U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For
the fiscal year ended: DECEMBER 31, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE
REQUIRED) For transition period from _____ to _____
Commission File Number: 0-12374
EQUITEX, INC.
(Name of small business issuer in its charter)
DELAWARE 84-0905189
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7315 EAST PEAKVIEW AVENUE, ENGLEWOOD, COLORADO 80111
(Address of principal executive offices)(Zip Code)
Issuer's telephone number: (303) 796-8940
Securities registered under Section 12 (b) of the
Exchange Act:
NONE
Securities registered under Section 12 (g) of the
Exchange Act:
COMMON STOCK, $.02 PAR VALUE
(Title of Class)
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Exchange during the past 12 months
(or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
Days: Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained in this form, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB: /X/
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $34,478,670 based on the last sale price of the Registrant's
common stock on March 26, 2001, ($5.50 per share) as reported by the Nasdaq
Stock Market.
The issuer had 7,071,618 shares of common stock outstanding as of March 26,
2001.
Documents incorporated by reference: YES
EQUITEX, INC.
FORM 10-K
THIS REPORT MAY CONTAIN CERTAIN "FORWARD-LOOKING" STATEMENTS AS SUCH TERM IS
DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 OR BY THE
SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND RELEASES, WHICH
REPRESENT THE REGISTRANT'S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED
TO, STATEMENTS CONCERNING THE REGISTRANT'S OPERATIONS, ECONOMIC PERFORMANCE,
FINANCIAL CONDITION, GROWTH AND ACQUISITION STRATEGIES, INVESTMENTS, AND FUTURE
OPERATIONAL PLANS. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE
NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS
"MAY", "WILL", "EXPECT", "BELIEVE", "ANTICIPATE", "INTENT", "COULD", "ESTIMATE",
"MIGHT", OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE
TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN
OF WHICH ARE BEYOND THE REGISTRANT'S CONTROL, AND ACTUAL RESULTS MAY DIFFER
MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT FACTORS, INCLUDING UNCERTAINTY
RELATED TO ACQUISITIONS, GOVERNMENTAL REGULATION, MANAGING AND MAINTAINING
GROWTH, THE VALUE OF THE REGISTRANT'S INVESTMENTS, THE OPERATIONS OF THE
REGISTRANT'S INVESTEE COMPANIES, VOLATILITY OF STOCK PRICE AND ANY OTHER FACTORS
DISCUSSED IN THIS AND OTHER REGISTRANT FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(a) General development of business.
The Registrant was organized under the laws of the State of Delaware in 1983 and
elected to become a business development company and be subject to the
applicable provisions of the Investment Company Act in 1984. Until January 4,
1999, Equitex, Inc. (the "Registrant") was a business development company
("BDC") which is a form of closed-end, non-diversified investment company under
the Investment Company Act of 1940 (the "Investment Company Act"). A BDC
generally must maintain 70% of its assets in new, financially troubled or
otherwise qualified companies, known as investee companies, and offers
significant managerial assistance to such companies. BDC's are not subject to
the full extent of regulation under the Investment Company Act. The Registrant
primarily was engaged in the business of investing in and providing managerial
assistance to developing companies which, in its opinion, would have a
significant potential for growth. The Registrant's investment objective was to
achieve long-term capital appreciation, rather than current income, on its
investments.
At a special stockholders meeting held on April 3, 1998, the Registrant's
stockholders authorized the Registrant to change the nature of its business and
withdraw its election as a BDC under the Investment Company Act. The withdrawal
became effective upon the Securities and Exchange Commission's receipt of the
Registrant's notice of election of withdrawal which was filed on January 4,
1999. Following the withdrawal, the Registrant is no longer subject to the
regulatory provisions of the Investment Company Act for BDC's, such as
insurance, custody, composition of the board, affiliated transactions and
compensation arrangements. Despite the Registrant's withdrawal of its election
as a BDC, the Registrant continues to be subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Under
the Exchange Act, the Registrant continues to file periodic reports such as Form
10-K and Form 10-Q, as well as reports on Form 8-K, proxy statements and any
other reports required under the Exchange Act.
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FIRST TELESERVICES CORP.
On August 13, 1998, the Registrant acquired all of the outstanding stock of
First TeleServices Corp. ("FTC") in exchange for 625,000 shares of the
Registrant's common stock. As a result of the transaction, FTC became a wholly
owned subsidiary of the Registrant. As a marketing arm for financial
institutions, FTC's business plan calls for it to perform as a consumer finance
company, offering financial products and services to the sub-prime market. FTC
continues to be a development stage company which has generated no significant
revenues.
FIRST TELEBANC CORP.
Through December 31, 2000, the Registrant has acquired shares totaling 8.1% of
the outstanding common stock of First TeleBanc Corp. at December 31, 2000, a
bank holding company which operates through its wholly owned subsidiary, Net
First National Bank, in Boca Raton, Florida. On May 4, 1999, the Registrant
signed a definitive agreement to merge First TeleBanc Corp. with and into the
Registrant. In August 1999, the Registrant filed an application with the Federal
Reserve Bank of Atlanta for approval to become a bank holding company. On August
2, 2000, the Registrant announced its agreement for the acquisition of First
TeleBanc Corp. had expired on July 31, 2000. In addition, as a result of certain
deficiencies noted in the operations of First TeleBanc's operating bank, Net
First National Bank, following the 1999 annual examination performed by the
Office of the Comptroller of the Currency ("OCC"), the Registrant withdrew its
application with the Federal Reserve to become a bank holding company. The
Registrant may engage in future discussions with First TeleBanc Corp. at an
appropriate time which, although there is no assurance, may result in a new
agreement and submission of application to the Federal Reserve.
FIRST BANKERS MORTGAGE SERVICES, INC.
On August 23, 1999, the Registrant acquired First Bankers Mortgage Services,
Inc. ("FBMS"). FBMS, a Florida corporation, is a full service mortgage banking
company headquartered in the Fort Lauderdale, Florida area. The Registrant
acquired all of the outstanding common stock of FBMS from its sole shareholder,
Vincent Muratore. The total aggregate purchase price for FBMS, was 1,000 shares
of 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 the Registrant, FBMS, Vincent Muratore and FBMS
Acquisition Corp., as amended. Under Delaware law, the Registrant was 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 FBMS transaction, the Registrant and its subsidiaries
invested approximately $10.7 million in FBMS for working capital purposes.
Subsequent to the acquisition of FBMS, all outstanding shares of FBMS were
transferred to our wholly owned subsidiary, nMortgage, Inc.
On August 15, 2000, the Registrant reached an agreement to rescind the
acquisition of FBMS effective June 28, 2000. Under the terms of the rescission
agreement, all assets and liabilities of FBMS as of June 28, 2000 were returned
to the former owner of FBMS The Registrant retained certain intellectual
property rights valued at approximately $2,500,000 related to the Internet-based
mortgage banking business of nMortgage. At December 31, 2000, the Registrant's
assessment of website development costs for impairment indicated that the
carrying value of $2,083,000 had been impaired. This assessment included
an evaluation of undiscounted future cash flows and the results of an external
appraisal. As a result, the carrying value of the website development costs was
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reduced by $353,000. Although all of the performance conditions were not met,
the Registrant intends 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. This will result in an aggregate of 300 shares
of Series E Preferred Stock outstanding. As a result of the rescission, we were
divested of the assets, liabilities, and operations of FBMS as of June 28, 2000
and as a result, recorded a loss of $3,979,000, which represents the write off
of the Registrant's investment in FBMS, including remaining goodwill as of the
date of the rescission, net of technological rights retained. The operating
results of FBMS have been included in the consolidated statement of operations
from the date of acquisition through the date of rescission.
The holder of the Series E Convertible Preferred Stock is not entitled to
dividends, does 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 an
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.
INNOVATIVE GAMING CORPORATION OF AMERICA
On January 3, 2000, the Registrant announced that it had executed a definitive
agreement whereby all of the outstanding common stock of nMortgage was to be
acquired by Innovative Gaming Corporation of America ("IGCA"), a reporting
company under the Securities Exchange Act of 1934, whose common stock trades on
the Nasdaq National Market under the symbol "IGCA" (the "Proposed nMortgage
Transaction"). On September 21, 2000, the Registrant and IGCA jointly announced
the termination of the Proposed nMortgage Transaction. Both parties agreed to
mutually terminate the Proposed nMortgage Transaction given the rescission of
the FBMS transaction and the Registrant's acquisition of the Meridian
Residential Group as described below.
MERIDIAN RESIDENTIAL GROUP
On September 7, 2000 the Registrant signed an agreement to acquire by merger all
of the issued and outstanding common stock of the Meridian Residential Group,
Inc. ("Meridian Residential") through a newly-formed wholly-owned subsidiary,
GR.com, Inc., in exchange for 425,000 shares of the Registrant's Series F
Convertible Preferred Stock. The acquisition was completed on September 27,
2000. The Series F Convertible Preferred Stock has a stated value of $8.00 per
share and is convertible into shares of the Registrant's common stock any time
and from time to time at the option of the holder until March 7, 2004, at a
conversion price of $7.00 per share. On March 7, 2004, all remaining outstanding
Series F Preferred Stock shall be automatically converted into shares of common
stock. To the extent the holders realize proceeds from the sale of the shares of
common stock in an amount that is less than conversion price, the Registrant has
agreed to issue the holders additional shares of common stock having a market
value equal to any such deficiency. Subsequent to the merger, GR.com changed its
name to Meridian Services, Inc.
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 $2,648,000, 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 of Equitex 2000,
Inc. as described below, Equitex 2000 will agree to issue additional shares of
common stock to the Meridian Residential 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
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.
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In connection with the Meridian Residential acquisition, nMortgage acquired from
Meridian Capital Group, LLC, the proprietary business model, website,
trademarks, corporate names and all related intellectual property rights related
to the Meridian Residential GreatRate.com business, including the names
GreatRate.com and GreatRateMortgage.com for a cash purchase price of $850,000.
The Meridian Residential 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.
KEY AND NOVA FINANCIAL SYSTEMS
On June 29, 2000 the Registrant signed a definitive agreement with Nova
Financial Systems, Inc. and Key Financial Systems, Inc., companies under common
control with nearly an identical ownership structure, 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. The Registrant intends to 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 the
Registrant's assets and liabilities to Equitex 2000 and the spin-off of Equitex
2000 common stock as described below; (ii) the approval of the Nova Financial
Systems, Inc. and Key Financial Systems, Inc. mergers by the Registrant's
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.
In connection with the acquisitions of Nova Financial Systems, Inc. and Key
Financial Systems, Inc. the Registrant intends to distribute all of the
Registrant's assets and liabilities to Equitex 2000, Inc., a wholly-owned and
Delaware-chartered subsidiary of the Registrant. As part of this distribution,
all of the outstanding shares of Equitex 2000 common stock will be distributed
to the Registrant's stockholders on the basis of one share of common stock of
Equitex 2000 for each share of the Registrant's common stock. Stockholder
approval is required to complete the distribution and spin-off. Further details
regarding the distribution and spin-off can be found under Item 1 (c) below.
REMAINING INVESTEE COMPANIES
As an operating company, the nature of the Registrant's business has changed
from investing in a portfolio of securities to achieve gains on appreciation and
dividend income, to being actively engaged in the management of businesses for
the generation of income from those operations. Thus, withdrawal of the
Registrant's election as a BDC has resulted in a significant change in the
Registrant's method of accounting from the value method of accounting required
of investment companies to either fair value or historical cost accounting,
depending on the classification of the investment and the Registrant's intent
with respect to the period it intends to hold the investment.
In fiscal years prior to 1999 as a BDC, the Registrant concentrated its efforts
in acquiring interests in more mature investee companies, in some cases, through
asset-based financing transactions. In that regard, the Registrant devoted more
of its time to providing managerial assistance to fewer companies, most of which
time was devoted to investees RDM Sports Group, Inc., VP Sports, Inc. and
IntraNet Solutions, Inc., which constituted a significant portion of the
Registrant's investment portfolio. The President of the Registrant was President
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and a director of RDM Sports Group from 1987 to June 1997 and was director of
IntraNet Solutions and its predecessor from February 1991 to October 1997.
During the fourth quarter of 1997, the Registrant received 2,000,000 shares of
common stock of VP Sports, Inc. ("VP Sports") in payment for the transfer of a
letter of intent for the acquisition of an unrelated company involved in the
sporting goods business as well as merger and acquisition advisory services
rendered to VP Sports. The total value for the transfer and services was
$250,000 which represents the Registrant's cost basis for the shares.
On July 27, 1999 VP Sports completed an acquisition pursuant to which Victoria
Precision, Inc. ("Victoria"), a corporation incorporated under the laws of the
Province of Quebec, Canada, merged with and into a wholly owned subsidiary of VP
Sports. Victoria is a Canadian manufacturer and distributor of a broad range of
bicycles and tricycles. VP Sports acquired all of the capital stock of Victoria
resulting in ownership of all of its assets, liabilities and business
operations. The transaction included future rights to a four-year international
consulting and non-compete agreement executed with an entity affiliated with
Victoria's former principal stockholder.
In June 1999, VP Sports commenced a private placement through which it offered
up to 40 units with each unit consisting of 100 shares of $1,000 per share 8%
preferred stock, 12,500 shares of common stock at $2.00 per share, and 287,500
warrants to purchase 287,500 shares of common stock at $.10 per share. Given the
increase in shares outstanding following the VP Sports private placement, the
Registrant's ownership percentage in VP Sports has been substantially reduced
resulting in Equitex owning approximately 13.6% of VP Sports' outstanding common
stock at December 31, 2000. For the first two quarters of 1999, the Registrant
consolidated the operations of VP Sports with that of the Registrant and its
subsidiaries. Due to the changes in ownership percentage, the Registrant is
utilizing the equity method of accounting for its ownership in VP Sports
beginning in the year ended December 31, 1999.
During 1998, the Registrant received 1,500,000 shares of the common stock of
Triumph Sports, Inc. ("Triumph") in payment of merger and acquisition advisory
services totaling $375,000. During 1997, Triumph was unsuccessful in its attempt
to acquire a golf accessory manufacturer. During 1998, Triumph acquired five
health food, nutritional and supplement related retail outlets in the South
Florida area. Triumph operates two of its retail outlets as an authorized
franchisee of General Nutrition Centers ("GNC"). In late 1999, Triumph received
notice from GNC that it was operating in contravention of clauses in its
franchise agreement related to owning and operating non-GNC franchised stores.
As a result, in December 1999, the Registrant sold one of its non-GNC franchised
operations to a third party for the value of the store's inventory plus a
$200,000 five year promissory note. During 2000, Triumph closed another of its
non-GNC franchised operations when its lease expired. During 2001, Triumph
intends to close its remaining non-GNC franchised operation.
During the year ended December 31, 2000, the Registrant was not involved in any
bankruptcy, receivership or similar proceedings. Other than explained above, the
Registrant has not undergone material reclassification, merger or consolidation;
has not acquired or disposed of any material amount of assets otherwise than in
the ordinary course of business; and has not experienced any material change in
its mode of conducting business.
(b) Financial information about segments.
Information relating to the Registrant's operating segments can be found in Note
19 to the Registrant's consolidated financial statements for the year ended
December 31, 2000.
(c) Narrative description of business.
EQUITEX
As a result of the Registrant's decertification as a BDC on January 4, 1999, the
Registrant is now a holding company operating through its wholly owned
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subsidiaries, FTC and Meridian Services, Inc., and its majority owned
subsidiaries nMortgage and Triumph. In addition, the Registrant includes in its
consolidated financial statements, on an equity basis, its ownership interest in
VP Sports.
During each of the past four years, on a stand-alone basis, the Registrant has
relied mainly on sales of investment securities for its revenues. As a result of
the Registrant's change from an investment company to an operating company and
the cessation of its investment activities, the Registrant will only be able to
rely on sales of investments for its revenues until such time as its investment
portfolio has been liquidated. During 1999 and 2000, the Registrant sold a
significant portion of its investment portfolio leaving only a small portion of
its investment in IntraNet Solutions, Inc. remaining. Further sales of IntraNet
Solutions common stock were made during the first quarter of 2001. As of the
filing of this report, the Registrant holds approximately 2,000 shares of
IntraNet Solutions common stock. The amount and timing of past and future sales
is primarily dependent upon the securities markets and the liquidity of each
investment.
In order to provide for future revenue streams as an operating company and as
part of the Registrant's overall decertification plan, the Registrant is
proceeding with the Nova Financial Systems, Inc. and Key Financial Systems, Inc.
acquisitions as described above in Item 1 (a). The Registrant, Nova Financial
Systems, Inc. and Key Financial Systems, Inc. recently agreed to extend the
closing date for this transaction to ninety days after the filing of a
definitive proxy statement for a special meeting of the Registrant's
stockholders provided the meeting is held on or before March 14, 2002
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 First 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 First 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 approximately 82,000 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 144 employees.
They provide credit card portfolio management services including application
processing, customer service, mediation, collections, risk management and
accounting pursuant to each bank's policies.
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: a proprietary
application processing system; a proprietary ACD (Automated Call Distribution)
telephone system; a proprietary dialing system using Dialogic hardware;
customized reporting from any application system; FoxPro, Sequel Server and
Microsoft Access Databases; and NT Network with interfaces to credit bureaus.
Support equipment includes: 8 servers; 250 personal computers; and DS3 (576
incoming and outbound telephone lines).
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
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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.
The opinions on the size of the sub-prime market vary depending on the
particular label described, however, a 1996 survey from Faulkner and Gray, a
respected research firm, estimated the size of this market in the U.S. at 30
million and growing. More recent surveys by MasterCard International indicate
the number to be at least twice as large. There are two basic segments in this
market:
1. EMERGING/THIN FILES - includes ethnic/immigrants groups, youth,
elderly on fixed income, divorced, widows/widowers; and
2. RECOVERING/CREDIT IMPAIRED - includes credit abusers with a history of
credit problems including bankruptcies and those who have experienced
a catastrophic one-time life event that destroyed their credit, such
as death, illness or divorce.
According to MasterCard International, this large underdeveloped segment
includes 25-30% of U.S. households. This market has continuous segment growth
and a 50% higher profit potential than the industry average (i.e. interest
rates, processing fees, annual/membership fees, ancillary fees, etc.).
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: fully
secured; partially secured; high fee unsecured; and low limit unsecured.
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 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.
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 First 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 First National Bank. This
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suspension was at the request of the Bank to conform to the requirements of a
Consent Order between Net First National Bank and Office of the Comptroller of
the Currency. Net First 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 First National Bank
notified Key Financial Systems, Inc. to resume marketing the Pay As You Go
credit card on its behalf.
The Registrant intends to distribute all of its assets and liabilities and
spin-off all outstanding shares of Equitex 2000, Inc. to its stockholders. If
the stockholders approve the distribution and spin-off, it is anticipated the
Registrant's 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.
The Registrant 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 Meridian Services, Inc. (formerly 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 the Registrant.
In addition, Equitex 2000 will assume all liabilities and will indemnify the
Registrant and assume the 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. UNGAR, Case No. 98-CV-2437 (Dist.
Ct. Arapahoe County, Colorado).
While the spin-off of shares of Equitex 2000 will be a taxable distribution to
the Registrant's stockholders, because the Registrant has 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 the Registrant to Equitex 2000.
The Registrant 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.
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.
-8-
Prior to the distribution to the Registrant's 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.
The Registrant's 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.
NMORTGAGE & MERIDIAN SERVICES
nMortgage is a business to consumer retail Internet mortgage banking company
which is developing its business to business mortgage services technology and
provides consulting services to the mortgage industry. As described more fully
above, in September 2000, the Registrant completed the acquisition of Meridian
Residential by merging it with GR.com, the Registrant's newly formed subsidiary.
Subsequent to the merger, GR.com changed its name to Meridian Services, Inc.
("Meridian Services"). nMortgage utilizes the services of Meridian Services'
virtual back office.
Meridian Residential was established on February 28, 1996. In its initial phase
Meridian Residential 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 became a provider of mortgage management services and E commerce
infrastructure platforms to the mortgage industry. As a result, Meridian
Residential began to seek a strategic alliance with an entity that could provide
technology compatible with its Internet streamlined virtual back office. Details
of the new business model and strategic alliance partner are detailed below.
Since March 1, 2000, Meridian Services has laid the groundwork for a new
business model. It has developed a web-based strategy called GreatRate.com with
the web address bearing the same name www.GreatRate.com. Through this site,
which is owned by nMortgage, Meridian Services has developed 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 Services, to reach out
to small banks and financial institutions allowing them to utilize Meridian
Services/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 without having to maintain an
infrastructure to process residential mortgages.
Meridian Services will provide the back office support to help originate, fully
process, underwrite and close residential mortgages. In order to properly
support this program, Meridian Services will utilize its high end website that
would allow its banking partners and their customers to access current rates and
loan status in real time.
nMortgage has been developing, and in conjunction with Meridian Services
introduced in the first quarter 2001, a business to business Internet technology
solution for the mortgage industry. The site will be targeted to local savings
banks and other similar financial institutions, individual mortgage and small
mortgage brokers, and eventually may be offered to mortgage related businesses
not currently offering mortgage loans such as insurance brokers, stockbrokers,
tax preparers, financial planners, etc. This site will allow these businesses to
leverage their client databases by offering a private label solution offering
Internet based mortgage loans.
On January 2, 2001, nMortgage and Meridian Services announced an agreement with
Mortgagebot, LLC of Cedarburg, Wisconsin, to provide the back office system for
originating and processing mortgage loans over the Internet. Mortgagebot is a
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complete online lending service available 24 hours a day, 365 days a year that
was built exclusively for the Internet. Utilizing Mortgagebot's existing
technology, nMortgage and Meridian Services will be able to offer customers a
complete Internet-based mortgage solution from application to closing.
Utilizing the nMortgage and Meridian Services business model along with the
Mortgagebot technology will enable Meridian Services to securely originate,
process, underwrite, approve and close mortgage loans on the Internet in a
seamless interactive process with consumers from the point-of-sale to closing.
This integrated system will allow Meridian Services to provide its business to
business customers with the ability to seamlessly outsource mortgage
origination, processing and closing activities to Meridian Services under a
private-label Website and technology system developed and hosted by Mortgagebot.
Utilizing this technology, Meridian Services will be able to provide its clients
with a fully interactive customized Web site system that connects the financial
institution and their customers directly to Meridian Services. In the first
quarter of 2001, Meridian Services has signed two agreements under this program.
In addition to the above strategy, mortgages are offered direct to the consumer
via the Internet utilizing the GreatRate.com website. Meridian Services had been
licensed to do business in New York, New Jersey and Connecticut. In March 2001
Meridian entered into an agreement with a financial institution allowing it to
offer its mortgage products in all fifty states. The financial institution,
utilizing its national charter and its private labeled Meridian Services-based
website, will be able to close loans in all fifty states. Meridian Services will
be purchasing these closed loans and effectively be operating in all fifty
states. The loans that Meridian Services will be purchasing will have been
pre-sold by Meridian Services to third party investors.
The business to business private label strategy will place a customized Internet
program with third parties that will receive a home page at a nominal price and
"back office" support by Meridian Services for all loans originated. Meridian
Services will not only earn fees from the mortgage loans but will become a
fee-based Internet Service Provider to third parties. This allows the loan
originator to offer an efficient online mortgage solution without the
significant time and expense involved in setting up and maintaining their own
Internet web site and related infrastructure. Once an application is submitted
through the web site either by the loan originator on behalf of the client or by
the client himself, Meridian Services handles processing the application on
behalf of the loan originator and offers it for underwriting to either Meridian
Services' preferred lenders or lenders used by the loan originator.
Meridian Services utilizes the "table funding" method for its traditional
residential mortgages. With the table funding process, Meridian Services
processes a borrower's application and prepares the file for underwriting. The
file is then offered to an Investor fitting the borrower's lending profile who
accepts the file for underwriting either directly or through its third party
underwriting agent. The process is then taken over by that Investor or its agent
who carries the loan through closing and funding. By employing this design,
Meridian Services is not responsible for funding these loans utilizing lines of
credit and thereby mitigates its exposure to interest expense, default events or
underwriting difficulties.
In 1999, mortgage origination volume in the U.S. was $1.3 trillion compared to
$1.5 trillion in 1998 and $834 billion for 1997. Demand for mortgage products
has been favorably affected by low interest rates, low unemployment rates,
increasing wages, high consumer confidence and strong housing starts and home
sales. The average loan amount increased to $132,930 in 1999 compared to
$127,000 in 1998. The retail origination market of the mortgage banking industry
is highly fragmented. According to the National Association of Mortgage Brokers,
approximately 20,000 mortgage brokers were operating in the U.S. in 1998.
The Internet has been emerging as a major source of mortgage originations.
Industry analysts predict that Internet mortgage originations will grow from
over $4.0 billion in 1998 to nearly $100.0 billion by 2003 as borrowers
recognize the convenience and benefits of shopping for a mortgage from the
comfort of their home or office. Capturing market share on the Internet will be
dependent upon access to consumers and the ability to consistently provide broad
product offerings at competitive rates.
Meridian Services competes with mortgage brokers, bankers and financial
institutions both large and small from locally owned mortgage businesses to
multi-national financial institutions. These competitors include nationally
recognized financial institutions with billions in assets and considerable
marketing budgets. With the increase in Internet-based mortgage originations,
many of the larger well-known mortgage companies have created web sites to
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attract customers. nMortgage and Meridian Services intend to market their
products to those consumers who would rather do business with smaller locally
based financial institutions and mortgage professionals who know the local
market and seek to provide more personal service.
Most states have laws and regulations governing the registration or licensing
and conduct of persons providing mortgage brokerage services. Such laws and
regulations also typically require certain consumer protection disclosures and
compliance with loan solicitation procedures and a variety of other practices,
throughout the various stages of the mortgage solicitation, application and
approval process. In addition to state law, federal law heavily regulates
mortgage brokerage services. Meridian Services is subject to regulations of
various federal entities including the Department of Housing and Urban
Development, Veterans Administration, Federal Housing Administration, Federal
National Mortgage Association, Government National Mortgage Association, Federal
Home Loan Mortgage Corporation and other agencies. These agencies impose various
rules and regulations which may include licensing and financial requirements,
discrimination policies and underwriting guidelines, among others. Failure to
comply with these requirements can lead to civil and/or criminal liability, loss
of approved status, demands for indemnification or loan repurchases from buyers
in the secondary market, rights of rescission for mortgage loans, class action
lawsuits and administrative and enforcement actions.
FIRST TELESERVICES CORP.
FTC is still developing its business and has not yet generated significant
income. As a marketing arm for financial institutions, FTC's business plan calls
for it to perform as a consumer finance company, offering an array of financial
products and services to the sub-prime market. These products will be developed
and serviced through correspondent relationships with companies specializing in
those particular products.
Initially, FTC intends to offer secured credit cards to large data bases of
customers through its debt transfer servicing program. "Debt transfer servicing"
is a term used in the collection industry which means using a new loan account
number to service and collect debt purchased in the secondary market. As
customers continue to make payments on their new accounts, thereby
rehabilitating their credit, the Registrant will begin cross selling other
financial and telecommunications products on a fee basis without the risk of
extending credit.
FTC's business is dependent upon the alliance partnerships it maintains with
other organizations for referral of debt portfolios which generate new
customers. Because FTC's business is ultimately dependent upon the quantity and
quality of these alliance partnerships, FTC must actively seek out new
partnerships while maintaining and evaluating its current relationships. If any
of these alliance partners fail to deliver quality products or services on a
timely basis, and if FTC is unable to develop alternative sources as required,
dissatisfied clients may turn to other sources to provide the products or
services they desire which may adversely affect FTC's business. During 1999, FTC
entered into a joint venture project which purchased a debt portfolio of
approximately $100 million in receivables from approximately 13,000 charged-off
credit accounts. This project met with limited success and generated limited
revenues. In addition, in the year 2000, FTC completed a mailing to
approximately 75,000 potential clients. This mailing was unsuccessful.
During the year 2000, while continuing to develop its business strategy, FTC
streamlined its operations and presently is operating on a minimal budget. FTC's
office lease expired on December 31, 2000 and the Company is presently operating
from the home of its President.
TRIUMPH SPORTS
At December 31, 2000, Triumph Sports owned and operated three vitamin and
nutritional supplement related retail stores in the Palm Beach, Florida area. In
March 2001, the company negotiated the early termination of its lease and closed
its final independent operation located in a Bally's fitness center. The
remaining two stores are registered franchisees of General Nutrition Centers
("GNC"). During 2000, Triumph closed one of its independent non-GNC franchised
stores after its lease expired. During 1999, Triumph also operated a fifth
location which was sold at the end of 1999 as explained more fully in Item 1 (a)
-11-
above. The Triumph GNC franchise agreements run for a period of ten years
expiring in 2008 and include renewals for two consecutive five-year terms
contingent upon GNC conditions and approval.
Each retail location typically employs one full-time manager and one to three
part-time employees. The GNC stores offer a wide-array of vitamins, nutritional
supplements, meal replacement products and other health and fitness products
targeted to a large consumer demographic seeking today's healthy and active
lifestyle. From children to senior citizens looking for vitamins, supplements,
books and advice for healthy living to triathletes and body builders seeking
nutritional supplements and meal replacements for their workout regimes, GNC
offers recognized high-quality branded products for all ages and fitness levels.
A majority of the products sold in the GNC outlets are GNC branded products with
additional offerings consisting mainly of meal replacement and nutritional
supplement products from popular major suppliers. The two smaller independent
stores located in Bally's fitness centers mainly offered meal replacement bars,
shakes, drinks, nutritional supplements, workout supplies and magazines targeted
to the Bally's consumers for their pre and post-workout convenience.
EMPLOYEES
The Registrant currently employs five full-time employees. In addition, FTC
employs one full-time employee and Triumph Sports employs 4 full and part-time
employees. nMortgage has two full-time employees while Meridian Services has 10
salaried and approximately 20 commissioned employees.
(d) Financial information about geographic areas.
Not applicable.
ITEM 2. PROPERTIES.
The Registrant's principal executive office is located in Englewood, Colorado.
The Registrant leases this space, consisting of approximately 1,800 square feet,
on a month-to-month basis for $2,500 per month, from a corporation in which the
Registrant's president is the sole stockholder. The Registrant believes these
terms to be no less favorable than those which could be obtained from a
non-affiliated party for similar facilities in the same area.
The Registrant also leases in Palm Beach Gardens, Florida an executive office
consisting of approximately 980 square feet. The lease payment is currently
$2,123 per month and increases by $82 per month in April of each year until the
lease expires in February 2004. The Registrant and its subsidiaries, nMortgage,
Triumph Sports and VP Sports, utilize this space.
Meridian Services leases a building with approximately 3,000 square feet of
office space in Brooklyn, New York. The lease payment is currently $3,750 per
month increasing to $4,000 per month in January 2002 and $4,250 per month in
September 2003. This lease expires in August 2005.
Triumph Sports currently leases retail space in three separate locations one of
which expires during the first quarter of 2001 following payments of $2,082. Of
the remaining two leases, one has annual rent payments of $18,363 in 2001 and
$12,640 in 2002 and expires in August 2002, and the other has annual payments of
$25,550 in 2001, $25,900 in 2002, $26,950 in 2003 and $14,000 in 2004 and
expires in June 2004.
ITEM 3. LEGAL PROCEEDINGS.
On August 18, 2000, William G. Hays, Jr., liquidating agent for RDM Sports
Group, Inc., and related debtors, filed an adversary proceeding against the
Registrant, Smith Gambrell and Russell, LLP, David J. Harris, P.C. and David J.
Harris, in the United States Bankruptcy Court for the Northern District of
Georgia, Newnan Division, Adversary Proceeding No. 00-1065. The liquidating
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agent alleges that the Registrant breached its October 29, 1987 consulting
agreement with RDM, breached fiduciary duties allegedly owed to RDM, and that
the Registrant is liable for civil conspiracy and acting in concert with
directors of RDM. The liquidating agent is seeking unspecified compensatory and
punitive damages, along with attorney's fees, costs and interest. On April 2,
2001, the court granted the Registrant's motion to enforce the arbitration
clause contained in the consulting agreement. The Registrant intends to
vigorously defend this matter. Because this matter is in the preliminary stages
and no arbitration date has been set, it is too early to predict the outcome of
this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 27, 2000, the Registrant held its Annual Meeting of Stockholders.
The stockholders re-elected each of the Registrant's three directors to serve
until the next Annual Meeting of Stockholders and the votes were cast as
follows:
For Withhold Authority
--------- ------------------
Henry Fong 6,427,821 62,281
Russell L. Casement 6,428,191 61,376
Aaron Grunfeld 6,428,281 61,218
Additionally, the following proposal was presented and voted upon at the meeting
and the votes were cast as follows:
To ratify the appointment of Gelfond Hochstadt Pangburn, P.C. as the independent
auditor of the Registrant for the year ending December 31, 2000.
For Against Abstain Non-Voted
--------- ------- ------- ---------
Shares voted 6,436,424 8,637 5,501 0
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information
The Registrant's common stock trades on the Nasdaq SmallCap Stock Market under
the symbol EQTX. The table below states the quarterly high and low last sale
prices for the Registrant's common stock as reported by The Nasdaq Stock Market,
and represent actual high and low last sale prices.
Last Sale
---------
Quarter ended High Low
------------- ---- ---
1999
----
March 31, 1999 $12.44 $6.75
June 30, 1999 $41.88 $9.50
September 30, 1999 $13.38 $9.50
December 31, 1999 $10.00 $8.00
2000
----
March 31, 2000 $11.13 $6.63
June 30, 2000 $9.38 $5.38
September 30, 2000 $8.00 $5.63
December 31, 2000 $6.25 $4.13
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(b) Holders
The number of record holders of the Registrant's common stock as of March 27,
2001 was 2,127 according to the Registrant's transfer agent. This figure
excludes an indeterminate number of shareholders whose shares are held in
"street" or "nominee" name.
(c) Dividends
The Registrant has not declared or paid cash dividends on its common stock, nor
does it anticipate paying any cash dividends in the foreseeable future. The
Registrant currently intends to retain any future earnings to fund operations
and for the continued development of its business. While a BDC, the Registrant
made an in-kind distribution of its larger investment positions to its
stockholders. Any further in-kind distribution will be made only when, in the
judgment of the Registrant's Board of Directors, it is in the best interest of
the Registrant's stockholders to do so. It is possible that the Registrant may
make an in-kind distribution of securities, which have appreciated or
depreciated from the time of purchase depending upon the particular
distribution. The Registrant has not established a policy as to the frequency or
size of distributions and indeed there can be no assurance that any future
distributions will be made. To date, only one such distribution has been
approved by the Board of Directors and was distributed in April 1988.
(d) Recent sales of unregistered securities
Not Applicable
ITEM 6. SELECTED FINANCIAL DATA.
The following tables contain selected financial data of the Registrant for the
previous five years. As a result of the Registrant's change in accounting method
from that of an investment company to that of an operating company following the
Registrant's decertification as a BDC on January 4, 1999, as described more
fully in Part I Item 1. Business, the following information is being presented
in two separate tables. For the years ended December 31, 2000 and 1999, a table
reflecting the Registrant's consolidated selected financial data as an operating
company is being furnished. The selected financial data presented in the second
table represents the Registrant's operations as an investment company for each
of the fiscal years ended December 31, 1998, 1997 and 1996, respectively.
- --------------------------------------------- ---------------- -----------------
2000 1999
- --------------------------------------------- ---------------- -----------------
Revenues $2,869,291 $2,340,175
- --------------------------------------------- ---------------- -----------------
Net loss (7,367,401) (7,716,559)
- --------------------------------------------- ---------------- -----------------
Net loss applicable to common stockholders (8,617,401) (10,985,572)
- --------------------------------------------- ---------------- -----------------
Basic & diluted net loss per common share ($1.21) ($1.64)
- --------------------------------------------- ---------------- -----------------
Total assets $9,431,627 $41,744,937
- --------------------------------------------- ---------------- -----------------
Total long-term liabilities 79,627 0
- --------------------------------------------- ---------------- -----------------
Redeemable preferred stock 1,536,000 0
- --------------------------------------------- ---------------- -----------------
Cash dividends 0 0
- --------------------------------------------- ---------------- -----------------
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- --------------------------------------------- ---------------- ----------------- ----------------
1998 1997 1996
- --------------------------------------------- ---------------- ----------------- ----------------
Revenues $447,840 $378,391 $632,765
- --------------------------------------------- ---------------- ----------------- ----------------
Realized gain from sales of investments 1,108,340 1,003,951 1,226,190
- --------------------------------------------- ---------------- ----------------- ----------------
Net investment (loss) and realized gain on (925,245) (401,649) 639,874
investments after income taxes
- --------------------------------------------- ---------------- ----------------- ----------------
Increase (decrease) in unrealized (1,056,054) (3,521,718) (5,206,732)
appreciation on investments net of deferred
income taxes
- --------------------------------------------- ---------------- ----------------- ----------------
Net increase (decrease) in net assets $(1,981,299) $(3,923,367) $(4,566,858)
resulting from operations
- --------------------------------------------- ---------------- ----------------- ----------------
Net increase (decrease) in net assets $(0.45) $(1.25) $(1.42)
resulting from operation per share
- -------------------------------------------- ---------------- ----------------- ----------------
Total assets $5,859,075 $5,038,425 $10,478,003
- --------------------------------------------- ---------------- ----------------- ----------------
Total long-term liabilities 0 0 0
- --------------------------------------------- ---------------- ----------------- ----------------
Cash dividends 0 0 0
- --------------------------------------------- ---------------- ----------------- ----------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of the Registrant's financial condition
and results of operations should be read in conjunction with the consolidated
financial statements and notes thereto for the years ended December 31, 2000,
1999 and 1998. As a result of the Registrant's change from a BDC to an operating
company as of January 4, 1999 effective January 1, 1999, the Registrant is
presenting its financial statements as an operating company for the years ended
December 31, 2000 and 1999, and as an investment company for the year ended
December 31, 1998. Accordingly, the consolidated balance sheets, consolidated
statement of operations and consolidated statement of cash flows for the years
ended December 31, 2000 and 1999 are presented for the Registrant as an
operating company. These statements include the accounts of the Registrant, its
wholly owned subsidiary FTC and majority owned subsidiaries nMortgage and
Triumph (four retail locations) for the entire year ended December 31, 2000, as
well as its wholly-owned subsidiary Meridian Services for the fourth quarter of
2000. Also included in the December 31, 2000 consolidated financial statements
are the results of the Registrant's 13.6% ownership interest in VP Sports which
is accounted for on an equity basis and the results of FBMS through June 28,
2000. The 1999 statements include the Registrant, FTC and Triumph (five retail
locations) as well as the accounts of majority owned subsidiary nMortgage and
the Registrant's 35.7% investment in VP Sports for September through December
1999 following the Registrant's acquisition of FBMS, and VP Sports' acquisition
of Victoria Precision both in August 1999. The financial statements for the year
ended December 31, 1998 continue to be presented in the investment company
format as audited in those years.
(a) Liquidity and Capital Resources.
As a result of the Registrant's change from a BDC to an operating company in
1999, the amount and sources of the Registrant's liquidity changed
significantly. Prior to 1999 while operating as a BDC, the Registrant relied
primarily on sales of portfolio securities as well as fees charged to investees
for various services to fund its operations. During 1999 and 2000, as the
Registrant continued to restructure its business, the Registrant relied
primarily on private placements of equity securities to fund its operations and
acquisitions as it sought to become an operating company. However, as in
past years, during 1999 and 2000, the Registrant continued to divest certain of
its portfolio securities to generate additional income.
For the year 2001, the Registrant, prior to consolidation of any subsidiaries,
anticipates that its liquidity and capital resources are sufficient to fund its
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operations as it works toward completing its acquisitions of Key Financial
Services and Nova Financial Services. While continuing to divest itself of
portfolio securities remaining from the Registrant's BDC operations, the
Registrant may also be required to fund its operations and acquisitions through
the sale of equity securities which may cause further dilution to the
Registrant's stockholders.
Ordinarily, all of the Registrant's subsidiaries operate on a stand-alone basis
and each is individually responsible for its own liquidity. However, the
Registrant may need to assist its subsidiaries from time-to-time should
liquidity issues arise. Should additional liquidity be necessary to fund the
operations of its subsidiaries or to complete any merger or acquisition, the
Registrant believes it has sources available, including the sales of certain
investments or the private placement of equity securities, to cover its needs.
On August 23, 1999, the Registrant acquired First Bankers Mortgage Services,
Inc. ("FBMS") a mortgage banking company headquartered in Ft. Lauderdale,
Florida in exchange for 250 shares of the Registrant's Series E Convertible
Preferred Stock. In September 1999 the Registrant transferred all outstanding
shares of FBMS to its then wholly owned subsidiary, nMortgage, Inc. On August
15, 2000, the Registrant reached an agreement to rescind the acquisition of
FBMS, effective June 28, 2000. Under the terms of the agreement, all assets and
liabilities of FBMS were returned to the previous owner effective June 28, 2000.
As a result of the rescission, nMortgage retained certain technological rights
which were developed after August 23, 1999 and funded by the Registrant's
investment. These technological rights are valued at approximately $1.7 million,
net of accumulated depreciation at December 31, 2000. Also as part of the
agreement and rescission, the Registrant has agreed to issue up to 50 additional
shares of its Series E Convertible Preferred Stock related to performance
conditions under the terms of the acquisition agreement that were satisfied
prior to the rescission bringing the total Series E shares outstanding to 300.
As a result of the rescission, the Registrant divested itself of the assets,
liabilities and operations of FBMS as of June 28, 2000 and the Registrant's
investment in FBMS was written-off as of June 28, 2000 resulting in a loss of
$3,979,000.
On September 7, 2000, effective September 27, 2000, Equitex acquired by merger
all of the issued and outstanding common stock of the Meridian Residential
Group, Inc. ("Meridian Residential") through its wholly-owned subsidiary,
GR.com, Inc., in exchange for 425,000 shares of the Registrant's Series F
Convertible Preferred Stock. GR.com, Inc. recently changed its name to Meridian
Services, Inc. ("Meridian Services"). In connection with the Meridian
Residential acquisition, nMortgage acquired from Meridian Capital Group, LLC,
the proprietary business model, website, trademarks, corporate names and all
related intellectual property rights related to Meridian Capital Group's
GreatRate.com business, including the names GreatRate.com and
GreatRateMortgage.com for a cash purchase price of $850,000. The Registrant
issued 1,300 shares of its Series G Convertible Preferred Stock for net proceeds
of $1,240,000 to fund the acquisition of GreatRate.com. The remaining funds were
utilized for working capital needs.
Prior to the rescission, additional capital expenditures were incurred during
the first half of 2000 as nMortgage completed its information technology in
connection with its Internet-based product offerings. Following the closing of
the Meridian Residential transaction, Meridian Services is now handling the
mortgage lending activities of nMortgage which plans to move forward with its
business plan and continue to roll out its business to consumer and business to
business mortgage programs in conjunction with Meridian Services. Meridian
Services is presently relying primarily on origination and other loan related
fees from lenders to whom it brokers mortgage loans. As nMortgage and Meridian
Services continue to develop the business to business Internet solutions, it is
anticipated additional fees will be recognized from fee-based programs for
private labeling third party Websites. This should generate additional
loan-related as well as service-related fees. nMortgage and Meridian Services
are currently cash flow positive and the Registrant anticipates both companies'
liquidity and capital resources will be sufficient to fund their operations
during 2001.
Triumph relies primarily on cash flows from operations for its working capital.
In addition, during 1999 and 2000, Triumph received a cash infusion from the
sale of an investment purchased from an officer of Triumph considerably below
market value. This capital infusion provided additional cash of approximately
$270,000 to operate its business and was considered a contribution of capital.
In an effort to streamline its operations and lower its operating overhead,
during 2000 and in the first quarter of 2001, Triumph closed its two independent
retail operations leaving only its two GNC retail stores. As a result of
Triumph's continuing losses, the Registrant may need to assist Triumph with its
liquidity and capital resources needs during 2001 to help fund its operations.
-16-
During 2000, the Registrant participated with other third parties in making
certain loans to VP Sports to assist both of its subsidiaries, Victoria
Precision and Torpedo Sports, with liquidity needs during peak manufacturing
periods. These loans were secured by certain of the assets of VP Sports'
subsidiaries. It is anticipated the Registrant may make further advances to VP
Sports and its subsidiaries during 2001 as additional peak liquidity and capital
resource needs arise.
On June 29, 2000, the Registrant announced that it had executed a definitive
agreement for the acquisitions of Key Financial Systems, Inc. ("Key") and Nova
Financial Systems, Inc. ("Nova") based in Clearwater, Florida. Key is a three
year old financial services call center organization that markets and services
credit card programs and provides customer service support for online
applications. Under the agreement, Key and Nova's current stockholders will
receive a combination of cash and stock of the Registrant as described further
in Part 1 above. The Registrant presently believes that it will have sources of
cash available to complete the Key and Nova acquisitions through the private
offering of equity securities of the Registrant or through the exercise of
certain outstanding warrants and options of the Registrant.
For most of 1999, FTC relied exclusively on the Registrant for operating funds
as the company continued to develop its business plan. During 2000, the
Registrant ceased funding the operations of FTC and the company relied on
internal sources of funds generated through cash flows from certain consulting
services for its liquidity and capital resources. During 2000, FTC embarked on
two initiatives to further its business plan and generate operating funds.
Neither initiative was successful and at December 31, 2000, FTC had only limited
operations. FTC's lease expired and the company currently operates from the home
of its president. While future capital infusions by the Registrant may be
necessary, it is anticipated the amounts can be absorbed by the Registrant given
the relatively low overhead requirements at FTC. Given the present staffing at
FTC and the past lack of success, the Registrant isn't anticipating significant
revenues from FTC in 2001.
(b) Results of operations.
Because of the fundamental change in the Registrant's operations and financial
presentation for 1999 and beyond, the comparison to prior years is difficult. As
a result, the discussion and analysis of the Registrant's results of operations
contain year over year financial comparisons for the years ended December 31,
2000 and 1999, while any comparisons to 1998 have been analyzed with a view
toward the Registrant's current and future business operations.
REVENUES: Consolidated revenues for the year ended December 31, 2000 were
$2,869,291 as compared to $2,340,175 for the Registrant and its subsidiaries for
the year ended December 31, 1999. Revenues for the Registrant as a BDC were
$447,840 in the year ended December 31, 1998.
2000 1999
-------------- --------------
Equitex $4,975 $53,965
FTC 63,800 0
Triumph 376,394 738,456
nMortgage 110,564 50,000
FBMS (nMortgage subsidiary) 1,433,475 1,497,754
Meridian 880,083 0
-------------- --------------
$2,869,291 $2,340,175
-------------- --------------
The Registrant's revenues for the years ended December 31, 2000 and 1999 on a
stand-alone basis consisted primarily of interest income related to certain
short-term loans to non-affiliated entities. Revenues decreased approximately
91% to of $4,975 as compared to $53,965 in 1999. As a holding company, the
Registrant has no significant sources of revenue other than those of its
operating subsidiaries. During both 1999 and 2000, the Registrant partially
funded its operations from the sales of certain investments, which is
considered other income not revenue. For the year 2001, the Registrant
anticipates it will continue to divest certain of its investments to cover its
-17-
operating overhead as it continues to work toward completion of its contemplated
acquisition and merger transactions.
The Registrant's subsidiary FTC continued its attempts to develop its business
plan during 2000. These activities generated $63,800 in consulting fee revenue
for the year. FTC's other operating initiatives proved unsuccessful. As a
result, FTC had only limited operations at year-end. FTC closed its office
thereby reducing its overhead to negligible levels. The Registrant presently
anticipates FTC will generate little or no operating revenue for the year 2001.
Triumph sales decreased by $362,062 in 2000 compared to 1999. The decrease is
attributable to a sale of one of the Registrant's retail locations in January
2000; this location accounted for sales of $293,859 in 1999. Additionally,
another store was closed in November 2000, and the Company plans on closing one
more location at the end of the first quarter 2001, further reducing overhead
costs. For the remainder of 2001, the Company plans on operating its two GNC
franchised stores, which accounted for sales of $185,768 in 2000. Additionally,
as a result of losses incurred in both 1999 and 2000, Triumph has replaced its
senior management in charge of store operations and instituted tighter inventory
and sales audit controls while installing point-of-sale computer systems to aid
in inventory tracking. These initiatives will allow Triumph to concentrate its
efforts on the two remaining GNC franchised stores and focus on a return to
profitability.
During 2000, nMortgage generated revenues of $110,564, an increase of 60,564
over 1999 revenues of $50,000 primarily from consulting services to the mortgage
industry.
FBMS revenues in 2000 (through June 28, 2000) were comprised of secondary
marketing of $871,134, loan production and processing of $293,065 and interest
and dividend income of $269,276. For FBMS 1999 (from August 1999) revenues
consisted of secondary marketing of $395,034, loan production and processing of
$302,811 and interest income of $799,909.
During 2000 nMortgage continued to implement changes in its operations, most
notably the rescission of FBMS and the corresponding loss of mortgage
origination revenue. During the second quarter of 2000, nMortgage transitioned
from warehouse funding to table funding a majority of its mortgage loans. As a
result of this change, nMortgage consolidated its operations and decreased its
operating overhead resulting in certain write-offs and severance costs during
the first six months of the year. Given these operational changes, nMortgage
experienced an overall decrease in loan originations during the period both in
the quarter ended June 30, 2000 as it changed its loan funding method, and in
the quarter ended September 30, 2000 as it ceased operations following the FBMS
rescission.
Revenues of $880,083 for Meridian Residential, acquired in September 2000, are
included in 2000.
With the merger of GR.com and Meridian Residential complete, the combined
companies now operating as Meridian Services sought an agreement with a
financial institution allowing them to operate in a greater number of
jurisdictions. During March 2001, Meridian Services entered into an agreement
with a financial institution through which it will effectively be operating in
all fifty states. The financial institution, utilizing its national charter and
its private labeled Meridian-serviced Website, will be able to close loans in
all fifty states. Meridian Services will purchase these closed loans to
effectively be operating in all fifty states. The loans Meridian Services will
be purchasing will be pre-sold by Meridian Services to third party investors.
As a result of these changes, the Registrant anticipates revenues from its
mortgage operations will increase significantly in 2001 as Meridian Services
continues to offer residential mortgage loans over the Internet utilizing
nMortgage's Website GreatRate.com. Additional revenues will be generated through
Meridian Services' agreement with the financial institution. In addition,
nMortgage and Meridian will continue development of the business to business
Internet solutions generating further revenues with a fully interactive
customized Website system that connects the financial institution clients and
their customers directly to Meridian Services. In the first quarter of 2001,
Meridian Services has signed two agreements under this program.
-18-
COST OF PRODUCT SALES: The Registrant's cost of product sales for 2000 were
$233,228 compared to $488,767 in 1999. The dollar decrease of $255,539 was
caused by the Registrant selling one of its retail operations in January 2000.
As a percentage of product sales the 2000 costs were approximately 62% compared
to 66% in 1999.
LOAN PRODUCTION AND PROCESSING: The Registrant's loan production and processing
costs for 2000 relating to the operations of FBMS through June 28, 2000, were
$739,735 compared to $728,501 for 1999.
INTEREST EXPENSE, MORTGAGE BANKING OPERATIONS: The Registrant's interest expense
relating to mortgage banking operations were $588,488 for the year ended
December 31, 2000 compared to $785,193 for the year ended December 31, 1999.
This interest is all related to FBMS warehouse lines of credit through June 28,
2000 in the year 2000 and from August 23 to December 31, 1999 in the year 1999.
SELLING, GENERAL AND ADMINISTRATIVE: The Registrant's selling, general and
administrative expenses for 2000 were $161,668 for officer's bonus and
$8,432,810 for other, compared to 1999 expenses of $883,164 for officer's bonus
and $6,250,365 for other. The officer's bonus decreased in 2000 compared to 1999
as the market value (the basis of the bonus) increased substantially more in
1999 than in 2000 (see Part III Item II Compensation). Other selling, general
and administrative expenses are summarized by company as follows.
2000 1999
-------------- --------------
Equitex $1,839,850 $1,539,649
FTC 476,753 402,061
Triumph 543,393 592,616
nMortgage 2,220,308 628,839
FBMS 2,503,956 3,087,220
Meridian 848,550 0
-------------- --------------
$8,432,810 $6,250,365
-------------- --------------
The Registrant's other selling, general and administrative expenses on a stand
alone basis accounted for $1,839,850 in the year 2000 as compared to $1,539,649
in the year 1999. These amounts relate to operation of the holding company
during both periods most notably legal and accounting expense which increased
slightly for the year 2000 due in part to the Registrant's merger and
acquisition activities.
FTC recorded $476,753 and $402,061 in selling, general and administrative
expense during 2000 and 1999, respectively, $300,000 of which was the write-down
of a note receivable in 2000.
Triumph's other selling, general and administrative expenses were $543,393 and
$592,616 during 2000 and 1999, respectively. These amounts are attributable to
the operation of the company's retail stores during 2000 and 1999, respectively,
and experienced little change.
nMortgage's other selling, general and administrative expenses were $2,220,308
in 2000 compared to $628,839 in 1999. The main reasons for the increase of
$1,591,469 was an increase in amortization of $829,007 and operating expenses of
$393,977 for professional fees $219,508, employee related expenses of $141,635
and other of $32,839 all incurred by nMortgage subsequent to the rescission of
FBMS on June 28, 2000. The increase also includes a non-recurring expense of
$368,750 for preferred stock to be issued in connection with the rescission of
FBMS.
FBMS other selling, general and administrative expenses were $2,503,956 in 2000
compared to $3,087,220 in 1999. A majority of the 1999 expense was incurred
during the fourth quarter as FBMS was acquired in late August 1999. This
compares to the 2000 expense which was incurred during the entire year with a
majority of the expense occurring during the first six months. This reduction
was due to FBMS continuing to implement changes in its operations from warehouse
funding to table funding, thereby decreasing its operating overhead during the
first half of 2000.
-19-
All of Meridian Services' total expenses of $848,550 were selling, general and
administrative expenses. These were incurred during the fourth quarter of 2000
following the acquisition of Meridian Residential in September 2000.
LOSS ON FBMS RESCISSION: The Registrant's subsidiary, nMortgage, in connection
with the June 28, 2000 FBMS rescission and divestiture recorded a loss of
$3,979,000 in 2000.
IMPAIRMENT LOSSES: At December 31, 2000, management's assessment of website
development costs for impairment indicated that the carrying value of $2,083,000
had been impaired. As a result, the Registrant recorded a charge of $353,000
during 2000.The Company also recorded a $454,250 impairment charge in 2000
related to the closings of two of its subsidiaries retail outlets. One outlet
closed in November 2000 and the second closing will occur by March 31, 2001.
UNUSUAL GAIN ON SUBSIDIARY STOCK TRANSACTION: In November 2000, all of the
nMortgage Series A preferred stock was converted to nMortgage common stock.
Prior to conversion, the Registrant had included as minority interest the
$5,132,000 applicable to the Series A preferred stock. Upon conversion, the
former Series A preferred stockholders no longer had liquidation preferences
greater than those of the nMortgage common stockholders. Consequently,
$5,132,000 of 2000 losses incurred by nMortgage which were previously absorbed
by the Registrant, were allocated to the minority interest resulting in a
material unusual gain.
OTHER INCOME (EXPENSES): For the year ended December 31, 2000, other income
(expense) included a net investment loss of $87,087, equity in losses of
affiliates of $364,415, interest expense of $148,261, interest income of
$113,229 and other income of $73,478 from Triumph's sale of the assets of a
retail store in the first quarter. Other income (expense) in 1999 includes net
investment loss of $571,267, equity in loss of affiliates of $418,209, and
interest expense totaling $10,357 and interest income of $79,089.
During 2000 the Registrant and Triumph recorded unrealized holding losses on
trading securities of $104,109 that was offset by realized gains from investment
sales by the Registrant of $36,246 and realized losses from investment sales of
$19,224 for Triumph. During 1999, the Registrant recorded investment income of
$797,516 from the sales of investments. At December 31, 1999, the Registrant
recorded a realized loss of $1,368,783 on trading securities resulting in the
investment loss, net of $571,267.
Equity in net losses of affiliates corresponds to the Registrant's 13.6%
ownership interest in VP Sports which is accounted for on an equity basis. VP
Sports and its subsidiaries loss for 2000 was $1,684,684. The equity in losses
of affiliates attributable to the loss was $364,415. The equity in losses
attributable to the decrease in the Registrant's ownership of VP Sports from
35.7% January 1, 2000 to 13.6% at December 31, 2000 was $743,483 and is recorded
as a reduction in additional paid-in capital.
NET LOSS: Net loss for the year ended December 31, 2000 was $7,367,371 as
compared to $7,716,559 for the year ended December 31, 1999. As a BDC, the
Registrant recorded net investment loss and net realized gain on investments
after income taxes of $(925,245) and net decrease in net assets resulting from
operations of $1,981,299 for the year ended December 31, 1998. Of the loss from
operations before unusual gain for 2000, approximately $7,938,750 is
attributable to the operations and rescission of FBMS. Excluding the operations
and rescission of FBMS, the Registrant and its subsidiaries would have lost
approximately $4,460,655 for the year ended December 31, 2000. Of this amount,
which excludes the operations and rescission of FBMS, the Registrant accounts
for approximately $1,680,100, FTC $526,580, Triumph Sports $974,300, nMortgage
$1,060,230, loss from equity investments of $364,415. The above losses were
partially offset by Meridian Services net income of $44,970, and the unusual
gain of subsidiary stock transaction of $5,132,000.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS: Net loss applicable to common
stockholders was $8,617,401 for the year ended December 31, 2000 and $10,985,572
for the year ended December 31, 1999. This amount gives effect to the
amortization of the discount on the preferred stock of the Registrant if the
-20-
preferred stockholders had converted their shares to common stock at year end as
well as deemed preferred stock dividends. This amount does not reflect an actual
loss at year end over and above the net loss figure presented above.
OTHER ISSUES
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement, as
amended by SFAS No. 137, is effective for fiscal years beginning after June 15,
2000. Currently, the Company does not have any derivative financial instruments
and does not participate in hedging activities. Therefore, management believes
that SFAS No. 133 will not have an impact on its financial position or results
of operations.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS. SAB No. 101, as amended by SAB No. 101A and SAB No. 101B, is
effective no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. SAB No. 101 provides the Staff's views in applying
generally accepted accounting principles to selected revenue recognition issues.
The Company believes that it complies with the accounting and disclosure
described in SAB No. 101; therefore, management believes that SAB No. 101 will
not impact the Company's financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements are listed under Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On August 20, 1999 the Registrant dismissed Davis & Co., CPA's, P.C. as its
independent certified public accountant. There have been no adverse opinions,
disclaimers of opinion or qualifications or modifications as to uncertainty,
audit scope or accounting principles regarding the reports of Davis & Co.,
CPA's, P.C. on the Registrant's financial statements for each of the fiscal
years ended December 31, 1998 and 1997, or any subsequent interim period. The
Audit Committee of the Registrant's Board of Directors approved the change of
accountants and the Board of Directors of the Registrant ratified that action.
There were no disagreements with Davis & Co., CPA's, P.C. on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures leading to their dismissal.
There were no reportable events, in each case, during either of the Registrant's
two most recent fiscal years or any subsequent interim period.
Simultaneously with the dismissal of its former accountants, the Registrant
approved and engaged Gelfond Hochstadt Pangburn, P.C. to act as its independent
certified public accountant as successor to Davis & Co., CPA's, P.C. During the
Registrant's two most recent fiscal years or subsequent interim periods the
Registrant has not consulted Gelfond Hochstadt Pangburn, P.C. regarding the
application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
the Registrant's financial statements, or any matter that was the subject of a
disagreement or a reportable event.
-21-
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
(a)(b)(c) Identification of directors, executive officers and certain
significant persons
Length of
Name Age Offices held Service
- ---- --- ------------ -------
Henry Fong 65 President, Treasurer, Since Inception
Principal Executive
Financial and Accounting
Officer and Director
Thomas B. Olson 35 Secretary Since 1988
Russell L. Casement 57 Director Since 1989
Aaron A. Grunfeld 54 Director Since 1991
The directors of the Registrant are elected to hold office until the next annual
meeting of the stockholders and until their respective successors have been
elected and qualified. Officers of the Registrant are elected by the Board of
Directors and hold office until their successors are duly elected and qualified.
No arrangement exists between any of the above officers and directors pursuant
to which any one of those persons were elected to such office or position.
The Registrant has appointed an audit committee currently consisting of Dr.
Casement as chairman and Mr. Grunfeld and a compensation committee currently
consisting of Mr. Grunfeld as chairman and Dr. Casement.
(d) Family relationships.
Not applicable.
(e) Business experience.
HENRY FONG
Mr. Fong has been the President, Treasurer and a director of the Registrant
since inception. Since 1999 Mr. Fong has been a director of iGenisys, Inc., a
business project management software company which is presently working to
complete its initial public offering. Since December 2000 Mr. Fong has been a
director of Popmail.com, Inc., a publicly traded Internet marketing company.
From 1987 to June 1997, Mr. Fong was chairman of the board and chief executive
officer of RDM Sports Group, Inc. (f/k/a Roadmaster Industries, Inc.) a publicly
held investee of the Registrant 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
-22-
Air Force Meritorious Civilian Service Award in 1982. Mr. Fong has passed the
uniform certified public accountant exam. In March 1994, Mr. Fong was one of
twelve CEOs selected as Silver Award winners in FINANCIAL WORLD magazine's
corporate American "Dream Team."
THOMAS B. OLSON
Mr. Olson has been Secretary of the Registrant since January 1988. From February
1990 to February 2000, Mr. Olson was a director, and from May 1994 to February
2000 secretary, of Immune Response, Inc. a publicly held investee of the
Registrant which merged with, and is now known as, Opticon Medical, Inc. Mr.
Olson has attended Arizona State University and the University of Colorado at
Denver.
RUSSELL L. CASEMENT
Dr. Casement has been a director of the Registrant since February 1989. Since
1969, Dr. Casement has been the president of his own private dental practice,
Russell Casement, D.D.S., P.C., in Denver, Colorado. Dr. Casement earned a
Doctor of Dental Science degree from Northwestern University in 1967. Dr.
Casement is a member of the American Dental Association, the Colorado Dental
Association and the Metro Denver Dental Association.
AARON A. GRUNFELD
Mr. Grunfeld has been a director of the Registrant since November 1991. Mr.
Grunfeld has been engaged in the practice of law for more than twenty-nine years
and has been of counsel to the firm of Resch Polster Alpert & Berger LLP, Los
Angeles, California since November 1995. Mr. Grunfeld received an A.B. in
Political Science from UCLA in 1968 and a J.D. from Columbia University School
of Law in 1971. He is a member of the California Bar Association.
(f) Involvement in certain legal proceedings.
Not applicable.
(g) Promoters and control persons.
Not applicable.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 ("Section 16") requires the
Registrant's officers, directors and persons who own more than ten percent of
the Registrant's voting securities to file reports of their ownership and
changes in such ownership with the Securities and Exchange Commission (the
"Commission"). Commission regulations also require that such persons provide the
Registrant with copies of all Section 16 reports they file. Based solely upon
its review of such reports received by the Registrant, or written
representations from certain persons that they were not required to file any
reports under Section 16, the Registrant believes that, during 2000, its
officers and directors have complied with all Section 16 filing requirements.
ITEM 11. EXECUTIVE COMPENSATION.
(a) General.
Henry Fong, the President of the Registrant and the only officer of the
Registrant whose total compensation exceeded $100,000 for the fiscal year ended
December 31, 2000, received an annual salary of $183,013. In January 1998, the
Compensation Committee of the Registrant's board of directors retained an
independent consultant to review the President's compensation. As a result of
that review, a new compensation arrangement was instituted based on
recommendations made by the independent consultant. In addition to Mr. Fong's
annual salary, beginning January 1, 1998, Mr. Fong receives an annual bonus
-23-
equaling 1% of the Registrant's total assets combined with 5% of the increase in
the market value of the Registrant's common stock, excluding shares owned by the
President, calculated quarterly from January 1 to December 31 of any fiscal
year. If there is a negative computation in any given quarter, no bonus is paid
and that negative amount is carried forward to offset the subsequent quarter's
bonus during the fiscal year. Negative amounts will not be accumulated nor
carried into subsequent fiscal years. During the year ended December 31, 2000,
this bonus totaled $161,668. This new compensation arrangement replaces the
previous bonus of 3% of the Registrant's total assets at year-end.
In April 1992, the Registrant obtained a life insurance policy with retirement
benefits for Mr. Fong, which pays his beneficiary $2,600,000 in the event of Mr.
Fong's death or provides for retirement benefits for Mr. Fong upon his
retirement, provided he is at least 65, utilizing the cash value of the policy
at that time. This benefit is being provided to Mr. Fong in consideration of his
seventeen years of service to the Registrant and in anticipation of his serving
the Registrant until retirement. The Registrant has no other retirement or
pension plan for Mr. Fong. The annual premium on this policy is $105,414 per
year for such period as may be necessary to fully fund the policy, and may be
considered other future compensation to Mr. Fong. For the year ended December
31, 2000, $105,414 was paid toward the policy and an additional $59,586 was paid
to Mr. Fong for deferred income taxes on the policy. Concurrently, the
Registrant obtained a term Key-man Life Insurance policy which pays the
Registrant $3,000,000 in the event of Mr. Fong's death. The Registrant paid
$27,846 on this policy in 2000 that is not considered compensation to Mr. Fong.
(b) Summary compensation table.
The following table sets forth information regarding compensation paid to the
officers of the Registrant during the years ended December 31, 2000, 1999 and
1998:
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards ------------
-----------------------------------
(a) (b) (c) (d) (e) (g) (i)
Other All
Name & Annual Other
Principal Salary Bonus Compensation Options Compensation
Position Year ($) ($) ($) & SARs(#) ($)
- -------- ---- --- --- --- --------- ---
Henry Fong 2000 183,013 161,668 -0- 476,000 165,000(1)
President,
Treasurer
Principal
Executive
Officer and
Accounting
Officer
Henry Fong 1999 183,013 883,164 -0- 469,700 165,000(1)
Henry Fong 1998 183,013 1,208,042 -0- 469,655 165,000(1)
- ----------
(1) Includes payments and tax liability on the life insurance policy as
explained more fully in "Item 10 (a) General" above.
-24-
(c) Option/SAR grants table.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
GRANT DATE
INDIVIDUAL GRANTS VALUE
(a) (b) (c) (d) (e) (f)
Number of
Securities Percent of total
Underlying options/ SARs Exercise Grant
Options/ granted to of Base Date
SARs employees in Price Expiration Present
Name Granted (#) Fiscal Year ($/Sh) Date Value($)
- ---- ----------- ----------- ------ ---- --------
Henry Fong 476,000 74% $5.50 4/17/2005 2,588,488(1)
- -----------
(1) Represents the value of the stock options based upon the closing stock price
of the Registrant's common stock ($5.438) on the date of grant.
(d) Aggregated Option/SAR exercises and fiscal year-end Option/SAR value table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End (#) at FY-End (#)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- ------------ ------------ ------------- -------------
Henry Fong -0- -0- 945,700/-0- $-0-/-0-
(e) Long Term Incentive Plans -- awards in last fiscal year.
Not applicable
(f) Defined benefit or actuarial plan disclosure.
Not applicable.
(g) Compensation of directors.
(1)Standard Arrangements
Each independent member of the Registrant's Board of Directors, Messrs. Russell
L. Casement and Aaron A. Grunfeld, receive $10,000 per year payable monthly and
$500 for each Board of Director's meeting attended either in person or by
telephone. For the year ended December 31, 2000, Messrs. Casement and Grunfeld
each received a total of $12,000. Members of the Board of Directors also receive
reimbursement for expenses incurred in attending board meetings.
-25-
(2) Other Arrangements
The Registrant adopted the 1993 Stock Option Plan for Non-Employee Directors
(the "Directors' Plan") reserving an aggregate of 250,000 shares of Common Stock
for issuance pursuant to the exercise of stock options (the "Options") which may
be granted to non-employee directors of the Registrant. On July 5, 1995, an
order was issued by the Securities and Exchange Commission authorizing the
Directors' Plan and the options granted thereunder. The Directors' Plan was for
a ten-year term commencing July 5, 1995 (the "Effective Date"). Each
non-employee director automatically, as of the Effective Date, was granted an
option to purchase 50,000 shares of common stock at $3.00 per share. This plan
was terminated effective with the creation of the 1999 Stock Option Plan
described below.
On June 2, 1998, the Registrant's Board of Directors authorized the granting of
75,000 options to purchase common stock of the Registrant to each of the
Registrant's two independent directors at $3.19 per share for a period of five
years. The grant of these options was contingent upon the Registrant's
successful withdrawal as a BDC. On January 4, 1999 the Registrant filed for
withdrawal as a BDC [see Part I, Item 1 (a) Business for a description of the
Registrant's withdrawal of its election as a BDC].
On January 5, 1999, the Registrant's Board of Directors adopted a new stock
option plan, the 1999 Stock Option Plan. On January 5, 1999, the Registrant's
two independent directors each received options to purchase 158,700 shares of
the Registrant's common stock at an exercise price of $6.75 per share expiring
on January 5, 2004. These options were granted in lieu of the 75,000 options at
$3.19 per share authorized on June 2, 1998, which were canceled. In addition,
each director received 86,800 options to purchase 86,800 shares of the
Registrant's common stock at an exercise price of $6.75 per share under the 1999
Plan.
On April 17, 2000, the Registrant's Board of Directors granted 84,000 options to
purchase the Registrant's common stock to each of the Registrant's two
independent directors. These options, granted under the 1999 Stock Option Plan,
are exercisable at $5.50 per share and expire on April 17, 2005.
(h) Employment contracts and termination of employment and change-in-control
arrangements.
On April 1, 1992, the Registrant obtained a life insurance policy on the
Registrant's President, Henry Fong, which policy provides for a payment to Mr.
Fong's beneficiary of $2,600,000 in the event of his death or a retirement
benefit to Mr. Fong consisting of the cash value of the policy upon Mr. Fong's
retirement from the Registrant at or after age 65 [See-Item 11. (a) "General."
above]. The Registrant has no other compensation plan or arrangement with
respect to any executive officer which plan or arrangement results or will
result from the resignation, retirement or any other termination of such
individual's employment with the Registrant. The Registrant has no plan or
arrangement with respect to any such persons, which will result from a change in
control of the Registrant or a change in the individual's responsibilities
following a change in control.
(i) Report on repricing of Options/SARs
Not applicable.
(j) Additional information with respect to Compensation Committee Interlocks and
Insider Participation in compensation decisions.
The Registrant's Compensation Committee for the year ended December 31, 2000
consisted of Mr. Grunfeld as chairman and Dr. Casement both of who continue to
serve in that capacity. No member of the Compensation Committee was an officer
or employee of the Registrant or any of its subsidiaries during the year. No
executive officer of the Registrant served on the board of directors of any
other entity with either member of the Compensation Committee.
(k) Board compensation committee report on executive compensation.
In January 1998, the Compensation Committee of the Registrant's Board of
Directors retained an independent consultant to review the President's
-26-
compensation. The compensation committee directed the consultant to review both
the President's salary and bonus structure. The independent consultant analyzed
the compensation structure of the Registrant and compared it to the compensation
structures of companies similar to the Registrant. The consultant recommended no
change in the President's salary. The consultant did recommend a change in the
bonus component of the President's compensation from one based solely on the
assets of the Registrant, to one based primarily on increases in the market
value of the Registrant's common stock. The Compensation committee agreed and
directed the consultant to provide a recommendation, based on its research, for
a bonus plan tied to the Registrant's market performance.
As a result of that further review, the consultant recommended an annual bonus
plan equaling 1% of the Registrant's total assets combined with 5% of the
increase in the market value of the Registrant's common stock not held by the
Registrant's President. The bonus is calculated and paid quarterly from January
1 to December 31 of any fiscal year based on a formula provided by the
consultant. The Compensation Committee feels this compensation arrangement, tied
primarily to the market performance of the Registrant's common stock while
including incentives for increases in assets, is the most equitable method for
compensating the Registrant's President. This provides a quantitative measure on
which to reward the President's performance, by directly emphasizing market
performance, which correlates directly with the expectations and goals of the
Registrant and its stockholders.
Although this plan was instituted during the period in which the Registrant was
operating as an investment company, the Compensation Committee feels it is no
less valid under the operating company structure. In reviewing any issues
related to that change, the Committee determined the 1% bonus based on total
assets would be paid based upon the Registrant's assets prior to consolidation
with any subsidiary. No further refinements were warranted.
During 2000, the Compensation Committee reviewed the compensation structure and
determined no changes should be made. However, in the year 2000 as in past
years, the Compensation Committee granted certain options to purchase common
stock of the Registrant to the President. The Compensation Committee feels these
options provide further incentive to the President to emphasize market
performance of the Registrant's common stock.
Compensation Committee
Russell L. Casement
Aaron A. Grunfeld
(i) Performance graph.
12/30/95 12/29/96 12/31/97 12/31/98 12/31/99 12/31/00
- --------------------------------------------------------------------------------
Nasdaq US 100.00 123.04 150.69 212.51 394.92 237.62
Nasdaq Financial 100.00 128.36 196.31 190.73 189.46 207.03
Equitex 100.00 69.07 30.97 261.90 304.76 183.35
-27-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) (b) Security Ownership of Certain Beneficial Owners and Security Ownership
of Management.
The following table contains information at February 28, 2001, as to the
beneficial ownership of shares of the Registrant's common stock by each person
who, to the knowledge of the Registrant at that date, was the beneficial owner
of five percent or more of the outstanding shares of the class, each person who
is a director or executive officer of the Registrant and all persons as a group
who are executive officers and directors of the Registrant and as to the
percentage of outstanding shares so held by them at February 28, 2001.
Name and address Amount and Nature of
of beneficial owner Beneficial Ownership (1) Percent of Class
- ------------------- ------------------------ ----------------
Henry Fong 1,564,719 (2)(3) 19.5%
7315 East Peakview Avenue
Englewood, Colorado 80111
Russell L. Casement 486,900 (4) 6.5%
1355 S. Colorado Blvd., Suite 320
Denver, Colorado 80222
Aaron A. Grunfeld 412,200 (5) 5.5%
10390 Santa Monica Blvd
Fourth Floor
Los Angeles, California 90025
All officers and directors 2,560,119 (6) 29.0%
as a group (four persons)
- ------------
(1) The beneficial owners exercise sole voting and investment power.
(2) Includes 945,700 shares underlying options granted under the Registrant's
1999 Stock Option Plan.
(3) Includes 403,719 shares owned by a corporation in which Mr. Fong is an
officer and director.
(4) Includes 36,400 shares underlying options granted under the Registrant's
1993 Stock Option Plan for Non- Employee Directors and 329,500 shares underlying
options granted under the Registrant's 1999 Stock Option Plan.
(5) Includes 50,000 shares underlying options granted under the Registrant's
1993 Stock Option Plan for Non- Employee Directors and 329,500 shares underlying
options granted under the Registrant's 1999 Stock Option Plan.
(6) Includes 86,400 shares underlying options granted under the Registrant's
1993 Stock Option Plan for Non- Employee Directors and 1,671,000 shares
underlying options granted under the Registrant's 1999 Stock Option Plan.
The issuance of 7,140,000 shares of the Registrant's common stock in the
acquisitions of Nova Financial Systems, Inc. and Key Financial Systems, Inc., as
described under Item 1 (a), may, at a subsequent date, result in a change in
control of our company.
-28-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(a) Transactions with Management and Others.
The Registrant currently leases approximately 1,800 square feet of office space
in Greenwood Executive Park, 6400 South Quebec, Englewood, Colorado from a
partnership in which its President is the sole partner, on terms comparable to
the existing market for similar facilities.
During 2000, the President of the Registrant, and a corporation in which he is
the sole officer and director, loaned the Registrant a total of $670,000 of
which $150,000 was repaid prior to year end. The remaining principal balance of
$545,000 is due on demand and bears interest at 10% per annum.
The Registrant has placed members of its Board of Directors and its officers on
the boards of directors of certain investee companies and other companies in
which it has obtained an equity interest or to which it has made loans or
guarantees. In most instances, the board representation was subsequent to these
acquisitions, loans or guarantees.
On December 29, 2000, Meridian Services, Inc. (formerly GR.com, Inc.) a
subsidiary of the Registrant, issued 35,325 shares of its Series A preferred
stock to Gulfstream Financial Partners, LLC in exchange for 35,325 shares of the
Registrant's common stock which were valued at $170,000. Each share of Series A
preferred stock has a value equal to the closing bid price of the Registrant's
common stock on December 29, 2000, which was $4.8125. Henry Fong, the President
of the Registrant, is the sole member of Gulfstream Financial Partners, LLC.
(b) Certain business relationships.
Not applicable.
(c) Indebtedness of management.
In August 1999, the Registrant loaned a director, Aaron Grunfeld, $180,000. The
note bears interest at 9.75% annually, is collateralized by 32,700 shares of the
Registrant's common stock, and was originally due on November 18, 1999. The note
has been extended to June 30, 2001. Mr. Grunfeld has consistently paid periodic
interest payments which are currently paid to March 31, 2001. Following a
payment in April 2000, there is a principal balance due at December 31, 2000 of
$100,000.
(d) Transactions with promoters.
Not applicable
-29-
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report immediately
following the signature page.
Page
1. Financial Statements and Supplementary Data
Independent auditors' report - Gelfond Hochstadt Pangburn, P.C. F-1
- ---------------------------------------------------------------- -------------
Report of Independent Certified Public Accountants -
Davis & Co. CPA's. P.C. F-2
- ---------------------------------------------------------------- -------------
Consolidated balance sheet - December 31, 2000 F-3
- ---------------------------------------------------------------- -------------
Consolidated balance sheet - December 31, 1999 F-4
- ---------------------------------------------------------------- -------------
Consolidated statement of operations -
years ended December 31, 2000 and 1999 F-5
- ---------------------------------------------------------------- -------------
Statements of operations - year ended December 31, 1998 F-6
- ---------------------------------------------------------------- -------------
Statements of changes in stockholders' equity - year ended
December 31, 1998 F-7 - F-8
- ---------------------------------------------------------------- -------------
Statements of changes in stockholders' equity - years ended
December 31, 2000 and 1999 F-9 - F-12
- ---------------------------------------------------------------- -------------
Consolidated statement of cash flows - years ended
December 31, 2000 and 1999 F-13 - F14
- ---------------------------------------------------------------- -------------
Statements of cash flows - year ended December 31, 1998 F-15
- ---------------------------------------------------------------- -------------
Notes to consolidated financial statements F-16 - F-44
- ---------------------------------------------------------------- -------------
2. Financial Statements Schedules.
Schedule II - Valuation and Qualifying Accounts and Reserves S-1
- ---------------------------------------------------------------- -------------
3. Exhibits.
3.1 Articles of Incorporation (1)
- ----- --------------------------------------------------------------------------
3.2 Bylaws (1)
- ----- --------------------------------------------------------------------------
3.3 Certificate of Designations of Registrant's Series D Convertible
Preferred Stock. (4)
- ----- --------------------------------------------------------------------------
3.4 Certificate of Designations of Registrant's Series E Convertible
Preferred Stock. (4)
- ----- --------------------------------------------------------------------------
3.5 Certificate of Designations of Registrant's Series F Convertible
Preferred Stock. FILED HEREWITH
- ----- --------------------------------------------------------------------------
3.6 Certificate of Amendment to Certificate of Designation of Registrant's
Series F Convertible Preferred Stock. FILED HEREWITH
- ----- --------------------------------------------------------------------------
3.7 Certificate of Designations of Registrant's Series G Convertible
Preferred Stock. FILED HEREWITH
- ----- --------------------------------------------------------------------------
10.1 1993 Stock Option Plan (2)
- ----- --------------------------------------------------------------------------
10.2 1993 Stock Option Plan for Non-Employee Directors (2)
- ----- --------------------------------------------------------------------------
10.3 Custody Agreement between Colorado National Bank and the Registrant (2)
- ----- --------------------------------------------------------------------------
10.4 1999 Stock Option Plan. (3).
- ----- --------------------------------------------------------------------------
10.5 Rescission Agreement among Vincent Muratore, the Registrant, and
nMortgage, Inc. (5)
- ----- --------------------------------------------------------------------------
10.6 Agreement and Plan of Merger by and among the Registrant, GR.com, Inc.,
Howard J. Zuckerman, David Brecher, Meridian Capital Group, LLC, and
The Meridian Residential Group, Inc. (6)
- ----- --------------------------------------------------------------------------
21 List of Subsidiaries. FILED HEREWITH.
- ----- --------------------------------------------------------------------------
-30-
(1) Incorporated by reference from the like numbered exhibits filed with the
Registrant's Registration Statement on Form S-18, No. 2-82104-D effective April
11, 1983.
(2) Incorporated by reference from the like numbered exhibits filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.
(3) Incorporated by reference from the like numbered exhibits filed with the
Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1998.
(4) Incorporated by reference from Exhibit 4 of the Registrant's Report on Form
8-K, No. 0-12374 filed with the Securities and Exchange Commission on September
8, 1999.
(5) Incorporated by reference from Exhibit 10.1 of the Registrant's Report on
Form 8-K, No. 0-12374 filed with the Securities and Exchange Commission on
August 30, 2000.
(6) Incorporated by reference from Exhibit 2.1 of the Registrant's Report on
Form 8-K, No. 0-12374 filed with the Securities and Exchange Commission on
October 12, 2000.
(b) Reports on Form 8-K.
On December 12, 2000, the Registrant filed a report on Form 8-K relating to
Items 5 and 7.
On October 12, 2000, the Registrant filed a report on Form 8-K relating to
Items 2 and 7.
(c) Exhibits required by Item 601 of Regulation S-K
See Item 14(a)(3) above.
(d) Financial statement schedules required by Regulation S-X
Not applicable.
-31-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: April 3, 2001 EQUITEX, INC.
(Registrant)
By /S/ HENRY FONG
--------------------------------------
Henry Fong, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: April 3, 2001 /S/ HENRY FONG
--------------------------------------
Henry Fong, President,
Treasurer and Director
(Principal Executive, Financial,
and Accounting Officer)
Date: April 3, 2001 /S/ RUSSELL L. CASEMENT
--------------------------------------
Russell L. Casement, Director
Date: April 3, 2001 /S/ AARON A. GRUNFELD
--------------------------------------
Aaron A. Grunfeld, Director
-32-
EQUITEX, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
EQUITEX, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent auditors' report - Gelfond Hochstadt Pangburn, P.C. F-1
Report of Independent Certified Public Accountants - Davis & Co., CPAs, P.C. F-2
Financial statements:
Consolidated balance sheet - December 31, 2000 F-3
Consolidated balance sheet - December 31, 1999 F-4
Consolidated statements of operations - years ended December 31, 2000 and 1999 F-5
Statement of operations - year ended December 31, 1998 F-6
Statement of changes in stockholders' equity - year ended December 31, 1998 F-7 - F-8
Consolidated statements of changes in stockholders' equity - years ended
December 31, 2000 and 1999 F-9 - F-12
Consolidated statements of cash flows - years ended December 31, 2000 and 1999 F-13 - F-14
Statement of cash flows - year ended December 31, 1998 F-15
Notes to consolidated financial statements F-16 - F-44
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Equitex, Inc.
We have audited the accompanying consolidated balance sheets of Equitex, Inc.
and subsidiaries as of December 31, 2000 and 1999, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the years in the two-year period then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Equitex, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the two-year period
then ended in conformity with generally accepted accounting principles.
Our audits referred to above included an audit of the 2000 and 1999 financial
statement schedule listed under Item 14-2. In our opinion, this 2000 and 1999
financial statement schedule presents fairly, in all material respects, in
relation to the 2000 and 1999 financial statements taken as a whole, the
information required to be stated therein.
GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
March 30, 2001
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Board of Directors
Equitex, Inc.
We have audited the accompanying statement of operations, statement of changes
in stockholders' equity, and cash flows for the year ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1998 financial statements referred to above present fairly,
in all material respects, the results of Equitex, Inc.'s operations and its cash
flows for the year ended December 31, 1998 in conformity with generally accepted
accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule on S-1 is presented for the purpose of
complying with the Securities and Exchange Commission's rules and is not a
required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, fairly states in all material respects the 1998
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Davis & Co., CPAs, P.C.
Certified Public Accountants
Englewood, Colorado
March 27, 1999
F-2
EQUITEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000
ASSETS
Current assets:
Cash and cash equivalents $ 337,234
Related party receivables, current portion (Note 5) 900,150
Other receivables, net (Note 5) 477,613
Inventories 70,084
Marketable securities (Note 6) 238,216
------------
Total current assets 2,023,297
------------
Equity investments (Note 6) 365,000
Other investments (Note 6) 867,471
Related party receivables, net of current portion (Note 5) 83,407
Other receivables (Note 5) 361,007
Furniture, fixtures and equipment, net (Note 8) 261,071
Intangible and other assets, net (Note 9) 5,470,374
------------
7,408,330
------------
$ 9,431,627
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes and advances payable, related parties (Note 10) $ 1,877,631
Accounts payable 377,763
Accrued liabilities:
Related parties (Note 13) 719,837
Others 162,259
------------
Total current liabilities 3,137,490
------------
Notes and advances payable, others (Note 10) 79,627
------------
Total liabilities 3,217,117
------------
Minority interest (Note 16) 631,070
------------
Commitments and contingencies (Notes 10, 11, 17 and 18)
Series G, 6% redeemable convertible preferred stock; stated value $1,000 per share;
1,300 shares issued and outstanding; liquidation preference, $1,690,000 (Note 17) 1,536,000
------------
Stockholders' equity (Note 18):
Preferred stock; 2,000,000 shares authorized:
Series D convertible preferred stock, 6%, stated
value $1,000 per share; 1,200 shares issued
and outstanding; liquidation preference $1,585,000 1,200,000
Series E convertible preferred stock, stated value $1,000 per share;
250 shares issued and outstanding 250,000
Series F convertible preferred stock, 460,000 shares issued and outstanding,
liquidation preference $3,864,000 2,990,000
Common stock, par value $.02; 7,500,000 shares authorized; 7,140,293
shares issued; 7,071,618 shares outstanding 142,806
Additional paid-in capital 18,497,547
Accumulated deficit (18,563,981)
Series E convertible preferred stock to be issued (50 preferred shares) 368,750
Receivable from Series E preferred stockholder (553,645)
Less treasury stock at cost (68,675 common shares) (284,037)
------------
Total stockholders' equity 4,047,440
------------
$ 9,431,627
============
See notes to consolidated financial statements.
F-3
EQUITEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
ASSETS
Cash and cash equivalents $ 783,606
Mortgage loans held for sale, net (Notes 2 and 15) 14,787,080
Receivables, net:
Related parties (Note 5) 1,203,810
Other 504,571
Inventories 167,346
Investments (Note 6):
Marketable securities 902,537
Equity investments 1,707,898
Other investments 865,000
Furniture, fixtures and equipment, net (Note 8) 1,058,032
Goodwill and other assets, net (Note 9) 19,765,057
------------
$ 41,744,937
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse loans $ 18,582,351
Accounts payable 1,584,926
Accrued liabilities:
Related parties (Note 13) 454,235
Others 2,773,989
Notes and advances payable (Note 10):
Related parties 832,000
Others 1,941,954
------------
Total liabilities 26,169,455
------------
Minority interest (Note 16) 6,473,070
------------
Commitments and contingencies (Notes 10, 11 and 18)
Stockholders' equity (Note 18):
Preferred stock; 2,000,000 shares authorized:
Series D convertible preferred stock, 6%, stated
value $1,000 per share; 1,200 shares issued
and outstanding; liquidation preference $1,585,000 1,200,000
Series E convertible preferred stock, stated value $1,000
per share; 250 shares issued and outstanding 250,000
Common stock, par value $.02; 7,500,000 shares authorized; 7,140,293
shares issued; 7,106,943 shares outstanding 142,806
Additional paid-in capital 18,820,223
Accumulated deficit (11,196,580)
Less treasury stock at cost (33,350 shares) (114,037)
------------
Total stockholders' equity 9,102,412
------------
$ 41,744,937
============
See notes to consolidated financial statements.
F-4
EQUITEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
------------ ------------
Revenues:
Product sales $ 376,394 $ 738,456
Loan production and processing revenues 1,173,148 302,811
Secondary marketing revenues, net 871,134 395,034
Interest and dividend income, mortgage banking operations 269,276 799,909
Other 179,339 103,965
------------ ------------
2,869,291 2,340,175
------------ ------------
Expenses:
Cost of product sales 233,228 488,767
Loan production and processing 739,735 728,501
Interest expense, mortgage banking operations 588,488 785,193
Selling, general and administrative:
Officer's bonus (Note 13) 161,668 883,164
Other, includes FBMS selling, general and administrative (Note 3) 8,432,310 6,250,365
Loss on FBMS rescission (Note 3) 3,979,000
Impairment losses (Notes 6 and 7) 807,250
------------ ------------
14,942,179 9,135,990
------------ ------------
Loss from operations before unusual gain (12,072,888) (6,795,815)
------------ ------------
Unusual gain resulting from allocation of a portion of subsidiary
loss to minority interest upon conversion of preferred stock to
common stock of a subsidiary (Note 16) 5,132,000
------------ ------------
Loss from operations (6,940,888) (6,795,815)
------------ ------------
Other income (expenses):
Investment losses, net (Note 6) (87,087) (571,267)
Equity in losses of affiliates (Note 6) (364,415) (418,209)
Interest income:
Related parties 108,276 79,089
Other 4,953
Interest expense:
Related parties (130,574) (10,357)
Other (17,687)
Other 73,478
------------ ------------
(413,056) (920,744)
------------ ------------
Loss before income taxes (7,353,944) (7,716,559)
Provision for income taxes 13,457
------------ ------------
Net loss (7,367,401) (7,716,559)
Beneficial conversion features (Note 17) (700,000) (3,217,713)
Accretion of redemption value on Series G preferred stock (Note 17) (453,000)
Deemed preferred stock dividends (97,000) (51,300)
------------ ------------
Net loss applicable to common stockholders $ (8,617,401) $(10,985,572)
============ ============
Basic and diluted net loss per common share $ (1.21) $ (1.64)
============ ============
Weighted average number of common shares outstanding 7,106,749 6,718,170
============ ============
See notes to consolidated financial statements.
F-5
EQUITEX, INC. AND SUBSIDIARIES
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
Revenues:
Interest and dividends $ 70,445
Consulting and transaction fees 375,000
Administrative fees 2,371
Miscellaneous 24
-----------
447,840
-----------
Expenses:
Salaries and consulting fees 300,613
Officers' bonus 1,208,042
Office rent 31,188
Advertising and promotion 48,612
Legal and accounting 276,359
Loss on indemnity agreement
Other general and administrative 266,129
Interest 101,002
Bad debt expense (34,435)
Depreciation and amortization 12,833
Employee benefits 207,902
-----------
2,418,245
-----------
Net investment loss (1,970,405)
-----------
Net realized gain on investments and net unrealized gain on investments:
Proceeds from sales of investments 1,712,802
Less: cost of investments sold (604,462)
-----------
Realized gain from sales of investments before income taxes 1,108,340
-----------
Net investment (loss) and realized gain on
investments before income taxes (862,065)
Less: income tax benefit, deferred (63,180)
-----------
Net investment (loss) and realized gain
on investments after income taxes (925,245)
Decrease in unrealized appreciation of investments (1,056,054)
Less: income tax benefit applicable to decrease
in unrealized appreciation of investments 431,361
Add: allowance for income tax benefit (431,361)
-----------
(1,056,054)
-----------
Net decrease in net assets resulting from operations $(1,981,299)
===========
Decrease in net assets per share - primary $ (.45)
===========
Weighted average number of common shares 4,416,988
===========
See notes to consolidated financial statements.
F-6
EQUITEX, INC. AND SUBSIDIARIES
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1998
Common stock
--------------------------
Additional
Treasury paid-in
Shares Amount stock capital Deficit
----------- ----------- ----------- ----------- -----------
Balances, January 1, 1998 3,494,465 $ 69,889 $ (114,037) $ 4,644,275 $ (118,874)
Common stock sold to officer at
$1.16 per share 10,000 200 11,400
Common stock sold to outside
directors at $1.16 per share 139,200 2,784 158,688
Common stock sold to officers
pursuant to option conversions at:
$3.00 per share 74,000 1,480 220,520
$3.19 per share 29,000 580 91,930
Common stock sold to others at :
$ .75 per share 330,000 6,600 240,900
$1.16 per share 350,000 7,000 399,000
$3.25 per share 366,000 7,320 1,182,180
Common stock issued in exchange
for First TeleServices Corporation 625,000 12,500 553,139
Commissions/fees paid
on 1998 private placement sales (133,408)
Net investment loss
Net realized gain on investments
Unrealized loss on investments
----------- ----------- ----------- ----------- -----------
Balances, December 31, 1998 5,417,665 108,353 (114,037) 7,368,624 (118,874)
----------- ----------- ----------- ----------- -----------
(Continued)
F-7
EQUITEX, INC. AND SUBSIDIARIES
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
YEAR ENDED DECEMBER 31, 1998
Accumulated
Accumulated realized Accumulated
net net gains from unrealized net Total
investment sales appreciation on stockholders'
loss of investments investments equity
---------------- ---------------- ---------------- ----------------
Balances, January 1, 1998 $ (13,431,269) $ 12,125,185 $ 364,747 $ 3,539,916
Common stock sold to officer at
$1.16 per share 11,600
Common stock sold to outside
directors at $1.16 per share 161,472
Common stock sold to officers
pursuant to option conversions at:
$3.00 per share 222,000
$3.19 per share 92,510
Common stock sold to
others at :
$ .75 per share 247,500
$1.16 per share 406,000
$3.25 per share 1,189,500
Common stock issued in exchange
for First TeleServices Corporation 565,639
Commissions/fees paid
on 1998 private placement sales (133,408)
Net investment loss (2,266,786) (2,266,786)
Net realized gain on
investments 1,108,340 1,108,340
Unrealized loss on
investments (1,056,054) (1,056,054)
---------------- ---------------- ---------------- ----------------
Balances, December 31, 1998 (15,698,055) 13,233,525 (691,307) 4,088,229
---------------- ---------------- ---------------- ----------------
(Continued)
F-8
EQUITEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000 AND 1999
Convertible preferred
stock Common stock
---------------------- ------------------------ Additional
Treasury paid-in
Shares Amount Shares Amount stock capital Deficit
-------- ---------- ---------- ---------- ----------- ----------- ------------
Balances, January 1, 1999 - - 5,417,665 $ 108,353 $ (114,037) $ 7,368,624 $ (118,874)
Cumulative effect of accounting
change (3,361,147)
Reclassification adjustment on
unrealized loss on investments
Issuance of Series A preferred
stock (net of offering costs) 900 9 769,991
Issuance of Series B preferred
stock (net of offering costs) 600 6 521,994
Issuance of Series C preferred
stock (net of offering costs) 600 6 509,994
Private placement of common
stock (net of offering costs) 350,312 7,006 936,984
Conversion of Series A, B and C
preferred stock to common stock (2,100) (21) 320,528 6,411 (6,390)
Conversion of note payable and
accrued interest to common stock 48,688 974 157,262
Exercises of stock options
issued to employees 665,600 13,312 2,081,234
Exercises of warrants 337,500 6,750 2,606,925
Issuance of warrants for services 150,000
Issuance of Series D preferred
stock (net of offering costs) 1,200 1,200,000 (180,000)
Issuance of Series E preferred
stock 250 250,000 2,281,000
Subsidiary stock transactions 1,622,605
Net loss (7,716,559)
-------- ---------- ---------- ---------- ----------- ----------- ------------
Balances, December 31, 1999 1,450 1,450,000 7,140,293 142,806 (114,037) 18,820,223 (11,196,580)
-------- ---------- ---------- ---------- ----------- ----------- ------------
(Continued)
F-9
EQUITEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
Accumulated
Accumulated realized Accumulated Receivable
net net gains from unrealized net from Series E Total
investment sales appreciation on preferred stockholders'
loss of investments investments stockholder equity
-------------- -------------- -------------- -------------- --------------
Balances, January 1, 1999 $ (15,698,055) $ 13,233,525 $ (691,307) - $ 4,088,229
Cumulative effect of accounting
change 15,698,055 (13,233,525) (896,617)
Reclassification adjustment on
unrealized loss on investments 691,307 691,307
Issuance of Series A preferred stock
(net of offering costs) 770,000
Issuance of Series B preferred stock
(net of offering costs) 522,000
Issuance of Series C preferred stock
(net of offering costs) 510,000
Private placement of common stock
(net of offering costs) 943,990
Conversion of Series A, B and C
preferred stock to common stock
Conversion of note payable and
accrued interest in common stock 158,236
Exercises of stock options issued to
employees 2,094,546
Exercises of warrants 2,613,675
Issuance of warrants for services 150,000
Issuance of Series D preferred
stock, (net of offering costs) 1,020,000
Issuance of Series E preferred stock 2,531,000
Subsidiary stock transactions 1,622,605
Net loss (7,716,559)
-------------- -------------- -------------- -------------- --------------
Balances, December 31, 1999 -- -- -- -- 9,102,412
-------------- -------------- -------------- -------------- --------------
(Continued)
F-10
EQUITEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
Convertible preferred
stock Common stock
---------------------- ------------------------ Additional
Treasury paid-in
Shares Amount Shares Amount stock capital Deficit
-------- ---------- ---------- ---------- ----------- ----------- ------------
Subsidiary equity transaction 382,807
Common stock of subsidiary
to be issued 62,000
Equity investee stock issuances
and related decrease in
proportionate share of
equity investment (743,483)
Series E preferred stock
to be issued
Receivable from stockholder
Issuance of Series F preferred
stock 460,000 2,990,000
Purchase of 35,325 previously
issued shares of the Company's
common stock in exchange for the
issuance of Series A preferred
stock of Meridian Services,
Inc. (170,000)
Issuance of warrants for
services
272,000
Offering costs in connection
with Series G redeemable
preferred stock issuance (60,000)
Issuance of warrants to
Series G preferred
stockholders 242,000
Deemed dividends on Series G
redeemable preferred stock (25,000)
Accretion of Series G
redeemable preferred stock (453,000)
Net loss (7,367,401)
-------- ---------- ---------- ---------- ----------- ----------- ------------
Balances, December 31, 2000 461,450 $4,440,000 7,140,293 $ 142,806 $ (284,037) $18,497,547 $(18,563,981)
======== ========== ========== ========== =========== =========== ============
(Continued)
F-11
EQUITEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
Accumulated
Accumulated realized Receivable
net net gains from Series E from Series E Total
investment sales Preferred Stock preferred stockholders'
loss of investments to be Issued stockholder equity
-------------- -------------- -------------- -------------- --------------
Subsidiary equity transaction 382,807
Common stock of subsidiary
to be issued 62,000
Equity investee stock issuances
and related decrease in
proportionate share of
equity investment (743,483)
Series E preferred stock to be
issued 368,750 368,750
Receivable from stockholder (553,645) (553,645)
Issuance of Series F preferred
stock 2,990,000
Purchase of 35,325 previously
issued shares of the Company's
common stock in exchange for the
issuance of Series A preferred
stock of Meridian Services,
Inc. (170,000)
Issuance of warrants for services 272,000
Offering costs in connection with
Series G redeemable preferred stock
issuance (60,000)
Issuance of warrants to Series G
preferred stockholders 242,000
Deemed dividends on Series G
redeemable preferred stock (25,000)
Accretion of Series G redeemable
preferred stock (453,000)
Net loss (7,367,401)
-------------- -------------- -------------- -------------- --------------
Balances, December 31, 2000 -- -- $ 368,750 $ (553,645) $ 4,047,440
============== ============== ============== ============== ==============
See notes to consolidated financial statements.
F-12
EQUITEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
------------ ------------
Cash flows used in operating activities:
Net loss $ (7,367,401) $ (7,716,559)
------------ ------------
Adjustments to reconcile net loss to net cash
used in by operating activities:
Loss on FBMS rescission 3,979,000
Unusual gain on subsidiary stock transaction (5,132,000)
Impairment losses 807,250
Gain on sale of subsidiary assets (76,620)
Depreciation and amortization 1,787,220 838,359
Warrants issued for services 702,750 150,000
Provision for bad debts on notes receivable 300,000 19,248
Investment loss, net 87,087 571,267
Equity in losses of affiliates 364,415 418,209
Changes in assets and liabilities, net of business
acquisitions and FBMS recission:
Decrease in investments in trading securities 958,395 852,128
Decrease in receivables 40,500
Decrease in mortgage loans held for sale 13,828,929 3,545,354
Decrease (increase) in inventories 29,200 (109,797)
(Increase) decrease in other assets (98,726) 1,093,098
Decrease in accounts payable and accrued liabilities 4,099,952 (3,961,145)
------------ ------------
Total adjustments 21,636,852 3,457,221
------------ ------------
Net cash provided by (used in) operating activities 14,269,451 (4,259,338)
------------ ------------
Cash flows from investing activities:
Purchase of other investments (2,471) (410,000)
Cash acquired on business acquisitions (256,000) (2,327,500)
Purchase of intellectual property rights (850,000)
Purchases of furniture, fixtures and equipment (2,534,406) (278,025)
Repayment of loans and notes receivable 1,017,630
Issuance of loans and notes receivable (2,903,242)
------------ ------------
Net cash used in investing activities (3,642,877) (4,901,137)
------------ ------------
Cash flows from financing activities:
Common stock issued for cash 5,652,211
Proceeds from Series G preferred stock 1,240,000 2,822,000
Issuance of notes payable 2,082,298 758,897
Warehouse loans and other notes payable (14,906,244) (2,826,517)
Proceeds from subsidiary stock transactions 1,627,000 3,505,000
------------ ------------
Net cash (used in) provided by financing activities (11,072,946) 9,911,591
------------ ------------
(Continued)
F-13
EQUITEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
------------ ------------
Change in cash and cash equivalents (446,372) 751,116
Cash and cash equivalents, beginning of year 783,606 32,490
------------ ------------
Cash and cash equivalents, end of year $ 337,234 $ 783,606
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 539,719 $ 2,939,873
============ ============
Supplemental disclosure of non-cash
investing and financing activities:
Common stock issued in satisfaction of
note payable and accrued interest $ -- $ 158,236
============ ============
Conversion of subsidiary preferred stock to common stock $ $ 1,802,000
============ ============
Amortization of discount on preferred stock $ 700,000 $ 3,217,713
============ ============
Subsidiary stock transactions $ 396,300 $ 1,622,605
============ ============
Receivable from Series E preferred stockholder $ 553,645
============
Purchase of The Meridian Residential Group, Inc. (Note 4):
Fair value of assets acquired $ 130,000
Intangible assets 2,648,000
Liabilities assumed (45,000)
Fair value of Series F Preferred Stock exchanged (2,990,000)
------------
Cash acquired $ (256,000)
============
Sale of Triumph retail store:
Equipment $ 38,500
Intangible assets 84,800
Inventory 68,142
Note receivable issued in exchange (268,062)
------------
Gain on sale of subsidiary assets $ (76,620)
============
Purchase (rescission) of FBMS:
Fair value of assets acquired (divested) $ (4,561,000) $ 12,392,600
Intangible assets recorded (impaired) (15,330,000) 18,900,000
Liabilities (assumed) divested 12,922,000 (29,541,600)
Preferred stock of subsidiary 2,990,000
Fair value of Series E preferred stock exchanged (2,531,000)
------------ ------------
Loss on rescission (2000) cash acquired (1999) $ (3,979,000) $ (780,000)
============ ============
Subsidiary purchase of Victoria Precision, Inc.:
Fair value of assets acquired $ 5,769,500
Intangible assets 3,166,000
Liabilities assumed (4,969,000)
Fair value of assets exchanged (859,000)
------------
Cash paid $ 3,107,500
============
See notes to consolidated financial statements.
F-14
EQUITEX, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
Cash flows used in operating activities:
Net loss $(1,981,299)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 12,833
Provision for bad debts on notes receivable (40,193)
Realized gain on sale of investments (1,108,340)
Unrealized loss on investments 1,056,054
Proceeds from sales of investments 1,712,802
Purchases of investments (1,388,626)
Issuance of notes receivable (943,365)
Collections of notes receivable 177,083
Changes in assets and liabilities:
Increase in interest receivable (26,433)
Decrease in accounts receivable - broker 50,943
Increase in other assets (23,119)
Increase in trade receivables 2,668
Decrease in accounts payable and other accrued expenses (45,059)
Increase in accounts payable to brokers 5,758
Increase in deferred income taxes 63,180
Increase in bonus due to officer 376,909
-----------
Net cash used in operating activities (2,098,204)
-----------
Cash flows from investing activities:
Purchase of fixed assets (10,396)
-----------
Net cash used in investing activities (10,396)
-----------
Cash flows from financing activities:
Common stock issued for cash 2,197,174
Issuance of notes payable - officer 165,000
Issuance of notes payable - other 250,000
Repayment of notes payable (480,271)
-----------
Net cash provided by financing activities 2,131,903
-----------
Change in cash and cash equivalents 23,303
Cash and cash equivalents, beginning of period 9,187
-----------
Cash and cash equivalents, end of period $ 32,490
===========
Supplemental disclosures of cash flow information:
Interest paid $ 95,677
===========
Interest received $ 42,217
===========
Supplemental disclosure of non-cash investing activities:
On August 13, 1998, the Company acquired all of the outstanding stock of
First TeleServices Corporation in exchange for 625,000 shares of the
Company's common stock, valued at $565,639.
See notes to consolidated financial statements.
F-15
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 2000, 1999 AND 1998
1. ORGANIZATION, RECENT TRANSACTIONS AND PLAN OF RESTRUCTURING:
BUSINESS HISTORY AND BASIS OF PRESENTATION
Equitex, Inc. (the "Company"), a Delaware Corporation, was incorporated on
January 19, 1983. On July 30, 1984, the Company elected to become a
Business Development Company ("BDC"), as defined in the Small Business
Investment Incentive Act of 1980, an amendment to the Investment Company
Act of 1940. This change resulted in the Company becoming a specialized
type of investment company.
On January 4, 1999, the Company withdrew its election to be treated as a
BDC subject to the Investment Company Act. Subsequent to this
withdrawal, the Company is required to present its financial statements
consistent with those of a regular operating company as opposed to a
BDC. Because the Company was a BDC during the year ended December 31,
1998, those financial statements reflect the BDC format.
In connection with the Company's January 4, 1999 withdrawal of its
election to be treated as a BDC, effective January 1, 1999, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES,
Accounting Principles Board ("APB") Opinion No. 18, THE EQUITY METHOD OF
ACCOUNTING FOR INVESTMENTS IN COMMON STOCK, and SFAS No. 94,
CONSOLIDATION OF ALL MAJORITY-OWNED SUBSIDIARIES. The cumulative effect
of the accounting change was a decrease in stockholders' equity of
$896,617. There was no effect on the 1999 consolidated statement of
operations. These standards were not applicable to the Company in prior
years, operating as a BDC.
SFAS No. 115 requires that certain debt and equity securities be carried
at market value and requires management to re-evaluate the appropriate
classification of securities at each balance sheet date based on its
intent to trade or hold the securities. APB No. 18 requires the use of
the equity method of accounting for investments in which the investor
has the ability to exercise significant influence over operating and
financial policies of the investee enterprise. That ability is presumed
to exist for investments of 20% or more and is presumed not to exist for
investments of less than 20%. SFAS No. 94 provides that consolidated
financial statements generally shall include enterprises in which the
parent has a controlling financial interest.
As discussed below, in connection with the Company's August 1999
acquisition of a mortgage banking company, the Company presented an
unclassified balance sheet from the date of acquisition through December
31, 1999. In June 2000, the Company entered into a rescission agreement
and divested itself of the mortgage banking subsidiary and through
December 31, 2000, entered into acquisitions and other transactions in
which a classified balance sheet was considered by management to
represent a better presentation of the Company's financial position at
December 31, 2000. In addition, certain 1999 balances have been
reclassified to conform to the 2000 presentation.
RECENT TRANSACTIONS AND PLAN OF RESTRUCTURING:
The Company incurred significant operating losses in 2000 and 1999 and has
a working capital deficiency and an accumulated deficit at December 31,
2000. The Company has also experienced difficulty and uncertainty in
meeting its liquidity needs. The Company has entered into recent
transactions and has developed plans and strategies to address these
matters, including the following:
A. Effective June 28, 2000, the Company entered into a rescission
agreement with the previous owner of First Bankers Mortgage
Services, Inc. ("FBMS"), whereby all of the assets and
liabilities of FBMS as of June 28, 2000, were returned to the
previous owner of FBMS, (Note 3).
F-16
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
1. ORGANIZATION, RECENT TRANSACTIONS AND PLAN OF RESTRUCTURING (CONTINUED):
RECENT TRANSACTIONS AND PLAN OF RESTRUCTURING (CONTINUED):
B. Under an agreement signed September 7, 2000, the Company
acquired all of the issued and outstanding common stock of The
Meridian Residential Group, Inc. The Company also acquired
intellectual property rights related to the Meridian
GreatRate.com business from Meridian Capital Group, LLC, a
company affiliated with The Meridian Residential Group, Inc.
through common ownership, for $850,000 (Note 4).
C. In September 2000, the Company issued 1,300 shares of Series
G, 6% redeemable convertible preferred stock for $1,000 per
share (Note 17).
D. On June 29, 2000, the Company signed a definitive agreement
with Key Financial Systems, Inc. ("Key") and Nova Financial
Systems, Inc. ("Nova"), companies under common control with a
nearly identical ownership structure, to acquire all of the
outstanding capital stock of Key and Nova in exchange for the
greater of 7,140,000 shares of Equitex common stock or 50% of
the Company's post-acquisition common stock outstanding and $5
million cash. Key and Nova are both financial services
companies which specialize in selling credit card programs
designed for high credit risk clients. Prior to and as a
condition of the Company's acquisition of Key and Nova, the
Company intends to complete the following transactions:
1. The Company intends to increase the number of
authorized shares of the Company's common stock from
7,500,000 shares to 50,000,000 shares, subject to
stockholder approval (Note 18).
2. The Company intends to distribute all of its assets
(which primarily consist of its investments in
subsidiaries) to Equitex 2000, Inc. ("E2000"), a
newly-formed subsidiary of the Company. E2000 also is
to assume all liabilities of the Company. The
outstanding common shares of E2000 are then to be
distributed to the stockholders of the Company based on
proportional ownership of the shares held by the
Company's stockholders in a spin-off transaction. As a
result of this transaction, the Company will be a
publicly-traded, non-operating entity immediately prior
to the date of the Company's acquisition of Key and
Nova. The Company plans to record the acquisition of
Key and Nova as an acquisition of Equitex, Inc. and a
recapitalization of Key and Nova.
3. In order to finance the Company's acquisition of Key
and Nova, the Company may issue a new series of
preferred stock for net proceeds of $5,000,000, net of
$500,000 of anticipated issue costs.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements as of December 31, 2000 and 1999,
include the accounts of Equitex, Inc., and the following significant
subsidiaries; all significant intercompany accounts and transactions
have been eliminated in consolidation:
F-17
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
1. ORGANIZATION, RECENT TRANSACTIONS AND PLAN OF RESTRUCTURING (CONTINUED):
PRINCIPLES OF CONSOLIDATION (CONTINUED):
FINANCIAL SERVICES SEGMENT:
MERIDIAN SERVICES, INC. ("Meridian", previously The Meridian
Residential Group, Inc.); a New York corporation, acquired on
September 27, 2000, originally incorporated in February 1996
to operate as a mortgage brokerage company; wholly-owned by
the Company at December 31, 2000.
FBMS; a Florida mortgage banking corporation incorporated in
1990, acquired by the Company on August 23, 1999, and
wholly-owned through June 28, 2000 (Note 3). FBMS was engaged
in the origination and sale of residential mortgages,
conventional mortgage products, and FHA and VA assisted
mortgages under the U.S. HUD lending program. Mortgages were
originated through retail branches and wholesale lending
centers located principally in Florida.
NMORTGAGE, INC. ("nMortgage"); a Delaware corporation formed
in September 1999. During the year ended December 31, 2000,
due to the conversion of nMortgage preferred stock to common
stock, the Company's ownership interest in nMortgage's voting
common stock decreased from 100% to 69% (Note 16).
FIRST TELESERVICES CORPORATION ("FTC"); a Florida corporation
incorporated in 1997, acquired by the Company in August 1998
(Note 6). FTC, wholly-owned by the Company, is a consumer
finance company offering financial products and services to
the sub-prime market.
SPORTING GOODS/PRODUCT RELATED SEGMENT:
TRIUMPH SPORTS GROUP, INC. ("Triumph"); a Florida corporation
formed in January 1998 for the purpose of acquiring operating
entities in the non-manufacturing licensed and supplemental
segments of the sporting goods and leisure-time industry.
Between February and June of 1998, the Company acquired an 88%
ownership interest in Triumph. Through December 31, 1999,
Triumph owned and operated five retail vitamin/health
supplement centers in south Florida. Triumph sold one center
in January 2000. Triumph discontinued operations of one center
in November 2000 and a second center in March 2001 (Note 6).
VP SPORTS, INC. ("VP Sports"); a Delaware corporation formed
in December 1997 for the purpose of acquiring an operating
entity in the sporting goods/recreation industry. Effective
July 27, 1999, VP Sports acquired all of the outstanding
common stock of Victoria Precision Inc. ("Victoria
Precision"), a Canadian bicycle manufacturer. As a result of a
private placement of VP Sports' common stock and other stock
issuances, the Company's ownership interest in VP Sports was
reduced from approximately 88% at December 31, 1998 to
approximately 35.7% at December 31, 1999. In March 2000, VP
Sports acquired all of the outstanding common stock of Torpedo
Sports Inc. ("Torpedo"), a Canadian manufacturer of children's
winter toy products. In 2000, due to additional stock
issuances by VP Sports, the Company's ownership percentage
decreased to approximately 13.6% at December 31, 2000 (Note
6).
F-18
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
1. ORGANIZATION, RECENT TRANSACTIONS AND PLAN OF RESTRUCTURING (CONTINUED):
PRINCIPLES OF CONSOLIDATION (CONTINUED):
Minority interest at December 31, 2000, represents issued and outstanding
preferred stock of nMortgage and Meridian. Minority interest at December
31, 1999, represents preferred stock of FBMS and nMortgage (Note 16).
During the years ended December 31, 2000 and 1999, net losses incurred
by the Company's majority-owned subsidiaries exceeded the minority
interest in the common equity (deficiency) of the subsidiaries. As a
result, the excess of losses applicable to the minority interest have
been charged to the Company, and no minority interest is reflected in
the Company's 2000 or 1999 statements of operations.
2. SIGNIFICANT ACCOUNTING POLICIES:
USE OF ACCOUNTING ESTIMATES IN FINANCIAL STATEMENT PREPARATION:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates, and it is reasonably possible that significant changes could
occur in the near term.
CASH AND CASH EQUIVALENTS:
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with an original maturity date of three months
or less to be cash equivalents.
INVENTORIES:
Inventories consist primarily of vitamin and health supplement products
held for sale by Triumph and are valued at the lower of cost (first-in,
first-out) or market value.
MORTGAGE LOANS (FBMS):
Through June 28, 2000, mortgage loans originated and intended for sale in
the secondary market were carried at the lower of cost or estimated fair
value in the aggregate. Net unrealized losses, if any, were recognized
through a valuation allowance by charges to income. Gain or loss on
sales of loans was recognized at the time of the sale. Origination fees
and loan origination costs on such loans were recognized when the
mortgage was sold, which was normally within 30 days of the origination
of the loan. Interest earned on these mortgages was recognized as income
from the time the mortgage was closed to the time the mortgage was sold.
Through June 28, 2000, the Company funded mortgage loans to customers.
Loans that management had the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally were reported
at their outstanding unpaid principal balances adjusted for charge-offs,
an allowance for loan losses, and any deferred fees or costs on
originated loans. Interest income was accrued on the unpaid principal
balance. Loan origination fees, net of certain direct origination costs,
were deferred and recognized as an adjustment to the related loan yield
using the interest method. Through June 28, 2000, the inventory of
mortgage loans consisted primarily of first trust deed mortgages on
residential properties located throughout the United States. As of
December 31, 1999, the Company had mortgage loans held for sale of
$14,787,080, which were net of an allowance for loan losses of
$1,386,000. All mortgage loans were pledged as collateral for the
warehouse loans through June 28, 2000.
F-19
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
MORTGAGE LOANS (FBMS) (CONTINUED):
The accrual of interest on mortgage and commercial loans was discontinued
at the time the loan was 90 days delinquent unless the credit was
well-secured and in process of collection. Loans were placed on
non-accrual or charged-off status at an earlier date if collection of
principal or interest was considered doubtful. All interest accrued but
not collected for loans that were placed on non-accrual or charged-off
status was reversed against interest income. The interest on these loans
was accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual status. Loans were returned to accrual
status when all the principal and interest amounts contractually due
were brought current and future payments were reasonably assured.
ALLOWANCE FOR LOAN LOSSES (FBMS):
The allowance for loan losses was evaluated on a regular basis by
management and was based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may
have affected the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available. Loan losses were charged against the allowance when
management believed the uncollectibility of a loan balance was
confirmed. Subsequent recoveries, if any, were credited to the
allowance.
A loan was considered impaired when, based on current information and
events, it was probable that the Company would be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment included payment status, collateral
value, and the probability of collecting scheduled principal and
interest payments when due. Loans that experienced insignificant payment
delays and payment shortfalls generally were not classified as impaired.
Management determined the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior
payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment was measured on a loan by loan
basis for commercial and construction loans by either the present value
of expected future cash flows discounted at the loan's effective
interest rate, the loan's obtainable market price, or the fair value of
the collateral if the loan was collateral dependent.
INVESTMENT VALUATION IN 1998 AS A BDC:
Investments held by the Company in 1998 consisted of holdings of
securities in and receivables of publicly and privately-held companies.
The Company had representation on the boards of directors of four of its
investee companies during 1998, and several investments were in
companies in which there was either direct or indirect ownership or
control of 5% or more of the outstanding voting shares. Through December
31, 1998, as a BDC, the Company utilized the fair value method adopted
in 1984, which provided for the Company's Board of Directors to be
responsible for the valuation of the Company's investments, including
notes receivable and interest receivable. Fair value is the value, which
could reasonably be expected to be realized in a current arms-length
sale. Investments through December 31, 1998 were carried at fair value
using the following four basic methods of valuation:
F-20
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INVESTMENT VALUATION IN 1998 AS A BDC (CONTINUED):
1. Cost - The cost method is based on the original cost to the
Company adjusted for amortization of original issue
discounts, accrued interest for certain capitalized
expenditures of the corporation, and other adjustments as
determined to be appropriate by the Board of Directors in
good faith taking into consideration such factors as
available financial information of the investee, the nature
of and duration of any restriction as to resale, and other
factors which influence the market in which a security is
purchased and sold. Such method is applied in the early
stages of an investee's development until significant
positive or adverse events subsequent to the date of the
original investment require a change to another method.
2. Private market - The private market method uses actual or
proposed third party transactions in the investee's
securities as a basis of valuation, utilizing actual firm
offers as well as historical transactions, provided that
any offer used is seriously considered and well documented
by the investee, and adjusted (if applicable) by the Board
of Directors in good faith taking into consideration such
factors as available financial information of the investee,
the nature and duration of any restrictions as to resale,
and other factors which influence the market in which a
security is purchased and sold.
3. Public market - The public market method is the preferred
method of valuation when there is an established public
market for the investee's securities. In determining
whether the public market method is sufficiently
established for valuation purposes, the Company examines
the trading volume, the number of shareholders and the
number of market makers in the investee's securities, along
with the trend in trading volume as compared to the
Company's proportionate share of the investee's securities.
Investments in unrestricted securities that are traded in
the over-the-counter market are generally valued at the
high bid price on the last day of the year. If the security
is restricted as to resale or has significant escrow
provisions or other significant restrictions, appropriate
adjustments are determined in good faith by the Board of
Directors taking into consideration such factors as
available financial information of the investee, the nature
and duration of restrictions on the ultimate disposition of
securities, and other factors which influence the market in
which security is purchased and sold.
4. Appraisal - The appraisal method is used to value an
investment position after analysis of the best available
outside information where there is not established public
or private market in the investee's securities.
Purchases and sales of securities transactions are accounted for on the
trade date which is the date the securities are purchased or sold. The
cost of securities sold is reported on the first-in first-out cost basis
for financial statement purposes.
F-21
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FURNITURE, FIXTURES, EQUIPMENT AND DEPRECIATION:
Furniture, fixtures and equipment are stated at cost, and depreciation is
provided by use of the straight-line method over the estimated useful
lives of the assets. The cost of leasehold improvements is depreciated
over the estimated useful lives of the assets or the length of the
respective leases, whichever period is shorter. Estimated useful lives
of furniture, fixtures and equipment are as follows:
Vehicles 5 years
Office equipment and furniture 3 to 7 years
Computer hardware and software 3 to 5 years
Leasehold improvements 7 years
WEBSITE DEVELOPMENT COSTS AND AMORTIZATION:
Website development costs related to the development of major interactive
mortgage banking systems are capitalized and amortized over the
estimated useful life of the related project, not to exceed three years.
INTANGIBLE ASSETS AND AMORTIZATION:
Goodwill represents the cost of the Company's investments in subsidiaries
in excess of the net tangible assets acquired and is amortized on the
straight-line method over fifteen years. Intellectual property rights,
which consist of the Meridian intellectual property, are being amortized
over three years.
Tradename and franchise rights are related to Triumph. Franchise rights
represent the initial fees paid by Triumph to operate its locations as
General Nutrition Centers. The franchise operating agreement gives the
Company the right to operate a General Nutrition Center for a specified
term at a given location. In exchange, the Company is obligated to pay
the franchisor a periodic payment of royalties based on a percentage of
sales and to operate its centers to a certain level of minimum
standards. Amortization of franchise rights is computed using the
straight-line method over the life of the related agreement, which is
ten years.
Foreclosed assets acquired through, or in lieu of, loan foreclosure were
held for sale by FBMS and were initially recorded at fair value at the
date of foreclosure, establishing a new cost basis.
SUBSIDIARY EQUITY TRANSACTIONS
The Company recognizes in its consolidated financial statements, increases
or decreases in its additional paid in capital resulting from the sales
of previously issued stock by its subsidiaries which have the effect of
reducing the parent's percentage equity holding.
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company reviews long-lived assets, including goodwill and identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to future undiscounted cash flows
expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the fair value of the
assets. In connection with the June 28, 2000, FBMS rescission, the
Company recorded a loss of $3,979,000 in 2000 (Note 3). In addition,
during the fourth quarter of 2000, the Company recorded a $353,000
impairment charge related to web-site development costs (Note 9) and an
$454,250 impairment charge related to the closings of two Triumph retail
stores and related to impairment of goodwill (Note 7). Based on
management's review, the Company does not believe that any other
impairment has occurred as of December 31, 2000.
F-22
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
REVENUE RECOGNITION:
Revenue from Meridian loan origination fees is recognized upon the
completion and closing of a mortgage. Revenue from product sales which
represent retail sales of vitamin/health supplement products, are
recognized at the time of the sales transaction with the customer.
COMPREHENSIVE INCOME:
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, establishes requirements for
disclosure of comprehensive income, which includes certain items
previously not included in the statements of operations, including
unrealized gains and losses on certain investments in debt and equity
securities, among others. In 2000 and 1999, net loss and comprehensive
loss were the same. In 1998, SFAS No. 130 had no effect on the Company
since it was following the fair value accounting guidelines required for
BDC's.
RECENTLY ISSUED ACCOUNTING STANDARDS:
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This
statement, as amended, is effective for fiscal years beginning after
June 15, 2000. Currently, the Company does not have any derivative
financial instruments and does not participate in hedging activities.
Therefore, management believes that SFAS No. 133 will not have an impact
on its financial position or results of operations.
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin ("SAB") No. 101, REVENUE RECOGNITION IN
FINANCIAL STATEMENTS. SAB No. 101, as amended by SAB No. 101A and SAB
No. 101B, is effective no later than the fourth fiscal quarter of fiscal
years beginning after December 15, 1999. SAB No. 101 provides the
Staff's views in applying generally accepted accounting principles to
selected revenue recognition issues. The Company believes that it
complies with the accounting and disclosure described in SAB No. 101;
therefore, management believes that SAB No. 101 will not impact the
Company's financial statements.
STOCK-BASED COMPENSATION:
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION defines a fair-value
based method of accounting for stock-based employee compensation plans
and transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees, and encourages but does
not require companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB No. 25") and related
interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee
must pay to acquire the stock.
F-23
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
NET LOSS PER SHARE (NET ASSETS PER SHARE IN 1998):
In 1999, in connection with the Company's withdrawal as a BDC, the Company
adopted the provisions of SFAS No. 128, EARNINGS PER SHARE. SFAS No. 128
requires dual presentation of basic and diluted earnings per share (EPS)
for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS
computation. Basic EPS excludes dilution; diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the entity.
Basic loss per share is computed by dividing net loss applicable to common
shareholders by the weighted-average number of common shares outstanding
for the year. In arriving at net loss applicable to common shareholders,
amortization of the beneficial conversion features and accretion to
redemption value related to the preferred stock and dividends on the
preferred stock (Notes 17 and 18) increased this amount. Diluted loss
per share reflects the potential dilution that could occur if dilutive
securities and other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the Company, unless the effect is to
reduce a loss or increase earnings per share. The Company had no
potential common stock instruments which would result in diluted loss
per share in 2000, 1999 and 1998. At December 31, 2000, 1999 and 1998
the total number of common shares issuable under the exercise of
outstanding options and warrants and upon the conversion of convertible
preferred stock was 4,115,324, 1,370,281 and 749,000 respectively.
In 1998, in accordance with the fair value accounting method used by
regulated investment companies, primary net assets (total stockholders'
equity) per share at December 31, 1998 was $.74, based on weighted
average shares outstanding of 5,384,315, and fully diluted net assets
per share was $.65, based on weighted average shares outstanding of
6,156,015.
3. RESCISSION OF AUGUST 23, 1999 FBMS AGREEMENT AND PLAN OF REORGANIZATION,
AND DIVESTITURE OF FBMS:
On August 23, 1999, the Company acquired all of the outstanding common
stock of FBMS in exchange for 250 shares of the Company's Series E
Convertible Preferred Stock, valued at approximately $2,531,000. The
transaction was accounted for as a purchase. The total purchase price
was allocated to the assets and liabilities acquired based on their
estimated fair values, including goodwill of approximately $18,900,000,
which has been amortized by use of the straight line method over ten
years.
Effective June 28, 2000, the Company entered into a rescission agreement
with the previous owner of FBMS, in which the Company and the previous
owner agreed to rescind the terms of the August 23, 1999 FBMS Agreement
and Plan of Reorganization. Under the terms of the rescission
agreement, all assets and liabilities of FBMS as of June 28, 2000, were
returned to the previous owner of FBMS.
Pursuant to the terms of the settlement relating to the rescission
agreement, the parties agreed that nMortgage retain certain
technological rights related to the development of an interactive
website developed subsequent to August 23, 1999, utilizing resources
acquired through the FBMS acquisition (Note 9). Also as part of the
settlement, the Company agreed to issue up 50 additional shares of
Series E preferred stock related to certain performance conditions
concerning the original acquisition that were satisfied prior to
rescission to fund the resolution of certain claims (Note 17). The 50
additional shares of Series E preferred stock are convertible into
50,000 shares of common stock and are valued at $368,750, which was
based on the quoted market price of the underlying shares of common
stock at the date of rescission, and which was recorded as expense by
the Company.
F-24
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
3. RESCISSION OF AUGUST 23, 1999 FBMS AGREEMENT AND PLAN OF REORGANIZATION,
AND DIVESTITURE OF FBMS (CONTINUED):
In connection with the rescission agreement, the Company divested itself
of the assets, liabilities, and operations of FBMS as of June 28, 2000,
and as a result, recorded a loss of $3,979,000, which represents the
write off of the Company's investment in FBMS, including remaining
goodwill as of the date of the rescission. The operating results of FBMS
have been included in the consolidated financial statements from the
date of acquisition through the date of rescission.
The following pro forma information has been prepared assuming the
rescission of FBMS had taken place at the beginning of the respective
periods. The pro forma information includes adjustments to remove the
operating results of FBMS, related amortization of goodwill arising from
the acquisition of FMBS, and the loss on the FBMS rescission.
The pro forma financial information is not necessarily indicative of the
results of operations as they would have been had the transaction been
effected on the assumed date.
Years ended December 31,
2000 1999
------------ ------------
Revenues $ 1,436,000 $ 842,000
Net gain (loss) $ (204,000) $ (4,040,000)
Net loss applicable to common shareholders $ (1,046,000) $ (7,927,000)
Basic and diluted loss per common share $ (.15) $ (1.18)
Shares used in per share calculation 7,106,749 6,718,170
4. BUSINESS ACQUISITIONS:
ACQUISITION OF MERIDIAN:
Under an agreement signed September 7, 2000, the Company, through a
newly-formed subsidiary GR.com, Inc., acquired all of the issued and
outstanding common stock of The Meridian Residential Group, Inc. ("MRG")
in exchange for 425,000 shares of Series F participating, convertible
preferred stock, valued at approximately $2,762,000. The acquisition was
completed on September 27, 2000. The Company also issued 35,000 shares
of Series F preferred stock, valued at $228,000 as additional
consideration for costs of the acquisition. The value of the Series F
Preferred Stock was based upon the quoted market price of the Company's
common stock ($6.50 per share) underlying the Series F Preferred Stock
on September 7, 2000 (the date the agreement was signed). MRG was merged
into GR.com, Inc. and GR.com Inc. subsequently changed its name to
Meridian Services, Inc. In addition, E2000 is to issue additional shares
of common stock to the MRG shareholders having a market value, at the
time of issuance, equal to 20% of the annual increase in pre-tax net
earnings compared to the immediately preceding year of the MRG business
for each of the five years subsequent to closing, commencing with the
year ended December 31, 2000, subject to certain limitations, as
defined.
The transaction was accounted for as a purchase, and the results of
operations of Meridian are included in the Company's 2000 consolidated
statements of operations from the date of acquisition. The total
purchase price was allocated to the assets and liabilities acquired
based on their estimated fair values, including goodwill of
approximately $2,648,000, which is being amortized by the use of the
straight-line method over fifteen years.
F-25
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
4. BUSINESS ACQUISITIONS (CONTINUED):
ACQUISITION OF MERIDIAN (CONTINUED):
The Company, through its subsidiary nMortgage, Inc., also acquired the
proprietary business model, website, trademarks, corporate names and all
intellectual property rights related to the Meridian GreatRate.com
business, including the names GreatRate.com and GreatRate Mortgage.com
from Meridian Capital Group, LLC, a company affiliated with MRG through
common ownership, for $850,000 cash. The intellectual property rights
are being amortized by use of the straight-line method over a three-year
period.
The following unaudited pro forma financial information for the years
ended December 31, 2000 and 1999, give effect to the above acquisitions
as if they had occurred at the beginning of each respective period.
Years ended December 31,
2000 1999
------------- -------------
Revenue $ 4,654,000 $ 4,585,000
Net loss $ (7,694,000) $ (8,153,000)
Net loss applicable to common shareholders $ (8,944,000) $ (11,422,000)
Basic and diluted loss per common share $ (1.26) $ (1.70)
Shares used in per share calculation 7,106,749 6,718,170
The following unaudited pro forma financial information for the years
ended December 31, 2000 and 1999, give effect to the Meridian
acquisition and the FBMS rescission and divestiture as if they had
occurred at the beginning of each respective period.
Years ended December 31,
2000 1999
------------- -------------
Revenue $ 3,231,000 $ 3,087,000
Net loss $ (122,000) $ (4,476,000)
Net loss applicable to common shareholders $ (1,791,000) $ (10,804,000)
Basic and diluted loss per common share $ (.25) $ (1.61)
Shares used in per share calculation 7,106,749 6,718,170
The unaudited pro forma financial information above does not purport to
represent the results which would actually have been obtained if the
acquisitions had been in effect during the periods covered or any future
results which may in fact be realized.
ACQUISITIONS OF FTC AND TRIUMPH:
In August 1998, the Company acquired all of FTC's outstanding common stock
in exchange for 625,000 shares of the Company's common stock valued at
$565,639. The Board of Directors used the Board appraisal method of
valuation for this investment through December 31, 1998, and recorded
FTC at $565,639, which was the net asset value of FTC's underlying
assets and liabilities at the acquisition date. From the date of the
acquisition through December 31, 1998, the Company loaned $160,000 to
FTC for working capital purposes.
In February and June 1998, the Company acquired a total of 1,500,000
shares of Triumph common stock in exchange for consulting services
valued at $375,000, which represented an ownership interest of
approximately 88% at December 31, 1998. The Company's president was also
the president and a director of Triumph. Through December 31 1998, the
investment was valued using the cost valuation method because no more
recent common stock sales had occurred. During 1998, the Company loaned
$561,569, to Triumph, which was used by Triumph primarily to acquire
four retail vitamin/health supplement centers in south Florida. Triumph
repaid $64,478 of these notes and $39,939 of interest during 1998,
resulting in balances due the Company at December 31, 1998 of $899,018
and $23,088 for note principal and accrued interest, respectively. Both
of these investments were accounted for and presented as investments in
controlled companies as of and for the year ended December 31, 1998. At
December 31, 1998, the fair value of these investments was $940,639.
Effective January 1, 1999, in connection with the Company's change from
a BDC to an operating company, the Company began consolidating FTC and
Triumph pursuant to SFAS No. 94.
F-26
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
5. RECEIVABLES:
Receivables at December 31, 2000 and 1999 consist of the following:
2000 1999
----------- -----------
RELATED PARTIES:
Notes receivable from officers and directors of the
Company; interest rates ranging from 8% to 10%; notes
collateralized in part by shares of the Company's common
stock; original maturities through March 2001, now due on
demand $ 130,895 $ 569,000
Notes receivable from affiliate; interest rates ranging
from 8% to 10%; unsecured; due on demand 477,081 300,000
Advances receivable from affiliates; non-interest bearing;
unsecured; due on demand 328,950 317,177
Note receivable from employee; interest at 8.25%;
unsecured; due in October 2001 7,600 8,800
Interest receivable 39,031 8,833
----------- -----------
983,557 1,203,810
----------- -----------
OTHER:
Receivables, non-interest bearing; unsecured 216,177 167,390
Notes receivable; interest at 15%; collateralized by real
estate; due in September 2001 (Note 6) 250,000 --
Notes receivable; interest rates ranging from 8% to 12%;
unsecured; maturing at various dates through December
x2000x 385,940 125,017
Mortgage loans receivable from FBMS customers; interest
rates ranging from 7.25% to 13.75%, maturing at various
dates through 2030; collateralized by real estate -- 374,500
Interest receivable 26,766 --
----------- -----------
878,883 666,907
Less allowance for uncollectible receivables (40,263) (162,336)
----------- -----------
838,620 504,571
----------- -----------
$ 1,822,177 $ 1,708,381
=========== ===========
F-27
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
6. INVESTMENTS:
At December 31, 2000 and 1999, the company's investments consist of the
following:
Investment type Investment balance
------------------------------ -------------------------
2000 1999
-------------------------
Marketable securities (trading securities):
Intranet Solutions, Inc. [A] $ 165,750 $ 786,250
Other 72,466 116,287
--------- -----------
238,216 902,537
========= ===========
Equity investments:
VP Sports [B] $ 365,000 $ 1,472,898
Net 1 Capital, LLC [C] - 235,000
--------- -----------
$ 365,000 $ 1,707,898
========= ===========
Other investments (cost basis investments):
First TeleBanc Corporation [D] $ 800,000 $ 800,000
Other 67,471 65,000
--------- -----------
$ 867,471 $ 865,000
========= ===========
[A] On January 1, 1998, the Company owned 473,250 shares of
common stock of Intranet Solutions, Inc. ("Intranet").
During 1998, the Company sold 284,665 shares of IntraNet
for proceeds of $1,240,613, which was used to provide
working capital, and which resulted in an ownership
position of 188,585 shares (less than 5%) at December 31,
1998. These shares were valued using the public market
valuation method at December 31, 1998. In addition, the
Company paid the remaining balance of a 150,000 payable to
IntraNet in January 1998.
Effective January 1, 1999, the Company classified its
investment in IntraNet as a trading security pursuant to
SFAS No. 115. As of December 31, 2000 and 1999, the market
value of the IntraNet investment based on quoted market
prices was $165,750 and $786,250, and the cost of the
IntraNet investment was $34,318 and $216,159, respectively
(an unrealized gain of $131,432 and $570,091). During 2000
and 1999, the Company realized gains on the sales of
IntraNet securities of $21,107 and $638,764, respectively.
At March 30, 2001, the market value of the IntraNet
investment, based on the quoted market price per share,
was approximately $78,000 .
[B] At December 31, 1998, the Company's investment in VP
Sports' common shares was valued using the private market
valuation method. The valuation reflected the price at
which the most recent common stock sales occurred in 1998.
The Company's president is also the president and a
director of VP Sports. During 1998, the Company loaned
$103,131 to VP Sports for working capital purposes, of
which $38,865 was repaid in 1998.
F-28
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
6. INVESTMENTS (CONTINUED):
Effective January 1, 1999, the Company began consolidating
VP Sports. In connection with a private placement of VP
Sports' common stock, the Company's ownership interest in
VP Sports was reduced from approximately 88% at January 1,
1999 to approximately 35.7% at December 31, 1999. Due to
the change in ownership percentage, the Company changed
its method of accounting for its investment in VP Sports
in 1999 from consolidation to the equity method of
accounting. During 1999, a receivable of $64,266 at
December 31, 1998 was repaid. Effective July 27, 1999, the
Company, through its majority-owned subsidiary VP Sports
and VP Sports' wholly-owned subsidiary, 9066-8609 Quebec
Inc., a Canadian corporation, acquired all of the
outstanding common shares of Victoria Precision, also a
Canadian corporation, as well as the future rights to a
four-year international consulting and non-compete
agreement. The transaction was accounted for as a
purchase. Total consideration of approximately $3,966,600
($6,000,000 CDN) was required. The purchase price for the
common stock was $2,000,000 CDN and was allocated to the
assets and liabilities acquired based on their estimated
fair values, including intangible assets of approximately
$3,166,000, which are being amortized by the use of the
straight-line method over four to ten years. In order to
finance the 1999 acquisition, VP Sports completed a
$4,500,000 private placement of 36 units; each unit
consisting of 100 shares of $1,000 per share, 8%
convertible preferred stock, 12,500 shares of VP Sports
common shares, and warrants to purchase 287,500 shares of
VP Sports common stock at $.10 per share.
In March 2000, VP Sports acquired all of the outstanding
common stock of Torpedo Sports, Inc. for $420,000. The
transaction was accounted for as a purchase, and the
purchase price was allocated to the assets and liabilities
acquired based on their estimated fair values.
During 2000, the Company's ownership interest in VP Sports
decreased to approximately 13.6% as of December 31, 2000
due to issuances of common stock by VP Sports. The
Company's ownership interest in the underlying assets of
VP Sports decreased by $743,483 which has been recorded as
a decrease to the investment and additional paid-in
capital The Company continues to account for its
investment in VP Sports under the equity method of
accounting due to the Company's ability to exercise
significant influence over operating and financial
policies of VP Sports.
[C] In March 1999, FTC entered into a joint-venture agreement
with Net 1 Capital, LLC ("Net 1 Capital"), a Florida
Limited Liability Company, formed for the purpose of
acquiring pre-existing portfolios of consumer debt and
servicing and/or marketing these portfolios. The Company
invested $250,000 for a 50% interest in Net 1 Capital. The
Company also loaned Net 1 Capital $317,629, which was
repaid in 1999. The Company accounted for Net 1 Capital
under the equity method of accounting through December 31,
2000. In March 2001, the Company entered into an agreement
with the joint venture partner to exchange its investment
to the joint venture partner in exchange for a $250,000
note receivable.
[D] During 1998, the Company and FTC acquired a 9% interest
in First TeleBanc Corporation ("FTB"), a closely-held
Florida corporation, for $625,000. On December 30, 1998,
First TeleBanc acquired all of the outstanding common
stock of Boca Raton First National Bank. During 1999, the
Company acquired an additional interest in FTB for
$175,000. At December 31, 2000 and 1999, the Company's
ownership interest in FTB is 7.2% and 8.1%, respectively.
During 2000 and 1999, the Company accounted for its
investment in First TeleBanc at cost.
F-29
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
6. INVESTMENTS (CONTINUED):
The Company's equity in the net losses of its equity investments was
$364,415 and $418,209 for the years ended December 31, 2000 and 1999.
Summarized unaudited combined financial information for these
investments as of and for the years ended December 31, 2000 and 1999, is
as follows:
2000 1999
------------ ------------
Current assets $ 12,218,138 $ 6,834,574
Non-current assets 5,784,223 7,552,862
------------ ------------
Total assets $ 18,002,361 $ 14,387,436
============ ============
Current liabilities $ 12,264,499 $ 6,070,949
Non-current liabilities 2,620,083 2,144,775
------------ ------------
Total liabilities 14,884,582 8,215,724
Total equity 3,117,779 6,171,712
------------ ------------
Total liabilities and equity $ 18,002,361 $ 14,387,436
============ ============
Revenues $ 19,604,490 $ 4,142,540
Gross profit $ 3,492,809 $ 611,100
Operating losses $ (1,064,279) $ (1,134,212)
Net loss $ (1,684,681) $ (1,026,292)
INVESTMENT IN RDM SPORTS GROUP (FORMERLY ROADMASTER INDUSTRIES):
During 1998, the Company valued its investment in RDM using the public
market valuation method. In addition, the Company recorded
administrative fees from RDM totaling $25,893. Effective January 1,
1999, the Company classified its investment in RDM as an available for
sale security pursuant to SFAS No. 115, and during 1999, in connection
with the Company's evaluation of investments for impairment, management
determined that the decline in the value of its investment in RDM was
other than temporary. As a result, the Company adjusted the unrealized
loss on this investment of $1,201,355 (which represented 4,979,437
shares of RDM common stock), previously recorded as a component of
stockholders' equity, to a realized loss, and fully reserved a note
receivable from Hutch Sports USA (an RDM subsidiary) which had a
carrying value of $56,475 at January 1, 1998. These adjustments resulted
in a $1,257,830 charge to the 1999 statement of operations. The Company
owns 4,979,437 shares of RDM common stock at December 31, 2000, valued
at $0.
OTHER INVESTMENTS:
During 1999, the Company determined that two cost-basis investments which
totaled $70,000 at December 31, 1998 were impaired, and were written off
in the 1999 statement of operations.
Other trading securities at December 31, 2000 and 1999 are recorded at
estimated fair value, based on quoted market prices, of $72,466 and
$116,287, respectively, which is $206,260 and $38,517 less than cost.
During 1999, the Company realized gains of $158,752 from the sales of
certain other trading securities held by the Company. At March 30, 2001,
the aggregate market value of the other trading securities had not
materially changed.
F-30
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
7. TRIUMPH OPERATIONS:
Effective January 1, 2000, Triumph sold the assets of one of its five
retail stores in exchange for a $268,000 note receivable. In connection
with this transaction, Triumph recorded a gain on the sale of
approximately $76,600, which is included in other income in the
accompanying statement of operations. In November 2000 and March 2001,
the Company terminated operations at two other retail stores. In
connection with these store closings, the Company recorded an $88,900
impairment loss in 2000. During the fourth quarter of 2000, in
connection with the store closings and an evaluation of future
undiscounted cash flows, the Company concluded that an impairment
charge of $365,350 was necessary to write off the carrying amount of
goodwill related to the Triumph operations.
8. FURNITURE, FIXTURES AND EQUIPMENT:
Furniture, fixtures, and equipment consist of the following at December
31, 2000 and 1999:
2000 1999
----------- -------------
Vehicles $ 121,575 $ 30,542
Office equipment and furniture 234,304 1,410,699
Computer hardware and software - 430,082
Leasehold improvements 197,494 76,759
----------- ------------
553,373 1,948,082
Less accumulated depreciation (292,302) (890,050)
----------- ------------
$ 261,071 $ 1,058,032
=========== ============
9. INTANGIBLE AND OTHER ASSETS:
Intangible and other assets consist of the following at December 31, 2000
and 1999:
2000 1999
------------ -------------
Goodwill $ 2,729,717 $ 19,072,300
Website development costs 1,730,000 -
Intellectual property rights 850,000 -
Tradename and franchise rights 67,326 172,800
Deposits 213,377 454,094
Other 22,655 227,872
Foreclosed assets of FBMS - 299,400
Restricted cash of FBMS - 210,169
------------ -------------
5,613,075 20,436,635
Less accumulated amortization (142,701) (671,578)
------------ --------------
$ 5,470,374 $ 19,765,057
============ =============
Subsequent to the August 23, 1999 acquisition of FBMS, the Company,
utilizing resources acquired through the FBMS acquisition, incurred
costs in the development of an interactive mortgage-banking website.
Through December 31, 1999, website development primarily consisted of
planning-stage activities and was expensed as incurred pursuant to
criteria outlined in Emerging Issues Task Force ("EITF") Issue No. 00-2.
Beginning in January 2000 and continuing through early June 2000, FBMS
incurred additional costs of website development, including costs
approximating $2,500,000 related to website application and
infrastructure development, and graphics and content development, which
were capitalized pursuant to EITF Issue 00-2 and SOP 98-1. These website
development costs are now being utilized by the Company and are being
amortized over a three-year term.
F-31
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
9. INTANGIBLE AND OTHER ASSETS (CONTINUED):
At December 31, 2000, management's assessment of website development costs
for impairment indicated that the carrying value of $2,083,000 had been
impaired. Management's assessment included an evaluation of undiscounted
future cash flows and the results of an external appraisal. As a result,
the carrying value of the website development costs was reduced by
$353,000.
Deposits include a contract deposit receivable whereby the Company is the
plaintiff in an action in which it is seeking to recover $300,000
deposited into an escrow account pending the receipt of required
documentation. The defendant has not delivered the required documents.
This deposit has been recorded at an estimated net realizable value of
$150,000 at December 31, 2000 and 1999.
10. NOTES AND ADVANCES PAYABLE:
At December 31, 2000 and 1999, notes and advances payable consist of the
following:
2000 1999
---------- ----------
RELATED PARTIES:
Notes payable to affiliates; interest rates ranging from
8%-10%; unsecured; due on demand $1,326,792 $ 542,000
Advances payable to affiliate, non-interest bearing, due
on demand 500 240,000
Notes payable to officer/director; interest rates ranging
from 8%-12% unsecured; due on demand 533,000 50,000
---------- ----------
1,860,292 832,000
---------- ----------
OTHERS:
Note payable to bank by FBMS; interest at 18%; unsecured;
balance originally due November 1999; due on demand
through date of FBMS rescission -- 477,000
Notes payable to individuals by FBMS; interest rates
ranging from 8% to 18%, unsecured; notes matured at
various dates through August 2000; at December 31,
1999, $454,473 of the notes payable were in default -- 723,160
Note payable to bank by FBMS; interest at 1.5% over bank's
prime rate (10% at December 31, 1999) loan was
collateralized by property and equipment -- 250,000
Capital lease obligations of FBMS, maturities at various
dates through October 2002 -- 398,391
Other 96,966 93,403
---------- ----------
96,966 1,941,954
---------- ----------
1,957,258 $2,773,954
==========
Less current notes and advances payable 1,877,631
----------
Long-term notes and advances payable $ 79,627
=========
F-32
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
10. NOTES AND ADVANCES PAYABLE (CONTINUED):
Notes and advances payable are due as follows:
Year ending
December 31,
------------
2001 $ 1,877,631
2002 18,453
2003 21,157
2004 24,256
2005 15,761
------------------
$ 1,957,258
==================
11. COMMITMENTS AND CONTINGENCIES:
LEASES:
The Company leases its Florida corporate facilities under a non-cancelable
operating lease which expires in February 2004. The Company also leases
office space in New York under a non-cancelable operating lease which
expires in August 2005. Future minimum lease payments under these
operating leases are as follows:
Year ending
December 31,
------------
2001 $ 101,000
2002 99,000
2003 90,000
2004 66,000
2005 25,000
------------------
$ 381,000
==================
In addition, the Company leases office space in Colorado on a
month-to-month basis for $2,500 per month from Beacon Investments, a
corporation in which the Company's president is the sole shareholder
Total rent expense for the years ended December 31, 2000, 1999, and 1998
was approximately $297,000, $272,000 and $30,000, respectively.
CONSULTING AND EMPLOYMENT AGREEMENTS:
In connection with the acquisition of Meridian, the Company entered into
consulting and employment agreements which requires nMortgage to issue
to the consultant/employee common shares of nMortgage equal to 2% of the
issued and outstanding common shares of nMortgage on a fully diluted
basis. The Company has recognized $62,000 of expense related to the
issuance of these shares through December 31, 2000. The employment
agreement also required nMortgage to grant to the employee options to
purchase up to 150,000 shares of nMortgage common stock at $1.00 per
share, the estimated fair value of the nMortgage common stock at the
date of grant.
F-33
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
11. COMMITMENTS AND CONTINGENCIES (CONTINUED):
CONSULTING AND EMPLOYMENT AGREEMENTS (CONTINUED):
In September 2000, the Company entered into a consulting agreement for
services to be performed subsequent to December 31, 2000, in which, upon
the satisfaction of various performance criteria, the Company is to
issue 75,000 shares of common stock and warrants to purchase and
additional 75,000 shares of common stock at an exercise price equal to
80% of the average closing bid price of the Company's common stock ten
days prior to issuance. At the date of commitment, the total
compensation cost was calculated to be approximately $750,000, which is
to be recognized subsequent to year-end as the performance criteria are
satisfied.
LITIGATION:
On August 18, 2000, William G. Hays, Jr., liquidating agent for RDM Sports
Group, Inc., and related debtors, filed an adversary proceeding against
the Registrant, Smith Gambrell and Russell, LLP, David J. Harris, P.C.
and David J. Harris, in the United States Bankruptcy Court for the
Northern District of Georgia, Newnan Division, Adversary Proceeding No.
00-1065. The liquidating agent alleges that the Registrant breached its
October 29, 1987 consulting agreement with RDM, breached fiduciary
duties allegedly owed to RDM, and that the Registrant is liable for
civil conspiracy and acting in concert with directors of RDM. The
liquidating agent is seeking unspecified compensatory and punitive
damages, along with attorney's fees, costs and interest. On April 2,
2001, the court granted the Registrant's motion to enforce the
arbitration clause contained in the consulting agreement. The Registrant
intends to vigorously defend this matter. Because this matter is in the
preliminary stages and no arbitration date has been set, it is too early
to predict the outcome of this matter.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
impact either individually or in the aggregate on consolidated results
of operations, financial position or cash flows of the Company.
12. INCOME TAXES:
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between
the financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
The difference between the expected tax benefit computed at the federal
statutory income tax rate of 34% and the effective tax rate for the
years ended December 31, 2000 and 1999 was due primarily to the tax
effect of the valuation allowance and due to state income taxes. The
provision for income taxes in 2000 represents New York State income
taxes, and the provision for income taxes in 1998 represents deferred
income tax expense.
The following is a summary of the Company's deferred tax assets and
liabilities at December 31, 2000 and 1999:
2000 1999
------------ ------------
Deferred tax assets:
Accrued items not currently deductible $ 209,000 $ 281,260
Tax benefit of unrealized loss on investments 25,000 465,390
Allowance for loan losses 115,000 592,690
Intangible assets 28,000
Net operating loss carryforwards 4,886,000 2,531,000
------------ ------------
Total deferred tax assets 5,263,000 3,870,340
Valuation allowance (5,263,000) (3,870,340)
------------ ------------
Net deferred tax asset (liability) $ - $ -
============ ============
Net operating loss carryforwards of approximately $14,300,000 are
available to offset future taxable income, if any, through 2020. The net
operating loss carryforwards may be subject to certain limitations due
to business acquisitions and other transactions. A valuation allowance
has been provided to reduce the deferred tax assets, as realization of
the assets is not assured.
F-34
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
13. RELATED PARTY TRANSACTIONS:
REVENUE CONCENTRATIONS, 1998:
Controlled Affiliated Other Total
--------- ---------- ---------- ---------
Interest and other income $ 68,043 $ 10 $ 2,416 $ 70,469
Consulting/transaction fees 375,000 375,000
Administrative fees 2,371 2,371
--------- ---------- ---------- ---------
$ 443,043 $ 2,381 $ 2,416 $ 447,840
========= ========== ========== =========
During 1998, one investee company accounted for 96% of the Company's total
revenues of $447,840.
BONUSES TO OFFICERS:
In August 1998, the Company's Board of Directors approved a bonus
arrangement with the Company's president. The bonus arrangement,
effective January 1, 1998, provides for an annual bonus to be calculated
quarterly based on a combination of 1% of the Company's assets and 5% of
the increase in the market value of the Company's common stock each
quarter. The unpaid portion of these bonuses was $614,522 and $452,854
at December 31, 2000 and 1999, respectively.
DIRECTORS' FEES:
During the years ended December 31, 2000, 1999, and 1998 the Company paid
$12,000, $13,000 and $12,500 to each of its two outside directors for
their attendance at meetings held each year.
14. BENEFIT PLANS:
OFFICER RETIREMENT PLAN:
As part of the Company president's total compensation package, the Company
purchased a whole life insurance policy on April 1, 1992, in order to
provide for the president's retirement. The Company pays an annual
premium on behalf of the president and also reimburses the president
each year for the personal income tax on this additional compensation.
Should the president die prior to age sixty-five, the policy pays a
$2,600,000 death benefit to his beneficiary. Upon retirement, provided
the president is at least sixty-five, the cash surrender value and death
benefit rider become the president's property. For each of the years in
the three-year period ended December 31, 2000, the Company paid $105,414
per year in premiums and $59,586 per year of additional compensation to
the president for related income taxes.
EMPLOYEE BENEFIT PLAN (FBMS):
The Company's former subsidiary, FBMS, had a defined contribution
retirement plan covering all full-time employees of FBMS who had three
months of service and were at least twenty-one years of age. For the
period ended December 31, 1999, FBMS's matching contribution equaled 50%
of the portion of the participant's contribution which did not exceed 2%
of the participant's compensation. FBMS incurred contribution expense of
$21,200 for the period ended December 31, 1999.
F-35
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
15. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of a financial instrument is the current amount that would
be exchanged between willing parties, other than in a forced
liquidation. Fair value is best determined based upon quoted market
prices. However, in many instances, there are no quoted market prices
for the Company's various financial instruments. In cases where quoted
market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. Accordingly, the fair value
estimates may not be realized in an immediate settlement of the
instrument. SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented may not necessarily represent
the underlying fair value of the Company.
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
MORTGAGE LOANS HELD FOR SALE:
Through June 28, 2000, the fair value of mortgage loans held for sale was
based on commitments on hand from investors or prevailing market prices.
For variable-rate loans that re-price frequently and with no significant
change in credit risk, fair values were based on carrying values. Fair
values for certain mortgage loans were based on quoted market prices of
similar loans sold (adjusted for differences in loan characteristics).
Fair values for non-performing loans were estimated using discounted
cash flow analyses or underlying collateral values, where applicable.
The fair value of mortgage loans held for sale at December 31, 1999 was
$14,923,000 (carrying value of $14,787,080).
RECEIVABLES:
The fair values of notes and advances receivable from non-related parties
approximates their carrying values because of the short maturities of
these instruments. The fair values of notes and advances receivable from
related parties are not practicable to estimate, based upon the related
party nature of the underlying transactions.
WAREHOUSE AND OTHER NOTES AND ADVANCES PAYABLE:
The fair values of warehouse notes payable and notes and advances payable
to non-related parties approximates their carrying values because of the
short maturities of the notes. The fair values of notes and advances
payable to related parties are not practicable to estimate, based upon
the related party nature of the underlying transactions.
OTHER FINANCIAL INSTRUMENTS:
The fair value of other financial instruments (cash and cash equivalents,
accounts receivables, accounts payable and accrued expenses) approximate
their carrying amounts because of the short maturities of these
instruments.
16. SUBSIDIARY STOCK TRANSACTIONS:
During the year ended December 31, 1999, nMortgage issued 3,505,000 shares
of Series A Preferred Stock for cash of $3,505,000 and issued 40,000
shares of Series B Preferred stock in exchange for payables of $461,070.
These preferred stock balances are presented as minority interest in the
December 31, 1999, consolidated balance sheet. Also included in minority
interest at December 31, 1999, is $2,507,000 of FBMS preferred stock.
F-36
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
16. SUBSIDIARY STOCK TRANSACTIONS (CONTINUED):
During the first quarter of 2000, nMortgage issued an additional 1,627,000
shares of Series A preferred stock for cash of $1,627,000. In November
2000, all of the nMortgage Series A preferred stock was converted to
nMortgage common stock. Prior to conversion, the Company had included as
minority interest the $5,132,000 applicable to the Series A preferred
stock. Upon conversion, the former Series A preferred stockholders no
longer had liquidation preferences greater than those of the nMortgage
common stockholders. Consequently, $5,132,000 of 2000 losses incurred by
nMortgage which were previously absorbed by the Company, were allocated
to the minority interest resulting in a material unusual gain pursuant
to paragraph 25 of APB No. 30. The Company has recorded the gain as a
fourth quarter transaction in accordance with paragraph 21 of APB No.
28.
In December 2000, Meridian purchased 35,325 shares of Equitex common stock
from an entity related through common ownership in exchange for Meridian
preferred stock. As a result of this transaction, the Company recorded
an increase in minority interest and in treasury stock of $170,000,
which was the quoted market value of the Equitex common stock at the
date of the transaction.
In connection with the nMortgage preferred stock issuances in 2000, the
Company issued warrants to purchase 100,000 shares of Equitex common
stock at a weighted average exercise price of $5.50 per share. The
warrants were valued at $183,000 utilizing the Black-Scholes option
pricing method, and were accounted for as costs of the subsidiary stock
issuance. These warrants expire in April 2004.
In 1999, in connection with VP Sports' private placement of common stock,
the Company's underlying equity in its investment in VP Sports increased
by $1,622,605, which was accounted for as an increase to additional
paid-in capital.
17. SERIES G REDEEMABLE CONVERTIBLE PREFERRED STOCK:
In September 2000, the Company issued 1,300 shares of 6%, Series G
convertible preferred stock (the "Series G Preferred Stock") along with
warrants to purchase 130,000 shares of common stock for $1,000 per
share, which is the stated value per share (total proceeds of $1,300,000
less issue costs of $60,000). The Series G Preferred Stock is
convertible, together with any accrued but unpaid dividends, at any time
into shares of the Company's common stock at a conversion price per
share equal to the lesser of $6.50 or 65% of the average closing bid
price of the Company's common stock as specified in the agreement. The
warrants were valued at $242,000 utilizing the Black-Scholes option
pricing model, and therefore $242,000 of the total proceeds was
allocated to the warrants, resulting in an imputed interest rate of
7.4%.
Because the Series G Preferred Stock contained an immediate beneficial
conversion feature, both additional paid-in capital and the accumulated
deficit were increased by $700,000 in 2000, the amount of the discount
resulting from the beneficial conversion feature. The holder of the
Series G Preferred Stock is entitled to cumulative dividends at 6% per
annum plus a 4% dividend default rate, payable quarterly commencing
September 30, 2000. Dividends are payable in cash or, at the Company's
option, in shares of the Company's common stock. Cumulative dividends at
December 31, 2000 are $25,000. All outstanding shares of Series G
Preferred Stock automatically convert into common stock on August 31,
2003. The Series G Preferred Stock is redeemable at the Company's option
at any time at a redemption price equal to $1,350 per share plus any
accrued but unpaid dividends. Through December 31, 2000, the Company
recorded a $478,000 accretion to the Series G Preferred Stock balance so
that the carrying value of the Series G Preferred Stock will equal the
redemption amount at the mandatory redemption date.
The Company was required to redeem the Series G Preferred Stock if the
Company's shareholders had 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 if a registration statement relating to
the resale of certain shares of the Company's common stock underlying
the Series G Preferred Stock and not been declared effective on or
before 180 days of its filing. These events did not occur before March
4, 2001. However, the Series G investor has agreed to extend the
redemption date to May 15, 2001. Due to the terms and conditions of the
Series G Preferred Stock, which may require mandatory redemption, the
Series G Preferred Stock is not included in stockholders' equity at
December 31, 2000.
F-37
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
18. STOCKHOLDERS' EQUITY:
AUTHORIZED CAPITAL:
The Company's authorized capital consists of, among other classes of
securities, 7,500,000 common shares. As of December 31, 2000, there are
7,140,293 common shares issued and 7,071,618 shares outstanding. In
addition, the Company has outstanding certain classes of securities
which are convertible into common shares which would, if converted,
cause the Company to exceed its authorized common shares. This is
prohibited by the laws of the State of Delaware and therefore, until the
Company is able to convene a Special Meeting of the Shareholders
pursuant to the proxy solicitation requirements of Section 14 of the
Securities Exchange Act of 1934, and the laws of the State of Delaware,
it cannot permit such conversions, which means the Company is or will be
in default of certain terms and conditions of such instruments. The
securities affected consist of the following at December 31, 2000:
(1) 1,200 shares of Series D preferred shares convertible
into 414,629 common shares,
(2) 300 shares of Series E preferred shares convertible
into 300,000 common shares,
(3) 460 shares of Series F preferred shares convertible
into 525,715 common shares,
(4) 1,300 shares of Series G preferred shares convertible
into 423,580 common shares,
(5) Warrants convertible into 670,000 common shares, and
(6) Options convertible into 1,786,400 common shares.
The Company has filed preliminary proxy solicitation materials to
convene a Special Meeting of Shareholders to among other things,
increase its authorized shares in an amount sufficient to permit the
conversion of its authorized and/or outstanding convertible
securities.
SERIES A, B, AND C CONVERTIBLE PREFERRED STOCK:
In January and February 1999, the Company issued a total of 2,100 shares
of 6%, Series A, B, and C convertible preferred stock for $1,000 cash
per share, which was the stated value per share. Each series of
preferred stock was convertible into common stock at any time by the
holders at a conversion price equal to 65% of the average closing bid
price of the Company's common stock as specified in the agreements.
Because this preferred stock contained an immediate beneficial conversion
feature, both additional paid-in capital and the accumulated deficit
were increased by $1,333,098, the amount of the discount due to this
beneficial conversion feature. The holders were entitled to receive a
cumulative annual dividend of $60 per share, payable quarterly, and had
preference to any other dividends which might have been paid by the
Company. The dividend was payable either in cash or in shares of the
Company's common stock, at the Company's option. The preferred
stockholders also received warrants to purchase a total of 250,000
shares of the Company's common stock at 120% of the market price as of
the grant date. In addition, the placement agent was issued 20,000
shares of the Company's common stock, valued at $200,000, in exchange
for services in connection with the preferred stock sales.
In April 1999, all 2,100 shares of the Series A, B and C convertible
preferred stock, plus accrued dividends on those shares, were converted
into 320,528 shares of the Company's common stock, at an average
conversion price of $6.63 per share.
F-38
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
18. STOCKHOLDERS' EQUITY (CONTINUED):
SERIES D CONVERTIBLE PREFERRED STOCK:
In May 1999, the Company reached an agreement with an accredited investor
to sell up to 3,500 shares of Series D, 6% convertible preferred stock
(the "Series D Preferred Stock") for $1,000 cash per share, which is the
stated value per share. In August 1999, the Company sold 1,200 shares of
the Series D Preferred Stock for $1,200,000. The balance of $2,300,000
for the remaining 2,300 shares of Series D Preferred Stock was held in
escrow through September 2000, pending authorization by the Company's
stockholders of a sufficient number of shares of the Company's common
stock to cover those shares underlying the Series D Preferred Stock. In
September 2000, under a mutual agreement with the investor the escrow
proceeds were released to the investor and no additional Series D
Preferred Stock was issued.
The Series D Preferred Stock contains a liquidation preference equal to
the sum of the stated value of each share plus an amount equal to 30% of
the stated value plus the aggregate of all accrued and unpaid dividends
on each share of Series D Preferred Stock until the most recent dividend
payment date or date of liquidation, dissolution or winding up of the
Company.
The Series D Preferred Stock is convertible into common stock at any time
at a conversion price per share of common stock equal to 65% of the
average closing bid price of the Company's common stock as specified in
the agreement. Because this preferred stock contained an immediate
beneficial conversion feature, both additional paid-in capital and the
accumulated deficit were increased by $1,884,615, the amount of discount
resulting from the beneficial conversion feature. The holder is entitled
to receive a cumulative annual dividend of $60 per share, payable
quarterly, and has preference to any other dividends which might be paid
by the Company. The dividend is payable either in cash or in shares of
the Company's common stock, at the discretion of the Company. Cumulative
dividends on the Series D Preferred Stock at December 31, 2000 is
$97,000.
SERIES E CONVERTIBLE PREFERRED STOCK AND RECEIVABLE FROM SERIES E
PREFERRED STOCKHOLDER:
In connection with the FBMS acquisition, the Company issued 250 shares of
Series E Convertible Preferred Stock (the "Series E Preferred Stock")
valued at approximately $2,531,000, and contingent consideration
consisting of up to 750 shares of Series E Preferred Stock, as specified
in the acquisition agreement. In conjunction with the agreement and FBMS
rescission agreement, the Company agreed to issue an additional 50
shares of Series E Preferred Stock to the owner relating to certain
performance conditions pursuant to the FBMS acquisition that were
satisfied prior to rescission. The 50 additional shares of Series E
preferred stock are convertible into 50,000 shares of common stock and
are valued at $368,750, which was based on the quoted market price of
the underlying shares of common stock at the date of rescission, and
which was recorded as expense by the Company.
The holder of the Series E Preferred Stock is not entitled to dividends,
does not have a liquidation preference and does not have voting rights.
The Series E Preferred stock, is convertible into 250,000 shares of the
Company's common stock upon the approval of an increase in the
authorized shares of common stock from 7,500,000 shares to 50,000,000
shares, or the subsequent merger of the Company with or into another
company, or the sale of substantially all the Company's assets.
In 2000, certain FBMS obligations totaling $553,645 most of which were
guaranteed by the Company were paid on behalf of the Company by the
Company's president or by the Company's subsidiary, nMortgage. The
Company recorded a payable to the president as well as a receivable from
the of the previous owner of FBMS, who is also the Series E Preferred
Stockholder. Due to the uncertainty regarding the ultimate realization
of the receivable, the balance is classified as a reduction to
stockholders' equity at December 31, 2000.
F-39
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
18. STOCKHOLDERS' EQUITY (CONTINUED):
SERIES F CONVERTIBLE PREFERRED STOCK:
In connection with the Company's acquisition of Meridian in September
2000, the Company issued a total of 460,000 shares of Series F
convertible preferred stock (the "Series F Preferred Stock"), valued at
$6.50 per share, which was the quoted market price of the Company's
common stock on September 7, 2000 (the date the agreement was signed).
The Series F Preferred Stock includes a stated value of $8.00 per share
and contains a liquidation preference in the amount of 105% of the
stated value. Series F Preferred Stockholders are entitled to dividends
in the amount declared with respect to the Company's common stock. The
Series F Preferred Stock may be converted into shares of the Company's
common stock at any time following the date of issuance until forty-two
months following the issue date, at a conversion price per share of
common stock equal to $7.00 per share. Forty-two months after issue, the
Series F Preferred Stock outstanding is subject to mandatory conversion
into shares of the Company's common stock, utilizing the stated value
per share.
COMMON STOCK:
During 1999, the Company sold 330,312 shares of common stock in a private
placement for cash of $3.25 per share. In addition, a note holder
exchanged a note and accrued interest totaling $158,236 for 48,688
shares of the Company's common stock in the same private placement. In
addition, employees and officers of the Company exercised options to
purchase 665,600 shares of common stock for $2,094,546. An additional
337,500 shares were issued pursuant to warrant exercises for $2,613,675.
In March 1998, the Company's Board of Directors authorized a private
placement offering of up to 500,000 shares of the Company's common stock
at $1.16 per share. As of the private placement closing on May 21, 1998,
499,200 shares had been sold. In June 1998, the Company's Board of
Directors authorized an additional private placement of up to 750,000
shares of the Company's common stock at $3.25 per share. All 750,000
shares under this placement were sold during 1998 and 1999.
During 1998, the Company sold to an officer of the Company, 10,000 shares
of common stock at $1.16 per share. Another 139,200 shares were sold to
outside directors at $1.16 per share. Common stock sales to unrelated
individuals during 1998 were as follows:
Share price Number sold
----------- -----------
$ .75 330,000
$1.16 350,000
$3.25 371,000
OTHER EQUITY TRANSACTIONS:
During the year ended December 31, 2000, an officer/shareholder of the
Company sold marketable securities to Triumph for $10,000. The
difference between the cost and market value of these securities at the
date of the sale totaled $382,807 and was recorded as an increase to
additional paid-in capital.
F-40
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
18. STOCKHOLDERS' EQUITY (CONTINUED):
STOCK OPTIONS AND WARRANTS:
In 1993, the Company adopted two stock option plans: the 1993 Stock option
Plan (the "Option Plan") and the 1993 Stock Option Plan for Non-Employee
Directors (the "Directors' Plan"). In January 1999, the Company's Board
of Directors adopted an incentive stock option plan covering up to
1,000,000 shares of the Company's common stock. During 1999, the Company
granted incentive stock options for 29,000 shares and 8,000 shares to
the Company's officers and employees, respectively. In addition,
non-statutory stock options for 472,000 and 491,000 shares were granted
to officers and directors, respectively. All options were granted at a
price of $6.75 per share which represents the market value of the
Company's common stock at the grant date.
In April 2000, the Company's Board of Directors increased the incentive
stock option plan to cover up to 1,700,000 shares of the Company's
common stock. During 2000, the Company granted incentive stock options
for 511,000 shares and 21,000 shares to the Company's officers and
employees, respectively. In addition, non-statutory stock options for
168,000 shares were granted to directors. All options were granted at a
price of $5.50 per share which represents the market value of the
Company's common stock at the grant date.
In 2000, 1999 and 1998, the Board of Directors granted the following stock
options to officers, directors and employees of the Company:
Number Option
Option type Grantee of shares price
------------- --------- ----------- --------
2000: Incentive Officers 511,000 $ 5.50
Incentive Employees 21,000 $ 5.50
Non-qualified Directors 168,000 $ 5.50
-----------
700,000
===========
1999: Incentive Officers 29,000 $ 6.75
Incentive Employees 8,000 $ 6.75
Non-qualified Officers 472,000 $ 6.75
Non-qualified Directors 491,000 $ 6.75
-----------
1,000,000
===========
1998: Incentive Officer 62,000 $ 3.19
Non-qualified Officers 447,655 $ 3.19
Non-qualified Employees 28,800 $ 3.19
-----------
538,455
===========
F-41
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
18. STOCKHOLDERS' EQUITY (CONTINUED):
STOCK OPTIONS AND WARRANTS (CONTINUED):
A summary of the status of the Company's stock options outstanding and
exercisable and weighted average exercise prices is as follows:
1993 Plans 1999 Plan Total
--------------------- --------------------- -------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares Price
---------- ----- ---------- ----- --------- -----
January 1,1998 311,545 3.00 311,545 3.00
Granted 538,455 3.19 538,455 3.19
Exercised (98,000) 3.05 (98,000) 3.05
Canceled/expired
---------- ----- ---------- ----- --------- -----
December 31, 1998 752,000 3.13 752,000 3.13
Granted 1,000,000 $6.75 1,000,000 6.75
Exercised (665,600) 3.10 (665,600) 3.10
Canceled/expired
---------- ----- ---------- ----- --------- -----
December 31, 1999 86,400 3.19 1,000,000 6.75 1,086,400 6.46
Granted 700,000 5.50 700,000 5.50
Exercised
Canceled/expired
---------- ----- ---------- ----- --------- -----
December 31, 2000 86,400 $3.19 1,700,000 $6.24 1,786,400 $6.08
========== ===== ========== ===== ========= =====
Options exercisable at December 31, 2000 expire from 2004 through 2005.
Had compensation cost for the Company's stock-based compensation plans
been determined based on the fair value at the grant dates consistent
with the provisions of SFAS No. 123, the Company's net loss and net loss
per common share would have increased to the pro forma amounts indicated
below:
2000 1999 1998
------------- ------------ -----------
Net loss applicable to common stockholders
(decrease in net assets), as reported $ (8,617,401) $(10,985,572) $(1,981,299)
Net loss applicable to common stockholders
(decrease in net assets), pro forma $(10,619,000) $(14,417,000) $(2,724,000)
Net loss (decrease in net assets) per
share, as reported $ (1.49) $ (1.64) $ (.45)
Net loss (decrease in net assets) per
share, pro forma $ (1.21) $ (2.15) $ (.62)
The fair value of each option granted during 2000, 1999, and 1998 was
estimated on the date of grant using the Black-Scholes option-pricing
model. The following assumptions were utilized:
2000 1999 1998
------- ------- -------
Expected dividend yield 0 0 0
Expected stock price volatility 56% 71% 83%
Risk-free interest rate 5.1% 6% 6.5%
Expected life of options 3 years 3 years 5 years
F-42
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
18. STOCKHOLDERS' EQUITY (CONTINUED):
STOCK OPTIONS AND WARRANTS (CONTINUED):
In 2000, the Company issued warrants and options to purchase up to 135,000
shares of the Company's common stock to outside consultants. The
warrants and options are exercisable immediately at exercise prices of
between $5.50 and $6.36 per share. The Company valued these warrants and
options, which expire through April 2004, at $272,000 utilizing the
Black-Scholes option pricing model. This amount has been recorded as
expense in 2000.
In connection with the Company's private placements of common and
preferred stock in 1999, the Company issued warrants to purchase 397,500
shares of the Company's common stock at a weighted average exercise
price of $7.99 per share. During 1999, 337,500 of these warrants were
exercised. The remaining 60,000 warrants outstanding at December 31,
2000 expire in February 2002. In 1999, an additional warrant to purchase
50,000 shares of the Company's common stock at $3.75 per share was
granted to an unrelated entity for services valued at $150,000.
19. OPERATING SEGMENTS:
In 1999, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION, which establishes reporting and
disclosure standards for an enterprise's operating segments. Operating
segments are defined as components of an enterprise for which separate
financial information is available and regularly reviewed by the
Company's senior management.
Beginning in 1999, in connection with the Company's acquisitions, the
Company has three reportable segments: the accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. The Company evaluates performance based on
operating earnings of the respective business units. As of and during
the years ended December 31, 2000 and 1999, the segment results were as
follows:
2000
----
Sporting goods/ Corporate activities
Financial product --------------------------
services related Investments Other Total
----------- ----------- ----------- ----------- -----------
Revenues $ 2,453,109 $ 416,182 $ 2,869,291
Segment loss (3,703,295) (844,546) $ (347,251) $(2,472,309) (7,367,401)
Total assets 2,953,885 908,811 1,470,687 4,098,244 9,431,627
Capital expenditures 2,512,014 11,266 876,230 3,399,510
Depreciation and amortization 1,460,184 161,373 165,663 1,787,220
Impairment losses 353,000 454,250 807,250
Loss on FBMS rescission 3,979,000 3,979,000
1999
----
Sporting goods/ Corporate activities
Financial product --------------------------
services related Investments Other Total
----------- ----------- ----------- ----------- -----------
Revenues $ 1,547,754 $ 738,456 $ 53,965 $ 2,340,175
Segment loss (4,153,125) (800,997) $ (571,257) (2,191,180) (7,716,559)
Total assets 35,998,614 1,211,539 2,915,435 1,619,349 41,744,937
Capital expenditures 135,329 122,335 20,361 278,025
Depreciation and amortization 737,629 87,954 12,776 838,359
F-43
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Selected unaudited quarterly financial data for the year ended 2000 is
summarized below:
2000 Quarters Ended
-------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter (c)
-------------------------------------------------------
Revenues $ 1,457,293 $ 321,427 $ 197,413 $ 893,158
Loss from operations before unusual gain (a) (1,850,592) (5,756,864) (1,072,209) (3,393,223)
Unusual gain (b) 5,132,000
Net income (loss) (1,909,215) (6,974,844) (1,496,448) (3,013,106)
Net income (loss) applicable to
common shareholders (1,926,915) (6,993,044) (2,219,948) 2,522,506
Basic income (loss) per common share (0.27) (0.98) (0.31) 0.35
Diluted income (loss) per common share 0.22
(a)In June 2000, the Company entered into a rescission agreement with
FBMS, and as a result, recorded a loss of $3,979,000 in the second
quarter of 2000. The operating results of FBMS have been included in
the consolidated financial statements from the date of acquisition
through the date of rescission.
(b)In November 2000, all of the nMortgage Series A preferred stock was
converted to nMortgage common stock. Prior to conversion, the
Company had included as minority interest the $5,132,000 applicable
to the Series A preferred stock. Upon conversion, the former Series
A preferred stockholders no longer had liquidation preferences
greater than those of the nMortgage common stockholders.
Consequently $5,132,000 of 2000 losses incurred by nMortgage which
were previously absorbed by the Company, were allocated to the
minority interest resulting in a material unusual gain pursuant to
paragraph 25 of APB No. 30. The Company has recorded the gain as a
fourth quarter transaction in accordance with paragraph 21 of APB
No. 28.
(c)In the fourth quarter of 2000, the Company recorded impairment
charges of $807,250.
F-44
EQUITEX, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II
Column A Column B Column C Column D Column E
Charged
Balance Charged to other Balance
beginning to costs/ accounts- at end
of period expenses describe Deductions of period
----------- -------- --------------- ----------- -------------
For the year ended
December 31, 2000:
Allowance for
uncollectible accounts:
Mortgage loans held
for sale $ 1,386,000 - $(1,386,000)(a) - -
Mortgage loans
receivable 57,500 - (57,500)(a) -
Notes receivable 56,575 - - $ (56,575) -
Interest receivable 65 - - (65) -
Accounts receivable 48,596 - - (8,333) $ 40,263
For the year ended
December 31, 1999:
Allowance for
uncollectible accounts:
Mortgage loans held
for sale $ 1,386,000 - - - $ 1,386,000
Mortgage loans
receivable 57,500 - - - 57,500
Notes receivable 100 $ 45,601 $ 10,874(b) - 56,575
Interest receivable 1,830 - - $ (1,765) 65
Accounts receivable 57,705 - - (9,109) 48,596
For the year ended
December 31, 1998:
Allowance for uncollectible
accounts:
Notes receivable $ 40,293 - - (40,193) 100
Interest receivable 35 $ 1,795 - - 1,830
Accounts receivable 53,742 3,936 - - 57,705
(a) Amount was returned to the previous owner of FBMS under the terms of the
rescission agreement.
(b) Amount was reclassified between the allowance for uncollectible interest
and accounts receivable.
S-1
EQUITEX, INC.
UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION
The following unaudited pro forma consolidated statement of operations presents
the pro forma consolidated operations of Equitex, Inc. for the year ended
December 31, 1998. Because the Company withdrew its election to be a BDC on
January 4, 1999, this unaudited pro forma information reflects the 1998
financial information as if the Company was an operating company rather than a
BDC for all of 1998. As a result of being an operating company, the 1998 pro
forma unaudited financial information is presented on a consolidated basis and
includes the accounts of Equitex, Inc., its wholly-owned subsidiary First
Teleservices Corporation, which was acquired in August 1998 and two
majority-owned subsidiaries, VP Sports, Inc. and Triumph Sports, Inc., which
were formed in December 1997 and January 1998, respectively. Pro forma
adjustments were made for revaluing certain investments from fair market value
to cost, consolidating three entities versus carrying them as investments at
fair value, eliminating all intercompany receivables, payables, income and
expense, and recording gains and losses on trading securities.
EQUITEX, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 (UNAUDITED)
(As if operating company)
Sales, consulting and other fees $ 574,425
Interest and dividend income 7,052
Gain (loss) on trading securities 105,367
------------
686,844
------------
Cost of goods sold 201,898
Advertising and promotion 54,088
Interest 112,040
Bad debt expense (34,435)
Depreciation and amortization 37,512
General and administrative 3,178,710
------------
3,549,813
------------
Loss before minority interest and taxes (2,862,969)
Minority interest in income (loss) 34,571
------------
Loss before income taxes (2,828,398)
Provision for income taxes - deferred (63,180)
------------
Net loss (2,891,578)
Other comprehensive income, net of tax
Unrealized holding gains on securities arising
during period 2,732
------------
Comprehensive loss $ (2,888,846)
============
Basic and diluted net loss per common share $ (.65)
============
Weighted average number of common shares outstanding 4,416,988
============