTIAL GROUP, INC., as of September 30, 2000, and the related statements of
income, retained earnings, and cash flows for the seven month period ended
September 30, 2000 and 1999, in accordance with the Statements on Standards for
Accounting and Review Services, issued by the American Institute of Certified
Public Accountants. All information in these financial statements is the
representation of the management of THE MERIDIAN RESIDENTIAL GROUP, INC.
A compilation is limited to presenting in the form of financial
statements information that is the representation of management. We have not
audited or reviewed the accompanying financial statements and, accordingly, do
not express an opinion, or any other form of assurance on them.
Hirsch, Oelbaum, Bram & Hanover
Certified Public Accountants, P.C.
New York, New York
November 9, 2000
THE MERIDIAN RESIDENTIAL GROUP, INC.
BALANCE SHEET
SEPTEMBER 30, 2000
Assets
------
CURRENT ASSETS:
Cash ........................................ $ 256,434
Accounts Receivable ......................... 2,137
---------
TOTAL CURRENT ASSETS ............... $ 258,571
PROPERTY AND EQUIPMENT:
Furniture and Fixtures ...................... 33,376
Leasehold Improvements ...................... 158,446
Accumulated Depreciation -
Furniture & Fixtures ...................... (48,594)
Accumulated Depreciation -
Leasehold Improvements .................... (32,657)
---------
TOTAL PROPERTY and EQUIPMENT ....... 110,571
OTHER ASSETS:
Security Deposits ........................... 2,078
Loan Receivable ............................. 15,179
---------
TOTAL OTHER ASSETS ................. 17,257
---------
TOTAL ASSETS ....................... $ 386,399
=========
Liabilities and Capital
-----------------------
CURRENT LIABILITIES:
Accounts Payable ............................ $ 45,053
TOTAL CURRENT LIABILITIES .......... $ 45,053
Long-Term Liabilities ................................ 0
TOTAL LONG-TERM LIABILITIES ........ 0
---------
TOTAL LIABILITIES .................. 45,053
CAPITAL:
Common Stock (No Par Value - 200
Shares Authorized - 100 Shares
Issued and Outstanding) ................... $ 260,850
Retained Earnings ........................... 80,496
---------
TOTAL CAPITAL ...................... 341,346
---------
TOTAL LIABILITIES and
CAPITAL .......................... $ 386,399
=========
SEE INDEPENDENT AUDITORS' REPORT and
NOTES TO FINANCIAL STATEMENT
3
THE MERIDIAN RESIDENTIAL GROUP, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE SEVEN MONTHS ENDED SEPTEMBER 30, 2000 and 1999
2000 1999
---- ----
REVENUE:
Origination Fee ........................ $ 1,435,858 $ 1,398,317
Operating Expenses ..................... 1,425,017 1,353,086
----------- -----------
NET OPERATING INCOME (LOSS) ... 10,841 45,231
OTHER INCOME:
Interest Income ........................ 2,529 3,545
----------- -----------
NET INCOME (LOSS) BEFORE
DEPRECIATION AND INCOME TAXES 13,370 48,776
Depreciation ........................... 13,299 11,665
Provision for Income Taxes ............. 6,500 20,784
----------- -----------
NET INCOME (LOSS) ............. $ (6,429) 16,327
Retained Earnings - March 1st ................... 170,462 161,777
----------- -----------
Dividend Distribution .................. (83,537) 0
----------- -----------
Retained Earnings - September 30th .............. $ 80,496 $ 178,104
=========== ===========
SEE ACCOUNTANTS' COMPILATION REPORT and
NOTES TO FINANCIAL STATEMENTS
4
THE MERIDIAN RESIDENTIAL GROUP, INC.
STATEMENT OF CASH FLOWS
FOR THE FOUR MONTHS ENDED SEPTEMBER 30, 2000 and 1999
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) ...................... $ (6,429) $ 16,327
Adjustments to Reconcile Net Income
(Loss) to Net Cash Provided by
Operating Activities:
Depreciation ........................... 13,299 11,665
Changes in Assets:
Accounts Receivable .................... 10,902 52,112
Prepaid Expenses ....................... 2,429 7,945
Accounts Payable ........................... (27,931) 26,995
Corporate Taxes Payable ................ (26,525) 7,145
Loan Receivable ........................ (15,179) 0
----------- -----------
Net Cash Provided (Used) by Operating
Activities .................................... (49,434) 122,189
CASH FLOWS FROM FINANCING ACTIVITIES:
Pay off Bank Loan ...................... 0 (17,420)
Dividend Distribution .................. (83,537) 0
----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents .............................. $ (132,971) $ 104,769
Cash and Equivalents - March 1st ................ 389,405 256,953
----------- -----------
Cash and Equivalents - September 30th ........... $ 256,434 $ 361,722
=========== ===========
Interest Paid for the Period .................... $ 1,252 $ 1,979
=========== ===========
Taxes Paid for the Period ....................... $ 7,774 $ 10,785
=========== ===========
SEE ACCOUNTANTS' COMPILATION REPORT and
NOTES TO FINANCIAL STATEMENTS
5
THE MERIDIAN RESIDENTIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
NOTE 1. ORGANIZATION
- ------
THE MERIDIAN RESIDENTIAL GROUP, INC. was incorporated in the State of
New York on February 28, 1996 to operate as a mortgage banking company. The
Company is also licensed to do business in the States of New Jersey and
Connecticut.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
- ------
Cash and Equivalents
--------------------
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments with a maturity of three months or less as
cash equivalents.
Revenue Recognition
-------------------
Revenue primarily consisting of Loan Origination Fees is earned upon
the completion and closing of the mortgage. Certain related expenses such
as Postage and Appraisal Costs offset related revenue. An allowance for
doubtful accounts is provided when and if a particular receivable evidences
a collection problem. As of September 30, 2000, management considered all
receivables to be collectible, accordingly, no allowance has been set up.
Concentration of Credit Risk
----------------------------
The Company maintains their cash accounts at various financial
institutions. The balances, at times may exceed federally insured limits.
Advertising
-----------
The Company expenses Advertising Costs as they are incurred. For the
period ended September 30, 2000 these expenses amounted to $41,654.
6
THE MERIDIAN RESIDENTIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
Fixed Assets
------------
Fixed assets are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. All
Leasehold Improvements are depreciated over the term of the lease. Revenue
was charged with depreciation expense of $13,299 for the period ended
September 30, 2000.
Assumptions
-----------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
NOTE 3. LOAN PAYABLE - CHASE MANHATTAN BANK
- ------
The Corporation had a $150,000 Revolving Line of Credit. At February
29, 2000, the Corporation was obligated for 0, and canceled the credit
line.
NOTE 4. COMMITMENTS
- ------
The Company leases space in New York and New Jersey.
The lease in New York is for 6 years terminating August 31, 2005. The
following are the annual minimum rental payments:
2000 $ 45,000
2001 45,000
2002 48,000
2003 51,000
2004 51,000
2005 25,500
7
THE MERIDIAN RESIDENTIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
The Corporation leases two locations in New Jersey.
1) Perth Amboy - $700 per month through August 31, 2000
and 2) Woodridge - $852.75 per month through April 30, 2001.
In addition, there are rent escalations for real estate tax, which at
this time are unknown.
NOTE 5. INCOME TAXES
- ------
The Corporation has elected to be taxed on the cash basis. The accrual
for Income Taxes payable and the expense related, reflect the taxes due on
the net income for cash basis.
Temporary differences between the recognition of certain income and
expense items for income tax purposes and financial reporting purposes are
as follows:
Federal Tax $ 5,102
State & City 2,966
------
Total 8,068
NOTE 6. PROPOSED MERGER
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In July 2000, The Meridian Residential Group Inc. ("The Company")
signed an agreement and plan of merger with Equitex Inc. in which The
Company will exchange all of its common stock for 425,000 preferred shares
of Equitex Inc. with stated value of $8.00 per share convertible into
shares of Equitex Inc. common stock at $7.00 per share. Furthermore, there
is a contingent consideration based upon performance, in which Equitex Inc.
will issue to The Company additional shares of its common stock.
Effective September 30, 2000, the Meridian Residential Group, Inc. was
acquired by GR.Com.Inc. a wholly owned subsidiary of Equitex Inc.
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THE MERIDIAN RESIDENTIAL GROUP, INC.
SCHEDULE OF OPERATING EXPENSES
FOR THE SEVEN MONTHS ENDED SEPTEMBER 30, 2000 and 1999
2000 1999
---- ----
OPERATING EXPENSES:
Salaries ............................ $ 333,738 $ 333,978
Commissions ......................... 745,406 732,547
Advertising and Promotion ........... 41,654 32,381
Office .............................. 27,049 33,233
Automobile .......................... 10,377 7,525
Postage ............................. 2,114 4,480
Rent ................................ 41,203 56,611
Telephone ........................... 22,761 30,156
Travel and Shows .................... 23,831(A) 15,879
Computer ............................ 21,056 10,349
Insurance ........................... 7,519 12,056
Medical Insurance and Employee
Benefits .......................... 24,064 22,472
Dues and Subscriptions .............. 2,041 5,309
Equipment Leases .................... 5,971 10,281
Professional Fees ................... 84,796(B) 11,375
Payroll Taxes ....................... 19,063 18,722
Interest Expense .................... 1,252 1,979
Utilities ........................... 8,710 7,529
Maintenance ......................... 2,412 6,224
----------- -----------
TOTAL OPERATING EXPENSES ... $ 1,425,017 $ 1,353,086
=========== ===========
(A) Travel & Shows - $15,952 Related to Merger
(B) Professional Fees - $66,135 Related to Merger
SEE ACCOUNTANTS' COMPILATION REPORT and
NOTES TO FINANCIAL STATEMENTS
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